Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: T7670-AF

TECHNICAL ANNEX

FOR A PROPOSED

GRANT OF SDR 27.9 MILLION

(US$40 MILLION EQUIVALENT)

TO

THE ISLAMIC REPUBLIC OF AFGHANISTAN

FOR AN

URBAN WATER SECTOR PROJECT

APRIL 14,2006

Energy and Infrastructure Sector Unit South Asia Region

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

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FOR OFFICIAL USE ONLY

AHC AIA AIC AUWSSC ARDS

ARTF CAWSS CFO DA DCI DOS DSS EA EMP

EIRP EO1 EPAP ESMP EU FIRR FMR FMS FNPV FSO GTZ

HQ I-ANDs IDA IRA JICA K fW

KURP LC MACA M C MDG

CURRENCY EQUIVALENT Currency Unit - - Afghan i (Afg) U S $ 1 -

SDRl - 49.9 Afg (as o f 3 1 M a r c h 2006) US$1.43783 (as o f 3 1 M a r c h 2006)

- -

GOVERNMENT FISCAL YEAR March 21 - March 20

ABBREVIATIONS AND ACRONYMS Asset Holding Company Afghanistan Interim Administration Average Incremental Cost Afghan Urban Water Supply and Sewerage Company Afghanistan Reconstruction and Development Services Afghanistan Reconstruction Trust Fund Central Authority for Water Supply and Sewerage Chief Financial Officer Designated Account Ductile cast Iron Department o f Sanitation Decision Support System Environmental Assessment Environmental Management Plan

Emergency Infrastructure Reconstruction Project Expression o f Interest Emergency Public Administration Project Environmental and Social Management Framework European Union Financial Internal rate o f Return Financial Management Report Financial Management System Financial Net Present Value Financial Support to Operations Gesellschaft fur Technische Zusammenarbeit (German Development Agency) Headquarters Interim Afghanistan National Development Strategy International Development Association Islamic Republic o f Afghanistan Japan International Cooperation Agency Kreditanstalt fur Wiederaufbau (German Development Bank) Kabul Urban Reconstruction Project Letter o f Credit Mine Action Center for Afghanistan (UN) Management Contract Millennium Development Goals

MEW M&E MIS MMI MOC

MOF MOU MTP

MOUD NEPA NGO NRVA OECD

O&M PACBP PEFA PFM PIU PPIAF PPP SBU sc SDU SOE

STP TA TISA TOR UN UPVC

USAID UWMP WHO wss

Ministry o f Energy and Water Monitoring and Evaluation Management Information System Ministry o f Mines and Industry Ministry o f Communications

Ministry o f Finance Memorandum o f Understanding Medium-Term Program

Ministry o f Urban Development National Environment Protection Agency Non-governmental Organization National Risk and Vulnerability Assessment Organisation for Economic Co-operation and Development Operation and Maintenance Public Administrative Capacity Building Project Public Expenditure and Financial Accountability Public Financial Management Project Implementation Unit Public Private Infrastructure Advisory Facility Public-Private Partnerships Strategic Business Unit Special Commitment Special Disbursement Unit (in Treasury Dept.) Statement o f Expenditures

Short-Term Program Technical Assistance Transitional Islamic State o f Afghanistan Terms o f Reference United Nations Unplasticized Polyvinyl Chloride

United States Agency for International Development Urban Waste Management Project World Health Organization Water Supply and Sanitation

Vice President : Praful Pate1 Country Director : Alastair McKechnie

Sector Director : Yusupha Crookes Sector Manager : Sonia Hammam

Task Team Leader : Christophe Bosch

ISLAMIC REPUBLIC OF AFGHANISTAN URBAN WATER SECTOR PROJECT

TECHNICAL ANNEX

Table o f Contents

A . BACKGROUND AND STRATEGY .................................................................................................... 1

A . 1 . THE URBAN WATER SECTOR IN THE RECONSTRUCTION OF AFGHANISTAN .......................... 1 A . 2 . GOVERNMENT RESPONSE AND SECTOR DEVELOPMENT STRATEGY .................................... 2

B . BANK RESPONSE AND STRATEGY ................................................................................................ 3

B . 1 . TRANSITIONAL SUPPORT STRATEGY FRAMEWORK .............................................................. 3 B . 2 . MOBILIZATION OF EXTERNAL RESOURCES AND COORDINATION MECHANISMS ...................... 3

8 .4 . RATIONALE FOR BANK INVOLVEMENT .................................................................................. 3 B . 3 . LESSONS FROM EARLIER EXPERIENCE IN AFGHANISTAN AND SIMILAR COUNTRIES ............... 3

............................................................................................. C . DETAILED PROJECT DESCRIPTION 4 c.1, PROJECT OBJECTIVES ........................................................................... 4 c . 2 . PROJECT DESCRIPTION .......................................................................

4 7 8

.... 10

C.2.1. Component 1 - Institutional Development of AUWSSC C.2.2. Component 2 - Financial Assistance to AUWSSC C.2.3. Component 3 - Extension of the Kabul Water Supply System

c . 3 . SUMMARY PROJECT COST ...........................

D . INSTITUTIONAL ARRANGEMENTS AND PROJECT IMPLEMENTATION ......................... 11

D.1. PROCUREMENT ............................................................................................................... 12 D .2 . FINANCIAL MANAGEMENT, DISBURSEMENT, AND AUDIT 13 D.3. MONITORING AND EVALUATION ......................................................................................... 14

E . PROJECT BENEFITS AND RISKS ................................................................................................... 15

E . 1. PROJECT BENEFITS ................................................ 15 E.2. PROJECT RISKS ............................................................................................................... 16 E.3. ALTERNATIVES CONSIDERED ......................... 18

F . ENVIRONMENTAL AND SOCIAL ISSUES AND SAFEGUARDS .............................................. 18

G . MAIN GRANT CONDITIONS ............................................................................................................ 20

i

FOR OFFICIAL USE ONLY

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

H . APPENDICES ........................................................................................................................................ 22

ANNEX 1: WORLD BANK (IDA) AND AFGHANISTAN RECONSTRUCTION TRUST FUND (ARTF) SUPPORT TO URBAN WATER SUPPLY. SANITATION AND SOLID WASTE MANAGEMENT .............................................................................................................................. 23

ANNEX 2: DETAILED PROJECT DESCRIPTION ............................................................................... 27

ANNEX 2 A : INSTITUTIONAL DEVELOPMENT OF AUWSSC .......................................................... 27 ANNEX 2 8 : FINANCIAL ASSISTANCE TO AUWSSC .................................................................... 29 ANNEX 2 C : KABUL WATER SUPPLY INVESTMENT ...................................................................... 32

ANNEX 3: PROCUREMENT ARRANGEMENTS ................................................................................. 37

ANNEX 4: FINANCIAL MANAGEMENT ARRANGEMENTS ........................................................... 46

ANNEX 5: SUMMARY OF THE SOCIAL AND ENVIRONMENTAL SAFEGUARDS FRAMEWORK ................................................................................................................................ 58

ANNEX 6: SOCIAL ISSUES. SERVICES TO THE POOR. INFORMAL SETTLEMENTS AND UNCONNECTED ............................................................................................................................. 72

ANNEX 7: SCOPING STRATEGIC OPTIONS FOR KABUL WATER SUPPLY: A MULTI- SECTOR DECISION SUPPORT SYSTEM APPROACH ........................................................... 75

ANNEX 8: MONITORING AND EVALUATION ARRANGEMENTS ............................................... 78

ANNEX 9: LIST OF DOCUMENTS IN THE PROJECT FILE ............................................................ 81

ANNEX 10: URBAN WATER SUPPLY AND SEWERAGE SECTOR POLICY ................................ 82

ANNEX 11: URBAN WATER SUPPLY AND SEWERAGE SECTOR INSTITUTIONAL DEVELOPMENT PLAN ................................................................................................................. 93

ANNEX 12: PRESIDENTIAL DECREE ................................................................................................ 105

I . MAPS ...................................................................................................................................................... 109

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A. BACKGROUND AND STRATEGY

A. 1. The Urban Water Sector in the Reconstruction o f Afghanistan

The Conflict, the Transition and the Emergency

1. Since December 2001 and the inauguration o f the Afghanistan Interim Administration (AIA) Afghanistan's economic, social and political achievements have been significant. The AIA, and the subsequent Transitional Islamic State o f Afghanistan (TISA) were confronted with an economy reeling from protracted conflict and drought, more than five million people displaced as refugees in neighboring countries, economic activities steered in an informal or illicit direction by insecurity, and a state that had become virtually non functional in terms o f policy making and service delivery - although the structures and many staff remained. The achievements - various reforms in the government, a successful constitutional Loya Jirga (Grand Council) peaceful completion o f the country's first ever presidential election, and the inauguration o f the new Cabinet in December 2004, just to name a few -have been significant, and in Afghanistan's context, commendable. The country's move towards democracy achieved a landmark when the new Parliament was sworn in on December 19,2005. These achievements notwithstanding, the challenges remain enormous in improving security throughout the country, reestablishing national unity, developing institutions with a capacity to formulate and implement policies, reaching out to provinces to collect revenues and deliver services, and implementing the Government's long-term vision for the future o f Afghanistan.

Urban Water Supply and Sanitation Sector Issues

2. As a result o f lack o f investment, conflict and drought during the last decades, and the very rapid urban growth in recent years, the water supply service in Afghan cities i s of very poor quality. Only Kabul (more than three million people) and 13 towns with populations ranging from 1,000,000 to 50,000 have piped water supply systems serving a total o f only about 60,000 connections, o f which 35,000 in Kabul. Even if the concerted efforts of the Government and the support o f several donors have resulted in improvements since 2002, the task ahead i s daunting. Current access to piped water infrastructure i s among the lowest in the world at around 18%, and because o f poor operation and maintenance (O&M) the water service reaches an even lower share o f the population. A vast majority o f urban dwellers draw small quantities o f water from generally unsafe boreholes and open wells, springs or streams. According to the National Risk and Vulnerability Assessment (NRVA) which surveyed about 6,000 households in urban areas in 2005, sources o f supply can be broken down as follows: handpumps: 42%; open wells: 34%; piped water: 18%; and springs and surface water: 6% .

3 , A sewerage system serves few apartment complexes in Kabul and covers less than 2% o f its population; wastewater i s only partially treated before being discharged o f f in the Kabul River. Septic tanks and vault latrines are not emptied regularly because of lack o f suction trucks and as a result, septage spills over in drains. The vast majority o f households rely on pit latrines. A rapidly declining share of the night soil produced i s used by farmers. Intermittence o f the piped service, inadequate water treatment and contamination of groundwater result in a precarious sanitary situation. Large quantities o f solid waste are not collected and often pile up in streets. There i s no specific facility to handle hazardous/medical waste.

4. The Central Authority for Water Supply and Sewerage (CAWSS) under the Ministry o f Urban Development (MOUD) i s responsible for the piped water supply and sewerage (WSS) service'. CAWSS

' CAWSS i s currently serving the following cities: Kabul, Herat, Kandahar, Mazar-i-Sharif, Jalalabad, Kunduz, Taluqan, Ghazni, Gardez, Qalat, Mehterlam, Charikar, Qala-i-Now, and Sheberghan. In addition, operations are expected to begin during 2007 in Pul-i-Khumri, Maimana and Zaranj. See Map No. 34686 in Section I.

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i s a centralized authority, but due to communication difficulties wi th provincial towns during the period o f conflict, i t s regional operations have acquired a certain degree o f autonomy. There i s no clear jurisdiction over point water supplies and on-site sanitation and several functional gaps and overlaps exist between CAWSS, and municipalities; the latter usually handle solid waste collection and on-site sanitation through local Department o f Sanitation (DOS). Current institutional arrangements do not allow for a clear separation o f policy, supervisory and operational roles.

5. In 2005, CAWSS employed about 700 staff, o f which 400 in Kabul. However, because CAWSS salaries cannot compare with that offered by NGOs and the private sector, qualified managers and staff can neither be retained nor be attracted. CAWSS operational, commercial and financial performance i s s t i l l very poor and most o f i t s branches, including Kabul, recover no more than 25% o f O&M costs from sales revenues. A tar i f f increase was recently approved, but collections s t i l l remain very low, partly due to the inadequacy o f the service provided; however, recent household surveys showed that users would be wi l l ing to pay for water service, which often ranked as their top priority. Under the Afghanistan Reconstruction Trust Fund (ARTF) funded WSS project (Annex l), a Financial Support to Operations (FSO) was put in place in mid-2005 to help CAWSS complement i t s collection o f user charges to meet current O&M expenditures, allow payment o f salaries and energy bills on a more regular basis, and improve overall operational and commercial performance.

A. 2. Government Response and Sector Development Strategy

6 . The Government i s considering urban WSS as a top priority and indeed it i s the largest component o f the Urban National Priority Program. MOUD has prepared a Short-Term Program (STP - 2005-07) and i s finalizing a Medium-Term Program (MTP - 2007-1 1) to channel efforts by donors who support the sector. The urban WSS sector has also been identified as a priority in the Interim Afghanistan National Development Strategy (I-ANDs) o f January 2006 presented at the London Donor conference o f February 2006; in particular as part o f i ts effort to meet the Millennium Development Goals (MDG), the Government envisages that 50% o f households in Kabul and 30% o f households in major urban centers wi l l have access to piped water by 2010. In 2003-2005, a total o f about US$50 mi l l ion have already been invested for emergency rehabilitation projects in the urban WSS sector, mostly financed by the German Development Bank (KfW), IDA, USAID, JICA and ARTF. Despite a diff icult working environment, encouraging results are being achieved in Kabul and 12 provincial towns; also, implementation capacities have been built both in M O U D and CAWSS.

7. In late 2005 and early 2006, the Government took major steps on the policy and institutional fronts wi th the announcement o f i t s Urban WSS Sector Policy (Annex lo), Urban WSS Sector Institutional Development Plan (IDP - Annex 11) and the Presidential Decree to corporatize CAWSS (Annex 12). According to the Sector Policy, the Government’s vision for the urban WSS reads: “The urban water supply and sanitation sector shall be reformed and developed to improve the quality of life in all urban communities. By ensuring an equitable provision ofpotable water and wastewater services at an affordable cost and on a sustainable basis, poverty w i l l be reduced, health generally improved and economic developmentpromoted”. The main objectives and implications o f the Sector Policy are to: (i) improve sustainable access to safe drinking water and basic sanitation in accordance with the MDG; (ii) provide the basis for the adoption o f technical standards and delivery mechanisms, to suit the needs o f urban and peri-urban settlements; (iii) prepare for the decentralization o f service delivery f rom one central authority to local autonomous entities and provide for community consultation and involvement and the participation o f civic organizations and Non-Governmental Organizations (NGOs); (iv) ensure improved O & M o f the WSS infrastructure; and (v) place emphasis on full cost recovery and the financial sustainability o f the service providers.

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B. BANK RESPONSE AND STRATEGY

B. 1. Transitional Support Strategy Framework

8. In its “Transitional Support Strategy” for Afghanistan, IDA identified WSS as a priority. IDA has been one o f the key actors in the sector since 2003 through the Emergency Infrastructure Reconstruction Project (EIRP), the urban WSS ARTF Short-Term Project (Annex l), various technical, institutional, legal studies and consensus-building activities (Annex 8). The Government has indicated that it wishes IDA to play a lead role in coordinating assistance to the urban WSS sector. IDA i s thus ideally positioned to support the urban WSS MTP. As institutions are progressively being strengthened, it i s estimated that the sector could possibly absorb an investment program o f about US$200 million during the 2007-1 1 period. However, to date only about a third o f this amount has been committed by donors, mostly the German Development Cooperation and IDA. The Government would expect additional contributions form other major donors such as the US (USAID), Japanese (JICA) cooperation agencies and ARTF, for extension o f existing and construction o f new urban WSS systems in Kabul and provincial cities and for assisting the institutions.

B. 2. Mobilization of External Resources and Coordination Mechanisms

9. activities in the urban WSS sector, notably by: (i) financing a full-time urban WSS advisor in MOUD; (ii) supporting several stakeholder workshops; and (iii) coordinating with the main donors notably the German Development Agencies and USAID. The proposed project has been jointly appraised and will be jointly supervised with the German Development Bank (KfW) - a main donor still active in the sector after 2005. Table 2 in Annex 1 provides a summary o f past and current donor support to the UWSS sector.

Since 2002, IDA has been actively supporting the Government in its efforts to coordinate donor

B. 3. Lessons from Earlier Experience in Afghanistan and Similar Countries

10. The lack o f Government capacity to design and implement projects has been the most critical constraint affecting this and other sectors and temporary measures, such as the provision o f Project Implementation Units (PIUs), staffed by foreign consultants, have proven to be unsustainable. While there will be a continuing need for extensive Technical Assistance, the proposed project aims to reach sustainability by: (i) moving from a simple project to a more comprehensive sector approach; and (ii) investing in the development of the capacity o f permanent institutions staffed by Afghan nationals to whom adequate training and financial incentives to perform would be provided.

B.4. Rationale for Bank Involvement

1 1. The Government gives a high priority to IDA involvement in the urban and urban WSS sectors. Because o f i t s strong in-country presence and development leadership in several other sectors, IDA i s well positioned to foster donor collaboration in the urban WSS sector and help accelerate urban development. IDA i s already supporting several projects in the urban sector: (i) the US$25 million Kabul Urban Reconstruction Project (KURP) under implementation; (ii) the US$4 1 million Short-term Urban WSS Project (financed by ARTF) under implementation finances WSS investments in Kabul and 12

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provincial towns; and (iii) an Urban Waste Management Project (UWMP), under preparation. The Urban Water Sector Project will complement these activities, a l l aimed at improving living conditions in cities that are fast becoming a main engine o f economic growth.

C. DETAILED PROJECT DESCRIPTION

C.l. Project objectives

12. The project objectives will be to initiate actions to: (i) transform CAWSS into a technically viable operation; (ii) establish the financial sustainability o f the Afghan Urban Water Supply and Sanitation Company (AUWSSC - CAWSS’ successor); (iii) increase access to and reliability o f the water supply service in Kabul; and (iv) prepare a follow-up project under which more substantial institutional and financial objectives could be achieved and coverage further expanded in Kabul and provincial towns.

C.2. Project Description

13. To achieve the above objectives, the proposed project wi l l include three main components (details in Annex 2): (i) institutional development o f AUWSSC; (ii) financial support to AUWSSC operations; and (iii) an extension o f the Kabul water supply system. The proposed project will be financed in parallel by KfW and GTZ.

C.2.I. Component I - Institutional Development of AUWSSC

14. Corporatization ofAUWSSC. The Institutional Development Plan (IDP -Annex 11) plans to transform CAWSS into a public corporation, owner o f the urban WSS assets and responsible for their development and for the overall quality o f the WSS service provided in urban centers. The Presidential Decree (Annex 12) to create AUWSSC that wi l l replace CAWSS was signed on January 25,2006. AUWSSC wil l be managed by a Board o f Directors appointed by the Ministry o f Finance (MOF) and M O U D . The Board will l ikely include representatives o f MOF, MOUD, Ministry in charge o f Water Resources, representatives of Local Governments, representatives o f domestic customers, businesses and/or other key stakeholders. Consultants to assist in the corporatization o f AUWSSC, financed by the Public Private Infrastructure Advisory Facil ity (PPIAF), are expected to mobilize by August 2006 and to complete their assignment by August 2007. MOF and MOUD have already established the Working Group, as requested by the Decree, to carry out the init ial steps required for transforming CAWSS into AUWSSC. Apart f rom being the main counterpart to the above corporatization consultants, the Working Group w i l l act as interim Board o f Directors and select AUWSSC Management and Technical Assistance teams (paras. 18 and 19). It has been agreed that CAWSS will be fully corporatized, Le., i ts statutes approved, i t s Board o f Directors appointed and i t s Management Team appointed by December 3 1,2006.

15. AUWSSC’s Role as Asset Holding Company. AUWSSC wil l eventually sub-contract the provision o f the WSS service to public (or private) operators and monitor their performance. MOUD preferred medium term institutional arrangement are: (i) Kabul (andpossibly Herat, Mazar, Kunduz/Taluqan): sub- contract operations to a locally incorporated private operator with a majority share held by an international professional operator; (ii) Kandahar, Jalalabad (andpossibly Herat, Mazar, Kunduz/Taluqan): sub-contract WSS operations to autonomous local public operators as (or if) the private sector i s unlikely to be interested in operating in these cities; (iii) 11 smaller centers with existing networks: s t i l l have the WSS service provided by AUWSSC, as the local capacity i s unlikely to be

4

sufficient to support an autonomous local public operator; and (iv) 17 new small centers: develop WSS systems and manage service under “Design, Build, Operate - DBO” schemes with local private companies or NGOs or by AUWSSC itself. During an interim period however, WSS operations in large cities will be run by decentralized Strategic Business Units (SBUs) that will still be part o f AUWSSC.

16. Memorandums o f Understanding (MOUs). I t has been agreed that a draft standard MOU will be submitted to IDA for review not later than June 30,2007 and that al l MOUs between AUWSSC/HQ and SBUs will be signed not later than June 30, 2008. The MOU, in principle signed for a five-year period between AUWSSC/HQ and a SBU, will clarify: (i) the investment program AUWSSCMQ i s committed to implement and the additional production and distribution capacities to be created; (ii) the minimum service standards the SBU will have to be achieve (water production, water sales, permanence o f service, pressure, metering, billing and collection.. .); (iii) the minimum financial standards (working ratio, accounts receivable.. .) the SBU will have to achieve; (iv) the financial assistance AUWSSC i s committed to provide to complement revenue from user charges (paras. 23 and 24); and (v) the format and the frequency o f the reporting by SBU on their technical, commercial and financial operations to AU W SSC/HQ.

MOU between AUWSSCZYQ and SBUs. AUWSSC headquarters (HQ) and SBUs will enter into

17. AUWSSC’s Role as Implementing Agency. AUWSSC/HQ will eventually become an Asset Holding Company (AHC), mostly responsible for developing urban WSS infrastructure. I t wi l l be a lean company, with only two small technical and financial departments. Establishing AUWSSC project implementation, procurement and financial management capacity i s one o f the project objectives that will be achieved by assisting in the recruitment o f managers and providing technical assistance and training. Before the end o f the project however, financial management functions will still have to be performed with the support o f the Special Disbursement Unit (SDU) o f the Treasury Department, MOF. Because AUWSSCiHQ cannot yet fully play the role o f implementing agency, Le., carry-out procurement and financial management operations, IDA wil l not enter into a Project Agreement with AUWSSC.

18. AUWSSCManagement Team. As part o f the corporatization process, the following AUWSSC management team will be recruited: (i) General Manager; (ii) Technical Manager; (iii) Financial Manager; (iv) WSS Operation Officer in charge o f assistance to smaller towns, and (v) heads o f the following six SBUs: Kabul, Mazar, Jalalabad, Kandahar, Herat, KundudTaluqan. The AUWSSC management staff will be competitively recruited after local and international advertisement; they will be offered fixed term contracts for an initial two-year period (with a possibility o f extension) that will clearly specify the performance to be achieved as well as a “market based” compensation package that will include a salary and a significant bonus (say up to 30% o f the salary) if contractual objectives, in particular bill collection, are achieved. The Working Group will follow a recruitment procedure similar to the Bank “Selection o f Individual Consultants” procedure. The selection o f each staff, hidher individual contract including salary and maximum bonus and the performance indicators against which the bonus may be paid will be submitted to IDA for review and no objection. I t has been agreed that that AUWSSC/HQ key managers will be recruited by December 3 1,2006 and that al l other AUWSSC/HQ and SBU management staff will be fully recruited by December 3 1, 2007, at the latest.

19. Technical Assistance to AUWSSC. Table 1 summarizes the Technical Assistance (TA) arrangement agreed upon with MOUD, CAWSS and the German Development Cooperation. TA to the SBU o f Kabul, Herat, and Kundun‘Taluqan wil l be provided by the German Development Agencies (KfW and GTZ) for an initial period o f two years, with the possibility o f extension to three years or more, depending upon the outcome o f the selection of a private operator (para. 20). IDA will finance (i) a Senior Technical Advisor to AUWSSC General Manager (36 months), with a strong background in planning, project design and implementation, procurement and capacity building o f counterpart technical managers and engineers; (ii) a Senior Financial Advisor to AUWSSC General Manager (36 months), with a strong background in

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utility commercial operations, accounting, financial management and reporting, general administration and capacity building o f counterpart financial managers and accountants; the Senior Financial Advisor wi l l also be responsible for the coordination o f the training program for AUWSSC and SBU staff; (iii) a WSS Operation Advisor based in Mazar (36 months) with a strong background in operations o f a WSS utility and capacity building o f counterpart staff to assist SBU o f Mazar and AUWSSC operations in North/Center that cannot be transformed into SBU; and (iv) a WSS Operation Advisor based in Kabul (36 months) with a strong background in operations o f a WSS utility and capacity building o f counterpart staff to assist SBUs o f Kandahar and Jalalabad and AUWSSC operations in South/East that cannot be transformed into SBU.

Agency or Medium Term Interim TA Needs

MOUD Re-establishment o f MOUD’s WSS 1 Sr. Policy Advisor department to carry out i t s policy, + visiting specialists coordination and regulatory functions

Management, Financial Management, Administration, Environmental/Social Safeguards, Training Coordination

Kabul, Management M O U with SBUs At least 3 Operation Herat (West), Contract with Advisors Kunduz (N.-East) Private Operator Mazar (North) Management M O U with SBU 1 Operation Advisor

City 0 bj ectives Arrangements

AUWSSC Planning, Procurement, Project 1 Sr. Technical Adv.; 1 Sr. Financial Adv.

Contract with Private Operator

Kandahar (South), M O U with M O U with SBUs 1 Operation Advisor Jalalabad (East) SBUs

Smaller centers Integration in AUWSSC Covered by above regional SBUs operation operation advisors

according to location

Financing Source

ARTF project + German Cooperation IDA project

German Cooperation (KfW, GTZ) I D A Project

I D A Project

IDA Project

20. Technical Assistance to MOUD. Support to MOUD to develop i t s Urban Water Supply and Environmental Sanitation Department and carry out i t s policy, regulatory and coordination roles, as per the sector policy and IDP, i s provided under the ARTF financed UWSS project (Annex 1) until end 2008.

2 1, Public Private Partnership. The IDP envisages, for i t s second phase o f implementation, the possibility o f Public-Private Partnerships (PPP). Early in 2005, M O U D (with PPIAF support) organized a market sounding among international operators to check their interest in a Management Contract (MC) for Kabul and the other cit ies listed above and to identify the guarantees to be put in place to arrive at an arrangement satisfactory to all parties. While a few operators seemed to be interested, the Government wi l l know what can actually be implemented only when bids are open. The project will finance the services o f a consulting firm to assist AUWSSC design a realistic PPP and select an operator; this consulting firm i s expected to mobilize early in 2007. Based on experience in similar projects: (i) operators could be pre-qualified by June 2007; (ii) bidding documents could be distributed by September 2007; (iii) a final bid evaluation report could be cleared by June 2008; and (iv) an operator could mobilize by September 2008. I t would not be realistic to envisage that an operator could mobilize earlier than

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about September 2008. The Management Contract itself would be financed, if necessary, under a follow- up project.

22. Other Consultancies, Audits, Training. In addition to the above, the project will finance (see details in Annex 2): (i) up to 24 man months o f visiting specialists to assist AUWSSCLIQ and SBUs in the drafting o f operation, procurement, accounting and financial management procedures, commercial activities, social and environmental management, and for advising on human resources development and training activities; (ii) social surveys, tariffstudies, services to the poor, consultation and communication: to prepare future projects in Kabul and other cities, including options to serve the poor and informal settlements, customer surveys, willingness to pay assessments, stakeholder consultation and communication campaigns; (iii) feasibility studies, detailed designs and bidding documents for future projects in Kabul (water and wastewater) and other urban centers, including assessments o f social, environmental and water resource development issues; (iv) audits o f AUWSSC/HQ and each SBU financial statements; and (v) training abroad: focusing mostly on planning, project management, procurement, commercial management, accounting and financial management, and in Afghanistan: for AUWSSC/HQ and SBU WSS operational staff focusing on plant management, network operation and plumbing. An updated training program wil l be submitted by AUWSSC to IDA for review every six months; it wi l l include the names and functions o f staff to be trained, the content o f the proposed training and the proposed budget. It has been agreed that a f i r s t training program will be presented not later than June 30,2007.

C.2.2. Component 2 - Financial Assistance to AUWSSC

23. AUWSSCSltort Term Performance Improvement. The second main objective o f the project i s to initiate actions to establish AUWSSC financial sustainability. The Financial Support to Operations (FSO) sub-project financed by ARTF i s now generating data on the number o f bil led connections, sales, production, operating costs and revenues for each of CAWSS operations and headquarters. However these data are s t i l l based on a limited period o f time o f about six months and cannot yet be considered as fully being representative. Annex 2 includes a rapid analysis o f AUWSSC current and future performance and suggests reasonable improvement targets as wel l as needed tar i f f adjustment and needed financial support to AUWSSC operations. Recommendations o f Annex 2 are summarized in Table 2.

