Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 42526-AZ

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$74.50 MILLION

TO THE

REPUBLIC OF AZERBAIJAN

FOR AN

ABSHERON REHABILITATION PROGRAM (ARP)

ARP I : CONTAMINATED SITES REHABILITATION PROJECT

MAY 19,2008

Sustainable Development Department South Caucasus Country Department Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective M a y 19,2008)

APL ARP C F A A CPAR

DA DHCS EA EAD E C A EIA EMF EMP EMS EO1 ESP FA FAD FM FMR GHG GOA GPN IAEA I C B IDA IDF IDP IF1 IFR IUFR I C B I S A ISDS

CQ

IS-ESP

Currency Unit = Azerbaijani N e w Manat AZNO.8449 = US$1

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS Adaptable Program Loan Absheron Rehabilitation Program Country Financial Accountability Assessment Country Procurement Assessment Review Selection based on Consultant’s Qualification Designated Account Department o f Housing and Communal Services Environmental Assessment Economical and Accounting Department Europe and Central Asia Region Environmental Impact Assessment Report Environmental Management Framework Environmental Management Plan Environmental Management Systems Expression o f Interest Environmental State Program Financing Agreement Financial and Economic Affairs Department of M E S Financial Management Financial Management Report Greenhouse Gas Government o f Azerbaijan General Procurement Notice International Atomic Energy Agency International Competitive Bidding International Development Association Institutional Development Fund Internally Displaced Person International Finance Institution Interim Financial Report Interim Un-audited Financial Report International Competitive Bidding International Standards on Accounting Integrated Safeguards Data Sheet Implementation Schedule for the Comprehensive Action Plan on

FOR OFFICIAL USE ONLY

LCS LFG LLW-LL M&E MED MENR MES NCB NGO NORAD NORM O M PAD PAS PDO PFS PGI PIU PMT P M U PoE POM PP PPL PRSC PSA QCBS

RAP RF RPF RRAP RSC SCIR S I A S I L SOCAR SOCAR EC SOE SPN SRC SWM T A TOR UEIP

QER

Improving Environmental Situation in Azerbaijan for 2006-201 0 Least Cost Selection Landfill Gas Long-Lived Low-Level Waste Monitoring and Evaluation Ministry o f Economic Development Ministry o f Ecology and Natural Resources Ministry o f Emergency Situations National Competitive Bidding Non Governmental Organization Norwegian Agency for Development Cooperation Naturally Occurring Radioactive Materials Operations Manual Project Appraisal Document Procurement Accredited Staff Project Development Objective Project Financial Statement Petroleum and Governance Initiative Project Implementing Unit Project Management Team Project Management Unit Panel o f Experts Project Operational Manual Procurement Plan Public Procurement Law Poverty Reduction Support Credit Production Sharing Agreement Quality and Cost Based Selection Quality Enhancement Review Resettlement Action Plan Resettlement Framework Resettlement Policy Framework Resource Restriction Action Plan Regional Safeguards Coordinator State Committee for IDPs and Refugees Social Impact Assessment Specific Investment Loan State O i l Company o f Azerbaijan Republic State O i l Company o f Azerbaijan Republic Ecology Company Statement o f Expenses Specific Procurement Notice State Refugee Committee Solid Waste Management Technical Assistance Terms o f Reference Urgent Environmental Investments Project

I I

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

UEIP Urgent Environmental Investment Program UNDB United Nations Development Business UNDP United Nations Development Program VLLW Very Low-Level Waste WB World Bank WG Working Group

Vice President: Shigeo Katsu Country Director: Donna Dowsett-Coirolo Country Manager Gregory T. Jedrzejczak Sector Manager: Wael Zakout

Task Team Leader: Aniruddha Dasgupta

AZERBAIJAN Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABILITATION PROJECT

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 I . A . B . C .

I1 . A . B . C . D . E . F .

I11 . A . B . C . D . E . F .

IV . A . B . C . D . E . F .

Country and sector issues .................................................................................................... 1

Rationale for Bank involvement ......................................................................................... 2

Higher level objectives to which the project contributes .................................................... 3

PROJECT DESCRIPTION ............................................................................................. 3 Lending instrument ............................................................................................................. 3

Program objective and Phases ............................................................................................ 3

Project development objective and key indicators .............................................................. 5

Project components ............................................................................................................. 5

Lessons learned and reflected in the project design ............................................................ 9

Alternatives considered and reasons for rejection ............................................................ 10

IMPLEMENTATION .................................................................................................... 11 Partnership arrangements .................................................................................................. 11

Institutional and implementation arrangements ................................................................ 11

Monitoring and evaluation o f outcomes/results ................................................................ 12

Sustainability ..................................................................................................................... 12

Critical r isks and possible controversial aspects ............................................................... 13

Loan conditions and covenants ......................................................................................... 15

. . .

APPRAISAL SUMMARY ............................................................................................. 15 Economic and financial analyses ...................................................................................... 15

Technical ........................................................................................................................... 16

Fiduciary ........................................................................................................................... 16

Social ................................................................................................................................. 17

Environment ...................................................................................................................... 18

Safeguard policies ............................................................................................................. 19

G . Policy Exceptions and Readiness ...................................................................................... 20

Annex 1: Country and Sector or Program Background ......................................................... 21

Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies ................. 27

Annex 3: Results Framework and Monitoring ........................................................................ 29

Annex 4: Detailed Project Description ...................................................................................... 35

Annex 5: Project Costs ............................................................................................................... 41

Annex 6: Implementation Arrangements ................................................................................. 42

Annex 7: Financial Management and Disbursement Arrangements ..................................... 44

Annex 8: Procurement Arrangements ...................................................................................... 50

Annex 9: Economic and Financial Analysis ............................................................................. 58

Annex 10: Safeguard Policy Issues ............................................................................................ 60

Annex 11: Project Preparation and Supervision ..................................................................... 66

Annex 12: Documents in Project Files ...................................................................................... 67

Annex 13: Statement of Loans and Credits .............................................................................. 69

Annex 14: Country at a Glance ................................................................................................. 70

Annex 15: Maps ........................................................................................................................... 73

AZERBAIJAN

Source Borrower International Bank for Reconstruction and Development Total:

ARP I: CONTAMINATED SITES REHABILITATION

Local Foreign T o t a l 22.50 2.00 24.50 48.73 25.77 74.50

71.23 27.77 99.00

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: M a y 19,2008 Country Director: D-M Dowsett-Coirolo Sector Director: Peter D. Thomson

Team Leader: Aniruddha Dasgupta Sectors: Sanitation (45%); Oil and gas (45%); General public administration sector (1 0%) Themes: Environmental policies and institutions (P); Pollution management and environmental health (P); Social risk mitigation (S) Environmental screening category: Full Assessment

Project Financing Data

Project ID: P104985

Lending Instrument: Specific Investment Loan

[XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 74.50 Proposed terms: The IBRD loan would be a U S Dollar denominated Fixed-Spread Loan (FSL) a

Borrower: Republic o f Azerbaijan Ministry o f Finance 83, S.Vurgun str. Baku, Azerbaijan, AZ 1022 Tel: +994 - 12 596 71 84 Fax: +994- 12 493 05 46 / 493 29 43

Responsible Agency: Ministry o f Emergency Situations 69 Fizul i street Baku, Azerbaijan, AZ 1014 Tel: + 994-12 512 0041 huseynov-t@hotmail.com

Fax: + 994-12 512 0098

Estimated disbursements (Bank FY/US$m) FY I 2009 1 2010 I 2011 I 2012 I 2013 I 2014 I 4nnual Cumulative

6.29 12.93 23.50 16.72 9.19 5.87 6.29 19.22 42.72 59.44 68.63 74.50

Expected effectiveness date: September 30,2008 Expected closing date: September 30,2014 Does the project depart f rom the CAS in content or other significant respects? Re$ PAD I. C. [ ]Yes [XINO

Does the project require any exceptions from Bank policies? Re$ PAD IV. G. Have these been approved by Bank management? I s approval for any pol icy exception sought from the Board? Does the project include any critical risks rated “substantial” or “high”? Re$ PAD IIL E. Does the project meet the Regional criteria for readiness for implementation? Re$ PAD I V . G. Project development objective Re$ PAD IL C., Technical Annex 3 The Project development objective i s to support the Environmental State Program (ESP) to curtail environmental degradation in the Absheron Peninsular, by assisting in decontamination o f former iodine production sites and the development o f a strategy for remediatiodcontainment o f Naturally Occurring Radioactive Materials (NORM) contaminated sites. The project wi l l also support in developing institutional capacity for the cleanup o f former o i l production sites and for developing rehabilitation and redevelopment plans for a specific o i l production site.

[ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o

Project description [one-sentence summary of each component] Re$ PAD ILD., Technical Annex 4 COMPONENT A - Clean-up and rehabilitation o f two former Iodine Sites

production sites in Surakhani and Ramani. This component wi l l develop immediate cleanup activities to decontaminate two former iodine

COMPONENT B - Construction o f a dedicated N O R M storage facility This component wi l l finance development and construction o f a dedicated facility to store

radioactive waste from the two former iodine sites to be decontaminated under Component A, and N O R M from former o i l production sites.

COMPONENT C - National Mapping and Remediation Program for NORM Contaminated

This component wi l l enable M E S to execute an extensive national-level survey to map NORM- Sites

contaminated sites and investigate them to determine contamination levels, priorities, and remediation or containment actions to produce a national phased mitigation program.

COMPONENT D - Remediation Program for the 1,000ha Site The objective o f this project component would be to develop efficient approaches for

remediation and returning to alternative productive reuse o f polluted former o i l production sites by a comprehensive plan and partially cleaning-up approximately 1,000 hectares o f o i l polluted

land with 350 wells between the Buzovni and Mashtagi settlements.

COMPONENT E - Capacity Building, Public Audit and Project Management This component wil l provide financial support for project management and performance

monitoring and technical assistance for institutional and strategy development and planning.

Which safeguard policies are triggered, if any? Re$ PAD I K F . , Technical Annex 10 The project involves removal, repackaging and transport o f contaminated low-level radioactive waste and the disposal o f this material at most l ikely a newly built dedicated disposal facility. This project i s preliminary classified as Category ‘A’ in view o f the Bank safeguard pol icy on Environmental Assessment (OP 4.01). A full EIA with Environmental Management Plan (EMP) covering al l components o f the project presented in two consultation rounds for the first decontamination project and the construction o f the disposal facility has been conducted to meet this safeguard requirement.

Additionally, an EA and Environmental Management Framework for additional sites that require decontamination and that may be financed (including for one site that has tentatively been identified) wil l be prepared. The Framework wil l reflect the fact that clean-up o f additional sites i s also likely to be classified as A-category and will require a site-specific and full EA, to be reviewed by the WB.

resettlement o f IDPs (1 3 families) living on the project site. This resettlement needs to comply with national and Bank’s safeguard policies. The Resettlement Pol icy Framework that sets out policies and procedures for the mitigation o f social impacts that may arise in any additional sites, some o f which may also be inhabited or used was prepared by the MES.

The Resettlement Policy i s triggered because the implementation o f project demands

Significant, non-standard conditions, if any, for: Re$ PAD IIL F. Board presentation:

Loadcredit effectiveness: (i) The Procurement specialist has been appointed, (ii) The Project Operational Manual including a detailed work program, environmental and social safeguards, implementation schedule and key TORS has been adopted, satisfactory to the Bank, and (iii) The Borrower has opened the Project Account in Manat with the initial deposit o f $50,000 equivalent on terms and conditions satisfactory to the Bank.

Covenants applicable to project implementation:

P M T headed by a Project Manager and with staff, resources and under terms o f reference satisfactory to the Bank.

Committee, which shall meet at least twice a year.

provide quarterly un-audited financial reports satisfactory to the Bank. The project’s financial statements, withdrawal applications, and designated accounts wil l be audited by independent

The Borrower, through the MES, shall maintain, throughout Project implementation, the

The Borrower shall, until the completion o f the Project, cause to maintain the Steering

The Borrower shall maintain a financial management system acceptable to the Bank and

auditors acceptable to the Bank and on terms o f reference acceptable to the Bank. The annual audited financial statements and audit reports wi l l be provided to the Bank within six months o f the end o f each fiscal year.

The Borrower, through the MES, shall take al l action required to carry out the Project in accordance with the requirements set forth or referred to in the Project Operational Manual. The Borrower wi l l establish the Panel o f Experts (PoE) by no later than one year after effectiveness. The Borrower shall provide a Progress Report covering the period o f one quarter throughout execution o f the project no later than forty-five days after the end o f the period covered by the Report. The Borrower shall ensure that al l measures necessary for the carrying out o f the EMF, EMP and RPF shall be taken in a timely manner. The Borrower shall ensure that the RAPS: (a) shall be prepared satisfactory to the Bank in according to the RPF prior to commencement o f any activities for the areas where physical relocation, land acquisition and/or loss o f income due to the Project activities have been identified, and; (b) shall be carried out in a timely manner, satisfactory to the Bank. The Borrower shall ensure that no activities involving works under Component A o f the Project shall commence before resettlement has been completed. Unless otherwise agreed with the Bank, the Borrower shall ensure that a technical design for each o f the two cleanup sites has been approved by the Bank prior to the commencement o f any activities involving works for respective site under Component A o f the Project. Unless otherwise agreed with the Bank, the Borrower shall ensure that a technical design for a new storage facility has been approved by the Bank prior to the commencement o f any activities involving works under Component B o f the Project. Unless otherwise agreed with the Bank, no activities involving works under Component C.2 o f the Project shall commence prior to completion o f a technical design, acceptable to the Bank, for each respective NORM contaminated site. Unless otherwise agreed with the Bank, no activities involving works under Component D.2 o f the Project shall commence prior to completion o f a technical design, acceptable to the Bank. A Mid-Term Review o f the Project wil l be carried out no later than 3 years from project effectiveness by September 201 1.

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues 1. The Government o f Azerbaijan has invited the World Bank to help implement the Environmental State Program (ESP), an ambitious response to the development challenges facing the Absheron Peninsula that surrounds the capital city of Baku - tackling critical environmental r isks while liberating land needed for the rapid economic and demographic growth o f this essential urban area. K e y development issues include the following:

0 Continued environmental degradation: The Absheron peninsula i s seriously polluted due to nearly 150 years o f o i l production that has contaminated some 30,000 hectares, 15,000 o f which are heavily polluted and o f primary environmental concern. Oil production on the peninsula has also affected the Caspian Sea through the discharge o f contaminated water; and generated radioactive waste (from natural radio-nuclides). Rapid urban growth and weak management capacity have caused sanitation and solid waste management to deteriorate significantly. Generally, there i s a continuing impact o f inadequate environmental management practices.

Rapid urban growth and resulting demand for land: Recently, many people have migrated to the Absheron Peninsula and its two main cities, Baku and Sumgayit, in search o f jobs and opportunities. This rapidly increasing population and the economic revival have created a strong demand for land. Baku i s ringed by former o i l fields and other polluted sites; urban growth has leapfrogged over these areas and extended literally across the Absheron Peninsula, often with l i t t le access to basic infrastructure. Informal settlements are growing in heavily polluted areas, creating a serious health risk. Meanwhile, contaminated land located close to rapidly growing residential and commercial areas has high potential value for redevelopment if i t were to be cleaned up.

Need for effective land management: A comprehensive approach to regional planning, development and capital investments for Greater Baku i s lacking. The most recent General Plan, developed in the mid-l970s, covers only a small portion o f the current urbanized area and excludes many areas with new settlements that have developed during the past 15 years. Lit t le information exists describing ownership and/or land use for the Absheron Peninsula and available information i s usually very outdated. Cleaning up and converting polluted land requires a systematic approach that prioritizes site for rehabilitation. The cost o f rehabilitating a site i s directly related to i t s future use. Additionally, the expected future use determines the value o f the site and the economic feasibility o f i t s cleanup.

2. The Environment State Program (ESP) instituted by the September 28, 2006 Presidential Decree (no. 1697) forms the basis o f the proactive response by the Government to this challenge. I t details 65 activities and 30 governmental or public stakeholders. It i s a comprehensive plan involving cleanuph-emediation, hazardous and non-hazardous waste, and forward-looking environmental management through renovating facilities and improving laws and regulations. The Decree makes the Cabinet o f Ministers responsible for overall coordination and supervision, and demonstrates high-level commitment that has motivated key ministries and agencies.

1

Project-specific background issues

3. A special concern from o i l exploitation activities i s the radioactive waste generated as so- called naturally occurring radioactive materials (NORM). NORM is mostly low-level radioactive waste and appears as deposits from o i l production water, and occurs as radon gas.

4. The Ministry o f Emergency Situations has had national responsibility since 2005 for regulating radiological safety and i s establishing institutional structures and capacity to perform tasks related to that mandate. Izotop, the national agency for management o f radioactive sources (from hospitals, etc.) reports to MES. Azerbaijan i s a member state o f the International Atomic Energy Agency (IAEA), and in 1997, adopted the Law o n Radiation Safety for the Population based on IAEA safety standards. The Russian standard i s used now for handling radioactive waste but this i s being revised.

5. MES in consultation with the IAEA has identified two former iodine-production plants as radioactive waste hotspots in need o f urgent remediation because they are within the built-up area o f Baku. These plants operated until 1995-96 in Surakhani and Ramani areas; they extracted iodine and bromine from o i l production water, a process during which dissolved and suspended materials were absorbed in activated carbon (charcoal) thus concentrating minerals in the charcoal pellets that are naturally present in o i l production water f rom geological formations. Among these minerals are natural radio-nuclides. The concentration o f radio-nuclides in the two iodine plants classifies the used charcoal as radioactive waste, requiring special precautions for storage and disposal.

6. Under the ESP, the Cabinet o f Ministers designated MES to rehabilitate the two Baku former iodine sites; develop a management plan for other radiological contaminated sites; and develop an integrated approach for cleaning up contaminated land and preparing it for redevelopment. MES wil l be the lead institution for these responsibilities which include rehabilitation o f the 1000 ha site north o f the international airport o f Baku between Buzovni and Mashtagi settlements, historically one o f the main o i l production fields, now only partially in use by SOCAR because most o i l production facilities are abandoned. The ARP I - Contaminated Sites Rehabilitation Project is supporting MES in these activities.

B. Rationale for Bank involvement

Rationale for Bank support for the ESP

7. The Bank has been in dialogue with the Government o f Azerbaijan on environmental clean-up activities for some years and supported a project with a pi lot o i l pollution cleanup component under the Urgent Environmental Investment Program (UEIP, closed 2005) to develop and test suitable cleanup technologies. The World Bank agreed with the GOA to incorporate environmental management and climate change issues as one o f four pillars in the Country Partnership Strategy (CPS) for FY07-FY10. The World Bank has thus agreed to partner with the Government in supporting the ESP through the Absheron Rehabilitation Program, a programmatic series o f projects and advisory services.

2

Specijk Rationale for Bank involvement in the Project.

8. The Wor ld Bank i s a leading donor in implementing complex high-priority environmental remediation projects and can build upon i t s knowledge o f environmental remediation approaches, hazardous waste management, and site redevelopment, al l o f which are required for the proposed Project. Bank participation in the sector and the proposed Project wil l provide the government with cost-effective financial support for a relatively expensive and complex program.

9. Bank support wil l provide the government access to state-of-the-art expertise, and extensive international experience for this large-scale project that cover the physical, social, institutional, and land-use aspects o f site remediation programs. Technical assistance provided under World Bank-supported investment operations has been important to the success o f similar environmental cleanup projects in the E C A Region.

C. Higher level objectives to which the project contributes

10. Country Partnership Strategy. The proposed Project i s part o f the Absheron Rehabilitation Program (ARP), a programmatic series o f Single Investment Loans (SILs) that respond to the Government o f Azerbaijan’s request for Wor ld Bank support for the ESP. The ARP supports two pillars o f the FY07-10 CPS: (a) Improving Environmental Management and Furthering the Climate Change Agenda (Pillar IV), and (b) Supporting Sustainable Growth o f the Non-oi l Economy (Pillar 11). It amplifies the assistance started under the US$20 mi l l ion Urgent Environmental Investment Project closed in 2005, which included pi lot ing o f technologies for mercury cleanup and onshore o i l field cleanup on the Absheron Peninsula. This project i s confirmed as a priority in the recent CPS Progress Report, prepared in M a y 2008.

11. PROJECT D E S C R I P T I O N

A. Lending instrument

11. The proposed project with MES i s conceptualized as part o f a f i rs t stage o f projects within this long-term ARP. As such, the project will focus on a few realistic objectives considered achievable within the project lifespan while taking into account the long-term environmental improvement and rehabilitation objectives. The choice o f lending instrument is a SIL. The Project wil l be financed through an IBRD Loan (US$74.5 million) with co-funding from the Government o f Azerbaijan (US$24.5 million). The total project budget i s US$99.0 mi l l ion which includes price contingencies and VAT.

