Vodokanal-Invest-Consulting, Moscow

Review of Key Reforms in Urban Water Supply

and Sanitation Sector

Draft Report

Version 2

November 2004

Prepared by

Contents

GLOSSARY .................................................................................................................................................. 3

1. INTRODUCTION............................................................................................................................... 4

2. LEGAL AND INSTITUTIONAL REFORMS ................................................................................. 6

2.1. OVERVIEW OF LEGAL SETUP........................................................................................................... 6 2.1.1. Management of, and Ownership in, Communal Water Supply and Sanitation Systems ............ 6 2.1.2. Public Relations. Accounting for Water Consumption. Billing and Payment Procedures ............ 7 2.1.3. Service Quality. Standards and Norms ...................................................................................... 7

2.2. PRIVATE SECTOR PARTICIPATION IN URBAN WATER SUPPLY AND SANITATION ............................ 8 2.1.1. Legal Framework for Private Sector Participation ................................................................... 8 2.1.2. Incentives for, and Main Trends in, Private Sector Involvement............................................... 8

3. ECONOMIC STANDING OF URBAN WATER SUPPLY AND SANITATION SECTOR....... 9

3.1. REVIEW OF CURRENT SITUATION.................................................................................................... 9 3.1.1. Tariff Regulation Practices........................................................................................................ 9 3.1.2. Taxation of Water Utilities......................................................................................................... 9 3.1.3. Assessment of Tariff Adequacy and Cost-Recovery Level........................................................ 10 3.1.4. Share of Water and Sanitation Bill in Household Expenses .................................................... 10 3.1.5. Political Aspects of Tariff Regulation...................................................................................... 11 3.1.6. Tariff Increase and Reduction Potential .................................................................................. 11 3.1.7. Form of Payment for Water and Sanitation Services. Accounts Receivable Pattern and Their

Influence on Financial Standing of Water Utilities........................................................................................ 11 3.2. CAPITAL INVESTMENT AND INVESTMENT REQUIREMENTS ........................................................... 12

3.2.1. Condition of Fixed Assets ........................................................................................................ 12 3.2.2. Investment Requirements ......................................................................................................... 12 3.2.3. Investment Sources and Lending Market ................................................................................. 13 3.2.4. Problems of, and Barriers to, Attracting Investment ............................................................... 13

4. SOCIAL PROTECTION OF THE POPULATION AND ENVIRONMENTAL PROTECTION 14

4.1. SOCIAL PROTECTION OF THE POPULATION.................................................................................... 14 4.1.1. Households’ Ability to Pay for Water Supply and Sanitation Services.................................... 14 4.1.2. Social Protection Mechanisms................................................................................................. 14

4.2. KEY TRENDS IN ENVIRONMENTAL PROTECTION........................................................................... 14

5. LOCAL SPECIALISTS’ OPINION ABOUT THE STATE OF WATER SUPPLY AND SANITATION SECTOR IN KAZAKHSTAN ................................................................................................. 16

REFERENCES ........................................................................................................................................... 17

ATTACHMENTS ....................................................................................................................................... 18 Attachment 1. Key Provisions of Sectoral Drinking Water Program for 2002-2010 ...................................... 19 Attachment 2. Key Functions of National Executive Authorities Governing Communal Water Supply and

Sanitation Services ................................................................................................................................................... 21 Attachment 3. List of Regulations Governing Quality of Water Utility Services ........................................... 22 Attachment 4. List of Tariff Regulations......................................................................................................... 23 Attachment 5. Water and Sanitation Tariffs. Cost of WSS Services. Water Loss Requirements .................... 24

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GLOSSARY

Akim Head of administrative territorial unit Akimat Local public executive body АО Joint-stock company NMRA Natural Monopoly and Competition Protection Regulatory Agency Association Association of Water Supply and Sanitation Utilities of the Republic of

Kazakhstan “Kazakhstan Su Arnasy”

WRC Water Resources Committee of the Ministry of Agriculture WTP Wastewater treatment plant EPC Environmental Protection Committee Maslikhat Oblast public executive body Minselkhoz Ministry of Agriculture of the Republic of Kazakhstan LSG Local self-governance VAT Value-added tax LSG authorities Local self-governance authorities Sectoral Program Sectoral Drinking Water Program for 2002-2010 MAC Maximum allowable concentration User Rules User Rules for Water Supply and Sanitation in the Localities of the

Republic of Kazakhstan

RK Republic of Kazakhstan Guiding Principles Guiding Principles for the Reform of the Urban Water Supply and

Sanitation Sector in the NIS

SanPiN Sanitary rules and standards CIS Community of Independent State USSR Union of Soviet Socialist Republics tenge national currency of the Republic of Kazakhstan

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1. INTRODUCTION

The Republic of Kazakhstan is situated to the south of the Russian Federation, has an area of 2,717 thousand km2 (ninth in the world), and borders on Russia, China, Kyrgyz Republic, Uzbekistan, and Turkmenistan. Total length of its borders is 12,187 km.

The population of the Republic of Kazakhstan is about 15 mln people. Its capital city is Astana with the population of about 500,000 people (official data). There are nineteen cities with population above 100,000 people in the country. The country’s urban population accounts for approximately 56 percent. Average population density is 20 persons/km2.

It is comprised of fourteen oblasts, City of Astana and City of Almaty.

Significant portion of Kazakhstan’s population is in the downstream reach of key trans-boundary water basins, which has a major impact on the degree of water supply to those areas.

Conventionally, the hydrographic territory of the country comprises eight water basins: Aral-Syrdarya, Shu-Talas, Balkhash-Alakol, Irtysh, Ishim, Nura-Sarysus, Tobol-Torgay, and Ural-Caspian.

Main rivers of the country – Irtysh, Ili, Syrdarya, Ural, Chu, and Talas – are trans-boundary ones. Total water resources in average year amount to 100.5 km2, of which just 56.5 km2 is formed in the territory of Kazakhstan and the rest of 44.0 km2 comes from neighboring countries (China, Kyrgyz Republic, Russia, and Uzbekistan). Climate and anthropogenic activities have considerable influence on the water resources, leading to sustainable downward trend in surface waters in the country.

