ATT-FY13_ACT_Progress_Report.pdf

i

AZERBAIJAN COMPETITIVENESS

AND TRADE (ACT) PROJECT

ACT Progress Report for FY2013 Quarter 1

October 1 – December 31, 2012

This publication was produced by Sibley International LLC, for review by the United States Agency for International Development.

Picture Caption: Anar Azimov, Value Chain Specialist, Azerbaijan Competitiveness and Trade (ACT) Project in front of the Project’s demonstration stand during the Pomegranate Festival in Goychay.

November 2012 ii

Prepared for the United States Agency for International Development, USAID Contract #:

AID-EEM-I-00-07-00003-00, Task Order #: AID-112-TO-10-00002

Sibley International Principal Contact: David Snelbecker

CEO

Sibley International LLC 1250 Connecticut Ave., NW, Suite 200 Washington, DC 20036 Tel: 1.202.833.9588 Email: dsnelbecker@sibleyinternational.com

In Azerbaijan: Melani Schultz

Chief of Party ACT Project 133 Bashir Safaroghlu St.

SAT Plaza, 15th floor, Baku, Azerbaijan, AZ1009 Tel: +994 12 596 2435 melani.schultz@actProject.net mailto:dsnelbecker@sibleyinternational.com mailto:melani.schultz@actProject.net mailto:melani.schultz@actProject.net iii

Azerbaijan Competitiveness and Trade (ACT) Project

ACT FY2013 Q1 October 1 – December 31, 2012

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the U.S.

Agency for International Development or the United States Government.

ACRONYMS

ABM Activity Based Management ACT Azerbaijan Competitiveness and Trade Project AML Anti-Money Laundering BDS Business Development Service Providers CBA Central Bank of Azerbaijan COP Chief of Party CSO Civil Society Organization DVC Digital Video Conference EU European Union FI Financial institutions FMS Financial Monitoring Service GAPS Good Agricultural Practices GATT General Agreement on Tariffs and Trade IFC International Finance Corporation IPPC International Plant Protection Convention ISPM International Standards of Phytosanitary Measures (ISPM) LE Local Expert MFA Ministry of Foreign Affairs MOED Ministry of Economic Development MOT Ministry of Taxes MSE Micro and Small Enterprises PMPI PMP indicator SCPI State Committee on Property Issues SLCC State Land and Cartography Committee SME Small and Medium Enterprises SOW Scope of Work SPS Sanitary and Phytosanitary Measures STTA Short-term Technical Assistance TBT Technical Barriers to Trade TRIPS Trade related Intellectual Property Rights US United States USAID United States Agency for International Development USTR United States Trade Representative WTO World Trade Organization http://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade

TABLE OF CONTENTS

Project Overview

Project Activities and Accomplishments in Year 3 Q1

Component 1: Domestic Business Environment Improved

Accomplishments Highlights in Year 3 Quarter 1 in Component 1

Activity 1.A: Build and Sustain the Case for Economic Reform in Azerbaijan

Activity 1.B: Facilitate Changes to Business-Related Laws, Regulations, and Administrative

Procedures so as to Improve the Business Climate, Particularly in the Non-Oil Sectors

Sub-Activity 1.B.1: Tax Reform

Sub-Activity 1.B.2: Property Law Reform

Sub-Activity 1.B.3: Commercial Law Reform

Sub-Activity 1.B.4: Administrative Barriers Reduction

Activity 1.C: Enhance the Capacity within the Central Bank to Maintain Stability within the

Financial Sector

Sub-Activity 1.C.1: Central Bank Assistance

Sub-Activity 1.C.2: Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT)

Issues/Constraints

Project Activities Planned for Q2 FY2013

Component 2: Liberalized, More Transparent Trade Environment Developed

Accomplishments Highlights in Year 3 Quarter 1 in Component 2

Activity 2.A: Support to GOAJ in Improving the Trade Environment

Sub-activity 2.A.1 Trade Environment Legal Reform

Sub-activity 2.A.2 Trade Environment Institutional Reform:

Activity 2.B: Support to GOAJ on Procedures and Mechanics of WTO Accession

Sub activity 2.B.1: WTO Accession

Issues/Constraints

Project Activities Planned for Q2 FY2013

Component 3: Targeted Agricultural Value Chains Improved

Accomplishments Highlights in Year 3 Quarter 1 in Component 3

Activity 3.A: Identify Subsector that Exhibit Potential for Competitive Growth

Activity 3.B: Improved Competitiveness of Targeted Sub-Sectors

Sub-Activity 3.B.1: Direct Value Chain Assistance

Horticulture (Pomegranates, Apples, Hazelnuts)

Dairy

Business Development Service Providers capacity development

Association Formation

Cold Chain Development

Food Safety and HACCP Compliance

Activity 3.C: Improve and Expand Knowledge of Agricultural Best Practices

Sub-Activity 3.C.1: Education/Extension

Horticulture

Dairy

Aquaculture

Sub-Activity 3.C.2: Demonstration Farms

Activity 3.D: Improve Access to Finance for SME’s and Farms, particularly in Rural Areas