B. Program objective and Phases

12. The overall objective o f the World Bank’s broader Absheron Rehabilitation Program i s to support the Government o f Azerbaijan to implement the ESP. It comprises multiple investments selected from ESP priori ty activities and agreed with the relevant government agencies. Each o f these agencies has been designated by the Cabinet o f Ministers as directly responsible for

3

implementation o f specific parts o f the ESP. In the f i rs t phase the ARP would include the fol lowing three projects:

ARP I: Contaminated Sites Rehabil i tat ion Project-includes cleanup activities at two former iodine production sites and a 1,000 ha o i l production site, to be implemented by the MES.

ARP 11: Integrated Solid Waste Management Project- includes reform o f the Greater Baku solid waste collection and disposal operations to be implemented init ial ly by the Ministry o f Economic Development (MED) and subsequently by a separate institution to be developed for this purpose.

ARP 111: Large Scale Oil Polluted L a n d Cleanup Project-includes land remediation and o i l recovery activities to be implemented by the State O i l Company o f Azerbaijan Republic (S OCAR) .

These three projects would be followed by others that will address more complex investments, including: upgrading o f wastewater treatment for Greater Baku, strengthening o f environmental pol icy and regulatory capacity-building for the ESP, and further investments in solid waste management, remediation o f o i l polluted lands, and NORM clean up.

13. Programmatic support for the ESP. Operationalizing the ESP requires strong prioritization, technical assistance and monitoring to manage the complexity and number o f activities. Within these very large needs, the proposed Bank support ini t ial ly aims to help rapidly implement strategic ESP activities that focus on practical solutions to tackle the worst environmental issues on the Absheron Peninsula and deliver quick and visible results within a short timeframe.

14. Bank involvement wi l l also help to ensure that international best practice i s designed into the investments from the outset. These init ial investments will yield lessons, by offering opportunities to test and streamline cleanup technologies, and to use the lessons learned to design scaled-up or more complex cleanup or environmental management investments. Bank-funded preparation o f strategic plans for these next investments will include a focus on institutional issues, including inter-agency and land ownership and transfer issues that wil l be important for program sustainability.

15. The proposed Bank-supported technical assistance wil l help assist implementing agencies internalize good international environmental and safety practices. Added emphasis on data follection, independent monitoring, public outreach campaigns, adoption o f clarified environmental standards and coordinated certification processes will benefit both existing operations and the design o f new investments.

16. Regional Development for the Absheron Peninsula. The Bank’s involvement wil l also help steer ESP implementation towards a regional development approach to Absheron rehabilitation, through the ARP projects as wel l as several other investment programs and advisory activities included in the CPS. These include a US$5.0 mi l l ion component o f the FY07

4

National Water Supply and Sanitation Project that i s financing preparation o f a Regional Development Plan for the Absheron Peninsula employing a flexible, market-based, strategic spatial development approach. The Regional Development Plan work wil l also develop a land use/zoning plan and associated implementation regulations. Further, each o f the projects under the Absheron Rehabilitation Program, as wel l as the on-going Real Estate Registration Project, ongoing Internally Displaced People (IDP) project, and the Urban Transport Project under preparation, points to a specific angle o f the land use, ownership and transfer issue. Whi le no single one project could tackle constraints that run across many different parts o f Government, altogether they are expected to converge and catalyze further pol icy dialogue on how to address these systemic constraints.

C. Project development objective and key indicators

17. The Project development objective i s to support the ESP to curtail environmental degradation in the Absheron Peninsula, by assisting in decontamination o f former iodine production sites and the development o f a strategy for remediatiodcontainment o f NORM contaminated sites. The project wi l l also support in developing institutional capacity for the cleanup o f former o i l production sites and for developing rehabilitation and redevelopment plans for a specific o i l production site.

18. objectives (additional details in Annex 3):

There are three key performance indicators to assess fulfil lment o f project development

Environmental degradation curtailed in two former iodine production sites (Surakhani and Ramani) and at abandoned o i l production site as evidenced by:

(i) Safe removal and disposal o f radiological waste (NORM) and other hazardous materials from former iodine contaminated sites;

(ii) Decontamination and cleanup o f water reservoirs on former iodine sites; (iii) Full cleanup rehabilitation plan developed and partial land prepared for reuse at the

abandoned o i l production sites. National inventory and plan has been prepared for the containment and remediation o f o i l production sites contaminated with NORM.

Institutions fully adopt standards and develop policies and procedures for continued environmental site investigations, cleanup, rehabilitation, certification and redevelopment o f contaminated sites.

D. Project components

19. The responsibilities o f MES in the management o f NORM and o i l contaminated sites requires both comprehensive investigations, planning and long-term efforts as wel l as the need to act fast in order to reduce unacceptable risks to public health from environmental hot-pots. In order to support MES in the latter, the Project components include activities to urgently remediate two hazardous sites (the former iodine production sites in Baku) and safely dispose the NORM waste and other hazardous materials. Additionally, another component supports a more strategic and planned approach at a national scale in dealing with the numerous sites that are

5

contaminated with NORM waste. Under this component further cleanup operations for NORM waste sites will be developed.

20. The remediation program for the 1,000ha o i l production site is an integrated rehabilitation program that cleans up contaminated soils, removes abandoned o i l production infrastructure and wil l prepare the site for re-development according to a land-use plan that will be prepared with stakeholders. This area-based focus on planning and re-development makes the Project different from the proposed ARP I11 project which focuses o n the overall scale o f o i l contamination and finding effective approaches to mobilize cleanup capacity.

The component budgets indicated below exclude VAT and price contingencies.

Component A - Cleanup and rehabilitation of two former iodine sites (US$12.15 mil l ion)

2 1. Objective. This component wil l develop immediate cleanup activities to decontaminate two former iodine production sites in Surakhani and Ramani. Site contamination includes radioactive materials that pose serious exposure hazards for the increasingly dense housing development surrounding the sites. Radioactive dust particles affect a much larger area. Decontamination should consider future land use.

22. Component Description. Two former iodine production sites in Greater Baku are contaminated with waste created from processing o i l production water. As a result, the sites have heaps o f charcoal contaminated with N O R M and some other heavy metals, polluted soil, and old production facilities containing oi ly products. Existing structures are contaminated and radioactive scaling and asbestos are present on site. A feasibility study has determined contamination levels and the most efficient methods to remediate the sites for future development. Activities under this component include: (i) implementation o f Temporary Safety Plan to minimize public exposure to hazardous materials by fencing and supervising the site when the project starts and decontamination works are underway; (ii) preparation o f detailed site investigations, design o f works, and project supervision requirements; (iii) removal, packaging, and transport o f radiological waste (NORM); (iv) removal o f other hazardous materials, preferably to existing hazardous waste sanitary landfill; (v) cleanup o f o i l contamination and contaminated water reservoirs; and (vi) demolishing buildings and preparation o f sites for redevelopment. Fol lowing remediation, the intention i s that the national regulatory body wil l declare the sites safe for “unrestricted use,” and land use and redevelopment options can then be explored.

Component B - Construction of a dedicated NORM storage facilitv (US$23.70 million)

23. Objective. Azerbaijan has no facility to safely store or dispose o f NORM. This component wi l l finance development and construction o f a dedicated facility to store radioactive waste from the two former iodine sites to be decontaminated under Component A, and NORM from former o i l production sites.

24. Component Description. MES plans to construct a special sanitary in-ground storage facility for N O R M adjacent to the existing Izotop storage facility for radioactive sources. This

6

facility wil l have sufficient capacity to contain the NORM from the two iodine plant sites with spare capacity and extension possibilities to store NORM from other, future cleanup operations including the disposal o f other N O R M waste generated alongside o i l production activities. NORM waste offered for disposal in the future i s l ikely to increase when Azerbaijan wil l introduce further radiological protection regulations. This component includes detailed site investigations, detailed design, construction works, and operations to receive the NORM from the former iodine sites. Izotop under supervision o f MES, wil l manage future (post-project) operations and monitoring.

Component C - National Mapping and Remediation Program for NORM Contaminated - Sites ((US$l 1 .O mil l ion)

25. Objective. This component will enable MES to execute an extensive national-level survey to map NORM-contaminated sites and investigate them to determine contamination levels, priorities, and remediation or containment actions to produce a national phased mitigation program. This component includes US$5.0 mi l l ion for high-priority NORM contamination cleanup operations that wi l l be selected during the national mapping and planning activities and wil l incorporate lessons learned during the cleanup o f the iodine sites.

26. Component Description. Deposits o f residues containing radium are common in o i l production, including in the Absheron Peninsula. Radium contamination and associated radon gas have accumulated in the Absheron Peninsula during 150 years o f o i l production, and are quite concentrated in some spots. Radon and other forms o f radiation pose serious health risks to local people. M E S plans to identify, map, and propose mitigation methods for radioactive- polluted areas. This component i s divided into the fol lowing two sub-components to distinguish between the planning stage and following remediation activities:

Sub-component C1- NORM Mapping and Preparation of Remediation Program. Sub-component C2 - High Priority Cleanup of NORM Contaminated Sites. The Project includes a budget o f US$5.0 mi l l ion for the remediation o f the highest priority NORM contaminated sites identified under Component C 1 o f the project.

Component D - Remediation Program for the 1,000 ha site (US22.0 million)

27. Objective. The objective o f this project component would be to develop efficient approaches for remediation and returning to alternative productive reuse o f polluted former o i l production sites by a comprehensive plan and partially cleaning-up approximately 1,000 hectares o f o i l polluted land with 350 wells between the Buzovni and Mashtagi settlements. This component will coordinate closely with the ARP 111: Large Scale O i l Polluted Land Cleanup Project, regional authorities, parallel Bank supported regional planning exercise and with local governments to help develop appropriate future land use plans for the parcel.

28. Component Description. North o f the international airport o f Baku i s an area o f approximately 1,000 ha that has long been used for intensive o i l production. Most wells are abandoned though some 30 wells still produce oil. Proper cleanup and dismantling activities were never undertaken and there are many old wells, above- and below-ground o i l production

7

structures, oil-spill contamination, o i l storage, oil-processing equipment, and production water storage and processing facilities. The Cabinet o f Ministers plans to use this component to develop a comprehensive approach on polluted land redevelopment - one that combines appropriate technologies for clean-up with land use planning and alternative reuse. The activities in this component are divided into three sub-components.

Dl - Feasibility Study for Comprehensive Cleanup. This sub-component wil l finance detailed feasibility study for the clean up o f the site and associated environmental studies

0 2 - Implementation of Jirst phase of Cleanup. This sub-component wil l finance investments identified for the f i rs t phase clean-up activities in the feasibility study.

0 3 - Land Use Planning and Alternative Reuse of Parcel. This sub-component will support consultant services to help coordinate land use planning, alternative reuse plan for the parcel and support pol icy discussion on land ownership transfer rules and procedures. Special care wil l be required for the preparation o f the Redevelopment Plan for future land-use.

Component E - Capacitv Building;. Public Outreach and Proiect Management (US$4.08 million)

29. Objective. This component wil l provide financial support for project management and performance monitoring and technical assistance for institutional and strategy development and planning. Technical assistance activities will be closely coordinated with IAEA technical cooperation program (Monitoring and Rehabilitation Programs for Contaminated Areas o f the Absheron Peninsula). The activities in this component are divided into three sub-components.

El - Development of Policies, Standards and Regulations. Under this sub-component, policies, regulatory procedures and standards will be developed, in particular for soil contamination levels; site cleanup and land redevelopment for o i l and NORM contaminated sites.

E2 - Public Outreach. The project aims to strengthen public awareness and stimulate an informed public debate on the need and benefits to clean up and rehabilitate former o i l contaminated sites. This sub-component wil l finance a communication program designed to: (a) build communication capacity in the implementing agency and establish dialogue among stakeholders; (b) raise awareness about environmental hazards and health r isks for the local population; and (c) build social and political support for the cleanup program to ensure sustainability. E3- Training and Project Management. The training program under this component will focus on project management and technical skills in implementing environmental cleanup projects and land redevelopment.

8

E. Lessons learned and reflected in the project design

30. An important reference for the project i s the completed Azerbaijan Urgent Environmental Investments Project, which included one pi lot project to treat oil-contaminated soil and another to remediate mercury-contaminated soil and dispose o f mercury waste in a hazardous waste disposal facility constructed under the UEIP. T o a certain extent, the ARP and the proposed project are follow-ups to the UEIP and the following lessons learned were incorporated in the project design:

Consistent standards are needed for cleanup and redevelopment. International standards will be evaluated, adopted, or adapted in component planning and design stage to determine the scope o f cleanup operations in view o f redevelopment requirements.

Small levels of remediation have no meaningfiul impact. The UEIP mercury contamination pi lot cleaned up only a small part o f the polluted site and therefore had l i t t le impact on reducing environmental r isks and worker r isks at the chemical plant. In the proposed project al l physical cleanup operations wil l fully remediate or contain site contaminants, or (as i s the case for the 1,000 ha site) remediate enough o f the site to make i t suitable for redevelopment.

Sustainability requires institutions and policies. Environmental cleanup programs can continue after the lifetime o f the project only if institutions and policies are established, funded, and hnct ioning (see section on ‘Sustainability’).

3 1. Azerbaijan i s new to cleanup operations for NORM-contaminated sites and rehabilitation o f former o i l production sites (decontamination and removal o f o i l production infrastructure) for redevelopment. An international panel of experts can help guide project design and implementation as in similar projects such as Kazakhstan’s Nura River Cleanup Project and Kyrgyzstan’s Disaster Hazard Mit igation Project that dealt with uranium mining tailings.

32. International experience in environmental remediation projects confirm the importance o f risk management to reduce r isks for environmental contamination, public health, and the economy, and to establish and maintain standards for acceptable risk levels instead o f policies that merely establish remediation targets. This international experience wil l be applied in the development o f national standards under the Project for site cleanup and redevelopment.

33. Extensive environmental investigations and monitoring should provide the basis for comprehensive design at the beginning o f project implementation, particularly if contaminant distribution i s not stationary but subject to dynamic processes.

34. Finally, an effective communication strategy i s crucial to achieve satisfactory outcomes. As part o f project preparation, the team has conducted regular consultations with local stakeholders for both core project components. A broad-based public information campaign i s envisioned at the implementation stage.

9

F. Alternatives considered and reasons for rejection

35. An option considered was to combine Bank-financed activities in support o f the ESP into a single horizontal and vertical APL, which may have strengthened coordination. However, Government requested that activities be structured as a series o f separate S ILs because coordination and ownership issues among the implementing agencies are significant enough to jeopardize the whole program. Therefore, the Absheron Rehabilitation Program wil l be processed as separate Specific Investment Loans (SILs). To maintain program coherence every effort wi l l be made to have a common processing calendar for the three most advanced projects for FY08.

36. The Project can be considered the f i rs t stage o f integrated cleanup and rehabilitation activities o f o i l production and related sites in Azerbaijan. This wil l enable the Government o f Azerbaijan to begin further cleanup operations and bridge any period required to seek additional funding for full implementation o f the Remediation Programs. Including full implementation o f the N O R M and 1,000 ha Remediation Programs in this SIL was considered but rejected for the following reasons:

It i s premature to make reasonable estimates o n the extent o f contamination, the final methods / technologies required for cleanup and rehabilitation, or total investments required for full implementation.

Some elements o f cleanup operations are long-term (possibly decades); i t i s impossible to predict staging and timetables for total program implementation at this stage.

Land reclamation has substantial economic benefits but i t i s difficult to predict now the extent o f future revenues, and this parameter influences the funding structure and needs o f future cleanup operations.

Therefore funding for the implementation o f the NORM and 1,000 ha remediation programs wil l be decided when related mapping, site investigations, design studies, and planning are completed.

37. Mapping, investigation, site prioritization, and planning remediations are key to project implementation. Completing the planning stage before starting o n the f i rs t remediation works was an option that was rejected, first, because the iodine plant sites are recognized internationally as urgent environmental hotspots that need immediate action, and second, these cleanups wil l provide practical experience that can be applied to full implementation o f cleanup operations.

38. The most efficient and cost-effective methods to decontaminate the former iodine sites, package, transport, and dispose o f waste have been investigated, compared with alternatives and selected in feasibility studies during project preparation. Alternatives to dispose o f NORM waste include the following: (i) burning, (ii) covering, (iii) dumping in wells, and (iv) containment in a landfill for radioactive waste. Containment in a landfi l l for radioactive waste was selected by MES, in consultation with MEA, based on international best practice, short- and long-term safety issues, and cost effectiveness. The waste wil l be removed from the contaminated sites and disposed o f i t in a newly constructed dedicated sanitary landfi l l for radioactive waste, adjacent to

10

the existing Izotop facility for disposal o f radioactive sources. This solution also meets the need for long-term monitoring o f disposed radioactive waste.

111. IMPLEMENTATION

A. Partnership arrangements (if applicable)

39. The Project was prepared in cooperation with IAEA specialists. The IAEA developed a technical cooperation program for Azerbaijan entitled “Monitoring and Rehabilitation Programs for Contaminated Areas o f the Absheron Peninsula’’ that wil l support M E S in i t s regulatory and operational responsibilities for radioactive waste management, primarily through training, guidance, and technical advice. The IAEA program in Azerbaijan i s fully complementary to the Project and provides technical support during the cleanup operations o f the former iodine sites, and to further mapping development and remediation works o f NORM-contaminated sites.

B. Institutional and implementation arrangements

40. Deputy Prime Minister i s responsible for overseeing implementation o f the overall Environment State Program. H e wil l head the ESP Steering Committee (SC) that wil l be established before negotiations to enhance coordination among al l agencies responsible for implementing the ESP activities including those financed by the World Bank. The ESP SC wil l be directly subordinated to the Cabinet o f Ministers and wil l include members o f each participating Ministries. In the case o f MES, the ESP SC will include the Deputy Minister and the Head o f Chief Department for Procurement and Infrastructure Development within the MES.

41. MES i s in charge o f implementing al l Project components under the leadership o f i t s Head o f Chief Department for Procurement Organization and Infrastructure Department. A dedicated Project Management Team wil l be established within MES prior to project negotiations to oversee technical issues, procurement, disbursement and financial issues, and project monitoring and evaluation. Details o f the P M T composition and its funding source as wel l as arrangements for adequate Financial Management (FM) and procurement were discussed during project appraisal (Section 4.C and Annex 6). FM arrangements were found to be acceptable to the Bank during appraisal. The Head o f the Accounting Department and one more experienced staff o f the same department have been nominated to be responsible for FM arrangements. The P M T wil l hire supervising engineering f i rms, consultants and selected design f i r m s for daily supervision o f cleanup works, monitoring o f quality and progress o f c iv i l works, and execution o f proper decontamination works. Adoption o f a Project Operational Manual for Project implementation arrangements, satisfactory to the Bank, to include a detailed work program, implementation schedule and key TORS wil l be a condition o f Project effectiveness.

42. The complexity o f the NORM and o i l contaminated sites cleanup requires a Panel o f Experts (PoE) to be established by no later than 1 year after Project effectiveness to guide and supervise implementation o f cleanup activities. For the NORM contaminated sites, the PoE wil l verify against the International Atomic Energy Agency (IAEA) safety standards but wil l not have the authority to mitigate any project implementation risks. The MES and the PoE

11

established for this Project wi l l coordinate with the PoE set up under the ARP I11 project for the development o f standards for cleanup o f o i l contamination,

43. Furthermore, a Project Regulatory Working Group (RWG) wil l be established for this project implementation and will consist o f representatives o f PMT, MES, MENR, MOH and other local government parties that play a role in permitting procedures and regulatory monitoring o f health, safety and overall environmental project compliance. The RWG will seek solutions o f regulatory and compliance issues at the technical working level. The P M T wil l constantly coordinate with the PoE during the project implementation.

C. Monitoring and evaluation of outcomes/results

44. P M T staff, assisted by MES wil l carry out monitoring and evaluation o f project results/outcomes/perfonnance against the Results Framework and Monitoring indicators in Annex 3, “Arrangements for Results Monitoring,” using quantitative indicators and qualitative assessments, and indicators to measure, detect, and address project implementation delays. P M T staff wil l prepare quarterly project progress reports and submit for Bank review.

