Document of

The World Bank

Report No: 23636-UZ

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$20.0 MILLION AND A PROPOSED

CREDIT IN THE AMOUNT OF SDR 15.9 MILLION

(US$20.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF UZBEKISTAN

FOR A

BUKHARA AND SAMARKAND WATER SUPPLY PROJECT

February 19, 2002

Infrastructure and Energy Services DepartmentCentral Asia Country UnitEurope and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January 31, 2002)

Currency Unit = Uzbekistan Sum (UZS)693.12 UZS = US$1US$0.0014 = 1 UZS

FISCAL YEARJanuary I -- December 31

ABBREVIATIONS AND ACRONYMS

ACS Agency of Communal Services NS National ShoppingBVK Bukhara Water and Wastewater Utility) O&M Operation & MaintenanceCAS Country Assistance Strategy PAD Project Appraisal DocumentCPI Consumer Price Index PAS Procurement Accredited StaffCIS Commonwealth of Independent States PCU Project Coordination UnitEMP Environmental Management and Monitoring PCO Procurement & Contract Coordination

Plan OfficersFMS Financial Management Specialist PICA Performance Incentive Compensation

AppenddixGoU Government of Uzbekistan PIU Project Implementation UnitIAS International Accounting Standards PMR Project Management ReportIBTA Institutional Building Technical Assistance POM Project Operational Manual

LoanICB International Competitive Bidding PSA Performance Standard AppendixICR Implementation Completion Report QCBS Quality & Cost Based SelectionIF Investment Fund SA Special AccountIFI International Financial Institute SC Service ContractIS International Shopping SLA Subsidiary Loan AgreementLCS Least Cost Selection SOE Statement of ExpendituresMMS Ministry of Macroeconomics and Statistics SVK Samarkand Water and Wastewater utility)MOF Ministry of Finance VAT Value-Added TaxNCB National Competitive Bidding

Vice President: Johannes F. Linn, ECAVPActing Country Director: Dennis de Tray, ECCO8

Sector Director/Sector Manager: Hossein Razavi/Motoo Konishi, ECSIETask Team Leader: Ede Jorge Ijjasz-Vasquez, ECSIE

UZBEKISTANBUKHARA AND SAMARKAND WATER SUPPLY PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 32. Key performance indicators 3

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 32. Main sector issues and Government strategy 43. Sector issues to be addressed by the project and strategic choices 6

C. Project Description Summary

1. Project components 82. Key policy and institutional reforms supported by the project 93. Benefits and target population 94. Institutional and implementation arrangements 11

D. Project Rationale

1. Project altematives considered and reasons for rejection 132. Major related projects financed by the Bank and other development agencies 153. Lessons learned and reflected in the project design 174. Indications of borrower commitment and ownership 185. Value added of Bank support in this project 19

E. Summary Project Analysis

1. Economic 192. Financial 203. Technical 234. Institutional 245. Environmental 266. Social 287. Safeguard Policies 32

F. Sustainability and Risks

1. Sustainability 322. Critical risks 333. Possible controversial aspects 35

G. Main Loan/Credit Conditions

1. Effectiveness Condition 362. Other 36

H. Readiness for Implementation 37

I. Compliance with Bank Policies 38

Annexes

Annex 1: Project Design Summary 39Annex 2: Detailed Project Description 61Annex 3: Estimated Project Costs 64Annex 4: Cost Benefit Analysis Summary 65Annex 5: Financial Summary 68Annex 6: Procurement and Disbursement Arrangements 76Annex 6B: Financial Management Assessment Report 86Annex 7: Project Processing Schedule 94Annex 8: Documents in the Project File 96Annex 9: Statement of Loans and Credits 97Annex 10: Country at a Glance 99Annex I 1: BVK and SVK Benchmarking Core Indicator Values 101Annex 12: Project Implementation Program 106Annex 13: Summary of Social Assessment 107

MAP(S)IBRD 30863

UZBEKISTANBukhara and Samarkand Water Supply Project

Project Appraisal DocumentEurope and Central Asia Region

ECSIE

Date: February 19, 2002 Team Leader: Ede Jorge Ijjasz-VasquezCountry Director: Dennis de Tray Sector Manager/Director: Motoo Konishi, Hossein

RazaviProject ID: P049621 Sector(s): MP - PSI, WU - Urban Water SupplyLending Instrument: Specific Investment Loan (SIL) Theme(s): Private Sector; Water