Sub-Activity 3.D.1: Agricultural/Rural Lending and Leasing

Demir Bank

Azercredit VF

AG Bank

Turan Bank

ARPA

Other activities

Issues/Constraints

Project Activities Planned for Q2 FY2013

Coordination with other Donor Projects

Cross Cutting Activities

Monitoring and Evaluation

Financial Reporting

Communications and Outreach

Fixed Price Contracts

Annex 1A – Legislative Tracking: Domestic Business Enabling Environment as of December 2012

Annex 1B – Legislative Tracking: Trade Environment as of December 2012

Annex 2 – Capacity Building

Project Overview

Sibley International is pleased to present the Azerbaijan Competitiveness and Trade Project Year 3 Quarter

1 Report in accordance with contract number AID-EEM-I-00-07-00003, task order number AID-112-TO-10-

00002. This report covers quarterly reporting for year 3 and describes project activities completed during

Q1 – October 1 – December 31, 2012.

The ACT Project began operations in October 2010. It aims to improve the domestic business enabling environment; develop a liberalized, more transparent trade environment; and improve targeted value chains in the agriculture sector of Azerbaijan.

Formally, the project is divided into the three abovementioned interconnected and interdependent components. In addition, there are several cross-cutting technical areas that support all three components.

These include the development of a public-private dialog to support discussions between the private and public sector to improve understanding of changes; overall monitoring and evaluation to ensure the project objectives are met; and development of partner organizations in building local institutional capacity including business development service providers and economic and trade related think tanks, to the extent possible.

The project works towards achieving the following as defined in the revised SOW1:

• Build and Sustain the Case for Economic Reform in Azerbaijan.

• Facilitate Changes to Business-Related Laws, Regulations, and Administrative Procedures so as to improve the business climate, particularly in the non-oil sector.

• Enhance the capacity within the Central Bank of Azerbaijan to maintain stability within the financial sector of Azerbaijan

• Support to GOAJ on WTO Accession to achieve legislative and regulatory compliance.

• Support to GOAJ on Procedures and Mechanics of WTO Accession.

• Identify sub-sectors that exhibit potential for competitive growth.

• Improve competitiveness of targeted sub-sectors.

• Improve and expand knowledge of agricultural best practices.

• Improved access to finance for SMEs and farms, particularly in rural areas.

The original project SOW was officially revised with modification number 3 in May 2012.

Project Activities and Accomplishments in Year 3 Q1

Component 1: Domestic Business Environment Improved

Accomplishments Highlights in Year 3 Quarter 1 in Component

After a substantial period of consultation the amendments to the Tax Code were passed by the

Milli Majlis and signed by President Aliyev. The amendments included several business-friendly provisions advocated by the project and its partners.

In other areas the project moved steadily closer to success. Two committees of the Milli Majlis have agreed to form a working group on the draft Competition Code, an approach long advocated by the project. The Ministry of Communications and Information Technology has been working very closely with the project to get the legislation identified in the e-commerce package (initially developed by the project) into sufficient shape for submission to the President’s Office and thereafter to the Milli Majlis. Finally, an order on inspection checklists (which had been developed with substantial project input) is now awaiting signature on the desk of the chairman of the State

Veterinary Service.

To attempt to establish high level buy-in for its agenda, the project submitted changes to a circulation draft to the President’s 2020 Statement, both indirectly, through AmCham, and directly by submitting to the Office of the President. At the end of the quarter, the final version was published. It incorporated several changes that the project had suggested.

With regard to technical assistance to the Central Bank (CBA), the project and the Bank have nearly completed the data collection necessary for building cost models under the activity based management system and the Bank has procured the necessary software. Work on risk-based bank supervision has slowed, awaiting identification and mutual agreement of an expert. Although the

Board has not formally approved the methodology the CBA is ready to commence implementation.

Work with the Financial Monitoring Service (FMS) was substantial at the beginning of the quarter with the launch of an e-learning system that the project had helped develop and the sponsorship of an FMS attorney to undertake anti-money laundering training and certification in the United

States. During the quarter, substantial numbers of individuals began enrolling in the e-learning system.

At the end of the quarter the CBA was finalizing a counterproposal to the list of proposed activities that the project had sent earlier.

Activity 1.A: Build and Sustain the Case for Economic Reform in

Azerbaijan

As agreed with USAID, Activity 1.A was phased out as a stand-alone activity.

Activity 1.B: Facilitate Changes to Business-Related Laws, Regulations, and Administrative Procedures so as to Improve the Business Climate, Particularly in the Non-Oil Sectors

This portion of the report describes sub-activities of the project as delineated by the work plan.

Sub-Activity 1.B.1: Tax Reform

At the end of Q1, the Milli Majlis approved a set of amendments to the Tax Code. These amendments came as the result of negotiations and dialogue that can be traced back to early

2011 when the project provided an economist as one of the speakers at a tax conference that

AmCham had organized.