Table 2: Summary of Performance Objectives, Tariff Adjustment and Financial Support

Figures for 2005 apply to a 6 month period.

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24. Financial Support to AUWSSC Operations. I t has been agreed that: (i) AUWSSC wil l be entitled to claim the reimbursement o f 45%, 30% and 15% o f reasonable2 operating expenses upon presentation o f Statements of Expenditure (SOE) detailing eligible bills (energy, chemicals, parts, small repair contracts for regular maintenance, operating costs, etc.) and salary slips o f non managerial staff, this within the limit o f US$1.90 mill ion, US$1 SO mil l ion and US$1 .OO mil l ion equivalent in years 2007 (matching Afghan year 1387), 2008 (matching Afghan year 1388) and 2009 (matching Afghan year 1389) respectively.; (ii) claims for advances to AUWSSC wil l be approved based on a satisfactory cash forecast, submitted at the beginning o f each quarter for the three months to come and providing a detailed SOE for the expenses paid from the prior quarter’s advance; any unspent advance from the previous quarter will be deducted from the subsequent quarter’s advance. I t was similarly agreed that adjustment for the financial support for each period o f 12 months will be made on the basis o f justifications submitted not later than three (3) months after the end o f the 12-month period; (iii) AUWSSC wil l be entitled to claim the reimbursement o f the salaries paid to i t s management staff (para. 18) upon presentation o f salary slips and within the limits o f US$0.30 mi l l ion equivalent per year in years 2007 (matching Afghan year 1387), 2008 (matching Afghan year 1388)and 2009 (matching Afghan year 1389) respectively ; (iv) AUWSSC wil l be entitled to claim the reimbursement o f the bonus paid to i t s management staff with the limit o f US$O. 10 mi l l ion equivalent per year in years 2007 (matching Afghan year 1387), 2008 (matching Afghan year 1388)and 2009 (matching Afghan year 1389)respectively; (v) external auditors will be requested to undertake an audit and confirm every six months that (a) AUWSSC operating expenses, and SOE claims for reimbursement, are “reasonable”, i.e., in line with international good practice and supported by available records (source documentation) ; (b) AUWSSC management staff for whom payment o f salaries i s requested have been active in their position for the full duration for which the reimbursement i s claimed; and (c) the payment o f bonus to AUWSSC management staff i s justif ied by the achievement o f the performance specified in their contract.

25. TariffAdjustment. Improving AUWSSC Working Ratio i s unlikely to be achieved simply by improving commercial operations (metering, billing and collection) and reducing operating costs, such as pumping costs, and by reducing physical leaks. Thus, it wi l l be necessary to envisage increasing the average revenue per cubic meter (m3) o f water bil led and collected. Based on the above assumptions made for key performance indicators, this would require raising the average revenue per m3 bil led and collected to about Afg 7.0/m3, Afg 8.5/m3 and Afg 10.0/m3 in 2006, 2007 and 2008 respectively; these figures have to be.compared with an estimated average tar i f f o f about Afg 5.0/m3 in 2005 and (probably) 2006. It has been agreed that AUWSSC wil l take measures necessary to ensure that i t s O&M costs are covered by the total o f the above financial support and i t s own collection o f user charges.

26. Adjustment of the Financial Support. It has been agreed that a review, and if necessary a revision, of the amount and conditions o f the financial support to be provided to AUWSSC will take place after six (6) months o f operation, when more reliable operating data are available (see results monitoring indicators in Annex 8).

C.2.3. Component 3 -Extension of the Kabul Water Supply System

27. The third objective o f the project will be to increase access to and reliabil i ty o f the water supply service in Kabul, by developing the f i rst phase o f the Logar I1 scheme. This scheme was selected on the basis of the KfW-financed Feasibility Study for the Expansion o f the Kabul Water Supply System o f January 2004, which identified it as a priority. The same scheme had been appraised by IDA in 1978

“Reasonable” i s defined as being in line with international good practice. Technical auditors wi l l in particular check that unit costs o f inputs (energy, fuel, chemicals, parts.. .) charged to AUWSSC are consistent with international prices and that quantities are realistic.

8

(Staff Appraisal Report for Kabul Water Supply and Sewerage Project), but i t s implementation was stopped by the Soviet invasion o f December 1979. Eventually, the project i s expected to increase piped water coverage from the current 0.50 million people (or 14% o f a total current population o f 3.5 million in 2005) to a total o f 1.1 mill ion people (or about 24% o f a population o f 4.5 mill ion in 2010), o f which 1.0 million through direct connections. Table 3 below summarizes the articulation o f the proposed project with the ongoing STP - supported by ARTF, K f W and USAID - and the second phase o f the MTP, for which financing remains to be secured.

Table 3: Main Areas of Emphasis under the Short-Term and Medium-Term Programs

Investment

i) Rehabilitation and initial expansion in Kabul and 13 provincial cit ies

ii) Development works in 3 new PTs i) Expansion o f Kabul water supply (Logar I1 scheme)

(PTs)

i) Expansion o f Kabul water, sewerage and wastewater treatment ii) Water resources development in 3 main PTs iii) Development works in up to 15 new PTs

Operations

i) Operational support and operating subsidies (FSO) for 14 PTs

i) Harmonized operation support across 14+3 PTs ii) Creation o f up to 6 SBUs iii) 75% O&M cost recovery in SBUs

i) AUWSSC functioning as an asset holding company, supervising contracts with SBUs iii) Full O&M cost recovery

Institutions

i) Sector policy and institutional development Plan (IDP) ii) Preparation activities to establish AUWSSC

i) Support to AUWSSC ii) Transfer o f macrorayon WSS systems to AUWSSC, for operation by Kabul SBU iii) Mobilisation o f private operator in Kabul and potentially 4 PTs i) Program to support regionalization o f SBUs ii) Potential separation o f up to 6 SBUs

28. Logar ZZ Water Supply Scheme. The Logar I1 scheme includes the development and equipment of a well field in the Logar aquifer located South o f Kabul, the construction o f a transmission line to the main reservoir E and the construction o f distribution network in a part o f the city that i s currently not served by CAWSS. IDA wi l l finance the supply and laying o f pipes for: (i) the collectors o f the well field (1 1.7 km pipes diameter 200 to 600 mm ductile cast iron -DCI); (ii) the transmission main (1 1.6 km diameter 800 mm DCI or steel); (iii) the extension o f the distribution network (34 km pipes diameter 200 to 800 mm DCI and 142 km pipes diameter 60 to 150 mm uPVC); and (iv) the construction o f 15,000 new connections, 60 public taps, 80 f ire hydrants and the supply and installation o f 16,000 meters.

29. KfW, who wil l be financing the project in parallel, including drilling o f the boreholes, electric and pumping equipment and reservoir E, have confirmed their level o f commitment for US$11.6 million equivalent for 2006-07 and US$12.9 mill ion equivalent for 2007-08. When the ARTF financed project was appraised, it was agreed that engineering consultants Beller (Germany) financed by KfW would be

9

responsible for the preparation o f the detailed designs, bidding documents, bid evaluation reports and for construction supervision and commissioning o f works for all the water supply projects listed above regardless o f the source o f financing. Beller are experienced engineering consultants with relevant references, including on Bank financed WSS projects. Their terms o f reference (TOR) have been reviewed and found satisfactory. It has been agreed that bidding documents for the IDA financed contracts will be submitted to IDA for review not later than mid November 15, 2006. Contractors are expected to mobilize early in July 2007 and construction to be completed by end 2009.

30. Kabul Sanitation. IDA has funded strategic and feasibility studies for Kabul sanitation, covering solid waste management, on-site sanitation, sewerage and drainage; documents are available in the project f i les . Sanitation investments are not proposed to be addressed under this project as they are, or will be, addressed under parallel projects (Annex I), which focus on improving on-site sanitation services; 98% of the Kabul population re l ies on the latter, including in areas to be served by the project. These projects comprise: (i) the ongoing ARTF-funded Short-Term Urban WSS project that finances investments (including a new sanitary landfi l l and a septage disposal station) and technical assistance to the Department o f Sanitation (DoS); (ii) the ongoing IDA-funded Kabul Urban Reconstruction Project (KURP) that supports upgrading o f low-income areas; (iii) the proposed IDA-funded Urban Waste Management Project (UWMP) that aims at improving the collection, transportation, processing and disposal of municipal s,olid waste and residues from on si te sanitation facilities, particularly in Kabul; and (iv) the proposed Carbon Finance Kabul Municipal and Domestic Waste Composting and Recycling Project. The Urban Water Sector Project will however finance engineering designs for the f i r s t phase o f wastewater investments in Kabul, to be financed under a subsequent project (para. 21).

C.3. Summary Project Cost

3 1. The project will support the f i r s t phase o f the Government’s Medium-Term Program valued at US$64.5 mi l l ion equivalent, including contingencies (Table 4 a). IDA will contribute US$40.0 mi l l ion towards this project cost and the German Development Agencies a total o f about US$24.5 mi l l ion equivalent. Table 4 b summarizes the base costs o f the three main project components to be financed by the IDA Grant and the proposed contingencies. Physical contingencies have been assumed at 7.5% o f base cost for TA, studies, training and financial support to operations and 10% o f base costs for construction. Price contingencies have been calculated using an average 2.5% annual inflation rate. In addition, tax contingencies have bee estimated at about 10% o f the base cost. Altogether contingencies represent about 20% o f the US$40 mi l l ion IDA Grant.

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Table 4 a: Medium Term Program - First Phase: Cost and Financing Plan (US$ million)

Component

Institutional development o f AUWSSC

Financial support to AUWSSC operations

IDA KfWIGTZ Total %

8.2 1.8 10.0 16.0

5.6 0.0 5.6 9.0

Extension o f Kabul water supply system 18.3 I 9.7 I 28.0 I 43.0

Engineering consultant (Kabul water)

Table 4 6: Summary Project Base Cost and Contingencies (US$ million)

9.0 9.0 I 14.0

I I 2007 I 2008

Base cost (as of February 2006)

Physical, price and tax contingencies

Total cost

Management (salaries)

32.1 20.5 52.6

7.9 4.0 11.9 18.0

40.0 24.5 64.5 100.0

I I Physical contingencies on (3) 10.0% 0.55 I 0.64

Price contingencies 2.5%

Tax contingencies

1 .o 4.4 11.0

0.3 0.9 2.3

0.1 0.3 0.7

0.28 0.63 0.89 1.80 4.5

3.13 7.8

-7EpJ-y 0.64

I I I I 40.00 I 100.0 I 1 Total cost

D. INSTITUTIONAL ARRANGEMENTS AND PROJECT IMPLEMENTATION

32. AUWSSC will be the implementing agency for the project. Its Management and Technical Assistance teams are scheduled to mobilize at about the time o f Effectiveness. As an Asset Holding Company, AUWSSCIHQ will mostly be in charge o f project preparation and implementation, financial management and supervision o f the SBUs.

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D.1. Procurement

3 3 , IDA wil l finance consultancies selected and construction contracts procured in accordance with Bank Guidelines (Annex 3).

Selection of Consultants: (i) the four Advisors to AUWSSC Management Team, to be mobilized as soon as the Grant becomes effective, will be selected in accordance with the “Selection o f Individual Consultants” procedure, in accordance with Bank guidelines; (ii) visiting specialists may also be selected according to the same “Selection o f Individual Consultants” procedure; (iii) al l other consultants and auditors will be selected according to either the “Quality and Cost-Based Selection” (QCBS) procedure or the “Selection on Consultants’ Qualifications” (CQS) procedure. Training: Training institutions may be selected based fol lowing the CQS procedure or the Single Source Selection ( S S S ) basis. Procurement of Works and Goods. Contracts for Goods above US$200,000 and Works above US$500,000 will be awarded according to the International Competitive Bidding (ICB) procedure. Contracts below these thresholds may be awarded according the Local Competitive Bidding (LCB) procedure. Goods valued at less than US$lOO,OOO may be procured fol lowing the Shopping procedure. Financial Support to AUWSSC Operations. Expenses to be reimbursed as part o f the financial support to AUWSSC operations will not be subject to procurement guidelines. However, the selection o f AUWSSC management staff, whose salaries and bonuses will be financed by IDA trough this facility wi l l fo l low a transparent and competitive procedure similar t o the “Selection o f Individual Consultants” procedure. Prior Review. All selection o f consultants following the QCBS procedure, a l l individual consultant contracts above US$50,000 and al l consultant contacts awarded according to the SSS procedure wi l l be subject to prior review by IDA. Annex 3 specifies review procedures for other selection o f consultants. All procurement o f Goods above US$200,000 and o f Works above US$500,000 following the I C B procedure will be subject to prior review. Annex 3 also specifies review procedures for other Goods and Works contracts. Procurement Plan. The draft f inal Procurement Plan was reviewed during Negotiations and found satisfactory. The procurement plan wil l be updated annually or as required by the needs o f the project, Developing A UWSSC Procurement Capacity. An individual procurement specialist (to be financed by the ARTF funded WSS project) wi l l be employed by CAWSS/MOUD for an init ial period o f six months prior to Grant Effectiveness to assist the Working Group formed by MOF and MOUD to corporatize CAWSS in their selection o f the four Advisors and the launching o f the procurement activities for the Kabul water supply component. The Technical Advisor to AUWSSC General Manager i s expected to have a strong procurement background and to develop AUWSSC procurement capacity. KfW-financed engineering consultants M/s Beller wil l be responsible for preparing the bidding documents for the works contracts financed by IDA, preparing bid evaluations reports, and finalizing contracts. As these procurement activities are scheduled to take place before AUWSSC i s fully effective, Beller will init ially report to MOUD/CAWSS for these tasks. Procurement Assessment. Despite the strengthening o f AUWSSC procurement capacity described above, the procurement risk i s rated as “high”, in particular because AUWSSC i s not yet created. IDA wil l carry out a close and regular procurement supervision o f the project, in addition to the two regular annual supervision missions.

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D.2. Financial Management, Disbursement, and Audit

34. Financial management and disbursement arrangements (including schedule and timetable) are detailed in Annex 4 and summarized below:

A UWSSC Financial Management Team. CAWSS financial management capacity under the ARTF financed project i s weak. AUWSSC Financial Manager and the Senior Financial Advisor are expected to mobilize by end 2006 and early 2007 respectively. It has been agreed that al l accounting staff for AUWSSCiHQ and SBUs will be mobilized by December 3 1,2007. Under existing F M arrangements (ARTF-UWSS funded), FSO consultants and counterpart Chief Financial Officer (CFO) at MOUD will continue to provide support til l the transition i s complete and AUWSSC demonstrate an acceptable level o f sustainability to manage its financial affairs independently. AUWSSC Opening Balance Sheet. The Senior Financial Advisor will be in charge of: (i) finalizing AUWSSC opening balance sheet, including the inventory o f land, property and fixed/operating assets (to define level o f capitalization) as well as AUWSSC rights and liabilities; and (ii) updating the financial analysis o f AUWSSC operations based on the new salary scale and the three-year investment program, including an estimation o f working capital and operating subsidies. It has been agreed that AUWSSC will submit to IDA for review a first report prepared by i t s auditors o f i t s corporate financial statement not later than six months after the closing o f i t s fiscal year ending on March 21, 2008. Funds Witlzdrawals. AUWSSC will be a Budget Unit under the National Budget Framework with powers to withdraw hnds or request payments from MOF. The signing o f a Disbursement Protocol between the Treasury Department o f MOF, MOUD and AUWSSC General Manager will be a condition o f first disbursement. After Effectiveness and AUWSSC incorporation, AUWSSC will be able to seek funds, request payments for contractors, suppliers and consultants, and obtain monies based on Cash Forecasts supported by Statement o f Expenditures (SOEs) from the designated account, which will be under the control o f the Special Disbursement Unit (SDU) o f the Treasury. Oversight by FSO consultants will continue until the corporatized AUWSSC has adequate FM systems and procedures in place. Financial Assistance to AUWSSC. Financial support to AUWSSC operations wil l be provided on a basis similar to that o f the ongoing FSO o f the present ARTF financed project. Disbursements under this component will be made based on a calculation o f a percentage o f reasonable operating expenses on a declining basis i.e. 45%, 30% and 15% for first, second and third year respectively on a quarterly basis as an advance (para. 22). The subsequent quarterly advance will only be disbursed upon acquittal o f the previous advance and submission o f any pre-agreed supporting SOEs or documents. The Disbursement Protocol between AUWSSC, MOUD and the Treasury Department o f MOF will outline the procedures for requesting the advance and acquittal o f the same thereof. Financial Management System. AUWSSC will establish adequate Financial Management Systems (FMS) to produce quarterly Financial Management Reports (FMRs) to IDA, pertaining to al l sources and application o f funds under the project. AUWSSC will undertake monthly and annual reconciliations of expenditures with Treasury. A KfW financed TA, expected to start in the third quarter o f 2006, wil l support the Kabul SBU and streamline i t s operations and FM. AUWSSC will harmonize FMS set up in the three SBUs supported by KfW and GTZ with that established for AUWSSC/HQ and the three other SBUs supported by the project. As part o f the training program supported by the project, on-the-job training wil l be provided to AUWSSC/HQ and SBU staff. Specific FM functions for which capacity needs to be built are listed below: (i) accounting based on international standards and compatible with the requirements of a WSS utility; (ii) formats for SBU financial statements and reporting to HQ; (iii) data and forecasts for F M such as inventory, assets, debt and liquidity; (iv) financial Management Information System (MIS) including monitoring o f

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actual performance against targeted performance and budgets; (v) monitoring o f billing and collection; (vi) financial analysis, cost calculation and cost control; and (vii) monitoring o f O & M expenses and service contracts. Audits. Accounting for IDA financed projects i s centralized in the Treasury Department o f MOF, which i s responsible for preparing annual financial statements and getting them audited by the newly created Internal Audit Department within MOF. I t has been agreed that AUWSSC wil l appoint independent external auditors, with TORs acceptable to IDA, for auditing i t s corporate financial statements and claims for reimbursement under the Financial Support component not later than June 30, 2007. The Government has committed to submit the TORs to IDA for review not later than August 15,2006. FM Risks. The Financial Management risk rating for the project i s expected to be “high” for similar reasons as that exposed for the procurement function. As a risk mitigating measure it has been agreed during Negotiations that the Financial Management Consultants (ARTF-funded FSO at CAWSS, ARTF-funded counterpart CFO at MOUD, PPIAF-funded corporatization consultants) wi l l continue to provide support until AUWSSC achieves an acceptable level o f sustainability in financial management activities.

0

0

D. 3. Monitoring and Evaluation

35, A comprehensive monitoring system tracking technical, commercial and financial indicators has been put in place in CAWSS under the FSO component o f the ARTF-urban WSS project (see operational manual and database in project files). Monitoring and Evaluation (M&E) o f the performance o f the urban WSS sector wi l l be carried out at two levels by MOUD and by AUWSSC (Annex 1 l), and will build upon the systems established under FSO. It has been agreed that M&E arrangements will mostly track the commercial, financial, commercial, and service performance (Annex 8) as described below and that annual M&E reports wi l l be submitted not later than six months after the end o f the fiscal year, starting with the fiscal year ending on March 21, 2007. AUWSSC wil l be responsible for data collection and will report to i t s Board and to the MOUD (WSS Department)

Commercialperformance per S B U (and other AUWSSC operations): (i) number o f total and billed connections: per category o f customer; (ii) population served and service ratio; (iii) production, and sales (m3iyear); (iv) metering, billing and collection (m3/year and Afg); and (v) N o n Revenue Water (YO). Financial Performance per S B U (and other AUWSSC operations and A U W S W H Q ) : (i) operating costs: electricity, fuel, chemicals, parts, maintenance (Afg); (ii) staff costs; salaries and bonus (Afg); (iii) management costs: salaries and bonus (Afg); (iv) revenues per SBU per category o f customer (Afg); (v) accounts receivable per category o f customer (days o f billing); and (vi) Working Ratio (%). Service Performance per SBU/other operations: (i) per connection and per capita production and sales (liters per capita per day - lpcd); and (ii) percentage o f samples tested meeting residual chlorine standards (%).

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E. PROJECT BENEFITS AND R I S K S

E.l. Project Benefits

36. Economic Analysis. A proper economic analysis o f the proposed project should be based on the assessed willingness to pay o f customers, or the capital and O&M costs o f existing water supply arrangements that wil l be replaced by a well functioning piped water service. I t should also factor in the cost of externalities, such as the collection and disposal o f incremental quantities of waste water generated, that would add to the project costs, and improved public health, time saving and protection o f the Kabul aquifers, that would add to its benefits. Since reliable data are not available, the analysis carried in Annex 2 for the extension o f the Kabul water supply system i s merely an estimate o f ratio based on financial data. As part o f this analysis, estimates o f the Average Incremental Cost (AIC) o f water, Financial Internal Rate o f Return (FIRR) and Financial Net Present Value (FNPV) have been carried out. This analysis can be summarized as follows: (i) AIC: for a discount rate o f lo%, the AIC i s estimating at Afg 35/m3 (US$0.70/m3); this figure i s rather high, but comparable with those that are estimated in, for example, African countries where the water supply service conditions are comparable to that o f Kabul (high capital costs, low consumption); (ii) Financial IRR: a FIRR o f 5.6% has been estimated on the basis o f an average revenue per m3 collected evolving from Afg 5/m3 in 2005 to Afg 1 O/m3 in 201 0 and thereafter increasing at an average rate o f 15% per year until it reaches Afg 35/m3 in 2020; and (iii) Financial NPV: based on the above revenue stream, the FNPV would be negative at minus Afg 1,430 million (US$28.6 million) for a discount rate o f lo%, with a switching value for the discount rate at 5.6%.

37. Least Cost Analysis. The design o f the Logar I1 scheme, and in particular the elevation o f the main reservoir E (that i s consistent with that o f existing reservoirs), has been checked against the “least cost solution” criteria. I t has been concluded that the complexity o f managing a distribution network with several pressure zones would offset potential savings o f only about US$20,000 per year on pumping costs, However, a higher residual pressure in the distribution network will require implementation o f a thorough leak management program; accordingly: (i) the new distribution network to be developed under the project i s being designed on this basis; and (ii) the TOR o f the technical assistance team to the Kabul SBU (to be financed by the German cooperation) have been complemented to ref lect this concern.

38. Social Benefits. While reliable willingness to pay data are not yet available, several surveys carried out in Kabul have shown that access to piped water supply i s consistently ranked among households’ top preferences for development projects. A survey carried out in 2003 by KfW in the Taimani area where the distribution system i s proposed to be developed under the project, piped water supply i s the first priority for both male and female respondents (61% female and 48% male for water supply; vs. 17% female and 28% male for power supply). Access to piped water supply i s expected to benefit more women and children who play a major role in collecting and storing water for domestic use. The cooking and cleaning o f the household are almost entirely female chores across a l l wealth groups, and so i s child care and training o f children in personal hygiene. In addition, the focus under this project on making the water providers technically and financially sustainable wil l enable a faster expansion o f reliable and affordable piped water services to the vast majority who are currently unconnected, either through the expansion o f the piped network, or through the provision o f temporary on-site services (e.g. water kiosks, tanker service) drawing water from an expanded and more reliable trunk system (Annex 6). According to several health surveys, the prevalence o f water borne diseases in Kabul i s among the highest in the world; the project i s expected have a significant positive impact on this social aspect also.

15

39. Environmental Benefits. Recent groundwater studies, carried out by the U S and German hydro- geological surveys, have highlighted the alarming situation o f the shallow aquifer underlying Kabul that i s used by more than 75% the population as the sole source o f drinking water, including in the areas to be served under the project. Groundwater levels are fast declining (minus 10 meters in recent years) and more wells are going dry every year. 70 % o f al l wells are polluted by fecal bacteria, and one quarter by E.coli. 75% o f shaft wells and 50% o f piped water and wells with hand pumps are polluted by fecal bacteria. Hal f o f a l l samples are above WHO limit for nitrate and all samples for borate; 85% o f groundwater i s too hard. The deeper aquifers around Kabul that are used by CAWSS are also under threat from an uncontrolled urban development. The project i s expected to yield environmental benefits by: (i) improving CAWSS O&M , which should be translated in improved quality o f piped water supplied; (ii) expanding the distribution network to provide a safe substitute to contaminated groundwater in newly served areas; (iii) establishing a strict protection o f the Kabul main aquifers; and (iv) preparing a long-term strategic planning for allocating water among various users o f the Kabul region in an environmentally sustainable manner. As indicated in para. 28, issues o f solid and liquid waste management are addressed under separate but fully coordinated projects.

E.2. Project Risks

40. The design o f the proposed project incorporates the lessons learned from on-going IDA supported projects in Afghanistan, particularly with regards to project implementation, procurement arrangements and financial management arrangements. At the same time, the design o f the component reflects experiences from similar technical developments supported by other aid agencies. Nonetheless, there are risks because o f the uncertain socio-economic and administrative situation in Afghanistan. Table 5 below summarizes the main risks and the proposed mitigation measures.

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Table 5 - Risks and Mitigation Measures

Risk Institutional Major delays with CAWS S corporatization

Major changes in AUWSSC ownership

Financial AUWSSC unable to mee i t s O&M costs

Technical and Implementation Coordination wi th other aid agencies

Delay project implementation.

Fiduciary Financial Management

Procurement

Safeguards Protection o f Logar aquifer

Land acquisition and resettlement

Mitigation Measures

0 PPIAF financed consultant to work under intensive Government and Bank supervision. IDA may exercise remedies if AUWSSC i s not fully “corporatized” by December 3 1, 2006, i.e. if its statutes are not approved, i t s AUWSSC Board o f Directors not appointed and i t s Management Team not mobilize( However, before taking any action IDA would request the Government to submit an action plan for completion o f the incorporation o f AUWSSC fo discussion with IDA.

0

0 The practicality o f ownership o f AUWSSC shares by MOF and MOUD and o f “floating AUWSSC shares”, as referred to in the Presidential Decree wil l be reviewed as part o f the CAWSS corporatization study and, if needed, revisited. IDA may exercise i t s remedies under the Financing Agreement if the Government sells shares o f AUWSSC to private interests without prior consultation with IDA.

0

0 Strong financial incentives to Management team to meet collection target, agreed in MOUs; Government commitment to gradually adjust tariffs; Possibility o f the level o f the Financial Support o f Operation 12 months after Effectiveness.

0

0

0 Excellent collaboration with aid agencies during Project preparation, expected to continue during implementation; Joint project implementation with German Cooperation agencies.

Procurement process underway by Effectiveness; Strong technical assistance to develop implementation capacity.

0

0

0

0 See details on risks and mitigation measures in Annex 4 (Table 1) 0 See details on risks and mitigation measures in Annex 3

0 Groundwater Management and Protection Plan o f Kabul major aquifers prepared not later than June 30, 2007. Polluting activities to be strictly monitored.

0 Detailed framework agreed at Negotiations and land to be acquired by June 30,2006 in accordance with the provisions o f the Project’s Environment and Social Management Framework.

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E.3. Alternatives Considered

41. The original project design envisaged to link project processing to the mobilization o f a private operator for Kabul and other urban centers WSS operations. It was also based on the assumption that a larger IDA allocation (US$SO million) would be available in FY07. Since MOF requested late in 2005 that the IDA allocation for the urban WSS sector be split in two tranches, with a first tranche o f US$40 million to be made available in FY06, the project objectives and components had to be slightly revised. I n particular, the mobilization o f a private operator, if feasible, now becomes an objective o f the project (that could possibly be supported in a sub-sequent operation) rather than a pre-condition, and i s replaced by the strengthening o f public operators with appropriate Management and Technical Assistance teams.

42. The original project design also envisaged to include an on-site sanitation component. The latter has been shifted to the Urban Waste Management Project under preparation (para. 28); this indeed simplifies project implementation, as on-site sanitation i s under the responsibility o f the Municipality o f Kabul. The investment component o f the project had to be limited to Kabul, mainly due to funding constraints. However, from a program perspective, a reasonable balance between Kabul and the Provinces has been achieved until now, with 60% of the combined IDA and ARTF funding (including this project) invested in Kabul, and 40% benefiting 14 Provincial centers (details in Annex 1). From the technical point o f view, the project proposes to develop the only source o f water in Kabul that can be mobilized at a reasonable cost: options for the long term that wi l l be investigated under a separate project would require long transfers and significant pumping heads.

F. ENVIRONMENTAL AND SOCIAL ISSUES AND SAFEGUARDS

43. Environmental andSocia1 Management Framework. As a part o f the socio-economic and environmental assessments conducted during project preparation, an Environmental and Social Management Framework (ESMF) has been developed for the project. The ESMF (see a summary in Annex 5) builds upon the generic safeguard framework developed for emergency operations in Afghanistan and used for all emergency operations, including the ongoing ARTF-financed Short-term Urban WSS Project. The ESMF prescribes specific mitigation and enhancement measures to address the social and environmental aspects o f project interventions, which are reasonably well-defined. In addition, the safeguards screening guidelines have been provided for possible subsequent variations in project interventions or possible additional investments.