Kazakhstan ranks last among the CIS countries in terms of the water supply. Water supply averages 20,000 m3 per km2, which is one of the lowest indicators among Eurasian countries.

Underground water is available practically in all the regions of the country, but its distribution is extremely uneven and it varies by quality and stock.

Average water consumption for household and drinking needs is approximately 170 liters per capita a day in urban areas and about 70 liters per capita a day in rural areas. Total water consumption by households for household and drinking needs accounts for about 5 percent of the water consumed by all the sectors of the country’s economy.

Underground water makes up 65.2 percent of the total water consumed for household and drinking needs, and surface water, 34.8 percent. In Aktyubinsk, Zhambyl, and Southern Kazakhstan Oblasts, underground water accounts for almost 90 percent. In Kostanay, Mangistaus, Akmolin, and Pavlodar Oblasts, mostly surface water is used (55-70 percent). Surface water is supplied fully or partially to cities such as Astana, Atyrau, Uralsk, Almaty, Petropavlovsk, and other.

Coverage of urban population with centralized water supply does not exceed 80 percent (Astana – 100 percent; Almaty – 95 percent; oblast centers – 80 percent; regional centers and towns – 70 percent).

Centralized water supply systems serve more than 100 water supply and sanitation utilities.

Main problems faced by the urban water supply and sanitation sector are:

• Inadequate use of underground water deposits explored specifically for water supply for household and drinking needs

• Technogenic pollution of water sources, especially surface water, with industrial, agricultural, and municipal effluents

• High deterioration of water supply and sanitation networks and facilities, due to which necessary reliability of their operation and uninterrupted water supply is not ensured

• Secondary pollution of drinking water in the water supply networks caused by destruction of the antirust coating in the pipes

• Inadequate quality of drinking water

• Considerable (up to 30 percent) water losses during transmission due to deterioration of the water networks

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• Inadequate government investment in the construction of new water supply networks and rehabilitation and repairs of existing systems.

The situation is exacerbated by the fact that currently there is no authorized public body in the Republic of Kazakhstan, which would regulate technical and operational aspects of water utilities or their relations with the local authorities (akimats) and users.

Currently the main burden of problem-solving in the in urban water supply and sanitation sector is on a non-governmental organization – Association of Water Supply and Sanitation Utilities of the Republic of Kazakhstan “Kazakhstan Su Arnasy” (hereinafter “Association”) established in 2002. At present, it is this Association which plays a lead role in drafting a development strategy for the country’s water supply and sanitation sector and legal and regulatory framework governing the water utilities. The Association also ensures necessary interaction of the water utilities with the national public authorities and is actively engaged in the collection and processing of information on performance indicators of the water utilities. The Association’s activities could also facilitate the implementation of the “Guiding Principles for the Reform of the Urban Water Supply and Sanitation Sector in the NIS” (hereinafter “Guiding Principles”) provided the national public authorities fully employ the capacity and accomplishments of the Association to that end.

The Guiding Principles have not been broadly implemented in the day-to-day activities of the country’s water utilities because the water utilities are unaware of the Principles. However, the Guiding Principles are used at the national level, which is confirmed by the practical actions taken by the public authorities (for example, development of the legal and regulatory framework, corporatization of the water utilities, regulation of tariffs for water supply and sanitation services) with a view to achieving the objectives provided for by the Guiding Principles.

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2. LEGAL AND INSTITUTIONAL REFORMS

2.1. Overview of Legal Setup

2.1.1. Management of, and Ownership in, Communal Water Supply and Sanitation Systems

Currently, there is no single authorized public body in the Republic of Kazakhstan, which would regulate water utilities and their relations with akimats and users. The water utilities do not yet have an independent body to guard them against political pressure, i.e., the Guiding Principles have not yet been implemented in this regard. Nor there is a legal framework, which would facilitate the implementation of water sector management initiatives at the inter-city level since there is no coordinating public authority such initiatives could be submitted to.

Some issues in the water supply and sanitation sector are regulated by various national executive authorities the key functions of which are described in Attachment 2.

One of the practical steps towards implementation of the Guiding Principles has been the adoption by the Government of the RK of sectoral Drinking Water Program for 2002-2010 (hereinafter “Sectoral Program”) which can be viewed as a national program of actions in the country’s drinking water sector. The Sectoral Program determines a set of activities aimed to improve the supply of drinking water to the population, sets priority activities, assesses investment requirements, and identifies sources of funding of the Sectoral Program activities. Key provisions of the Sectoral Program are shown in Attachment 1.

The Sectoral Program can be viewed as a basis for future development of:

• Legal and regulatory framework which would arouse the interest of both public authorities and water utilities in implementing the reforms, including with the private sector participation;

• National water resource management system with integration of urban water services in the comprehensive basin management systems;

• Water quality monitoring system.

Activities envisaged by the Sectoral Program create conditions for development of market relations in the country’s water supply sector and ensure public involvement in solving the issues of drinking water supply. The activities are fully consistent with the Guiding Principles.

Although the Sectoral Program is a major step towards implementation of the Guiding Principles, funding the activities envisaged by the Program does not dovetail into the capacity of the budgets or economic entities, i.e., the funding is unrealistic. This is confirmed by the fact that practically no money has been allocated from the state budget for the activities envisaged by the Sectoral Program in 2002-2004 (according to “Kazakhstan Su Arnasy” Association).

Under current legislation of the Republic of Kazakhstan, communal water supply and sanitation systems can be state-owned, privately-owned, leased, or privatized.

Currently, communal water supply and sanitation systems in Kazakhstan are being actively decentralized consistent with the Guiding Principles by delegating respective powers to municipal authorities.

Thus, while until 2000 practically all the water supply and sanitation systems were state-owned, in recent years communal water supply and sanitation facilities tend to be transferred from state ownership into private ownership.

In the cities of Petropavlovsk (190,000 people) and Aktobe (280,000 people) the water utilities were transformed from state-owned utilities into open joint-stock companies with a majority interest owned by a local public authority (akimat). At the same time, utilities in some cities such as Karaganda (608,000 people), Pavlodar (283,000 people), Shymkent (480,000 people), and Kyzyl-Orda (225,000 people) were transformed into joint-stock companies and limited liability companies without the state or akimat owning a majority interest in their authorized capital.

