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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 53.2 MILLION (US$82.00 MILLION EQUIVALENT) TO THE REPUBLIC OF UZBEKISTAN FOR THE ALAT AND KARAKUL WATER SUPPLY PROJECT Sustainable Development Department Europe and Central Asia Country Department Europe and Central Asia Region NOVEMBER 14, 2012 Report No: UZ This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank s policy on Access to Information.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective November 15, 2010) Currency Unit = Uzbek Sum (UZS) UZS = US$1 US$1.56 = SDR 1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AF AKWSP AVK BRG BVK BSSP BSWSP CAS CFAA CIFA ECA EA EMP FM FS GDP GOU KVK IBRD IDA IFI ICC ISDS l/c/d MoE MoF MoFERT O&M OPIAP PAD PCU PDO PFM POM PID RAP Additional Financing Alat and Karakul Water Supply Project Alat District Vodokanal Bukhara Region Governorate Bukhara Regional Vodokanal Bukhara and Samarkand Sewerage Project Bukhara and Samarkand Water Supply Project Country Assistance Strategy (of the World Bank) Country Financial Accountability Assessment Country Integrated Fiduciary Assessment Europe and Central Asia Region (of the World Bank) Environmental Assessment Environmental Management Plan Financial Management Feasibility Study Gross Domestic Product Government of Uzbekistan Karakul District Vodokanal International Bank for Reconstruction and Development International Development Association International Financial Institution Interagency Council for Cooperation Integrated Safeguards Data Sheet Liters per Capita per Day Ministry of Economy Ministry of Finance Ministry of Foreign Economic Relations and Trade Operations and Maintenance Operational Performance Action Plan Project Appraisal Document Project Coordination Unit Project Development Objective Public Financial Management Project Operational Manual Project Information Document Resettlement Action Plan

3 RPF SCADA SIL SOVK SWSP UCSA VAT WDC WIS WSS WSSPL WTP Resettlement Policy Framework Supervision, control and data acquisition Specific Investment Loan Samarkand Regional Vodokanal Syrdarya Water Supply Project Uzbek Communal Service Agency, or Uzkommunkhizmat Value Added Tax Water Distribution Center Welfare Improvement Strategy Water Supply and Sanitation Water Supply and Sanitation Program Loan Water Treatment Plant Regional Vice President: Country Director: Sector Director: Country Manager: Sector Manager: Task Team Leader: Philippe H. Le Houerou, ECAVP Saroj Jha, ECCU8 Laszlo Lovei, ECSSD Takuya Kamata, ECCUZ Sumila Gulyani, ECSS6 Pier F. Mantovani/Rinat Iskhakov, ECSS6

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5 Table of Contents I. Strategic Context... 1 A. Country Context... 1 B. Sector and Institutional Context... 1 C. Higher Level Objectives to which the Project Contributes... 5 II. Project Development Objectives... 5 A. Project Development Objective... 5 B. Project Beneficiaries... 6 III. Project Description... 7 A. Project Components... 7 B. Project Financing... 9 C. Lessons Learned and Reflected in the Project Design IV. Implementation A. Institutional and Implementation Arrangements B. Results Monitoring and Evaluation C. Sustainability V. Key Risks and Mitigation Measures VI. Appraisal Summary A. Economic and Financial Analysis C. Financial Management D. Procurement E. Social (including safeguards) F. Environment (including safeguards) Annex 1: Results Framework and Monitoring Annex 2: Detailed Project Description Annex 3: Implementation Arrangements Annex 4: Operational Risk Assessment Framework (ORAF) Annex 5: Implementation Support Plan Annex 6: Resettlement Policy Framework (Summary) Annex 7: Summary of Social Assessment Annex 8: Economic and Financial Analysis Annex 9: Map... 88

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7 .. PAD DATA SHEET Republic of Uzbekistan Alat and Karakul Water Supply Project PROJECT APPRAISAL DOCUMENT Europe and Central Asia Water, Urban and Disaster Risk Management Basic Information Date: August 22, 2012 Sectors: General Water and Sanitation (100%) Country Director: Saroj Jha Sector Manager/Director: Sumila Gulyani / Laszlo Lovei Project ID: P Lending Instrument: SIL Team Leader(s): Pier Mantovani /Rinat Iskhakov Joint IFC:. Borrower: Republic of Uzbekistan Themes: Access to Urban Services and Housing (P) EA Category: B Responsible Agency: Bukhara Regional Production Enterprise Suvokova (BVK) Ibn Sino Str. 111 Bukhara, Uzbekistan. Contact: Iskandar Kholmurodov Title: Director of BVK Telephone No.: bukharavodokanal@gmail.com Project Implementation Period: Expected Effectiveness Date: March 1, 2013 Expected Closing Date: December 31, 2017 [ ] Loan [ ] Grant [ Other [X] Credit [ ] Guarantee ] For Loans/Credits/Others Total Project Cost : $113.2 million Start Date: January 1,2013 End Date: July 1, 2017 Project Financing Data(US$M) Total Cofinancing : $31.2million Financing Gap : - Total Bank Financing : $82.0 million i

8 .. Financing Source BORROWER/RECIPIENT Amount(US$M) $31.2 million IBRD - IDA: New $82.0 million IDA: Recommitted - Others - Financing Gap - Total Expected Disbursements (in USD Million) Fiscal Year Annual Cumulative Project Development Objective(s) $113.2 million Improve the coverage, quality and efficiency of public water supply service in the districts of Alat and Karakul in the Bukhara region. Components Component Name Part A: Improvement of Water Supply Infrastructure: 1. Engineering-design and operational technical assistance services to support the Project Implementing Entity and the PCU and its Bukhara branch in the following tasks of Project implementation: (a) review of the available feasibility study and preparation of optimized preliminary designs; (b) preparation of detailed designs and bidding documents, construction supervision, and reporting; and (c) improvement of utility operation, maintenance and management, all through the provision of goods and consultants services. 2. Rehabilitation and expansion of water production and bulk transmission systems through: (a) the construction of a new expanded water treatment plant in Dvoinik, including the rehabilitation of the existing intake and presedimentation ponds; (b) the renewal and expansion of transmission systems including the 24 km trunk line from Dvoinik to Alat-town; (c) the rehabilitation of the 13 km trunk line from Alat-town to Karakul-town; and (d) the rehabilitation and expansion of the transmission pumping stations and related water tanks to upgrade the production and transmission capacity to about 49,800 m 3 per day, all through the carrying out of works and the provision of goods and consultants services. 3. Rehabilitation and expansion of urban and rural water networks through: (a) the rehabilitation and expansion of existing water distribution systems in Alat-town and Karakul-town, including treated water tanks, treated water Cost (USD Millions) before taxes ii

9 . pumping stations, disinfection systems, distribution networks, installation of meters on about 7,200 existing household connections and installation of about 1,600 new household connections and meters; and (b) construction of new rural water transmission and distribution systems including pumping, storage, networks and metered connections in about 120 of the surrounding villages based on the optimized feasibility study and preliminary design cost estimates, all through the carrying out of works and the provision of goods and consultants services. Part B: Institutional Strengthening and Capacity Building: 1. Institutional strengthening and capacity building through the carrying out of institutional assessments of the capacity, organization and training needs of the Project Implementing Entity to improve its management and operational performance for a sustainable water supply service in the Alat and Karakul districts. 2. Strengthening the capacity of utility management and operations staff by providing local and international training on management and technical operations, through the provision of consultants services and Training. 3. Strengthening the management and operational capacity of Project Implementing Entity through: (a) the establishment of modern procedures and systems, including hardware and software, for billing, collection, customer service, internal auditing, accounting and record keeping; (b) the provision of operations and maintenance equipment; and (c) the provision of laboratory equipment and supplies, all through the provision of goods, consultants services and Training. 4. Developing a communications strategy and carrying out of public consultations and awareness campaign, consumer satisfaction and gender surveys, through the provision of consultants services. Part C: Studies for Future Investments: Preparation of a feasibility study of sewerage and on-site sanitation investment needs in the towns and districts of Alat and Karakul, to accompany increased water supply service, through the provision of consultants services. Part D: Project Management: Strengthening the capacity of the Project Coordination Unit at the level of the Project Implementing Entity, for Project management, monitoring and coordination, through the provision of goods, consultants services, including financial and technical audits, and Training, and financing of Incremental Operating Costs Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ]. Does the project require any waivers of Bank policies? Yes [ X ] No [ ] Have these been approved by Bank management? Yes [ X ] No [ ] iii

10 Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the project meet the Regional criteria for readiness for implementation? Yes [ ] No [X]. Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 Natural Habitats OP/BP 4.04 Forests OP/BP 4.36 Pest Management OP 4.09 Physical Cultural Resources OP/BP 4.11 Indigenous Peoples OP/BP 4.10 Involuntary Resettlement OP/BP 4.12 Safety of Dams OP/BP 4.37 Projects on International Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP Legal Covenants The Additional Conditions of Effectiveness Per FA Article V 5.01 consist of the following: (a) Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity. (b)the Project Operational Manual including the updated financial management section satisfactory to the Association has been adopted by the Recipient. (c)a financial analyst with terms of reference and qualifications acceptable to the Association has been selected by the Recipient within the PCU at level the Project Implementing Entity. Legal Covenants Name Recurrent Due Date Frequency 1. Interagency Council for Cooperation, FA Schedule 2 Section IA.1 X iv X X X On-going basis The Recipient shall maintain the Interagency Council for Cooperation (ICC) until completion of the Project with terms of reference satisfactory to IDA. Name Recurrent Due Date Frequency 2. Project Coordination Unit, FA Schedule 2 Section IA.2 X On-going basis Recipient shall maintain the Project Coordination Unit (PCU) within Uzkommunkhizmat including representatives at the Project Implementing Entity until completion of the Project with staff, resources and terms of reference satisfactory to IDA. Name Recurrent Due Date Frequency 3. Disposal facility FA Schedule 2 Section ID.4 November 15, 2013 The Recipient shall cause the Project Implementing Entity to construct a disposal facility in the vicinity of X X X X X X X