Poverty Targeted Intervention: N

Program Financing Data[ ] Loan [ ] Credit [ ] Grant [] Guarantee [ ] Other:

For Loans/Credits/Others:Amount (US$m): IBRD Loan - US$ 20.0 million; IDA Credit - SDR 15.9 million (US$20.0 million equivalent)Financing Plan (US$m): Source Local Foreign .TotalBORROWER 13.33 0.00 13.33IBRD 2.18 17.82 20.00IDA 3.50 16.50 20.00SWITZERLAND, GOV. OF (EXCEPT FOR FOFEA) 0.00 9.00 9.00Total: 19.01 43.32 62.33Borrower: REPUBLIC OF UZBEKISTANResponsible agency: BUKHARA AND SAMARKAND WATER UTILITIES (BVK AND SVK)Project Coordination UnitAddress: 45a, Uzbekistanskaya Av., Tashkent, Uzbekistan 700003Contact Person: Vyacheslav Bulychev, PCU DirectorTel: (998-71) 132 64 54 Fax: (998-71) 132 63 19 Email: BK@pcu.pv.uz

Other Agency(ies):Ministry of Macroeconomics and Statistics

Address: 45a, Uzbekistanskaya Av., Tashkent, Uzbekistan 700003Contact Person: Mr. Bakhodir Khodjaev, Deputy MinisterTel: (998-71) 132-6510; 132-6364 Fax: (998-71) 139-8163 Email:Bukhara Water Utility/Samarkand Water UtilityAddress: PCU Coordination Offices - Bukhara and SamarkandContact Person: Rasul Ostanov, Director BVK; Shukhrat Rakhmonov; Director SVK; Olim Vokhidov, ProjectCoordinator in Bukhara City; and Abdualim Azimov, Project Coordinator in Samarkand CityTel: (998-7165) 2242308/(998-71662) 332800 Fax: (998-71665) 2242308/(998-71662) 334372Email:

Estimated disbursements ( Bank FY/US$m):FY 2002 2003 2004 2005 2006 2007

Annual 0.50 8.50 9.00 9.25 9.00 3.75Cumulative 0.50 9.00 18.00 27.25 36.25 40.00

Project implementation period: 5 yearsExpected effectiveness date: 05/15/2002 Expected closing date: 06/30/2007

A. Project Deveiopment Objective

1. Project development objective: (see Annex 1)

The Development Objective of the project is to improve the safety, quality, reliability, efficiency, financialviability and sustainability of the water supply services in Bukhara and Samarkand. The DevelopmentObjective would be achieved through: (a) strategic rehabilitation and efficiency improvement of existingfacilities in critical condition; (b) institutional strengthening of the Bukhara and Samarkand Water Utilities(Bukhara City Vodokanal - BVK and Samarkand City Vodokanal - SVK) through a perfornance-basedmanagement contract (SC) with an internationally experienced water utility operator (the Operator); and (c)strengthening of BVK's and SVK's financial capacity through improved financial management andcommercial practices.

2. Key performance indicators: (see Annex 1)

The Performance Standard Appendix (PSA), the Performance Incentive Compensation Appendix (PICA),and other related provisions of the management contract establish a set of annual performance targets to bemet during project implementation. The extent of progress towards achieving those performanceimprovement targets by the Operator will be directly related to the amount of annual performance incentivecompensation paid. Annex 1 presents the key performance indicators and the detailed PSA and PICA ofthe draft management contract. The key indicators for the project through which progress towards thedevelopment objectives will be assessed include:

* Safety and Oualitv: Percentage of water quality samples meeting target values of key parameters;* Reliability: Continuity of service;* Efficiency: Reduction in energy use per cubic meter of water; Reduction in water losses; and Increase

in accounted-for water;* Financial Viability: Annual ratio of collected revenues over the sum of operation and maintenance costs

and project-related expenses; and* Sustainability: Satisfaction of population with water services, and agreement on effective institutional

arrangement for sustainability of project achievements after completion, possibly with expandedparticipation of the private sector.