44. Environmental Assessment. Operational Policy 4.0 1 “Environmental Assessment” i s triggered, Environmental impacts have been identified and addressed in the Environmental Assessments (EA) and Environmental Management Plans (EMP) which were carried out as part o f the feasibility studies for the expansion o f the Kabul water supply system (funded by KfW) and about 22 provincial towns (funded by IDA and ARTF). Issues of wastewater disposal and treatment have been analyzed under the IDA-funded Strategic Sanitation Plan and Sewerage/Drainage Master Plan for Kabul and the Sanitation Strategy for provincial cities. They w i l l be addressed under the proposed FY07 Urban Waste Management Project (for on-site sanitation) and a possible FY08/09 second Urban Water Sector project (for sewerage), The proposed project wi l l improve existing arrangements for water treatment, water quality monitoring, and importantly the establishment of groundwater protection zones to ensure sustainability o f the resource, Issues o f security o f access to bulk water, inter-sectoral water allocation, conjunctive use o f ground and surface water are being addressed through the strategic study on long-term WSS issues for Kabul and follow-up activities in Kabul and other regions (Annex 7).

18

45. Groundwater Protection and Management Issues. A critical issue i s to ensure sustainability of Kabul’s major aquifers, both for water quality and quantity, as they are by far the least expensive source o f supply available. The EA has identified areas that need to be considered as part o f aquifer protection zones, to minimize chances o f irreversible contamination. Enforcing zoning would be facilitated by activities such as the demarcation o f aquifer protection zones, annual aquifer audits and informing siting o f new development, to be supported by the proposed project (Annex 5). The Government has committed to ensure that AUWSSC will: (i) submit to IDA for review a draft Groundwater Management and Protection Plan o f Kabul major aquifers after consultation with key stakeholders not later than June 30, 2007; and (ii) cause the Kabul Municipality and the National Environment Protection Agency (NEPA) to take action for implementation o f these recommendations, no later than December 3 1,2007.

46. Water Resources Planning and Management. A recent study on “Scoping Strategic Options for Kabul Water Supply: A Multi-Sectoral Decision Support System (DSS) Approach” i s available in the project f i l es (Annex 7). It highlights the need for multi-sectoral coordination for developing water resources in the country and for creating an Inter-Ministerial Water Board and i t s Technical Secretariat to undertake long-term water resources planning. The proposed project wi l l support activities (Annex 2) to support M O U D and the proposed Technical Secretariat to further refine and uti l ize the DSS already developed for Upper Kabul River Basin, and to develop similar tools for other major cities (Mazar, Kandahar, Jalalabad, Herat).

47. Social Assessment. Social assessments and socio-economic surveys were carried out under ongoing WSS projects as part o f the feasibility studies for WSS system expansion in Kabul (funded by KfW) and about 20 provincial towns (funded by IDA and ARTF). In addition, a qualitative assessment o f past experiences in community involvement in WSS in Kabul and other larger cities, e.g. by UN-Habitat, should be carried out, along with a review o f the experiences among NGOs and UN agencies o f WSS- related health-hygiene campaign. Particular attention w i l l be paid to the potential for women’s employment, e.g. as attendants at water kiosks or public toilets, as wel l as other jobs related to public wss.

48. Land Acquisition. Although no resettlement issues are expected, Operational Policy 4.12 “Inv01untary Resettlement” i s triggered as there wi l l be a need for limited land acquisition, in particular for each borehole o f the Logar well f ield (financed under ARTF-UWSS project), the main pumping station and reservoir E. Furthermore, maintenance o f the right-of-way for the transmission line to reservoir E i s also critical as the alignment will cut across a hill which i s rapidly turning into a residential area. The status o f the land involved i s being clarified and actions are being initiated to acquire the required land, in compliance with the Land expropriation law and fol lowing the Environmental and Social Management Framework’s stipulations regarding compensation for loss o f land and livelihood o f project affected families in a consultative and mutually agreeable manner, compliant with OP 4.12, in case o f both formal and informal settlements. The Government has committed to complete the process o f land acquisition for the Project by June 30,2006, in accordance with the provisions o f the Project’s Environmental and Social Management Framework.

49. Beneficiary Surveys. I t was agreed that a water supply and sanitation household survey wil l be carried out in Kabul during the second hal f o f 2006, jo in t ly with the energy consumption household survey, wi th funding f rom a Bank Trust Fund. This survey should establish baseline data on the current WSS situation, the willingness and abil ity to pay, current water use and sanitation practices and awareness of their health-implications, and potential for consumer participation in planning, implementation and maintenance, in particular in areas to be served by public standposts. The survey will inform tar i f f design and structure, consumer organizational issues and identify the need for health education targeting women in particular. This activity wil l draw upon the social survey that was carried out in 2003 under the KfW-financed feasibility study for the extension o f the water system. Several

19

workshops have already taken place to consult with stakeholders on the objectives and components o f the project. Consultations at the community level wi l l also take place before and during actual project implementation.

50. Capacity Building for Social and Environmental Management. Capacity for the management o f social and environmental issues in the urban WSS sector will be built in MOUD and AUWSSC under the project and also through an Environmental Institutional Development Project implemented by the newly created National Environmental Protection Agency (NEPA). This project should establish fully operational social and environmental management capacity within N E P A and line Ministries and agencies, including M O U D and AUWSSC.

G. MAIN GRANT CONDITIONS

5 1. Grant Covenants: 0 Corporatization of AUWSSC (para. 14): CAWSS w i l l be fully “corporatized” , Le., i t s statutes

approved, i t s Board o f Directors appointed and i t s Management Team appointed by December 3 1, 2006. IDA may exercise remedies under the Financing Agreement if AUWSSC i s not fully “corporatized” by December 3 1, 2006, i.e. if i t s statutes are not approved, i t s AUWSSC Board o f Directors not appointed and i ts Management Team not mobilized. However, before taking any action IDA would request the Government to submit an action plan for completion o f the incorporation o f AUWSSC for discussion with IDA. AUWSSCManagement Team (para. 18): the AUWSSC/HQ key managers wil l be recruited by December 3 1, 2006 and al l other AUWSSC/HQ and SBU management staff will be fully recruited by December 3 1, 2007, at the latest. Financial Support to AUWSSC Operations (para. 23):

0

0

o AUWSSC wil l be entitled to claim the reimbursement o f 45%, 30% and 15% o f “reasonable” operating expenses upon presentation o f detailed and satisfactory SOEs for bills (energy, chemicals, parts, small repair contracts for regular maintenance.. .) and salary slips o f non managerial staff, this within the limit o f US$1.90 million, US$1.50 mi l l ion and US$1 .OO mi l l ion equivalent in years 2007 (matching Afghan year 1387), 2008 (matching Afghan year 1388)and 2009 (matching Afghan year 1389) respectively.; Claims for cash advances (supported by a forecast) may be submitted at the beginning o f each quarter for the three months to come accompanied by satisfactory and detailed SOEs for expenditures financed through the prior quarter’s advance; unspent advance from the prior quarter wi l l be deducted from the amount o f advance requested for the new period; .adjustment for the financial support for each period o f 12 months will be made on the basis o f justifications submitted not later than three (3) months after the end o f the 12 month period; AUWSSC wil l be entitled to claim the reimbursement o f the salaries paid to i t s management staff upon presentation o f salary slips and within the limits o f US$0.30 mi l l ion equivalent per year in years 2007, 2008 and 2009 (or periods o f 12 months starting f rom Grant Effectiveness); AUWSSC wil l be entitled to claim the reimbursement o f the bonus paid to i t s management staff with the limit o f US$O. 10 mi l l ion equivalent per year in years 2007, 2008 and 2009 (or periods o f 12 months as above); External auditors will be requested to confirm every six months that (a) AUWSSC operating expenses, including those for which reimbursement i s requested are “reasonable”, i.e., in line with international good practice; (b) AUWSSC management staff for whom payment o f

o

o

o

o

20

salaries i s requested have been active in their position for the full duration for which the reimbursement i s claimed; and (c) the payment o f bonus to AUWSSC management staff i s justif ied by the achievement o f the performance specified in their contract.

Tariff Adjustment (para. 25): AUWSSC will take measures necessary to ensure that i t s O&M costs are covered by the total o f the above financial support and i ts own collection o f user charges. Adjustment of the Financial Support (para 26): a review, and if necessary a revision, o f the amount and conditions o f the financial support provided to AUWSSC will take place after six (6) months o f operation, when more reliable operating data are available. AUWSSC Financial Management Team (para. 34): a l l accounting staff for AUWSSC/HQ and SBUs would be mobil ized by December 3 1,2007. AUWSSC Opening Balance Sheet (para. 34): AUWSSC wil l submit to IDA for review a first report by i t s auditors o f i t s corporate financial statement not later than six months after the closing of i ts fiscal year ending on March 2 1, 2008. Audits (para. 34): AUWSSC wil l appoint independent external auditors, with TORs acceptable to IDA, for auditing i t s corporate financial statements and claims for reimbursement under the Financial Support component not later than June 30, 2007. Monitoring & Evaluation (para. 35): M&E arrangements will mostly track the technical, financial, commercial, and service performance, as per Annex 8 o f the Technical Annex; annual M&E reports will be submitted not later than six months after the end o f the fiscal year, starting with the fiscal year ending on March 2 1, 2007

52. Disbursement Conditions

0 Funds Withdrawals (para. 34): the signing o f a Disbursement Letter between MOF-Treasury, M O U D and AUWSSC General Manager wi l l be a condition o f first disbursement. N o withdrawal shall be made out o f the proceeds o f the Grant unless AUWSSC has been incorporated and a general manager appointed for it.

0

53. Other Apreements Reached

MOU between A UWSSCYHQ and SBUs (para. 16): a draft standard MOU will be submitted to IDA for review not later than June 30,2007 and all MOUs between AUWSSC and SBUs wil l be signed not later than June 30, 2008. Training Programs (para. 22): A first training program wil l be presented for review not later than June 30,2007. Logar II Water SuppIy Scheme (para. 29): bidding documents for the IDA financed contracts will be submitted to IDA for review not later than November 15,2006. Audits (para. 34): TORs for the external auditors to be appointed for AUWSSC will be submitted to IDA for review not later than end August 15, 2006. FinancialManagement risks (para. 34): As a risk mitigating measure it has been agreed that the financial management Consultants (ARTF-funded FSO at CAWSS, ARTF-funded counterpart CFO at MOUD, PPIAF-funded corporatization consultants) will continue to provide support until AUWSSC achieves an acceptable level o f sustainability in financial management activities. Groundwater Management and Protection Plan (para. 45): AUWSSC w i l l : (i) submit to IDA for review a draft Groundwater Management and Protection Plan o f Kabul major aquifers after consultation wi th key stakeholders not later than June 30, 2007; and (ii) cause the Kabul

21

Municipality and the National Environment Protection Agency (NEPA) to take action for implementation o f these recommendations, no later than December 3 1, 2007. LandAcquisition (para. 48): land acquisition will be completed by June 30, 2006. Beneficiary Surveys (para. 49): a WSS household survey will be carried out in Kabul during the second half of 2006, jointly with the energy consumption household survey.

0

0

54. Additional Event of Suspension

0 Project Risks -Major changes in AUWSSC ownership (para. 40). Grant may be suspended if the Government sel ls shares o f AUWSSC to private interest without prior consultation with IDA.

H. APPENDICES

Annex 1 : World Bank (IDA) and Afghanistan Reconstruction Trust Fund (ARTF) Support to Urban Water Supply, Sanitation and Solid Waste Management

Annex 2: Detailed Project Description Annex 2a: Institutional Development o f AUWSSC Annex 2b: Financial Assistance to AUWSSC Annex 2c: Kabul Water Supply Investment

Annex 3 : Procurement Arrangements

Annex 4: Financial Management Arrangements

Annex 5: Summary of the Social and Environmental Safeguards Framework

Annex 6: Social Issues, Services to the Poor, Informal Settlements and Unconnected

Annex 7: Scoping Strategic Options for Kabul Water Supply: A Multi-Sector Decision Support System Approach

Annex 8: Monitoring and Evaluation Arrangements

Annex 9: L is t o f Documents in the Project File

Annex 10: Urban Water Supply and Sewerage Sector Policy

Annex 1 1 : Urban Water Supply and Sewerage Sector Institutional Development Plan

Annex 12: Presidential Decree

22

Annex 1

Annex 1: World Bank (IDA) and Afghanistan Reconstruction Trust Fund (ARTF) Support to Urban Water Supply, Sanitation and Solid Waste Management

Introduction

1, World Bank (IDA) and ARTF support to the sector since 2002 have included the following: Support to the Urban WSS emergency phase (2002-05), through the $15m UWSS component o f the IDA-funded Emergency Infrastructure Reconstruction Project (P077779) Support to the Government’s Urban WSS short-term programme (2005-07), through the $41m ARTF Urban Water Supply and Sanitation Project (PO92 162) Support to the Government’s Urban WSS medium-term programme (2007-1 l), through the

0

0

o $40m IDA Urban Water Sector Project (P087860) for fiscal year 06, with a possible second project in FY08/09 Proposed $20m IDA Urban Waste Management Project (P098461) for fiscal year 07 Proposed Kabul Waste Recycling and Cornposting (Carbon Finance) Project (P 100 133) for fiscal year 07

o o

Urban WSS Emergency Phase (2002-05): UWSS component of IDA-funded Emergency Infrastructure Reconstruction Project (EIRP)

2. This project included: 0 water supply rehabilitation works in provincial towns ($ 9.0 million) complementing investments

financed by WHO, UN-Habitat, ICRC, UNOPS and feasibility studies for 22 provincial towns (and 7 other towns financed by USAID); sanitation improvements in Kabul city with Emergency Solid Waste Collection (implemented by UN-Habitat in 2003-2004), priority and pilot investments in Solid Waste Management and On- site Sanitation systems ($1.5 million) and preparation o f a Strategic Sanitation Plan and a Sewerage & Drainage Master plan for Kabul c i ty (final draft under review).

3 , The main outcomes o f the provincial towns investment component include, subject to confirmation during the implementation completion review in mid-2006 (see details in Table 1 below):

Preliminary data on the 11 provincial towns indicates that the average coverage (number o f household connections I number o f households) has increased from 16% (ranging from 0 to 52%) to 28% (ranging from 8% to 60%). The overall production capacity raised from 15,000 to 25,000 m3/day which translates into an improvement o f the average water availability from 6.5 lpcd (or 46 lpcd if expressed on the basis o f population actually covered) to 10.5 Ipcd. Overall, it appears that there i s still much room for improvement from a better management o f commercial operations with only 12,223 consumers formally registered to date compared to the 22,330 estimated number o f household connections and an average pumping duration o f 9.5 hrslday only.

0

0

23

Table 1 -Preliminary Provincial Towns indicators (subject to change)

Daily water production

Source: Beller Consult, February 2006

4, The main outcomes o f the Kabul sanitation investment component include, subject to confirmation during the implementation completion review in mid-2006: (i) a total o f 16 public toilet complexes rehabilitated or constructed, (ii) a pilot community septic tank (row houses) completed in district 11, (iii) 22 concrete ramps in district 6, and (iv) the Gazak dumpsite fully rehabilitated.

Urban WSS Short-Term Programme (2005-07): ARTF Urban Water Supply and Sanitation Project (PO921 62)

This project became effective in February 2005 (first tranche o f $20.0 million) and November 2005 (second tranche o f $21 .O million) and includes:

0 Kabul Water Supply ($15.0 million): This component i s jointly financed by KfW and comprises:

o the Upper Kabul River package, which involves construction o f new well fields, transmission mains and reservoirs which wil l ultimately serve up to 300,000 people. The package includes construction o f distribution networks to serve 100,000 people (75% house connections, 25% stand-posts). The remaining 200,000 people will be served under the first phase o f the Medium-Term Programme (financed by IDA fy06 and KfW). the Logar package (financed by KfW), under which new distribution networks, linked to existing water infrastructure will serve 200,000 people through a combination o f house connections (50%) and stand-posts.

o

0 Kabul Sanitation ($5.0 million): This component i s closely articulated with other integrated Urban Upgrading initiatives, especially under the IDA-financed Kabul Urban Reconstruction Project (KURP) and includes:

0 Solid waste investments, notably the construction o f the first stage o f a new solid waste sanitary landfill, the rehabilitation and closure o f the Chamtala dumpsite, and a workshop for the Department o f Sanitation (DOS)

24

0

0 Organizational Strengthening for DOS

On-site sanitation investments, with the construction o f a septage disposal station and the provision o f additional equipments to DOS

0 Provincial Towns Water Supply and Sanitation ($15.0 million): This component provides WSS services in 12 provincial towns through the following:

0 Completion o f rehabilitation o f systems in selected provincial towns, including supervision o f IDA-funded works under EIRP in 2005; Expansion o f systems, if and where possible, in these towns; Provision o f new systems in towns which are not yet served by a water supply network.

0

0

The 12 towns comprise 9 o f the 1 1 towns under the current IDA-supported EIRP (Kandahar, Qalat, Shibergan, Mazar-e-Sharif, Kunduz, Taloqan, Charikar, Mehterlam and Jalalabad) plus three additional towns (Maimana, Sari Pul, Aybak, Pul-e-Khumri and Zaranj). Sari Pul and Aybak - which were initially included under ARTF financing - would be financed by other donors. Funding for works in Ghazni and Gardez, the other two towns addressed by the IDA- supported EIRP will be provided by USAID. New systems in unserved towns would be funded in parallel by KfW and by USAID.

0 Engineering Support and TA to CAWSS and Kabul Municipality ($3.0 m)

0 UWSS sector policy and institutional development support, also funded from ARTF/TAFS (Technical Assistance and Feasibility Studies facility) and other grant TA sources.

0 Financial support to the CAWSS operations (FSO) ($3.0m): This component provides transitional financial support to CAWSS operations until Medium-term Programme (MTP) i s initiated. The financial instrument provides for two funds:

The Operating Subsidies Fund to ensure that the CAWSS Branches are operating in a decent manner until Medium-Term Program arrangements are implemented; The Bonus Fund to create incentives among CAWSS and utilities staff, encourage revenue increases and operational improvement.

o

o

Urban WSS Medium-Term Programme (2007-11):

Urban Water Sector Project ($40.0 million), which i s described in this Technical Annex, with a possible second phase under a fiscal year 08/09 IDA allocation with Public-Private Partnerships if and where possible and further investments in Kabul (water and wastewater) and Provincial towns.

Proposed Urban Waste Management Project ($20.0 million) to support the institutional agenda for the Urban Sanitation sector: (i) formulation o f national Urban Sanitation Policy & Strategy, (ii) a menu o f institutional and investment measures for the Department o f Sanitation in Kabul, including recycling and composting, and (iii) strategic planning and small scale investment in 4 major provincial towns

IDA and ARTF support to the sector has been complemented by other donors, including the German, US and Japanese Development Agencies, UN agencies (UN Habitat, WHO, UNOPS), the International Committee o f the Red Cross (ICRC), and NGOs such as CARE, Oxfam, and Acted. A summary i s presented in Table 2 below.

25

4 E!

-

N L n P - 0 0 0 0 0 0

II

W N

Annex 2

Annex 2: Detailed Project Description

This Annex contains a detailed description o f the project components: (i) Institutional Development o f AUWSSC, (ii) Financial Support to AUWSSC, and (iii) Kabul Water Supply Investments.

Annex 2A: Institutional Development of AUWSSC

1. Technical Assistance. The IDA Grant will finance the services o f four Technical Assistants: A Senior Technical Advisor to AUWSSC General Manager (36 months), with a strong background in planning, project design and implementation, procurement and capacity building of technical director and counterpart engineers; (US$25,000/month net o f tax). A Senior Financial Advisor to AUWSSC General Manager (36 months), with a strong background in utility commercial operations, accounting, financial management and reporting, general administration and capacity building o f financial manager and counterpart accountants ; the Sr. Financial Advisor will also be responsible for the coordination o f the training program for AUWSSCiSBU staff; (US$25,000/month net o f tax). A WSS Operation Advisor based in Mazar (36 months) with a strong background in day to day operations o f a WSS utility and capacity o f counterpart staff; (US$22,500/month net o f tax). A WSS Operation Advisor based in Kabul (36 months) with a strong background in day to day operations o f a WSS utility and capacity o f counterpart staff to assist SBUs and AUWSSC operations; (US$22,500/month net o f tax). Costs include salaries, international travel, housing and subsistence, but do not include local travel and office operation. The total TA budget (base cost net o f a l l contingencies) i s estimated at US$3.45 mi l l ion.

2. German Cooperation funded TA Engineering support for the Extension o f Kabul Water Supply Project (2005-09) i s currently financed by KfW (EUR 9.1 mill ion) and provided by Beller Consult. This engineering support cover technical studies, engineering designs, bidding documents, procurement and supervision o f the overall investment program (MTP 1 and 2 at minimum) irrespective o f the source o f financing for this later (Le. inclusive o f any IDA contribution). In addition, management support wil l be provided for an init ial two-year period to operations in Herat and Kunduz-Taloqan under GTZ financing and in Kabul under K f W financing. GTZ- financed support wil l primarily focus on business areas and KfW-financed support on operational areas, but the two consultancies are expected to complement and back up each other in these three to four cities through cross-support mechanisms.

0

3 . Consultants Services. 0 Corporatization of AUWSSC. US$0.45 m i l l i on have been requested from PPIAF to finance the

consultants (under contract with the Bank) who will prepare the documentation needed for the corporatization o f AUWSSC; this i s not included in the project cost.

27

0 Mobilization of a Private Operator (for Kabul and possibly Herat, Mazar and KundudTaluqan). The consultant services will cover the organization o f a new market sounding, the pre- qualification o f operators, the preparation o f bidding documents, the evaluation o f bids and the assistance to the contract negotiations. Based on similar projects, a budget o f US$1 .O mil l ion i s proposed to be earmarked for this task. U p to 24 man months o f visiting specialists to assist AUWSSC and SBUs for assisting in the drafting o f operation, procurement, accounting and financial management procedures, social and environmental management, and for advising on commercial activities human resources development and training; a budget o f US$0.6 mi l l ion i s earmarked for these missions: Social surveys, tariff studies, options for services to the poor, consultation and communication to provide a solid basis to future projects in Kabul and other cities, including options to serve the poor and informal settlements; customer surveys and willingness to pay assessments will be carried out as part o f consultation and communication process. These activities would complement the household survey to be carried out during 2006 in Kabul (under separate Bank financing), and the awareness campaigns in Kabul to be funded by K f W for which US$1.2 mi l l ion has been earmarked. Based on 6 man months o f international expert and a total o f 40 man months o f local staff, a budget o f US$0.25 mi l l ion i s allocated for these activities. Studies, detailed designs and bidding documents for futureprojects. A budget o f US$1.50 mi l l ion i s set aside for these tasks.

a. Fol low up activities related to the Decision Support System (DSS) developed for the Upper Kabul River basin in the context o f Kabul bulk water supply options (see details in Annex 7) and development o f similar DSS for identifying water resources development options for other major cities such as Mazar, Jalalabad, Herat and Kandahar;

b. Hydro-geological surveys, as required in the above cities3; c. Engineering designs and social and environmental assessments for bulk water supply in

the above cities and other provincial centers4; and d. Engineering designs for the first phase o f the waste water collection and disposal

program under the Kabul Strategic Sanitation Plan, inclusive o f social and environmental assessments.

0

0

0

4. Audits. Based on a team including an international auditor (2 man month per audit) and four local auditors (16 man month per audit) the cost o f an audit should be an average o f US$125,000; based on semi-annual audits o f AUWSSC and each SBU accounts, the budget earmarked for this task i s US$750,000.

5 , Training. Training abroad wil l focus mostly on planning, project management, procurement, commercial management, accounting and financial management. The training program will be formulated by AUWSSC management team with the assistance o f the technical advisors. Based on about 200 participations to sessions in specialized training centers (50 in Europe, 150 in South Asia) and an average duration o f 15 days per session, a budget o f US$0.6 mi l l ion i s earmarked. In addition, for training to be carried out in Afghanistan (1 00 staff for 10 days per year) a total budget o f US$O. 15 mi l l ion i s provided.

For Kabul bulk water, hydro-geological surveys would be financed by the German Development Cooperation. Feasibility studies for the extension o f water supply system in these and 18 other provincial centers have already

been carried out and financed by IDA and ARTF (see project files). For Kabul bulk water, engineering designs for extension o f production and related transmissioddistribution would be financed by the German Development Cooperation.

28

6. Technical Assistance Budget. It i s summarized below

US$ 000’ Technical Assistance Consultants Services Audits Training Total

Total 2007 2008 2009 3,400 1,150 1,150 1,100 3,3 00 750 1,400 1,150

750 3 00 250 200 750 150 300 300

8,200 2,350 3,100 2,750

Annex 2B: Financial Assistance to AUWSSC

1. The “Financial Support to Operations - FSO” project financed by ARTF i s now generating baseline data on the number o f billed connections, sales, production, operating costs and revenues for each o f CAWSS operations and headquarters. However these data are s t i l l based on a short period o f time (three to six months depending upon the operation) and cannot yet be considered as fully representative. Baseline data and assumptions are summarized in simplified cash f low forecasts available in the project f i les.

2. Connections. The cash f low forecast provides the number o f b i l led connections for Kabul, Herat and the 12 other centers served by CAWSS; it i s likely that a significant number o f unregistered connections exists, in particular in Kabul. The evolution o f the number o f connections i s based on estimates carried out by projects for which financing has been secured for the 2005/2010 period. Between 2005 and 20 10, the total number o f AUWSSC billed connections i s l ikely to evolve f rom 91,500 to 151,500, corresponding to an additional population o f about 900,000. In Kabul, connections are l ikely to evolve f rom 33,000 to 70,000 corresponding to an additional served population o f about 555,000.

3. Sales. Based on FSO figures, total sales in 2005 have been about 9.7 mill ion, or 4.3, 3.6 and 1.8 mi l l ion m3 in Kabul, Herat and the other centers respectively. These figures translate in average sales per connection o f about 130, 160 and 50 m3/conn./year or 24,29 and 9 liters per capita per day (lpcd) for an average population o f 15 people per connection. While fairly low, these lpcd figures seem to be consistent wi th the widespread use o f groundwater by most connected customers and the limitation imposed by individual storage capacities needed to cope with a piped water service that i s typically provided 12 hours every other day. For the coming five years, it has been assumed that the average consumption per connection would increase by lo%, 7.5% and 10% per year in Kabul, Herat, and other centers respectively, leading to average per capita sales o f 42, 46 and 16 lpcd in 2010. Future sales are calculated by multiplying the above connection figures by the sales per connection. Between 2005 and 2010, AUWSSC sales are l ikely to increase from 9.7 million/m3/year to 25.4 mi l l ion m3/year; in Kabul, sales are l ikely to evolve f rom 4.3 to 14.7 mi l l ion m3/year.

4. Production and Non Revenue Water (NR W). Based on FSO figures, total production in 2005 has been about 36.5 mi l l ion m3, or 15.3, 6.6, 14.6 mi l l ion m3 in Kabul, Herat and the other centers respectively. These figures translate in N o n Revenue Water (NRW) o f 72%, 45% and 88% that are extremely high, even by South Asian standards. Setting NRW objectives depends upon several factors: (i) incentives SBUs and AUWSSC wil l have to improve collection; and (ii) the pace at which the distribution network and connections can be extended and commercial activities (meter reading, bi l l ing and collection) can be improved.

For each SBU, the MOU with A U W S S U H Q will specify clear collection objectives; management staff o f the SBUs and AUWSSUHQ, who wil l be on fixed term contracts, will have a significant bonus (say 30% o f their salary) paid if objectives are achieved.

0

29

5.

0 Kabul: an additional 800 km o f new distribution pipes should be added to the existing distribution network o f about 500 km, during the 10 years to come; assuming an average N R W o f 20% for the new distribution networks and a gradual improvement to 50% for the existing distribution network, it would not be unrealistic to assume that NRW could reach 30% in 2015. The cash f low forecast i s based on an improvement o f NRW by 4 percentage points per year between 2006 and 2010; NRW objective for 2010 i s set at 52%. Herat and other centers: using similar reasoning, NRW objectives can be set at 39% and 58% respectively for 20 10 (for average improvement o f 3 and 6 percentage points per year). AUWSSC: as an average, NRW i s proposed to evolve f rom an estimated 73% in 2005 to 52% in 20 10. These are s t i l l extremely poor ratio by international standards.

0

0

Operating Expenses. To simplify, the attached cash f low forecast considers only three main expenses: 0 Existing staff: the forecast i s based on an annual increase o f the current expenditure o f Afg 55

mi l l ion per year (an average US$l, 1 OO/year per staff for a work force o f about 1,000 staff) by an average 17.5% per year to reflect staff increase and a gradual shift to a salary scale close to that o f the Priority Reform and Restructuring (PRR), including a bonus system similar to the ongoing ARTF-financed FSO. Assuming a staffing ratio o f 10 per 1,000 connections, the entire AUWSSC operations could be run by a staff o f 1,450 in 2010; this would correspond to a total staff expenditure o f Afg 1 15 million/year for an average gross salary o f Afg 80,00O/staff/year. AUWSSC management sta8 the forecast i s based on a team that includes one general manager (Afg 3.6 million/year, including bonus), one technical manager and one financial manager (Afg 2.70 mi l l iodyear each) and seven regional managers (Afg 1,80 million/year each). The total compensation package i s indicated above for the sole purpose o f preparing the cash f l ow forecast; it includes salary, benefits and bonus o f about 30% payable upon achievement o f performance; these figures are proposed to increase by 5% per year. Energy, chemical and maintenance: FSO available figures, in particular that for energy, have to be used with precaution, even more so that the electricity tar i f f charged to CAWSS does not seem to be in line with international figures. Pending clarifications by FSO, and technical audits of energy consumptions and expenses, the forecast i s based o n an average cost o f A f g 3/m3 produced and an average increase o f 7.5% per year. Total O&Mcosts: while production i s assumed to increase by about 35% (from about 36.5 to about 50 mi l l ion m3/year), O&M costs are estimated to roughly double (from Afg. 165 to 300 mi 11 iodyear).