The amendments introduce several business friendly changes to the tax regime that the project advocated over the course of 2011 and 2012. For instance the upper tax rate for employees has been reduced from 30 to 25 percent. Further, this amount will be taxed only after the first 2,500 manats has been earned, rather than the first 2,000. With regard to VAT, the threshold for obligatory registration is now at a unified rate of 120,000 manats for both individuals and companies. This will likely bring more companies into the VAT system, a reform long advocated by the project.

Finally, with respect to VAT, companies have been granted an additional 30 days in which they can account for provision of goods and services which they have provided to clients but have not yet been paid for. Before the amendments companies would have to account for this income on the date of invoice. After the amendments, they now appear to have up to 30 days to do so.

While it is not exactly what the project advocated, it is close.

On the property tax modeling effort, the project was able to come to a consensus with the

Ministry of Finance on the approach to take and the expert that would be optimal for performing the required tasks.

Sub-Activity 1.B.2: Property Law Reform

In the property sphere it appears that various government agencies have taken up several of the recommendations offered in the property paper that the project previously circulated. For instance, in order to address ongoing technical problems with land data from the State Land and

Cartography Committee (SLCC), the State Committee for Property Issues (SCPI) is attempting to clarify land data using a combination of their own orthophotos and the data provided by the SLCC.

Further, the most recent draft on registration of rights in property reduces the number of property objects from 15 to 8 (a major recommendation in the paper). This, combined with some procedural reforms, will likely reduce the time necessary to register properties and speed the full build out of a comprehensive property cadastre.

Finally, the SCPI is beginning the process of building a land management system that would eventually allow for the sharing of geographical data by government agencies all working off of the same digital map. These issues, which were discussed at length in the property paper, will begin to be addressed in a pilot project in Sumgayit.

Sub-Activity 1.B.3: Commercial Law Reform

This sub-activity breaks down into several distinct areas. For details on the current status of all legislation supported in the component see Annex 1A.

Competition Code Dialogue

Early in Q1, the project, in cooperation with its CSO partner, organized an official hearing on the

Draft Competition Code at the Milli Majlis. There the project was able to advocate its position on the Draft Code, along with other CSOs, donors, and government officials. The comments made to the members of the Milli Majlis as well as their responses thereto indicated that some progress had been made in raising awareness of the need for a progressive law.

Building on this, the project published two articles on competition policy. One of them, “Destiny of the Monopolists” (about the main gaps in the official draft Competition Code) made the cover of the local Economist magazine. The project published another more academic article, “The

Antimonopoly Legislation of the Republic of Azerbaijan: Current Situation and Perspectives” in the law journal “Qanun”.

By the end of the quarter, the heads of the two responsible Milli Majlis committees agreed to form a working group, which would include a representative from the project, to develop the changes necessary to make the law more effective and progressive.

These activities are captured under PMPIs 1-2.1 (Direct Exposures of Public Education Advocacy) and 1-2.2 (Indirect Exposures of Public Advocacy).

E-Commerce Legislative Package

During the quarter, the project worked with the Ministry of Communications and Information

Technology and other ministries in circulating the proposed legislation on e-commerce and coordinating responses to comments that various agencies had submitted. By the end of Q1 most of the comments had been addressed with the remaining task being the final circulation of individual pieces of legislation that make up the package.

At the same time, the project worked with the State Procurement Agency responding to their request to bring out more comprehensive draft changes to the law “On Public Procurement”.

Secured Transactions Law Promotion

The project hosted a joint conference with the International Finance Corporation (IFC) on legal reforms in secured transactions, approximately a year after a previous one. In the latest conference the number of participants was higher and guests demonstrated far greater understanding and appreciation of the proposed reform. The conference generated a substantial amount of discussion in the press.

By the end of the quarter the project was continuing to assist the Central Bank on development of the legislation and held discussions on approach with a regional expert on the topic. The regional expert is planned to provide support starting next quarter.

Other: Azerbaijan 2020

The project submitted a detailed set of proposed amendments to the Azerbaijan 2020 document to the President’s Office directly. The project also contributed substantially to AmCham’s submission to the President’s Office.

At the end of the quarter, the government issued the revised 2020 statement. The President’s

Office was apparently open to several of the recommendations that the project submitted. The final version of the 2020 statement included the following points that the project had recommended:

On more effective judicial measures to protect investors.

On the need to conduct reforms required for WTO accession in order to join it and helping Azerbaijani exporters compete in foreign markets.

On greater competition in the leasing sector.

On incorporating international best practices into state measures for supporting agriculture.

On a business environment that encourages greater private lending in the agricultural sector.

On the need to increase worker capacity and productivity in the agricultural sector.

On the need to prioritize infrastructure projects by reference to economic effectiveness, in particular through cost-benefit analysis.

Sub-Activity 1.B.4: Administrative Barriers Reduction

This sub-activity initially encompassed work on business start-up, leasing of land, food safety inspections, and the adoption of regulatory impact analysis methodologies. The activities of leasing of land and the adoption of regulatory impact analysis have been dropped as a result of lack of prioritization of these issues by government counterparts and agreement with USAID.

The project continued working with its private partner, Iskanderov, to finalize its study on business start-up constraints in the olive growing and fish processing sectors. Iskanderov will hold consultations with additional stakeholders in Q2 to finalize the recommendations and publicize the findings.