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However, to-date state-owned utilities have prevailed in Kazakhstan. Water utilities are still state-owned in such large and medium-sized cities as Astana (502,000 people), Almaty (1,141,000 people), Ust-Kamenogorsk (312,000 people), Taraz (312,000 people), Kokshetau (143,000 people), as well as in practically all the small towns.

2.1.2. Public Relations. Accounting for Water Consumption. Billing and Payment Procedures

At present, water utilities’ relations with users are governed by:

• Civil Code of the Republic of Kazakhstan

• Natural Monopoly Law of the Republic of Kazakhstan

• Rules of rendering communal services

• User Rules for Water Supply and Sanitation in the Localities of the Republic of Kazakhstan (hereinafter “User Rules”)

• Rules of maintenance of housing and household plots by apartment owners’ cooperatives.

The downside is that the state registration of User Rules was abolished in February 2000. Although the Rules themselves were not cancelled, they only have an advisory status now and cannot be used as a regulation in disputes settled in court. Current situation is because under the Law of the RK on Regulations, a public authority cannot pass a regulation if this is not explicitly provided for by respective law. There is not a single law which would stipulate the need to pass a regulation governing activities in the communal water supply and sanitation sector. The parliament of the RK is currently reviewing draft Law on Water Supply and Sanitation of the RK, which partly solves the problem and stipulates that the Water Resources Committee of the Ministry of Agriculture (Minselkhoz) of the Republic of Kazakhstan is an authorized water utility regulatory agency.

Water utilities throughout the country have contractual relations and directly bill users, including households. Such a system of direct settlements with the population has been used by the water utilities in the RK for more than five years already.

Pursuant to the User Rules, water consumed by users is accounted for based on the water meter readings and, if there is temporarily no meter in place or it is out of order, based on the water consumption standards.

In the cities where water utilities are private, consumer motivation principle is employed and assistance is provided to them in the installation and operation of the water meters. This reduces the water consumption. For example, in the City of Shymkent where 98 percent of consumers are covered with water meters, water consumption went down from 450 liters per capita a day to 104 liters a day, i.e., more than by a factor of 4. The trend is also typical for other cities where the accounting system is being streamlined.

Where water utilities are state-owned, consumers are not motivated and coverage with the water meters is considerably lower (not above 20 or 30 percent, according to “Kazakhstan Su Arnasy” Association.

2.1.3. Service Quality. Standards and Norms

Quality requirements for the services rendered by water utilities are set by the regulations (listed in Attachment 3) passed back in the USSR or practically fully consistent with the current Russian requirements.

Local experts note that the highest quality of the water supply and sanitation services was achieved in Kazakhstan immediately before the demise of the USSR (in 1991). The quality level declined sharply due to lack of investment support over the past decade.

The Sectoral Program notes that water supply to the population goes down by 5 percent each year; an average of 25.8 percent of the water supply systems in the country do not comply with the hygiene requirements, in some regions the indicator is much higher: in Zhambyl Oblast, 89.7 percent; Pavlodar Oblast, 57.1 percent; Eastern Kazakhstan Oblast, 50.8 percent; Western Kazakhstan Oblast, 46 percent; and Karaganda Oblast, 36 percent.

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Morbidity increased sharply due to low quality of drinking water in recent years. Thus, in 1992, 181 persons suffered from intestinal infections in the country; in 1995, 305; and in 2000, 3,220. Incidence rate of water-borne viral hepatitis also increased several-fold. The largest outbreak of hepatitis was recorded in Zhidelin Region where 2 percent of the population caught the disease due to disconnection of drinking water (the data is provided by the Sectoral Program).

The Sectoral Program provides for the following key activities aimed to improve the quality of services:

• Construct 465 km of new and rehabilitate 2,379 km of existing water mains and urban water distribution network

• Construct eleven new water intakes and rehabilitate seven existing ones

• Construct seven new water treatment plants and rehabilitate seven existing ones

• Introduce new materials and technologies in the construction of systems and facilities

• Utilize explored deposits of underground fresh water and search new ones

• Revitalize existing domestic producers of pipes, fittings, sanitary engineering equipment, and meters and set up new ones

• Organize control over introduction of energy-saving technologies and ensure accounting for water consumption by all the user categories

• Arrange water protection zones at drinking water sources.

These activities should ensure compliance of rendered water services with established hygiene standards and norms.

2.2. Private Sector Participation in Urban Water Supply and Sanitation

2.1.1. Legal Framework for Private Sector Participation

Current legislation of the Republic of Kazakhstan (Civil and Water Codes) provide for the possibility of privatization of communal water supply and sanitation systems. Privatization, lease, or transfer into trust management is only banned for strategic water sector facilities. The list of such facilities is determined by the President of the RK; to-date, communal water supply and sanitation systems were not on the list.

Communal water supply and sanitation systems can be operated by state-owned utilities or operated, leased, or managed under a trust management agreement by other companies, including those created with private sector privatization.

2.1.2. Incentives for, and Main Trends in, Private Sector Involvement

The Sectoral Program provides for the following with a view to encouraging and motivating private sector involvement in the communal water supply and sanitation sector:

• Create a competitive environment in the area of household and drinking water supply with private sector involvement in rendering water supply services to the population

• Create flexible pricing mechanism for water, including drinking water, establishing a system of tariffs for water supply services

• Develop subsidy mechanism for specific water supply systems at the first stage of their operation until prerequisites are created for economic growth and self-financing of the utilities;

• Ensure financial sustainability of the water sector.

As noted in section 2.1.1, many water utilities in the country have transformed from state-owned utilities into joint-stock companies with private sector participation over the past three years. The trend persists.

However, private sector involvement in the communal water supply and sanitation sector has been impeded by rather strong political influence on the business activities of the communal water supply sector.

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3. ECONOMIC STANDING OF URBAN WATER SUPPLY AND SANITATION SECTOR

3.1. Review of Current Situation

3.1.1. Tariff Regulation Practices

In Kazakhstan, the influence of the state on water and sanitation tariff regulation is very strong and quite elaborate.