0

0

0

6. Revenues. AUWSSC operating expenses wil l be covered from user charges -that depend upon the average tariff and the collection ratio - and a decreasing complement to be provided by the project. The proposed short term cost recovery strategy i s based on the fol lowing assumptions: 0 The average ratio o f cash collection to O&M expenses (Working ratio -WR) will gradually

evolve form i t s current level o f about 30% to 100% in 20 1 1 ; it wil l improve by about 15 percentage points per year as o f 2007, Le., when AUWSSC new management team and TA are mobilized and the payment o f bonus for achievement o f agreed performance i s possible. At the end of three-year project period, it i s targeted to recover 75% o f O&M costs f rom collection. The project will contribute an agreed percentage o f “reasonable” O&M expenses; this percentage will fixed to for a period o f 12 months, starting with 45% in 2007 and declining by 15 percentage points per year for the next two years; in 2008 and 2009, the project will thus contribute 30% and 15% o f O&M costs. Contribution o f the project to AUWSSC O&M

0

30

expenditures, broken down between O&M and staff costs, management salaries and management bonus, wi l l in addition be capped to the figures provided in table 1 below, i.e., a total o f US$5.6 mi l l ion for the three year period o f the project. The average revenue from user charges per m3 o f water billed and collected i s as a result expected to increase regularly from an average Afg 5/m3 in 2005 and 2006 to reach Afg 10/m3 in 2009.

0

Summary of the Proposed Cost Recovery Strategy. The table below summarizes the key parameters o f the proposed cost recovery strategy:

Management salaries

(Base cost as of Feb. 06)

Figures for 2005 apply to a 6 month period.

Sensitivity analysis. Because o f the paucity o f data, the above forecast i s based on many assumptions. A sensitivity analysis has been carried out to identify impact on the average tar i f f that needs to be reached in 2009;

0 N R W (keeping the financial support to operations for the 2007/2009 period equal to US$5.6 mil 1 ion):

0

0

Base case: evolving f rom 73% in 2005 to 52% in 2010 Alternative 1: evolving f rom 73% in 2005 in 2005 to 42% in 2010 Alternative 2: evolving from 73% in 2005 to 62% in 2010.

0 Financial support t o operations for the 2007/2009 period (keeping the base case evolution o f NRW):

0 Base case: US$5.6 mi l l ion Alternative 1 : US$6.5 mi l l ion

0 Alternative 2: US$4.7 mi l l ion Extreme cases:

0 Worst case: NRW reaching orlLj 62% in 2010 and financial support l imited to US$4.7 mi l l ion Best case: NRW reaching 42% in 2010 and financial support increased to US$6.5 mill ion.

0

31

I Sensitivity to NRW Case (NRW in 2009) Tariff needed in 20 10 (Afg/m3) Sensitivity to financial support Total support Tariff needed in 2009 (Afg/m3) Extreme cases Tariff needed in 2009 (Afg/m3)

56% 48% 64% 10.0 8.8 11.9

US$5.6 mio US$6.5 mio US$4.7 mio 10.0 9.2 10.9

Best Worst ’ 8.0 12.8

Annex 2C: Kabul Water SUDP~Y Investment

Introduction and Background

1. Kabul Water Supply Situation. Estimates for the population o f Kabul vary from 3.0 to 3.5 million in 2005, 4.0 to 5.0 million and 5.0 to 6.0 million in 2010 and 2015.

About 0.5 million people currently have access to CAWSS piped water supply that derives i ts water from the Logar, Upper Kabul (Allaudin) and Paghman (Afshar) well fields. CAWSS 500 km distribution network serves about 33,000 billed connections and about 600 standpipes; there i s probably a large number o f non registered or illegal connections. Based o f the data generated by FSO, the CAWSS system produces about 15 million m3/year (42,000 m3/day) but generates revenues only from the sale o f 4.3 million m3/year. The Non Revenue Water (NRW) at 72% i s extremely high, even but South Asian standards. Water i s typically delivered 12 hours every other day, forcing households and businesses to store water. Based on FSO data, the average consumption i s about 25 lpcd (130 m3 per connection per year for an average population o f 15 per connection) and the average revenue i s Afg 5/m3 (US$O.lO/m3) billed and collected. It i s known that most customers with access to CAWSS piped water also use groundwater as secondary (or even sometimes primary) source o f water. An additional 0.15 million people living in collective housing managed by the MOUD (Macrorayon) are served by independent piped systems that rely on boreholes tapping local aquifers. I t i s estimated that these systems produce about 3.8 million m3/year (10,500 m3/day) on the basis of a 70 lpcd average consumption. The water bill i s included in the rent. The remaining 2.35 to 2.85 million people, o f which about 1.0 million live in unplanned areas, rely mostly on wells taping shallow ground waters; based on an average consumption o f 15 lpcd, s e l f supplies would represent a production o f about 36,000 m3/day (13 million m3/year). The cost o f construction of an open well i s about Afg 50,000 (US$l,OOO). Operating a powered pump (electricity or diesel) costs about Afg l,OOO/month (US$20). The table below summarizes the Kabul current water supply situation; o f course, these are rough estimates that will be clarified by appropriate surveys o f actual consumptions, recurrent budgets, customer preferences and customer willingness to pay to be carried out in 2006.

0

32

2. Kabul Sanitation Situation. As part o f the IDA-funded strategic and feasibility studies for Kabul sanitation (covering solid waste management, on-site sanitation, sewerage and drainage) an inventory o f existing facilities revealed that: 0

0

0

7 1% o f the Kabul area i s served by dry toilet systems like vault toilets or pit latrines 27.5% o f the Kabul area i s served by septic tank/cesspit systems 1.5% o f the Kabul area i s connected to conventional sewerage systems

Sanitation issues are not addressed under this project as they are (or will be addressed) under parallel projects: 0 The ongoing ARTF-funded Short-Term Urban Water Supply and Sanitation project that i s

financing a new sanitary landfi l l and a septage disposal station (for disposal o f sludges from latrines and septic tanks); The ongoing IDA-funded Kabul Urban Reconstruction Project that i s supporting upgrading o f low-income areas, including on-plot water and sanitation; The proposed IDA-funded Urban Waste Management project that aims at improving the management (collection, transportation, processing and disposal) o f urban waste (municipal solid waste and residues from on site sanitation facilities) through institutional strengthening and selected investments in municipal solid waste and on-site sanitation in Kabul; The proposed Carbon Finance Kabul Municipal and Domestic Waste Composting and Recycling project.

0

0

0

The Proposed Project

Objectives. The proposed project i s based on a feasibility study financed by K f W and carried out in 2003 by a jo in t venture o f consultants led by Beller (Germany). The project aims at making full use o f the groundwater resources available in the Kabul area; this should result in an increase o f the installed production capacity f rom 42,000 to 120,000 m3/day (42 mi l l ion m3/year). Such a production capacity should be sufficient to supply o f a total o f 103,000 individual connections (to be compared with the existing 33,000) requiring an extension o f the distribution network f rom 500 km to about 870 km. As a result, the project should result in an increase o f coverage from the current 500,000 people to about 1.55 mi l l ion people in 2015, or 30% o f the total population o f 5.0 million; out of this 1.55 million, about 1.10 mi l l ion would have direct access to piped water through connections and about 0.45 mi l l ion through public standpipes.

Phasing. The above objectives wil l be achieved in two phases: 0 The first phase referred to as STP (short term program) i s currently financed jo int ly by ARTF and

KfW for a total o f US$25.6 mi l l ion. It aims at increasing the production capacity f rom 42,000 m3/day to 60,000 m3/day by rehabilitating and extending the Upper Kabul River (KBR) well f ield scheme including an additional 10 boreholes and associated pumping equipment, main pumping stations, collectors and reservoirs and the distribution network by 132 km to reach an additional 1 1,000 customers. Construction for this scheme i s scheduled to start in September 2006 and to be completed by October 2007. This first phase also includes the drilling o f 11 new boreholes in the Logar I1 aquifer to be equipped under the second phase (MTP) The second phase referred to as M T P (medium term program), to which the IDA Grant will contribute jo int ly with KfW aims at increasing the production capacity f rom 60,000 m3/day to 120,000 m3iday by developing the Logar I1 wel l f ield scheme and extending the distribution

0

0

33

network by an additional 370 km to reach 42,000 new customers. Construction i s scheduled to start in 2006 and to be completed by 2010. The MTP i s divided in two phases, to take into account available financing. The IDA Grant for fiscal year 2006 wil l contribute to MTP1.

5 . The Logar Scheme 0 A n analysis of the Logar aquifer was carried out in 1978 by consultants Montreal Engineering

Co. o f Canada. As part o f the project preparation, the quality o f water has been surveyed in a limited number o f shallow wells and found to be chemically acceptable, even if some high concentration o f nitrates was found in a small number o f wells; the water i s not aggressive to concrete (reservoirs and piped lining). The aquifer that i s located at the outskirts o f the city has to be protected against accidental pollution (Annex 5) The production/distribution scheme wil l be fully implemented between 2007 and 2010. The table in para. 9 below gives a summary description o f i t s main component, base cost as on mid 2006 (excluding physical, price and tax contingencies) as well as the available and needed financing sources.

0

0

6. Project Readiness and Implementation Arrangement. Feasibility studies and detailed designs for al l the components listed under the M T P 1 sub-project have already been prepared by consultants Beller o f Germany. It has been agreed under the ARTF/KfW financed project that consultants Beller would be in charge o f the preparation o f the bidding documents, the assistance to the procurement o f works and the construction supervision o f all works under MTP, regardless o f the source o f financing. Beller i s an experienced consulting firm with relevant references, in particular on several Bank and IDA financed water supply projects in other regions. Beller’s TOR have been reviewed and found satisfactory; it has been agreed that the detailed staffing arrangement for construction supervision wi l l be agreed jo in t ly between IDA, KfW and Beller. Beller wi l l prepare the bidding documents for the IDA financed components by November, 2006. Basically IDA financed components will be broken into three (possibly four) packages:

0

0

a. Supply and laying o f pipes: collectors and transmission l ine (US$6.7 million); b. Supply and laying o f distribution pipes: two packages (US$6.0 and 5.8 million).

7. Least Cost Solution. The present design proposes to deliver a l l the Logar I1 water to a reservoir E (to be built under the project) and located at elevation 1,860 meters above sea level (ASL). The two main reasons for this choice i s that: (i) it i s compatible with the elevation o f existing reservoirs and wil l thus limit the to one the number o f pressure zones; and (ii) it wil l a l low a gravity supply o f reservoir H located about 7.6 km away at altitude 1,857 A S L (whose construction i s not included in this project). During appraisal it was checked that the proposed scheme corresponds to the least cost solution. Indeed locating reservoir E at elevation 1,860 A S L (which i s not really needed, since most o f the city i s located at elevation 1,800 A S L and the type o f housing - one to two stories - require a residual pressure at the connection point o f no more than 20 meters ) would result in an extra pumping cost of about US$20,000/year accounting for higher pumping head and incremental volume o f physical leaks (a major concern in a city where NRW i s estimated to be above 50%). It was agreed that it would be simpler to distribute water under a single main pressure zone fed by reservoirs located at elevation 1,860 A S L and to implement a comprehensive leak management program based on: (i) for newly developed distribution networks: “district metering areas - DMA” serving 500 to 1,000 connections connected to high pressure mains through a proper pressure reduction device and a bulk meter; and (ii) for existing networks: a gradual testing and replacement o f connections (where typically 70% of physical leaks take place) and small diameter distribution pipes. Focus on leak

34

management will be reflected in the detailed design o f the new distribution networks and the TORS o f the technical assistance (to be finance by the German assistance) to Kabul SBU. Optimization o f the design o f the reservoir E to H 7.6 km transmission line will be carried out prior to i t s design.

8. Project Economic Analysis. A n economic analysis o f the proposed project should be based on willingness to pay o f customers (or the cost o f substitutes to piped water) as well as on the cost o f externalities, such as the collection and disposal o f incremental quantities o f waste water generated, that would add to the project costs, and improved public health, time saving and protection o f the Kabul aquifers, that would add to i t s benefits. Since reliable data i s not yet available, the following analysis i s merely an estimate o f ratio based on financial data.

9. Project Financial Analysis. As part o f this analysis, tentative estimates o f the Average Incremental Cost (AIC) o f water, Financial Internal Rate o f Return (IRR) and Net Present Value (NPV) have been carried out. They wi l l be updated and revised, based in particular on the FSO data for the third quarter for Kabul operations, expected by the end o f March 2006. This analysis can be summarized as follows .

Assumptions: a. Calculation carried out for a 25 year period (2006 to 2030); b. Investment program between 2006 and 2012: A fg 4,650 mill ion (US$93 million); c. Connections served: increasing from 33,000 in 2005 to 103,000 in 2015 and remaining at

103,000 thereafter; d. Average consumption per connection: increasing from 130 m3/year (25 lpcd) in 2005 to

275 m3/year (50 Ipcd) in 2017 and remaining at 275 m3/year/connection thereafter; e. NRW: decreasing by 4 percentage point per year from 72% in 2005 to reach 30% in 20 16

and remaining at 30% thereafter; f. Staff costs: increasing from Afg 30 mill ion in 2005 to A fg 92 mill ion in 2013; remaining

at A fg 92 mill ion after 2013; g. Energy, chemicals: estimated at A fg 3/m3 produced throughout the calculation period; h. Maintenance: 1% o f the value o f assets in operation.

0 AZC: for a discount rate of lo%, the AIC i s estimating at A fg 35/m3 (US$0.70/m3); this figure i s rather high, but comparable with those that are estimated in African countries, for example, where the water supply service conditions are comparable to that o f Afghanistan (high capital costs, low consumption). The AIC would evolve from Afg 3 l /m3 to A fg 39.5/m3 for discount rate o f 8% and 12%. Financial ZRR: the financial IRR has been estimated on the basis o f an average revenue per m3 collected evolving from A fg 5/m3 in 2005 to A fg 1 O/m3 in 20 10 and thereafter increasing at an average rate of 15% per year until it reaches A fg 35/m3 in 2020. Under these conditions, the FIRR i s only about 5.6%. Financial NPV: based on the above revenue stream, the project financial NPV i s negative at minus Afg 1,430 mill ion (US$28.6 million) for a discount rate o f 10%. The financial NPV would be positive for discount rate below 5.6%.

0

0

3 5

Logar I1 Scheme: Project Description, Project Cost, Financing plan

Engineering (for 5 years) Detailed design, bidding doc., procurement Supervision, commissioning Total

Supply and installation o f E&M equipment 1 1.7 km diam. 2201600 mm D C I or steel Housing, roads, misc.

10.7 km diam. 800 mm. D C I or steel 2 x 2,500 m3 concrete reservoirs

34 km diam. 200 to 800 mm. D C I 142 km diam. 60 to 150 mm uPVC 15,000 connections (200 km diam. 1” PeHD) 60 public taps, 80 f i re hydrants 16,000 meters 1” diam.

9.0

MTP 2 (additional 16,000 customers) Miscellaneous Total

9.8 2.2

12.0 22.0

36

Annex 3

Annex 3: Procurement arrangements

A. COUNTRY CONTEXT

1. Afghanistan through its involvement in the interim procurement arrangements put in place through the Emergency Public Administration Project (EPAP) as well as with the institutions with current responsibility for those and the subsequent arrangements, namely ARDS. As part o f the broader review o f Afghanistan’s Public Finance Management (PFM) system, IDA carried out an assessment o f the procurement environment in the country based on the baseline and performance indicators developed by a group o f institutions led by the World Bank and OECD’s Development Assistance Committee (DAC).

IDA has gained substantial experience and understanding o f the procurement environment in

2. The first key issue identified through the procurement assessment i s the need for ownership and a champion in the Government for reform deepening o f capacity, ensuring integrity in the operation o f procurement systems, and promoting sound procurement among ministries. A second, related issue i s the lack o f capacity in the line Ministries, as evidenced by their inability to define and communicate effectively their desired technical specifications in their procurements. The lack o f capacity i s also evident in the local private sector: while the number o f bids i s reasonably high, there i s a lack o f understanding on application o f public procurement rules.

3. legal and regulatory framework. While it provides a very modern legal system for procurement, it may be difficult to implement in the current context. I t relies, for example, on the establishment o f a procurement policy unit to ensure implementation through the creation o f secondary legislation, standard bidding documents, provision o f advice and creation o f the necessary information systems for advertising and data collection. I t further relies on the development o f an independent complaints review mechanism to ensure enforcement. Neither i s yet in place.

A new Procurement Law has been adopted in November 2005 which radically transforms the

4. procurement facilitation service has been established. IDA and the Government have agreed on a program for country wide procurement reform and capacity building, leading to the transition from centralized to decentralized procurement services. The IDA funded Public Administration Capacity Building project (PACBP) i s the primary instrument for implementing the program to strengthen capacity o f the line ministries to manage public procurement in an effective, transparent and accountable manner. However, the implementation o f the procurement capacity building strategy has not made any significant progress yet due to lack o f coordination and delays in decision making within the Government. The radical changes to the procurement environment brought about by the new Law also require the urgent implementation o f a comprehensive capacity development program. The implementation o f the procurement reform component o f the PACBP should be considered with due priority to ensure that fiduciary standards are further enhanced and that capacity i s developed in the Government to maintain these standards.

In absence o f adequate capacity to manage procurement activities effectively, a central

B. GENERAL

5. “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated May 2004, and the provisions stipulated in the Financing Agreement. The Bank’s Standard Bidding Documents, Requests for Proposals and Forms of Consultant Contract will be used. In case o f conflict or contradiction between

Procurement for the proposed project will be carried out in accordance with the World Bank’s

37

Bank’s procurement procedures and national rules and regulations, the Bank’s procedures will take precedence. The general descriptions o f various items under different expenditure category are given below. For each contract to be financed by the proposed Grant, the different procurement methods, the need for prequalification, estimated costs, prior review requirements, and time frame agreed between the Recipient and the IDA project team are indicated in the Procurement Plan (Attachment 1). The Procurement Plan will be updated annually or as required to reflect actual project implementation needs and improvements in institutional capacity. A General Procurement Notice will be published in UNDBiDgMarket to indicate the major packages to be procured under the project.

6. (AUWSSC) will be responsible for procurement under the project.

Procurement Responsibility. The “Afghan Urban Water Supply and Sewerage Company”

7. Management Information Systems (MIS) and Software to complement, as may be required the MIS to be funded by the German Cooperation (KfW/GTZ).

Procurement of Goods. Goods procured under the project will include about US$0.2 million o f

8. water supply system; the Grant will finance the supply and laying o f well field collector pipes, the transmission main and the distribution network, while KfW will finance in parallel the supply and installation o f electro-mechanical equipment and the construction o f a main reservoir. The procurement for Grant financed contracts will be done using Bank’s SBDs. The estimated cost of expenditure on procurement o f works i s expected to be about US$18.1 million (not accounting for physical, price and tax contingencies). The works will be procured following the ICB procedure.

Procurement of Works. Works procured under the project will include investment for the Kabul

9. advisors for operational support to AUWSSC, corporate and project audits, advisory support for the mobilization o f private operator(s); (ii) engineering support for the preparation of future investments, social surveys and consultations; (iii) visiting specialists and training inputs into an agreed program. The estimated cost o f a l l consultancies i s expected to be about US$8.3 million (not accounting for physical, price and tax contingencies). For services exceeding US$200,000, QCBS shall be used. Selection o f training institutes, government research institutes, universities, specialized international organizations and NGOs for the social surveys and the training inputs may be awarded following CQS fore contracts estimated to cost more than US$lOO,OOO. Short-lists o f consultants for services estimated to cost less than US$50,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. Al l other positions (four advisors and visiting specialists) will follow the procedure for “Selection o f Individual Consultants”.

Selection of Consultants. Consultant services provided under the project will include: (i) four

10. Operational Costs. Financial Support to AUWSSC’ operations will be provided under the project as per the modalities detailed in Annex 2. The estimated cost o f such a financial support i s expected to be about U S $ 5.6 million, including some U S $ 1.2 million to cover the salaries and bonuses o f the AUWSSC management staff (but excluding contingencies). Because the management staff will be indirectly financed by the Grant, it has been agreed that their recruitment will follow transparent and competitive procedures similar to that o f the Bank’s “Selection o f Individual Consultants” procedure.

1 1. Others. Not Applicable

C. IMPLEMENTING AGENCY’S PROCUREMENT CAPACITY

12. capacity by the IDA team through discussions was carried out during appraisal through discussions with concerned officials, advisors and engineering consultants. I t i s very weak: CAWSS does not have staff

A preliminary assessment of CAWSS (which will be succeeded by AUWSSC) procurement

38

conversant with Bank procurement procedures. I t will not be possible for CAWWAUWSSC to handle directly large procurements under the project. The following mitigation measures have been agreed:

Appointment for an initial period o f six months o f a procurement specialist to assist the working group created by MOF/MOUD to corporatize CAWSS in selecting the four advisors and initiate the procurement o f works together with the engineering consultant M / s Beller (see below); this procurement specialist will be financed initially by the ARTF funded WSS project; Appointment of a Technical Advisor to AUWSSC General Manager with procurement qualifications and familiarity with procurement under IDA financing for a period o f 36 months; Technical support throughout project implementation from the KfW-financed engineering consultant M/s Beller Consult for the procurement o f works for the Kabul water supply component; Beller have proven procurement capacity in Bank financed projects; Orientation and capacity building o f staff on Bank procurement procedures as part o f the training program.

0

0

0

0

13. to Grant effectiveness and incorporation o f AUWSSC. No retro-active financing i s envisaged under the project. However, as procurement steps will be initiated prior to Grant effectiveness (in which case the provisions for Advance Contracting may apply) incorporation o f AUWSSC, it has been agreed that: (i) CAWSS, on behalf of MUDH, will initiate the procurement o f works with the support o f the engineering consultants Beller; (ii) the Working Group formed by MOF and MOUD to prepare AUWSSC incorporation, acting as temporary Board o f Directors will initiate the selection o f advisors with the assistance o f the short term procurement specialist financed by ARTF.

Transitional Arrangements. N o contract negotiation and signature i s expected to take place prior

14. Procurement Risk. The overall procurement risk with the above measures i s considered “High”

D. PROCUREMENT PLAN

15. The Recipient has developed an Initial Procurement Plan for project implementation which was reviewed and found satisfactory during the Appraisal o f the project in late February 2006. This plan provides the basis for procurement methods and i s available as Attachment 1. The Procurement Plan will be updated annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Draft Scope o f Works for the Works and Draft Terms of Reference for the Selection o f Consultants were prepared by the Borrower and reviewed during the Appraisal o f the project, Bidding documents for the procurement o f works and the selection o f consultants wil l be made available by December 2006 at the latest.

E. FREQUENCY OF PROCUREMENT SUPERVISION

16. Most o f the procurement activities under the project will be subject to prior-review and as such a close and regular procurement supervision will ensured by the Bank office in Kabul under the project. In addition, as part o f the regular supervision missions, and not less than twice a year, the project team will visit the project sites to review the progress o f the project implementation. In addition the supervision mission will interact with the concerned officials, advisors and engineering consultants to assess any variation in institutional capacity and carry out post review o f procurement actions. Finally, the project team will remain fully available to consider any specific project implementation need. Table 1 below summarizes procurement supervision arrangements.

39

Table 1 - Supervision Plan

Deadline/ Frequency By December 2006

Annually

Twice a year

Regularly

By December 2009

ActivitiedReviews I 0 Bidding documents for procurement o f works and selection o f

consultants made available 0 Initial program for Training and Visiting Specialists inputs

submitted Update o f Procurement Plan, Program o f Visiting Specialists, Training program Supervision mission, including assessment o f variation in institutional capacity and post review o f procurement actions. Prior review o f procurement actions and consideration o f any suecific uroiect imulementation need

0 Final version o f Procurement Plan, Program o f Visiting Specialists, Training Program

0 Summary o f prior- and post-reviews of procurement actions

E. PROPOSED PROCUREMENT ARRANGEMENTS

17. However, first two contracts under each category would be subject toprior review.

The thresholds for procurement methods and prioripost reviews are given in Table 2 below.

40

Table 2 - Thresholds for Procurement Methods and PriorPost Reviews - SI . No. 1. -

- 2.

- 3 .

-

Expenditure Category 3oods

Works

Consulting Services

Contract Value Threshold (US$) Contracts o f value more than US$200,000 equivalent

Contracts less than us$200,000

Contracts less than $100,000 equivalent

Contracts o f value more than US$500,000 equivalent

Contracts o f value less than US$500,000 equivalent

(a) Firms

Contracts more than US$200,000 equivalent

Contracts less than US$200,000 equivalent

(b) Individuals

Contracts more than US$50,000 equivalent

Contracts less than US$50,000 equivalent

[c) Training

Contracts more than US$lOO,OOO equivalent

Contracts less than US$ lOO,OOO equivalent

Procurement Method _ _ _ _ _ ~ ~

[nternational Competitive Bidding (ICB)

National Competitive Bidding

Shopping

International Competitive Bidding (ICB)

National Competitive Bidding (NCB)

Quality- and Cost-Based Selection (QCBS)

Quality- and Cost-Based Selection (QCBS), Selection on Consultants’ Qualifications (CQS)

As per Section V o f the Consultants Guidelines

As per Section V o f the Consultants Guidelines

Selection on Consultants’ Qualifications (CQS)

Single Source Selection (SSS)

o Prior Review ill contracts

?rst two contracts rrespective o f Ialue

I11 contracts ubject to post meview ill contracts

:irst two contracts rrespective o f (alue

411 Contracts

?CBS All Contracts. CQS: ToRs and Short-list m l y

A l l Contracts

TOR Only

First two contract irrespective o f value

All

41

18. packages to be procured, their estimated costs and proposed methods o f procurement are given in the Procurement Plan in Attachment 1 below. The packages shown in italics in the procurement plan are jnanced by other donors (KJW and PPIAF).

Project costs by procurement arrangements are given in Table 3 below. Details on the proposed

Category Goods and Works Consultants’ Services and Training

ICB NCB Shop. QCBS CQS SIC SSS N A Total

Goods and Works 17.7 0.5 0.1

Consultants’ Services and Training 4.0

(a) Technical Assistance 3.2 0.2 (b) Studies and Audits 0.5 0.3

(c) Training

Incremental Operating Costs 5.6

Total (US$ million) 17.7 0.5 0.1 3.2 0.7 4.0 0.3 5.6 32.1 c

Unallocated (US$ million) 7.9 7.9

Total (US$ million) 40.0

Total (Percent) 55.1 1.6 0.3 10.0 2.2 12.5 0.9 17.4 100.0

1 Total (Percent) 57.0 I 25.6 I 17.4 I 100.0 1 -

Table 3 -Project Cost by Procurement Arrangements (US$ million and Percent of IDA Grant)

ICB: International Competitive Bidding; NCB: National Competitive Bidding; Shop.: Shopping; QCBS: Quality and Cost-Based Selection; CQS: Selection Based on the Consultants Qualifications; SIC: Selection o f Individual Consultants; SSS: Single-Source Selection; NA: not applicable

42

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Annex 4

Annex 4: Financial Management Arrangements

Country Issues

1. environment in Afghanistan through the large number o f projects under implementation over the past four years. The Public Administration Capacity Building project, PACB, i s the primary instrument to continue and enhance the fiduciary measures put in place during the past years to help ensure transparency and accountability for the funding provided by IDA and other donors.

IDA has gained substantial experience and understanding o f the financial management

2. that was developed by the Public Expenditure and Financial Accountability (PEFA) multi-agency partnership program was applied in Afghanistan in June 2005. The system i s structured around six core dimensions o f PFM performance: (i) budget credibility, (ii) comprehensiveness and transparency, (iii) policy-based budgeting, (iv) predictability and control in budget execution, (v) accounting, recording, and reporting, and (vi) external scrutiny and audit. Afghanistan’s ratings against the PFM performance indicators generally portray a public sector where financial resources are, by and large, being used for their intended purposes. This has been accomplished with very high levels o f support from international firms. This assistance will continue to be neeaed in the medium term if these ratings are to be maintained. There i s also much room for improvement.

A Public Financial Management (PFM) performance rating system using 28 high-level indicators

3 , In spite o f undeniable gains made in reconstruction since the end of 2001, the challenges facing Afghanistan remain immense; not least because o f the tenuous security situation in the region and continued prevalence of a large illegal and illicit economy. The policy framework benchmarks have not yet been costed so various priorities are funded through the annual budgeting process. The rising costs o f the security sector constitute the major constraint on attainment o f fiscal sustainability. The national assembly will play an increasingly active role with regard to executive oversight. The national strategy has created high expectations o f the executive which could prove to be quite difficult to meet.