11 . Dvoinik, in accordance with the safety standards and technical requirements agreed with the Association, for the water treatment sludge and sediments generated by the Project, by not later than November 15, The Recipient shall not commence construction of a new water treatment plant under Part A.2 of the Project until such disposal facility is completed and is fully operational. Name Recurrent Due Date Frequency 4. Working Ratio FA Schedule 2, Section II. B. 4 X Annual The Recipient shall take all necessary measures in order to maintain for the Project Implementing Entity for the fiscal years 2013 and 2014 of the Project Implementing Entity a ratio of total cash operating expenses to total cash operating revenues not higher than 1.0 and a ratio of not higher than 0.9 for the remaining years of the Project and to enable the Project Implementing Entity to collect effectively all operating revenues related to its operations. Such measures shall include: (i) annual adjustments of water supply and sewerage tariffs; (ii) budgeting and paying for water supply and sewerage services that benefit its oblast budget organizations; and (iii) budgeting and payment of operating subsidies to cover shortfalls. Name Recurrent Due Date Frequency 5. Debt service ratio FA Schedule 2 Section II B. 5 X Annual Except as IDA shall otherwise agree, the Recipient shall take all measures necessary to ensure that the Project Implementing Entity (PIE) shall not incur any debt unless a reasonable forecast of PIE s revenues and expenditures shows that the estimated net revenues for each fiscal year during the term of the debt to be incurred shall be at least 1.2 time its estimated debt service requirements in such year on all debt of the PIE, including the debt to be incurred. Name Recurrent Due Date Frequency 6. Restructuring by merger of Alat and Karakul district service providers into the Project Implementing Entity. FA Schedule 2 Section I D. 5. February 1, 2013 The Recipient shall, by not later than January 15, 2013, submit to the Association the decree for the restructuring of the Project Implementing Entity to absorb the assets and operations of the water supply service providers at the district level in Alat and Karakul. Team Composition Bank Staff Name Title Specialization Unit UPI Pier Mantovani Lead Water & Sanitation Sp. ECSUW Maha Armaly Sr. Urban Finance Specialist ECSS6 Galina Alagardova FM Specialist ECSS03 Janis Bernstein Sr. Environmental Specialist ECSS4 Roxanne Hakim Sr. Anthropologist ECSS4 Stephane Dahan Water and Sanitation Engineer ECSUW v

12 Van Anh Vu Hong Young Professional ECSUW Ruxandra Floroiu Environmental Engineer ECSS3 Rinat Iskhakov Sr. Operations Officer ECSUW Fasliddin Rakhimov Procurement Specialist ECS02 Yarissa Lyngdoh Sommer Operations Analyst ECSUW Ghada Youness Sr. Counsel LEGLE Joseph Formoso Sr. Finance Officer CTRLA Gulnora Kamilova Program Assistant ECCUZ Guy Tchabo Tchakounte Program Assistant ECSUW Rumiya Garipova Program Assistant ECCUZ Non Bank Staff Name Title Office Phone City Friedrich Holzmann Leila Talipova Knud Bitch-Lauritzen. Locations Country Engineering Consultant Engineering Consultant Financial Consultant First Administrative Division Uzbekistan Bukhara Region Alat and Karakul districts Location Planned Actual Comments vi

13 I. Strategic Context A. Country Context 1. A growing nation at the heart of Central Asia. Uzbekistan is a resource-rich, fast-growing lower middle-income country, strategically located in Central Asia. Its 29.2 million inhabitants, of which 49.7 percent live in rural areas, represent half of Central Asia s population. Following independence in 1991, the Government of Uzbekistan s (GOU) home-grown, gradualist, stateled development strategy has delivered consistent economic growth, as well as gradual reforms. In contrast to many other former Soviet Union countries, this approach has eased the social costs of transition and reduced the vulnerability to external shocks. Poverty has been steadily declining, from 27.5 percent of the population in 2001 to 19.5 percent in Robust growth since the mid-2000 s. Gross domestic product (GDP) growth has been robust since the mid-2000s averaging 8 percent annually through 2011, thanks to favorable terms of trade for the country s key export commodities copper, gold, natural gas and, since 2010, cotton; and to the GOU s effective macro-economic management, and limited exposure to international financial markets. The impact of recent increases in global food and energy prices is expected to be limited because of GOU s policy of self-sufficiency in both food grains and energy. Until the crisis, the economic growth was largely fueled by booming commodity prices and manufactured exports. In 2008, the industrial sector contributed 22 percent of GDP, down from 33 percent in 1991; construction contributed 6.0 percent and services 43 percent. Agriculture remains an important sector, accounting for about 18 percent of GDP, 27 percent of employment, and close to 22 percent of export income. 3. A MIC vision. Uzbekistan s vision is to become an industrialized, high middle-income country (MIC) by mid-century. The keys for such a transformation include: (a) increasing the economy s efficiency and competitiveness; (b) strengthening the financial sector to support private sector activity; (c) diversifying production towards higher value-added activities; (d) creating jobs for the rapidly growing population; and (e) improving governance. Achieving these goals implies continued gradual transition to a more market-oriented economy, equitable distribution of growth between regions, enhanced competitiveness, increased efficiency of infrastructure and improved access to social services, as reflected in GOU s five-year Industrial Modernization and Infrastructure Development Program ( ). B. Sector and Institutional Context 4. Shared water resources. Straddling the Amu Darya and Syr Darya international river basins, Uzbekistan has access to significant, but unevenly distributed water resources. Both surface water and groundwater were aggressively developed under the Soviet Union for the needs of agriculture, industry, mining and hydropower, within a broader regional context. Such resources must today be managed more conservatively, in the face of conflicting riparian demands, depletion and salinization of aquifers and looming climate change impacts. As Uzbekistan s economy is highly dependent on water flows originating in Tajikistan and the Kyrgyz Republic, plans to increase usage or storage by upstream neighbors are a concern. 1

14 5. A degraded infrastructure legacy. Uzbekistan benefits from extensive and robust water supply and sanitation (WSS) infrastructure built in the Soviet era, including major regional water transfer aqueducts and well developed networks in urban areas, and to a lesser extent, in rural areas. Although the country has been more proactive than most of its neighbors in attending to infrastructure needs through the economic transition, over time, the limited capacity of sector institutions to maintain, renew and expand such assets has led to an effective degradation of access to WSS services. Because of network and equipment disrepair, existing WSS capacity is vastly underutilized: According to official data, about 88% and 79% of the urban and rural population respectively receive piped water supply 1, but only 17% of users have continuous service, and over 65 percent of users have less than 6 hours of service per day. The situation is particularly dire in rural areas, where previously served communities often cope with chronic service breakdown or no service at all. Demand management and operational efficiency are poor, with average hydraulic losses estimated at 42%, and only about 33% of user connections metered. Installed technology and systems operations are inefficient from an energy-use perspective. Adding to the sustainability challenge, the capital and operating costs of new infrastructure are seldom optimized, as a result of obsolete design and service standards. Compared to water supply, urban sewerage service is substantially less developed, with an estimated 17 percent effective coverage ratio, limited to about 70 cities and towns. Built in the 70 s and 80 s and largely neglected since then, sewerage infrastructure is in very poor condition, locally collapsing. Wastewater treatment capacity is also highly degraded, often only ensuring marginal pollution abatement. The status of rural sanitation is not well documented, its development being left to the initiative of households and communities. 6. A huge investment challenge. Overall, WSS rehabilitation, renewal and expansion needs represent a huge investment challenge for Uzbekistan. GOU estimates urgent priorities at USD 5.4 billion through 2020, of which USD 4.1 billion for water supply and USD 1.3 billion for wastewater management. 7. Weak institutional framework and leadership. Starting from a highly centralized, state-run sector organization, GOU has since independence sought to strengthen and reform the legal and institutional foundation of municipal services. In 1996, local governments were made responsible for WSS service, with control over regional, municipal or district Vodokanals in charge of service provision. Introduction of private sector participations (PSP) was attempted as early as , and a partial corporatization reform was successfully enacted for the Tashkent Vodokanal. The institutional framework of the WSS sector remains however weak, impaired by incomplete decentralization, inconsistent ownership of assets, fragmented responsibilities and legislation, inefficient financing and regulatory mechanisms, and low institutional capacity. Local governments and utilities do not have adequate autonomy and capacity, and lack effective policy support and regulatory incentives from the central administration. No adequately funded and staffed ministry-level entity is responsible within GOU for communal services such as WSS service. Sector development and oversight are entrusted to the Uzbek Communal Services Agency (UCSA), or Uzkommunkhizmat, an unfunded agency focused on implementation of 1 In rural settings, only about one third of the population benefitting from piped water supply receives water through an individual household connection, the other two thirds having access to public standpipes. 2 As part of the Bank-funded Bukhara and Samarkand Water Supply Project. 2

15 investment programs and on the operation of regional aqueducts, with limited capacity to lead sector planning, policy or performance agendas. 8. Sector financing is inefficient. Tariffs apply to either water consumption norms or to actual metered usage. At the hands of the Antimonopoly Commission, tariff regulation is mostly driven by social concerns, somewhat disconnected from utility cost-recovery and investment imperatives. By any international yardstick, water service is inexpensive and affordable, with a median price of USD 0.06/m3, and an average cost of WSS utility service estimated below 1 percent of household expenditures 3. For most utilities, this results in an insufficient revenue base, further eroded by unsatisfactory collection levels. As GOU s policies rule out any operating subsidy, utilities cope with extremely constrained operating budgets, which cannot afford competitive salaries or adequate maintenance, let alone capital improvements. On the other hand, if their investment needs are retained among GOU s priorities, utilities can benefit from substantial capital subsidies, in the form of debt service support flowing through local government budgets. The level of such debt service subsidies can be as high as 90% and is adjusted annually, in order to meet the utility s minimal cost-recovery obligations, after accounting for any approved tariff increase or other changed condition. While helpful on a yearto-year basis, this mechanism fails to provide clear incentives for improved performance, and keeps utilities in a subordinated position, unable to plan their own development. The sustainability of this extensive capital subsidy approach is also questionable. 9. Sector challenges are also rooted in capacity and governance issues. With exceptions, the performance of administrations and utilities is low, due to weak technical and managerial capacity, and a yet limited culture of efficiency and customer service. Technical capacity limitations also affect the local engineering-design and construction market. With unattractive compensations and an aging workforce, the sector is in fact not effectively motivating performance nor renewing its skills base 4. Along with obsolete design standards and rigid procurement rules, this is delaying the overdue introduction of modern management practices, efficient designs and innovative technology to the sector. In such context also, transparency and governance failings are common, impacting the quality of procured studies, designs and works. 10. A growing awareness of inefficiencies and reform needs. GOU is increasingly aware of sector deficiencies, and intent on addressing them more proactively with donor help. With support from the Swiss Secretariat for Economic Affairs and Cooperation (SECO), GOU will pilot Public Service Contracts with utilities in Bukhara, Samarkand and Syrdarya. This promising initiative aims at designing and testing a contract model that may help clarify roles and regulate the performance of service providers. The Swiss Agency for Development Cooperation (SDC) is helping demonstrate community-based approaches for the autonomous development of rural water supply in selected villages of the Ferghana Valley. A 2020 Strategy effort is underway by Uzkommunkhizmat as part of an Asian Development Bank (ADB) funded project, aimed at updating capital improvement programs and assessing institutional and financing constraints to sector development. 3 A generally accepted upper target ratio is 3.5% for water and 5% for water and sanitation. The level of expenditure incurred by households having to buy water from tankers due to deficient or absent utility service is much higher, and may range between 10% to 20% in parts of the Syrdarya or Bukhara regions. 4 Vodokanal employees are on average 49 years old. 3