45. Currently, there i s no monitoring system o f radioactive contamination in Azerbaijan. However, the Government o f Azerbaijan (MENR) i s implementing with the IAEA a project during 2007-2008 that targets the establishment o f such a system. In addition, the IAEA i s intensively discussing with the Government o f Azerbaijan the need to establish the country’s independent Regulatory Agency on radioactive and nuclear activities. However, the practical establishment o f Regulatory institution and launch o f such monitoring system implementation wil l take time and wil l not be achieved before the start o f the World Bank-financed project. Due to this fact, the combination o f the monitoring capacity created within the P M T and the RWG establishment will represent an efficient arrangement to support the current project implementation.

D. Sustainability

46. government.

The ESP provides an overall framework and enjoys strong backing from al l branches o f

47. During project preparations, MES demonstrated strong ownership and commitment to implement the Project, adopt long-term capacity, and develop policies and programs to continue post-project remediation work. Ample resources and government budget were mobilized rapidly for cleanup investment preparation studies under the Project (Site Investigations, Feasibility Study, Environmental Impact Assessment, and Environmental Safeguards Framework, Social Assessment, and Resettlement Framework). T o meet Category ‘A’ project requirements, al l work was completed on time in the period September 2007 - February 2008.

48. To establish a basis for continued post-project site remediation and redevelopment, the Project design includes a careful mix o f physical cleanups, site investigations, planning, programming, and pol icy development for long-term interventions, capacity building, and

12

budgets for follow-up work. Bank willingness to stay involved for implementation o f future interventions under the program i s welcomed by the Government at the highest level.

49. this would not erode positive impacts o f completed project cleanup operations.

Unforeseen developments could delay or discontinue post-project remediation work, but

E. Critical risks and possible controversial aspects

50. Potential risks and mitigation. MES has had national responsibility for regulating radiological safety only since 2005, and i s establishing institutional structures and capacity to perform related tasks. Izotop, the national agency for management o f radioactive sources now reports to MES; this lack o f separation between regulatory and executive responsibilities is a major concern and topic o f discussion between IAEA and the Government. The Project monitoring arrangements accommodate independent oversight and may support development towards institutionalized independence in radiological safety monitoring.

5 1. Azerbaijan has l i t t le experience with low-level radioactivity decontamination. Under the relationship between MES and the IAEA a capacity-building program i s under development to manage these activities and recruit expertise for these tasks. This program and the involvement o f IAEA in both general oversight and technical support wil l be highly beneficial to the implementation o f the Project.

52. The rehabilitation o f former iodine plant sites involves decontamination, repackaging, transport, and disposal o f radioactive and other hazardous materials, which classifies this project component as Category ‘A’ under OP4.0 1 on Environmental Assessment.

53. Resettlement must be carried out as soon as possible and before works commence for 59 internally displaced persons (1 3 families) that l ive in abandoned factories close to radioactive charcoal waste heaps at one o f the former iodine plant sites. An Executive Order from the Cabinet o f Ministers has already been issued taking responsibility for this action.

Description of risk

MES i s responsible for regulating radiological safety. A t the same time, Isotop, the national agency for management o f radioactive sources, i s now reporting to MES, which means regulatory and implementation responsibilities rest in a single agency. Overall responsibility for implementation o f the ESPis divided among many agencies. Coordination among these agencies i s weak. Division o f responsibilities between MES and

Mitigation measures

The project w i l l provide momentum for an expanded policy dialogue addressing issues such as the importance o f separating regulatory and implementation responsibilities. This i s also a major concern o f IAEA’s, which i s cooperating closely wi th MES on a range o f issues. A Steering committee for al l agencies involved in implementation o f the ESP w i l l be established before negotiations. The ARP, in the next cycle, will also support improvements in the regulatory framework and enforcement

13

Ratinga of residual risk

Moderate

Substantial

I Description of risk

SOCAR on the 1000 ha site i s not clear. Lack o f qualified consultants able to develop technically sound designs for either: a) collecting, packaging, transporting and/or disposing o f the low-level radioactive waste materials from the two sites; or b) for the clean up o f the 1000 ha site. The responsible Ministry was recently established and has no prior experience working with the Bank or on this kind o f project. The project management team within the Ministry i s also new.

MES has no prior experience in implementing Bank-financed projects. The financial management environment o f MES was not ready to handle the accounting and reporting o f the project during pre-appraisal. However, they have been found to be acceptable to the Bank during appraisal. The responsible Ministry has no experience in implementing World Bank projects. Therefore, they are not familiar wi th the World Bank procurement guidelines and procedures. A new Project Management Team (PMT) w i l l be established in MES. The P M T shall recruit a procurement specialist.

This i s a Category A environment project. I f the low-level radioactive waste materials on the sites are not properly collected, packaged, transported or disposed of, there i s a risk to people in the vicinity. Additionally, there are 13 IDP families l iving on one o f the sites who need to be resettled into

Mitigation measures

mechanisms in MENR for oil- contaminated land. Consulting assignments will be advertised internationally. MES has hired an international expert on low- level radioactive waste removal as an advisor. IAEA i s providing training and i s advising on the technical solutions proposed.

MES recognizes i t s lack o f experience and i s very supportive o f international assistance, including from IAEA. The project management team within the Ministry i s fully mobilized and effectively engaged in project preparation. MES management i s closely supervising the work o f the project management team. - Nominate FM staff with adequate qualifications. Done. - Customize the accounting system to accommodate project accounting and reporting. To be completed by M a y 30,2008. - Determine reporting templates. Done - Prepare a financial management manual. By effectiveness.

- Recruit a procurement specialist with experience in World Bank funded projects. - Continuous training o f the P M T procurement staff. - Close supervision by the WB Team. - Adequate, local market competitive remuneration for P M T staff

During project preparation, potential environmental impacts will be assessed and the MES w i l l prepare an Environmental Impact Assessment Report acceptable to the Bank. This report will also include a monitoring plan o f potential project impacts during the rehabilitation works, which will be implemented throughout uroiect execution.

Ratinga of residual risk

L o w

Moderate

Moderate

Substantial

Moderate

Substantial

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F. Loan conditions and covenants

54. Conditions for Loan Effectiveness: 0 Procurement Specialist appointed.

Adoption o f the Project Operational Manual, satisfactory to the Bank, to include a detailed work program (including al l environmental and social safeguard frameworks, implementation schedule and key TORS. The Borrower has opened the Project Account in Manat with the initial deposit o f $50,000 equivalent on terms and conditions acceptable to the Bank.

55. Major Legal Covenants: 0

0

0

0

0

0

0

IV.

The Borrower shall, until the completion o f the Project, cause to maintain the Steering Committee, which shall meet at least twice a year. The borrower wil l establish the PoE by no later than one year after effectiveness. The Borrower shall ensure that no activities involving works under Component A o f the Project shall commence before resettlement has been completed. Unless otherwise agreed with the Bank, the Borrower shall ensure that a technical design for each o f the two cleanup sites has been approved by the Bank prior to the commencement o f any activities involving works for respective site under Component A o f the Project. Unless otherwise agreed with the Bank, the Borrower shall ensure that a technical design for a new storage facility has been approved by the Bank prior to the commencement o f any activities involving works under Component B o f the Project. Unless otherwise agreed with the Bank, no activities involving works under Component C.2 o f the Project shall commence prior to completion o f a technical design, acceptable to the Bank, for each respective NORM contaminated site. Unless otherwise agreed with the Bank, no activities involving works under Component D.2 o f the Project shall commence prior to completion o f a technical design, acceptable to the Bank.

APPRAISAL SUMMARY

A. Economic and financial analyses

56.

0 positive impacts on public health from cleanup activities and better environmental management; particular benefits for populations now exposed to severe health hazards,

0 return o f unutilized or unsafe land to normal economic use; capture land value increases.

Overall project benefits fal l in two main categories:

57. Due to lack o f useful data, the long time it would take to monitor radioactive dust levels (12-18 months) and the general difficulty o f assessing impacts o f radiation o n public health, the positive impacts o f the Project on public health have not been quantified. But health benefits remain the key project driver, mandated by the serious health hazards posed by the current situation and the objective o f the Project to mitigate these risks by bringing back radiation exposure to normal background levels.

15

58. The total increase in land value for the Ramani and Surakhani sites i s between US$6.9 and US$13.8 million'. Whi le this i s less than cleanup costs, i t significantly offsets them. Benefits from increased land value wil l accrue financially to the State as the property owner, as i t can lease or privatize the land. Recurring costs to be borne by the national budget include maintenance costs for the dedicated storage facility.

59. With respect to the 1,000 ha project, analysis performed under the ARP 111: Large Scale O i l Polluted Land Cleanup Project (P110682) indicates that given the high value o f land, the cleanup and preparation for land-use purposes such as housing and agriculture are l ikely to be economically justified.

B. Technical

60. The proposed project builds on international good practice and international experience o f environmental cleanup operations and rehabilitation for land-use o f contaminated sites. The environmental and public health r isks mitigated by the Project are issues o f high-priority for support in Azerbaijan.

61. A feasibility study, supported by an international technical specialist, led to the proposed technical cleanup and land rehabilitation options for the former iodine sites under the Project. Based on available information and a site investigation program, project activities include options that most effectively meet internationally accepted environmental standards. The iodine sites remediation and the construction and operation o f the NORM disposal facility incorporate the selected techniques for cleanup, land rehabilitation, and contaminant disposal. The basic project design, scope o f works, and budget allocations were identified in the project feasibility study. During project implementation and before works commence, detailed site investigations wil l be conducted and a detailed construction design wil l be prepared.

62. The same approach wil l be applied and international standards used to prepare the further cleanup operations under the national NORM Contaminated Sites Remediation Program and the 1,000 ha Site Remediation Program.

C. Fiduciary

Procurement

63. An assessment o f the procurement arrangements for the Project has been undertaken in December 2007 and updated during the Appraisal mission in March 2008. M E S i s doing i t s procurement under the Azeri Public Procurement Law. The Project wil l be managed by a P M T to be established in the Ministry. The Ministry has no prior experience with procurement under Wor ld Bank funds. The P M T will recruit a procurement specialist with previous knowledge and experience in procurement under Wor ld Bank-funded projects to work specifically for the Project. The recruited procurement specialist shall go through in-depth training as required. Technical assistance to the P M T wil l be provided by the technical staff from the relevant

' See Annex 9.

16

departments o f MES on an as required basis. The P M T wil l be the central unit responsible for day-to-day operations o f the Project and wil l work with al l relevant agencies on matters related to project preparation and implementation, including procurement actions. At the country level, a comprehensive analysis o f the public procurement system was carried out during the Country Procurement Assessment review (CPAR) in 2002 and finalized in June 2003. The CPAR concluded that Azerbaijan should be rated as a medium to high-risk country in respect o f public procurement systems. A new CPAR i s underway in 2008 to benchmark progress against agreed actions and provide further guidance on improvements needed.

Budgeting

Internal Controls

Staffing Accounting/ Reporting Flow o f funds

Auditing

Financial Management Arrangements.

The national budgeting procedure w i l l be used. MES will ensure that the project expenditures are included in i ts annual budget. MES existing controls (with some additions, if necessary) will be used to process project transactions. MES will document internal control procedures in the FM section o f the Project Operations Manual. MES has appointed FM staff to work on the Project. MES existing accounting software w i l l be customized for Project requirements. MES wi l l open a designated account in US$ for funds f low f i o d t o the Bank, and two Manat accounts for government contributionslcontractor payments. MES w i l l hire independent auditors for the annual project financial statements audit when disbursements envisaged in the Project commence.

64. in December 2007 and was updated during Appraisal in March 2008. management arrangements for the Project have been found to be satisfactory to the Bank.

An assessment o f the financial management arrangements for the Project was undertaken Current financial

65. MES has no prior experience in implementing Bank-financed projects. However, M E S Accounting unit has a reliable accounting system that can be easily adjusted for the needs o f the project. The Bank and M E S agreed on action plan that was init ial ly developed in December 2007. The implementation o f the action plan was found to be satisfactory to the Bank.

66. The following table summarizes agreements on financial management:

There i s no overdue audit in the sector. MES accounting, budget formulation and monitoring systems and the M o F Treasury systems for the disbursement o f counterpart funds will be used during project implementation. The overall residual financial management risk i s rated as moderate. Detailed financial management assessment, including agreed upon action plan i s outlined in Annex 7 o f the PAD.

D. Social

67. During the preparation o f the Project, the Social Impact Assessment (SIA) was carried out with the main focus o n the following issues: a) impact on I D P families living on the Surakhani iodine plant site; b) impact on people living within the 1,000 ha o f oil contaminated land; c) possible impacts on population living in the close neighborhood to iodine plant sites; d) potential impact on population living along the radioactive wastes transportation route.

17

68. The SIA has identified 59 IDPs in 13 families in Surakhani and approximately 300 individuals in the entire contaminated land that spans over 1,000ha. Other findings o f the SIA include: (i) more than 50% o f population living around the iodine plant site are not aware about radioactive pollution and potential danger to their health; (ii) one new IDP family moved into and settled in Surakhani lately; and (iii) no other settlement i s found close to the new polygon for radioactive waste disposal.

69. Since the exact nature and scope o f impact in both Surakhani site and the “1,000ha” site cannot be known prior to project implementation, the Resettlement Policy Framework (RPF) has been prepared that sets out policies and procedures that wil l apply to the relocation o f households and other unidentified impact both in Surakhani and those in other contaminated areas to be cleaned up in the subsequent phases o f the Project. It has been agreed that the State Committee for Refugees and IDPs (SCRI) will implement the relocation o f IDPs from the Surakhani site. A Social and Communication Coordinator wil l be hired in the P M T who wil l work together with the SCRI and prepare a Resettlement Action Plan (RAP). The Social and Communication Coordinator wil l be responsible for the planning and implementation o f potential displacement in the “1,000ha” site. The RPF has been reviewed by the Bank and found to meet OP 4.12 satisfactorily.

E. Environment

70. The Project i s expected to have important and positive environmental impacts on the Absheron Peninsula, that will lead to: (i) reducing public health risks and environmental damage caused by inappropriate management o f the site’s legacy waste from years o f o i l production activities in the Project area; (ii) possible new land utilization fol lowing cleanup and remediation o f two former iodine production sites in Surakhani and Ramani and o f 1,000 hectares o f o i l polluted land between the Buzovni and Mashtagi settlements; and (iii) overall pollution prevention and waste minimization from o i l production activities in the Absheron Peninsula through enhancing MES capacity to launch remediation and cleanup actions o f the highest priority o i l production sites in the Project area by developing a national remediation mitigation program for N O R M contaminated sites and a national radiological monitoring plan.

71. The activities which raise short-term environmental concerns are those related to the execution o f specific proposed c iv i l works that involve: (i) full-scale remediation o f two former iodine production sites, including treatment, packaging, transport and disposal o f affiliated plants’ buildings and o f about 85,000 m3 o f mixed low-level waste (charcoal) pi led and buried at these sites; (ii) cleanup o f 1000 ha oil polluted site including removal o f old o i l production infrastructure, decontamination from o i l spills, o i l storage, and o i l processing equipment, and removal o f other types o f waste including N O R M containing materials; and (iii) construction o f long-term radioactive waste storage facility receiving waste f rom the two former iodine production sites and from other o i l production site cleanups.

72. Several technical and engineering background studies (e.g., Feasibility study, EIA) have been developed by M E S during the Project preparation to characterize and define the overall proposed Project site current baseline environmental conditions including historical site

18

contamination characterization and spatial distribution o f contaminants, groundwater pollution assessment, existing potential radiological dose to the public, evaluation o f radioactive and non- radioactive waste management at the Project sites. Also, under the proposed Project a comprehensive radiological monitoring program to assess the current radioactive contamination situation in the country will be developed and implemented in collaboration with the International Atomic Energy Agency (IAEA).

73. The detailed Environmental Impact Assessment (EM) prepared by MES for the decontamination o f the two former iodine production sites at Surakhani and Ramani highlights possible long-term environmental impacts (e.g., on land-use and land resources) that may arise during the operation o f a proposed waste disposal facility to receive the charcoal waste. The EIA recommends the implementation o f a mitigation plan to avoid possible impacts during constructions and o f a comprehensive environmental monitoring program including radiological measures o f surface, subsurface and groundwater during proposed cleanup operations.

74. An Environmental Management Framework (EMF) was prepared and publicly disclosed by MES for NORM decontamination works o f the highest priority o i l production sites as identified in the National Remediation Mitigation Program and for the cleanup works proposed at the 1,000ha site, for which specific investments will be known during project implementation once the requested technical studies are developed. More information on the content o f the Project EIA and EMF i s summarized in Annex 10.

F. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [X I [ I Natural Habitats (OP/BP 4.04) [ I [XI

Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [XI

Involuntary Resettlement (OP/BP 4.12) [X I [ I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI

Forests (OP/BP 4.36) [ I [XI

Safety o f Dams (OP/BP 4.37) [ I [ I Projects in Disputed Areas (OP/BP/GP 7.60)* [ I [XI

Projects on International Waterways (OP/BP/GP 7.50) [ I [XI

[ I

1 1

75. The Project has been classified as an environmental category A and i ts proposed investments trigger the World Bank Policies OP/BP 4.01 on Environmental Assessment, the OP/BP 4.12 on Involuntaiy Resettlement, and the OP 17.50 on Disclosure Policy.

76. Environmental Assessment. The decontamination o f two former iodine production sites (Component A) involves removal, repackaging and transport o f contaminated low-level radioactive waste as well as the disposal o f this material at a newly built dedicated N O R M waste

* By supporting the proposedproject, the Bank does not intend to prejudice the f inal determination of the parties' claims on the disputed areas

19

storage facility (financed under Component B). A detailed Environmental Impact Assessment (EIA) including a proper Environmental Management Plan (EMP) was prepared for these two components’ investments and discussed with the local public o n two occasions before the Project appraisal. The EIA and EMP ensure that these investments will comply with the existing environmental laws and regulation in Azerbaijan as well as with the Bank’s Operation Policy on Environmental Assessment. The EMP proposes a rigorous environmental monitoring program consisting o f sampling and analyzing various media (water, groundwater, air, soil and sediments) on and around the Project sites to detect potential radioactive or hazardous contaminants such as heavy metals and inorganic chemicals. Such monitoring data wil l be evaluated to determine the degree o f regulatory compliance and for pollution-management practices.

77. The EMF prepared for investments at additional sites that require further decontamination (unknown at this point, Component C) and for the cleanup works proposed at the 1,000 ha site (Component D), provides a general option impact analysis with environmental and social criteria and an overall assessment on how to mitigate and monitor possible environmental effects affiliated with these investments.

78. Involuntary Resettlement. The Resettlement Policy Framework has been developed that sets forth policies and procedures for the relocation o f households from the entire contaminated land. The RPF has been reviewed, and adequately meets OP 4.12.

79. Public consultation and disclosure O n December 19, 2007, fol lowing the World Bank’s safeguard policy and requirements, the MES held the f i rs t round o f public consultations for this Project. The meeting was attended by representatives o f the Academy o f Sciences, NGOs, local governments and community representatives (municipalities) o f the districts of, or adjacent to, the Project areas. The Project team (implementing agency and consultants) briefed the audience on the proposed Project and on the preparatory work carried out, answered questions raised by participants. A second round o f public consultations took place on February 7, 2008. The meeting brief ly discussed the draft EIA, EMF, and RPF. The public welcomed the Project and advised for constant public awareness during its implementation. Comments received during the meeting were incorporated in the final safeguard documents and publicly disclosed in Azerbaijan and in the Infoshop. An Executive Summary o f the EIA together with the EMF have also been disclosed to the World Bank Board o f Directors and at the Infoshop120 days before the project board date in accordance with the requirements stipulated in the Pelosi Amendment.

G. Policy Exceptions and Readiness

80. The Project complies with al l applicable Bank policies and no exceptions are required.

81. (consultants’ services) wil l be completed before effectiveness.

I t i s expected that procurement documents for the init ial contracts o f the Project

82. The formal adoption o f the Project Operational Manual i s a condition o f Loan Effectiveness

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Annex 1: Country and Sector or Program Background AZERBAIJAN: Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABIL ITATION PROJECT

The challenge

1. This Project i s part o f a broader World Bank support to the Environmental State Program (ESP) instituted by a Presidential Decree on Sept. 28, 2006. The ESP i s a comprehensive and proactive approach that signals the highest level commitment to remedy the acute environmental situation in Azerbaijan in general, and on the Absheron Peninsula in particular. The Bank supports the ESP as an effective and ambitious response to development challenges facing the Absheron Peninsula: tackling critical environmental risks and liberating land necessary for rapid economic and demographic growth o f this essential urban area.