Further, on the basis of the portion of the study focusing on aquaculture, the project has developed a guide to starting an aquaculture business, which will be annexed in the latest edition of the aquaculture manual that the project is reprinting.

With respect to food safety, the State Veterinary Service’s inspection checklist order (which was developed with substantial input from the project) has been finalized and is awaiting the signature of the chairman. The staff of the State Phytosanitary Service also finalized an inspection checklist (with substantial input from the project), though it has not yet presented to the chairman of that organization.

Activity 1.C: Enhance the Capacity within the Central Bank to Maintain

Stability within the Financial Sector

This activity includes work with the CBA proper and with the FMS, which is under the CBA but has separate offices and a more specialized mission. Note that even though the work here represents substantial effort with these institutions, activities here will not be measured by incremental change in PMPI 1-2.3 as these two institutions have already been counted as “strengthened” in

Y1.

Sub-Activity 1.C.1: Central Bank Assistance

The project continued to move forward with the work necessary to introduce activity based management (ABM) across the Bank. By the end of the quarter, over 80% of the raw data necessary for populating the system had been collected. However, the CBA chose the Oracle software package rather than the SAS software recommended by the project expert which will require a little more time than originally estimated to build the necessary cost models during the second phase of the activity.

The Bank embraced the risk-based banking supervision methodology developed by the project in

Y2 and began planning implementation of the methodology in Y3 (although not yet officially approved). The project offered three banking expert candidates to support implementation of the methodology, two of which the Bank agreed to interview. As the quarter ended, one was interviewed by the Bank and the other was to occur very early in Q2.

With the Euro-crisis continuing on, it has become more and more apparent the macro concerns are a crucial aspect of the health of the banking sector. Recognizing this, the project began planning with the Bank and USAID funded Partners for Financial Stability a regional

“macroprudential workshop” to be hosted by the Bank tentatively scheduled for late February

2013.

The project also began discussing how it could support the work of the Center for Research and

Development (CRD) within the Bank, in particular with its econometric models for forecasting inflation. By the end of the quarter, the project had reached a general agreement with the CRD with respect to two discrete projects with two US economics professors, one to occur in later winter early/spring of 2013 and the other to occur a few months thereafter.

Sub-Activity 1.C.2: Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT)

Training and Outreach

Early in Q2, the project sent an attorney from the FMS to the United States to take the certification course and test sponsored by the Association of Certified Anti-Money Laundering

Specialists. The attorney passed the test with a score well above the minimum to do so.

Development of an E-Learning System and Publication of Legal Text on AML and CFT Issues

In Y2 the project helped the FMS develop an e-learning system for bank compliance officers and the public. At the beginning of Y3 the project assisted the FMS in launching and presenting this system to the public, namely at an event held at a local hotel and attended by representatives from all of the banks. The event demonstrated the capabilities of the e-learning system and encouraged banks to get their people certified by the system as soon as possible.

The event was also used to promote a law book on combatting anti-money laundering, one of the first of its kind in Azerbaijani language. The book was written by the assistant director of the FMS, with layout and publication costs (200 copies) covered by USAID.

By the end of the quarter 180 people had enrolled in the e-learning system (representing all 44 active banks). Fifteen users have been very active recently and five people have already completed the course. This latter statistic is being tracked by the project’s PMP.

Issues/Constraints

The biggest constraint affecting activities in Component 1 continues to be the lack of political will and a consensus by the highest level of government on reforms that need to take place to improve the business enabling environment2. While trade environment reform has been clearly defined through two legislative agendas (issued by the President’s office), there is no such

“roadmap” for business related reforms. Support has been provided by technical levels within the various ministries and continues to be the way forward to push for change from within the government agencies. Greater higher level access would of course further facilitate this process.

Project Activities Planned for Q2 FY2013

Commercial Law Reform

Begin work on property tax modeling initially to frame the model and clearly define the data necessary to make the model workable and relevant.

Submit comments to the SCPI on the draft law on a unified cadastre and amendments to the law on state registration of property.

Participate in the working group on the Competition Code, in the Milli Majlis.

Participate in a planned promotional event (TV show) on the competition law in Ganja.

Participate and/or encourage other promotional activities on improvement of competition and business environment.

Ensure that the amendments to various legislation under the E-commerce package are submitted to the President’s Office after completion of review at the Cabinet of Ministers.

Make progress on the secured transaction legislation and submit a package of amendments to the Central Bank.

Hold a roundtable event with various think tank leaders on the secured transactions law.

Finish perfecting the Azerbaijani version of the Convention on International Sales of Goods and submit it to the MOED.

Submit recommendations on the draft agricultural law.

Reduction of Administrative Barriers

Ensure that the chairman of the State Veterinary Service signs the inspection checklist order.

The project’s efforts to contribute suggestions to the 2020 Statement is an example of efforts to address this constraint.

Get a signature-ready version of an inspection checklist order on the desk of the chairman of the State Phytosanitary Service.

Develop a draft risk identification and assessment regulation for review by the State Veterinary Service.