16 11. Towards an updated sector strategy. At a high-level meeting in June 2012, GOU signaled to the Bank its intent to more proactively develop Uzbekistan s water supply infrastructure and institutions. A vision was shared of safe water supply as a basic human right, for which GOU is committed to develop, modernize and reform the sector, taking into account growing human water demands, mounting water resource stress, uneven efficiency of institutions, and substantial gaps in access to service (especially in rural areas). GOU asked for a substantial technical assistance grant to design a new sector strategy and assist its implementation. Support to such strategy development and enactment is seen as a new priority in the GOU-WB partnership. Needs analyses and grant proposals are being developed based on a formal request received in the fall of World Bank involvement. Along with ADB, KfW and the Swiss Cooperation, the Bank is one the main donors in the sector. The Bank has so far financed rehabilitation projects, such as the Water Supply, Sanitation and Health Project ( , IBRD $75m) for urban and rural water supply in the Karakalpakstan and Khorezm regions, and the Bukhara and Samarkand Water Supply Project (BSWSP, , IBRD $20m, IDA $23m) for urban water supply with establishment of PSP. The projects have substantially achieved their infrastructure and service objectives, albeit with delays and quality issues, and uneven institutional outcomes. Ongoing projects include the Bukhara and Samarkand Sewerage Project (BSSP, 2009, IDA $55m), and the Syrdarya Water Supply Project (SWSP, 2011, IDA $88m), also focused on infrastructure rehabilitations. AKWSP will be the fifth loan in Uzbekistan s WSS sector, and the first to combine rehabilitations with substantial development of new coverage. Openings for policy dialogue and support to institutional reforms have until now been limited. It is expected that following the June 2012 GOU request, a partnership on a new sector strategy will lead to the design of operations that also address sector-wide policy and institutional weaknesses, while also aiming for improved quality of implementation and outcomes. Beyond AKWSP, it is thus envisioned that future operations 5 may be structured as tranches of a program loan, also aimed at supporting selected sector-wide institutional strengthening and capacity building activities. 13. The urgent Alat and Karakul water challenge. The two southern districts of Alat and Karakul in the Bukhara region feature one of the most precarious water supply situations in the country. In the 70 s, with the growing depletion and salinization of local groundwater resources, a trunkline system was built to mobilize freshwater from the Amu-Bukhara canal, and provide potable water service to Alat-town and Karakul-town. Network coverage of rural areas was however not implemented at the time, for reasons understood to include the high investment costs. Today, after two decades of shoestring operations and maintenance, the trunkline and urban systems are in a deep state of disrepair, functioning well below capacity 6, with no effective water treatment. Distribution networks cover 23% of Alat district s population (100% in Alattown, 9% in rural areas), and only about 15% of Karakul district s population (61% in Karakultown, 5% in rural areas). Piped water supply, where available, is of extreme low quality, with turbid unfiltered water reaching customers discontinuously in the two towns, and a few periurban villages in their immediate vicinity. Nearly 80 percent of the districts population still lives 5 Karakalpakstan Sewerage Project (KSP, IDA $50m); Djizzak Region Water Supply Project (DRWSP, IDA USD 150 million); Kashkadarya Water Supply Project (KWSP, IDA USD 40 million) 6 Installed capacity of 14,000 m 3 /day only distributes about 3,000 m 3 /day. 4

17 in rural areas, and remain with no piped water supply, relying on unsafe water drawn from irrigation channels and saline wells, or bought at high cost from tanker trucks. The lack of access to potable water is having crippling effects on human and economic development in both the urban and rural areas of the districts, and AKWSP is understood as urgently needed to alleviate them. AKWSP will therefore combine the rehabilitation of existing water production, transmission and distribution infrastructure built in Soviet times for the two towns of Alat and Karakul (combined population 37,000 people), with the development of new networks to cover unserved rural areas in the Alat and Karakul districts (180,000 people). 14. An evolving investment scope. Started in the fall of 2010, AKWSP preparation experienced delays and setbacks due to suboptimal scoping and feasibility study (FS). With high sunk costs for the renewal of the trunkline system, an investment scope originally limited to rehabilitation of urban water supply service was found hard to justify. Phased investment alternatives (phase 1: urban, phase 2: rural) and institutional restructuring options were explored, but could not be firmed within the limitations of the FS consultancy. As Project appraisal and approval were not reached within the IDA 15 cycle, the Bank and GOU agreed to a substantial investment scope update and extension of FS services, towards preparing a single-phase project integrating urban and rural investment needs, with a substantial funding increase under IDA 16. C. Higher Level Objectives to which the Project Contributes 15. The Project is aligned with the Country Partnership Strategy (CPS) objective of supporting infrastructure efficiency, economic competitiveness, diversification and social inclusion elements of GOU s medium term development strategy. 16. The Project will ensure that safe and reliable water service is provided to urban and rural populations, contributing to human development and social inclusion through improved health and productivity benefits, as well direct creation of local jobs. The Project will also in particular change the daily lives of women and girls, contributing to gender advancement. The Project will be accompanied by increased capacity, efficiency and accountability in public service provision, thus also improving local governance outcomes for citizens. Finally, the Project is expected to sustain the economic development potential of the two districts of Alat and Karakul, which are located along the main trade route between Turkmenistan and Uzbekistan. II. Project Development Objectives A. Project Development Objective 17. The project development objective (PDO) is to improve the coverage, quality and efficiency of public water supply service in the districts of Alat and Karakul in the Bukhara region. The objective will be achieved through the rehabilitation and expansion of water production, transmission and distribution infrastructure, at the urban and rural level. Efficiency is to be measured from a financial and operational perspective. 5

18 B. Project Beneficiaries 18. The primary beneficiaries are the inhabitants of the Alat and Karakul districts, two of eleven districts in the Bukhara region. The districts are mostly rural in nature and rely heavily on irrigated farming and agro-industry. Alat district has a population of 94,000 of which approximately 14,000 in Alat-town. Karakul district has a population of 122,000 of which 23,000 in Karakul-town 7. The existing Alat District Vodokanal (AVK) and Karakul District Vodokanal (KVK) are small district utilities with very low capacities, outdated equipment and infrastructure. They will be restructured and merged into an operating division of BVK, which will in turn benefit from the Project technical assistance and training activities. 19. Women and children (especially girls) are primary beneficiaries of this project as the burden of fetching water, filtering it or boiling it is currently primarily their responsibility. Children will also benefit through water service established for schools. 20. Government program for Alat and Karakul: The area is on GOU s priority list for improvement of WSS service. GOU s goal, as stated in the Presidential Decree PP969 dated October 2, 2008, is to rehabilitate service and expand coverage to 100% of Alat-town and Karakul-town, and to 100% and 85% respectively of Alat and Karakul districts as a whole, including rural areas. As delimited by GOU, the Project area covers the entirety of the settled areas of the Alat and Karakul districts, with the exception of one rural settlement in Karakul (Sayot) and seven settlements in Alat (Karikon, Kirlishon, Buralang Eski, Gazmach, Karvok, Khamza 1 and Khamza 2). These remote outlying settlements are either already served or to be served by other means, and are not included in the AKWSP investment perimeter. PDO Level Results Indicators 21. Achievement of the objective will be measured against the following outcome indicators: Number of direct Project beneficiaries, accounted as the number of people provided with access to improved water sources under the Project, including, as a percentage, female beneficiaries (Core indicator). Percentage of regulatory water samples meeting potable quality standards; Improved bill collection ratio; Reliability of water supply service. 22. Other Project-specific and/or core indicators will be monitored during implementation as intermediate result indicators: Number of people provided with access to improved water sources under the Project, in urban areas and in rural areas. Number of new piped household connections resulting from the Project intervention; Number of piped household connections affected by rehabilitation works undertaken under the Project; 7 The numbers relate to almost all Alat and Karakul district areas, with the exception of one rural settlement in Karakul (Sayot) and seven in Alat (Karikon, Kirlishon, Buralang Eski, Gazmach, Karvok, Khamza 1 and Khamza 2) that the proposed Project does not cover. 6

19 Number of water utilities that the Project is supporting. Reduction in Non Revenue Water 8 ; Number of breakages per km of transmission pipelines and distribution networks; Number of breakage per km of water transmission mains; Number and percentage of connections with operating water meters; BVK Financial cash working ratio 9 ; Number of staff recruited and trained by BVK for Alat and Karakul service needs BVK participation in IBNET for Water and Sanitation Utilities. III. Project Description 23. The Project will rehabilitate and expand water treatment, transmission and distribution infrastructure to restore or provide potable water service to 232,000 residents in the Alat and Karakul districts of the Bukhara region. To that effect the project will: (i) rehabilitate and expand the Dvoinik intake along the Amu-Bukhara canal, with construction of a new water treatment plant; (ii) renew bulk transmission lines to convey potable water to storage facilities in Alat-town and Karakul-town; (iii) rehabilitate and expand the urban distribution systems of Alat-town and Karakul-town, including meter installation on user connections; (iv) build new rural transmission, storage and distribution systems to serve about 120 villages in the Alat and Karakul districts through metered household connections; (v) build the institutional capacity of BVK to manage, operate and maintain the new systems, and (vi) prepare a feasibility study for follow-up investments for sewerage and sanitation in the districts. The total cost of the Project is estimated at US$113.5 million before taxes (US$137.7 million including taxes). Unless otherwise specified, all costs presented in the report exclude Value Added Tax (VAT) and include a 7% provision for contingencies. Project background and contents details are provided in Annex 2. A. Project Components 24. Component A: Improvement of Water Supply Infrastructure (US$ million): Subcomponent A1. Engineering-design and operational technical assistance services to support the Project Implementing Entity and the PCU Bukhara branch in the following tasks of Project implementation: (a) review of the available feasibility study and preparation of optimized preliminary designs; (b) preparation of detailed designs and bidding documents, construction supervision, and reporting; and (c) improvement utility operation, maintenance and management, all through the provision of goods and consultants services. Subcomponent A2. Rehabilitation and expansion of water production and bulk transmission systems through: (a) the construction of a new expanded water treatment plant in Dvoinik, including the rehabilitation of the existing intake and pre-sedimentation ponds; (b) the renewal and expansion of transmission systems including the 24 km trunk 8 Annual volume of water distributed for which bills have been collected (m 3 ) / Annual volume of water produced by the water treatment plant (m 3 ) 9 Cash operating expenses / cash operating revenues 7