4. weak outside o f Kabul. The lack o f qualified staff in the civil service and the absence o f qualified counterparts in the government after 30 years or war and conflicts i s a binding constraint. Delays in reforming the pay structure and grading o f civil servants have severely crippled the public administration o f the country. Domestic revenues lag behind expenditures by a factor of ten to one. Large-scale corruption could emerge to undermine the government’s efforts to enhance aid flows through national accounts. Capacities to track expenditures and monitor expenditure outcomes have improved, but they need rapid and substantial strengthening if progress toward the attainment o f national development targets i s to be monitored. Currently, 75% o f external revenues bypass government appropriation systems.

The public sector, in spite o f considerable efforts to reform i t s core functions, remains extremely

5. Advisor to assist the Control and Audit Office, and a Procurement Advisor to assist in Procurement- related activities. Also an Internal Audit Function i s being developed in the country with IDA financing. USAID and earlier the Indian Aid Assistance Programme are also financing a team of consultants and advisors to assist the Da Afghanistan Bank in local as well as foreign currency operations. The activities carried out under the existing Public Administration projects have helped the Government to ensure that appropriate fiduciary standards are maintained for public expenditures, including those supported by IDA and the donor community.

IDA i s financing a Financial Management Advisor to assist the Ministry o f Finance, an Audit

46

6. Advisors to capacity development and knowledge transfer to the civil servants. Given that, the use o f the Advisors i s expected to continue to be required for the medium term. Challenges s t i l l remain in attaining the agreed upon fiduciary standards and also to further enhance them. And in the interim, the regulatory environment in Afghanistan has advanced significantly. Unfortunately even the mastery o f basic skills in the early environment does not fully qualify the civil servants to work effectively in the new emerging environment.

Progress has been slower than expected in shifting from operations support provided by the

7. Management matters o f the project.

Country systems which are in place for externally aided projects will be used for al l Financial

Risk Assessment and Mitigation

8. to be addressed.

Table 1 below identifies the key risks that the project may face and indicates how these risks are

Table 1 - Risk Assessment and Mitigation

Risk

Inherent Risk Country Inherent Risk Project Financial Management Risk

Perceived Corruption

Overall Inherent Risk Control Risk 1. Weak Implementing Entity

2. Funds Flow

3. Budgeting

Risk Rating

M S

H

S

H

H

S

Risk Mitigation Measures

Source - PFM study Minimize use o f designated account, maximize direct payments to consultants; al l procurement through procurement agent. Government commitment, internal controls and new internal audit will a l l help reduce the high level o f corruption

AUWSSC which i s expected to be corporatized wil l be the implementing entity. Qualified management staff will be hired at market rates including Finance Manager/CFO, before the transition from CAWSS to AUWSSC. They wil l be supported by a team o f advisors including a Sr. Financial Advisor. Till such time, FSO consultants, Corporatization consultants and the CFO (MOUD) will provide support to AUWSSC in financial management under the project and for the corporate affairs o f the new entity. Follows fund flow established for al l IDA funded projects, however as AUWSSC will be a new entity, required authorizations from the Government to be obtained in order for AUWSSC to independently request payments. Initially CCFO o f MOUD along with Working group and subsequently Finance Manager sumorted bv Sr Financial Advisor will be

Residual risk

M M

M

M

S

S

M

47

Risk Rating

Risk Mitigation Measures Residual risk

Risk

responsible for this function pertaining to development budgeting. Continued support from FSO consultants will be critical in collating data from al l CAWSS branches and HQ . Will follow international standards with support from Financial Management Agent. Within AUWSSC, the Finance Manager will ensure that international accounting standards are followed to produce annual Financial Statements. CFO (MOUD) wil l facilitate as part o f the Working Group in the transition to ensure coordination between FSO consultants, Corporatization consultants and Finance staff at AUWSSC and transfer o f financial data. Newly created internal audit department wil l review project internal control systems. AUWSSC will have an independent internal audit department reporting to the General Manager Will be audited by CAO with support from Audit agent. AUWSSC will also have its annual Financial Statements Audited by independent auditors acceptable to the Association. Strengthening the Special Disbursement Unit (SDU) i s a priority under the new F M Agent contract, to provide information that will comply with agreed format o f interim unaudited financial reports (commonly referred to as financial monitoring reports or FMRs). In the corporate entity Finance Manager supported by Sr Financial Advisor will be responsible for this function based on adequate F M systems in Dlace.

H S Procedures

H S 5 . Lack o f Internal Audit

I 6. External Audit M S

H S 7. Reporting and Monitoring

H S L AccountingiRecordingloversight by SDU -

MOF o f al l advancesm- 16 supported by L

‘=substan

_ _ Financial Management Agent. a1 risk: M=modest risk: L-low risk Risk rating: H=high risk;

Strengths and Weaknesses

Strengths

9 . that capacity i s in place to strengthen accountability and transparency in its operations. . PACB helps to strengthen the: financial management in Treasury operations, internal audit, public procurement, and

The main strength i s the Government’s commitment to the PACB project’s approach to ensure

48

external audit under the Auditor General. This helps to provide assurance to IDA and other donors that the current measures designed to ensure appropriate utilization o f funds wil l not be circumvented

10. reforms o f the ministry’s administrative and financial functions. Appointment o f counterpart CFO has been requested b y MOUD, which wil l bring the required support to implement the reforms and improve management o f the development budget. CAWSS i s expected to be “corporatized” with assistance o f consultants financed by PPIAF (under contract with the Bank). A working group wil l be formed by M O F and M O U D to interact with these consultants. Similar arrangements for oversight on the monitoring o f expenditures wi l l be in place which i s provided by FSO consultants currently and wil l be supported by individual consultant/s under the new project to build capacity in SBUs. However, continued support from FSO wil l be critical until AUWSSC demonstrates sustainability in financial management activities across SBUs and HQ at Kabul. Appointment o f staff based on the corporatization consultants (PPIAF- funded) recommendations at market rates (with performance bonus) including Finance ManagerKFO and accounting staff at Head quarters and SBUs together with appointment o f Sr Financial Advisor and extensive training to the staff o f the newly formed corporate entity and strategic business units w i l l be a major strength. CFO-MOUD and corporatization consultants will remain actively involved in the operations o f AUWSSC till Finance Manager and the Sr. Financial Advisor completely take over the financial matters o f the new entity.

The MOUD and CAWSS (an existing semi autonomous unit under MOUD) have initiated

11. operations. This TA, to be provided by a consultant and an international water operator, i s scheduled to mobilize during the third quarter o f 2006.

In addition, KfW wil l also finance a technical assistance to the Kabul and two other SBU

Weaknesses

12. The main weakness in this project, as in many others in Afghanistan, i s the ability to attract suitably qualified and experienced counterpart staff at governmental pay scales. Lack o f capacity in the c iv i l service has cased continued reliance on international firms to perform core government functions.

13. CAWSS does not have the required capacity to manage foreign grants and i t s FM systems and staff lacks the capacity to deal effectively with donor agencies. I t i s presently being supported by a consulting firm under the ARTF -UWSS for the financial support operations. However, to address this weakness, appointment o f staff based on the consultants (PPIAF) recommendations at market rates (with performance bonus) including Finance ManagerICFO and accounting staff at Head Quarters and SBUs together with appointment o f Sr Financial Advisor and extensive training to the staff o f the newly formed corporate entity and strategic business units wil l overcome this weakness.

Implementing Entity

14. budget unit under the National Developmental Budget Framework with powers to request payments under the project. CAWSS (an existing semi autonomous unit under MOUD) i s expected to be corporatized with assistance f rom a team o f experts funded under PPIAF. This team o f expert wi l l also include a Financial Management Specialist (FMS) who will advise on structuring o f the new entity with respect to the Financial Management functions. The F M S scope wil l include Inventory o f land, property and fixedioperating asset t o define level o f capitalization; financial analysis o f CAWSS operations and extrapolation based on new salary scale and a 3-year investment programme for the definition o f working capital and operating subsidies; Inventory o f rights and liabilities, including financial obligations, to finalize the opening balance sheet.

AUWSSC (corporatized CAWSS) will be the implementing agency for this Project. It wi l l be a

49

Budgeting

15 . Since this project will be the first donor project in which AUWSSC will take full responsibility for implementation, very little capacity exists in managing development budget within the existing CAWSS. To strengthen the FM capacity o f CAWSS before it i s corporatized, a soon to be hired CCFO for MOUD will provide budget and financial management support. Initially the above mentioned working group with assistance from CCFO along with the Counterpart in the Planning Department o f MOUD will be responsible for ensuring that the Project expenditures envisaged to be expended in a f iscal year are captured in the Governmental Development budget o f that fiscal year and that the budget i s allotted to AUWSSC as an implementing agency. I t i s to be ensured that the project i s included in the budget decree; however, in case it has not been included, AUWSSC must get an approval from the presidential off ice to be attached to D1 forms at the time o f requesting yearly allotments for contracts under development project to avoid delays when payments are processed. Upon corporatization this function will be the responsibility o f AUWSSC.

16. Accountants at SBU to coordinate with Finance Manager and Sr Financial Advisor and individual consultants to prepare quarterly budgets to be consolidated into the annual development budget for AUW S SC.

For the first few quarters (depending on the need by AUWSSC), FSO consultants will assist the

Funds Flow

17. The flow o f funds will be similar to previous projects except that al l receipts from MOF will be deposited in the Bank account of the AUWSSC. Project funds from IDA will be deposited in the Designated Account (DA) to be opened and maintained at the Da Afghanistan Bank (DAB) or in a local commercial bank. Capacity in terms of delivery o f service and charges for the services will have to be assessed by the Government (MOF) and arrangements formalized before moving from the existing practice o f placing this account in Da Afghanistan Bank (DAB). The DA, in keeping with current practices for other projects in Afghanistan, will be operated by the Special Disbursement Unit (SDU) in the Treasury Department o f Ministry of Finance. Requests for payments out o f DA funds will be made to the SDU by AUWSSC.

18. A Disbursement Protocol between AUWSSC, MOUD and MOF-Treasury wil l be signed outlining the procedures, rules and regulations for requesting funds and/or paymentdadvance from MOF and specifically outlining procedures, controls and reporting as related to Component 2 (Financial Support).. Signing o f this disbursement protocol i s a condition o f disbursement for the Grant.

19. The Bank’s FM Unit along with MOF and AUWSSC officials will review this arrangement at the first supervision mission with a view to carry out an FM assessment o f the capacity o f the corporate entity in terms o f managing funds. On a satisfactory rating o f such assessment, the possibility of fund flows directly to the corporate entity’s bank account will be discussed and arrangements and disbursement protocols and the Disbursement Letter amended accordingly.

20. make direct payments to suppliers, consultants or consulting firms, and issue special commitments for import contracts for goods covered by letters o f credit. Such requests will follow the World Bank procedures. Project payments that are expected to be made to either international firms or local firms, will made either through bank transfers into the account o f such firms or, if necessary, by way o f check payment with account details written on the check.

In addition to payments out o f DA funds, the implementing entities could also request the SDU to

50

Working CapitaVO&M Expenditure Component

2 1. For simplification purposes, expenditures wi l l be clubbed into categories depending on the chart o f accounts being followed by CAWSS for reporting purposes. Disbursements under this component will be made based on a calculation o f a percentage o f “reasonable” operating expenses on a declining basis i.e. 45%, 30% and 15% for first, second and third year respectively on a quarterly basis as an advance. The subsequent quarterly advance will only be disbursed upon acquittal o f the previous advance and submission o f pre-agreed supporting documents. Disbursement Protocol between AUWSSC and MOF- Treasury wi l l outline the procedures for requesting the advance and acquittal o f the same thereof.

Legal requirements for authorized signatures

22. Specimen signatures o f authorized signatories in corporatized AUWSSC for purposes o f signing M 1 6 forms wil l be approved by the Minister o f Finance and to be submitted to IDA prior to commencing disbursements.

Accounting Policies and Procedure

23. Under the on-going ARTF-UWSS project, FSO consultants along with the finance staff at CAWSS HQ and branches supervise preparation o f supporting documents for operating expenditures which forms the supporting documentation for payment request or M 1 6 from MOUD to SDU. Under the new project, this wil l s t i l l be supported by FSO Consultants until adequate external technical assistance i s in place. AUWSSC Management wi l l have the authority to sign payment orders (Form M16) for onward submission to the Treasury Department in MOF which in turn wil l issue a check payable to the cash trustee by DAB after verification o f supporting documents and approvals on the form.

24. Financial Management Manual has already been prepared for CAWSS operations by FSO consultants under the ARTF - UWSS project (see project files). This will be updated with changes envisaged based on PPIAF consultants team recommendations. The revised financial management manual i s expected to include guidelines based on best practices and international standards to maintain financial data under AUWSSC resulting in annual Financial Statements. The revised FM manual will particularly include arrangements in terms o f : (i) internal control systems and procedures to ensure that AUWSSC can be s e l f sufficient and successful in managing i t s affairs towards becoming a profitable venture; (ii) adequate corporate governance structure in place with roles and responsibilities o f key FM staff in the management team o f the new entity (job descriptions to be included); and (iii) role o f various FM consultants/advisors wi th in CAWSS and their responsibilities continuing in the corporatized AUWSSC and finally handover to AUWSSC management team until a sustainable structure i s in place.

25, consultants and local staff wil l establish project financial management in accordance with international standards. For each fiscal year, AUWSSC Finance Manager will be responsible for the preparation o f Financial Statements fo l lowing international accounting standards duly audited by independent auditors acceptable to the Association.

Finance Manager with the support o f Financial Advisor, CFO (MOUD), Corporatization

26. with the help o f regional local staff in Access Database. Reporting o f financial data has improved and achieved some reliability in the past few months. FSO and K f W / G T Z are discussing the option o f using a more sophisticated yet manageable software which i s user friendly and cost effective. The decision will be taken in coming months; till then, the existing arrangements wil l continue to be followed by FSO.

Currently, all financial data pertaining to CAWSS operations i s maintained by FSO consultants

51

27. applied in terms o f preparation o f M- 16 forms by the implementing agency and payments through MOF- SDU.

Civil works will be outsourced by means o f a large contract. Similar FM arrangements will be

28. The project will follow standard governmental financial management policies and procedures. It will use the Chart o f Accounts which has been developed for previous projects and which i s currently being upgraded. Ultimately the SDU will be responsible for accounting for al l expenditures and receipts in the Government’s accounting system.

29. The Finance Department in AUWSSC will be responsible for coordination with the SDU. Project accounts will be consolidated centrally in the Ministry o f Finance, through the Special Disbursement Unit in the Treasury supported by financial management agent. Consolidated Project Financial Statements will be prepared for al l sources and uses o f project funds.

Harmonization with Donors

30. A TA funded by KFW/GTZ i s envisaged to start in the third quarter o f 2006 which will support Kabul SBU (to include Herat and KundudTaluqan subsequently) to streamline operations including financial management. I t has been agreed that other three SBUs o f AUWSSC will work towards streamlining their operations replicating best practices introduced in Kabul SBU.

3 1. Individual consultants will ensure that on-the-job training i s imparted to staff in SBUs to have a uniform system in place across the six AUWSSC SBUs and the HQ. Specific areas in terms o f financial management where capacity wil l be built include; a) financial analysis, cost calculation and controlling; b) setting up o f an accounting system according to international standards and compatible with the requirements o f a water utility; c) standard formats for financial statements and reporting to HQ and initial preparation o f data and forecasts for financial management (notably with respect to inventory, asset, debt and liquidity management); d) establishment o f a financial MIS including monitoring o f actual performance against targeted performance and budgetskinancia1 plans; e) Financial monitoring (billing, collection, accounting) and; f) monitoring o f O&M and other service contracts.

Internal Audit

32. The project financial management systems will be subject to review by the newly established internal audit directorate o f the MoF, according to programs to be determined by the Director o f Internal Audit. Additionally, an internal audit department will be established within AUWSSC which will ensure that adequate internal controls are in place within HQ and SBUs.

33. Under the existing ARTF - UWSS project, FSO consultants just finished the first informal audit which will be repeated every quarter. The findings are being discussed and mitigating measures are being put in place. This practice i s envisaged to be taken over by the internal audit department of AUWSSC.

External Audit

34. External Audit scope has been enhanced for this project. The accounts o f the project will be audited by the Auditor General, with the support o f the Audit Agent, with terms o f reference satisfactory to the Association. The audit o f the project accounts wil l include an assessment o f the: (a) adequacy o f the accounting and internal control systems; (b) ability to maintain adequate documentation for transactions; and (c) eligibility o f incurred expenditures for Association financing. The audited annual project financial statements wil l be submitted within 6 months o f the close o f fiscal year. Al l agencies

52

involved in implementation and holding records o f expenditures would need to retain these records as per the IDA retention policy.

Responsible Agency MOF, supported by Special Disbursement Unit

35 , as indicated in table 2:

The following audit reports will be monitored in the Audit Reports Compliance System (ARCS),

Audit Auditors Date SOE, Project Accounts and Auditor General Sep 22 Special Account

36. Also the IDA project will fund audit fees for an independent external audit o f the corporate entity in respect o f al l sources and application o f funds. The TOR o f such auditor will be o f an acceptable level to IDA. The audited financial statements along with the audit opinion will be submitted to IDA within 6 months of the end o f the fiscal year beginning with f iscal year ending March 2008.

Reporting and Monitoring

37. interim unaudited financial reports (commonly referred to as Financial Management Reports or FMRs) to IDA pertaining to al l sources and application o f funds under the project. AUWSSC will undertake monthly and annual reconciliations o f expenditures with Treasury. A KfW financed TA i s expected to start in the third quarter o f 2006 to support the Kabul SBU and streamline its operations and FM. AUWSSC will harmonize FM Systems set up in the three SBUs supported by KfW and GTZ with that established for headquarters (HQ) and the three other SBUs supported by the project. As part of the training program supported by the project, on-the-job training will be provided to HQ and SBU staff; specific FM functions for which capacity needs to be built are listed below:

accounting based on international standards and compatible with the requirements o f a WSS utility; formats for SBU financial statements and reporting to HQ; data and forecasts for FM such as inventory, assets, debt and liquidity; financial Management Information System (MIS) including monitoring of actual performance against targeted performance and budgets; monitoring o f billing and collection; financial analysis, cost calculation and cost control; and monitoring o f O&M expenses and service contracts.

AUWSSC will establish adequate financial management systems (FMS) to produce quarterly

0

0

0

0

0

3 8. monitoring and supervision. The Finance Manager supported by the Sr. Financial Advisor will be responsible for this function together with preparation o f annual financial statements / reports o f AUWSSC operations.

Interim unaudited financial reports/Financial Monitoring Reports (FMRs) wil l be used for project

39. Quarterly interim unaudited financial reports/Financial Monitoring Reports will be produced showing: (i) sources and uses o f funds by disbursement category and project component; (ii) physical progress; and (iii) status o f procurement activities. The government and IDA have agreed on a proforma format for al l IDA financed projects, and a final customized format wil l be agreed prior to project negotiations.

53

40. the Treasury Department, supported by the Financial Management Agent, and consolidated Project financial statements wi l l be prepared for al l sources and uses o f Project funds.

Annual project accounts w i l l be consolidated centrally in the Ministry o f Finance; in particular,

Year Amount IDA

Disbursement Arrangements

Cumulative

41, for the Grant. The project will be disbursed over a period o f 3 years. The closing date o f the project will be June 30,2010, with a final disbursement deadline four months after the closing date. During this additional 4-month period, project-related expenditures incurred prior to the closing date are eligible for disbursement.

Table 3 shows the allocation o f IDA proceeds, and reflects the categories o f eligible expenditures

2007 2008 2009 2010

Table 3: Allocation of Grant Proceeds

Expenditure Category Amount, incl. Financing Percentage contingencies (US$ million)

1) Goods, works, 26.5 100% consultants’ services and training under components 1 and 3 o f the project, and

(US$ million) (Percent) Disbursements (YO) 6.1 15.0 15.0 13.3 33 .O 48.0 13.9 35.0 83.0 6.7 17.0 100.0

45% o f expenses incurred in 2007 within the limit o f US$1.9 mi l l ion equivalent, 30% o f expenses incurred in 2008 within the limit o f US$1.5 mi l l ion equivalent and 15% o f expenses incurred in 2009 within the limit o f US$1 mi l l ion the project

Total 40.0 100%

Note: 2007 corresponds to Afghan FY 1387; 2008 to 1388 and 2009 to 1389.

42. Disbursements procedures set out in the Bank’s “Disbursement Handbook for Wor ld Bank Borrowers” (October 2005) are applicable to this project.

Disbursement timetable o f the IDA proceeds over the project’s duration are presented in Table 4.

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Disbursement Conditions

43. and SDU i s a condition o f disbursement for the Grant.

Incorporation o f AUWSSC and signing o f a disbursement protocol between AUWSSC, MOUD

Supporting documentation

44. (source documentation evidencing expenditure) will be required for most expenditures - all goods, works, services contracts, regardless o f value. IDA may also opt to from time to time ask for additional supporting evidence to ensure eligibility.

Records. Due to the high procurement and control risks associated with this project, Records

45. for expenditures on training programs under Category 1 which are below US$ 10,000 and for operating expenses, salaries and bonuses on Categories 2, 3, 4 (for Financial Support to AUWSSC). In the event SOE quality or audits are not satisfactory, then records would be also required for all of these expenses.

Summary Reports. Summary reports in the form o f Statements o f Expenditure will only be used

46. Designated Account. A single designated account will be opened at Da Afghanistan Bank or in a local commercial bank in US dollars for a maximum amount o f US$ 1 million representing 3 months o f estimated expenditures. The SDU in MoF will manage payments from and new advances to this account. As authorized by Treasury in accordance with procedures to be stipulated in the disbursement protocol, cash advances may be taken from the Designated Account and held and managed by AUWSSC. This agency’s controls as related to holding and accounting for cash, and properly record expenditures and prepare Summary Reports and maintain documentation will be reviewed during the first supervision mission. New cash advances will only be made when al l other prior cash advances have been justified through submission o f SOEs to the SDU. The designated account will be replenished on a monthly basis, The amount o f advance outstanding in the Designated Account will be adjusted upward or downward depending on cash flow requirements.

47. the advance in the Designated Account. Al l such payments require supporting documentation.

Direct Payments. Third-party payments (direct) will be permitted for amounts exceeding 25% o f

48. primarily restricted to payments and Letters o f Credit (LCs) above US$ 200,000.

Minimum Application Value. Direct payments and Special Commitments (SC) issuance will be

49. Preparation of Withdrawal Applications. The SDU will review for quality o f withdrawal applications and conformity to Treasury procedures, then obtain signature. Selected AUWSSC finance staff will become registered users o f Client Connection and take an active hand in managing the flow of disbursements.

55

Action Plan

Responsible Person IDA/MOF/AUWS SC (DBER) AUWSSC

Table 5 - Action Plan

Target Date Before Effectiveness

Before effectiveness

Action Financial Monitoring Reports (FMR) formats confirmed. Appointment o f Finance Manager/CFO in AUWSSC and adequate FM staff based on FMS (PPIAF) recommendation hired for each o f the six SBUs and HO

AUWSSC AUWSSC

CAWSS/MOUD/Consultants

AUWSSC

MOF/AUWS SC

IDA/MOF/AUWS SC

. Appointment o f Sr Financial Advisor Individual consultant's to build capacity in

Before effectiveness Upon completion o f FSO consultants contract Before disbursements

Within six months o f end of the fiscal year commencing from fiscal year ending March 2008 Before disbursement

First project supervision expected to be after 6 months of implementation.

SBUs.

Revise financial management manual to incorporate based on best practices and international standards to maintain financial data under AUWSSC resulting in annual Financial Statements. Prepare Financial Statements following international accounting standards duly audited by independent auditors o f AUWSSC operations.

A Disbursement Protocol between AUWSSC, MOUD and MOF-Treasury will be signed outlining the procedures, rules and regulations for requesting funds and/or paiments/advance from MOF Carry out an FM assessment o f the capacity o f the corporate entity in terms o f managing funds with a view to direct fund flows to the corporate entity's bank account.

50. e

e

e

Financial Management Covenants

They include: IRA shall submit audit financial statements within six months of the end of each fiscal year. The audit report will cover the project financial statements, the project special account and SOEs, in accordance with terms o f reference to be agreed with IDA. The newly formed corporate entity shall submit audited financial statements within six months o f the end o f each fiscal year. The audit report wil l cover the financial statements o f the corporate entity in relation to al l sources and application o f funds, in accordance with terms of reference to be agreed with IDA. The first such audited financial statement wil l be for the fiscal year ending March 2008. Financial monitoring reports wil l be submitted on a quarterly basis.

56

Supervision Plan

5 1. This i s a high risk project from financial management standpoint. Continuous supervision for at least first year will be undertaken by the Financial Management Specialist. During project implementation, IDA will supervise the project’s financial management arrangements in two main ways: (i) review the project’s quarterly financial monitoring reports as well as the project’s annual audited financial statements and auditor’s management letter; and (ii) during IDA’S supervision missions, review the project’s financial management and disbursement arrangements (including a review o f a sample o f SOEs and movements on the Special Account) to ensure compliance with the IDA’S minimum requirements. As required, a Bank-accredited Financial Management Specialist wil l assist in the supervision process.

Conclusion

52. support this project - subject to implementation o f the items listed in the action plan.

The FM arrangements, including the systems, processes, procedures, and staffing are adequate to

57

Annex 5

Annex 5: Summary of the Social and Environmental Safeguards Framework

Introduction

1. An environmental and social management framework (ESMF) has been developed for the project to effectively address environmental and social opportunities and concerns. A framework approach has been chosen because, although project interventions have been well-defined, there are uncertainties given the overall post-conflict operational context in Afghanistan, which requires substantial f lexibil i ty during implementation. The ESMF builds upon the generic safeguard framework developed for emergency operations in Afghanistan and used for all emergency operations. The ESMF prescribes specific mitigation and enhancement measures to address the social and environmental aspects o f project interventions. In addition, safeguards screening guidelines have been provided for possible subsequent variations in project interventions or possible additional investments.

Safeguard issues and applicability o f Bank policies

Environmental Assessment

2. Operational Policy 4.0 1 “Environmental Assessment” i s triggered. Environmental impacts have been identified and addressed in the Environmental Assessments (EA) and Environmental Management Plans (EMP) which were carried out as part o f the feasibility studies for the expansion o f the Kabul water supply system (funded by KfW) and about 22 provincial towns (funded by IDA and ARTF). Issues o f wastewater disposal and treatment have been analyzed under the IDA-funded Strategic Sanitation Plan and Sewerage/Drainage Master Plan for Kabul and the Sanitation Strategy for provincial cities. They wil l be addressed under the proposed FY07 Urban Waste Management Project (for on-site sanitation) and a possible FY08/09 second Urban Water Sector project (for sewerage). The proposed project wi l l improve existing arrangements for water treatment, water quality monitoring, and importantly the establishment o f groundwater protection zones to ensure sustainability o f the resource. Issues o f security o f access to bulk water, inter-sectoral water allocation, conjunctive use o f ground and surface water are being addressed through the strategic study on long-term WSS issues for Kabul and follow-up activities in Kabul and other regions (Annex 7).

Social assessment

3. part o f the feasibility studies for WSS system expansion. In addition, a qualitative assessment o f past experiences in community involvement in WSS in Kabul and other larger cities, e.g. by UN-Habitat, will be carried out, along with a review o f the experiences among NGOs/INGOs and UN agencies o f WSS- related health-hygiene campaign. Particular attention wi l l be paid to the potential for women’s employment, e.g. as attendants at water kiosks, as wel l as other jobs related to public water supply and sanitation.

4. The components o f the project will benefit households in general by providing increased level o f services including water, sanitation health awareness training. Whi le women and children are not specifically targeted, they wil l be the primary beneficiaries o f the interventions in water and sanitation in terms o f health gains (the under-5 mortality rate i s currently 25%) and reduced workload in water collection. The realization o f these benefits will be ensured through the provision o f health education as part of the water and sanitation interventions.

Social assessment and socio-economic surveys were carried out under ongoing WSS projects as

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Involuntary Resettlement

5. Operational Policy 4.12 i s triggered. Although no resettlement issues are expected, there will be a need for limited land acquisition for the new pumping station and reservoir envisaged as part o f the Logar I1 sub-project. Furthermore, maintenance o f the right-of-way for the transmission line to the reservoir will also require land acquisition as the alignment will cut across a hill which i s rapidly turning into a residential area. A survey i s being conducted to document and clarify the status o f the land involved and to determine the number o f people affected.

6, An abbreviated Resettlement Framework (see Annex 2 o f the ESMF) has been developed containing policies and procedures for restoring housing and compensating for loss o f land and livelihood o f project affected families in a consultative and mutually agreeable manner, compliant with OP 4.12. Private voluntary donations will be documented as required by the Framework, as wil l compensation payments made by the community. For government land, documentation will be required that the land i s free o f encroachments, squatters or other encumbrances, and has been transferred for the project by the authorities. A satisfactory and policy compliant settlement o f the land issues i s a precondition for project implementation.

7. requiring the resettlement or compensation o f more than 200 people. Consequently, no Resettlement Action Plan will be required for the proposed project.