Sponsor a TV show emphasizing the importance of adoption of the food safety strategy.

Develop a strategy paper for advocating the reforms recommended as a result of the business start-up study and begin implementation.

Finalize educational materials out of the findings of the business startup study.

Begin holding events promoting awareness of the educational materials on business startup.

Support to the Central Bank of Azerbaijan

Support the Central Bank in holding a regional workshop on macroprudential supervision tentatively scheduled for the end of February.

Finish collecting data necessary to establish an ABM system and begin building cost models.

Support the CBA to begin implementation of the methodology for risk-based bank supervision.

Assist and train CRD staff on econometric modeling.

Component 2: Liberalized, More Transparent Trade

Environment Developed

During this quarter, the project made significant progress toward advancing the WTO accession process. A successful working party meeting and a bilateral round of negotiations on services and goods market access were held. Negotiations intensified with the US, EU, Japan, Brazil, Canada and Norway, resolving many contentious points. Progress was made with respect to improving the trade environment: consent for the law on technical regulations was provided by all concerned ministries; three draft laws were submitted to the Cabinet of Ministers (draft law on

Accreditation, draft amendments to the Law on Standardization, draft law on Foreign Trade); the draft law on Accreditation is now ready for submission to the President’s Office; the draft law on

Trade Remedies has been revised with further improvements; and cooperation was launched with the Public Procurement Agency on e-procurement and other institutional aspects.

Accomplishments Highlights in Year 3 Quarter 1 in Component 2

During this quarter, legislative progress was made in a few areas for improving the trade environment and improving compliance with the WTO agreements.

Activity 2.A: Support to GOAJ in Improving the Trade Environment

Sub-activity 2.A.1 Trade Environment Legal Reform

The local team of lawyers continued monitoring the legislative process (22 drafts) for bringing the legal framework in line with best practices and the WTO agreements covering a wide array of areas including intellectual property, food safety, animal and plant life health, customs, trade remedies, licensing, foreign trade policy, standardization and accreditation, and technical regulations. The updated chart of legislative progress is provided in Annex 1B.

Where required, the team provided technical reviews, support, and advice to advance the process. In some instances, support was sought from international experts. The following were the most significant activities performed by the team to advance legal reform for improving the trade environment:

1. Worked closely with the Cabinet of Ministers to improve understanding of the draft law on Technical Regulations. The draft has been agreed by all relevant ministries and is ready for submission to the President’s Office.

2. Discussed the draft law on Accreditation with the Cabinet of Ministers. The draft has been agreed by all relevant ministries and is ready for submission to the President’s Office.

3. Completed work with the State Committee on Standardization, Metrology and Patents on finalizing the draft amendments to the Law on Standards. The draft has been submitted to the Cabinet of Ministers.

4. Worked with the Ministry of Economic Development on a major revision to the law on Trade Remedies (Anti-Dumping, Countervailing, and Safeguards). The draft has been submitted to the Ministry of Justice.

5. Assisted the Public Procurement Agency in developing draft amendments to the law on Public Procurement concerning e-procurement.

6. Launched assistance to the Ministry of Telecommunication and Information Technologies on drafting amendments to the Law on Telecommunications on the basis of WTO principles and in reviewing draft amendments for EU approximation.

7. Assisted the Ministry of Health in incorporating amendments to the Law on Food products prepared by the EU and ACT. Assisted the State Sanitary-Epidemiological Service of the Ministry of Health in preparing the table of justifications in connection with comments from relevant governmental bodies (MOED, Ministry of Justice, Ministry of Agriculture, Standardization State Committee).

8. The draft law on Foreign Trade Activities was submitted to the Cabinet of Ministers in December 2012.

The team continued promoting the advancement of the legislative process for relevant legislation.

Meetings were held in this respect with the Ministry of Justice, the Ministry of Economic

Development, the Ministry of Foreign Affairs, Ministry of Public Health, and State Committee on

Standards, Metrology, and Patents as well as the Presidential Administration and the Cabinet of

Ministers.

Sub-activity 2.A.2 Trade Environment Institutional Reform:

The project provided limited assistance this quarter with respect to institutional reforms.

Activities related to IPPC and Codex harmonization were shifted to next quarter. Workplan activities related to food laboratories complying with ISO 17025 were cancelled. Also, all activities related to customs institutional reforms were cancelled. Activities related to a system for development of technical regulations in line with WTO were put on hold.

ACT improved understanding of the Public Procurement Agency about modern e-procurement system through provision of training and discussions.

The project, however, reached agreement to provide institutional support to the following two state bodies.

1. Copyright agency on building capacity to implement the recently adopted law on Anti-piracy; improving understanding of digital media management; and understanding experience of other countries in administering intellectual property legislation.

2. Public Procurement Agency to assist in the development of a public procurement system including:

Developing guidelines for estimation of the cost of procurement contracts;

Providing the service of registry of public procurement agreements/contracts;

and

Improving the mechanism for consideration of complaints from bidders.