20 line from Dvoinik to Alat-town; (c) the rehabilitation of the 13 km trunk line from Alattown to Karakul-town; and (d) the rehabilitation and expansion of the transmission pumping stations and related water tanks to upgrade the production and transmission capacity to about 49,000 m 3 per day, all through the carrying out of works and the provision of goods and consultants services. Subcomponent A3. Rehabilitation and expansion of urban and rural water networks through: (a) the rehabilitation and expansion of existing water distribution systems in Alat-town and Karakul-town, including treated water tanks, treated water pumping stations, disinfection systems, distribution networks, installation of meters on about 7,200 existing household connections and installation of about 1,600 new household connections and meters; and (b) construction of new rural water transmission and distribution systems including pumping, storage, networks and metered connections in about 120 of the surrounding villages based on the optimized feasibility study and preliminary design cost estimates, all through the carrying out of works and the provision of goods and consultants services. 25. Component B: Institutional Strengthening and Capacity Building (US$3.23 million): Subcomponent B1. Institutional strengthening and capacity building through the carrying out of institutional assessments of the capacity, organization and training needs of the Project Implementing Entity to improve its management and operational performance for a sustainable water supply service in the Alat and Karakul districts. Subcomponent B2. Strengthening the capacity of utility management and operations staff by providing local and international training on management and technical operations, through the provision of consultants services and Training. Subcomponent B3. Strengthening the management and operational capacity of Project Implementing Entity through: (a) the establishment of modern procedures and systems, including hardware and software, for billing, collection, customer service, internal auditing, accounting and record keeping; (b) the provision of operations and maintenance equipment and machinery; and (c) the provision of laboratory equipment and supplies, all through the provision of goods, consultants services and Training. Subcomponent B4. Developing a communications strategy and carrying out of public consultations and awareness campaign, consumer satisfaction and gender surveys, through the provision of consultants services. This component will address BVK capacity needs to ensure sustainable management, operations and maintenance of water supply service in the Alat and Karakul service areas, following the merger of AVK and KVK into a new operating division of BVK. By investing in technical assistance, services and goods, the Project will upgrade BVK s capacity in terms qualifications of management and operational staff, management and customer service systems and methods, operation and maintenance equipment, and water quality monitoring and laboratory capabilities, as required to operate and maintain large rural water supply systems. 26. Component C: Studies for Future Investments (US$0.38 million), includes the preparation of a feasibility study of sewerage and on-site sanitation investments needs in the towns and districts of Alat and Karakul, to accompany the increased provision of water supply services, through the provision of consultants services. 8

21 The study will assess different alternatives including collective network sewerage and individual, decentralized or condominial options, for urban and rural areas. It will provide a feasibility-level assessment and preliminary designs for the works, goods and services needed to implement the solutions. GOU will use the documents to mobilize relevant sources of financing. 27. Component D: Project Management (US$2.36 million) includes the strengthening the PCU and its Bukhara branch s Project management, monitoring and coordination capacity, through the provision of goods, consultants services, including Project financial and technical audits, and Training, and financing of Incremental Operating Costs. B. Project Financing Lending Instrument 28. Financing will be provided through a Specific Investment Loan (SIL) of USD million. GOU will provide counterpart funding of USD 55.7 million, of which USD 31.5 in co-financing of Project costs before taxes (27, 6%), and about US$ 24.5 million in estimated taxes. This financing does not account for beneficiary contributions to new household connection costs. Table 1. Summary of Project costs and financing COMPONENT COST US$ IDA SHARE % IDA AMOUNT US$ Component A. Improvement of Water Supply Infrastructure 107,254, % 76,846,058 A1. Engineering and Implementing Consulting Services A2. Production and Transmission Systems A3. Distribution Systems 8,566,481 35,947,259 62,740, % 69% 69% 8,566,481 24,871,010 43,408,567 Component B. Institutional Strengthening and Capacity Building 3,228, % 2,416,753 B1. TA for Improvement of Utility Management and Operational Practices (incl. in A1) - B2. Training of Utility Staff and Management 324, % 324,280 B3. Equipment, Machinery and Software for Utility Management, Operations and Laboratory B4. Communication Strategy, Public Awareness Campaigns, Consumer Satisfaction and Gender Surveys 2,633, % 1,822, , % 270,234 Component C. Studies for Future Investments 378, % 378,327 Feasibility Study for sewerage and on-site sanitation 378, % 378,327 Component D. Project Management 2,358, % 2,358,862 D1. PCU 1,620, % 1,620,710 D2. Financial and Technical Audits 738, % 738,152 Total (before taxes, including contingencies) 113,219, % 82,000,000-9

22 C. Lessons Learned and Reflected in the Project Design 29. The design of AKWSP benefits from the lessons of past operations under the management of Uzkommunkhizmat and its Project Coordination Unit (PCU), including BSWSP and BSSP already implemented by BVK. Despite substantial achievement of infrastructure goals, such projects have been liable to delays, uneven quality of designs and works, insufficient focus on achieving institutional and sustainability outcomes, financial management deviations, and gaps in reporting and monitoring. To mitigate such capacity-related risks, the Project will expand the scope and duration of the Implementation Consultant (IC) contract, so as to ensure more comprehensive technical assistance and capacity building for both project implementation and operation needs. Sustainability will be promoted by prioritizing the establishment of metered service with effective billing and collection systems, while counting on continued GOU allocation of debt service subsidies. It is also expected that IC technical assistance to BVK s management and operations will improve customer service, public outreach, as well as collection performance, as pre-requisite to facilitate the acceptance of new tariffs. 30. The Project otherwise benefits from Bank-wide experience with the development of similar projects, in particular for expansion of rural services, consolidation of service providers, budget support to rural water supply services, establishment of simplified urban-type utility service in rural areas. In order to provide the required level of service under Uzbek legislation, the Project will expand centralized utility service, with individual household metered connections across the Alat and Karakul districts, without aiming at full cost-recovery through tariffs, and relying on GOU budget support. Small low-capacity local service providers, will be consolidated into regional operator, more qualified to ensure sustainable service O&M. IV. Implementation A. Institutional and Implementation Arrangements 31. GOU will be the Recipient of the IDA credit. BVK will be the Project Implementing Entity. 32. Uzkommunkhizmat. As the central agency responsible for overseeing and developing municipal WSS services and projects, Uzkommunkhizmat represents GOU in all AKWSP preparation and implementation matters. Its Project Coordination Unit (PCU) will provide coordination and management support to AKWPS, in particular through its Bukhara Branch (BBPCU) resident within BVK. 33. Project Coordination Unit (PCU). Reporting to Uzkommunkhizmat and resident in its Tashkent offices, the PCU was established in 2002 and currently oversees and manages BSSP and SWSP, as well as the preparation of AKWSP. The PCU is staffed with a director, as well as technical, procurement, financial management (FM) and translation staff under Project-funded individual consultant contracts. PCU is responsible for: 10

23 Overseeing and managing Bank-financed projects including schedule, procurement, financial management, management of the designated accounts, disbursements, monitoring and evaluation, quality and compliance oversight, Coordinating project activities of implementing agencies 10, and project communications with the Bank and within GOU. 34. The activity of the PCU, including that of its decentralized branches, is funded by operating budgets of the projects under implementation. PCU does not have dedicated resources nor funding for project preparation activities. Under a wider process in the coming months, the Bank will review with the Government the overall governance arrangements for project preparation and implementation in the water supply and sanitation sector, including the role and responsibilities of the PCU. PCU mandate and capacity may have to be revised, in order to promote clarity of fiduciary responsibilities, with increased accountability of implementing entities. Such review would also account for the substantial additional preparation and implementation demands associated with three projects envisioned under a future program loan. 35. Inter-Ministerial Coordination Council (ICC). The PCU also reports to the ICC responsible for overseeing internationally-financed projects. ICC includes representatives from local governments and key agencies of the central Government (Cabinet of Ministers, Ministry of Finance, Ministry of Foreign Economic Relations and Trade, State Committee of Architecture and Construction, Ministry of Environment and Uzkommunkhizmat). 36. Bukhara Branch of the PCU (BBPCU). A PCU Bukhara branch was established in Bukhara to support BSWSP (completed) and BSSP (ongoing). PCU Bukhara branch has technical, FM and procurement staff with consultant status, experienced with Bank procedures. Although reporting to PCU, staff of the PCU Bukhara branch is fully integrated in BVK operations. Its capacity in terms of staff, equipment and resources will be strengthened for the specific needs of AKWSP. PCU Bukhara branch will be responsible for: Procurement, including procurement plan and document development, managing the procurement process and interacting with consultants and contractors. Financial management, including payments to contractors, suppliers and consultants, process disbursements applications, manage the special account and record all transactions in the PCU Bukhara branch accounting systems, generate FM and progress reports. Coordination with BVK and other relevant government agencies to obtain all necessary permits and clearances, Oversight and coordination of the Project activities to ensure compliance with the POM, the EMP, the RPF as well as the Financing Agreement (FA), the Project Agreement (PA) and the Subsidiary Agreement (SA). 37. Bukhara Region Vodokanal 11 (BVK). BVK is the largest WSS utility in the Bukhara region, providing water and sanitation services to Bukhara city (population 240,000) as well as operational oversight and support to 11 district vodokanals across the Bukhara region 12. Up until 10 Such coordination role is critical for projects such as BSWSP and BSSP implemented by two distinct utilities. 11 Official name: Bukhara Region Production Enterprise Suvokova. 11