The indicators in the PSA and in the PICA have a specific annual performance target presented in Annex 1.The installation of monitoring systems and data collection for the performance improvement indicators andfor a better understanding of BVK's and SVK's physical and commercial operations will be part of theOperator's responsibility. Independent technical and financial auditors will verify the results as they aredirectly linked to the incentive fee to the Operator.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 17376 UZ Date of latest CAS discussion: 03/10/98

The project is fully consistent with the latest CAS and supports two of the four focus areas agreed in theCAS discussion, namely, the need to remove the inefficiencies in resource utilization in municipal services,infrastructure and social services, and the need to address environmental problems. Progress on thesefronts would have a substantial impact on softening the constraints that bind Uzbekistan's low-incomefamilies, and on moving towards cost recovery, institutional strengthening and privatization of municipalservices. Performance benchmarks agreed include: (i) increase in level of cost recovery; (ii) increase in

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institutional capacity; and (iii) increase in competition among service providers and expansion ofprivatization of services. A new CAS for FY02-04 will be presented to the Board of Directors at the sametime as this project. The proposed Bukhara and Samarkand Water Supply Project is included in the newCAS and is consistent with its objectives.

2. Main sector issues and Government strategy:

The water and sanitation services in Uzbekistan are rapidly deteriorating and the reliability and safety ofdrinking water are continuously decreasing in a downward spiral. The water supply and sanitation sectorin Uzbekistan and in particular in Bukhara and Samarkand faces several constraints:

Inefficient operations: Potable water and wastewater treatment plants are poorly maintained and operatedresulting in poor performance in terms of quality of output and efficiency. With respect to energyefficiency, improper design of pumping stations, old equipment and low level of automation lead to highlevels of energy consumption. For example, the two main pumping stations of wastewater system ofSamarkand have been in service for at least 35 years with little maintenance, and pump efficiency isreported to be in the range of 45% leading to very high waste of energy. In Bukhara, the main and thenetwork pumping stations of the wastewater system are in a dramatic poor state of maintenance. As a resultof this situation and rapidly rising energy prices, energy costs in 2000 are as high as 66% of operationaland maintenance expenses in Samarkand and 42% in Bukhara. Other components of the water and sewagesystems are similarly inefficient. For example, water networks suffer from excessive leakage (measuredloss rates are about 39% for Bukhara and 48% for Samarkand respectively). Other measures of leakageperformance show that the systems in Bukhara and Samarkand are 10-100 times worse thanwell-maintained systems. For example, losses in Bukhara and Samarkand are 5.6 and 17.6 m3/km ofmain/day/meter of pressure, compared to 0.25 for systems in Westem Europe. Losses inside apartmentblocks is equally high. Measured consumption by apartment dwellers is about 112 liters per capita per day(lpcd), but leakage in apartment blocks is as high as an additional 100 lpcd. Consumers, households,industry and public agencies not accustomed to water conservation and not faced with appropriate watertariffs waste significant amounts of water. All the losses in the system result in a total production of waterof about 700 lpcd in Samarkand and 750 Ipcd in Bukhara. These levels are several times higher than inWestern Europe, and consequently the operating costs is significantly higher than international practice.

Poor service levels: The excessive water losses and waste result in poor service levels to the population andindustries. The water supply services in the two cities are poor in different dimensions. In Samarkand, 30percent of the network receives a supply for just two periods of two hours every day, and the rest of thenetwork suffers from very low pressure. In Bukhara, the quality of potable water is deficient with very highcontent of solids.

Poor state of repair of facilities: Although the percentage of urban households connected to pipe watersupply is greater than 80%, the water treatment and distribution facilities, as well as the wastewatercollection and treatment installations are rapidly deteriorating. In both cities a good part of the secondarynetwork of the wastewater system is hydraulically overloaded. The lack of appropriate maintenance, poorplanning, the use of low quality materials and equipment, and poor construction quality, combined with therecent shortages of resources, are responsible for the poor state of repair of water supply and wastewaterassets. This trend brings the water and sanitation systems towards lower and lower service levels that willbring parts, and eventually the totality of the system, to a halt.

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Unviable financial shortfalls: The water and wastewater utilities in Uzbekistan are facing reducedgovernment transfers due to fiscal constraints and decentralization policies aimed at increasing self-relianceof local utilities, very low tariffs authorized by the local Governments (the household water tariff inSamarkand in 1999 was about US$0.014/m3 and in Bukhara US$0.005/m3), high cross-subsidies (inBukhara and Samarkand the level of tariffs for non-domestic consumers is about 8-10 times higher than fordomestic consumers), and poor collections. Not only revenues are insufficient to cover basic operationalcosts (much less maintenance costs), the BVK and SVK are only able to receive about 18% and 27% oftheir billings in cash respectively. The rest is either paid through a cumbersome system of invoice clearingand compensation with other utilities and customers' own invoices and payments, or simply not recoveredat all leading to a total collection level of 56% and 79% of billing in Bukhara and Samarkand respectively.In both cities the utilities' accounts receivable represent about 7 months of billing leaving them in afinancially untenable situation. The utilities continue their operations by cutting maintenance expenses andnot paying vodokanal staff and their suppliers, most notably electricity providers.