Activity 2.B: Support to GOAJ on Procedures and Mechanics of WTO

Accession

Sub activity 2.B.1: WTO Accession

Azerbaijan successfully held its Tenth Working Party (WP) meeting on December 7, 2012.

Over 25 Members participated in this meeting. Members reported satisfaction with progress made. The Chairperson indicated the wishes of WTO Members to consider Azerbaijan’s accession in 2013 as a priority. He suggested that Azerbaijan and its trading partners meet more often in the coming months to build on recent progress made with regard to bilateral negotiations and reach closure. He was further pleased that plurilateral discussions on domestic support were practical and useful. He commended positive improvements in all accession documents.

Bilateral negotiations on goods and services market access were held with the US, EU, Japan, Brazil, Canada and Norway. The bilateral protocol with the Kyrgyz Republic was signed and negotiations with China were concluded. Azerbaijan indicated during the WP meeting its willingness to sustain a proactive dialogue with Members in capitals and Geneva as well as through DVCs.

ACT participated as an observer in the WP meeting and reported on proceedings.

Recommendations were developed for next steps to enable the next working party meeting and conclude bilateral negotiations.

During FY 2012 Q3 and Q4, ACT supported preparations for the Tenth Working Party meeting and bilateral round of negotiations. This continued during the first quarter of FY 2013 where ACT assisted in reviewing certain aspects of the factual summary. In addition, Azerbaijan agreed to include in the Draft Factual Summary over half of the proposed commitments as recommended in the table prepared by ACT. Further, the project assisted in translating a number of documents in support of the WP meeting and provided a simultaneous interpreter for the WP meeting in Geneva.

ACT continued support to further improve the goods and services offers. A key achievement was the reduction of the agricultural sensitive goods and full adherence to the sectoral agreements. The bilateral meetings in December 2012 were held on the basis of these revised offers. ACT, in addition, facilitated a DVC between USTR and Azerbaijan which helped pave the way for successful bilateral negotiations in Geneva.

ACT’s assistance in shaping the ACC4 – Domestic Support Table and in building the capacity of the Ministry of Agriculture and improving understanding of plurilateral negotiations has led for the first time to a very successful round of plurilateral negotiations.

Events:

Provided an interview to Public TV on Combatting Piracy and arranged counterparts’ interviews.

Issues/Constraints

Steady progress continues to be made on advancing the WTO bilateral negotiations process.

However, the legal reform process continues lag behind. This hinders progress for the project in achieving adoption of reforms and moving legislation through the process as initially planned.

Without a significant change in political will, this will continue to be the case.

Project Activities Planned for Q2 FY2013

Legal reforms:

Continue support to all draft legislation with focus on the following main priorities: draft law on Technical Regulations, draft law on Accreditation, draft law on Foreign Trade activities, draft law on Trade Remedies, draft law on Customs Tariff, draft amendment to the Law on Food Products, and draft amendments to Decree 782.

Assist in further development for regulations related to intellectual property, technical regulations, and the Trade Remedies Law.

Institutional development:

Build capacity of Copyright Office on administering IP related laws.

Provide assistance to the Public Procurement Agency.

International standards:

Resume activities to assist in harmonizing with Codex Alimentarius (Maximum Residue Limits (MRLs) for Veterinary Drugs in Food - CAC/MRL 2).

Resume activities to assist in harmonizing with the International Plant Protection Convention (ISPM 7 (1997) Export Certification System; and ISPM 12 (2001) Guidelines for Phytosanitary Certificates).

WTO Accession process:

Assist in preparation of the next working party meeting including replies to questions.

Assist in updating the legislative action plan.

Promote further liberalization toward improving revised offers on goods and services.

Provide additional support for plurilateral agricultural negotiations.

Conduct WTO events.

Update any needed conformity charts.

Component 3: Targeted Agricultural Value Chains Improved

Accomplishments Highlights in Year 3 Quarter 1 in Component 3

In Q1 Year 3 Component 3 made significant progress in furthering the work in the area of value chain development, farmer training and the establishment of demonstration plots. The implementing BDS partners and local experts continued farmer training throughout the quarter.

The early results have been impressive with 4,507 farmers trained in improved farming techniques in all value chains. Along with the farmer training, staff continued to improve the farmer training program by producing and distributing additional manuals, brochures and pamphlets. ACT technical staff ensured regular support to the local trainers holding train the trainer sessions building the technical capacity of the field local experts. Excellent progress has been made in the Artificial Insemination (AI) area as the Project with the help of an international

AI expert held technical training for local AI technicians and farmers.

On the demonstration plots, the ACT project made great progress towards identifying beneficiaries and establishing the actual sites. To summarize, to date sixteen calf hutches have been established and handed over for operation by four dairy farms in Barda, Agjabedi, Beylagan and Lankaran. Construction of the carp hatchery in Neftchala has been completed including the construction of the physical building and installation of all the necessary equipment and pipelining. As the incubation season approaches in late spring, the hatchery will be fully operational, servicing the industry with millions of fingerlings. The hazelnut demonstration plot in

Zagatala is in place with trees growing and new equipment has been purchased by GIZ and handed over to the beneficiary. This effort is a joint collaboration among USAID, GIZ, Ferrero, and

Azerstar (the beneficiary). Although the apple demonstration plots in the Northern regions got off to a slower start, progress has been made in all locations bringing the number of the apple demonstrations to five. Thus, ACT supported the establishment of two GAP demonstration orchards in Shabran and Guba, two intensive orchards in Khachmaz and Shabran and one nursery plot in the Guba region.