Over the past two years key tariff regulation documents were drafted and approved (the documents are listed in Attachment 4), according to which water and sanitation tariffs comprise the following:

• Material resources costs determined based on the cost requirements as approved by the Natural Monopoly and Competition Protection Regulatory Agency (NMRA) and prices resulting from tender purchases;

• Expenses related to technical water losses included in the tariffs based on the NMRA-set requirements;

• Funds channeled for capital repairs included in the tariffs based on technical justification provided by a water utility in coordination with the NMRA;

• Labor costs determined based on monthly average wage and actual staff number not above the standard staff number set by the NMRA in coordination with the Ministry of Labor and Social Protection of the Population of the RK;

• Investment loan servicing costs in the amount agreed upon with the NMRA;

• Depreciation allowances consistent with the requirements approved by the Government of the RK;

• General business, representation and other expenses agreed upon with the NMRA;

• Profit determined as profit margin multiplied by the regulated share of equipped assets.

Water utilities coordinate virtually all their expenses with the NMRA.

In Kazakhstan, the principle of assessing profit incorporated in a tariff is different from that applied in Russia or other FSU countries. The profit margin is determined in view of required investment in replacement of fixed assets, which encourages water utilities to attract investment. Regulated share of equipped assets is determined as asset value multiplied by the asset utilization ratio. The asset utilization ratio is determined by dividing actual volume of services rendered by production capacity of water supply and sanitation systems. This encourages water utilities to increase production facilities utilization ratio. Such a profit assessment principle saves the water utilities the need to raise their expenses in order to increase their profit, which is inherent in the tariff regulation principles in Russia and other FSU countries.

Kazakhstan has applied a single tariff for all the consumer groups for more than five years already, i.e., there are no cross-subsidies.

In 2004 water supply and sanitation tariffs have ranged from 15 tenge to 45 tenge per m3, amounting to an average of 25 tenge (ex VAT) per m3. The 2004 tariffs by city are shown in Attachment 5.

Tariffs can be revised no more than once every six months.

In order to have a new tariff approved, a water utility should submit to the NMRA materials which must be reviewed by the NMRA within 45 days since the date of application for tariff revision. Once a decision is made on a new tariff, the NMRA brings it to the notice of the water utility fifteen days before a new tariff is introduced. The water utility is obliged to notify users of the new tariff five days thereafter or ten days before the new tariff is introduced.

3.1.2. Taxation of Water Utilities

Taxation of water utilities is no different from that of all other business enterprises.

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Main taxes:

• Profit tax – 30 percent

• Corporate tax to local budget – 35 percent of profit after profit tax

• Value-added tax – 15 percent (in 2000 the tax rate was 20 percent)

• Property tax – 2 percent of the carrying value of property

• Social tax – 21 percent of the wage bill

• Charge for water taken from a surface water source (assessed at the rates set by the Government of the RK per cubic meter of water taken from a surface water source, which depend on the river basin and, provided the intake is within the set limit, average 0.04 tenge per m3 of water for household needs and 0.1 tenge per m3 of water for industrial needs; in excess of the limit triple rate is applied; in the event of unauthorized water use, five-fold rate is applied);

• Charge for pollution discharged with wastewater (assessed based on the mass of discharged pollution according to the requirements set by the Government of the RK).

Total tax burden averages approximately 20 percent of the proceeds from services provided by the water utilities.

3.1.3. Assessment of Tariff Adequacy and Cost-Recovery Level

Settlement tariffs for water utility services should cover all required service costs. However, in practice the situation is different because actual income of the water utilities is below that planned and expenses are higher than those planned for the following main reasons:

• Actual sales are often considerably below those planned, which lowers income

• Users delay payment for services, which forces the water utilities to take short-term loans for immediate needs and unforeseen loan servicing costs increase the water utilities’ costs;

• Netting for services rendered by water utilities increases their expenses on purchase of commodities and materials.

Data provided in the attachment (Attachment 5) shows that tariffs in many cities are below the cost of services. This, in Astana the water supply and sanitation tariff accounts for 81 percent of cost; in Atyrau, 30 percent; in Pavlodar and Ekibazstuz, 89 percent; and in Taraz, Taldykurgan, and Uralsk, approximately 98 percent.

By local specialists’ estimates, country-average actual income of water utilities covers just about 90 percent of all the operational costs, including depreciation. If depreciation were to be excluded from costs, actual income in most cities could cover all the operational costs.

If estimated planned water sales equal actual water sales during tariff justification and the water utilities were paid for water and sanitation services by all the users within the set deadline, water utilities’ income would be adequate to cover all required operational costs.

3.1.4. Share of Water and Sanitation Bill in Household Expenses

Average data on cash income of the population, subsistence minimum, and water supply and sanitation expenses in Kazakhstan is shown in Table 3-1.

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Table 3-1. Cash Income and Expenses of Households

Indicator Year 2000 2001 2002 2003

Monthly average per capita wage, tenge 19,514 22,717 27,658 33,002

Nominal cash per capita monthly income, tenge (and year-on-year gain, percent)

10,130 13,332 (32%)

14,564 (9%)

17,387 (19%)

Per capita monthly subsistence minimum, tenge (and year-on-year gain, percent)

4,055 4,635 (14%)

4,777 (3%)

5,295 (11%)

Per capita monthly food basket, tenge (and year-on-year gain, percent)

2,839 3,244 (14%)

3,344 (3%)

3,706 (11%)

Share of population with income below subsistence minimum, percent

11.6 4.0 3.2 2.1

Share of population with income below food basket, percent 5.1 2.3 1.3 0.4

The data shows that average wage and nominal cash income of the population increased 1.7-fold between 2000 and 2003 while subsistence minimum only went up 1.3-fold, which suggests that people’s income has been growing faster than their expenses.