Weak human resource and institutional capacity: Despite many of skilled technical professionals workingin the water sector in Uzbekistan, there is an urgent need for updating and improving skills in modemutility management systems (including management and operations of water supply and sanitationsystems), planning strategies, financial and commercial management, and investment selection. Thecapacity of Municipalities and anti-monopoly commissions to monitor and regulate the vodokanals withoutundue interference also needs substantial strengthening.

Lack of adequate information: The financial and technical information available to the utility managementis insufficient and does not provide the information base needed to manage the operations or plan thedevelopment of the water and sanitation systems efficiently. The accounting, financial and operational datacollection and management systems are inadequate and do not provide a clear picture of the problems facedby the utilities. In fact, financial reports severely overstate the financial performance of vodokanals.

Water resources scarcity: Many water supply enterprises in Uzbekistan are located in basins with limitedwater resources. Although urban water supply is not the largest user of water resources, the competitionwith other sectors, mainly agriculture becomes particularly important during drought periods. The problemof water resources is compounded by poor management of regional water systems, poor allocation ofwater, pollution caused by agriculture and industry in some areas, and wastage in the drinking watersystems, both from leakage and lack of water conservation practices. Additionally, operational costs ofsome of the utilities, such as BVK, are increased by their dependence on water resources located at a longdistance from the population they serve and transported through channels or large mains over hundreds ofkilometers.

The Government strategy for the proposed Bukhara and Samarkand project is twofold. First, to define anew relationship between the central and local governments based on a full decentralization ofresponsibilities to the local level for the provision of services and full cost-recovery of operational,maintenance and debt service expenses through water and wastewater tariffs. Second, to test for the firsttime in Uzbekistan, a new strategy to improve water supply services by involving the private sector in theprovision of these services. This operation is designed as a first step in the implementation of this strategy,focusing on the two key areas that need the most improvement in the vodokanals, namely the operationalefficiency of the water supply systems and the financial and commercial strategies.

As part of the Government strategy in the water supply sector, and more generally in the communalservices, the Ministry of Communal Services was restructured in December 2000 as an Agency ofCommunal Services (ACS) with the main goal of commercializing the activities of city and district

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communal service providers. Some of the key goals of this restructuring and the responsibilities of the newACS include: (i) to coordinate the reforms in the communal services sector; (ii) to act as regulator and tomonitor the compliance of local authorities and commercial entities with the sectoral legislation; and (iii) toattract foreign investments into the sector, including the establishment of joint ventures. As part of thereform, the local governments received the responsibility for the provision of water supply and sanitationservices. The new policy calls for the promotion of altemative contractors for such provision so as to createa competitive environment. Additionally, the policy gives a clear mandate to the local governments andservice providers to improve efficiency and focus on water demand management.

3. Sector issues to be addressed by the project and strategic choices:

Restoring basic levels for water supply service in Bukhara and Samarkand (both ancient cities ofsignificant cultural and historical importance and important tourism potential) is estimated to requireinvestments of about US$125 million. This estimate does not include the resources needed for therehabilitation and expansion of the sewage collection system and the upgrading of the wastewater treatmentsystem. These additional resources are expected to be larger than those needed for water supply. For thetime being, addressing all of these investment needs is clearly beyond the present financial capacities ofBVK and SVK because of the enormous short-term tariff increases it would entail for the both Bukharaand Samarkand population. It is also beyond the availability of external resources that can reasonably beexpected to be mustered for such an operation in Uzbekistan. Furthermore, the very weak institutional andimplementation capacities of BVK and SVK would prevent them from implementing such an ambitiousprogram. The approach proposed for the project would be to design this operation in the simplest possibleway with a view to address, in an emergency basis, only the technically and financially most critical issuesand to use it to build up a basis for future, gradually expanding support to BVK and SVK from the WorldBank, other International Financial Institutions (IFIs) or bilateral donors.