2. Economic growth. Since regaining independence and signing the “Contract o f the Century” with a consortium o f foreign o i l companies, the o i l economy o f Azerbaijan has been undergoing a strong resurgence with the development o f the massive Azeri-Chirag-Gunashli field and the the Shah Deniz gas field. These o i l and gas discoveries have given Azerbaijan new means to combat poverty and develop into a diversified, sustainable middle-income economy: per capita income rose to US$2,740 in 2006, up from a post-independence l o w o f just US$470 in 1995.

3. Demographic growth. Recently many people have migrated to the Absheron Peninsula in search o f jobs and opportunities. According to official statistics, the registered population o f the Ci ty o f Baku (including al l settlements) increased from 1.1 mi l l ion at the 1989 census to 1.87 mi l l ion by the end o f 2006. However, unofficial estimates are much higher - ranging from 2.5 to 3 .O million when Absheron Rayon inhabitants, unregistered migrants and internally displaced people from the conflict with Armenia are included. Similarly, the official population o f the Ci ty o f Sumgayit on the northwest peninsula i s 294,400 but unofficial estimates range up to 400,000.

4. Demand for land. A rapidly increasing population and the economic revival fostered by increased oil revenues have created a strong demand for land. Baku i s ringed by former o i l fields and other polluted sites; urban growth has leapfrogged over these areas and extended literally across the Absheron Peninsula, often with l i t t le access to either basic infi-astructure, such as waterhewerage, or to social infrastructure, such as schools. The demand for land i s such that informal settlements are even growing in heavily polluted areas, creating a serious health risk. The city urgently needs land for communication networks, housing, businesses, and recreational areas. I t i s necessary to reuse degraded land within the city and ringing the city. Meanwhile, contaminated land located close to rapidly growing residential and commercial areas has high potential value for redevelopment if it were cleaned up.

5. However, land reuse requires a system to select land for remediation and determine what i t wil l be used for; to balance redevelopment values (linked to urban growth) and rehabilitation criteria (e.g. clean soil depth required; level o f residuals acceptable) which determine rehabilitation costs. The system must also monitor the progress o f land conversion and tackle

21

institutional issues o f land ownership to permit the transfer o f land to developers. Currently, this system does not exist or, where it exists, i s dysfunctional. A comprehensive approach to planning infrastructure investment needs i s also lacking: the former General Plan, developed in the mid-l970s, covers only a small portion o f the current urbanized area and excludes many areas with new settlements that have developed during the past 15 years.

6. Environmental demadation. Pollution on the Absheron Peninsula has many origins. Nearly 150 years o f o i l production have left some 30,000 hectares o f oil-contaminated land, o f which 15,000 are heavily contaminated. Soviet enterprises that no longer exist created most o f the pollution but since SOCAR took over in 199 1, pollution has continued with many examples o f poor practice, including o i l and wastewater spi l ls onto the ground at drilling sites. Inefficient environmental control, o i l production, and other Soviet-era chemical producers o n the peninsula also generated radioactive waste (from naturally occurring radioactive materials - NORM). The solid waste management system has deteriorated significantly due to rapid urban growth, weak management, and lack o f institutional framework. Municipalities lack collection equipment, infrastructure, and funds to cover costs so that most solid waste i s never picked up. The official Balakhani waste disposal site i s in deplorable condition with continuous fires, and new unofficial dumps are being established in inappropriate locations. The Baku sanitation system i s in urgent need o f reconstruction; untreated residential and industrial wastewater i s contaminating the Caspian Sea, damaging public health and the marine environment, including the sturgeon population.

The Environmental State Program

7. The Environmental State Program (ESP) instituted by the September 28, 2006 Presidential Decree (no. 1697) forms the basis o f the proactive response by the Government to this challenge. The ESP focuses on the Absheron Peninsula but includes some nation-wide activities. I t i s a comprehensive plan involving cleanuphemediation, hazardous and non-hazardous waste, and fonvard-looking environmental management through renovating facilities and improving laws and regulations. The Decree makes the Cabinet o f Ministers responsible for overall coordination and supervision, and demonstrates high-level commitment that has motivated key ministries and agencies.

I t details 65 activities and 30 governmental or public stakeholders.

8. Legacy vs. ongoing pollution. The ESP addresses legacy and ongoing environmental pollution in the Absheron Peninsula. Legacy problems have developed over many years but have l i t t le new degradation. Bibiheybat, the heavily polluted artificial peninsula at one end o f Baku Bay exemplifies legacy pollution. In contrast, ongoing problems wil l create future environmental degradation unless steps are taken to curb them - the ESP includes untreated industrial and residential wastewater, solid waste disposal, and continued o i l production pollution.

9. Implementation o f the ESP. To carry out efficient implementation, supervise performance o f the ESP, and improve coordination among government agencies, the Cabinet o f Ministers issued a subsequent decree (no. 325 S, October 21, 2006), which defined the “Implementation Schedule for the Comprehensive Action Plan on Improving Environmental Situation in

22

Azerbaijan for 2006-2010” (IS-ESP), and assigned the Deputy Prime Minister, as the supervisor and implementer o f the September 28 decree. The implementation schedule specifies the government agencies directly responsible for implementation o f each action - the key ones being the Ministry o f Emergency Situations, the Ministry o f Economic Development, SOCAR, and Azersu - while the Ministry o f Ecology and Natural Resources i s responsible for reporting to the Cabinet o f Ministers on implementation o f the ESP, based on inputs o f implementing agencies. It also specifies when the action should be started and completed, and requires the responsible agencies to determine expected costs and identify funding sources. However, the general inadequacy o f existing data and the lack o f feasibility studies prevent even a basic estimate o f costs and timeline.

Wor ld Bank strategy for supporting the ESP

10. The proposed Project i s part o f a programmatic series o f SILs that respond to the Government o f Azerbaijan’s request for World Bank support for the ESP. This series o f SILs i s i t se l f part o f a broader Wor ld Bank approach for cleaning up the environment in Azerbaijan. I t supports two pillars o f the 2006-10 Country Partnership Strategy: (a) improve environmental management and conditions and (b) support sustainable and balanced growth o f the non-oil economy. I t amplifies the assistance started under the U S 2 0 mi l l ion Urgent Environmental Investment Project closed in 2005, which included mercury cleanup and onshore o i l field cleanup on the Absheron Peninsula. The ARP projects wil l support operationalizing the ESP through stronger prioritization, monitoring and technical assistance to manage i t s sheer complexity.

11. The World Bank’s strategy for support for the ESP rests on three fundamental considerations: (a) the importance o f regional economic development and growth; (b) the need to address land conversion; and (c) the importance o f independent monitoring and public outreach.

12. Bank involvement wi l l also help steer ESP implementation towards a regional development approach to Absheron rehabilitation. This regional development approach starts with a US$5.0 mi l l ion component o f the National Water Supply and Sanitation Project (approved in FY07) that finances preparation o f a Regional Development Plan for the Absheron Peninsula. This will help the Government move from the former system o f general planning to a flexible, market-based, strategic spatial development approach.

13. The Bank’s strategy also prioritizes the importance o f developing a systematic approach to land conversion. Land conversion has emerged as a critical constraint on cleanup as land reuse i s essential for sustainability. The ARP I11 and ARP I Projects both include components to support connecting cleanup o f land with i t s future use. The ARP Projects, as wel l as the on-going Real Estate Registration Project, and the urban transport project under preparation, addresses a specific element o f the land use, ownership and transfer issue. Whi le no single project can simultaneously tackle constraints that run across many parts o f Government, together they are expected to converge and catalyze further pol icy dialogue on how to address these systemic constraints.

23

14. Finally, the Bank’s strategy supports independent monitoring and public outreach. In order to monitor the overall program, a Panel o f Experts wil l be established to serve as an independent advisory body providing high-level, independent technical oversight and advice for ARP cleanup projects. The Panel o f Experts wil l consist o f qualified experts with long-term o i l and gas sector experience, recruited from sector-specific enterprises and institutions with a strong environmental track record. Both local and international organizations wil l be included on the Panel. The ARP Projects also include components to promote public awareness and stimulate informed public debates.

P r o g r a m design

15. Government plans to complete the ESP by 2010, but realistically the scope o f work suggests that i t may take much longer. Within these very large needs, the goal o f the proposed Program i s to help rapidly implement strategic ESP Projects. Discussions between the Bank and the agencies focused on selecting activities for which Bank support would best add value, and on practical solutions to operationalize the ESP and boost Government momentum by supporting Projects that could deliver quick and visible results within the short timeframe established for the ESP. The program therefore i s structured as follows:

16. The f i rst series o f S I L s focuses on: (i) critical, self-standing urgent projects ready for implementation, that wil l quickly tackle some o f the worst environmental issues in Absheron and dramatically improve living conditions for residents, including informal settlers, (ii) strengthening environmental management and cleanup capacity in key agencies; and (iii) preparation o f strategies, feasibility work and designs for the more complex cleanup or environmental management investments to be financed in the next phase. The Projects wil l provide visible results and provide momentum for the ESP. The first phase includes:

a. ARP I: Contaminated Sites Rehabilitation Project (P104985) b. ARP 11: Integrated Solid Waste Management Project (P110679) c. ARP 111: Large Scale O i l Polluted Land Cleanup Project (P110682)

17. These three projects would be followed by others that wil l address more complex investments, including: upgrading o f wastewater treatment for Greater Baku,, strengthening o f environmental pol icy and regulatory capacity-building for the ESP, and further investments in solid waste management, remediation o f o i l polluted lands, and NORM clean

Project-specific background issues

18. A special concern from o i l exploitation activities i s the radioactive waste generated as so- called naturally occurring radioactive materials. NORM i s mostly low-level radioactive waste and appears as deposits f rom o i l production water, and occurs as radon gas.

19. Since 2005 when MES was established, i t has had national responsibility for regulating radiological safety and is establishing institutional structures and capacity to perform tasks related to that mandate. Izotop, the national agency for management o f radioactive sources (from hospitals, etc.) reports to MES. Azerbaijan i s a member state o f the IAEA, and in 1997,

24

adopted the L a w on Radiation Safety for the Population based on IAEA safety standards. The Russian standard i s used now for handling radioactive waste but this is being revised.

20. Azerbaijan has no experience with low-level radioactive waste (including NORM) decontamination. MES and IAEA are developing capacity and management structures to bring in the expertise required for the Radio-ecological Monitoring and Rehabilitation Programs for Contaminated Areas o f the Absheron Peninsula. Under these programs, IAEA offers technical cooperation, mainly training and advisory activities. The program is at an early stage, but covers a broad range o f contaminated sites and activities that includes contaminated iodine production plant sites in Baku and a program to map al l radiological contaminated sites in Azerbaijan, most o f which are exclusively related to o i l production.

21. The Government o f Azerbaijan in consultation with the IAEA has identified two former iodine-production plants as radioactive waste hotspots in need o f urgent remediation because they are within the built-up area o f Baku. These plants operated until 1995-96 in Surakhani and Ramani areas; they extracted iodine and bromine from o i l production water, a process during which dissolved and suspended materials were absorbed in activated carbon (charcoal) thus concentrating minerals in the charcoal pellets that are naturally present in o i l production water from geological formations. Among these minerals are natural radio-nuclides, mainly uranium- 238 and radium-226/228. The concentration o f radio-nuclides in the two iodine plants classifies the used charcoal as radioactive waste,’ requiring special precautions for storage and disposal.

22. Adjacent residential areas are encroaching upon both the Ramani and Surakhani sites. N o one lives at the Ramani site, but since 1993-94, 13 families (59 people, refugees from Nagorno-Karabakh) l ive in the former office buildings at the Surakhani site.

23. In 1996, when the iodine plants were abandoned, no measures were taken to remove the waste materials or contain the waste on site. Since then, site structures have deteriorated releasing waste materials and the charcoal waste heaps have been exposed to the weather and used as a source o f fuel by local people. Consequently, charcoal waste volumes on the two sites have been almost halved. Combined volume from both sides i s now estimated at 32,000 m3 (19,000 tons); remaining charcoal pellets have been spread over a much wider area o n the sites than the original locations o f the charcoal waste heaps; and only coarse charcoal particles are visible; finer materials may have been carried away by wind.

24. More recent efforts have been made to fence o f f the sites and inform the local people and the families living on the Surakhani site about the hazards o f the waste materials. This has substantially reduced, but not stopped, the removal o f charcoal for fuel. In addition, construction materials are s t i l l removed from the site and from areas with charcoal waste.

25. Under the ESP, the Cabinet o f Ministers designated the newly established (2005) M E S to develop an integrated approach for cleaning up contaminated land and preparing it for

The waste (roughly 5,000-13,000 Bqkg) needs to be classified according to national standards based on International Atomic Energy Agency (IAEA) codes and the possible annual public exposure to certain radiation levels. Most l ikely category w i l l be [Radium-Bearing] Long-Lived Low-Level Waste (LLW-LL) or Very Low- Level Waste (VLLW), for which storage in an engineered landfill facility may suffice for safe disposal.

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redevelopment. MES will be the lead institution for rehabilitation o f the 1000 ha site north o f the international airport o f Baku between Buzovni and Mashtagi settlements, historically one o f the main o i l production fields, now only partially in use by SOCAR because most o i l production facilities are abandoned.

26. The remediation program for the 1,000ha o i l production site i s a comprehensive rehabilitation program that cleans up contaminated soils, removes abandoned o i l production infrastructure and wil l prepare the site for re-development according to a land-use plan that has been prepared with stakeholders. This area-based focus on planning and re-development makes the Project different from the ARP I11 Project, which focuses on the overall scale o f o i l contamination and finding effective approaches to mobilize cleanup capacity.

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Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies

AZERBAIJAN: Absheron Rehabilitation Program ARP I: CONTAMINATED SITES REHABILITATION PROJECT

Project

1. Azerbaijan: Urgent Environmental Investment project (UEIP): Completed 2. Azerbaijan: National Water Supply and Sanitation Project

3. Real Estate Registration Project

Amount

USD $20 mi l l ion

USD $230 mi l l ion

U S D $30

4. IDP Economic Development Support Project

U S D $11.5

Other Donors 5. Capacity Building

Financier

USD $0.3

World Bank (IDA)

for Clean Development Mechanism in Azerbaijan

6. Preparing the Social Infrastructure for Internally Displaced Persons and Vulnerable Population

World Bank (IBRD)

U S D $0.84

World Bank (IBRD)

World Bank (IDA)

ADB

Sector Issues Addressed

Address urgent actions identified in the Azeri National Environmental Plan (NEAP). Improve the availability, quality and reliability o f water supply and sanitation services in twenty o f Azerbaijan’s regional (Rayon) centers. T o ensure a reliable, transparent and efficient real estate registration system supporting real property markets and suitable systems for the management and use o f State-owned immovable urouertv. Help improve the living conditions o f IDPs and enhance their economic opportunities and prospects for social integration

Building capacity o f the Azeri public and private sector to involve in and benefit fkom participation in the C D M . Improve access to basic social infrastructure for vulnerable segments o f the population, including internally displaced uersons (IDPs).

OED Rating for Bank Projects

IP: s DO: S

IP: MS DO: S

IP: s DO: S

IP: s DO: S

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7. Capacity Building and On-the-Ground Investment for Integrated and Sustainable Land Management

8. Solid Waste Management Improvement Project (SWMIP) Azerbaijan

USD $0.69

USD $0.86

UNDP (GEF / Government o f Norway)

UNDP (Government o f Norway)

Promote sustainable and I integrated management o f land resources and meet country’s obligations to the UN Convention to Combat Desertification (UNCCD). Improve solid waste management by exploring multi-sector partnerships approaches.

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Annex 3: Results Framework and Monitoring

AZERBAIJAN: Absheron Rehabilitation Program ARP I: CONTAMINATED SITES REHABILITATION PROJECT

Results Framework

PDO

The PDO i s to support the ESP to curtail environmental degradation in the Absheron Peninsula, by assisting in the decontamination o f former iodine production sites and in the development o f a strategy for remediatiodcontainment o f NORM contaminated sites. The project will also support in developing institutional capacity for the cleanup o f former o i l production sites and for developing rehabilitation and redevelopment plans for a specific o i l production site.

Intermediate Results One per

Component Component A Cleanup and Rehabilitation o f former Iodine Sites

Component B Safe disposal and storage o f NORM.

Outcome Indicators

Environmental degradation curtailed in two former iodine production sites (Surakhani and Ramani) and at abandoned o i l production site as evidenced by: (i) Safe removal and disposal o f

radiological waste (NORM) and other hazardous materials from former iodine contaminated sites;

(ii) Decontamination and cleanup o f water reservoirs on former iodine sites;

(iii) Full cleanup rehabilitation plan developed and partial land prepared for reuse at the abandoned o i l production sites;

National inventory and plan has been prepared for the containment and remediation o f o i l production sites contaminated with NORM. Institutions fully adopt standards and develop policies and procedures for continued environmental site investigations, cleanup, rehabilitation, certification and redevelopment o f contaminated sites.

0

Results Indicators for Each Component

Component A: Decontamination and cleanup o f contaminated structures. Two former iodine sites are cleaned and prepared for future reuse.

Component B : * Construction o f NORM storage facility

Use of Outcome Information

Measure the effectiveness o f former iodine sites and abandoned o i l production sites cleanup efforts to make available unpolluted land for redevelopment and reuse. Assess the reduction in r isks to population and the environment o f sites cleaned up o f contamination.

Use o f Results Monitoring

Component A: Determine if indeed al l contamination has been removed in a proper manner and the sites are made suitable for redevelopment.

Component B: 0 To determine if the facility has

been constructed and i s operated as per design specifications.

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Component C Improved National Mapping and Mitigation Plan o f NORM

Component D Partial Rehabilitation o f polluted O i l Production site

Component E MES improves their governance, develops implementable environmental reforms.

Component C: Identification o f areas contaminated by surface radioactivity. Development and implementation o f a National Mitigation Plan for N O R M contaminated sites. NORM Cleanup Fund used to fund national efforts to cleanup land and reduce future pollution.

Component D: Site investigations, rehabilitation and redevelopment plan. Removal o f old o i l production structures and infrastructure from site. Area o f land cleared o f production wellsirigs initiated Partial cleanup o f o i l contaminated soils.

Component Five Policy document developed, approved by cabinet and presented to the industry for compliance. 85% o f population l iving around the iodine plants are aware o f radioactive pollution and health hazards.

Measure effectiveness o f the containment o f the structure through inspections and monitoring.

Component C: 0 Determine the extent o f

radiological contamination in Azerbaijan and help identify the needs and urgency for mitigation measures. Determine highest priority allocation for cleanup fund.

Component D:

Determine allocation o f funds.

Help identify cleanup needs and urgency mitigation measures.

Component Five Evaluate the commitment o f MES to ESP. Measure effectiveness o f public awareness campaign.

30

E

s 0

s 0

g g

1

3 m

m * I

I

A 0 m 3

B 0 m

B m c.l

A 0

A 0

2 0

B 0 m 3

B 0 m

A 3

m c 3

Annex 4: Detailed Project Description

AZERBAIJAN: Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABILITATION PROJECT

1. The Ministry o f Emergency Situations (MES) will implement a project to identify, map and cleanup sites that are contaminated from oil production processes and related activities, in particular sites that are contaminated with naturally occurring radioactive materials (NORM) and the ‘ 1000 ha site’ north o f Baku’s international airport. Two former iodine production sites in Greater Baku (in Surakhani and Ramani) have been identified as ‘hotspot’ sites contaminated with NORM and other pollutants and the Project gives first priority to the cleanup o f these two sites.

2. preparation for site redevelopment; the fol lowing components have been identified.

The Project aims to build capacity and operations in high-priority site cleanups and

3. The component budgets indicated below exclude VAT and price contingencies

Component A - Cleanup and rehabilitation of two former iodine sites (USS 12.15 mil l ion)

4. Background. (see Annex 1, Sector Issues).

5. Objective. This component wi l l develop immediate cleanup activities to decontaminate two former iodine production sites in Surakhani and Ramani, which includes radioactive materials and poses serious health threats to the increasingly dense housing development surrounding the site. Radioactive dust particles affect a much larger area. The decontamination must prepare the sites for re-use, preferably for housing.

6. Component Description. Two former iodine production sites in Greater Baku are contaminated with waste from the production o f iodine from o i l production water. The sites have heaps o f charcoal that contains NORM and other heavy metals, polluted soil, and old production facilities that contain oi ly products. Existing structures are contaminated and the site includes materials such as radioactive scaling and asbestos. A feasibility study has determined contamination levels and the most efficient methods to remediate the sites for h t u r e development as residential areas. This component includes: (i) implementation o f the Temporary Safety Plan to minimize exposure o f the public to hazardous materials on the site through fencing, supervision, etc. from Project start date to the commencement o f the decontamination works; (ii) preparation o f detailed site investigations, detailed design o f works, and Project supervision requirements; (iii) removal, packaging and transportation o f radiological waste (NORM); (iv) removal and disposal o f other hazardous materials, preferably to the existing hazardous waste sanitary landfill; (v) cleanup o f o i l contamination and contaminated water reservoirs on the sites; and (vi) demolishing o f buildings and prepare site for redevelopment. Following remediation, i t i s anticipated that the two sites wi l l be declared safe for “unrestricted use” by the national regulatory body so that land-use options for redevelopment can be explored.