In 2003, monthly average per capita income was 17,387 tenge. With average water consumption of 150 liters per capita a day and average tariff (including VAT) of 30 tenge per cubic meter of water and wastewater, country-average water and sanitation expenses were approximately 140 tenge a month, or less than 1 percent of monthly-average per capita income. The share of water and sanitation expenses varies considerably by city. Thus, in Astana where the tariff is 40 tenge per m3 and consumption is about 250 liters per capita a day, monthly bill is 307 tenge, which is close to 2 percent of country-average cash income. In some cities (Karaganda), it is above 2 percent.

3.1.5. Political Aspects of Tariff Regulation

Influence of political aspects on tariff regulation in Kazakhstan has been growing weaker in recent years because all the tariff regulation principles and procedures are clearly set forth in the regulations. However, such influence on tariff regulation process remains strong, as evidenced by the fact that tariffs in many cities of the country (Astana, Atyrau, Pavlodar, Taraz, etc.) are set below the actual cost of services.

3.1.6. Tariff Increase and Reduction Potential

Tariffs are unlikely to go down because, as water meters are installed, water consumption will be going down, which would require raising tariffs. Moreover, considerable investment needed in the water supply systems cannot lead to tariff reduction.

Affordability of tariff increase has not been assessed in the country; no such studies have been conducted within the framework of state or private programs over the past four years. Local specialists believe that if increase in water utility tariffs does not outpace per capita income gain (i.e., 10 to 15 percent a year), such tariff increase should not have any negative implications.

3.1.7. Form of Payment for Water and Sanitation Services. Accounts Receivable Pattern and Their Influence on Financial Standing of Water Utilities

At present, netting operations in the water utilities make up no more than 17 percent (in 1999 they accounted for up to 60 percent), of which electricity is about 10 percent.

In Astana water utility, the accounts-receivable-to-accounts-payable ratio was 450 mln tenge (mostly from households) worth of accounts receivable to 98 mln tenge worth of accounts payable as of 1 July 2004. With annual volume of Astana water utility services worth 1.266 mln tenge, accounts receivable amount to its four monthly turnovers. The picture is similar in other cities of the country.

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3.2. Capital Investment and Investment Requirements

3.2.1. Condition of Fixed Assets

It is noteworthy that depreciation of fixed assets of the engineering infrastructure is getting close to the country-average of 70 percent and keeps building up. In view of the local experts, if the situation is not changed drastically, by 2010 the deterioration of the engineering infrastructure would exceed the critical level and jeopardize the operation of the communal water supply and sanitation system.

The Water Resources Committee of the Ministry of Agriculture of the Republic of Kazakhstan together with Association of Water Supply and Sanitation Utilities of the Republic of Kazakhstan “Kazakhstan Su Arnasy” conducted monitoring of water supply and sanitation systems in the cities of the RK in 2003. The studies conducted established the following:

• Depreciation of fixed assets in 27 percent of cities is more than 70 percent; in other cities it ranges from 40 percent to 70 percent

• Length of water supply networks is 14,100 km; sanitation networks, 8,200 km, of which more than 70 percent is deteriorated – 5,000 km (35 percent) of water supply networks and 2,600 km (32 percent) of sanitation networks; depreciation of other networks ranges from 40 percent to 70 percent

• Deterioration of current water supply and sanitation networks has been building up each year; more than one-third of the networks should be fully replaced; network replacement has stopped virtually completely in recent years

• Out of 47 water treatment plants, depreciation of sixteen of them is more than 70 percent; that of others, from 40 percent to 70 percent; as a result, in a number of cities (Stepnyak, Yesil, Karatau, Arkalyk, Shevchenko, Ayagoz, Arys) water quality fails to comply with the statutory requirements

• Depreciation of electric equipment at one-third of water and sanitation pumping stations exceeds 70 percent

• Efficiency of pumping equipment is very low; as a result, the share of electricity costs in the utilities’ operational costs ranges from 30 percent to 40 percent

• There are wastewater treatment plants (WTPs) with complete cycle in just 28 cities (38 percent), of which in nineteen cities the depreciation of the WTPs is above 70 percent

• There is no biological treatment of wastewater in thirteen cities; as a result, only 33 percent of wastewater discharged into water bodies is treated in compliance with the statutory requirements in the country.

3.2.2. Investment Requirements

Total investment for implementation of activities provided for by sectoral Drinking Water Program is estimated at 115.1 bln tenge, of which:

• At stage 1 (2002 – 2005), 37 bln tenge should be allocated, of which: - From the central budget – 16 bln tenge - From local budgets – 17.6 bln tenge; - By economic entities – 3.4 bln tenge

• At stage 2 (2006 – 2010), 78.1 bln should be allocated, of which: - From the central budget – 27.4 bln tenge - From local budgets – 28.7 bln tenge; - By economic entities – 22.0 bln tenge.

For the capital city of Astana a stand-alone water supply and sanitation system rehabilitation program was adopted estimated at US$ 215 mln (32.3 bln tenge at the exchange rate of US$ 1 = 150 tenge), of which US$ 161 mln will be obtained from loans extended by the Government of Japan.

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3.2.3. Investment Sources and Lending Market

Sources of investment in the water supply and sanitation systems are:

• Accrued depreciation

• Profit generated by water utilities

• Loans.

There are three major banks in Kazakhstan (Narodny Bank, Kazcommertsbank, and Turanalem) where clients can obtain loans. However, whether loan servicing costs are incorporated in tariff depends on the NMRA. The problem is that loans can only be extended against a government guarantee, at very high interest rate, and for a very short period (up to a year) so there is virtually no long-term lending market for the water utilities in the country.

3.2.4. Problems of, and Barriers to, Attracting Investment

There are no legal barriers to attracting private investment in Kazakhstan. Attracting private investment is mostly a political problem, i.e., a political decision of the local government is required for private sector participation.

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4. SOCIAL PROTECTION OF THE POPULATION AND ENVIRONMENTAL PROTECTION

4.1. Social Protection of the Population

4.1.1. Households’ Ability to Pay for Water Supply and Sanitation Services

Numerous social and economic studies have been conducted in various spheres in the RK; however, no special studies have been conducted in order to determine the households’ demand for water supply and sanitation services or their willingness to pay for such services.

According to the National Statistics Committee, poverty level reduced markedly over the past three years: in the first quarter of 2004 population with income below the subsistence minimum accounted for an average of 19.9 percent.