Value chain development above the farm gate level was led by value chain specialists and further supported by the implementing partners. BDS submitted their strategic work plans for Year 3 activities. These activities consist of several major concentrations such as technical assistance to the beneficiary processing companies with sourcing for equipment, establishing linkages with farmers/suppliers of the raw material, providing information on current international food industry standards, and helping with marketing and sales efforts. The project visited many new cold storage companies, holding large regional workshops bringing the best international practices to the local companies and providing hands-on technical assistance to demonstrate the functionality and maintenance of new technologies.

The project made progress in the association development area. Highlights of assistance in this area included activities with the existing Northwest Aquaculture Association in building the capacity of the key members and training them in association management techniques, which resulted in the organization of the general assembly, members from four regions working together, and payment of the first membership dues. The project also identified eight entrepreneurs ready to form the hazelnut processors’ association in Zagatala and hundreds of pomegranate farmers in the Central regions interested in working together. Development and formation of associations will be a prominent activity in Q2.

Food safety activities continued, with progress being made in all six client companies in the

HACCP program and the identification of two new possible participating companies (both cold storages) this quarter. To date, all participating companies have completed over 90% of the

HACCP implementation process.

During this quarter, the ACT project continued to work with three commercial banks (Demir Bank, Turan Bank and AG Bank) and a non-banking financial institution (AzerCredit) in the implementation of new ag-lending tools. Additionally, Bank Respublika joined the group of banking and non-banking financial institutions assisted by the Project. The MoU was signed on

December 6, 2012. The Bank’s main objective in joining the Project is to implement a new agriculture loan product to be applied countrywide.

The Management of other partner banks where ACT executes the pilot projects confirmed their interest in continuing with the Project and in expanding the ag-lending approach to the rest of their bank branches adopting the new agriculture loan product. The pilot tests were considered very successful and the branch managers expressed their satisfaction with the approach and its contribution to simplifying the loan application process and improving client outreach.

Activity 3.A: Identify Subsector that Exhibit Potential for Competitive

Growth

Activities in this area were carried out in the first year to assist in formulating project activities, and were completed in Y1Q2. At this time, no explicit activities are planned for the current and future quarters, as the project enters its last year of operation. However, the project will remain open to new opportunities in sectors not yet covered and will continue to identify and ameliorate weak links in the value chains.

Activity 3.B: Improved Competitiveness of Targeted Sub-Sectors

Sub-Activity 3.B.1: Direct Value Chain Assistance

This activity focuses on developing the value chains above the farm gate level, and is targeted at processors, service providers, associative groups, storage, transportation, sales, marketing and establishment of B2B relationships, and any other element in the value chain except the farmer.

The specific activities include providing direct technical assistance to companies in processing and cold storage, capacity building of project BDS partners, cold chain services development, food safety and certification activities, and association development. These activities support indicator

3.2 from the ACT project PMP, which is the number of firms receiving USG supported assistance.

Key accomplishments by value chain, and/or sub-activity are as follows:

Horticulture (Pomegranates, Apples, Hazelnuts) Pomegranates

During Q1, the ACT project assisted the Sabirabad Conserve through its central BDS partner ARAZ

Business Center. This pomegranate processing company based in the Sabirabad region began to source raw materials from regional farmers. As a result of the linkage 135 farmers have supplied the processor with over 300 tons of pomegranates. Farmers prefer to sell their premium product directly to the market and/or distributors. When farmers are finished selling their premium product, they are left with second and third grade pomegranates which are still of good quality but perhaps of inferior marketability for fresh purchase. Several large and medium processors usually compete with each other to procure these pomegranates from farmers to fill their production capacity needs. Sabirabad Conserve made a decision to procure better quality product and offer a 10% higher price than the competition. This resulted in higher output from Sabirabad

Conserve. Sabirabad Conserve contributed to 75,000 AZN additional income earned by farmers based on this new linkage.

Sabirabad Conserve is currently exporting pomegranate concentrate to Russian and Ukrainian markets. The buyers expect to purchase the concentrate in aseptic bags. In order to increase their export volumes Sabirabad Conserve requested that the ACT project help them identify a source for new suppliers of the aseptic bags. Having researched the market, the processor was linked to the local representative of Goglio FRESCO company, resulting in a purchase of 2000 aseptic bags worth 18,000 AZN. The volume of each aseptic bag is 220 liters. Sabirabad Conserve will supply its customers with additional aseptic bags during the coming 10 months and the forecasted amount of sales generated from 2000 aseptic bags approximates 1,600,000 AZN.