24 2005, the district vodokanals, including AVK and KVK, were part of BVK, but now operate independently, reporting to the Bukhara Regional Government (BRG). BVK is familiar with implementation of WB and ADB-funded projects, and has benefited from substantial capacity building under BSWSP. BVK is seen as a well-managed and responsive utility for day-to-day operations, with substantial opportunities for improving operational efficiencies, financial performance and asset management. 38. BVK will sign a Project Agreement with IDA ruling its PIE responsibilities, and a Subsidiary Agreement with the Ministry of Finance (MOF) specifying on-lending terms equivalent to the IDA credit. BVK will absorb AVK and KVK, and merge their assets and operations to form an independent division responsible for water supply in Alat and Karakul, with relevant separation of accounts and of tariff structures. Given the fact that AVK and KVK are small organizations, with unsophisticated paper-based operations, previously part of BVK, their merger into BVK does not entail major administrative challenges (such as for asset inventory or staff transfers). BVK will receive support from the Project to improve its operations in Alat and Karakul. As such BVK will be responsible for owning, managing, operating and maintaining Project assets. Project implementation tasks will be delegated to PCU Bukhara branch, and supported by the Implementation Consultant (IC). BVK will nevertheless be the signatory of all procured contracts under the Project, and thus hold ultimate responsibility for their procurement and execution. 39. With the expansion of metered service to an estimated 232,000 urban and rural people by 2017 in Alat and Karakul, or about 46,000 customer accounts, BVK will need to very rapidly increase the O&M capacity inherited from AVK and KVK, including through large scale local recruitments. Assuming a productivity ratio of 3 employees per thousand customer accounts, local BVK operations may require the creation of approximately 130 jobs. An institutional assessment of organizational, staffing and training needs will be developed for BVK by the IC at Project inception. 40. Implementation Consultant (IC): An international engineering-consulting firm will be recruited for the entire duration of the Project. Under contract with BVK, and in close day-to-day collaboration with PCU Bukhara branch, the Bukhara-based IC will be responsible for: Supporting PCU Bukhara branch s Project management, with planning and schedule management of all Project activities, preparation of terms of reference and bidding documents, support to procurement processes, assistance to Project monitoring and evaluation, and reporting. Leading engineering-design tasks such as: FS review and development of optimized preliminary designs; oversight of detailed design and bid package preparation; construction supervision; development of a sewerage and sanitation feasibility study. Procurement support with an International Procurement Specialist during entire project life to prepare bid documents, mange bidding process, prepare bid evaluation reports, assist PCU in interacting with the Bank during review process, assist in contract award, preparing contract documents and assist contract management. Leading institutional capacity building tasks such as: Development of BVK s institutional assessment, technical assistance for the strengthening of operations and maintenance in Alat and Karakul (including for the development and implementation of a BVK 12

25 Operational Performance Improvement Plan, and of BVK outreach, awareness campaigns, surveys, etc,); Coordination of training program, with provision of on-the-job managerial and technical training. 41. Readiness for implementation. Because of pre-existing experienced entities of the PCU and its Bukhara branch and BVK, AKWSP benefits from a substantial readiness advantage in terms of implementation capacity and operational procedures. However, not all first year procurement packages will be ready for launch at effectiveness. A key condition for launching works design and procurement tasks is the effective mobilization of the Implementation Consultant. The procedure to select the IC is underway, tentatively to be completed on or before credit effectiveness. Retroactive financing of IC costs will be possible in case of Effectiveness delays. To ensure the quality and consistency of design for key works, only limited detailed design and bid package preparation is planned to occur prior to IC mobilization. 42. Conditionality. The additional Conditions of Effectiveness consist of: The Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity (standard condition). The Project Operational Manual including the updated financial management section satisfactory to the Association has been adopted by the Recipient (standard condition). A financial analyst with terms of reference and qualifications acceptable to the Association has been selected by the Recipient within the PCU Bukhara branch. 43. Given the weak FM performance and potential ineligible expenditures reported under BSSP, a request for exception of OP/BP provisions was approved on September 28, 2012 allowing to proceed with AKWSP negotiations and Board presentation. B. Results Monitoring and Evaluation 44. Monitoring the development objectives and implementation progress will be handled by BVK and PCU Bukhara branch, and reported to Uzkommunkhizmat s PCU and to WB in semiannual progress reports. The IC will be responsible for ensuring that relevant monitoring data is collected before, during and at the end of the execution of activities. For example, currently, available data on water production, consumption and wastage only comprises rough estimates because of the absence of meters. The available baseline data will be adjusted once the work at the facilities or on the network is started and meters installed to accurately measure baseline data. Financial data of Project and BVK operations, including BVK s division responsible for Alat and Karakul operations, will be reviewed annually by the auditor and presented in internationally accepted formats with the required calculated financial indicators. The auditors will also be asked to perform a technical audit of the quality and consistency of Project activities and investments. Progress reports to be prepared by PCU Bukhara branch including description of physical progress of work, contract status, and updating indicators will be required semi-annually prior to Bank missions. A mid-term review of the progress towards achievement of the Project objectives will be undertaken in early

26 45. As part of Monitoring and Evaluation, AKWSP would finance: Customer Satisfaction Survey. Annual Surveys will be carried out to evaluate the satisfaction of project beneficiaries. The questionnaires will be developed by the IC. Qualitative data will supplement the survey through focus group discussions with target groups such as women, youth, etc. Gender and Vulnerability Impact Surveys. A Gender Assessment and baseline survey will be conducted to determine how the availability or lack of water supply service affects the daily lives and health of people, particularly women and girls. In addition, the Project will explore ways to ensure that a certain percentage of women are gainfully employed by BVK for its Alat and Karakul operations, either as supervisors, surveyors or as manual labor at project construction sites. Such options will be explored in consultation with women and the Mahalla committees and a rapid assessment will be carried out to determine the role women currently play, informally or formally, in the management of water services delivery. The sanitation studies will look at specific needs of women, children and elderly. C. Sustainability 46. AKWSP investments, in particular those dedicated to development of rural water service, respond primarily to a social development rationale. As is often the case for rural water supply service in poor rural areas, systems dependent on distant water sources, requiring substantial treatment, pumping and conveyance, cannot be expected to achieve full cost-recovery through tariffs. Accordingly, the financial sustainability of the Project will depend on GOU s support of BVK through necessary capital subsidies and tariff adjustments, while regulating BVK s performance and promoting its institutional capacity. Through improved O&M performance and application of increased tariffs, BVK will aim at recovering operations and maintenance costs, as well as a share of the debt service estimated around 10 percent. Cost recovery will also be facilitated by the improved revenue associated with radically increased customer base and quality of service. Billing and collection will also improve under the Project, and tariffs will be adjusted by the Antimonopoly Commission, as proposed by BRG and assess by MOF, a view to affordability and cost recovery. The Project will seek improved collection from all connected customers before tariffs increases. Under such conditions, the financial sustainability of the Project is likely. The operational and environmental sustainability of the Project will be supported by demand management enabled through systematic metering, as well as more efficient system design and operations. 14

27 V. Key Risks and Mitigation Measures Risk Ratings Summary Table (Table 2) Risk Stakeholder Risk Implementing Agency Risk Capacity Governance Project Risk Design Social and Environmental Program and Donor Delivery Monitoring and Sustainability Overall Implementation Risk Rating Moderate Substantial High Moderate Moderate Low Low Substantial Overall Risk Rating Explanation 47. An Operational Risk Assessment Framework (ORAF) was developed, and is updated as per appraisal conditions in Annex The overall preparation risk is assessed as Substantial. AKWSP experienced a laborious and protracted preparation process, as a result of poor initial scoping and limited capacity of the feasibility study consultant. Bank, BVK and PCU were substantially involved in scope optimization and design iterations with the FS consultant, a process in which options were considered for the phasing of investments, different levels of service, alternatives sources of water (other than the Dvoinik intake) and various transmission configurations. As a result, the comprehensiveness and reliability of the FS have been improved, and the proposed Project retains a conservatively priced least cost option. The Bank s, BVK s and PCU s experience for the preparation of urban and rural water supply operations in Uzbekistan also helped confirm the feasibility of proposed institutional, financial and implementation arrangements. Project preparation fundamentally lacked the backing of effective policies for new rural water supply development. A key factor to mitigate and resolve residual preparation risks will be the selection of a strong Implementation Consultant firm, capable of optimally adjusting project designs to field conditions and community demands. The level of ownership of the project by BVK and GOU is also high, suggesting that residual preparation risks and issues can be mitigated. Opportunities for technical design optimization will be assessed by the IC at project inception, as will the institutional, organizational, staffing and training needs of future BVK operations in Alat and Karakul. 49. The overall implementation risk is assessed as Substantial. The capacity of BVK and PCU and its Bukhara branch for Project implementation are known, based on experience for other past or on-going projects. The Bank is aware of limited technical capacities, uneven quality of documentation and frequent fiduciary deviations. These weaknesses will be mitigated through relevant staffing and capacity building measures, as well as by a strong IC mandate and relevant level of Bank supervision. Experience has shown that implementation risks may be primarily 15

28 linked to potential approximations or non-compliance in fiduciary processes. Uzbekistan s overall public procurement and FM systems do not typically satisfy the requirements of the Bank. Bank guidelines will be applied to the implementation of the Project. Due to low overall technical and fiduciary capacity in Uzbekistan, associated implementation risks are deemed high. The PCU and its Bukhara branch established for previous projects will continue to be used, as both have had exposure to technical, procurement and FM requirements of the Bank. These capacities will nevertheless need to be strengthened. 50. With regards to operation and maintenance of the assets, the risk associated with AVK and KVK very low capacity is substantial. The reorganization and envisaged merger of Alat and Karakul vodokanals into BVK, which is a condition of Negotiations, and the establishment of Alat and Karakul operating divisions will improve the institutional and financial capacity and ensure sustainability of service operations. 51. Other potential implementation risks, for instance related to lack of a clearly identified and permitted land-disposal solution for the sediments and sludge generated by water treatment, are being addressed though special covenants and EMP provisions. BRG has agreed to make an authorized land-disposal site available in the vicinity of the treatment plant, and a time-bound legal covenant will require it. A decision and action plan for the establishment of the necessary disposal solution was submitted as a condition of Negotiations and the confirmed availability of an authorized and economically viable disposal facility is a dated covenant to ensure compliance. 52. Integrity risk: The Bank s global experience in water supply projects over recent years has highlighted several integrity risks, particularly in relation to procurement of works and goods, preparation of bids, collusion in bidding, and capacity of post-installation service. Such risks may be significantly heightened where local competition is weak and where management capacity is lacking. VI. Appraisal Summary A. Economic and Financial Analysis 53. Institutional set-up. AKV and KVK are small-town utilities in the middle of mostly rural districts, and feature very limited technical, financial and managerial capacities. To secure better capacity and sustainability for the implementation of the Project and for the future provision of water supply services to Alat and Karakul, the two district vodokanals will merge their assets and activities into BVK at the beginning of the Project. This consolidation is expected to benefit and bring improvement to water supply services in the Project area. It also includes consolidation of supporting processes and the management of those, for instance for billing & collection, strategic planning, human resources, finance and accounting. 54. BVK s debt and financial position. As is customary in previous and on-going Bank-financed WSS projects, GOU will on-lend the credit to BVK with unchanged IDA terms (25 year maturity, 5 year grace) and provide debt relief to BVK, by taking on an estimated 90% of its debt service obligations for the proposed Project. BVK in the past received through MOF credits and 16