According to sample survey of 12,000 households, monthly average per capita income spent on consumption amounted to 7,752 tenge in the second quarter of 2004. Its growth rate compared to the second quarter of 2003 was 110.9 percent. Household expenses on utilities, housing maintenance and repairs made up 9.2 percent of their total consumer expenses in the second quarter of 2004. Given that country-average water supply and sanitation tariff is approximately 31.32 tenge (about 0.4 percent of average per capita income), households can afford to pay for the water supply and sanitation services in full.

4.1.2. Social Protection Mechanisms

Social protection of law-income strata of the population is envisaged by current legislation. If housing and utility payments (including water supply and sanitation services) exceed 20 percent of total household income, the amount of excess is paid for (subsidized) by the state.

4.2. Key Trends in Environmental Protection

Sectoral Drinking Water Program provides a brief summary of the state of play in the environmental protection in the country.

The largest rivers used as sources of water supply are highly polluted. Thus, Ural is polluted with phenol (maximum allowable concentration – hereinafter “MAC” – is three times as high); Ilek River is polluted with bromine (more than 20 MACs) and chromium VI (up to 14 MACs). Irtysh is polluted with copper and zinc; Nura, with mercury.

More than 700 sources of underground water pollution have been identified in the country, which increases their hardness and exceedance of MAC for oil products, heavy metals, and various organic compounds.

Utilities discharge approximately 0.66 km3 of wastewater in the water bodies, of which just 0.22 km3 is treated in compliance with the requirements, i.e., about 33 percent. The situation is exacerbated by the fact that considerable volume of industrial wastewater (in some cities, up to 24 percent) flows into urban wastewater treatment plants not designed for industrial wastewater. Recently, effluents of imported detergents have prevailed in the municipal wastewater, which are difficult to treat, have protracted negative environmental impact, and therefore, pollute water sources.

Many cities do not have storm-collector systems with a complete set of treatment facilities; as a result, a large volume of polluted effluents flows into water bodies.

Pollution of water bodies that serve as sources of drinking water supply combined with inadequate efficiency of treatment plants lead to decline in the quality of water supplied to users.

The problem of drinking water and its quality aggravates in Kazakhstan year by year.

The following data on the state of environment in Kazakhstan is available in Internet (http://www.CentrAsia.Ru/newsA.php4?st=1072821540).

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According to NPO “Vodnye resursy i okhrana okruzhayuschey sredy” (Water Resources and Environmental Protection), at present there are no sources or water bodies in Kazakhstan which could supply water without prior treatment. Out of 44 surveyed water bodies, only nine rivers, two lakes, and two reservoirs were declared clean.

The largest water arteries in Kazakhstan – Irtysh, Ili, Syrdarya, and Ural – are constantly exposed to chemical and biological pollution.

According to NPO “Vodnye resursy i okhrana okruzhayuschey sredy”, in Atyrau epidemiologists found cholera vibrio in the water samples taken from Ural River, which is especially dangerous for humans.

Water pollution is the highest in the country in Kyzylorda Oblast, according to the most recent data.

With such levels of pollution in the country, most oblast centers, for example Kokshetau, Uralsk, Petropavlovsk, Kostanay do not have treatment facilities. And the wastewater storage facilities are overloaded.

In particular, in Eastern Kazakhstan, as a result of double or triple load, under-treated wastewater (5-5.1 MAC of BOD; 174 MACs of ammonium nitrogen; 3.1 MACs of zinc; and 5 MACs of oil products,) is discharged into Irtysh. Together with drainage water from a refuse heap (Irtysh tributary) 500 tons of zinc, 10 tons of copper, and 3 tons of cadmium is discharged in Ulba River each year. Ishim River feeds 12,000-km long system of water mains (about 600 localities) that is why water quality is a special priority there. Oil products are typical pollutants (up to 50 MACs; 28 MACs of copper; 6 MACs of phenols). According to data available, MAC of cadmium increased two- to three-fold in the tap water in the City of Petropavlovsk; in Southern Kazakhstan Oblast untreated wastewater is discharged from Burzhan storage facility into Badam River due to under-capacity of the treatment plant (197,000 m3 while the actual load is 300-350 m3). In 1996, 68 tons of pollutants were discharged.

The state of environment is tense in many regions due to radioactive pollution of soils. In twenty-two largest oil deposits in Western Kazakhstan, 267 areas of radioactive pollution were identified with stratal water ejected on the surface. Radioactive radiation power of radium and thorium in them is approximately 100-170 micro-roentgens an hour.

Total number of population exposed to radiation is about 100,000 people.

Radioactive waste is accumulated during extraction and processing of uranium ores in the form of mining refuse heaps and tailing pits. Approximately 80,000 sources of ionizing radiation concentrated on more than 100 storage sites should be disposed of.

There are local underground water pollution problems in Kazakhstan, which could develop into regional or international issues if emergency measures are not taken. In Semipalatinsk Oblast, kerosene which accumulated in the underground water near a military airport (about 6,460 tons on 42 hectares) can get into Irtysh River with the underground water flow and lead to environmental catastrophe downstream the river, including in Russia. In Pavlodar Oblast, underground water polluted with 900 tons of mercury on 50-hectare area was found. The situation can deteriorate. Huge amount of mercury – more than 1,000 tons – accumulated under the mercury electrolysis section of Pavlodar AO “Chimprom” – such amount of mercury can lead to a catastrophe downstream the river. Environmentalists and hydrologists claim the mercury would move towards Irtysh. If the mercury gets into Irtysh, residents of Altai Region and Omsk Oblast of the Russian Federation could suffer.

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5. LOCAL SPECIALISTS’ OPINION ABOUT THE STATE OF WATER SUPPLY AND SANITATION SECTOR IN KAZAKHSTAN

Local specialists from Association of Water Supply and Sanitation Utilities of the Republic of Kazakhstan “Kazakhstan Su Arnasy” expressed their opinion about the state of the water supply and sanitation sector in the country.