The Sabirabad Conserve company also made an investment in its equipment over the quarter by upgrading its boiling facility spending 40,000 AZN for new Turkish boilers. Aznar processing company purchased a decanter; this equipment serves the purpose of improving the filtration of the pomegranate juice. The new equipment was sourced from the US at a cost of 250,000 AZN.

Generally due to the technical assistance, either service provider or equipment recommendations, provided by the ARAZ BDS partner and the staff, the pomegranate processors reported 325,500 AZN in investment during the last quarter.3

The Pomegranate Festival was first held in November 2006, for the purpose of developing the pomegranate sector, increasing the productivity of pomegranate orchards, and expanding the sales network for pomegranates. This year, the USAID ACT project team attended the festival to give information about its activities and achievements in the pomegranate sub-sector as well as to disseminate training materials covering its five target products/sectors. The USAID/ACT-supported festival displayed training materials based on over 25 topics covering all the project sectors as well as over 100 kg of seven varieties of pomegranates produced by the farmers who had benefited from the ACT Project trainings, technical assistance and other recommendations.

Over 2000 copies of training materials were handed out to attendees at the festival.

The representatives of media and TV companies were also present at the festival to give full press coverage to the event. Mass media representatives were interested in the display and information provided by the ACT project. In a TV interview for EL TV, Zaur Hajiyev gave detailed information about ACT project activities, the services provided to the farmers and results achieved until now. The Director of ARAZ Business Center, Lutveli Zeynalli, also gave an interview to inform about the services provided by the project to pomegranate processors and other value chains aimed at building a strong presence of pomegranates in international markets and boosting their export.

Over 50 pomegranate varieties, including a first time Indian pomegranate variety were displayed at the festival. The festival also displayed over 20 other pomegranate products like pomegranate sauce, concentrates, compotes, jams, pomegranate seed oil etc.

Note these figures are based on information provided by project partners and not the official ACT processor survey.

The survey is conducted annually.

Two farmers from Goychay talked about the good agricultural practices (GAPs) they had learned and the results they had achieved through a series of technical assistance provided by the project.

They expressed their gratitude to the USAID ACT Project for the training and technical assistance provided by Zaur Hajiyev, the Project pomegranate expert, because high-quality pomegranates displayed at the festival were the result of efforts made by the project team. Dozens of local participants and guests who attended the festival used the ACT-organized display to get information about pomegranates and showed a great interest in the training materials displayed by the project. They expressed their desire to benefit from the training and technical assistance provided by the project in the future to produce pomegranates as wonderful and healthy as the ones displayed.

The event was also attended by the head of the executive committee of Goychay region, a number of MPs, the Deputy Minister of Agriculture, the chairman of the committee of MIlli Majlis on Agrarian Issues, the head of SSAC Maleyka Abbaszadeh, the UN Resident Coordinator, Extraordinary and Plenipotentiary Ambassadors of Kazakhstan, Russia, Iran, Moldova, Latvia, Norway, Japan, Georgia, Pakistan, Romania, Uzbekistan, Korea, Jordan, Cuba, Turkey and other countries in Azerbaijan, the representatives of the international organizations, social and political figures, singers and businessmen.

On November 11, 2012, the ACT Project Pomegranate Expert Zaur Hajiyev appeared live on

Yevlakh TV for the second time to talk about the possibilities of developing the pomegranate sub-sector. Initially, he gave detailed information about the pomegranate festival held in November and the displays organized by the ACT Project. He also talked about the changes occurring in this sector and the services provided by the project for pomegranate growers. As the TV show was live he received a number of calls from the people who wanted to benefit from his recommendations on GAPs and asked him to visit their orchards. The expert also stated that if the pomegranate orchards receive better care, that is, if they are pruned, fertilized and irrigated properly the farmers will be able to produce much higher quality pomegranates and increase the yields at least by 40%. The TV show also included the interviews taken from the pomegranate experts and farmers during the Pomegranate Festival.

Hazelnuts

During the months of October – December hazelnut farmers began preparation for the next production season. This implies application of agro-technical measures such as pruning (shaping the trees), fertilizing and plowing the soil around the trees. Several farmers started the establishment of new orchards. In order to perform these activities more efficiently, farmers experienced the need for agricultural inputs and equipment. Thus, during these month farmers were instructed in the necessity and proper usage of tools and fertilizers. The regional BDS identified the relevant input suppliers and established multiple linkages with farmers. Thus, as a result of these activities six farmers purchased different agricultural inputs such as pruning saws and shears and other pruning means. Two farmers acquired 200 kg fertilizers, potassium and phosphorus; and several farmers purchased rakes used for cleaning of orchards and tools for mowing of grass.

As a result of technical recommendations provided to Azerstar LLC, the company purchased new blanching and roasting equipment. Azerstar is planning to start a product new line – roasted hazelnuts packed in 5, 10 and 20 kg bags. This will diversify Azerstar’s market and grant new opportunities to export value-added product. Also Azerstar purchased a new tractor to use at the hazelnut orchards. The overall investment by this company constituted 327,000 AZN.

Reaching international standards for hazelnut kernel exporters remains a challenge to overcome as some containers shipped to the EU were rejected due to identification of Aflotoxin and other prohibited chemical content.