29 loans from the Bank for BSWSP and BSSP. In addition, BVK has on its books, loans for Spanish-funded investments dating back to There are already arrangements in place whereby GOU provides substantial subsidy to reduce the impact of these loans on thee indebtedness of BVK. However, as a result of the low cost recovery of BVK s primary operations over the years, the company s financial position has remained weak with very low degree of solvency currently. In 2010, ADB financing was approved for improving water supply in five other districts of the Bukhara region. Under an arrangement that is specific to the ADBfunded project, ADB funds are on-lent by GOU to BRG and not to BVK, and no arrangement is in place to reflect the liability in BVK s finances, nor in those of the five independent district vodokanals. GOU is considering changing the role of BVK in the coordination and improvement of the performance of the WSS sector in the Bukhara region. In accordance with existing legal agreements with the Bank, BVK must maintain a debt service coverage ratio does not fall below 1.2 before obtaining additional debt. For this reason, GOU provides debt repayment relief to BVK according to an agreed schedule. 55. Cost Recovery Tariffs. Current tariffs in the Project service area are very low, and with the highest burden falling on non-household customers, i.e. budget institutions and commercial entities. Tariffs for the latter are about three times those for households. Unpaid residential bills constitute the larger portion of accounts receivable, due to the particularly poor level of service received by households (low quality water, interrupted service). Financial projections have been made to determine the future tariffs that would need to be applied to obtain sustainability, taking into account the proposed Project financing and debt repayment strategy. The analysis shows that the tariffs in Alat and Karakul currently very low have to be raised significantly to ensure financial sustainability of the Project. At the household level, they will have to be almost tripled when the new facilities are expected to be in full operation, and further increased when debt repayment is initiated after the grace years. The assessment is based on the assumption that effective billing systems are fully implemented, for instance through electronic billing. Table 3: Projected future cost recovery tariffs for households Residential Water Supply Tariffs Year Levels in UZS/m 3 (2012 prices) Current tariff Projected tariffs Tariff affordability. The analysis of water tariff affordability shows that the projected tariffs are affordable for the residents in Alat and Karakul districts, even under conservative planning assumptions, i.e., low growth in disposable income. More specifically, the analysis demonstrates that the water bill is around 2% of household income for the average rural household in the lowest income quintile (i.e., for the poorest households), while urban households have better affordability. General accepted affordability benchmark for the combined water and wastewater bill is 5%. 57. Economic Analysis. Least cost approach was applied for the justification of this Project as low tariffs, poor service and scarce reliable data on produced and distributed volumes make it difficult to undertake a solid cost benefit analysis of the project. After assessing various scoping,

30 phasing and level of service scenarios, GOU has set the goal to provide a high-level of service (household connection) to all households (urban and rural), by the end of the Project, with no required beneficiary contribution to the connection cost. The proposed project design is deemed as the least cost option to achieve such goal. Other less costly alternatives were considered including supplying water through standpipes or from wells. Standpipes in urban areas are not aligned with GOU s developmental and policy options, particularly given the existence of the distribution systems that need rehabilitation and limited expansion. In rural areas, standpipe service is as a cost-saving option, but it was not further considered as it would result in higher water tariffs due to water consumption at the rural level that is expected to be lower. With regard to the source of water: groundwater resources in Alat and Karakul districts are scarce, depleted by past uses. Moreover, they are increasingly saline, thus unfit for potable water supply purposes, unless a multitude of wellhead desalination plants are installed. This alternative is rejected due to a high life-cycle cost and lack of capacity to maintain such schemes in Alat and Karakul. Although expensive, mobilization of Amu-Bukhara canal waters for potable treatment appears to be the only viable option. Despite costing optimization reviews, the cost of the program remains very high on a per capita basis, at about US$445/person, as compared to an already high US$268/person for the Syrdarya Water Supply Project (SWSP). Nevertheless, unlike SWSP, the need for new investments in expansion and for more pumping is higher in Alat and Karakul, which explains the higher per capita cost. B. Technical 58. A series of technical challenges will be addressed by the Project: (a) water supply will be increased from less that 30 l/capita/day on average today to meet the service standards of 115 l/capita/day for urban users and 95 l/capita/day for rural users, based on 2025 population forecasts; (b) the rehabilitation of conveyance system will entail 105 km of transmission lines (including 71 km to allow rural water supply), pumping stations and related water tanks; (c) the expansion of the urban and rural distribution systems entail a total of 259 km of secondary networks for Alat-town and Karakul-town and a total of 1,095 km of secondary rural distribution networks in about 120 villages, a total of 363 km of tertiary networks (line connections) for Alattown and Karakul-town, and a total of 1,481 km of tertiary networks (lime connections) in rural areas; (d) 24-hour water supply service with good water quality will be provided to the entire population in the served areas; (e) consumers will benefit from individual metered service connections to their households; and (f) machinery and facilities will be rehabilitated with longlasting equipment and materials where needed, according to international standards. 59. Multiple level of service scenarios were assessed with GOU for rural areas, including standpipe service, individual connection service, and mixed models with planned transition from standpipe service to individual connection service. In light of the dire water supply situation, and potential competition by traditional nonpotable sources, GOU opted in favor of investing in universal individually connected service, and to support the higher investment cost through adequate levels of capital subsidy or debt service relief. Additional cost and operational optimization may be at hand at Project inception, by requiring the assessment of gravity distribution options instead of the currently proposed pumped distribution. 18

31 C. Financial Management 60. PCU and its Bukhara branch will be responsible for the financial management of AKWSP on behalf of BVK. PCU and its Bukhara branch already are responsible for FM tasks under the ongoing BSSP (along with the Samarkand Branch of the PCU). Despite sharing systems and resources, the FM for AKWSP and BSSP will be kept strictly separate. 61. An FM review conducted in April 2012 as part of BSSP supervision, allowed to assess the FM practice and capacity of PCU and its Bukhara branch, with regards to internal controls, flow of funds, budgeting, accounting, reporting and auditing. BSSP FM arrangements were found moderately unsatisfactory. In the most recent audit reports, received in July 2012, the auditor expressed an unmodified (clean) opinion on the Project Financial Statements, as maintained by the PCU. The auditor expressed modified opinions on the BVK and Samarkand Regional Vodokanal (SOVK) Entities Financial Statements. The auditor s management letters however signaled internal control issues at the PCU level, as well as within BVK and SOVK entities, including contract monitoring procedures, internal verifications and approvals, accounting and reporting aspects, and possible ineligible expenditures incurred by SOVK under BSSP. Subsequent due diligence by the Bank has determined that the potential ineligible expenditures, if any, do not exceed USD 47, to be confirmed by an external technical expert review. 62. For both BSSP and AKWSP needs, PCU and its Bukhara branch capacity must be enhanced by (i) customizing the 1C automated accounting system to better support project accounting and reporting; (ii) recruiting a financial analyst for PCU Bukhara branch and (iii) updating the FM chapter of the Project Operations Manual (POM) and ensuring strict adherence to its policies and procedures. A time-bound FM Action Plan (see Annex 3) aimed at strengthening FM capacity at BBPCU was elaborated and was agreed with the client prior to Negotiations. The client further agreed at Negotiations to reimburse to IDA any part of the potential ineligible expenditures that may be confirmed by the pending assessment. 63. The customization of the accounting software, the satisfactory updating of POM, and the reimbursement of ineligible expenditure are proposed as conditions of negotiations. The selection of the new BBPCU Financial Analyst is a proposed condition of effectiveness. 64. PCU s Financial Manager and the new PCU Bukhara branch Financial Analyst to be recruited will have the ultimate responsibility for accounting, reporting, flow of funds and disbursement functions of AKWSP. PCU will customize the accounting software currently used for BSSP to automatically generate financial reports, including Statements of Expenditures (SOEs) and Interim Financial Reports (IFRs) required for reporting to the World Bank and to GOU. The system shall have adequate security safeguards for reliable reporting and data integrity. 65. Disbursements from the IDA Credit Account will follow the transaction-based method, i.e., traditional Bank procedures: including advances to the designated account, direct payments, Special Commitments and reimbursement with full documentation and against Statements of Expenditures (SOEs). For payments above the minimum application size, as specified in the Disbursement Letter, PCU may submit withdrawal applications to the Bank for payments to 19

32 suppliers and consultants directly from the Credit Account. The Project s designated account will be maintained by PCU at a commercial bank acceptable to the Bank with all payments to vendors to be made by PCU. 66. The adequacy of FM arrangements will be continuously monitored during Project supervision and adjustments will be made when necessary to ensure fiduciary compliance. The Bank will review the annual audit reports and the quarterly IFRs, including a monthly reconciliation of accounts, and perform at least one complete supervision mission per ninemonth period, which could be complemented by other supervision missions as necessary. 67. Under the circumstances of weak FM performance and potential ineligible expenditures under BSSP, a waiver request was approved on September 28, 2012 allowing to proceed with AKWSP negotiations and Board presentation. D. Procurement General: Procurement for the proposed project will be carried out in accordance with the World Bank s "Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines) and the provisions stipulated in the Financing Agreement. If there is conflict between government decrees, rules and regulations and the Bank Procurement and Consultant Guidelines, then Bank Procurement and Consultant Guidelines shall prevail. In addition the project will also follow Guidelines: On Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants Dated October 15, 2006 and Revised in January, Details on the procurement capacity assessment, procurement arrangements, risk mitigation measures and details of procurement plan for the Project are provided in Annex There is a possibility of retroactive financing to finance category (3) consultants services including the Implementation Consultant. E. Social (including safeguards) 70. As part of Project preparation, a team of social scientists carried out a social assessment (SA) in the towns and surrounding rural areas of Alat and Karakul. The assessment included a household survey and focus groups discussions involving a wide range of stakeholders: households, representatives of commercial enterprises and organizations, mahalla committees, polyclinics, kindergartens, schools and water supply providers. The main findings are listed below and a summary of the Social Assessment is included in Annex 7: (a) Inadequate water supply is a critical household problem. The large majority (about 85%) of the surveyed population in the area view water supply as a priority household problem. The main reported issues are: poor quality of the water and inadequacy of the supply. Among households that have a connection to piped water, most receive water 20