N o activities will be supported that require involuntary land acquisition or the acquisition o f land

Cultural Property

8. property. The Safeguards Framework includes a negative list that precludes any activity that would significantly damage nonreplicable cultural properties. The framework also includes guidelines for chance-finds o f cultural property, so that appropriate procedures are followed.

OPN 1 1.03 i s triggered. The proposed project i s unlikely to pose a risk o f damaging cultural

I n digen o us Peoples

9. through the planned follow-on social assessments, the project will explore how to ensure greater social equity in outreach through community participation and involvement o f women in planning and service delivery.

OP 4.10 i s not triggered. There are no groups classified as Indigenous Peoples in Afghanistan and

Projects on International Waterways

10. from locally confined ground water aquifers and hence will not have any measurable impact on international waters.

OP 7.50 i s not triggered because the project only supports investments for abstraction o f water

Environmental and Social Management Framework (ESMF)

1 1. studies during project preparation. In addition, the ESMF for this project (see summary and additional details in Attachment) builds upon the generic safeguard framework developed for emergency operations in Afghanistan and used for al l emergency operations, including the ongoing ARTF Urban Water Supply and Sanitation Project with MOUD (see Box below). The following box indicates the key elements o f the generic safeguards framework in effect for emergency operations in Afghanistan. These are also reflected in the screening framework that follows.

Socio-economic and Environmental Assessments have been completed as part o f feasibility

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Box: Basic Safeguard Framework for Emergency Operations in Afghanistan

I t i s acknowledged that currently social and environmental management in Afghanistan i s suffering from critical capacity constraints. Since there i s potential for adverse impacts, albeit limited, on the environment due to the proposed activities under emergency operations, their mitigation and management i s key to wholesome rehabilitation and development o f neighborhoods. Hence, keeping in view the existing social and environmental management capacity, as well as the flexibility required with investments s t i l l to be finalized, a framework approach i s adopted for emergency operations. I t allows the early identification o f potential adverse impacts, without the requirement o f rigorous analysis through quantification, and also provides broad guidance for their effective mitigation. Consistent with existing national legislation, the objective o f the Framework i s to help ensure that activities under the project will:

Protect human health; Prevent or compensate any loss o f livelihood; Prevent environmental degradation as a result o f either individual subprojects or their cumulative effects; Enhance positive environmental and social outcomes; and, Ensure compliance with World Bank safeguard policies.

Recognizing the emergency nature o f proposed reconstruction operations, and the related need for providing assistance, while at the same time ensuring due diligence in managing potential environmental and social risks, this Framework i s based on the following principles:

o The proposed operations wi l l support multiple subprojects, the detailed designs o f which may not be known at appraisal. To ensure the effective application o f the World Bank’s safeguard policies, the Framework provides guidance on the approach to be taken during implementation for the selection and design o f subprojects, and the planning o f mitigation measures;

A l l proposed investments wi l l be screened to ensure that the environmental and social risks can be adequately addressed through the application o f standardized guidelines;

Project design and subproject selection wil l aim to maintain regional balance, and equity between genders, and ethnic and religious groups, considering variations in population density. Employment opportunities within the projects wil l be available on an equal basis to all, on the basis o f professional competence, irrespective o f gender, or ethnic or religious group. In all projects which require consultations with local communities or beneficiaries, gender-separated consultations wi l l be conducted to elicit the views o f the female population, along with that o f the male population; and,

Consultation and disclosure requirements wil l be simplified to meet the special needs of these operations. Prior to approval by the World Bank Board, this Environmental and Social Safeguards Framework wil l be disclosed in Afghanistan in Dari and Pashto, and in the World Bank Infoshop.

o

o

o

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Safeguard Screening

Amroach

12. Although project interventions are reasonably well-defined, there may be variations or additional investments (for well drilling, pumping stations, water treatment facilities, and distribution networks) that require safeguard screening during the project. In this case, the following approach that has been adopted for similar World Bank financed projects in Afghanistan will be used.

Characteristics

13. The selection, design, contracting, monitoring and evaluation o f any subprojects identified later will need to be screened and assessed for environmental and social impacts according to the guidelines contained in the ESMF (see project files). The ESMF and guidelines are also available at the World Bank Infoshop, on the World Bank internet site or at the World Bank Office, Kabul.

Environmental Assessment and Full Social Assessment - see Attachment 9 & 10 o f the ESMF

14. The sub-projects will be screened according to the following criteria to determine if (i) they are ineligible, or (ii) need no additional assessment, or, (iii) need a Limited Environmental and Social Assessment (LESA), or (iv) need full environmental and social assessments. A l l LESAs and Full Environmental and Social Assessments have to be cleared by the World Bank before implementation o f civil works i s initiated.

Sub-projects that supply Over 2000 households and not in the negative list

Project Component Responsibilities for implementation of the safeguards framework

Investments in Kabul AUWSSC + Consultant Financial support to AUWSSC AUWSSC + Consultant Technical assistance AUWSSC + Consultant

Ineligible

Responsibilities for oversightlmonitoring

MOUD (WSES Dept.) MOUD (WSES Dept.) MOUD (WSES Dept.)

. Sub-projects that have characteristics indicated in the negative list (see Attachment 2 o f the ESMF) . Sub-projects which supply less than 500 households and not in the negative list N o Additional Assessment

I . Sub-projects that supply over 500 households and less than 2000 households and not in the negative list

Limited Environmental and Social Assessment (LESA) - see Attachment 8 o f the ESMF

Responsibilities for Safeguard Screening and Mitigation

15. MOUD will have overall monitoring responsibility through its Water Supply and Environmental Sanitation Department. A designated Safeguards Nodal Officer will be identified within AUWSSC with responsibility for overseeing the implementation o f the Environmental and Social Safeguards Framework and Management Plan. The KfW-funded Consultant firm that implements the project investment components will have primary responsibility as per the terms o f their Contract to ensure adequate social and environmental mitigation and management during design, construction and operation, as shown below:

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Capacity Building

16. As part o f the social and environmental capacity building that will be provided for implementation of IDA-financed operations in Afghanistan, the Safeguards Focal Officer and relevant staff o f MOUD, AUWSSC and Consultants will receive training in the application o f the Safeguard Framework. Specialist training modules may be considered after an acceptable level o f base knowledge has been established. The capacity building activity will be implemented under the training component o f the project and also through a separate Technical Assistance program for Social and Environmental management implemented by the newly created National Environmental Protection Agency (NEPA). During supervision o f the project, the World Bank will assess the implementation o f the Framework, and if required, will recommend additional strengthening.

17. Through the implementation process, NGOs will facilitate community mobilization and participation in UWSS activities as well as undertake an extensive health hygiene campaign to increase the benefits o f improved water supply and sanitation. Awareness campaigns wil l be funded by KfW.

Awareness Raising and Facilitation of Inter-Agency Collaboration

18. internet, public forums, consultations, newsletters, messages with billing, etc.); (ii) Improving critical inter-agency collaboration; (iii) Provide support to develop and implement an effective Grievance Redressal and communication strategy on environmental and social aspects (including reporting), (iv) Training on Environmental and Social Issues and preparation o f detailed codes o f practice. In addition, the studies component o f the project will cover: (i) the preparation o f contract clauses under future PPP and other contracts to ensure effective management o f environmental and social issues; (ii) an assessment o f issues o f long-term sustainability o f water supplies for Kabul (issues, threats, opportunities, action plan), and (iii) environmental and social assessments as part o f planning and preparation studies.

These activities will include: (i) Environmental awareness improvement (effective use o f media,

Participation Framework

19. Participation i s a process through which stakeholders influence and share control over development initiatives and the decisions and resources which affect them. This process will be carried out through the different stages o f proposed project Le. selection o f investments, planning, implementation and monitoring for which a strategy will be prepared (by the consultants implementing the project components, notably urban upgrading, as part o f inception reports), with the following objectives :

0 Understand existing modes o f participation to improve the effectiveness o f stakeholder participation. Collaborate with government to identify appropriate stakeholders. Recognize customs, beliefs, attitudes and constraints related to participation are gender-specific and stem from the fact that men and women play different roles, have different needs, and face different constraints on a number o f different levels.

Develop a strategy for involving stakeholders as participants and monitoring and evaluating participation and outcomes that involves both quantitative and qualitative tracking o f indicators over the l i fe o f the project which i s done with the direct involvement of the communities whose participation i s being monitored.

0

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20. to ensure participation by and consultation with women, as they can not be expected to be covered through the general community consultations.

During the process o f consultations wi th local communities, separate arrangements shall be made

Consultation and Disclosure

2 1, The Project’s Environmental and Social Safeguards Framework was developed on the basis o f an overall Framework for Wor ld Bank-funded reconstruction operations which was prepared in consultation with the principal NGOs and development partners participating in reconstruction activities in Afghanistan. Pr ior to approval o f the project by the World Bank Board, it wi l l be disclosed by the Government i n both Dar i and Pashto, as well as English, and it will also be made available at the World Bank’s Infoshop.

22. The project wi l l support feasibility studies for future large urban infrastructure schemes, for which World Bank safeguard policies relating to consultation and disclosure will apply, if they are financed by IDA. In particular, for environmental Category A and B investments (as defined in World Bank Operational Policy 4.0 1, Environmental Assessment) proposed for future operations, the implementing agency wil l consult project-affected groups and local non-governmental organizations about the project’s environmental and social aspects, and wil l take their views into account. The executing agency wil l initiate such consultations as early as possible, and for meaningful consultations, wi l l provide relevant material in a timely manner prior to consultation, in a form and language that are understandable and accessible to the groups being consulted.

Details o f E S M F Mitigation and Enhancement Measures

23. guidelines for implementation o f ESMF mitigation and enhancement measures.

This section provides additional details (see Table ES1 below for summary) for procedures and

ENVIRONMENTAL ISSUES

Aquifer Protection

24. and quantity. This would require a concerted effort to protect the current l i feline aquifers for Kabul, which could remain the cheapest source o f water supply for Kabul in any scenario o f supply options.

A critical need i s to ensure sustainability o f the water supplies for Kabul, both for water quality

25. These would entail initiating a zoning for aquifer protection. The environmental assessment has indicated areas that need to be considered as part o f aquifer protection zones (see figure below). These areas need to have special consideration, especially in the future, to minimize the chances o f irreversible aquifer contamination.

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26. essential to move seriously in this direction to ensure sustainability o f the resource base. This could be facilitated by the following activities that would be supported by the project:

Enforcing zoning for aquifer protection would be difficult for such large areas o f Kabul, but it i s

0 Demarcation o f Aquifer Protection Zones: marking the aquifer regions with signboards and maps on ground and improving local awareness and communication with key development approving agencies Annual Aquifer Audit: This would include a periodic audit o f the State of Kabul's Water Sources that would document the existing situation in the aquifer protection zones, the monitoring o f land- use changes, identification o f threats, and evolution o f a management strategy to address these (e.g. IPMiIPNM for agricultural areas; inform industrial siting/compliance management, wasteleffluent management, conflict management, recharge, etc.). This report would be discussed annually in a multi-sectoral workshop for follow-up in collaboration with other agencies. Additional studies would be commissioned as required. Informing siting o f new development: A critical issue i s the regulation o f new potentially harmful developments. NEPA, MMI, Kabul Municipality and other agencies that would have a say in this regard should help develop strategies to regulate potentially harmful development (e.g. industries/ industrial parks with liquid or solid hazardous waste generation and disposal, landfills, etc.) in the aquifer protection zones that could negatively impact the quality and sustainability o f the aquifer system. In addition, regional developments (e.g. the new copper mining potential at Aynak and other similar activities upstream in the Logar) should also be examined carefully and adequate protection plans put in place to mitigate any impacts on these aquifers.

0

0

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Water Resources and Sustainable Yield

27. determined. The assessment took into consideration:

As part o f the environment assessment, the sustainable yield o f Kabul’s major aquifers was

an assessment o f groundwater hydraulics carried out in 2003 as part o f the feasibility study, and earlier studies including: (i) large-scale groundwater explorations by the Soviets in 1962/63, (ii) investigations by the German Water Economy Group from 1964 to 1972 that included hydro- geological investigations and a geo-electrical survey, (iii) a comprehensive study on the principal aquifers o f Kabul carried out in the seventies by Proctor & Redfern International Ltd. o f Canada, (iv) studies by the UN Food and Agriculture Organisation (FAO)

0

0

The potential of the local aquifers has been determined as follows:

Source: Beller Consult, January 2004. Note: “day” i s average day at 20h pumping time

28. According to the environment assessment, the Upper Kabul River aquifer (UKRA) and the Logar River aquifer are the only aquifers with a potential for extension of the already existing wellfields. The Lower Kabul river aquifer (LOKRA) has limits both in quantity and quality parameters; the Paghman river aquifer has a high storage capacity but very limited recharge because o f the small catchment area o f the river. Its capacity needs to be downgraded. Possibilities to extend the UKRA exist mainly south o f the Allaudin weels, preferably on the left bank o f the Kabul River. The Logar aquifer has the potential to sustain a substantial additional number o f wells. Future well drilling should concentrate on the left bank o f the Logar River to the East and West o f the village o f Shewaki, Le. the former investigation zone 11. Small-scale geophysical investigations and test drilling are required in both aquifers before final well siting. Further consideration o f artificial recharge o f the aquifers should be based on experience with the operation o f existing and future wells and must be compatible with overall basin development (Annex 7).

Water Quality and Public Health

29. During the environmental assessment as part o f the feasibility study, water quality in the proposed well fields was tested. The German Federal Institute for Geo-Sciences and Natural Resources carried out the groundwater survey o f the Kabul aquifers. They analyzed water from many shallow wells, and from 9 o f CAWSS’s deep wells. Except for a slightly elevated concentration o f Borondioxide, which i s not hazardous to man, only one well (OY3) has shown a significant exceedance o f the WHO limit o f 50mgil nitrate. I t has been suggested that this water be mixed prior to distribution.

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Source: Beller Consult, January 2004

0,28 13,7 0,36 11,7

Monitoring of water quality

30. health are identified in a timely manner. At a minimum, this will include:

The water quality will be monitored on a periodical basis to ensure that any threats to public

. Testing water quality at source bore-wells and reservoir (daily for pH, weekly for bacteriological plate counts and nitrates, monthly for BOD, COD, annually for complete chemical analysis, including for toxic metals and pesticides) Testing for a sample o f households (1 00 representative households every six months for residual chlorine, bacteriological plate counts, and pH)

3 1. This information will be collected and analyzed using standard sampling and analysis protocols, with proper labeling and logging o f information. The information will be computerized, compared with past data and trends and reported to the CAWSS/AUWSSC, MOUD, Kabul Municipality, the Ministry o f Public Health and the National Environmental Protection Agency (NEPA). Appropriate mitigation measures (e.g. switching/blending sources, additional treatment, public advisories, etc.) wil l be undertaken as required by the water quality results. Based on the first few months o f operation, standard operating protocols would be developed with technical assistance from this project.

32. crises) to the general public wil l also be evolved during project implementation.

Appropriate mechanisms for communication o f these reports (at periodic intervals and during

3 3 . impacts are provided in Attachment 7 o f the ESMF.

Additional codes o f practice for prevention and mitigation o f water quality-related public health

Construction-related impacts

34. considered as part of the UWSS project. These include, among others, the issues of:

There are a number o f construction-related environmental and social impacts that need to be

0 Resettlement & Rehabilitation 0 Silt disposal 0 Excavated area/Borrow area rehabilitation

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0 Labor camp environment 0

0 Mining (UXO) protection Contract clauses for chance finds (cultural property)

35. wi l l have the following environmental precautionary clauses:

In order to minimize the potential adverse impacts o f construction, standard bidding documents

0

b

0

b

0

0

0

0

36.

The natural landscape should be preserved to the extent possible by conducting operations in a manner that wi l l prevent unnecessary destruction or scarring o f natural surroundings. Except where required for permanent works, quarries, borrow pits, staging and processing areas, dumps, and camps, al l trees, saplings, and shrubbery should be protected from unnecessary damage by project related activities. After unavoidable damage and to restore quasi-original conditions were appropriate;

Contractor's operations should be so performed as to prevent accidental spillage o f contaminants, debris, or other pollutants, especially into streams or underground water resources. Such pollutants include untreated sewage and sanitary waste, tailings, petroleum products, chemical, biocides, mineral salts, and thermal pollution;

Wastewater, including those from aggregate processing and concrete batching, must not enter streams without settling ponds, grade I filters, or other process, so as not to impair water quality or harm aquatic l i fe;

The contractor should ensure proper disposal o f waste materials and rubbish. If disposal by burial or fire, it should not cause negative impact to either the air, soil nor ground water supplies;

The contractor should minimize air and water pollution emissions. Dust from the handling or transporting o f aggregates, cement, etc., should be minimized by sprinkling or other methods. Materials, brush or trees should only be burned when the owners permits, under favorable weather conditions;

The contractor's facilities, such as warehouse, labor camps, and storage areas, should be planned in advance to decide what the area wi l l look like upon completion o f construction. These facilities should be located so as to preserve the natural environment (such as trees and other vegetation) to the maximum extent possible;

After project construction, camps and building should either serve as permanent residences and form future communities, if such use can be foreseen and approved, or be torn down and the area restored to its quasi-original condition in order to avoid deterioration into shanty towns;

Borrow pits should be landscaped and planted accordingly to an ecological design to provide some substitute area for lost natural landscapes and habitats.

A detailed Environmental Management Action Plan listing the environmental issues and the specific mitigation measures for addressing them at the pre-construction, construction and operations stages o f the project interventions i s provided in Attachment 4 o f the ESMF.

Cultural Property

37. followed, as provided in Attachment 5 o f the ESMF. In addition, the negative l i s t (Attachment 2 o f the ESMF) prohibits activities that w i l l destroy non-replicable cultural property at the sites mentioned therein.

Specific guidelines and procedures for protection o f chance finds o f cultural significance wi l l be

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Mine Hazards

38. Afghanistan. These procedures, presented in Attachment 6 o f the ESMF, will be followed during the course of a l l construction activities funded by the project.

Specific procedures have been designed to respond to the risk caused by the presence o f mines in

SOCIAL ISSUES

Land Acquisition

39. All physical investments must conform to the Guidelines for land and asset acquisition, entitlements and compensation, which are detailed in Attachment 3 o f the ESMF. Proposals that require more than minor expansion, along rights o f way, demolishing houses or acquiring productive land should be carefully reviewed to minimize or avoid their impacts through alternative alignments. N o land or asset acquisition may take place outside o f these guideIines. An Abbreviated Resettlement Framework defining rules and procedures i s attached as Attachment (3 (i) and a format for Land Acquisition Assessment i s attached as Attachment 3(ii) o f the ESMF.

40. These guidelines provide principles and instructions to compensate affected persons to ensure that al l such persons negatively affected, regardless o f their land tenurekenancy status, wil l be assisted to improve, or at least to restore, their living standards, income earning or production capacity to pre-project levels.

Community Management o f Informal Services

41. It wi l l be many years before Kabul and other large towns will be covered by formal provision o f services in the WSS sector. The alternative i s community management o f informal service provision which needs to be officially acknowledged and the potential for community participation strengthened to ensure greater involvement o f and responsiveness to local demand and to ensure better downward accountability, particularly in face o f local-level corruption. Furthermore, government institutions need to increase their capacity to work with c iv i l society organizations and to coordinate and regulate initiatives by non-governmental actors.

42. of supply and maintenance o f public water sources (stand pipes, wells and water takers) in areas which wil l not be covered by the domestic connections for the foreseeable future. Experiences from Mazar indicate that community management functions best when the community contracts specific work functions or services out to individuals. Specialized intermediation may be required to facilitate the formation o f effective user groups in the urban context, where individual connections are not affordable and shared connections, or public wells or tanker service, are provided instead.

Explorative work and Pilots are required to develop an inclusive and community managed system

43. Another important set o f intermediary services relates to customer awareness and education. While beneficiary consultation i s mandatory, it may be necessary to involve NGO facilitation in the consultation and information o f the urban customers to ensure that they are fully aware o f what arrangements are being made on their behalf, what types o f services they will have access to, and what k ind o f assistance they can request - and what are their options and need for organizing themselves in effective user groups.

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Gender

44. Piped water i s not available on a 24-hour basis anywhere in Afghanistan, and both in rural and urban areas women and children play a major role in collecting and storing water for domestic use. The cooking and cleaning o f the household are almost entirely female chores across all wealth groups, and so i s child care and training o f children in personal hygiene.

45. around 25%. The prevalence o f water-borne diseases i s high, and seven out o f nine o f the most common diseases are related to poor water quality and sanitation, plus poor personal hygiene practices. Hygiene education i s thus needed to ensure that people get the full benefits that improved water supply and sanitation offer. I t i s already common to find NGOs providing education and awareness building in the rural and urban water supply sector.

The health indicators for Afghanistan are among the worst in the world, with under-five mortality

46. consumers and as the main ‘hygiene instructors’ o f the households. This fact needs to be fully realized and incorporated in any water and sanitation strategy which aims at introducing behavioral changes and improved health as an outcome o f increased supply and access to water and sanitation services.

Women and girls are key actors in water and sanitation activities, both as ‘water handlers’,

47. life, community consultations regarding water supply and sanitation need to be conducted with men and women separately, and the same applies to face-to-face instruction in health education. Exploratory work and Pilots need to be conducted to develop models for women’s active involvement in community managed public water sources (public stand pipes, public wells), which could possibly offer income opportunities for vulnerable households (e.g. very poor, disabled, widows).

Due to the social and cultural restrictions put on women’s mobility and participation in public

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Table ES1: Summary ESMF for Project Interventions

Investments

Investments in Kabul under a first investment phase (STP) financed by ARTF and K P : I Drilling of 17 new wells in the Upper Kabul River

I Upper Kabul wellfield, collector I ME-Equipment wells, suction tank and pumping

station o f UKR well field (extension o f Allaudin pumping station)

I ME-Equipment Bagrami pumping station (extension o f Bagrami pumping station) Replacement of trunk main Allaudin to reservoir A and rehabilitation works at reservoir A

I Replacement o f part o f trunk main Bagrami to reservoir 0 and rehabilitation works at reservoir 0 Construction o f trunk main Allaudin to reservoir F and minor modifications at reservoir F

I Distribution networks Deh Naw, Parwan 3, Khosal Mena

I Distribution networks at extension at Rahman Mena I Kabul Utility's HQ

(UKR) Logar wellfields, access and fencing

In addition, a second investment phase (MTPA), firzanced by IDA and K P will include: I Logar I1 wellfield, collector I ME-Equipment wells, suction tank and pumping

station Logar 11, incl. stand-by power a Construction o f trunk main Logar I1 to reservoir E

in Wazi Akbar Khan I Construction of reservoir E on Bibi Mehro Hill in

Wazi Akbar Khan I Distribution networks in service are reservoir E

(Wazir Akbar Khan, Shar-e-Naw, Wazir Abad, Teomany etc.) . Remaining distribution networks in service area reservoir A (Karte Char, Jamal Mena, Dabory)

Sustainability o f groundwater resources (quantity and quality) Land acquisition Construction-related impacts (construction camps, excavation aredsoil disposal, borrow area management, choice o f construction materials, local construction-related environmental impacts, chance finds - cultural property, mine hazards) Water quality and public health

Environmental and Social Issues

(Opportunities and Risks)

Mitigationmnhancement Measures and

Responsibilities (see ESMF for details)

Monitor and manage extraction, water quality, and explore ways to enhance recharge Identification and improved management o f groundwater protection zones Implement land acquisition guidelines Adequate environmental management o f construction camps, rehabilitation o f excavation and borrow areas, safe disposal o f soil and debris, use o f local construction materials wherever possible, protection of cultural property, mine safety measures, etc. Ensure treatment (chlorination) of water supply to ensure safe water at tap.

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Institutional Development and

Technical Assistance Technical assistance including (i) institutional and operational support to the Company before and after its establishment, (ii) engineering support for the implementation of investments financed under the project, (iii) preparation o f future Public-Private Partnerships (PPP), and (iv) technical support for the preparation o f future investments in the sector, including bulk water supply and sewerage for Kabul

Environmental and Social Issues (Opportunities and Risks)

Capacity building o f AUWSSC to adequately manage environmental and social aspects (including appropriate staff skills, information management, institutional arrangements, accountability, mainstreaming environmental and social aspects in planning, design, operations, monitoring, etc.) Public awareness on environmental and social aspects Grievance redressal and communication strategy for AUWSSC on environmental and social aspects Ensuring accountability on environmental and social issues in PPP arrangements Uncertainty on long-term sustainable water supply source possibilities for Kabul city Adequate consideration o f environmental and social issues in water supply and sewerage planning and preparation studies

MitigationEnhancement Measures and Responsibilities

(see ESMF for details) Monitoring o f water quality o Water quality testing, analysis,

o Groundwater protection (with

Awareness raising and facilitation o f inter-agency collaboration Training on Environmental and Social Issues; preparation o f detailed codes o f practice Provide support to develop and implement effective Grievance Redressal and communication strategy on environmental and social aspects (including reporting to GOA and public and grievance redressal) Contract clauses to ensure effective management o f environmental and social issues in PPPs Study for long-term sustainability o f water supplies for Kabul (issues, threats, opportunities, action plan) Environmental and social assessments as part o f planning and preparation studies

reporting and disssemination

MMI)

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Annex 6

Annex 6: Social Issues, Services to the Poor, In formal Settlements and Unconnected

I

In t roduct ion

1. NRVA 2005 provides the most recent data on water supply according to which there presently i s 18% coverage o f piped water supply in urban Afghanistan. Even if the concerted efforts o f the Government and the support o f several donors have resulted in improvements since 2002, the task ahead i s daunting, and it will be many years before all the gozars (neighborhoods) o f Kabul and other large towns will be covered by formal provision o f services in the WSS sector. A possible alternative i s community management o f informal service provision which, however, needs to be officially acknowledged and the potential for community participation strengthened to ensure greater involvement o f and responsiveness to local demand and to ensure better downward accountability, particularly in face o f local-level corruption. Furthermore, government institutions need to increase their capacity to work wi th c iv i l society organizations and to coordinate and regulate initiatives by non-governmental actors.

2. terms o f various levels o f community participation/citizen involvement in urban development and specifically i n service provision. Mazar-i Sharif has a rather unique position among the cities o f Afghanistan as it has independent, functioning and elected community councils representing al l 10 city districts, which are working already for more than ten years. These councils, steered by a local NGO, the Community Forum Development Organization (CFDO), took over responsibility to run community forums from UN-Habitat, who first initiated the whole process in the mid-1990s. In some parts o f Kabul, local communities have been involved in community-based upgrading activities - but different experiences have neither been compared nor assessed, and clear lessons are s t i l l t o be drawn.

Initiatives have been taken by different agencies (e.g. UN-Habitat, NGOs) over the past decade in

The ‘Mazar Model’5 The kalantar i s the official neighborhood representatives who are acknowledged by the municipality. There are 195

kalantars in Mazar, representing the 199 neighborhoods that currently make up the city. Among the main activities of the kalantar is: Collecting money from the community for public works, such as construction o f communal buildings (mosque), wiring for electricity, well digging, etc. organizing people to carry out these tasks. Many o f the decisions a kalantar takes for his community are made in consultation with a council o f local elders, so that any wider community issues that may require contributions such as time, labor and cash are backed up and agreed upon. However, these councils are not involved in community-based upgrading activities, nor do they directly work together with the municipality. Instead they attempt to address (with external funding) the pressing issue of insecurity of employment in Mazar by providing a variety o f skills-building income generating projects as well as educational projects and social services.

The urban poor and vulnerable are widely excluded from access to basic services all over Mazar, giving r ise to potentially hazardous situations and reinforcing their vulnerable situation. In spite o f community shura on the district level and kalantars working in each neighborhood, the very poor often lack representation, and as a consequence are sometimes excluded from assistance flows. Consequently, there i s a need to better realize local poverty differentiation and to uncover the poverty niches in the heterogeneous urban environment in order to ensure that the “poorest” are included in local decision-making processes, and that those who are better of f are not capturing benefits o f support activities (ibid).

Stefan Schutte: Poor,Poorer, Poorest: Urban Livelihoods and Vulnerability in Mazar-i-Sharif. M U , January 2006.

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3 , Experiences f rom Mazar indicate that community management functions best when the community contracts specific work functions or services out to individuals. Specialized intermediation may be required to facilitate the formation o f effective user groups in the urban context, where individual connections are not affordable and shared connections, or public wells or tanker service, are provided instead.

Objective

4. The objective of the study i s to develop models for an inclusive and community managed system o f supply and maintenance o f public water sources (stand pipes, wells and water takers) in areas which w i l l not be covered by the domestic connections for the foreseeable future. Provision should be made for women’s active involvement in community managed public water sources, and models should be explored for how community managed public water supply could serve as an income source for vulnerable households.

Scope o f Work

5. on urban, community participation/management in service provisionhrban upgrading (e.g. CFDO in Mazar-i Sharif, UN-Habitat, NGOs and other agencies).