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Component B - Construction of a dedicated NORM storage facilitv (USS23.70 mil l ion)

7. Objective. Azerbaijan has no facility to safely store or otherwise dispose o f NORM. This component will provide financial resources to develop and construct a dedicated facility for the storage o f radioactive waste from the two former iodine sites to be decontaminated under Component A and NORM from other site cleanups such as for former o i l production sites.

8. Component Description. Adjacent to the existing Izotop storage facility for radioactive sources, MES has planned the construction o f a special sanitary in-ground storage facility for NORM. This facility wi l l have sufficient capacity to contain the NORM from the two iodine plant sites with spare capacity and extension possibilities to store N O R M from other, future cleanup operations including the disposal o f other NORM waste generated alongside o i l production activities. N O R M waste offered for disposal in the future i s l ikely to increase when Azerbaijan will introduce further radiological protection regulations. This component includes detailed site investigations, the detailed design, construction works and operations to receive the NORM from the former iodine sites. Future (post-Project) operations and monitoring wil l be managed by Izotop under supervision o f MES.

ComDonent C - National Mapping and Remediation Program for NORM-Contaminated - Sites (US$I 1 .O million)

9. Background. (See Annex 1, Sector Issues).

10. Objective. This component will enable MES to execute a national-level extension survey program to map NORM-contaminated sites and investigate these sites to determine contamination levels, priorities, and remediation or containment actions. This work should result in a phased national mitigation program for NORM-contaminated sites. This component also includes a budget o f US$5.0 mi l l ion for high-priority N O R M contamination cleanup operations for sites that wil l be determined during the national mapping and planning activities, and wil l incorporate experiences from the iodine sites cleanup.

11. Component Description. Deposits o f residues containing radium are common in o i l production, including in the Absheron Peninsula. Radium contamination and associated radon gas have accumulated in the Absheron Peninsula during 150 years o f o i l production, and are quite concentrated in some spots. Radon and other forms o f radiation pose serious health risks to local people so MES plans to identify, map, and propose mitigation methods for radioactive- polluted areas. This component is divided into two sub-components to distinguish between the planning stage and following remediation activities.

12. Cl - NORM Mapping and Preparation of Remediation Program, which includes the following activities: (i) develop and implement a comprehensive radiological monitoring program to assess national radioactive contamination status, including Baku and the Absheron Peninsula and areas in the Caspian Sea; (ii) develop a national map o f surficial radioactivity distribution, and radionuclide inventory, radionuclide activity levels, and potential radiation hazards, based on the radiological assessment; (iii) develop a prioritized, budgeted, national remediation program for contaminated areas; and (iv) establish an integrated program for continuous national radiological monitoring o f existing NORM-contaminated areas; and (v) a

36

radiation emergency and response plan for these areas. This program wil l include cleanup criteria, decontamination methods, safety specifications, and requirements for institutional and legal structures, and capacity building.

13. C2 - High Priority Cleanup of NORM Contaminated oil Production Sites. T h i s component will finance priority clean-up investments identified in the NORM Mapping and Remediation Program (see above). This investment plan and subsequently the design o f the clean-up works wil l be agreed with the Bank at the conclusion o f the mapping activity. The allocation for this sub-component i s US$5.0 million.

ComDonent D - Remediation Program for the 1,000 ha Site (USS22.0 million)

14. former o i l production and most site Contamination has the fol lowing characteristics:

Background. The 1,000 ha site has many abandoned structures and infrastructure from

. O i l contamination to depths o f one meter or more, ranging from under 1 .O percent to near saturation, and open ponds and puddles. A mapping campaign captured an overall picture o f o i l contamination occurrence, degree, type, and approximate depth. Data on contamination extent, type, and properties are limited, but there are a variety o f types o f drilling-related contamination encompassing aged crude oil, bitumen, salt or brine, and other chemicals. . A frequent contamination type i s characterized by highly weathered crude o i l (mazut) which i s mixed with soil and often forms extensive encrustations o n the topsoil. . Homebuilders have acquired land (by semi-legal procedures) and begun to construct houses on some o f the contaminated sites. . The reclaimed land could become important to provide space for new housing, businesses, or recreational / ecological use. Land shortages exist on Absheron, and this area could accommodate considerable urban growth in the Baku area, and provide areas for parks, recreation facilities, or a nature preserve for public use.

.

15. Objective. The objective o f this project component would be to develop efficient approaches for remediation and returning to alternative productive reuse o f polluted former o i l production sites by a comprehensive plan and partially cleaning-up approximately 1,000 hectares o f o i l polluted land with 350 wells between the Buzovni and Mashtagi settlements. This component wil l also support close coordination with regional authorities, parallel Bank supported regional planning exercise and with local governments to help develop appropriate future land use plans for the parcel.

16. Component Description. North o f the international airport o f Baku i s an area o f approximately 1,000 ha that has long been used for intensive o i l production. Most wells are abandoned though some 30 wells s t i l l produce oil. Proper cleanup and dismantling activities were never undertaken and there are many old wells, above- and below-ground o i l production structures, oil-spill contamination, o i l storage, oil-processing equipment, and production water storage and processing facilities. The Cabinet o f Ministers plans to use this component to develop a comprehensive approach on polluted land redevelopment - one that combines

37

appropriate technologies for clean-up with land use planning and alternative reuse. The activities in this component wi l l be divided into three sub-components.

17. Dl - Feasibility Study for Comprehensive Clean-up. This sub-component will finance detailed feasibility study for the clean up o f the site and associated environmental studies. A comprehensive site investigation and feasibility study wil l establish the basis for a detailed cleanup and rehabilitation program that includes the fol lowing activities: (i) remove old oil production structures and infrastructure; (ii) evaluate appropriate technical options for clean-up; (iii) implement adequate closure o f o i l production wells; (iv) clean up oil-contaminated spots; and (v) remove other types o f hazardous waste including NORM containing materials.

18. 0 2 - Implementation of first phase of Clean-up. This sub-component wil l finance investments identified for the f i rs t phase clean-up activities in the feasibility study. The program must also deal with the few wells that may remain in production, and residential encroachments that affect the remediation works. About US$20 mi l l ion wil l be available for the first phase o f the high priority cleanup activities on the site. Full and further program implementation for the 1,000 ha site will take place during a second project.

19. 0 3 - Land Use Planning and Alternative Reuse of Parcel. This sub-component wi l l support consultant services to help coordinate land use planning, alternative reuse plan for the parcel and support pol icy discussion on land ownership transfer rules and procedures. Special care wi l l be required for the preparation o f the Redevelopment Plan for future land-use. The Redevelopment Plan wil l be prepared in close consultation with local stakeholders and relevant institutions to determine most adequate land-use purposes for the 1,000ha Site but also to address the wider issue o f land transfer after reclamation. The Redevelopment Plan should give guidance in this complex field and act as a catalyst for a broader pol icy dialogue with the Government on land issues to ensure transparency in transferring land and who wil l have access to the proceeds from land sales and whether the proceeds can be reinvested in cleaning up additional land. The Redevelopment Plan wil l also pay careful attention to the protection o f the main Absheron irrigation canal that runs through a part o f the 1,000ha Site.

Component E - Capacity Building, Public Outreach and Proiect Management (US$4.08 million)

20. Objective. This component will provide financial support for project management and performance monitoring and technical assistance for institutional and strategy development and planning. Technical assistance activities wil l be closely coordinated with IAEA technical cooperation program (Monitoring and Rehabilitation Programs for Contaminated Areas o f the Absheron Peninsula). The activities in this component are divided into three sub-components.

El - Development of Policies, Standards and Regulations. Under this sub-component, policies, regulatory procedures and standards will be developed, in particular for soil contamination levels; site cleanup and land redevelopment for o i l and NORM contaminated sites. An equally important activity i s the development o f regulations for NORM management for generators, property owners, parties / institutions that are involved in NORM and NORM waste management, as wel l as institutions that are responsible for permitting, monitoring, inspection and enforcement. Policies, standards, and regulatory procedures for the cleanup and certification

38

o f land (independent assessment against established standards o f residual contamination levels in view o f potential future use purposes) wil l be developed in close consultation with other stakeholders including SOCAR and the Ministry o f Ecology and Natural Resources. The f i rs t certifications o f cleaned up sites under component B and D wil l involve international certification institutes.

2 1. E2 - Public Outreach. In order to strengthen public awareness and stimulate an informed public debate on the need to clean up and rehabilitate contaminated sites this subcomponent wil l finance a communication program to, promote understanding o f project objectives, assure a high level o f transparency and access to information, and provide venues for feedback to al l stakeholders. The objectives o f the communication program wil l be to: (a) build communication capacity in the implementing agency and establish dialogue among stakeholders; (b) raise awareness about environmental hazards and health risks for the local population and (c) build social and political support for the cleanup program to ensure sustainability. This component will finance communication professionals who wil l conduct formal and on-the-job training for key staff and assist the P M T by providing leadership in designing and implementing the public awareness campaigns. The communication specialist seating in the P M T wil l be responsible for (i) the preparation o f the communication action plan, (ii) coordinating the public outreach component, (iii) ensuring a proper internal communication, (iv) coordinating activities and messages o n ESP and ARP issues across government agencies involved. The development o f a project portal represents a key tool to disseminate information and raise awareness as wel l as enhance the project transparency and CSOs’ watchdog role. The P M T communication specialist wil l work closely with IT department in MES to establish and maintain the project portal o n the website currently under development. This subcomponent wil l cover: (i) the operational costs related to the planning, implementation and supervision o f the activities, (ii) cost o f communication research, (iii) costs related to the production and dissemination o f communication products. MES will finance a share o f the costs related to production and dissemination for an estimated amount o f USD 200,000. .

22. E3 - Training and Project Management. The training program under this component wil l focus on project management and technical skills in implementing environmental cleanup projects and land redevelopment. The training package wil l complement the highly specialized training activities planned under the IAEA technical support program, which includes trainings in the field o f N O R M waste management. This sub-component will provide budget for the Project Management Team (PMT) o f MES to cover incremental operational costs and to attract short-term external specialists for project procurement, financial management, and technical expertise.

39

FINANCING PLAN Costs before Total costs IBRD Government VAT with VAT share share

U S $million U S $million US $million U S $million

12.15 14.34 10.77 3.58

23.70 27.97 20.25 7.72

11.00

Component A: Cleanup and rehabilitation o f former Iodine Sites Component B: Construction o f a dedicated N O R M storage facility Component C: National Mapping and Mitigation Plan for N O R M Component D: Rehabilitation Program for the 1,000ha Site Component E: Technical Assistance and Project Management

Total Baseline Cost Price contingencies Front-end fee

22.00

4.08

12.98

25.96

4.59

10.37

19.18

4.08

2.61

6.78

0.51

72.93 85.83 64.65 21.19 12.98 9.67 3.32

0.19

Total Financing Required 99.00 74.50 24.50

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Annex 5: Project Costs

AZERBAIJAN: Absheron Rehabilitation Program ARP I: CONTAMINATED SITES REHABILITATION PROJECT

Local Foreign Total US$ million US$ million US$ million Project costs by component

A Cleanup and rehabilitation o f former iodine sites 9.94 4.40 14.34

B Construction o f a dedicated NORM storage facility 22.88 5.09 27.97

C National mapping and mitigation plan for NORM 7.51 5.47 12.98

D Rehabilitation Program for the 1.000 ha site 20.12 5.84 25.96

E Capacity building, public outreach and project management 2.76 1.83 4.59

Total baseline cost 63.20 22.63 85.83 Price contingencies 12.98 Physical contingencies (included) Front-end fee 0.19

Total funding required 99.00

Identifiable taxes are the VAT, accounting for 18% o f project base costs. The total project baseline cost net o f taxes i s US$72.93 million.

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Annex 6: Implementation Arrangements

AZERBAIJAN: Absheron Rehabilitation Program ARP I: CONTAMINATED SITES REHABILITATION PROJECT

ESP Steering Committee (SC)

1. Deputy Prime Minister is responsible for overseeing implementation o f the overall ESP. H e wil l head a SC that will be established before negotiations to enhance coordination among al l agencies responsible for implementing ESP activities financed by the World Bank including the ASP I - Contaminated Sites Rehabilitation Project. The SC will include representatives o f participating ministries and wil l carryout bi-annual meetings.

Ministry of Emergency Situations

2. The MES will be in charge o f implementing al l ARP I Projeit components. The Head o f the Chief Department for Procurement Organization and Infrastructure Development wil l oversee the project implementation. MES will prepare weekly project progress reports to the Deputy Minister and monthly progress reports to the Minister.

Project Regulatory Working Group (RWG)

3. M E S has established by Minister’s Order # 094 dated October 23, 2007, a Project Working Group (WG) and assigned the MES Deputy Minister, to be in charge o f the Project’s implementation and coordination. The RWG consists o f the Ministry’s high-ranking staff and management o f different ministerial structures involved in the project implementation such as representatives from PMT, MES , MENR, local government, and possibly other institutions and technical specialists. The RWG will focus its activities on the adequacy o f project implementation against environmental and safety standards, permitting procedures and overall environmental compliance o f the Project. Discussions will be carried out every three months or as frequently as needed and will target regulatory and compliance issues at the technical working level. P M T representatives will prepare minutes o f these meetings and wil l distribute them among the RWG members, the P M T Director and the MES Head o f Chief Department.

Project Management Team (PMT)

4. MES will establish a dedicated project management team prior to project negotiations to oversee technical issues, procurement, financial and disbursement issues, and project monitoring and evaluation. MES, created in 2005, has no experience implementing Bank projects, and wil l recruit technical, financial management, and procurement specialists as needed, financed by the Project. The core operational P M T staff will include a P M T Director, a Procurement Specialist and a Financial Management Specialist. P M T may hire external independent consultants (e.g., 3 or 4 technical and/or supporting staff) to provide support in preparing tender documents, reviewing designs and supervising works and delivery for al l big contracts foreseen under this project. P M T will be established within the MES and will closely coordinate i t s activities with the RWG and the Panel o f Experts. P M T wil l perform supervision o f consultancy and design

42

contracts through selected Supervision Engineering firms contracted during the implementation o f the decontamination and construction works. P M T will prepare daily reports to the M E S Head o f Chief Department, biannual reports to SC and quarterly reports to the Bank (including also progress on implementation o f EMF and RPF).

5. The MES accounting department created in 2005 has responsibility for project accounting and reporting. This department will also ensure that effective internal controls are in place during implementation, budget is prepared on a timely basis and necessary arrangements are made for the annual audit o f project accounts. MES accounting and reporting software wil l be customized for the project to handle project expenditures in both local and foreign currency and to generate the project financial reports automatically from the system. The project accounts wil l be reported in U S dollars for the World Bank and in Azeri Manats for the Azerbaijan authorities.

6. Adoption o f a Project Operational Manual for Project implementation arrangements, satisfactory to the Bank, to include a detailed work program, implementation schedule and key TORS will be a condition o f Project effectiveness.

Panel of Experts (PoE)

7. The complexity o f the NORM and o i l contaminated sites cleanup requires a Panel o f Experts (PoE) to be established by no later than 1 year after Project effectiveness to guide and supervise implementation cleanup activities. For the NORM contaminated sites, the PoE wil l verify against the IAEA safety standards but wil l not have the authority to mitigate any project implementation risks. For the development o f standards for the cleanup o f o i l contamination, MES and the PoE for this Project wil l cooperate with the PoE for the ARP-I11 Project.

Monitoring and evaluation of results/outcomes

8. P M T staff, assisted by M E S wil l carry out monitoring and evaluation o f project results/outcomes/performance against the Results Framework and Monitoring indicators in Annex 3: “Arrangements for Results Monitoring,” using quantitative indicators and qualitative assessments, and indicators to measure, detect, and address project implementation delays. P M T staff wi l l prepare semi-annual project progress reports and submit for Bank review.

9. Currently, there is no monitoring system o f radioactive contamination in Azerbaijan. However, the Government o f Azerbaijan is implementing with the IAEA a project during 2007- 2008 that targets the establishment o f such system in future. In addition, the IAEA i s intensively discussing with the Government o f Azerbaijan the need to establish the country’s independent Regulatory Agency on radioactive and nuclear activities. However, the practical establishment o f Regulatory institution and launch o f such monitoring system implementation will take time and will not be achieved before the start o f the World Bank-financed project. Due to this fact, the combination o f the monitoring capacity created within the P M T and the RWG establishment will represent an efficient arrangement to support the current project implementation.

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Annex 7: Financial Management and Disbursement Arrangements

AZERBAIJAN: Absheron Rehabilitation Program ARP I : CONTAMINATED SITES REHABILITATION PROJECT

A. Financial Management Arrangements

1. mitigation measures, and rated as moderate after the mitigation measures are implemented.

The FM risk table i s presented below. Accordingly, the FM risk i s substantial before

Inherent Risk Country Level

Entity Level New PMT with no or little prior Bank project implementation experiences

Project Level

Overall Inherent Risk Control Risk Budgeting Accounting The FM software not customized, the FM staff inexperienced in Bank procedures, staff not nominated

Internal Controls The internal controls are not documented at this stage

Funds Flow Traditional disbursement w i l l be used

Financial Reporting The FM software is not customized to generate the reports of the project

Auditing No arrangement for the audits at this stage

Overall Control Risk Overall FM Risk

FM Risk Rating

High

Substantial

Moderate

Substantial

Moderate Substantial

Substantial

Moderate

Substantial

Substantial

Substantial Substantial

Risk Mitigating Measures

Legal and regulatory reforms conducive to increased accountability and efficiency addressed in the PRSC and in the proposed Corporate & Public Sector Accountability project The responsible FM staff have been appointed and IFRs formats are agreed with the Bank, the accounting software w i l l be customized by M a y 30,2008 The project does not include complex activities with respect to financial management.

MES Head o f Accounting Unit (AU) o f FAD wi l l have overall responsibility for the proposed project FM arrangements. MES will complete the customization o f the 1C software by M a y 30, 2008.. The existing internal control procedures will be adapted for the project and documented in the FM section o f the Operational Manual and P M T wi l l ensure their enforcement. Traditional disbursement techniques will be used. MES w i l l make sure to have the bank accounts opened by effectiveness. Interim Financial Reports (IFRs) w i l l be generated using the 1C accounting software, and submitted to the Bank on a quarterly basis. The software will be customized accordingly. Appointment o f acceptable independent auditors to audit the project accounts under the TOR acceptable to the Bank.

Risk after mitigation

High

Moderate

Moderate

Substantial

Moderate Moderate

Moderate

Moderate

Moderate

Moderate

Moderate Moderate

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Country Issues

Action

The financial affairs department w i l l nominate the staff that w i l l be responsible for the financial management o f the project. These staff w i l l continue to be supervised by the Head o f Financial Affairs Department.

The customization o f the 1C accounting and reporting software for project will be finalized. IFR formats w i l l need to be set up in the system and amendments to the existing chart o f accounts w i l l need to be introduced.

2. A Country Financial Accountability Assessment (CFAA) for Azerbaijan was carried out in 2003. The report identified weaknesses and made recommendations to strengthen public and corporate sector accounting, auditing, governance and financial accountability fiameworks. With respect to the public sector, the Government has made efforts to strengthen public financial management through enactment o f a Budget System Law, modernization o f the Treasury operations, and strengthening capacity o f the Chamber o f Accounts. The Government continues to receive support f i om the donors to continue i t s efforts in reinforcing public financial management, particularly on improving budget preparation and allocation, introducing internal audit function and overall accountability and transparency in financial reporting. The proposed Corporate and Public Sector Accountability Project wil l provide support to corporate sector development and investment, improve public financial management and accountability, and establish a sustainable training capacity in accounting and auditing, thus integrating Bank support into the Government’s overall program o f accounting and auditing reform in the country.

Responsibility Deadline

MES FAD in consultation wi th one more additional relevant Deputy Minister

Done. Head o f AU with

assistant w i l l have overall responsibility for FM

MES FAD by M a y 30,2008

Strengths

A project financial management manual will be prepared to reflect the financial management arrangements o f the project .