The sector issues to be addressed by the project and the strategic choices made during project design are:

Progress towards financial viability of BVK and SVK at the core of sector issues addressed by the proiect:Aside from considerable technical problems, the main obstacle that must be overcome to re-establishsatisfactory water supply conditions is to set up the financial and institutional framework that willeventually allow BVK and SVK, over a long-term horizon, to operate as both technically and financiallysound local utilities. Increasing BVK's and SVK's water tariffs and revenue collection are the most criticalissues. The project's strategic choice has been to jointly prepare and agree with the municipal governmentsa feasible financial recovery plan aimed at reducing costs associated with system inefficiencies, increasingtariffs and collections, reducing accounts payable to BVK and SVK from Government-owned entities,reducing non-cash forms of payment, and improving financial and accounting information and planning. Itis important to note that under the prevailing circumstances it is unrealistic to expect an immediateimprovement of BVK's and SVK's financial situation leading to full cost-recovery. Close supervision ofprogress and effectiveness of the financial recovery plan, and flexibility to adapt to changing conditionswithin the framework of the management contract are required.

Turning over key management and operation responsibilities of the vodokanals in the water supply andfinancial/commercial areas to a private operator under a management contract: At present BVK's andSVK's very weak managerial and technical capacity prevents the companies from addressing even the mosturgent operational problems and would not allow them to implement the project. Effective internationalassistance will be an important factor in reaching project objectives. The strategic choice is to bring in aforeign qualified operator under a performance-based management contract with a highly focused scope ofresponsibilities that would be limited to the management of the water supply, financial and commercial

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areas, and more specifically to: (i) the rehabilitation and operations improvement of the water treatment anddistribution system; (ii) the implementation of a program of demand management and customer service; (iii)the implementation of an energy efficiency program; and (iv) the implementation and operation ofcommercial and financial management systems, as part of a financial recovery plan. In these areas theoperator will have full responsibility, including the management and training of BVK and SVK staff,determination of strategic approaches, and selection and implementation of investments. Involvement of anexperienced and qualified intemational utility operator under a management contract type arrangement asopposed through a traditional technical assistance program will provide a faster and more cost-effectiveway to improve services and efficiency, management and operation of BVK and SVK, and to invest scarceresources in the most cost effective capacity with direct and long lasting benefits to the utilities. Aperformance-based management contract is considered the most adequate approach to involve the privatesector at this time as it has attractive features that would increase the likelihood of success and is in linewith the Government's policy of gradual transformation of the economy.

BVK and SVK as proiect executing agencies: In line with the decentralization policies of the GoU, thedecisions and ownership of the project will be focused on the lowest level of government involved in theprovision of water and wastewater services. All aspects of project administration and coordination will bemanaged by the vodokanals, as the lowest and most direct level of government organization dealing withwater and sanitation services. The vodokanals will be supported by a small Project Coordinating Unit(PCU) supported by an experienced international technical and financial auditing firm. BVK and SVK willcoordinate certain aspects of project implementation with the Ministry of Macroeconomics and Statistics(MMS), the ACS, the Ministry of Finance (MOF) and the local and regional governments of Bukhara andSamarkand, but these higher-level government organizations will not have a direct day-to-day involvementin project implementation.

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C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

Indicative Bank- % ofComponent Sector Costs % of financing Bank-

.__________________________ _ . .(US$M) Total (US$M) financing1. Investment Fund (IF) Urban Water Supply 0.0 0.01.1 Bukhara IF Urban Water Supply 21.30 34.2 15.40 38.51.2 Samarkand IF Urban Water Supply 25.58 41.0 18.34 45.9

2. Service Contract (SC) - Base Fee Urban Water Supply 3.65 5.9 3.65 9.1SC - Incentive Fee Urban Water Supply 1.55 2.5 1.55 3.9

3. Consulting services and Project Urban Water Supply 1.05 1.7 0.86 2.2Coordination Unit

4. Swiss-financed component Urban Water Supply 9.00 14.4 0.00 0.04.1 Swiss-financed Investment Fund Urban Water Supply4.2 Swiss-financed technical and Urban Water Supply

financial audits and consultingservices

Total Project Costs 62.13 99.7 39.80 99.5Front-end fee 0.20 0.3 0.20 0.5

Total Financing Required 62.33 100.0 40.00 100.0

(1) The costs for components 2-4 correspond to the combined estimates for Bukhara and Samarkand.(2) Percentages are rounded.