Assess and consolidate existing studies (e.g. AREU) and documented experiences in Afghanistan

6. Conduct social survey in selected gozars o f Kabul (which will not be covered by the formal provision o f services in the WSS sector in the near future) in cooperation with UWSP and K U R P to assess feasibility and potential model for inclusive, community managed WSS system. Focus should b e o to establish a socio-economic profi le o f the community and households, incl. land & house tenure

status, identifying the vulnerable households, and HHs’ present WSS provision and expenditures to assess existing water sources o f HHs, and expenditures and time spent on water collection, to assess potential o f existing community-based organizations and active NGOs/CSOs in the area, social capital o f the community to assess women’s economic participation and potential for active involvement in community water source management.

o o

o

7. discussions (gender segregated) and combined with relevant international Best Practices:

On the basis o f above information collected through household interviews and community level

A. For Public Water Sources @on-piped water sources) Develop model for inclusive, community managed WSS system to be piloted in selected gozars in Kabul incl. models for women’s active involvement in community managed public water sources (implementation to be financed from other sources). Develop models for future sources and technical solutions for provision o f potable water for communities outside network, incl. contracting arrangements Develop models for management o f public water sources which may offer an income source for vulnerable households (very poor/disabled/widows/ women-headed households). Also review opportunities for water vending Def ine the roles and responsibilities o f Kabul Municipality and Kabul Water Supply Authority in supplying water to the areas not covered by the services o f CAWSS, particularly in terms in extending Operational and Management Support

73

Discuss the future integration and role o f such community managed stand-alone systems with the city network in the event o f extension o f the piped networks

B. for Piped Water Network:

8.

Develop models for inclusive, community based models for gozars that are going to be connected to the piped network under KURP for Operations and Management. Def ine the role o f community groups vis-&vis Kabul Water Authority, develop models for management o f public water sources (public taps/fountains) which may offer an income source for vulnerable households (very poor/disabled/widows/ women-headed households and practice minimal water wastage Develop a suitable policy on according water connection to these vulnerable groups that include cost o f connection; water quantity and quality etc) Develop a set o f recommendations to CAWSS HQ/ Kabul Water Authority on water quantity required, pressure at which it should be supplied; recommended hours o f water supply and suitable supply hours (to minimize loss o f employment). Suggest ways and means to improve hygiene behavior to enhance impact o f improved water services Finally, check for willingness to pay for improved water services and review tariff policy. From the findings, recommend if any cross subsidization i s required in tariffs. Identify barriers that are preventing the poor and marginalized from accessing improved water services

The study and the proposed models shall be presented to community representatives and other stakeholders in a workshop, where the feasibility o f the different options shall be explored and discussed in terms of their implications in terms o f cost and organizational requirements.

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Annex 7

Annex 7: Scoping Strategic Options for Kabul Water Supply: A Multi-Sector Decision Support System Approach

Introduction

1, systematically examine the key attributes o f the various water projects that are planned in the Upper Kabul river basin from the perspective o f Kabul's water supply, taking into account the technical, economic, financial, social and environmental constraints, and for developing a decision support framework for development o f water resources of the Kabul region. This work also included the development of a long-term action plan for creating capacity and institutional mechanisms for integrating water resources management in the Kabul region.

Objectives

2. The objective o f this study was to analyze the medium and long-term options for expansion of water supply to the City of Kabul in the context o f the optimum multi-purpose development and use o f the water resources o f the Upper Kabul River basin (see below detailed schematic).

The Bank Netherlands Water Partnership Program (BNWPP) has supported a study to

Detailed DSS Schematic RS Earah

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fSaiaogR CS \

58 0' F r % R I I : Bagdara

R

-"."..-"

\ \SorkhabR.

charkhRk

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3 , basin and existing and potential development o f i t s water resources into a simple and readily used Decision Support System (DSS) that would facilitate and enable the joint multi-sector analysis o f development options in the basin by the concerned ministries and their development partners.

A second objective of this study was to assemble what i s known about the Upper Kabul River

Approach

4. River basin and to use the DSS to analyze and assess the various options based on their cost, economic impacts, and long-term consistency with development goals and trends in various sectors. The DSS consists o f two major components: an economic optimization model, and a knowledge base. The knowledge base includes data on water demand in Kabul, current and potential developments in various sectors throughout the Upper Kabul River basin, the characteristics o f current and potential future infrastructure, and hydrologic and climatic data.

The approach of this study was to develop a Decision Support System (DSS) for the Upper Kabul

Implications

5. scattered information on projects and from various sectoral masterplans to help consider water resources management and development options in an integrated manner. This kind o f planning i s essential for the sustainable development o f the water resources of Afghanistan. This work has to be under the broad policy direction o f the new Inter-ministerial Water Board and coordinated by its Technical Secretariat. The actual work should be done in Afghanistan by a multi-disciplinary team o f technical specialists drawn from the “best and brightest” in Afghanistan. I t i s critical that basin plans be developed, facilitated by such tools and adequate consultation. However, it should also be noted that such plans would not be like “masterplans” developed in the past; rather they would involve systems for decision support that would be periodically re-assessed based on an evolving knowledge base and stakeholder opinions.

The implications o f the approach developed indicate that it i s possible to organize even patchy,

Benefi ts and Limitations

6. The benefits of this approach are many. These include: (i) integrated basin approach (taking into account various supply, multi-sectoral demands and development/management options); (ii) focal point for multiple stakeholders in developing shared vision o f basin development; (iii) determine trade-offs and synergies explicitly; (iv) make best use o f available data; (v) visual, flexible, readily expandable, and easy to use. Limitations include (i) problems with data quality and coverage; (ii) currently only optimized over single year but system needs to be studied with long flow sequences; and (iii) framework i s intended for Planning not System Operations.

Institutional Arrangements

7. water planning tools, are expected to evolve over time (see figure below). A good beginning has been made with the setting up of an Inter-Ministerial Council for Water (or National Water Board). It i s expected that this would have a technical secretariat to support its activities and also to take on an interim central role for basin planning in Afghanistan. This role could then eventually be devolved to basin entities as they emerge. There could be many options for the exact structure and roles o f basin entities, but it i s inevitable that such entities (or the central technical secretariat before them) would need to develop and use decision support tools for short, medium and long term planning o f the water resources o f the nation. This would be important in regional, national and inter-national contexts.

The institutional arrangements for water planning in Afghanistan, and hence for the use o f such

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Possible Institutional Framework for Key Multi- Sectoral Water Planning & Management Functions

1 Inter-Ministerial Water Board M i W, MAAM, MMI, M1113W, MKRi), NEPA?

, Line Ministries 1

~

Identify demands, options Design Implementation Monitoring

I Optimize national Policy & Inst. Coordination Conflict Resolution Inter-Basin Issues Trans-boundary Issues I Support Water Board ,

National Water Board

I I I I I I I

- - - - - - - - - - - - I

I I

I I

I I

I I

Basin-Level Policy & I I Inst. Coordination Basin I Conflict Resolution Technical Secretariat I Planning, Regulation/Enforcement,

I I Technical Suwort for National I Management, Monitoring I

I I - - Fr=m_ego&kfotPhncing & M_aan_aaqem_ean_t & La& gadn, - - - ~

I Interim Basin Planning

Next Steps

8. Kabul Water Supply include:

Critical next steps in the further development and use o f this system for decision support for

0 Activate Institutional Arrangements for Multi-Sectoral Basin Planning o National Water Board o Technical Secretariat (including interim Basin Planning)

Develop and Enhance Analytical Framework Improve knowledge base (bring data up-to-date), elaborate options (and investigate unexplored options) and enhance modeling

Adopt the Upper KRB Plan (National Water Board) Design, Finance and Implement Investments (Line Ministries)

0 Prepare Upper Kabul Basin Development Plan (Technical Secretariat) o o

o Facilitate Consultation Processes 0

0

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Annex 8

Annex 8: Monitoring and evaluation arrangements

1. been put in place in CAWSS under the FSO component o f the ARTF-UWSS project (see operational manual and database in project files).

A comprehensive monitoring system tracking technical, commercial and financial indicators has

2. The main objectives o f the project being to establish AUWSSC financial sustainability and to improve the quality o f the piped water supply service provided to customers, M&E arrangements will build upon those established under FSO and will mostly track financial, commercial, and technical aspects o f operations:

0 Commercial performance per SBU (and other AUWSSC operations): a. number o f total and bil led connections: per category o f customer; b. population served and service ratio; c. production, and sales (m3/year); d. metering, billing and collection (m3/year and Afg); e. N o n Revenue Water (YO).

Financial Performance per SBU (and other AUWSSC operations and AUWSSClHQ) a. operating costs: electricity, fuel, chemicals, parts, maintenance (Afg); b. staff costs; salaries and bonus (Afg); c. .management costs: salaries and bonus (Afg); d. revenues per S B U per category o f customer (Afg) ; e. accounts receivable per category o f customer (days o f billing); f. Working Ratio (%)

0 Service Performance per SBU/other operations a. per connection and per capita production and sales (lpcd); b. percentage o f samples tested meeting residual chlorine standards (%).

3. The tables below describe in more detail the project’s M&E arrangements, including: The results framework (Table 1) that includes project development indicators and related key outcome indicators and use o f outcome information; and The key monitoring indicators (Table 2) that includes baseline, target values and data collection and reporting arrangements. AUWSSC wil l be responsible for data collection and will report to i t s Board and to the MOUD (WSS Department). I t should be noted that the values shown in the table are based on a data collection exercise carried out over a limited time period, and are thus subject to change as further collection and validation exercises are carried out to improve the quality of the data.

0

0

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Results Framework

Project Development Objective Initiate actions to transform CAWSS into a technically viable operation

Initiate actions to establish the financial sustainability o f AUWSSC

Initiate actions to increase access to and reliability o f the water supply service in Kabul

Prepare a follow-up project under which more substantial institutional and financial objectives could be achieved and coverage further expanded in Kabul and provincial towns.

Key Outcome Indicators

CAWSS corporatized into AUWSSC (Le. statutes approved, Board o f Directors and Management Team appointed)

M o U signed between AUWSSC/HQ and SBUs

First audit o f AUWSSC/HQ and each SBU financial statements completed

Technical assistance and training programs completed

AUWSSC short term performance improvement completed

Investment and technical assistance program completed, under first phase o f Medium-Term Programme (MTP)

Technical studies, detailed designs and bidding documents, social surveys, services to the poor studies, consultation and Gommunication activities completed

Possible future PPP designed and under procurement

Use o f Outcome Information

Init iation o f the next step (medium-term plan) as per the Institutional Development Plan

Implementation o f M o U provisions.

Preparation o f subsequent audits.

Assessment o f AUWSSC management and staff capability to design future programs

Assessment o f performance (key indicators in table below) to design follow-up performance improvement plan.

Assessment o f performance (key indicators in table below) to design and implement next phases o f MTP, in Kabul and Provincial Towns.

Implementation o f future projects in Kabul and other cities, to be possibly funded by IDA and other donors.

I f applicable, selection o f operator(s) under possible follow-up project

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0 cc

Annex 9

Annex 9: List o f Documents in the Project Fi le

A. Preparation Study Reports Feasibility Study for the Extension o f the Kabul Water Supply System, Beller for CAWSS, January 2004 (KfW-funded) Scoping Strategic Options for Kabul Water Supply: a Multi-Sectoral Decision Support Approach (draft final report and model), World Bank, February 2006 (BNWPP-funded) Environmental Assessment, Management Plan and Groundwater Protection Plan for Kabul Water Supply, Beller for CAWSS, March 2004 (KfW-funded) Socio-Economic Survey for Kabul Water Supply, Beller for CAWSS, September 2003 (KfW- funded) Strategic Sanitation Plan for Kabul (draft final), Gauff for Kabul Municipality, January 2006 (IDA-funded) Sewerage and Drainage Master Plan for Kabul (draft final), Gauff for Kabul Municipality, January 2006 (IDA-funded) Environmental Assessment for Sewerage and Drainage for Kabul (draft final), Gauff for Kabul Municipality, January 2006 (IDA-funded) Institutional report for the urban water sector, Beller for MOUD/CAWSS, March 2004 (IDA- funded) Report on Market Sounding, Aquanet, February 2005 (PPIAF-funded) Financial report for Provincial Towns WSS, Beller for MOUD/CAWSS, March 2005 (IDA- funded) Social Assessment for Provincial Towns WSS, Beller for MOUD/CAWSS, March 2005 (IDA- funded) Environmental Assessment and Management Plan for Provincial Towns WSS, Bel ler for MOUD/CAWSS, March 2005 (IDA-funded) Feasibility studies for the expansion o f Water Supply Systems in 22 Provincial Towns, Beller for MOUDICAWSS, March 2005 (IDA and ARTF-funded) Sanitation Strategy for Provincial Towns, Beller for MOUD/CAWSS, March 2005 (IDA-funded)

1.

2.

3 ,

4.

5.

6.

7 .

8.

9 . 10.

1 1.

12.

13.

14.

B. Bank Staff Assessments 1. 2. 3. 4. 5.

Aide Memoires, Project Concept Note, Minutes o f Meetings Review o f “Feasibility Study for the Extension o f the Kabul Water Supply System”, April 2006 Note on social issues, March 2006 Preliminary cash-flow analysis (electronic file), March 2006 Staff Appraisal Report (1978) and Project Completion Note, Kabul Water Supply and Sewerage Project

C. Project Implementation Documents 1.

2. 3.

CAWSS Financial Support to Operations (FSO) Operational Manual, Beller for MOUD/CAWSS, July 2005 (ARTF-funded) Environmental and Social Management Framework, March 2006 Note on Procurement Process, MOUD/CAWSS

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Annex 10

ISLAMIC REPUBLIC OF AFGHANISTAN

Ministry of Urban Development and Housing

Urban Water Supply and Sewerage Sector Policy

October 24,2005

CONTENTS

PREAMBLE; BY H I S EXCELLENCY THE MINISTER OF URBAN DEVELOPMENT AND HOUSING, ENGINEER YUSOF PASHTUN ................................................................................ 83

DEFINITION OF URBAN WATER AND SEWERAGE SERVICES .................................... . . A 4

EXISTING POLICY AND DOCUMENTATION ........................................................................ 84 1.

2.

3.

4. SECTOR PRINCIPLES .................................................................................................................. 87

POLICY VISION, OBJECTIVES AND SECTOR REFORM ............................ ......................... 87

4.1 SEPARATION OF WATER RESOURCES MANAGEMENT AND URBAN WATER SERVICES PROVISION .............................................................................. a7

4.2 FUNCTIONAL SEPARATION ........................... ...................... aa 4.3 LONG RUN COST REC ..................................................................................... .88 4.4 AUTONOMY AND DEC .......................... .a9

4.6 TECHNICAL STANDARDIZATION .............................................. 5. INSTITUTIONAL POLICIES ............................................... .... ..................................................... 90

6. FINANCIAL AND COMMERCIAL POLICIES .......................................................................... 90

7. SOCIAL POLICIES ......................................................................................................................... 91

8. SERVICE POLICIES ............................................................. ...................................................... -92

9. FROM VISION TO REALITY ....................................................................................................... 92

4.5 HUMAN RESOURCES DEVELOPMENT ........................................................... a9

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PREAMBLE by H i s Excellency the Minister of Urban Development and Housing, Engineer Yusuf Pashtun.

Twenty four years o f war, conflict and drought have devastated the social, environmental and economic structures in Afghanistan. Water resources and infrastructure have suffered. The rehabilitation o f the water infrastructure and the rebuilding o f the sector institutions are top priorities o f the Government.

Our water policy i s deeply rooted in our Islamic faith and traditions. Water i s considered sacred, and we have been taught that:

“Water i s the source o f all l i fe ” “Polluting o f water i s a sin’

“Wastage o f any commodity, particularly water, i s forbidden” “Water resources are the property o f all Humanity”

Water issues have reached a crisis as a result o f population growth and resource depletion. Therefore, water management must emphasize conservation and efficiency in water usage. The keys to success in the water sector are self-sustainability and effective maintenance.

Our urban water policy, fixed by the Ministry o f Urban Development and Housing, must incorporate the following principles:

0

The infrastructure must be rehabilitated in order to develop self-sustaining and

Comprehensive planning for the entire water sector

Water conservation to be implemented without delay

community- based urban water supply systems

Capacity building based upon effective training o f water staff

Decentralized water and wastewater services

The water services programme including the financing o f required future expansion must become self-sustaining.

0

0

0

The Government o f the Islamic Republic o f Afghanistan has approved this policy. The policy also links with the already approved document o f the Ministry o f Irrigation, Water Resources and Environment (MIWRE) “A Strategy Policy Framework for the Water Sector”. (SPFWS)

Signed, on this day, October 24,2005

H.E. Eng Yusuf Pashtun Minister o f Urban Development and Housing

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1. DEFINITION OF URBAN WATER AND SEWERAGE SERVICES

This policy i s concerned with the supply o f potable water and sewerage services to the urban and peri-urban communities o f Afghanistan.

Urban areas are defined as those with a population generally in excess o f five thousand and falling within the jurisdiction o f an authority established and governed by the Law o f Municipalities (Law 794 o f Year 1421 Chapter 2 Article 7).

Peri-urban areas comprise the settlements outside the urban boundaries. These settlements are usually populated by low-income families and generally lack basic services, such as water supply and sanitation facilities.

Water users comprise domestic, institutional, commercial and industrial consumers.

Importantly, this policy also concerns the collection, treatment and safe disposal o f urban waste water

The management o f solid waste and the products o f traditional toilet facilities are specifically excluded from this policy. Municipalities or other designated institutions wi l l continue to be responsible for solid waste management and the oversight o f traditional on-site sanitation facilities.

The Ministry o f Urban Development and Housing has jurisdiction over the services and areas as defined above. However, in some areas definition may become difficult as there are peri-urban and semi-rural characteristics. I n such cases, cooperation between Ministry of Urban Development and Housing and Ministry o f Rural Rehabilitation and Development will be required.

2. EXISTING POLICY AND DOCUMENTATION

This urban water supply and sewerage services policy incorporates relevant elements contained in existing laws and regulations. Also included are statements from current international and Government agreements. This policy also provides the basis for legislation that w i l l in turn formalize the strategies and institutions needed for the sector to function effectively.

International Policy Statements:

This policy has i t s foundation in the M a r del Plata Statement (1977) and the Dublin Statement (1992). Also, it i s based on the fundamental right to water that i s entrenched in the UN Committee on Economic Social and Cultural Rights General Comment No. 15 (2002), which states:

“The human right to water entitles everyone to sufficient, safe, acceptable, physically accessible and affordable water for personal and domestic uses ”

Further, Target 10 o f the Millennium Development Goals (Rio+lO Summit) states the following objective:

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“Halving by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation”.

Afghan Policy Statements and Legislation:

Firstly, Article 13 of the Constitution of Afghanistan (1382) defines that the state i s responsible for formulating and implementing effective programs for “...increasing o f public living standards.”

Articles 13 7- 14 1 o f the Constitution describe the roles and purposes o f Provincial Councils and Municipalities as devolved governance institutions.

The National Development Framework o f April 2002 recognizes the key role o f investments in water resources, urban institutions and infrastructure. Also, the National Development Strategy (NDS), currently under preparation has among its goals the reduction of poverty, the harnessing o f the private sector to promote economic growth, and the protection o f the vulnerable parts o f the population. Once the interim NDS i s published later in 2005, the urban water services sector policy will need to be harmonized with it. Access to urban water services i s an important component o f the NDS.

Secondly, the Water Law (1360) deals mainly with irrigation. However, Article 2 states that: “Water belongs to the people and i s preserved by the Government.” Article 5 o f the same law gives priority to the use o f water “for drinking and other living requirements.”

The Kabul International Conference on Water Resource Management and Development in Afghanistan April-May 2002, issued the “Kabul Understanding” that deals mainly with water resources management and irrigation, but also makes the following statements that are relevant to urban and domestic water supply:

0

0

0

“We agree that priori ty should be given to safe drinking water supply which should be a basic right for all; We agree that meeting the priority for drinking water and water for domestic use requires investment in technologies which are affordable and sustainable; We agree that all external partners should support national capacity building, including the private sector; the private sector and market-based approaches should play an important role in the development o f water resources within an appropriate legislative and regulatory framework; We agree that in the short term external funding for water resource management and development wi l l be essential.”

0

The document Transitional Islamic State of Afghanistan, Ministry of Irrigation, Water Resources and Environment (MIWRE) “A strategic policy framework for the Water Sector”, emphasizes the need to build institutional capacity in the water sector, while at the same time decentralizing operations and controls to the local level, and involving private sector investors:

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0 “Provision o f necessary support and regulations to promote and encourage the development o f an effective and dynamic private sector in the natural resource sector generally, and in the water sector especially, guided by the established national policies and guidelines.”

0 “Water delivery services will be decentralized using a variety o f autonomous and accountable agencies, including public, private and community -based water users associations and organizations.”

0 “Urban water supply would be addressed through a combination o f different mechanisms, including the municipality, the Ministry o f Urban Development and Housing and the private sector. Autonomous water supply institutions may be created to effectively handle urban water supply.”

0 “Reorganization and strengthening o f government institutions that can effectively respond to the present and future needs o f the country in the water sector.”

0 “In this (decision making) process, three functions can be distinguished: a constitutional -, an organizational - and an operational one. Al l functions need to be applied in an integrated way.”

Thirdly, the following legislation exists on the statutes:

0

0

0

Legislation of the Utility of Constructional and Project Designing for the Water Supply and Sewerage Network (LAW 651, Year 1987). Utility for PreservationMaintenance and Operating of Water Supply and Sanitation for Kabul City (LAW 655,1987) Legislation of Water Supply Network and Sanitation Utility (LAW 799,2001)

These laws generally establish, as a state-owned utility enterprise, the powers and duties o f the Central Authority for Water Supply and Sewerage (CAWSS) and the operating service providers in Kabul and other citiesitowns.

Fourthly, the Afghanistan Reconstruction Trust Fund (ARTF)- Short-term Support to Urban Water Supply and Sanitation Sector (Final Version February 14th, 2005)

This document elaborates some key policy objectives for the urban water services sector in Afghanistan:

Government’s Vision and Objectives include:

0

0

“Transform current sector institutions (notably CAWSS) into high-performing WSS utilities, financially self-sufficient, and customer orientated;” “To decentralize utility management and to increase the involvement o f local government, communities and consumers;”

The ARTF agreement also envisages the strengthening of the human resources o f the institutions through the payment o f better salaries and performance incentives.

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3. POLICY VISION, OBJECTIVES AND SECTOR REFORM

The Government Vision for the Urban Water and Sanitation Sector reads:

The urban water supply and sanitation sector shall be reformed and developed to improve the quality of life in all urban communities. By ensuring an equitable provision of potable water and wastewater services at an affordable cost and on a sustainable basis, poverty will be reduced, health generally improved and economic development promoted.

The policy broadly seeks to satisfy and balance the interests o f the various stakeholders in society:

Government, through the MUDH, in meeting national objectives o f improving urban water and sewerage services provision.

The urban population, particularly the poor and marginalized communities, who have pressing social needs following the war.

Business and commercial interests, who require reliable water supply to facilitate manufacturing and commerce, the engine o f economic growth.

Private Sector investors, who might bring additional funding and/or expertise into water and sewerage services provision and who require an acceptable risk/ return profile.

The main objectives and implications o f this policy are to:

0

0

e

Improve sustainable access to safe drinking water and basic sewerage in accordance with the Millennium Development Goals. Provide the basis for the adoption o f technical standards and delivery mechanisms, to suit the needs o f urban and peri-urban settlements. Prepare for the decentralization o f service delivery from one central authority to local autonomous entities and provide for community consultation and involvement and the participation o f civic organizations and NGOs. Ensure improved operation and maintenance o f the infrastructure. Place emphasis on full cost recovery and the financial sustainability o f the service providers.

e 0

4. SECTOR PRINCIPLES

4.1 SEPARATION OF WATER RESOURCES MANAGEMENT AND URBAN WATER SERVICES PROVISION

The Ministry o f Energy and Water has jurisdiction over the nation’s surface water resources and i s responsible for setting up the policy and structures to manage it.

The Ministry o f Mines and Industries has jurisdiction over ground water

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The Ministry o f U r b a n Development and Housing has jurisdiction over urban water services and i s responsible for setting up the policy and structures to manage it.

Urban water service providers must apply to River Basin Authorities for abstraction rights, in the same way as wil l be required o f other users.

4.2 FUNCTIONAL S E P A R A T I O N

A three-tier separation o f functions controlling the Urban Water Sector i s proposed, as follows:

0 Constitutional/ Pol icy Function:

The central Government, through the Ministry o f Urban Development and Housing (MUDH) sets urban water and sewerage services policy. I t s m a i n roles and responsibilities are to formulate pol icy and legislation fo r the sector, enter i n t o and coordinate internat ional agreements, and ensure good performance by the sector.

0 Regulat ion and Supervision Function:

This function i s concerned with the monitoring and supervision o f the implementation o f sector policy to ensure that the intentions o f Government are followed. The associated tasks involve setting standards and mon i to r i ng the performance and qual i ty o f service provision. I n addi t ion coordinat ion o f nat ional funding such as that provided by donors i s required. Recommending tariffs f o r Government approval i s also included.

0 Operat ional (Service Delivery) Function:

Service providers are fully responsible for the operation and maintenance o f urban water and sewerage systems. The operat ing entities will be required, either direct ly o r indirectly, t o cover a l l aspects o f the management o f autonomous commercial business units including delivering water, collecting and treat ing wastewater, maintaining the infrastructure, prepar ing and meeting budgets f o r revenue and costs, managing the relationship with customers, and implement ing capital projects.

The three-tier functional separation i s envisaged to work bi-directionally, with policy and direction flowing downwards and reporting and other information flowing upwards.

4.3 LONG RUN C O S T RECOVERY

The urban water sector service providers should aim to recover all costs in the long run. Costs will include both operational costs and investment costs. Water services users will be required to collectively pay for the full costs. In order to make cost recovery possible a l l water connections should have a meter in good operating order and the service providers will have the obligation and right to read such meters at cost-efficient intervals, and bill customers in relation to the amount o f water consumed. Similarly, consumers will be billed, where applicable, for the collection and treatment o f wastewater.

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4.4 AUTONOMY AND DECENTRALIZATION

The authority to make operational and local management decisions should l i e at the lowest appropriate level. Decentralization o f authority wil l be extended as institutions become more capable. In order to exercise their authority, service providers must be guaranteed the right to charge customers and collect revenue and to have deficits funded through budget transfers.

4.5 HUMAN RESOURCES DEVELOPMENT

The overall shortage o f skilled and experienced human resources wil l restrain progress in the sector unless addressed.

Strategies and management models adopted in the sector wi l l therefore aim to develop Afghani managers and workers who could effectively and efficiently manage the provision o f water and sewerage services. Selective skills may be provided on occasion by expatriates, wi th t h e objective o f transferring skills to Afghan counterparts.

A comprehensive HR development plan covering al l facets o f water and sewerage wil l be implemented across all institutions in the sector.

4.6 TECHNICAL STANDARDIZATION

Technical standards for design and selection o f materials, plant and equipment will be established in order to minimize the sum o f investment and operating costs over the lifespan of the facilities, t ime value o f money taken into account.

Particular attention will be paid to finding infrastructure solutions that lower costs and improve the accessibility to water services by the urban poor.

Nevertheless, in producing water, and in the treatment o f waste water, water service providers shall ensure that the environment i s protected and that the requirements o f the Ministry o f Environment and National environmental laws in connection with water abstraction and effluent discharge are followed.

In urban and peri-urban areas, the Ministry o f Urban Development and Housing wil l promote efficient water use by a l l customers, and wil l take steps to ensure that opportunities to implement approaches such as waste water reuse and aquifer recharge are followed wherever they are viable.

As far as i s practicable and possible, international design and operating standards will be adapted to the needs o f Afghanistan, rather than creating totally new standards.

To this end, documentation wi l l be created, outlining the various standards to be applied. Standards shall cover at least but not be limited to, the following:

0

0

Operations and Safety

Design criteria for urban water supply and sewerage systems Construction materials and electro-mechanical plant and equipment

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0

0

0

Tender documentation and bidding procedures Potable water quality, effluent quality and environmental management Metering, billing and other customer services

5. INSTITUTIONAL POLICIES

The present roles o f the various institutions involved in the sector are as follows:

0 The MUDH i s responsible for setting policy.

0 CAWSS i s responsible for the provision o f water and sewerage services through i t s branches established in each town/city.

It i s an urgent priority to initiate reform o f the sector as performance i s inadequate under the present institutional arrangements. It i s necessary for the sector to place a greater emphasis on efficient service delivery, devolution o f responsibility to local institutions, and sustainability o f the sector. Therefore, the evolving roles o f the various institutions involved in the sector wil l be as follows:

0 The MUDH wil l remain responsible for setting policy but will also ensure necessary regulation.

0 CAWSS as an entity will be corporatised under the commercial law o f Afghanistan. CAWSS will delegate i t s responsibility to the lowest appropriate level o f service providers, some o f which might include several urban centers. Such providers will possibly be l inked with private management contractors, and include participation by community based organizations.

0 Where service provision i s decentralized, CAWSS wil l assume responsibility for monitoring the performance o f the local service providers. The local service providers wil l be autonomous organizations responsible and accountable for a l l aspects o f managing and producing improvements in performance, and will ultimately become accountable to supervisory boards.