3. The significant strength that provides the basis for reliance on the project financial management system i s that the MES i s already using an accounting software that can be customized in l ine with Bank’s requirements on financial management. The financial affairs department i s adequately staffed and they have staff with appropriate qualifications to assign to the project.

formats MES FAD by effectiveness

Weaknesses and Action Plan

4. MES has no prior experience in implementing Bank-financed projects. The financial management arrangements for the proposed project wil l be set up using existing finance and accounting systems o f the MES and introducing additional controls. The fol lowing action plan was developed during the pre-appraisal mission and updated during appraisal:

The templates for the interim un-audited project reports MES FAD wi l l be prepared

Done, MES has agreed with the Bank the report

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Implementing Entity

5. The Financial and Economic Affairs Department (FAD) o f MES will have the responsibility for project financial management including the budgeting, accounting, disbursements, payments and bank transactions, auditing arrangements and reporting. The FAD i s staffed with 50 professionals. The accounting and reporting unit o f the FAD (FAD Accounting) consists o f 14 cadres, seven o f which wil l be recruited by the end o f 2008. There are currently seven personnel working in the accounting and reporting unit. Head o f AU with one more assistant from the same unit wil l have overall responsibility for FM arrangements. The risk associated with the implementing entity is assessed as substantial and moderate after mitigation measures implemented.

Budgeting

6. The project budget wi l l be part o f the annual budget o f the MES. The budget preparation wil l be consistent with the Budget Law and the Decree o f the Cabinet o f Ministers o f Azerbaijan. The Financial Affairs Department will have the overall responsibility for the finalization o f the budget and for entering the budget figures into the accounting software. FAD will make sure to have timely data inflows from technical departments in the agreed format. The project budget will be split by quarterly expenditures, components and sources o f finance. The draft project budget wil l need to be agreed with the relevant departments o f MES before it i s finally sent for consolidation to the department o f the ministries responsible for annual budget formulation o f the Ministry. Parliamentary approval o f the budget normally takes place around November each year by issuance o f a Decree in accordance with the Budget Law. The risk associated with the budgeting process is assessed as moderate.

Accounting

7. StafJing. MES will use i t s own staff for the financial management o f the project. The selection will be made from FAD Accounting staff who have the appropriate qualifications to handle the accounting and reporting and who can also communicate in English. I t has been agreed with the Bank that the Head o f AU with the assistance o f one more staff wil l be responsible for FM arrangements. They wil l be responsible for maintaining accounting records in the system and preparing the quarterly reports and the Head o f AU will be responsible for regular reconciliations and overall supervision o f the financial operations o f the project.

8. Information Systems and Accounting Procedures. The MES uses the 1C accounting software that wi l l be customized in l ine with the project’s accounting and reporting requirements by M a y 30,2008. The 1C i s a multi-currency project accounting software that i s widely used in Azerbaijan for bookkeeping and reporting, including preparation o f the quarterly Interim Financial Reports (IFRs). The project accounts wil l be denominated in U S Dollars for Bank reporting and in Azeri Manats for reporting to Azerbaijan authorities.

9. Accounting policies and procedures. MES, through i t s FAD, wil l maintain appropriate financial records and reports in accordance with existing government financial regulations and standards acceptable to IBRD. The Project Operational Manual (POM) will have a separate FM

46

section where all essential accounting policies and procedures will be outlined. This section wil l mainly cover: (a) the financial and accounting policies and procedures for the project (b) organization o f the financial management unit, functions, staffing, and relevant job descriptions with special emphasis o n the segregation o f duties (c) the financial management information system (d) disbursements (e) project budgeting, planning procedures and financial forecasting and (0 project reporting. The draft P O M FM section/ FM Manual will be ready by project effectiveness.

10. The major accounting policies to be applied for project accounting are as follows: i) cash accounting as the basis for recording transactions, ii) reporting should b e done in U S dollars (reporting currency), iii) Interim Un-audited Financial Statements should cover al l funds, including Government co-financing funds.

The risk associated with accounting is considered substantial before mitigation measures and wi l l be reduced to moderate once the customization of the accounting software i s completed.

Internal Control and Internal Auditing

1 1. Controls and procedures for project implementation, including f low o f funds, contracting, authorizations and segregations o f duties will be documented in the Project Operational Manual. An intensive supervision to be undertaken by the project team wil l ensure that P M T has maintained a reliable internal control framework for the project.

12. following ways:

MES could minimize the risk o f misuse with respect to financial management in the

The FAD will process the payments to contractors upon receipt o f the payment request letter by the spending unit, supported by the invoices and other payment documents containing al l required technical approvals. The FAD will also make sure that the payment requests are l ine with the contracts and relevant legal documents. The FAD wil l be responsible for making regular reconciliations o f the Designated Account and the loan account at the World Bank. The reconciliation files wil l be supervised and signed by the Project Coordinator on a monthly basis. The assets and equipments purchased from the project funds wil l be registered in a separate asset register.

The risk associated with internal control is assessed as substantial and the rating wil l be reduced to moderate after the completion o f the draft FM sections o f the POM.

Financial Reporting

13. The interim un-audited financial reports (IFRs) wi l l be prepared on a quarterly basis and wil l be submitted to the Bank no later than 45 days after the end o f each calendar quarter. Moreover, the FAD will ensure that these reports are automatically generated from the accounting software that wil l be installed and customized for project accounting purposes.

14. The IFRs wil l include the fol lowing reports: Sources and Uses o f Funds, Uses o f Funds by project activities, designated account statement and project Balance sheet. The IFR templates

47

have been prepared and agreed upon with the Bank. The POM/financial management manual will have sample IFRs o f the project.

Entity financial statements Project financial statements (PFS), including SOEs and designated account. PFS include sources and uses o f funds by category and by components; SOE statements, Statement o f Designated Account, notes to the financial statements.

The risk associated with reporting and monitoring is assessed as substantial. The rating wil l be upgraded to moderate once the accounting software customization i s completed.

Not applicable Within six months after the end o f each calendar year and also at the closing o f the project.

Auditing

15. The project financial statements will be audited by the independent auditors under the terms o f reference acceptable to the Bank and in accordance with International Standards o n Auditing (ISA). The f i rs t set o f audit reports wi l l be submitted to the Bank before June 30 o f the year fol lowing the calendar year in which the f i rs t disbursement f rom the loan has been made and also at the closing o f the project. The contract for the audit awarded during the f i rs t year o f project implementation can be extended from year-to-year with the same auditor, subject to satisfactory performance. Sample audit TOR was discussed with the M E S during appraisal and it will be attached as an annex to the minutes o f negotiations. The cost o f the audit i s eligible for financing from the proceeds o f the Loan.

16. implementing entity together with the due date o f submission:

The following chart identifies the audit reports that wil l need to be submitted by MES

I Audit Rmort I DueDate

The risk associated with auditing is assessed as substantial before mitigation measures and reduced to moderate after mitigation measures agreed with the MES.

B. Funds Flow and Disbursement Arrangements.

Funds Flow and Designated Account

17. There will be one Designated Account (DA) for MES for disbursements. The DA wil l be in the currency o f the loan and wil l be at the International Bank o f Azerbaijan on terms and conditions acceptable to IBRD. All payments to the contractors, suppliers and consultants wil l either be made directly from the loan account or from the Designated Account. The DA will be used following procedures to be agreed with the Bank, and wil l have an authorized allocation o f US$7,000,000. Two signatures indicated in the l ist o f authorized signatures submitted by M E S will be required on the withdrawal applications. The minimum application size for payments directly from the Loan Account for issuance o f Special Commitments i s US$1,400,000. Withdrawal Applications for documenting funds utilized from the DA wil l be submitted to the Bank on a monthly basis, and wil l include a reconciled bank statement as wel l as other appropriate supporting documents.

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Transaction Based Disbursement Methods

18. The IBRD Loan funds under the Project wil l be disbursed through transaction-based disbursement methods that include: reimbursements with full documentation, reimbursements on basis o f Statements o f Expenditures for small expenditures with defined thresholds, payments against issued Special Commitments, direct payments to third parties, and payments through the Designated Account.

19. Disbursements wil l be made on the basis o f full documentation for (a) contracts for works costing more than the equivalent o f US$2,000,000 each;(b)contracts for goods costing more that the equivalent o f US$300,000 each; (c) contracts for consulting services with f i r m s costing more than the equivalent o f US$lOO,OOO each; and (d) contracts for individual consultants costing more than the equivalent o f US$50,000 each. Full documentation in support o f SOEs would be retained by MES for at least two years after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made. This information wil l be made available for review during supervision by Bank staff and for annual audits which wil l be required to specifically comment on the propriety o f SOE disbursements and the quality o f the associated record-keeping.

The risk associated with fundsflow is considered as moderate.

C. Supervision Plan

20. During project implementation, the Bank wil l supervise the project’s financial management arrangements as follows;(i) during the Bank’s supervision missions financial management and disbursement arrangements wi l l be reviewed to ensure compliance with the Bank’s minimum requirements (ii) project’s quarterly interim un-audited financial reports as wel l as the project’s annual audited financial statements and auditor’s management letter wil l be reviewed. As required, a Bank-accredited Financial Management Specialist will assist in the supervision process. The Bank FMS will conduct at least two supervisions every year at the init ial stages o f the project implementation and the frequency o f FM supervisions can be reduced at a later stage subject to acceptable project FM arrangements. FM supervision wil l focus on procurement o f cleaning equipment and c iv i l work contracts to monitor whether al l supporting documents are properly authorized and filed.

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Annex 8: Procurement Arrangements

AZERBAIJAN: Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABILITATION PROJECT

A. General

1. Procurement o f goods and works for the proposed project wil l be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004, revised October 2006 (Procurement Guidelines) and the relevant provisions stipulated in the Financing Agreement (FA). Selection o f contracts for consulting services wil l be carried out in accordance with the "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, revised October 2006 (Consultant Guidelines) as wel l as and the relevant provisions stipulated in the FA. The various items under different expenditure categories are described in general manner below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, if any, estimated costs, prior review requirements, and time frame will be agreed between the Borrower and the Bank and documented in the Procurement Plan (PP).

2. Advertisement: A General Procurement Notice (GPN), acceptable to the Bank, wi l l be published online in the United Nations Development Business (UNDB) and in the Development Gateway's dmarket. The GPN wil l give a description o f the goods, works and consulting services contracts to be procured under the project and wil l invite al l potential suppliers, contractors and consultants to express interest and request additional information from the respective Borrower. Specific Procurement Notices (SPN) for International Competitive Bidding (ICB) procurement packages and Expression o f Interest (EOI) for consulting assignments estimated to cost US$ 200,000 equivalent per contract wil l be published in UNDB (on-line) and in dgMarket. In addition, the PP (including al l formal updates), SPNs and EOIs for a l l contracts as well as results o f contract awards wil l be published on the external website o f the MES [to be confirmed].

3. The Borrower wi l l respect debannent decisions by the Bank and will exclude debarred f i r m s and individuals f rom the participation in the competition for Bank-financed contracts. Current listing o f such firms and individuals i s found at: http://www.worldbank.orddebarr.html

4. Procurement of Works: Works procured under this project wil l include but not be l imited to: (i) clean - up and rehabilitation for future land-use o f the Ramani and Surakhani former Iodine Sites; (ii) construction o f dedicated storage facility for the low-level naturally occurring radiological waste (NORM); and rehabilitation works for the 1,000 ha. north o f Baku international airport. Works estimated to cost more than U S 2.0 million shall be procured using International Competitive Bidding (ICB) procedures. Works estimated to cost less than US$2.0 mi l l ion and less than U S $ 100,000 each may be procured using National Competitive Bidding (NCB) and shopping procedures respectively.

5. Procurement o f Goods including supply and installation: Goods procured under this project wi l l include but not be limited to: (i) special trucks for the transportation o f NORM materials. The procurements wil l be done using the Bank's SBD for al l I C B procurement o f

50

goods. Goods and equipment estimated to cost more than US$300,000 would be procured through ICB. Goods estimated to cost less than US$300,000 each may be procured through National Competitive Bidding. Small contracts for supplies and minor equipment estimated to cost less than US$ 100,000 each may be procured under Shopping procedures based o n a model request for quotations satisfactory to the Bank, on the basis o f three or more written price quotations obtained from suppliers. Where certain goods are available f rom one particular supplier or in case where compatibility with existing equipment requires that goods must be procured under Direct Contracting and have obtained prior approval from the Bank can be purchased in accordance with paragraphs 3.6 and 3.7 o f the Procurement Guidelines.

6. The project would finance the technical services contracts for (i) decontamination o f Normally Occurring Radioactive Material (NORM) and other materials; (ii) abandoning o f o i l wells and pipes in 1,000 ha. site; and (iii) clean up o f o i ly components in 1 .OOO ha site.

Procurement of non-consulting services:

7. Selection of Consultants: Consulting services under this project would include technical assistance for (i) identification and survey o f o i l production sites contaminated with NORM and preparation o f mitigation plan; and (ii) development o f rehabilitation and cleaning plans for 1,000 ha. site; and (iii) policy development, preparation o f legislation, public awareness campaigns.

8. Short lists o f consultants for services estimated to cost less than US$100,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

9. Bank in accordance with paragraphs 3.9 through 3.13 o f the Consultant Guidelines.

Single-Source method may be used for certain assignments with prior approval o f the

10. Operating Costs: The project wil l finance the incremental operating costs including: (a) procurement, financial management and other professionals, including travel expenses locally and abroad; and (b) communications, maintenance and operation costs o f equipment procured or used under the Project.

11. Training / Study Tours / Seminars: Training, study tours and attending to seminars will be carried out according to a training plan that wil l be prepared by MES annually and submitted to the Bank for review and no objection prior to implementation. Substantial revisions during the year wi l l also be submitted to the Bank.

B. Assessment of the agency’s capacity to implement procurement

12. The project wil l be implemented through a P M T to be established in the MES. MES has no previous experience with procurement under World Bank funds. M E S wil l appoint a project manager, to lead the P M T to be staffed with specialists appointed as consultants o n the basis o f their qualifications, including one procurement specialist and one financial management specialist. The technical experts wil l be seconded to the project by MES.

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An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project, made during the December 2007 mission, was updated by the project PAS, during the Appraisal mission in March 2008. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff which will be responsible for procurement and financial management and the MES’s relevant central unit for administration and finance. The 2003 CPAR concluded that Azerbaijan should be rated as a medium to high-risk country in respect o f public procurement systems. A new CPAR i s underway in 2008 to benchmark progress against agreed actions and provide further guidance on improvements needed. In light o f the overall environment and the implementing agencies unfamiliarity with Bank procurement procedures, the overall project procurement risk, after mitigating measures, i s deemed “substantial.”

13. been identified and include the following:

The key issues and r isks concerning procurement for implementation o f the Project have

(a) At the project level MES lacks experience with the Bank’s procurement.

(b) P M T members and other officials, who would be involved in project procurement through Tender Committees, may not be familiar with the Wor ld Bank procurement procedures.

(c) Tendering, contract approval and signature procedure may take too long and seriously affect timely implementation.

(d) Publication o f contract announcements and contract awards should be done widely to ensure wide participation and transparency.

Mitigation Measures

14. The Bank team intends to maintain customary oversight and wil l carry out prior review o f all major contracts according to the thresholds that wil l be regularly reviewed and adjusted as needed in Procurement Plan. Init ial ly set up thresholds are provided below in Table 1 o f Section E o f this Annex. The fol lowing measures wil l be carried out to mitigate corruption risk:

A procurement specialist, with previous experience in Bank projects and international procurement and a financial management specialist wil l be recruited by the PMT.

All fiduciary staff wil l be given specialized training focusing on the necessary connection between proposals or bids and the resulting contracts as wel l as the need to assure that payments are not directed to any party other than the one performing the contract. The Bank will review and comment on qualifications and experience o f proposed members o f the Evaluation committee(s) with a view to avoid that unqualified or biased candidates are nominated. All evaluation committee members wi l l be required to s i g n a disclosure form (sample wi l l be included in Operational Manual). The members o f the tender committees should receive the basic training in procurement.

Borrower wi l l prepare the procurement plan and keep i t updated for project indicating procurement method, available budget and estimated time schedule (key steps o f the

52

procurement process) for each contract and wil l try to avoid the slippages in the contract schedules .

(d) All publications o f advertisements and contract awards, including the results o f the awards wil l be done in accordance with the Guidelines requirements and also in the Borrower’s web site.

C. Procurement Plan

15. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on April 29, 2008 and i s available at MES. It wil l also be available in the project’s database and in the Bank’s external website. The Procurement Plan wil l be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

16. In addition to the regular, prior and post review supervision to be carried out by the project PAS, the capacity assessment o f the Implementing Agency has recommended an average o f two supervision missions per year to visit the field. Contracts to be post reviewed will be selected from the procurement plan.

E. Details of the Procurement Arrangements

17. Thresholds for procurement methods and prior review requirements are summarized below in Table 1. The correspondence between procurement thresholds and prior review requirements i s based on the Bank team’s assessment o f the capacities o f the agency carrying out procurement. The risks o f corruption and fraud in the country as wel l as the capacities o f the manufacturing, construction and consulting industries in Azerbaijan have also been taken into consideration.

Table 1: Summary of Procurement and Pr ior Review Thresholds (in thousand US$)

Exr, CatePorv Proc Method Proc Threshold Prior Review Threshold *

53

oss NA All contracts > 100 ~~ ~

FBS NA Lcs - NA m <200 sss NA

4.2 Individual - I C NA

ICB: International Competitive Bidding,. NCB: National Competitive Biddin% S: Shopping, DC: Direct Contract, A P : Ameed Procedures, OCBS: Ouality and Cost Based Selection, OBS: Quality Based Selection, FBS: Fixed Budget Selection, LCS: Least Cost Selection, COS: Selection based on Consultant Qualifications, SSS: Single Source Selection, IC: Individual Consultant Selection

All contracts >lo0 All contracts >loo**

First 2 ** All contracts

All contracts > 50 and all

* All amendments require justification and prior review by the Bank **Short l is ts for contracts estimated at < US$ 100,000 may comprise national consultants only.

Consultants

1. Goods, Works, and Non-Consulting Services

sole source contracts

(a) L is t o f contract packages to be procured following ICB and direct contracting:

1

Ref. No.

TS- 1

w- 1

TS-2

TS-3

TS-4

2

Contract (Description)

Iodine Site Decontamination for NORM and other contaminated materials

Construction o f a NORM dedicated storage facility

Priority NORM clean-up activities

H igh priority clean up o f oi ly components on 1,000 ha. site

Abandoning o f o i l wells and

3

Procurement Method

ICB

I C B

I C B

ICB

I C B

4

P-Q

Yes P/Q sent on 0611 111 1

Yes P/Q sent

0511 5/09

Yes P/Q sent by 01/01/11

Yes P/Q sent by 0510 111 0

Yes P/Q sent

by

5

Domestic Preference

(yestno)

No

No

No

No

No

54

6

Review bY

Bank (Prior t Post) Prior

Prior

Prior

Prior

Prior

7

Invitation to Bid

09/16/11

09/30/09

05/18/11

0911 9/10

09/20/10

8

Expected Bid-

Opening Date

11/15/11

11/29/09

07/17/11

11/18/10

11/19/10

9

Contract Award

12/30/11

01/13/10

0813 111 1

01/02/11

0110311 1

10

Contract Completion

1211 911 3

0 11071 13

12/23/12

11/22/12

12/23/12

G- 1

I removal o f pipes and structures on 1,000 ha. site

Procurement o f 8 special trucks for transportation o f NORM material

ICB

bY 0510 111 0

No 09/03/11

(b) All ICB contracts for goods and works, f i rs t two NCB contracts for goods and works, all NCB contracts for goods estimated to cost USD 200,000 or larger, all NCB contracts for works estimated to cost USD 1,000,000 or larger, first two shopping contract for goods and works and all direct contracting wil l be subject to prior review by the Bank.

2. Consulting Services

(a) L i s t o f consulting assignments with short-list o f international f i rms .