Project Component 1: Investment Fund. This component would finance essential short-term expenditures(such as materials, equipment, vehicles) and a least-cost capital investment program (including associatedengineering and construction supervision services) aimed at improving the operations of the water supplysystem and the services to the population by achieving the performance improvement targets in the servicecontract. The Operator, together with BVK and SVK staff, will propose the investments that are requiredto optimally re-structure and rehabilitate key components of the systems (such as sections of the waterdistribution networks and block distribution systems, specific components of the treatment plants, pumpingstations), implement a demand management program, and set up financial management, accounting andcommercial systems.

Project Component 2: Service Contract. This component would finance the costs related to the servicecontract. These costs include a base fee and a performance-based fee to be paid to the private Operatorbased on achievement of targets defined in the contract. The Operator would be given full responsibilityfor managing the investment program, operating the water supply system, and developing and implementingthe demand management program and the commercial (billing and collection) and financial managementdepartments.

Project Component 3: Consulting Services and Project Coordination Unit. This component would support

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the PCU including salaries, training, and incremental operating costs; and various consulting services oftechnical, legal and financial nature.

Proiect Component 4: Swiss-financed component. The Government of Switzerland is processing a US$9.0million grant to provide parallel financing to the World Bank-financed project. This grant will providesupplemental resources for two activities. First, it will finance an investment fund (goods and services ofSwiss origin) with uses to be determined in parallel to those of the IF under Project Component 1. It willalso finance independent technical and financial auditors that would monitor the Operator's performanceand prepare the financial project and water utility audits, as well as complementary consulting services tosupport the PCU.

The front-end fee will be financed from the proceeds of the IBRD Loan.2. Key policy and institutional reforms supported by the project:

The key policy and institutional reforms in the provision of water services in Bukhara and Samarkandsought by the project are to:

* Change the Government's role in infrastructure development and public service provision in these twocities, accompanied by greater autonomy and decentralization of the management of services;

* Support the first steps of an institutional reform under which BVK and SVK would truly be able tocarry out their responsibilities, in accordance with their original charters as autonomous municipalenterprises, following commercial principles, and with greater technical and financial efficiency andimproved customer-orientation;

* Use of a private operator to manage key parts of the BVK and SVK operation through a servicecontract with the aim of initiating the reform of the operating practices and the managerial andtechnical capacity of BVK and SVK;

* Implement a financial recovery plan with a view to have BVK and SVK collect sufficient revenues tocover their operational costs, ensure a basic level of maintenance of their assets at the end of the projectand service their debt; and

* Change in the criteria and approach to select investments in the water and sanitation sector, from aview that focuses only on capacity expansions to one that supports adequate maintenance,improvements in operational efficiency, and reduction of wastage.

3. Benefits and target population:

The final beneficiaries of the project are the populations of Bukhara and Samarkand connected to the watersupply systems of BVK and SVK (about 260,000 and 390,000 people respectively) who are now facing arapid deterioration of quality and reliability of their services. The main direct benefit is expected to be animprovement in the service by halting the deterioration of the water supply infrastructure, reducinginefficiencies in the systems, and addressing some of the most urgent priorities. Given the limited resourcesthat would be available through the project, the rehabilitation of the system would not be completed to afully acceptable level, but noticeable improvements in the quality, reliability, efficiency and sustainabilityare expected. Because of the high level of connection to the water supply network, the systemimprovements would benefit the great majority of the populations of Bukhara and Samarkand includingtheir poorer segments.

The intermediate beneficiaries are the water and wastewater utilities in Samarkand and Bukhara. Theinvolvement of an experienced private sector operator would bring better management to specificoperations of the vodokanals such as water supply services and the financial and commercial operations, as

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well as operational and technical know-how. Furthermore, the policy and institutional reforms sought bythe project would help BVK and SVK take the first few steps in a gradual path towards self-sustainability,technical efficiency and financial viability. Additionally, the success of this project will have an importantdemonstration effect for the necessary reforms in the urban water sector in Uzbekistan.

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The reduction of water and energy wastage would bring environmental benefits. Improvements in thequality of drinking water and in the operation of the water supply system are expected to bring healthbenefits and respond to an expressed preference by the population.

4. Institutional and implementation arrangements:

Implementation period: FY2002 - FY2007.

Executing agencies: Bukhara Water and Wastewater Utility (BVK) and Samarkand Water andWastewater Utility (SVK).