Despite the sector reforms described in this policy, it i s recognized that the resources available from within the sector might not be adequate to ensure that the required progress in service delivery takes place at an acceptable pace. Therefore, the engagement o f the private sector i s envisaged in order to supplement the resources available to the sector. Various options and forms o f contract with the private sector are possible, and these will be considered for implementation in the short to medium term, in line with requirements.

6. FINANCIAL AND COMMERCIAL POLICIES

The following commercial and financial policies shall apply to the urban water sector:

0 Water i s an economic good, l imited in availability. Service providers and users alike should reduce losses and wastage on both the supply side and on the demand side.

0 The full costs o f providing water services, operating water and sewerage infrastructure, and financing the institutions in the longer term should be borne by the users o f the services. Tariffs and charges wil l be based on international efficiency norms for water service provision and users wi l l not be expected to pay for gross inefficiency.

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Although capital projects are largely donor funded at this stage, in the future the sector should strive to finance capital projects through loans raised in the markets, private sector investors and by surpluses generated from revenue collection.

0 Tariffs shall be designed to be efficient, which means that on average tariffs wi l l equate to the long run cost, tariffs shall be financially self-sufficient which means that revenue should cover all costs less subsidies, tariffs shall be affordable which means that low-income consumers wi l l be entitled to subsidies to pay for the services, and tariffs shall be transparent and easily understood by consumers. Life-line tariffs shall be available to ensure a l i fe sustaining service for poor consumers. Consumers wi l l be required to settle water and wastewater bills; failure to do so wi l l attract sanctions by the service provider.

Especially:

Funds generated within the sector wi l l be applied within the sector and shall not be used or applied to non-water related services.

Government recognizes the need for cross-subsidization and transfer through the tar i f f system from wealthier to poor users.

Government will approve tar i f f levels, and it wi l l define the institutional arrangements to review and implement tariffs and charges.

Service providers must strive for economic self-sufficiency and efficiency, meaning the reduction and eventual elimination o f subsidies.

The financial systems o f each water and sewerage service provider should enable the identification o f different service costs, and these costs shall be separated.

Water and sewerage service providers shall subject their financial affairs to annual audit by external auditors acceptable to CAWSS.

7. SOCIAL POLICIES

The following social policies wil l apply to the urban water supply and sewerage sector:

0 Service providers wi l l ensure that the poor and marginalized communities fall ing within their urban and peri-urban supply areas receive priority attention in the planning and implementation of water distribution and sewerage projects.

0 Women are generally responsible for the collection o f water and i t s use in the households. As women hold a unique position in Afghani communities, strategies applied by water service institutions wi l l recognize and respect the relevant cultural practices.

0 Water services providers are expected to supply adequate water services to the Mosques and Holy Places. Arrangements will be made through the Ministry o f H a j and Islamic Affairs to pay the provider for this supply on the basis o f metered consumption.

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0 Rapid urbanization in recent years has lead to the proliferation o f large unplanned and poor areas surrounding the cities and towns. Particular attention will be given to finding effective and low-cost alternative ways o f serving these communities with good water and sewerage services.

8. SERVICE POLICIES

The following service policies will apply to the urban water supply and sewerage sector:

0 The service providers in the towns and cities will focus on customer service and customer orientation. Customers will be entitled to receive information on water and sewerage service issues that concern them. A Service Charter will be put in place to articulate the relationship between each service provider and its customers.

0 As a short term objective, and given that water resources are scarce in many places, the quantity o f water to be provided for each person served by a private household connection should be a minimum o f 40 litres per person per day. Where consideration i s given to installing water borne sewerage systems, availability o f the required water resources must be a precondition. Generally, the requirement for water borne sewerage increases to about 100 litres per person per day for the households connected to sewers. Each person served by a communal tap should receive a minimum o f 15 litres per day.

0 I n the medium to longer term, urban water services providers will endeavor to supply water 24 hours per day, seven days per week.

0 Service pressure after the water meter should be between 1.5 bar and 6.0 bar.

0 The quality o f drinking water in respect to aesthetic, physical, chemical and microbial properties shall be in accordance with the standards o f the World Health Organization (WHO).

9. FROM VISION TO REALITY

The further development o f the sector will be elaborated in accordance with this policy in a separate strategy paper outlining an Institutional Development Plan for the Urban Water Supply and Sewerage Sector. As development o f the sector proceeds and changes occur in the sectoral context, the Ministry of Urban Development and Housing will review and amend this policy accordingly.

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Annex 11

ISLAMIC REPUBLIC OF AFGHANISTAN

Ministry of Urban Development and Housing

Urban Water Supply and Sewerage Sector . Institutional Development Plan

October 24,2005

PREAMBLE; by His Excellency the Minister of Urban Development and Housing, Engineer Yusuf Pashtun

Following the adoption o f the “Urban Water Supply and Sewerage Sector Policy”, this document outlines the essential roadmap for the development o f the institutions that will carry out the implementation o f Government’s mandate.

This Institutional Development Plan also links with the document o f the Ministry of Irrigation, Water Resources and Environment (MIWRE) “A Strategy Policy Framework for the Water Sector (SPFW S).”

The Government o f the Islamic Republic o f Afghanistan has approved this Institutional Development Plan and the Ministry o f Urban Development and Housing looks forward to the support o f al l stakeholders in its implementation.

Signed, on this day, October 24,2005

H.E. Eng Yusuf Pashtun Minister o f Urban Development and Housing

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1. OVERVIEW

The major objective of institutional reforms within the water sector is to enhance the technical, operational andfinancial capabilities of water agencies so they can address the drinking water needs of the Afghan people now and in future. To achieve this objective, several key principles must be adhered to as follows:

The treatment of water as an economic commodity, so that the cost of water reflects its true value. That is, to ensure that people are paying for water at a price that can sustain the continued management, operation and maintenance of the systems and personnel.

The promotion of ownership and involvement by the municipality and the customers served by the systems.

The promotion of a decentralized operational and decision making structure.

The encouragement and adoption of modem technology, management practices, organizational structures and standards, notably through the participation of the private sector

The attraction of investments fFom markets/ international financial institutions/ donors -necessary to build water and sewerage assets to fully meet the demands of the urban population

The need for reform, along with the rationale for why a change needs to occur in the Afghan urban water sector, is well understood. The struggle is how to effectively implement this change within the political, cultural, historical and economic constraints of society.

2. BACKGROUND

The urban population o f Afghanistan has increased dramatically in the last 3 years since the fal l o f the Taliban. In Kabul alone, refugees have flocked to the city along with people f rom rural areas seeking jobs and the benefits offered by urban l i fe . The population has increased from 1.2 mi l l ion in 2000 to at least 2.4 mi l l ion i n 2003. The current country-wide urban population i s estimated to be 6.4 mill ion, which i s 30 percent o f Afghanistan’s total population. Of the urban population, 70 percent o f the people are concentrated in the six cities o f Kabul, Kandahar, Herat, Mazar-I-Sharif, Jalalabad and Kunduz.

This massive population relocation to urban areas places tremendous pressure on land and services. The challenge o f Afghan urban post-conflict reconstruction i s daunting. The needs for space, services, employment, municipal capacity and good governance are substantial. If lef t unaddressed, the quality o f life in urban areas wil l degrade and ultimately the security o f the country wil l follow. This unfortunate chain o f events has been wel l documented in Afghan history as wel l as in the history o f numerous other countries.

Investment in Afghanistan’s water supply and sewerage sectors, both in respect o f capital and operations and maintenance has been minimal over the past three decades. This has resulted in a rapid decline o f these previously marginal systems to a totally dysfunctional state. The situation has been compounded by armed conflict and drought. In response to these circumstances, substantial investments are being made and structural deficiencies are being addressed by international donors and financiers, notably the ARTF, World Bank-IDA, KfW, GTZ and USAID.

The Ministry o f Urban Development and Housing (MUDH) i s responsible for urban water supply and sanitation (UWSS), along with the coordination o f donor activities and priorities. The Central Authority

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for Water Supply and Sewerage (CAWSS), which operates under MUDH, i s the operations and management arm that provide UWSS services in the major urban areas o f Afghanistan. A lack of leadership, resources and capabilities at CAWSS and MUDH has resulted in ad hoc developments in the operations and maintenance capacity in provincial centres over the last 20 years.

The Government’s “Strategic Policy Framework for the Water Sector” calls for major institutional reforms, especially in the role o f the Government (under the National Development Framework - NDF) from “implementer to a facilitator and regulator” and emphases i t s constitutional functions o f being in charge o f national planning, establishing laws, policies and strategies.

The Ministry o f Urban Development and Housing (MUDH) has drafted a comprehensive UWSS Policy that describes the responsibilities and jurisdiction o f MUDH on water issues under i t s domain. This policy i s necessary to carry on the spirit exhibited in the Government’s policy for the water sector and the policies o f other water agencies, and to strengthen the institutional framework required to more clearly define the responsibilities o f different players in the UWSS sector. The policy has been reviewed in the context o f the Government’s Water Sector policy to determine clear jurisdictional limits for all agencies having regulatory and operational roles in the sector.

3. PRESENT INSTITUTIONAL SETUP

The MUDH i s responsible for policy making, regulation and operation o f UWSS services under the current institutional framework. At present these functions are carried out by different departments within MUDH.

CAWSS, a state owned enterprise (SOE) agency, i s the management and operations arm o f MUDH for urban water supply and sewerage. CAWSS has personnel in most larger Afghan cities and towns that either supervise or directly participate in the management and operation o f water systems. Within this operation there are many different arrangements throughout the country due to a lack o f coordinating capacity in the central agency. Since the approval o f the CAWSS budget for the year 1384 CAWSS has started to decentralize the management o f operations to local branches (13 including Kabul), with improved financial accountability, supported by ARTF-FSO.

The organisational set up o f CAWSS i s very technically oriented. It i s focused mainly on operations and maintenance, The provision o f management, training, cost recovery and financial guidance to water service entit ies has only recently started. The current organizational structure does not sufficiently deal with the issues o f improved levels o f services, consumer satisfaction, economic pricing o f water, revenue and accounts, and planning. These are factors that must be addressed by any national level agency to provide minimum levels o f service to i t s constituents. The inadequacies o f structure are exacerbated by a lack of enabling policy support, inadequate resources and capacity. CAWSS i s deficient in meeting MUDH’s goal o f providing sustainable and quality water services to the urban populations o f Afghanistan by 2015. Also, the present legal framework o f CAWSS, as a state-owned enterprise with limited autonomy, wi l l not allow it to reorganise itself to take on the challenges.

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Table: Overview of sample functions at different levels

LEVEL

Constitutional

Regulatory

Operational

MAIN ROLES AND RESPONSIBILITIES - Sector Policy development Urban Water Sector Legal Framework development Negotiating and signing inter-governmental and donor agreements Inter-ministerial issues and overall water sector coordination National planning and overall sector performance, measured against national objectives such as the Millennium Development Goals Setting tariff policy that treats water as a scarce economic good and approving regulatory recommendations on tariffs and charges Holding shares in the sector institutions in the national interest Ensuring that the sector follows national policies with respect to social responsibility and social equity

Developing PPP models

Setting national standards for the UWSS sector, both in technical and service level areas Reviewing and making recommendations to constitutional level on tariff applications Proposing regulatory measures for the sector Advising on UWSS policy development Coordinating national UWSS objectives and planning Monitoring the individual and collective performance o f the sector against set criteria and benchmarks Providing advice and technicalimanagerial support and training

Approval o f private sector concession/lease/management contracts Co-ordination and management of donor funding and other financing instruments on a national basis Coordinating organizational development and human resource development initiatives for the sector Appointing members o f institutional boards in accordance with statutes and shareholding conditions Approving tariff applications and water service standards Ensuring that financial resources and investment levels are adequate nationally Reviewing and approving major international contracts for design/supply /construction

Putting in place the management and organization structure required to operate the systems and provide the services Operating and maintaining the systems and infrastructure, Ensuring that the correct procedures are followed in running and maintaining the systems Developing the customer base, supplying service in accordance with standards, billing and collecting the revenue Preparing operations budgets and monitoring performance against budgets Preparing reports on performance results for the information o f relevant stakeholders Ensuring good performance and development o f local employees Identifying need for infrastructure expansion and working with partner organizations to implement infrastructure projects Preparing annual business plans for approval by relevant board(s) Ensuring that planning takes place for improvement and expansion o f supply and that appropriate investment decisions are taken Directly employing staff Coordinating and maintaining a good relationship with stakeholders including municipalities and communities

This vision i s also consistent with the objectives o f the National Urban Priority Program, which sees increased decentralization o f government activities and assumption o f a role as facilitator and regulator.

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5. ROAD M A P OF THE INSTITUTIONAL DEVELOPMENT PLAN (IDP)

Implementation o f the vision at once i s impossible considering the present limitations in the capacity o f the different institutions and the present legislation under which the institutions function. A road map has been developed for a smooth transition f rom the present situation towards the vision ensuring at the same time the proper continuation and development o f services in water supply and sewerage. The road map towards the vision consists o f a short-term, a medium-term and a long-term plan allowing overlaps o f the plans. Progressive advancement along the steps contained in the road map will not be based on a r ig id timeframe, but wi l l be driven by the attainment o f specific measurable indicators. Such indicators may include operational performance benchmarks, degree o f financial autonomy and the overall extent o f organisational development.

SHORT-TERM PLAN

In th i s phase a few, but important steps wil l be taken forming the basis for the development o f the medium and long term phases. The major components o f the plan are:

e

e

Component 1: Combining the constitutional and regulatory functions for execution by MUDH.

Component 2: Corporatizing CAWSS as it i s presently functioning and renaming it the Afghan Urban Water Supply and Sewerage Corporation (AUWSSC);

Component 3: Preparation and start o f implementation of the objectives o f the new Corporation.

Component 4: Drafting of new legal framework and laws for the Urban Water Sector.

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Elaboration of Component 1

The existing institutions that regulate the UWSS wil l be redesigned to support sector reforms. Due to the limited capability o f staff in the institutions a functional delineation into two levels, constitutional and regulatory functions (strategic/policy functions) and management, operations and maintenance functions (operational functions) wi l l be implemented as a start. A new section in MUDH will be developed to carry-out the constitutional and regulatory functions. With an adequate level o f capacity building, ample staffing and funding, and legislative authorization MUDH will be able to perform these regulatory functions. This approach would facilitate immediate improvements in the water sector and provide a training ground for MUDH staff to learn proper regulatory policy making and governance practices.

Elaboration of Component 2

The new AUWSSC wil l have autonomy as it wil l be governed by i t s board and by the law applicable to any commercial entity. The law wil l form a basis to work with local governments (municipalities) and in partnership with the private sector.

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Figure 2: Short-term Plan

Key Features o f Corporatisation:

0

0

New AUWSSC i s accountable to its Board o f Directors (BOD), not to MUDH

MUDH as the shareholder appoints the majority of Board Members; key stakeholders such as Ministry o f Finance and Municipalities may also appoint a few representatives on the Board

0

0

BOD accountable to Ministry for the performance o f AUWSSC

BOD appoints senior executives in AUWSSC (on a fixed term basis and with indicators to achieve) and decides on powers delegated to them

BOD responsible for financial results o f AUWSSC; any deficits in the first years grants from the Government and donors

0

clear performance

can be covered by

The objective o f forming the new AUWSSC i s to initiate the smooth implementation o f the road map for the institutional development o f the urban water supply and sewerage sector, assuring at the same time the proper and continuous provision of water supply and sewerage services in the urban centres of Afghanistan.

The new AUWSSC will be structured with a head office in Kabul, branches in cit ies and towns and a number o f Strategic Business Units (SBU) for major cities. (See Figure 2.) It will be empowered to conduct i t s duties free from interference by outside parties, so long as its conduct and decisions are in line with approved business plans, statutory duties, obligations and rights, as prescribed by MUDH. The

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relationships between the Board, Management and other stakeholders should conform to international norms o f good corporate governance.

Features o f A U W S S C Head Office:

0 Coordinating the operation and maintenance o f water supply and sewerage services in Branches and SBUs

0 Providing supporting services and functional guidelines in management, accounting, billing and revenue, procurement, HR development and training, I T development and training, planning, stores management, engineering in water supply and sewerage (design, electro-mechanical -, civil engineering), metering, water quality testing, survey - GIS and mapping, public and legal affairs. The level o f support provided by AUWSSC H/O will depend on the level o f delegated power to the Branches and SBUs.

0 Functioning as liaison link with MUDH

0 Compiling annual reports o f national UWSS sector

0 Appointing Senior Managers in Branches and SBUs, depending on the powers delegated by the Board

0 Implementing the UWSS Institutional Development Road map.

Features o f Branches (Less Developed Water Systems):

0 Closely managed branches in cities in towns where systems and services are still basic

0 AUWSSC directs and monitors performance o f operations, financial management, human resources and asset development

0 Branches measured against compliance with directives from AUWSSC WO

0 AUWSSC subsidizes deficits and ensures resource balancing between branches

Features of Strategic Business Units:

0 SBUs have increasing responsibility and accountability to become operationally and financially self- sufficient

0 SBUs take increasing responsibility for capital projects

0 SBUs produce and follow approved business plans

0 SBUs measured against targeted performance criteria, rather than compliance

0 SBUs have Advisory Boards comprising representatives o f various interest groups like municipalities, civil society and other administrative representatives. The roles and responsibilities for such Advisory Boards will be approved by MUDH on AUWSSC recommendation

I t i s recognized that Branches and SBUs will require extended financial support and subsidization from Government and donors before they become self-sustaining, Such support i s more likely to be required during the start o f the IDP. Branches and SBUs will raise revenue in accordance with the tariffs approved by AUWSSC. They will be allowed to use such revenue to cover operational costs and to contribute towards capital and service improvement projects, under AUWSSC guidance. Financial affairs wil l be transparent even at the local level, including any subsidization o f tariffs to particular groups o f customers.

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The financial affairs o f the AUWSSC, Branches and SBUs will be subject to external audit and consolidated financial statements will be published to stakeholders within a reasonable time after the end o f each calendar year. The AUWSSC will be required to provide MUDH with detailed annual statistics on its performance in al l key business areas.

Elaboration of Component 3

As preparation for the start-up o f AUWSSC the following actions need to be taken:

0 Appointment o f Working Group by the Minister o f Urban Development o f Housing to carry out the initial steps in implementing the Institutional Development Plan, and preparing for the formation o f the Afghanistan Urban Water Supply and Sewerage Company (AUWSSC), setting criteria for delegation o f powers towards Branches and SBUs and setting criteria for independence o f Water Service Providers. The Working Group will also advise on key issues underpinning the IDP such as financial (tariffs setting and cross-subsidies, flow o f funds mechanisms) and human resources policies. The Working Group will be assisted by sector experts and consultants who wil l prepare draft statutes for AUWSSC. MUDH will prepare a detailed TOR for the Working Group.

Appointment o f consultants for the preparation o f statutes o f the new Corporation.

Setting up o f initial SBUs according to the criteria prepared by the Working Group.

0

e

Elaboration of Component 4

Preparation o f a legal framework for the UWSS sector and drafting additional laws to formalise the rights, powers and duties o f various institutions, the ownership o f assets and to regulate the interface with the customers.

For planning purposes, the time period o f this term i s estimated from the present to 2 years in the future.

MEDIUM-TERM PLAN

As Urban Water Sector begin to witness growth and development over a period of time in the line with the MUDH objectives, MUDH will eventually transfer its regulatory functions to a nominated body which will be supported by a suitable framework on water legislation, performance standards, options to pursue private sector participation or privatization as appropriate to the situation. The number o f SBUs would also grow, shrinking AUWSSC’s full responsibilities to a fewer Branches, while it will it will continue to provide support to the SBUs. However, AUWSSC will remain chief negotiator and liaison body with MUDH for all the Branches and SBUs and strive to source the funding necessary for general improvement in the urban water sector.

Main components o f medium term plan:

0 Splitting the constitutional and regulatory functions in MUDH and establishing an independent Regulator.

Further development o f capacity for constitutional function in MUDH

Clustering o f smaller Branches with already existing SBUs or into new SBUs

Development o f SBUs towards independent water service providers

0

0

e

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6. CONCLUSION

The Institutional Development Plan hinges on:

0 Emerging legal, policy and regulatory capacity building for proper execution o f the constitutional, regulatory and operational functions in UWSS sector,

Local Municipal participation in the urban water and sewerage sector,

Support to the decentralization and independence o f water service providers and so, contributing to financial and operational sustainability in the sector

0

0

The Institutional Development Plan i s a work in progress that wi l l be reviewed, amended and completed based on the recoinmendations o f the Working Group and supporting consultants. Revisions to the Institutional Development Plan should remain consistent with the principles and objectives stated in the agreed Sector Policy.

This vision i s also consistent with the objectives o f the National Urban Priority Program, which sees increased decentralization of government activities and assumption o f a role as facilitator and regulator.

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No. 130 Dated: 0511 111384 (January 25, 2006)

Annex 12: Presidential Decree

Decree Of President o f Islamic Republic o f Afghanistan

Concerning changing the legal form Of

The Water Supply and Sewerage Enterprise To

The Afghan Urban Water Supply and Sewerage Company

Unofficial Translation, February 2006

Article One:

Pursuant to paragraph three o f Approval No. 36, dated 18, 10, 1384, o f the Cabinet o f Ministers o f the Islamic Republic o f Afghanistan, and in order to ensure the health and well-being [of people] in urban areas, the preservation o f environment, provision o f safe drinking water, collection and treatment o f wastewater, and to promote efficient and sustainable water supply services and expand the necessary human resources, it i s approved to change the legal form o f the Water Supply and Sewerage Enterprise to the Afghan Urban Water Supply and Sewerage Company.

Article Two:

The Ministries o f Finance and Urban Development and Housing are responsible:

1 in cooperation with the Ministry o f Economy, for outlining the legal framework within which the preparation for the creation o f the company may be accomplished and the company could be created , in accordance with the provisions o f this decree and its attached Procedure, and for registering the company according to the Law o f Commerce; [and]

2. in consultation with Ministries o f Economy and Justice, for taking necessary actions for drafting and processing, the Articles/bylaw , the organizational structure, and to provide the required capital o f the Company.

Article Three:

The Ministers o f Finance and Urban Development and Housing shall have the authority to appoint members o f the General Meeting and Board o f Directors o f the Company, as long as the shares o f the Ministries o f Finance and Urban Development and Housing exceed 5 1% [of the total capital o f the Company], and this should also be reflected in the Articles/bylaw of Incorporation.

Article Four:

This Decree, with its attached Procedure shall be effective from the date of signature [by the President] (Tawsheeh) and shall be published in the Official Gazette.

Hamid Karzai [signed] The President o f the Islamic Republic o f Afghanistan

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Procedure for changing the legal form Of

The Water Supply and Sewerage Enterprise To

The AFGHAN URBAN WATER SUPPLY AND SEWERAGE COMPANY

Attachment to decree

Article 1 - Purpose

This Procedure shall be enacted in order to regulate the process for changing the legal form o f the Water Supply and Sewerage Enterprise to Afghan Urban Water Supply and Sewerage Company.

Article 2: Formation of the Company

(1) The Ministry o f Finance shall, in cooperation with MUDH, appoint a Working Group to carry out the initial required steps for changing the legal form o f the Water Supply and Sewerage Enterprise to Afghan Urban Water Supply and Sewerage Company.

(2) The Working Group shall have the duty to take action conforming to this Procedure and The Commercial Law o f Afghanistan in order to change the legal form o f the Water Supply and Sewerage Enterprise to Afghan Urban Water Supply and Sewerage Company

(3) The Ministry o f Urban Development and Housing shall, after the registration, determine the exact Transfer Date for changing the legal form o f the Enterprise to the Company, .

Article 3 - Structure and Capital o f the Company:

(1) The amount o f capital investment o f the Company shall be determined based on the proposal of The Working Group and the confirmation of the Ministries o f Finance, Urban Development and Housing and Economy. Following its initial capital investment, in accordance with Article 6 o f this Procedure, and as long as the Ministries o f Finance and Urban Development and Housing hold at least 5 1% o f [its] shares, the increase in the Company’s capital shall be made after approval o f Cabinet o f Ministers.

(3) The Company’s Executive Board, which shall be appointed by the Board o f Directors, shall divide its shares into several classes/categories and attach thereto rights, privileges, or special conditions or preferences as necessary.

Article 4: Articles/bylaw of Incorporation

The Working Group shall develop the Articles/bylaw o f the Company, in a form consistent with this procedure and in accordance with international best practices for comparable companies, in consultation with the Ministries o f Economy and Justice, and shall prepare it for legal processing before the transfer date.

Article 5: Immunity from the SOE Law

The Afghan Urban Water Supply and Sewerage Company, established pursuant to this Procedure, shall be a corporation, and the provisions o f the State Owned Enterprises’ Law shall not apply to the Company.

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Article 6 - Issue o f Shares to the Ministry of Urban Development and Housing Against the Transfer of Property:

Shares in the Company shall be issued against the pledge o f ministry for i t s init ial participation for payment o f the working capital or against the assets transferred to the company in accordance with Articles ten, eleven, and twelve o f this Procedure.

Article 7 - Transfer o f Shares by Ministry of Urban Development and Housing:

The Ministry o f Urban Development and Housing shall not se l l or otherwise transfer any o f i t s shares except through an auction/bidding.

Article 8 - Provision of Money for Purchase of Shares:

(1) The Ministry o f Finance shall pay f rom the Consolidated Fund o f the State the amounts [o f money] required by the Ministry o f Urban Development and Housing in respect o f shares taken up by it.

(2) The Ministry o f Finance shall have power to borrow money or to issue securities for the purpose o f pargraph (1) o f t h i s article.

(3) The principal money o f and interest on any securities, issued under this Article, shall be paid from the State Fundsibudget.

Article 9: The Power to Borrow

As long as the Ministries o f Finance and Urban Development and Housing own 100% o f Company shares, the Company shall not, without the consent o f the mentioned Ministries, incur in any fiscal year debt exceeding US$2,000,000.

Article 10 - Provision of Working Capital for the Company:

In order to accelerate the implementation o f privatization policy, a l l shares o f the company shall belong to the Ministry o f Finance, except for those o f the four state shareholders.

Article 11 - Transfer o f Land and other Properties:

(1) The Working Group shall be obliged to prepare the l i s t o f the properties o f the Enterprise that wi l l be required for the proposed operations o f the Company and to submit such l i s t to the Ministry o f Finance for approval, after confirmation o f the Ministry o f Urban Development and Housing.

(2) The Working Group shall, after the approval, orderly transfer the properties referred in paragraph (1) o f this article through lease, or other legal methods, as agreed to by the parties, to the Company on the date o f transfer.

(3) The Ministries o f Finance and Urban Development and Housing may when necessary [on their own initiative] or upon the request by the Company, jo in t ly issue a certificate in respect o f properties as provided for in Paragraph (1) o f this Article. Such certificate shall be conclusive evidence o f the facts so certified.

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Article 12 - Transfer o f Rights and Liabilities:

(1) The Working Group shall develop a list o f all rights and liabilities o f the Enterprise that arise by virtue o f any contract or commitment (expressed or implied) [entered into] before the Transfer Date, in relation to functions to be assigned to the Company under this Procedure, which should be transferred to the Company, and shall upon the confirmation o f the Ministry o f Urban development and Housing and the approval o f the Minister o f Finance, hand it over to the Company on the Transfer Date.

(2) The Ministries of Finance and Urban Development and Housing may as necessary or upon request by the Company issue a certificate in respect of a specific contract or commitment certifying that the said rights and liabilities as provided for in Paragraph (1) o f this Article were transferred on the Transfer Date to the Company or were not so transferred to the Company. The certificate shall be conclusive evidence o f the facts so certified.

(3) Filing o f claims in respect o f every right and liability as provided for in Paragraph (1) o f this Article, whether by or against the Company, shall take place in the Company’s own name and shall be valid after the date o f transfer..

Article 13 - Transfer o f Rights and Obligations:

(1)Prior to the Transfer Date, the Working Group i s responsible to develop a plan for the orderly transfer o f rights & obligations o f the Enterprise that will be transferred to the Company. The transfer shall be subject to the confirmation o f the Ministry o f Urban Development and Housing and the approval o f Ministry o f Finance, and any related disputes between the parties being resolved jointly by the Ministries of Finance and Urban Development and Housing.

(2) After the Transfer Date, the Afghan Water Supply and Sewerage Company shall be responsible for all rights and obligations of the Enterprise.

Article 14 - Transfer of Enterprise Staff to the Company

(1) The Working Group i s responsible to prepare a list o f employees needed by the company who immediately before the Transfer Date are staff members o f the Enterprise or MUDH, and shall submit i t to MUDH for approval.

(2) The employees who are not hired in the company, shall be recruited as needed in other departments o f the MUDH. Otherwise, they shall be subject to retirement and their pensions shall be paid in accordance with the provisions o f the applicable legislation.

Article 16 - Exemption from Taxes:

The transfer or vesting in the Company o f any movable or immovable property, in accordance with this Procedure, shall be exempt from the relevant taxes.

Article 17: Levying of Taxes

From commencement of its activity, the company shall be subject to payment o f taxes in accordance with the provisions o f the Income Tax Law

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