1

Ref. No.

cs-1

cs-2

cs-3

cs-4

cs-5

2

Description o f Assignment

Technical assistance for safety assessment, detail design, preparation o f bidding documents and works supervision for former Iodine Sites

Preparation o f EIA for former Iodine Sites

Preparation o f National Mitigation plan

Preparation o f EIA for 1,000 ha. site

Preparation o f national inventory o f NORM contaminated sites

3

Selection Method

QCBS

QCBS

QCBS

QCBS

QCBS

4

Review by

Bank (Prior I

Post) Prior

Prior

Prior

Prior

Prior

5

Expected Proposal Invitation

Date

1011 1/08

08/09/08

05/30/10

08/09/08

11/14/08

6 Expected Proposal

Submission Date

11/25/08

09/23/08

07/14/10

09/23/08

12/29/08

7 Expected Contract Award

01/24/09

11/22/08

09/12/10

11/22/08

02/27/09

8

Expected Contract

Completio n

0 1/03/13

0 112 1/09

09/12/11

0 112 1/09

02/17/11

55

CS-6

cs-7

cs-9

cs-10

cs-11

cs-12

CS-13

CS-15

CS-16

Design and supervision o f rehabilitation program for 1,000 ha site

Social assessment for 1,000 ha site

Preparation o f EIA for NORM clean UP

Technical assistance for safety assessment, detail design, preparation o f bidding documents, bid evaluation o f N O R M clean up package

Supervision o f NORM clean up activities

Developing o f policies, legislation and standards

Public awareness campaign

Project Financial Audits

Social Assessment for former Iodine Sites

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

LCS

QCBS

Prior

Prior

Prior

Prior

Prior

Prior

Prior

Prior

Prior

11/19/08

08/09/08

0511 211 0

0811 1108

0511 111 1

051 1211 0

1011 6/08

1011 1/08

09/23/08

0 1/03/09

09/23/08

06/26/10

09/25/08

0612511 1

0612611 0

11130108

11125108

10103108

03/04/09

11122108

08/25/10

11124108

0812411 1

08/25/10

0 1/29/09

0 1/24/09

11/22/08

0 81261 10

0 1/26/09

1212311 0

04/23/09

04/23/09

0211 0113

0 1/08/13

0 1 I28114

0 112 1 109

(b) All consultancy services under QCBS and LCS, and the f i rst two contracts under CQ and all contracts with f i r m s estimated to cost more than U S $ 100,000 per contract and all contracts with individuals for assignments estimated to cost more than U S $ 50,000 wi l l be subject to prior review by the Bank.

(c) Short l i s ts composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

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F. Ex-Post Review:

18. All other contracts for goods and consulting services below prior review thresholds are subject o f Bank’s selective ex-post review. Periodic ex-post review by the Bank will be undertaken during regular supervision missions. Procurement documents, such as bidding documents, bids, bid evaluation reports and correspondence related to bids and contracts will be kept readily available for the Bank’s ex-post review during supervision mission or at any other point o f time. Bank’s mission will review at least one out o f every five contracts which are subject o f ex-post review.

19. Record Keeping: The P M T wil l maintain complete procurement files, which wil l be reviewed by supervision missions. All procurement related documents that require prior review will be cleared by the Procurement Accredited Staff (PAS) and related technical staff. Procurement information will be recorded by the P M T and submitted to the bank as part o f quarterly (FMRs) and annual progress reports. A simple management information system with a procurement module would be established to assist the P M T procurement officer to monitor procurement information.

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1.

e

e

2.

Annex 9: Economic and Financial Analysis

AZERBAIJAN: Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABILITATION PROJECT

Overall project benefits fal l in two main categories:

In general, positive impacts on public health from cleanup activities and better environmental management, in particular, benefits for people now exposed to severe health hazards, Return o f unutilized or unsafe land to normal economic use, generally captured by increases in land values.

Impacts on public health from the radioactive waste have not been investigated. The main negative impacts are f rom inhalation o f radioactive dust f rom the site and from the use o f charcoal or direct exposure to radiation in the close vicinity o f the waste heaps. These impacts must have been most prominent when the charcoal waste was used as fuel at a significant scale and the waste heaps were s t i l l dusty. N o w the dust levels are much less, to the extent that they are difficult to measure. In the case o f low-level radiological waste, negative health impacts are almost impossible to measure directly, as they occur long after exposure and cannot be separated from other factors, and no baseline health data exist on residents in and around the sites. Therefore financial and economic benefits from cleaning and removal o f health r isks have not been quantified.

Components A, B, and E: cleanup and remediation for future land-use of the Ramani and Surakhani former iodine sites (US$12.15 m), construction of a dedicated storage facility for the low-level naturally occurring radiological waste ( N O M ) from the two iodine plant sites with capacity to store additional N O M as well from other, future cleanup operations (US$23.70 m), and capacity building, public outreach and project management (US$4.08 m). Total: USS39.93m.

3. The Ramani and Surakhani sites are in areas o f high demand for land. They are within an o i l field crescent around the center o f Baku that, due to i t s heavy pollution, i s constraining urban development and cutting o f f the center from newly developed settlements on the Absheron peninsula. The Ramani site is bordered by residential developments. The Surakhani site i s wel l located along the airport road. The real estate market in Azerbaijan i s distorted and not very liquid, making i t difficult to establish values for cleaned land parcels. Estimates5 for land in these areas that i s available for development, with access to nearby infrastructure, range f i o m US$200,000 to US$400,000 per Ha. US$150,000 per ha i s considered the lower limit o f any land on Absheron.

4. On this basis, and assuming the current value o f the sites i s zero as they are unfit to any economic use, the increase in value o f the 4.3 ha Ramani site would be between US$1.2m and US$2.5m. The increase in value o f the 28.2 ha Surakhani site would be between US$5.6m and US$l1.3m. The total amounts to between US$6.9m and US$13.8. Whi le this i s s t i l l inferior to

Real estate agency estimates cross-checked with non-commercial sources.

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cleanup costs, i t significantly offsets them. If public health benefits could be quantified and added to this, it i s l ikely that the overall project ERR would be above the cost o f capital.

5. Financial andfiscal impact. Benefits from increased land value wil l financially accrue to the State, who owns the property, as it will be able to either lease or privatize the land. The only recurring costs are maintenance costs o f the dedicated storage facility for hazardous waste. These costs are marginal but should be adequately budgeted.

Components C: National Mapping and Mitigation Plan for NORM (US$I Im).

6. Although the economic return from this component cannot be quantified (one purpose o f the mapping i s precisely to know the extent and location o f NORM-related contaminations), i t i s expected to be o f a magnitude similar to the economic return on the decontamination o f the Ramani and Surakhani sites. Minimal land values observed on Absheron are about US$150,000 per ha. Moreover, the National Mapping and Mit igation Plan should ensure that the NORM cleanup program i s sustained and that adequate budget resources are assigned to keep the dedicated storage facility maintained and operational.

Component D: Rehabilitation program for IO00 ha site (US$22m)

7 . Most o f the 1000 ha site i s polluted from o i l production. Preparation studies for cleanup wil l include an assessment o f remediation alternatives. This assessment should not only rely o n technical parameters, such as target residual concentrations o f contaminants, but on economic parameters, such as cost-effectiveness. The method, cost, and potential usehalue for the cleaned up site will determine the economic rate o f return o f this component. Indications from a pi lot social assessment also confirmed land value estimates in the US$200,000 to US$400,000 range for this area, for residential use. As an indication, analysis performed for the ARP - Development o f SOCAR'S Environmental Strategy and Large Scale O i l Polluted Land Cleanup Project (P110682) indicates that given the high value o f land cleanup operations are l ikely to be economically justified.

59

Annex 10: Safeguard Policy Issues

AZERBAIJAN: Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABIL ITATION PROJECT

Environmental Aspects

1. In accordance with the Bank’s safeguard policies and procedures (OP/BP 4.01 Environmental Assessment and OP/BP 4.12 Involuntary Resettlement) the proposed project has been classified as environmental assessment Category “A”. M a i n investments are targeting remediation, cleanup works and proper disposal o f highly radioactive and non-radioactive contaminated land in the Absheron Peninsula including about 32 ha land polluted by low-level radioactive waste, o i ly compounds and other hazardous materials derived from over 60 years o f iodine production operations in Baku area (Surakhani and Ramani settlements) as well as 1,000 ha o f o i l polluted land covered with more than 300 un-operated wells and other old o i l exploitation equipment and infrastructure. Other high priority NORM contamination cleanup operations are envisaged under the project at selected sites identified later during project implementation once the national mitigation program for N O R M contaminated sites and affiliated national mapping strategy (project component C) are developed.

2. Given the multiple components included in the project, complemented by the fact that M E S s t i l l needs to finalize several specific investments (e.g., decontamination o f the highest priori ty o i l production sites and specific cleanup interventions at the 1,000 ha) proposed to be financed under this project, the Bank and M E S prepared the following documents prior to project appraisal in order to meet the Bank’s Category A requirements and the national EA legislation: (i) a full Environmental Impact Assessment (EIA) report including a proper E M P for the decontamination works o f the 32-ha land at two former iodine production sites and the safe disposal o f 85, 000 m3 o f charcoal waste in a special NORM storage facility; (ii) an Environmental Management Framework (EMF) for the cleanup works envisaged at the high priori ty N O R M contaminated sites and the 1,000 ha o f o i l polluted land; and (iii) a Resettlement Policy Framework (RPF). The final drafts o f these documents were disclosed in a final public consultation meeting held on February 7, 2008, which addressed the environmental and social impacts affiliated with the proposed investments.

Background

3. One o f the project main objective aims at lowering the health r i sks and improving living standards o f the families in the project area by reducing their exposure to air, land and water- pollution generated by potential radiation hazard from the low-level radioactive charcoal waste materials and other o i l production pollution sources.

4. Several studies o f general description o f the project area contamination have been developed during the last few years but there i s s t i l l insufficient quantitative information to completely characterize the extent o f pollution generated by the oil exploration and production operations in the Absheron Peninsula. Therefore, during the proposed project preparation several studies have been initiated to enhance the pollution characterization o f the Ramani and Surakhani iodine contaminated sites and their surroundings, establish a waste inventory and the

60

overall environmental baseline conditions and evaluate remediation options. From available information recently collected in October 2007, the estimated volume o f radioactive waste at the two former iodine sites totals 85,3 10 m3 (1 8,993 m3 in Ramani, and 66,377 m3 in Surakhani site). The gamma-radiation dozes o n both sites have been found to exceed the region’s normal indicators. This radiation originates from the presence o f natural radio-nuclides (e.g., uranium- 238 and radium-226/228 and potassium-40) in the o i l production water, used as main source to extract iodine and bromine by activated carbon (charcoal) absorption at the two sites in Baku. The used charcoal waste accumulated during 60-year o f iodine plant operation i s classified as radioactive waste given the presence o f the radium isotopes.

5. Monitoring o f radioactively contaminated sites in the Absheron peninsula was carried out in 1988-1990 but adequate radiochemical analysis o f these sites has not been performed. When the iodine plants stopped operation and were abandoned in 1996, no measures were taken to remove the waste materials or to contain the waste on site. Since then, site structures and scrap metal (used pipes, valves, collectors, etc.) have deteriorated releasing waste materials that were originally contained inside buildings and the charcoal waste heaps have been subject to weather influences and use as a source o f fuel by local population. Considerable contamination by abovementioned isotopes was also observed in the chemical sediments deposited in the inner walls o f the asbestos pipelines used for the drainage o f processed oil water. Pipelines transported the used water together with other liquid wastes back into the reservoirs or into the neighboring industrial waste collectors. Art i f ic ial lakes containing high petroleum acids’ concentration were created in natural hollows on both former production sites as a result o f the o i l water discharge during the plant operation. Groundwater on both iodine sites present at depths varying between 0.34 and 2.9 m is l ikely to be contaminated with radio nuclides, heavy metals, and other oil compounds as a result o f the lack o f proper waste management at these sites.

I

6. Adjacent residential areas are encroaching upon both the Ramani and Surakhani sites. There are no residentdpeople living in the Ramani site, whereas 13 families (59 people displaced f i om Nagorno-Karabakh) l ive in the former office buildings at the entrance o f the Surakhani site since 1993-94.

7. MES, in discussions with IAEA, has preliminary identified four options for the treatmenudisposal o f the charcoal waste piled at the iodine sites: (1) burning, (2) covering, (3) dumping in wells, and (4) transporting and disposing o f the waste in a special landfi l l for radioactive waste. The preferred approach appears the transport and dispose o f the waste in a newly engineered landfill site for low-level radioactive waste, adjacent to the existing Polygon disposal site. The adequacy and feasibility o f this option i s further investigated in the feasibility study and includes a confirmation o f the Polygon site’s geological and (geo)-hydrological suitability.

Environmental Assessment

8. The EA report for the overall cleanup o f both iodine sites includes the environmental baseline conditions following a complete site characterization based o n a specific environmental sampling program for site materials, soil, groundwater, surface water and surface water sediments.

61

9. describes the baseline situation at the two production sites:

From the analyses performed during the EIA process, the following characterization

the radiological contamination analysis revealed that the charcoal waste identified at the two sites correspond to the I1 and I11 radiation hazard categories6 while the asbestos pipes, the charcoal mixed with bricks or soils, and different other mixed solid wastes correspond to the I and I1 radiation hazard categories according to the IAEA classification. According to the testing results, buildings and construction materials located o n sites may not be considered as radioactive materials. Solid samples collected from the sites were found to be exposed to considerable radioactive contamination, which requires total removal o f topsoil up to a 1 m depth; Large volumes o f active charcoal (o f category 11) were discovered in samples collected from the bottom sediments o f adjoining artificial reservoir (lake); Specific activity level o f radium isotopes contained in surface and groundwater was found to be o f concern (e.g., 0.2 Bq/l); Air measurements collected at both sites identified radon at a specific activity level o f about 1 1 OBq/Kg; this i s considered l o w mainly due to the open-air storage o f radioactive charcoal waste and prevailing winds; Furthermore, o i l contamination in soils was detected o n both Ramani and Surakhani sites with concentrations varying between 5-60 times more than the allowable concentration level at the Ramani site and between 2 - 65 times more at the Surakhani site. The o i l contamination in ground water at both sites is about 3-55 times more than the allowable concentration level. M a i n heavy metals analysis performed at both sites revealed concentrations lower than the acceptable concentration level.

10. The site proposed for the construction o f the new NORM disposal facility i s located at the current disposal area for high radioactive wastes (sources) owned by the Special Industrial Complex “Izotop”. This storage facility i s located at approximately 37 km from Baku in a relatively isolated area where there i s no groundwater (up to a depth o f 600 m) and 10 km away from the nearest water and gas pipelines. Also, there are no settlements or industry within 3 km from the site. For these features, the site has been determined as most suitable for management and storage o f radioactive waste. The existing facility has been constructed and i s operated in l ine with international good practices and includes a mobile laboratory to monitor and analyze radioactivity levels. After being sorted out by activity and lifetime, the high and medium radioactive waste i s stocked in 200-litre barrels and stored in 4m deep concrete bunkers that are continuously monitored. The construction o f the new NORM facility foresees works including building an in-s i tu reinforced concrete shelter, steel fence, and a separate 700m long road from the Baku-Shamakhy highway to the facility.

1 1. In addition, the EA describes the possible environment effects affiliated with the cleanup works as wel l as the proposed alternative options to the selected technical solution. Predicted environmental impacts are related to construction works performed during the proposed cleanup and disposal o f the charcoal waste. Effects could appear o n air quality (e.g., associated with excavating waste sites and transporting waste to the disposal facility, vehicle emissions), soil or

In accordance with the IAEA classifications these waste categories must be totally removed from the site

62

groundwater (e.g., cumulative radionuclide concentrations). The E M P including mitigation o f possible environmental impacts and a monitoring program during the construction phase as wel l as after completion o f proposed c iv i l works wi l l ensure that negative impact could be managed appropriately. The long-term monitoring program (including radioactive measurements) proposed during as wel l as after project implementation for the different areas o f the environment at the iodine plant sites wil l allow constant verification o f physicochemical and biological changes associated with the cleanup remediation o n the site and will provide guarantees to the health o f the population and contractors performing the works.

12. The process o f environmental assessment for the remediation actions proposed for other possible high priority NORM contaminated sites in the peninsula including the 1,000 ha o f o i l polluted land between the Buzovni and Mashtagi settlements are captured in an EMF that ensures that the proposed remediation works will not have a lasting adverse impact o n the environment or people’s health. The EMF report includes: (i) a br ie f review o f local environmental laws and regulations and the Bank’s pol icy requirements related to the proposed project; (ii) roles and responsibilities for the EMF implementation as agreed with MES; (iii) description o f specific investments’ environmental management plan including description o f envisaged activities, related environmental issues and their mitigation and monitoring; and (iv) public disclosure requirements.

13. Monitoring o f project performance and implementation o f E M P requirements wil l be the responsibility o f the MES implementation team, but the team will relay heavily for this task on the support of: (i) the day-by-day responsibility to monitor work progress and environmental performance by the independent supervising engineer; (ii) the oversight o f an independent project steering committee for which regulatory institutions wil l be invited; and (iii) the panel o f national and international experts for which also IAEA specialists wil l be invited.

Social aspects

14. During the preparation o f the project, the Social Impact Assessment (SIA) was carried out with the main focus on the fol lowing issues: a) impact on IDP families living o n the Surakhani iodine plant site; b) impact on people living within the 1000 ha o f o i l contaminated land; c) possible impacts on population living in the close neighborhood to iodine plant sites; d) potential impact on population living along the radioactive wastes transportation route.

15. The SIA has identified 59 individuals in 13 families in Surakhani, who are registered IDPs (Internally Displaced Persons) and refugees from the Karabakh area, and approximately 300 individuals in the entire contaminated land that spans over 1,000ha. Other findings o f the SIA include: (i) More than 50% o f population living around the iodine plant site are not aware about radioactive pollution and potential danger to their health; (ii) one new IDP family moved into and settled in Surakhani lately; and (iii) no other settlement i s found close to the new polygon for radioactive waste disposal.

16. In order to increase the public awareness o f the project, the M E S i s planning to organize l ive TV dialogue on project impacts with the participation o f representatives o f c iv i l society and directly address questions raised by viewers o f the program.

63

17. Since the exact nature and scope o f impact in both Surakhani site and the “1,000ha” cannot be known prior to project implementation, the Resettlement Pol icy Framework (RPF) has been prepared that sets out policies and procedures that will apply to the relocation o f households and other unidentified impact both in Surakhani and those in other contaminated areas to be cleaned up in the subsequent phases o f the Project. Whi le the Ministry o f Emergency Situations (MES) i s the project implementation agency, i t has been agreed that the State Committee o f Refugees and IDPs (SCRI), who i s legally charged under national laws o n matters o f relocation and accommodation o f refugees and IDPs, wi l l carry out the relocation o f IDPs in the Surahani site. The Social and Communication Coordinator will be hired in the Project Management Team (PMT) to represent the MES and help SCRI prepare the Resettlement Action Plan (RAP). The potential displacement in the “1,000ha” site, whose scope and scale i s to be determined during project implementation, wil l be the sole responsibility o f the MES. The Social and Communication Coordinator will take a lead in the MES and prepare the RAP as per the policies and provisions o f this RPF. If it proves that IDPs need to be relocated from the “1,000ha” site, the RAP will be prepared by the SCRI, together with the Social and Communication Coordinator, as in the Surakhani site.

18. The SCRI has considerable experience in the accommodation and relocation o f IDPs. SCRI has been implementing programs to relocate IDPs from tent-camps, railroad wagons and so-called “Finnish Camps” into housing units supplied with utilities and other basic infrastructure services. The below characterizes the current program o f relocating IDPs in and around the Greater Baku:

o Since l i t t le land i s available in the area, construction o f new apartments and housing units to accommodate IDPs have been implemented o n a step-by-step basis, only after land i s made available to the SCRI from the land reserves o f Baku city.

o The Resettlement Department o f the SCRI i s responsible for the relocation o f IDPs, and develops relocation plans and selects target IDP groups for relocation.

o A baseline i s taken to determine IDPs eligible for relocation, wel l before a relocation plan i s finalized and prior to the announcement o f the planned relocation. The SCRI visits the target IDP groups selected for relocation and conducts a census to collect key information such as the number o f family members, IDP status, places o f registration, etc.

o IDPs are given alternative relocation sites to choose from, and a grievance redress mechanism i s built in the relocation process. The SCRI usually offers alternative relocation sites if IDPs are unwilling to accept the f i rst offer. In one example, IDPs who refused a housing in distant new settlements were offered two alternative options - (i) moving to new individual houses on the outskirts o f the city after 3 months; or (ii) moving to newly-built apartments inside the city after 12 months.. The IDPs who selected either o f these options rented apartments at their own-cost until the selected housing was ready, but they were given a guarantee that they would be relocated to the selected housing, as the units were finished.

o The SCRI allows IDPs with an established residence in the Greater Baku to continue living there even if they are off icial ly registered in other districts. Many IDPs in the Greater Baku area have migrated from their official place o f registration. If they are targeted for relocation, they are given the option to officially move their place o f official registration to

64

Baku so that they can stay in the area. In the case o f IDPs resident in Baku who have already been allocated a housing unit in one o f the new settlements far from the city, they are offered the choice o f either returning to the unit they have been provided, or o f surrendering that unit in order to be allocated a new unit in Greater Baku.

o From the initial notification o f a relocation plan until the actual move, the SCRI’s f ield staff visit beneficiary IDPs regularly and update them on progress. The IDPs are provided with access to direct telephone lines to the Resettlement Department o f the SCRI so their questions can be addressed.

o Mov ing cost o f the relocated IDPs i s covered by the SCRI.

o The SCRI would relocate any IDPs displaced by the Project as part o f a larger IDP relocation plan to one o f the apartment buildings being built on land provided by the city. Alternatively, they might be offered individual units on the periphery o f the city.