Project administration and coordination:

* The PCU has been established under the authority of the provinces of Bukhara and Samarkand as thegovernment level responsible for the provision of water supply services. The PCU will also have acoordination role with the MMS, as this organization has taken a leading role in the reform of thewater supply sector. The PCU will report to a Coordination Committee that will have representativesfrom the local governments and key agencies of the central government (MOF, ACS, State Committeeon Property and MMS). The Coordination Committee, headed by the MMS, will meet at leastquarterly to review the progress of the project and to approve the annual procurement plans preparedby the operator, BVK and SVK. The Coordination Committee will also provide the forum to discusspolicy issues of the water sector related to project implementation, particularly on financial matters.The PCU would be responsible for: overseeing day-to-day project activities and the implementation ofthe service contract; coordinating with BVK, SVK, the Operator, the Municipalities of Bukhara andSamarkand, and the auditing consultants; monitoring performance indicators during implementation ofthe service contract; and carrying out all coordination and supervisory functions related to projectimplementation. The PCU is fully staffed and operational and has received training during projectpreparation, particularly on the Service Contract documents. Under the proposed administration andcoordination structure the PCU is in no way subordinate to the Operator and no payments to the PCUstaff will be channeled through the Operator.

* BVK and SVK will operate as legally separate, government owned enterprises (a Regional ProductionEnterprise and a Municipal Production Enterprise, respectively). The relationship between municipalgovernments and utilities will be at arm's length. Municipal governments will provide an enablingenvironment that will give their utilities the freedom and obligation to reform and strengthen theirinstitutional and financial capacity. The Coordination Committee will deal with policy and strategicissues and project oversight.

* BVK and SVK will sign a single service contract with the Operator with specific items in the serviceagreements to reflect the differences in the city systems. The Operator will be responsible formanaging the water supply services in Bukhara and Samarkand under a four-year performance-basedcontract. Ownership of the underlying assets and authority for setting tariffs will remain with theMunicipalities of Bukhara and Samarkand. The Operator will have responsibility to carry out, onbehalf of the vodokanals and in coordination with them, the procurement goods, works and services inaccordance with the World Bank Procurement Guidelines, including contract signature. The PCU willapprove and submit to the World Bank for review the annual implementation plan for the use of IFresources as proposed by the Operator.

Financial Management: To maintain project accounts and produce reports in accordance with standardsacceptable to the Bank, an interim FMS was established at the PCU. This system will be integrated into theoverall financial management system that will be installed by the Operator in BVK and SVK to ensureconsistency and adequate reports using the format agreed for Project Management Reports (PMRs). Inaccordance with OP/BP 10.02, a Bank-accredited financial management specialist reviewed the proposedfinancial management system in March 2001. Based on this assessment, it was found that the PCU satisfiesthe Bank's minimum financial management requirements. However, the PCU has agreed to take a series ofactions to improve its financial management processes as described in Appendix 6.

The PCU will ensure the preparation and distribution of consolidated periodic progress reports to the BVKand SVK and relevant government institutions, including the World Bank, to reflect: (i) sources and uses offunds, by component and activity; (ii) project progress; and (iii) procurement activities. In this context, thePCU will prepare quarterly Project Monitoring Reports (PMRs), which would be submitted to the Bankwithin 45 days of the end of each quarter. The first quarterly PMRs will be submitted at the end of thethird quarter of 2002.

Audit Arrangements: The PCU, with the support of the Operator, would be responsible for ensuring thatthe Project financial statement, Special Accounts (SA), and Statement of Expenditures (SOEs) are auditedby an independent auditor, acceptable to the Bank, in accordance with International Auditing Standards(IAS). The PCU will maintain responsibility for the management of project funds and the SpecialAccounts. They will monitor and keep track of the use of funds. The audit will cover all funds related to theproject, including counterpart funds, for all project components. The annual audit will be carried out inaccordance with the Guidelines for Financial Reporting and Auditing of Projects Financed by the WorldBank. The audited financial statements, the Special Accounts, and SOEs of the preceding fiscal year willbe sent to the Bank within six months of the end of the fiscal year. Selection of an independent Auditorwill be a loan and credit condition of effectiveness. In addition, the financial statements of both BVK andSVK will be audited and sent to the Bank along with the project audit.

Disbursements: Disbursements from the Loan and Credit will be made based on traditional disbursementmethods (i.e., from the Special Account with reimbursements made based on Statements of Expenditures(SOEs) and full documentation, and direct payments from the Loan Account). The proceeds of the WorldBank Loan and Credit will be allocated in accordance with Table C, Annex 6. To facilitate timely projectimplementation, the PCU will establish, maintain and operate, four special accounts (two each for BVKand SVK, corresponding to the IBRD funds and the IDA funds, respectively) under terms and conditionsacceptable to the Bank.