33 only two hours a day in the winter and from six to seven hours in the summer. None of the households receives properly treated water, whatever the source, and a significant number of them reports that family members were either currently ill or have been ill with waterborne diseases due to their poor quality drinking water. (b) Households in Alat and Karakul have different priorities. According to the SA, in Karakul, most households store their drinking water in an outdoors cistern periodically filled by a water tanker; in Alat, the main source of water for half the population is a hand-pump or standpipe on the street, and for 30% of the population, water is supplied through a tap inside their homes 13. Most respondents from Alat-town indicated that their priority request was to obtain 24-hour supply of good quality water since they were already connected to the (dysfunctional) centralized system. In Karakul-town, where most households purchase water from vendors, only about half of the respondents demand a household connection. In both towns however the water situation is so dire that a third of respondents concedes that they would be happy with easy access to a standpipe continuously supplied with good quality water. (c) Children, senior citizens and women are the most vulnerable to the poor conditions of water supply. Survey respondents from both towns indicated that children and the elderly have the highest incidence of water borne diseases. In Alat, 83% of households reported that their children were sick from the bad quality water. Based on the focus group discussions, children have a high incidence of waterborne diseases because they drink water directly from canals. Women suffer from having the primary burden of fetching water for washing and other non-potable uses. (d) Willingness to pay an increased tariff for improved water supply services is strong. Almost all the respondents indicated that they were willing to pay more than what they are currently paying, provided they have an improved water supply service. Most households however, in both Alat and Karakul, were unable to quantify how much more they were ready to pay. The average monthly household payment that would achieve Project cost recovery (estimated at the time between 3,600 and 5,000 Soums/household/month) appeared affordable, compared to current higher cost paid to water tankers. The SA assesses that such monthly payment may represent about 1% of the average household income. (f) Subsidies may be needed for the poor. While the proposed cost recovery scheme will not require households to pay any separate cost for a connection to the centralized water supply system, there may still be households that will face difficulties paying the monthly water tariff even if it is lower than the existing one offered by vendors. In such cases, families will be subsidized through the existing state subsidy system administered by the local mahalla committees. 13 These figures differ from coverage figures given in Paragraph 11 whereby the distribution system is connected to 100% of households in Alat-town (respectively 60% in Karakul-town), but where service is de facto absent for many connected households. Many of these networks have failed, and households are reverting to other sources. 21

34 (g) Interactions between the consumer and vodokanals need improvement. According to the SA, most requests for assistance from the vokokanal to repair pipelines, meet water delivery schedules or improve the quality of service, go unnoticed or unaddressed. The Project will address this issue by providing technical assistance and equipment to the BVK to improve consumer service and better respond to calls for repairs. (h) Need for public awareness raising and sanitary education. The Project will include a comprehensive public awareness program, planned and designed to: (i) reach the urban and rural population in Alat and Karakul and make Project information accessible; (ii) provide information and explanations to stakeholders on who may and who may not benefit from the investments under the proposed Project and why, on the timeframe of the Project, on GOU s strategy in terms of providing water supply and sanitation services, on the financial arrangements for covering the costs of connecting the households to the water supply system, on the monthly tariff through metering, on how to communicate concerns or requests for emergency service need, and on other obligations to be fulfilled on the consumer s side and on the service provider s part; and (iii) build awareness and change behaviors with respect to responsible water usage and hygiene practices, through outreach and education activities aimed at households, women, schools, etc. 71. The SA findings are accounted for in project design. Women and children (especially girls) are recognized as primary beneficiaries of this project, as the burden of getting and transporting both potable and non-potable water is primarily their responsibility. The project will hence result in saving both time and effort for women and girls. Customer satisfaction surveys will seek to quantify, at project inception and closing, the time spent by women, children and men fetching water. Further, sanitation studies and initiatives need to target women, elderly and children as these groups suffer the most when sanitation facilities are lacking. 72. Advocacy on efficient use of water, implications of water meter installation, basic information on maintenance of meters etc. must target women as they influence the way and quantity in which water is used. Studies on sanitation needs will identify the needs of women, children and the elderly as these groups suffer the most when sanitation facilities are poor. Women are primarily responsible for sanitation and hygiene in and around the home, including waste disposal and need to be included in the studies. Hence all awareness raising, information and advocacy campaigns on water usage, maintenance of water stand posts, home hygiene, and waste disposal and sanitation facilities must actively target women. 73. The implementation of AKWSP is likely to make the water tanker vending unnecessary. Based on information available, most if not all of the tanker trucks are owned and managed by the municipalities and district vodokanals, and no private entrepreneur is expected to be impacted. 74. Safeguards: Involuntary Resettlement. The Project triggers Operational Policy 4.12 (OP Involuntary Resettlement) because it may involve permanent or temporary land acquisition for the rehabilitation of existing pipelines or construction of new pipelines in areas not currently served. Many of the large investments will take place within fenced production and 22

35 treatment facilities, such as the water treatment and pumping facilities or the Dvoinik water intake, where there is no residential or commercial activity. Where land may be needed for the expansion of the water intake and treatment, priority will be given to acquire state-owned land away from residential or commercial activities. The trunk lines will be laid along existing roads, where the right of temporary access for public works is usually granted. However if project activities result in restriction of access (such as to a home or shop) or removal of trees or structures, the impacts will be mitigated in accordance with the instruments required under OP None of the civil works are expected to require relocation of residents or enterprises. The specific locations where land acquisition or restriction of access is needed for the rehabilitation of the water distribution systems within the two towns will be determined in more detail and accuracy during the detailed design stage. For these reasons, the Borrower has prepared a Resettlement Policy Framework (RPF), a summary of which is in Annex 6. The RPF clarifies the policies, principles and organizational arrangements for the delivery of compensation and other entitlements in the event that land acquisition and/or displacement occur. For any Project component requiring land acquisition, specific Resettlement Action Plans (RAPs) consistent with the principles of the RPF will be submitted to the Bank for approval before it is implemented. Related civil works will be initiated only after RAPs are approved by the World Bank, and the agreed compensation/resettlement package is delivered. F. Environment (including safeguards) 75. The project is ranked as Category B (low risk) in accordance with the Bank Policy OP/BP 4.01 on Environmental Assessment. The proposed water supply system rehabilitation and upgrade works, including improvement and expansion of the water treatment, transmission, storage and distribution systems in Alat and Karakul are likely to generate minor and temporary site-specific environmental impacts (e.g., dust pollution, construction noise, vibrations and waste generation), impacts of accidental pollutant discharge in water/groundwater, impacts on soil and air quality, traffic interferences and occupational risks, as well as possible temporary effects to the local vegetation (trees) or landscape. However, these impacts may be effectively prevented or reduced through the application of appropriate protective actions, mitigation measures and monitoring activities (highlighted in the EMP and incorporated in contractors technical specifications and bidding documents). Furthermore, health and safety hazards to workers from the management of chlorine used for disinfection and other contaminants will be mitigated through training to workers on how to handle hazardous materials. 76. Possible impacts on workers safety related to dismantling of asbestos pipes will be managed in line with the Bank s Asbestos Good practice Note (May 2009) attached to the EMP and contractors documents. Potential risks associated with the management and disposal of sediments and sludge generated by water treatment operations, are to be managed through regulated disposal at a permitted site. Risks associated with long-term agricultural practices, such as the use of regulated and/or unregulated pesticides and herbicides generating objectionable concentrations of these toxic substances in the raw water of the Amu Bukhara canal, have only been partially lifted by the FS results. Confirmatory due diligence, through additional testing, is required at project inception, as part of the FS review and optimization steps, as well as the related EMP update. 23

36 77. As noted in the FS, the water production and transmission capacity will increase from 14,000 m 3 per day currently to about 49,000 m 3 per day. It is understood that this does not exceed the maximum installed withdrawal capacity at the Dvoinik intake. Formal assurance was received from GOU that the planned additional water withdrawals in Dvoinik are compatible with the provisions of the existing agreements between Uzbekistan and Turkmenistan for the shared management and use of Amu Darya waters. 78. The planned increase in water production and distribution will also generate an increase in household wastewater generation and possibly have negative impacts on current limited sanitary or drainage systems. Both the urban areas and rural settlements of Alat and Karakul lack sewage collection networks. Households rely on individual, on-site, improved sanitation solutions, with drainage and stormwater management at best provided by ditches along the main streets. Despite the prevalent mitigating dry weather and sandy soil conditions, increased grey water disposal by household, especially in more densely populated urban areas, carries a risk of pooling and stagnation, with potential health impacts. In order to address these issues, the Project is financing a separate feasibility study and relevant technical documentation (including an Environmental Assessment) to identify urban wastewater management needs in the towns of Alat and Karakul and appropriate rural sanitation investments. No sewerage or sanitation investments are currently planned by GOU for the area through No major impacts on physical cultural resources (PCR) are expected during Project implementation; yet, attention will be paid to the possibility of built PCR (e.g., monuments, religious buildings) being affected by dust and vibration during construction works. Consequently, the EMP attached to the works contracts provides guidelines in case of chance finds. 80. The question of disposal of sludge and sediments generated by the water treatment process at the Dvoinik WTP was thoroughly discussed at appraisal. Options proposed by the FS consultants, such as the disposal of these inert but possibly voluminous residuals into the Amu Bukhara canal were not found acceptable. In the absence of a solid waste landfill within practical distance of the Dvoinik WTP, it was decided that a sludge and sediment disposal facility would have to be established in Dvoinik. The appraisal mission was informed of the Regional Governorate commitment to provide land for the facility, and of GOU s agreement to design and build such facility at no cost to the Project before the start of construction of the Dvoinik WTP. Formalization of such commitments into a plan for disposal facility development is a condition for negotiations. The effective establishment of the disposal facility is a legal covenant in the financing agreement. 81. A draft Environmental Assessment (EA) with an EMP satisfactory to the Bank s requirements and addressing provisions in national laws, was prepared by Uzkommunkhizmat to help implement the necessary measures to minimize potential negative environmental impacts and implement the Project in an environmentally-sound and sustainable manner. The EMP outlines the impacts during the construction period (noise, dust, etc.) and operational phase, and defines mitigation measures and related monitoring indicators. The draft EA and EMP were subject to public consultations and disclosures by Uzkommunkhizmat and BVK to stakeholders in Alat and Karakul on February 5, The draft report including minutes of theses public 24