The sector evolved largely from 1960 to 1970 when major investment was made in the construction of water supply and sanitation facilities. After the demise of the USSR, investment in the sector was completely discontinued. Fixed assets deteriorated, which lead to higher accident rate and a sharp increase in operational costs. Current financial standing of the water utilities does not allow for maintenance of the water supply and sanitation networks and facilities in a satisfactory condition.

In November 2001, parliamentary hearing took place on drinking water supply to the population of the Republic of Kazakhstan. It was noted that drinking water supply to the population reached a critical level and jeopardizes the national security of the country. It was recommended that akims and maslikhats of oblasts and cities allocate budget funds for construction and reconstruction of the water supply and sanitation facilities.

Sectoral Drinking Water Program envisages allocation of considerable funding for construction and reconstruction of the water supply and sanitation facilities; however, the Program implementation in 2002-2004 showed that the funding is not allocated in reality.

In the cities of the country from 60 percent to 80 percent of the water supply and sanitation networks should be replaced. Total water losses during transmission are above 30 percent due to highly deteriorated pipes; in some cases, losses make up more than 50 percent of water supplied to the network. Accident rate goes up by 4-5 percent each year. Average number of accidents is as high as 60 per 100 km of the network.

By preliminary estimate, in Astana and Almaty alone investment requirement is 60 bln tenge, of which about a half is necessary to replace and reconstruct the networks.

Electricity costs account for 30-40 percent of the cost of water utility services. Lowering electricity consumption is one of the most promising avenues of reducing the water utility costs; however, the water utilities do not have money to purchase necessary equipment.

The following should be done on a priority basis:

1) Develop the water utility development and operation concept in a new economic environment

2) Resume research

3) Solve the issue of budget funding for development and reconstruction of the water supply and sanitation systems

4) Ensure tariff regulation so that the water utilities do not operate at a loss

5) Set up an authorized public water utility regulatory authority

6) Pass Water Supply and Sanitation Law submitted by the Government of the RK to the Parliament in June 2004

7) Draft and approve new User Rules for Communal Water Supply and Sanitation Systems in view of all the amendments introduced in the legislation over the past eight years

8) Institutionalize principles and procedures of water utility transfer into private ownership

9) Ensure establishment of backup sources of water supply for large cities, such as Astana and Almaty.

These activities would improve the state of the water supply and sanitation systems and enhance reliability and quality of services provided by the water utilities.

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REFERENCES

1. Сарсембеков Т.Т., Нурушев А.Н., Кожаков А.Е., Оспанов М.О. Использование и охрана трансграничных рек в странах Центральной Азии. Алматы. 2004.

2.Отраслевая программа «Питьевые воды» на 2002-2010 годы. Утверждена постановлением Правительства РК от 23 января 2002 года № 93.

3. Водный кодекс Республики Казахстан.

4. КЗ РК «О Правительстве Республики Казахстан» от 18 декабря 1995 года № 2688

5. Закон РК «О местном государственном управлении в Республике Казахстан» от 23 января 2001 года № 148

6. Гражданский Кодекс РК

7. Закон РК «О естественных монополиях» от 9 июля 1998 года № 272-1

8. Правила предоставления коммунальных услуг. Утверждены постановлением Правительства РК от 7 декабря 2000 года № 1822

9. Правила пользования водопроводом и канализацией в населенных пунктах Республики Казахстан. Утверждены приказом Председателя Комитета по водным ресурсам Министерства сельского хозяйства от 18 июля 2003 года № 125-П

10. Закон РК «О внесении изменений в некоторые законодательные акты Республики Казахстан по вопросам социальной защиты населения» от 16 ноября 1999 года № 477-1

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ATTACHMENTS

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Attachment 1. Key Provisions of Sectoral Drinking Water Program for 2002-2010

The Sectoral Program sets the following priorities:

1) Rehabilitate and improve existing water supply sources

2) Utilize new sources of water supply and develop alternative ones

3) Improve quality of consumed drinking water

4) Use drinking water in a rational manner

5) Improve environmental and hygiene state of water bodies

6) Create information environment conducive to appropriate understanding of the issue of rational use of drinking water

7) Improve management, coordination, and efficiency of water supply and water protection activities.

The Program is to be implemented in two stages aimed to accomplish the following:

• Stage 1 for years 2002 – 2005 aims to accomplish the following: - Stop further decline in the state of water supply and water quality at drinking water supply

sources - Start planned development of the sector with a view to improving human health

• Stage 2 for years 2006 – 2010 aims to accomplish the following: - Bring the level of quality drinking water supply to the population up to 65 percent - Increase the number of population using water from centralized drinking water supply

systems by 20-25 percent in the country as a whole and by 40 percent or more in specific areas

- Ensure full compliance with the hygiene standards and rules and drinking water quality standards

- Use underground water as much as possible for drinking water supply purposes and eliminate decentralized use of surface water sources for drinking purposes due to high level of their bacterial pollution

- Reduce water-related morbidity of the population by 70-80 percent - Prevent possible negative environmental impact on water supply sources - Create systems of flash monitoring of drinking water quality in specific regions and river

basins - Lower service cost by introducing new technologies in construction, drinking water

treatment systems and by replacing some sources of water supply with alternative ones.

The following sources of funding of Sectoral Program activities are envisaged:

• National and inter-oblast water supply facilities are to be funded from the national budget as per Government Investment Program of the RK

• Oblast, regional, and local water supply facilities are to be funded from the local budgets, loans, domestic or foreign direct investment, as well as by the economic entities based on special-purpose programs approved by the local governments.

Investment in the amount of at 115.1 bln tenge is envisaged for the Program implementation, of which:

• At stage 1 (2002 – 2005), 37 bln tenge should be allocated, of which: - From the central budget – 16 bln tenge - From local budgets – 17.6 bln tenge; - By economic entities – 3.4 bln tenge

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• At stage 2 (2006 – 2010), 78.1 bln should be allocated, of which: - From the central budget – 27.4 bln tenge - From local budgets – 28.7 bln tenge; - By economic entities – 22.0 bln tenge.