19. It i s thus considered that the relocation programs implemented by the SCRI address the Bank’s OP 4.12, except that the SCRI does not prepare a Resettlement Action Plan (RAP) in a manner required under the OP 4.12. The Social Coordinator o f the P M T in the MED will therefore prepare a RAP in cooperation with the SCRI and submit it to the Bank prior to the relocation o f IDPs. Any IDPs to be relocated under the Project wi l l be consulted o f the relocation plan and provided with alternatives if they have strong and legitimate concerns about the plan offered.

Consultation with affected groups and local NGOs

20. A public consultation process has been implemented for the project in accordance with the Bank OP 4.01. An initial public meeting was held by MES on December 19, 2007. The meeting was attended by representatives o f the Academy o f Sciences, NGOs, local governments and community representatives (municipalities) o f the districts of, or adjacent to, the project areas. The project team (implementing agency and consultants) briefed the audience on the proposed project and on the preparatory work carried out, answered questions raised by participants. The second round o f public consultations on the EIA and related safeguard documents was held on February 7, 2008 when draft documents were presented and discussed to a various public. Comments received during both meetings were incorporated in the final safeguard documents and publicly disclosed in Azerbaijan and at the Bank’s Infoshop.

2 1. Furthermore, the EIA Executive Summary together with the EMF was sent to the WB Board o f Directors on February 12, 2008 in order to meet the project requirements stipulated by the Pelosi Amendment7.

Pelosi Amendment requires that al l environmental documents (detailed EIA and the affiliated EMP and Executive Summary) for a category A project should be disclosed to the U S ED 120 days before the project board date (in t h ~ s project case, proposed for June 17,2008)

65

Annex 11: Project Preparation and Supervision

AZERBAIJAN: Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABILITATION PROJECT

Planned Actual PCN review 11/12/2007 11/12/2007 Init ial P ID to PIC 0 1/10/2008 01/10/2008 Initial ISDS to PIC 01/11/2008 01/11/2008

Start Negotiations 04/21/2008 04/28/2008 Board/RVP approval 0611 712008 Planned date o f effectiveness 0913012008 Planned date o f mid-tern review 09130120 1 1 Planned closing date 09130120 14

Start Appraisal 03/15/2008 03/03/2008

Key institutions responsible for preparation o f the project: Ministry o f Emergency Situations

Bank staff and consultants who worked on the project included:

Name Title u n i t Aniruddha Dasgupta Lead Urban Planner ECSSD Ellen Hamilton Sr. Urban Planner ECSSD Bakhtiyar Karimov Consultant ECSSD Frank Van Woerden Sr. Environmental Engineer ECSSD Gulana Hajiyeva Environmental Specialist ECSSD Satoshi Ishihara Social Development Specialist ECSSD Wolfhart Pohl Sr. Environmental Specialist ECSSD Francois Boulanger Urban Economist ECSSD Ahmet Gokce Sr. Procurement Specialist ECSPS Norpulat Daniyarov Financial Management Spec. ECSPS

Junk0 Funahashi Senior Counsel LEGEM Grazia Atanasio Communications Officer EXTCD Hadji Huseynov Infrastructure Specialist ECSSD Ruxandra Floroiu Environmental Engineer ECSSD Solvita Klapare Operations Analyst ECSSD Vusala Asadova Team Assistant ECCAZ Yarissa Sommer Consultant ECSSD Delphine Hamilton Sr. Program Assistant ECSSD

Hanna M. Koilpi l lai Senior Finance officer LOAFC

Bank funds expended to date on project preparation: 1. Bank resources: US$984,362.35 2. Trust funds: US$O.OO 3. Total: ARP 111- (P110682)

US$984,362.35 (for (i) ARP I - P104985; (ii) ARP I1 - (P110679); & (iii)

Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$75,000 (for (i) ARP I - P104985; (ii) ARP I1 - (P110679); & (iii) ARP 111- (P110682) 2. Estimated annual supervision cost: US$lOO,OOO (for ARP I - P104985)

66

Annex 12: Documents in Project Files

AZERBAIJAN: Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABILITATION PROJECT

Bank Assessments common for four project in the Absheron Rehabilitation Program ( M P )

1. Project Concept Document (PCN) 2. Minutes o f PCN Review Meeting 3. PCN Peer Reviewers Comments 4. Project Information Document -Concept Stage 5. Aide Memoires o f Project Preparation Missions 6. Financial Management Assessment 7 . Agency’s procurement Assessment 8. Economic and Financial Analysis OER minutes 9. Minutes o f Safeguard Review Meeting, November 14,2007

Other Reports and Studies for specific projects General

1.

2. 3.

4.

5.

6.

7. 8. 9.

Presidential Decree : Comprehensive Action Plan on Improving environmental Situation in Azerbaijan for 2006-201 0 (English translation) Cabinet Minister’s Decree #325 S (English translation) Deputy Prime Minister’s letter requesting inclusion o f Solid Waste Management (English translation) Deputy prime Minister’s letter requesting inclusion o f 1000 ha site clean up and Implementation o f Environmental Standards and Certification component (English translation) Decree # 094 establishing working group within Ministry of Emergency Situations (MES) (English translation) Decree # 653 establishing working group within Ministry o f Economic Development (MED) (English translation) AARP Minutes o f Public Consultations: 1 St Round December 19,2007 AARP Minutes o f Public Consultations: 2“d Round SOCAR, February 8,2008 AARP Minutes o f Public Consultation: 2nr Round MED, February 21,2008 (To be obtained)

ARP I: Contaminated Sites Rehabilitation Project (MES) 10. Environmental Impact Assessment (EIA) Executive summary 1 1. Environmental Impact Assessment (1 000 ha) 12. Environmental Management Framework (EMF) 13. Draft Resettlement Action Plan (RAP) 14. Resettlement Policy Framework (RPF) 15. Social Impact Assessment 16. Procurement Schedule

67

ARP 11: Integrated Solid Waste Management Project. (MED) 17. EU Pre-Feasibility Report: Baku Solid Waste Management Project 18. Socio Economic Survey o f Modernization o f the Balakhani Landfill: Draft Report 19. Absheron Peninsula Integrated Waste Management Report 2 0. Procurement Schedule

ARP 111: Large Scale Oil Polluted Land Cleanup Project (SOCAR)

21. SOCAR Feasibility Study (Development o f Clean-up Strategies and Procurement o f Plant and Equipment for the Remediation o f Oil-polluted Land, Absheron Peninsula, Azerbaijan, 21. Jan. 2008)

22. SOCAR Restructuring and Commercialization Project: Draft Report 23. Environmental Management Framework (EMF) 24. Environmental Management Plan (EMP) 25. Draft Operational Plan 26. Procurement Schedule

68

Annex 13: Statement of Loans and Credits

AZERBAIJAN: Absheron Rehabilitation Program ARP I: CONTAMINATED SITES REHABILITATION PROJECT

Project F Y ID

P100667 2008

P102117 2008 PO99924 2008 P107613 2008 PO83108 2008 P109885 2008

P100582 2007 PO96213 2007 PO99201 2006 PO94488 2006 PO94220 2006 PO90887 2006 PO89751 2005 PO83341 2005 PO81616 2005 PO77031 2005 PO66199 2005 PO76234 2004 PO49892 2004 PO70989 2003 PO08286 2003

PO66100 2002 PO40716 2001

Purpose

HIGHWAYS I1 - ADDL. FINANCING EDUCATION APL I1 C O W & PUBLIC ACCT IDP - ADDL. FINANCING

RAIL, TRADE & TRANSP

FINANCING REAL ESTATE REG. WATER SUPPLY JUDICIAL MOD Highway 2 Health Sector Reform Project ADCP-I1 IDP ECON DEVT SUPPORT POWER TRANSMISSION FIN SERVS DEVT RURAL ENVIRONMENT (GEF) RURAL ENVIRONMENT RURAL INVSMT (AZRIP) PENSION & SOC ASST ED SECT DEV (APL #1) IRRIG DIST SYS & MGMT IMPROVMT AVIAN FLU (formerly IBTA 2)

HIGHWAY

RURAL INVEST - ADDL.

Original Amount in U S $ Millions

IBRD

300.0

450.0

30.00 230.00

0.00 200.00

0.00 0.00 0.00

48.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

I D A

0

25.0 11.0 15.0

15.0

0.00 0.00

21.60 0.00

50.00 29.20 11.50 0.00

12.25 0.00 8.00

15.00 10.00 18.00 35.00

9.45 40.00

SF

0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

GEF

0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

Cancel. Undisb.

300.0

25.0 11.0 15.0

- 450.0 15.0

0.00 30.00 0.00 230.00 0.00 22.43 0.00 182.82 0.00 50.97 0.00 28.92 0.00 4.30 0.00 46.94 0.00 11.59 0.00 4.75 0.00 7.78 0.00 5.50 0.00 5.87 0.00 3.23 0.00 30.98

0.00 3.77 0.00 5.20

Difference between expected and actual

disbursements

Orig.

0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.83 0.82

29.49 7.45 5.78 1.72

25.61 5.12 1.92 2.63

-1.63 4.68 1.25

10.53

-1.24 -1.71

Fm. Rev’d

0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 2.29 0.00 0.00 0.00 0.00 0.00 1.77

0.00 0.00

1.87 -2.02

Total: 1258.00 326.00 0.00 5.00 0.00 1491.05 93.25 3.91

69

Annex 14: Country at a Glance

AZERBAIJAN: Absheron Rehabilitation Program

ARP I: CONTAMINATED SITES REHABILITATION PROJECT

Azerbaijan a t a glance 3/14/08

Key Development Indicators

(2006)

Population, mid-year (millions) Surface area (thousand sq. km) Population growth (Oh) Urban population (% of total population)

GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $)

GDP growth (%) GDP per capita growth (%)

(most recant estimate, 2000-2006)

Poverty headcount ratio at $1 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP. Oh) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of chiidren under 5)

Adult literacy, male (% of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female ( % of age group)

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

Azerbaijan

8.5 87 1.1 52

16.0 1,890 5,960

34.5 33.0

4 33 72 74

7

97 95

77 54

Europe 8 Central

Asia

460 24,114

0.0 64

2,206 4,796 9,662

6.8 6.8

1 10 69 28 5

99 96

103 100

92 85

Lower middle income

2,276 28,549

0.9 47

4,635 2,037 7,020

8.8 7.9

71 31 13

93 85

117 114

81 55

Net Aid Flows

(US$ mMions) Net ODA and official aid Top 3 donors (in 2005).

United States Turkey Germany

Aid (% of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumer pnces (annual YO change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$)

Population, mid-year (miilions) GDP (US$ millions)

Agnculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

Exports of goods and services imports of goods and services Gross savings

Manufactunng

1980

6.2

1990 2000

0 139

19 0 4 I 9

2.1 2.8 0 17

107.0 1.8 83.5 12.5

0.0 0.9

7.2 8.0 8,858 5,273

(% of GDP) 29.0 17.1 32.9 45.3 19.3 5.6 38.1 37.5

51.2 63.5 17.6 15.2 26.5 20.7

43.9 39.0 39.2 38.4 4.9 17.3

2006

223

44 29 19

1.9 27

8.4 11.3

0.9

8.5 20,982

7.5 60.6

6.1 23.8

31.6 10.8 29.9

66.5 38.8 47.5

Age distribution, 2006

Female

30-34

20-24

10-14

0-4

15 10 5 0 5 10 15

percent

Under-5 mortality rate (per 1,000)

120

'! 20 h 1890 1995

40

OAzerbaijan OEu

2000 2005

)e &Central Asia

Orowth of GDP and GDP per capita (%)

I " .

90 85 00 05

&GDP -GDP m r camta

1980-90 1990-2000 2000-06 (average annual growth %) 1.5 1.2 0.9

-6.3 15.6

-2.1 5.9 -0.8 20.1

-12.0 8.8 -2.3 12.2

1.5 12.2 -1.7 10.6 42.9 39.5

6.8 15.4 15.5 24.9

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available. a. Aid data are for 2005.

Development Economics, Development Data Group (DECDG).

70

Azerbaijan

Balance of Payments and Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (df) Net trade in goods and services

Current account balance as a % of GDP

Workers' remittances and compensation of employees (receipts)

Reserves, including gold

Central Government Finance

(% of GDP) Current revenue (including grants)

Current expenditure

Overall surpluddeficit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

External Debt and Resource Flows

(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC, MDRi)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

2000

1,858 1,539

95

-168 -3.2

57

680

20.2 13.3 17.8

0 . 6

35 27

1,328 130 -

25.2 5.8

130 0

2006

13,015 5,269 5,822

3,708 17.7

693

2,500

27.2 19.0 18.4

-0.2

35 22

1,900 242 -

9.1 1.6

-584 1

:ompositton of total external debt, 2006

IBRD 5 IDA 583 Short.bm. 302

IMF, 134

Private, 588

Bllaterlli 573 1a1era1 -288

Private Sector Development

Time required to start a business (days) Cost to start a business (% of GNI per capita) Time required to register property (days)

Ranked as a major constraint to business (% of managers surveyed who agreed)

Tax administration Tax rates

Stock market capitalization (% of GDP) Bank capital to asset ratio (%)

2000 2006

- 52 - 9.3 - 61

.. 24.9

.. 22.9

0. I .. 14.2

Technology and Infrastructure

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 1,000 people)

(% of manufactured exports)

Environment

Agricultural land (% of land area) Forest area (% of land area) Nationally protected areas (% of land area)

Freshwater resources per capita (cu meters) Freshwater withdrawal (% of internal resources)

C02 emissions per capita (mt)

GDP per unit of energy use (2000 PPP $ per kg of oil equivalent)

Energy use per capita (kg of oil equivalent)

World Bank Group portfolio

(US$ millions)

IBRD Total debt outstanding and disbursed Disbursements Principal repayments interest payments

IDA Total debt Outstanding and disbursed Disbursements Total debt service

IFC (fiscal year) Total disbursed and outstanding portfolio

Disbursements for IFC own account Portfolio sales, prepayments and

repayments for IFC own account

of which IFC own account

MlGA Gross exposure New guarantees

Governance indicators, 2000 and 2006

Voice and accountability

Political stability

Regulatory quality

Rule of law

Contml of wmp%on

0 25 50 75 100

.ZOO6 Country's percentile rank(0-100) 02000 hrghw vtlluer mply t d e r ratings

Sou- Kaufmann-Kmay-Martruul, World Bank

2000

92.3

152

4.5

57 11.3

213.0

3.7

1.7

1,430

2000

0 0 0 0

216 27 2

163 124 46

6

65 30

2005

49.4

397

0.8

58 11.3 4.8

966

3.5

2.3

1,559

2006

5 5 0 1

583 60 8

10 10 5

29

1 0

Note: Figures in italics are for years other than those specified. 2006 data are preliminary .. indicates data are not available. -indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

3/14/08

71

Millennium Development Goals Azerbaijan

With selected targets to achieve between 7990 and 2075 (estimate closest to date shown, +/- 2 yearsj Azerbaijan

Goal 1: halve the rates for $1 a day poverty and malnutrition 1990 1995 2000 2005 Poverty headcount ratio at $1 a day (PPP, % of population) 10.9 3.7 Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5)

68.1 49.6 6.8 7.4

10.1 16.8

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 89 86 85 Primary completion rate (% of relevant age group) Secondary school enrollment (gross, %) Youth literacy rate (% of people ages 15-24)

81 89 94 88 75 83

100

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) loo 100 97 Women employed in the nonagricultural sector (% of nonagricultural employment) Proportion of seats held by women in national parliament (%)

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) Infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, %)

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total)

33 38 44 49 12 12 11

105 98 93 89 84 80 77 74 66 97 99 98

94 84

Goal 6: halt and begin to reverse the spread of HlVlAlDS and other major diseases Prevalence of HIV (% of population ages 1549) Contraceptive prevalence (% of women ages 15-49)

Tuberculosis cases detected under DOTS (%) 5 6 55

0.1

Incidence of tuberculosis (per 100,000 people) 35 50 75 76 55

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 68 70 75 77 Access to improved sanitation facilities (% of population) 55 55 54 Forest area (% of total land area) 11.2 11.3 11.3 Nationally protected areas (% of total land area) 4.8 C02 emissions (metric tons per capita) 7.5 4.2 3.7 3.5 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) 1.9 1.1 1.7 2.3

Goal 8: develop a global partnership for development Fixed line and mobile Dhone subscribers (Der 1,000 DeoDle) 87 84 152 397 . . internet users (per I ,000 people) Personal computers (per 1,000 people) Youth unemployment (% of total labor force ages 15-24)

Education indicators (%)

:"E 25 2000 2002 2005

+Primary net enmilment ratio

+Ratio of girls to boys in pnrnary 8 secondary education

0

I leasles immunization (% of 1-year olds)

50 ' ~ I 1 25 4 1880 lBB5 2000 2005

OAzerbaijan OEumpe & Central Asia I

0 1 81 23

CT indicators (per 1,000 people)

350

150 100 50 0

2000 2002 2005

0 Fixed + mobile subscribers Internet users

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

Development Economics, Development Data Group (DECDG).

3/14/08

72

A B S H E R O NA B S H E R O N

S U M G A Y I TS U M G A Y I T

B A K UB A K UB A K UB A K U

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LOKBATAN

GYUZDEK

GEOKMALY

KOBU

SARAINOVKHANA

BINGADI

PIRSHAGA

SUMGAYIT

DIGYAKH

MAMEDLI

ZABRAI

RAMANA

BYULBYULA

SABUNCHU

SURAKHANI

AMIRADZHAN

GOVSAN

BINA

MASHTAGABUZOVNA

MAPDAKAN

SHUVELAN

KALA

TURKAN

ZIRA

NARDARAN

BILGYAKH

BAKU

GORADIL

FATMAI

JEIRANBATAN

KHYRDALAN

RASULZADE

BALAKHANY

MASAZYR

BALADZHARY

PATAMDAR

B INAGAD I D I S TR ICT( RESORT AREA )

B I N A G A D I D I S T R I C T

KHATAI DISTRICT

NIZAMI DISTRICTNARIMANOV

DISTRICT

NASIM

IDISTRICT

YASAMALDISTRICT

A Z I Z B E Y O V

D I S T R I C T

Q A R A D A G H

D I S T R I C T

SABAYI LD ISTR ICT

SURAKHANIDISTRICT

SABUNCHUDISTRICTA B S H E R O N

S U M G A Y I T

B A K UB A K U

LakeJeiranbatan

Lake

Masazyrgyol

Lake

Mirzaladi

Lake Khojhasan

Lake Ganli Gel

Lake Beyuk Shor

Lake Byul

Byula

Lake Zikh

Lake

Krasn

oye

S u m g a y i tB a y

PIRALLAHIISLAND

B a k u B a y

C A S P I A N

S EA

C A S P I A N S E A

APRIL 2008

49˚45' 50˚15´50˚00´

49˚45´ 50˚15´50˚00´

40˚30´

40˚20´ 40˚20´

40˚30´

AZERBAIJANARMENIA

ISLAMIC REP. OF IRAN

TURK

MEN

ISTANT U R K E Y

SYRIAN ARAB REP. IRAQ

GEORGIA

U K R A I N E

RUSS IAN

FEDERAT ION

KAZAKHSTAN

Baku

B lack SeaCasp ian

Sea

0 2 4 10 6 8

KILOMETERS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

IBRD 36087

AzizbeyovAzizbeyovAzizbeyov

QaradaghQaradaghQaradagh

BalakhanyBalakhanyBalakhany

l l l

MAIN ROADS

OTHER ROADS

DIRT ROADS

RAILROADS

BUILT-UP AREAS

AIRPORT

RIVERS

BAKU DISTRICT BOUNDARIES

RAYON BOUNDARIES

INTERNATIONAL BOUNDARIES (INSET)

PROJECT DISTRICTS, CENTRAL BAKU

PROJECT DISTRICTS, OUTLYING DISTRICTS

PROJECT DISPOSAL SITES

AZERBAIJAN

ABSHERON REHABILITATION PROGRAMII – Integrated Solid Waste Management Project

ZIRA