37 meetings as well as comments and suggestions from the Bank was finalized, disclosed again incountry in local language and disclosed in English in Infoshop on March 14, In addition, the 2011 EIA, EMP and the RPF were revised in line with the updated June 2012 Feasibility Study. New public consultations were held in Alat and Karakul in June 2012 to inform stakeholders of the expanded project scope especially in the rural areas. Updated versions accounting for the results of public consultations were publically disclosed in country, on July 16 and 18, 2012 respectively. The updated EIA and RPF were sent to Infoshop on July 24, G. Other Safeguards Policies triggered (if required) 82. The water intake ( Dvoinik ) is located at the Uzbek-Turkmen border and draws water from the Amu-Bukhara irrigation canal, which is supplied from Amu Darya River in Turkmenistan. Consequently, OP/BP 7.50 on International Waterways is triggered, and the Borrower has notified the riparians (Turkmenistan) about the proposed investments and possible impacts. GOU informed the Government of Turkmenistan about the Project on February 10, 2011, asking to receive any comments by April 4, No comments or objections were received at the time nor since then. 83. With regard to the location of the Dvoinik facility along the border with Turkmenistan, GOU guaranteed (and provided related documentation, such as official maps to the Bank) that, although located between the two border stations of respectively Uzbekistan to the north and Turkmenistan to the south, the site is the property of Uzbekistan and located indeed within its official borders. The intake operates as an Uzbek facility and has received bilateral investment support from Spain over the past recent years. Based on this information, OP 7.60 on Projects in Disputed Areas is not triggered. 84. At the request of the Bank, GOU provided the necessary information to verify dam safety issues in relation to the Farab facility located in Turkmenistan across the Amu-Bukhara canal, about 10 km upstream of Dvoinik. The information provided clarified that the Farab facility is in fact a hydrocenter with the role of water distribution, but with no storage function. Based on the clarification provided by the borrower, OP 4.37 on the Safety of Dams is not triggered. 25

38 Core Annex 1: Results Framework and Monitoring UZBEKISTAN: Alat and Karakul Water Supply Project Project Development Objective: Improve the coverage, quality and efficiency of public water supply service in the districts of Alat and Karakul in the Bukhara region. PDO Level Unit of Cumulative Target Values Responsibility Description Data Source/ Baseline Frequency for Data (indicator Results Indicators Measure YR 1 YR 2 YR3 YR 4 YR5 Methodology Collection definition etc.) Indicator 1: People provided with access to improved water sources under the Project (number) of which female (percentage) Indicator 2: Percentage of regulatory water samples meeting potable quality standards Indicator 3: Bill collection ratio Indicator 4: Reliability of water supply service Y N N N Number 40,456 40,456 40,456 59, , ,000 Annual PCU Bukhara branch % % Alat 53 Karakul 57 Number In 2010: Alat: 46%; Karakul: 58% Number of hours per day Alat 53 Karakul 57 Alat 53 Karakul 57 Alat 53 Karakul for both for both PCU Bukhara branch Annual BVK PCU Bukhara branch 60% 65% 70% 75% 80% Annual Annual financial audit, BVK in urban areas; 6 in rural areas Annual BVK, annual surveys Auditor, PCU Bukhara branch PCU Bukhara branch Accounted as the number of people provided with access to improved water sources under the Project Measured on basis of residual chlorine requirement Ratio of collections vs. issued bills. Measures service efficiency and improved institutional capacity of BVK s Alat and Karakul division after merger. Average number of daily hours of service availability for a representative sample of connected users. Measures quality

39 Project Development Objective: Improve the coverage, quality and efficiency of public water supply service in the districts of Alat and Karakul in the Bukhara region. PDO Level Unit of Cumulative Target Values Responsibility Description Data Source/ Baseline Frequency for Data (indicator Results Indicators Measure YR 1 YR 2 YR3 YR 4 YR5 Methodology Collection definition etc.) Core INTERMEDIATE RESULTS (IR) IR indicator 1: New piped household water connections that are resulting from the project intervention (number) IR indicator 2: Piped household water connections affected by rehabilitation works undertaken under the project (number) IR indicator 3: Number of connections with operating water meters Y Y Number ,500 15,700 35,400 Annual PCU Bukhara branch Number ,700 7,400 7,400 Annual PCU Bukhara branch N Number 3, ,331 11,000 23,200 42,900 Annual PCU Bukhara branch PCU Bukhara branch PCU Bukhara branch PCU Bukhara branch of service per annual survey. Hypothesis: 1 household = 5.4 people Hypothesis: half of the alreadyconnectedhouseholds benefiting in YR3; the totality in YR4 and YR5 IR Indicator 4: Number of breakages per km of water transmission mains IR indicator 5: Number of breakage per km of water distribution N N Number per km per year Number per km per year Annual BVK operational data Annual BVK operational data 27 PCU Bukhara branch PCU Bukhara branch Measures the reduction of breaks on mains from Dvoinik to Alat and to Karakul Measures the reduction of number of breaks per km of distribution

40 Project Development Objective: Improve the coverage, quality and efficiency of public water supply service in the districts of Alat and Karakul in the Bukhara region. PDO Level Unit of Cumulative Target Values Responsibility Description Data Source/ Baseline Frequency for Data (indicator Results Indicators Measure YR 1 YR 2 YR3 YR 4 YR5 Methodology Collection definition etc.) networks Core mains IR indicator 6: BVK Cash Working Ratio 14 IR indicator 7: Percent of households for whom water is a priority problem IR indicator 8: Water utilities that the project is supporting (number) IR Indicator 9 Number of BVK staff recruited, and trained for Alat and Karakul water supply N Number Alat: Karakul N % Alat 75 Y Karakul Annual Annual Financial Audit /BVK operational data Alat 75 Karakul 85 Alat 75 Karakul 85 Alat 75 Karakul 85 Alat 50 Karakul 50 Alat<20 Karakul <20 Annual PCU Bukhara branch /Survey Number Annual PCU Bukhara branch N Number 0 TBD TBD TBD TBD 1 Annual BVK operational data Auditor/ PCU Bukhara branch PCU Bukhara branch PCU Bukhara branch PCU Bukhara branch Cash Operating Expenditures/Cas h Operating Revenues. To be reassessed, after AVK/KVK merger into BVK. Measures improved institutional capacity under component B. Measure of improved institutional capacity due to a combination of improved outreach, systems and customer service. Assumes AVK/KVK have merged into BVK Measures progress on institutional capacity. Detailed target values to be 14 Operating Ratio baseline indicator is best estimate based on available data. Accounts of Alat and Karakul Vodokanals will be professionally reviewed and standardized financial statements compiled in order to monitor progress during progress implementation. 28

41 Project Development Objective: Improve the coverage, quality and efficiency of public water supply service in the districts of Alat and Karakul in the Bukhara region. PDO Level Unit of Cumulative Target Values Responsibility Description Data Source/ Baseline Frequency for Data (indicator Results Indicators Measure YR 1 YR 2 YR3 YR 4 YR5 Methodology Collection definition etc.) service needs IR indicator 10: Non Revenue Water IR indicator 11: BVK Participation in IBNET for water and sanitation utilities Core N % 2009 estimates Alat: 54% Karakul: 47% Average: 51% NA NA 40% 35% 25% Annual BVK operational data N Number 0 NA NA NA 1 1 Mid-term and end of project BVK PCU Bukhara branch PCU Bukhara branch defined in the Institutional Assessment. Final target numbers will be determined based on Institutional assessment and reorganization. Ratio of annual volumes of water sold for which bills are collected, and of water produced. Measure of improved institutional capacity of the utility to collect, monitor, analyze and plan. Target is indicative. Number of IBNET Partial Performance indicators for which data is available will be determined during Implementation 29

42 Annex 2: Detailed Project Description Background 1. The Alat and Karakul Water Supply Project (AKWSP) area covers the two districts of Alat (Alat rayon) and Karakul (Karakul rayon) of the Bukhara region. The two districts are located south of Bukhara, towards the border with Turkmenistan. Karakul-town is about 60 km from Bukhara city, and 15 km further south lies Alat-town. The two districts span largely semi-desertic areas with saline soils. Human settlements are concentrated in irrigated zones supplied with water from the Amu-Bukhara and Amu-Karakul canals. The Project area covers most of the populated settlements in the districts, including about 120 villages, in addition to the two urban centers of Alat-town and Karakul-town. Towns and rural settlements are subdivided into community groups or mahallas. The area is essentially rural and dependent on irrigated agriculture. The road linking Bukhara, Karakul and Alat to the Turkmen border post is a very active international trade route. Natural gas fields and a gas processing plant are being developed in the western part of the Karakul district. 2. The water supply situation in Alat and Karakul is deemed dire, and its alleviation represents a social emergency for GOU. Existing water supply systems, installed around 1978 only cover Alattown and Karakul-town, leaving the rural population unserved. Key pumping equipment was renovated in 2005, thanks to a Spanish Cooperation credit. The systems include the Dvoinik intake on the Amu- Bukhara canal, along the border with Turkmenistan. At Dvoinik water would undergo decantation in a pre-sedimentation basin, before being pumped, untreated, 25km to the water treatment plant (WTP) located in Alat-town. After conventional treatment, water would be sent into the Alat-town distribution system, or pumped for 13km to a storage facility (a.k.a. water distribution center, WDC) in Karakul-town. From there water would be pumped into the Karakul-town distribution system, or to another nearby WDC. In Alat, the WTP also had the seasonal option to supplement or replace the Dvoinik water source with water pumped directly from the Amu-Karakul canal in Alat (only possible under high summer flow conditions in the canal). Karakul water supply could also be supplemented with groundwater wells. Rural and peri-urban settlements located in the immediate periphery of the two towns, or along the path of the Dvoinik-Alat-Karakul pipelines also benefited over time from lateral connections to such centralized water supply. The surrounding rural areas would for their part depend on up to 250 individual boreholes and wells, or increasingly, on municipal and private tanker truck service. The existing systems are illustrated in figure A The system was designed in Soviet times, for operation by a well-capacitated central agency. Since 1996 the systems have been operated, with decreasing capacity, by Bukhara Region Vodokanal, and then since 2004 by the Alat District Vodokanal and the Karakul District Vodokanal. Due to general lack of maintenance over the years, and despite the Spanish-funded pump rehabilitations, the infrastructure is in a state of advanced disrepair, with clogged and leaking transmission lines, loss of coagulation/sedimentation/filtration capacity, and openly leaking distribution networks. This results in turbid water being delivered a few hours per day. In surrounding rural areas furthermore, groundwater has become depleted and saline, and with some exceptions, borehole and wells are no longer adequate for household water supply. Rural households have thus reverted to using water drawn from irrigation channels or traditional shallow wells, and to expensive tank truck deliveries. In essence, as of today, the two towns and surrounding villages have neither safe, nor reliable drinking water. 30

43 Figure A2-1: Existing Water Supply Schemes, 2006 Existing water supply schemes Alat rayon Alat Existing network Network to be constructed Rural Community Center with water supply scheme Rural Community Center without water supply scheme Existing water supply schemes Karakul rayon Karakul Existing network Network to be constructed Rural Community Center with water supply scheme Rural Community Center without water supply scheme 31