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Attachment 2. Key Functions of National Executive Authorities Governing Communal Water Supply and Sanitation Services

National executive authorities engaged in specific issues of communal water supply and sanitation services are:

• Water Resources Committee (WRC) of the Ministry of Agriculture

• Natural Monopoly and Competition Protection Regulatory Agency (NMRA)

• Environmental Protection Committee (EPC)

• Construction Affairs Committee of the Ministry of Industry and Trade

• Standardization, Metrology, and Certification Committee of the Ministry of Industry and Trade

• Health Ministry

• Ministry of Economy and Budget Planning

Water Resources Committee (WRC) of the Ministry of Agriculture is a national water resources management body. Water resources are managed in the country based on the combination of water basin and administrative and territorial principles. River basins are viewed as a basis for development of public water resource management authorities.

The WRC comprises eight water basin departments equal to the number of major river basins. Their tasks include: management of use of water resources in a basin, including their distribution among water users; development of water intake and water supply plans; issuance of licenses and permits for special water use where water intake is carried out by means of hydraulic facilities; setting water use limits and reservoir operation regimes; real-time control over compliance with them; development of operational basin plans; and arranging state accounting for water use.

As state institutions, water basin departments are only supported from the budget and it is not allowed to use other sources of funding for their operation.

Natural Monopoly and Competition Protection Regulatory Agency (NMRA) is an authorized body engaged in control over, and regulation of, natural monopoly activities.

Pursuant to Article 4 of the Natural Monopoly Law, “water supply and/or sanitation sector services,” i.e., those rendered by water utilities, are a natural monopoly and water utilities themselves are natural monopoly holders subject to state control and regulation.

State regulation of activities of the water utilities as natural monopoly holders is ensured through:

• Approval of the water supply and sanitation tariffs by an authorized body (NMRA)

• Approval of a water utility’s tariff budget by an authorized body (NMRA), which means that not only the tariff size, but also tariff pattern is controlled by the state

• Setting by an authorized body (NMRA) of a temporary compensating (discounted) tariff or temporary discounting coefficient for water supply and sanitation tariffs to make up for losses caused to users by the natural monopoly holder (water utility).

Functions, rights, and duties of the NMRA are set by the Natural Monopoly Law (Articles 13, 14 and 14-1).

Environmental Protection Committee (EPC) issues permits for discharge of treated effluents into water bodies and conducts regional-level environmental inspections.

Standardization, Metrology, and Certification Committee of the Ministry of Industry and Trade arranges drafting, approval, and implementation of drinking water safety and harmlessness standards and ensures control over water quality and drinking water certification.

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Attachment 3. List of Regulations Governing Quality of Water Utility Services

There is Drinking Water GOST (GOST 2874-82) in the country, adopted based on the Soviet standard. Drinking water quality requirements are set by the Sanitary Rules and Standards (SanPiN 2.1.4.559-96) based on the Russian standards. These standards set hygiene requirements and principles of control over the drinking water quality.

GOST 25150-82 is the regulation that defines the terms in the field of sanitation. Provisions of the Water Code, Surface Water Protection Rules of the RK, Environmental Protection Law of the RK, and Sanitary Rules and Standards of Surface Water Protection against Pollution are applied. SN 245-71 sets forth requirements to the composition of industrial wastewater discharged into municipal sewerage or biological treatment plants as well as maximum allowable concentrations for various pollutants, which should not be exceeded once treated water has mixed with that in a water body.

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Attachment 4. List of Tariff Regulations

Tariff regulations are:

• Program of Improvement of Tariff Policy of Natural Monopoly Holders for 2002-2004 (approved by Decree of the Government of the RK No. 1126 of 15 October 2002)

• Rules of Procurement of Material and Financial Resources and Services by Natural Monopoly Holders, Expenses on Which Are Incorporated in Services Tariffs (approved by Order of the NMRA President No. 149-OD of 6 June 2003)

• Rules of Special Formation of Expenses Applied in Approval of Tariffs for Services (Goods, Works) of Natural Monopoly Holders (approved by Order of the NMRA President No. 185-OD of 30 July 2003)

• Tariff Assessment Methodology for Water Supply and Sanitation Services (approved by Order of the NMRA President No. 196-OD of 15 August 2003)

• Instruction on Approval of Tariffs for Services (Goods, Works) Produced and Provided by Natural Monopoly Holders (approved by Order of the NMRA President No. 85-OD of 19 March 2003)

• Instruction on Assessment of Profit Margin (Net Income) for Regulated Equipped Assets for Natural Monopoly Holders Rendering Water Supply and Sanitation Services and Those in Energy Sector (approved by Order of the NMRA President No. 17-OD of 27 January 2003)

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Attachment 5. Water and Sanitation Tariffs. Cost of WSS Services. Water Loss Requirements

Water Supply Sanitation

Cost Tariff (ex VAT)

Cost Tariff (ex VAT)

Water Loss Requirement

City Population, thousands

Tenge/m3 Tenge/m3 Tenge/m3 Tenge/m3 %

Astana 502 25.2 20.31 17.89 14.63 41.4

Almaty 1,142 8.06 9.33 4.88 5.5 39.7

Aktobe 280 16.45 4.7 33.8

Atyrau 313 40.95 12.53 47.85 14.49 53.1

Aktau 140 17.45 18.22 17.10 18.00

Karaganda 608 24.46 26.22 17.97 18.67 27.0

Kyzylorda 225 16.57 17.5 11.05 12.00

Kokshetau 143 21.39 18.04 31.7

Kostanay 220 12.93 12.56 32.2

Pavlodar 283 12.64 11.88 11.40 9.59 35.7

Petropavlovsk 190 12.79 11.03 13.3

Semipalatinsk 260 8.95 7.7 41.0

Taraz 312 8.54 7.76 3.37 3.75

Taldykorgan 124 12.42 12.05 9.43 9.58 33.3

Ust-Kamenogorsk 312 9.55 From 8.8 to 17.73

31.3

Uralsk 214 18.65 16.06 12.75 14.17 27.3

Shymkent 480 21.43 25.14 8.64 9.51 34.4

Ekibazstuz 102 33 23.8 9.35 12.95

Source: Association of Water Supply and Sanitation Utilities of the Republic of Kazakhstan “Kazakhstan Su Arnasy”