On-lending Arrangements: Loan proceeds will reach BVK and SVK via a Loan Agreement and aDevelopmental Credit Agreement (DCA) with the Ministry of Finance (MOF) on behalf of the GoU andtwo Subsidiary Loan Agreements (SLAs) between MOF and BVK and SVK. The on-lending terms to BVKand SVK for both Loan and Credit funds will be on IBRD terms (including a five year grace period and arepayment period of 20 years). During project preparation, the central Government indicated that, in linewith national policies for foreign loans to sub-national entities, the foreign exchange risk would be passedon to BVK and SVK (i.e., sub-loan repayments would be made using the official UZS/USD exchange rateon the day of payment). As the Government continues to implement the program of unification of thevarious exchange rates and a liberalization of the foreign exchange rate regime, the UZS/USD exchangerate is expected to increase significantly. The Government will provide an annual zero-net budget subsidyto compensate for this risk. The methodology to determine this subsidy is incorporated in the Credit andSub-Loan Agreements.

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Monitoring and evaluation arrangements: The PCU, with the support of international independenttechnical and financial auditors acceptable to the Bank, will monitor progress against agreed performanceindicators specified in the service contract. One of the tasks given to the Operator under the service contractwill be the implementation of monitoring mechanisms to gather the necessary technical data to bettermanage the water supply system. This data will also serve as basis to determine performance improvementsin a way that can be independently verified by auditors. The Operator will furnish the PCU with quarterlyand annual reports summarizing the service contract operations and the utilization of project funds. ThePCU will prepare and provide to the Bank, on a quarterly basis, consolidated reports on projectimplementation progress covering: (i) projections for project financing and implementation; (ii) status ofproject finances, procurement of goods and works; (iii) status of implementation of the Investment Fund;(iv) statement of income and expenditure for the current and previous quarter; and (v) monthly cash flowprojections for the next six months. Reporting formats were discussed at appraisal. All project financialinformation presented would be in compliance with International Accounting Standards (IAS). Thesereports would be submitted to the World Bank within one month of the end of the relevant quarter, andwould provide the basis for monitoring the progress of the project. Draft annual action programs for theupcoming year will be included with the corresponding quarterly report for the Bank's review andcomment. The Government of Uzbekistan and the World Bank will conduct joint reviews annually duringsupervision missions.

The PCU would prepare a detailed mid-term report to serve as the basis for a Project Mid-Term Review, tobe undertaken no later than two years after project effectiveness. The Government will prepare and discusswith the World Bank, no later than three years after project effectiveness, a report on the futureinstitutional and managerial arrangement for the provision of water and wastewater services in Bukharaand Samarkand with the consideration of the various options for private and public sector participation.The PCU, with guidance from the World Bank, would also prepare and submit an ImplementationCompletion Report (ICR) to the World Bank within six months of the closing date of the IBRD Loan andIDA Credit. Included in the ICR would be an assessment of the execution of the project, its costs andbenefits, the performance of the Borrower, BVK, SVK, the Operator, the PCU, the Bank, and Governmentagencies involved in the project regarding their respective obligations and accomplishments, and lessonslearned.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

Conceptually, the project would follow a two-pronged approach to improvement of utility operations: onone hand, the rehabilitation of existing key elements of operational infrastructure for water supply services,and, on the other hand, the implementation in parallel of a few well-defined and critical changes in BVK'sand SVK's financial management structures and institutional framework, that will provide the basis forstrengthened operations and the preparation of future investment projects.

The alternatives for project design considered and rejected included:

Institutional approach:

Traditional Technical Assistance: The Bank experience in the municipal water supply sector worldwidehas demonstrated that a Technical Assistance approach is limited in achieving rapid and successfulimplementation of the cost-effective investments and institutional reforms necessary to bring water utilitiesin a path of financial self-sustainability and technical efficiency, particularly when the initial capacity of theutility is very weak. As a consultant contracted to provide technical assistance services does not have

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managerial responsibilities nor a financial incentive tied to improvements in technical and commercialperformance, his ability and commitment to support and bring about effective and positive changes in watercompanies are limited unless the utility is able to absorb and effectively implement the advice. Both theGovernment and the Bank believe that, if done right, a service contract would have more direct and longlasting benefits to the utilities. It was also agreed that there is a need to introduce new and innovativeforms of service provision in Uzbekistan as demonstration cases for utilizing private sector orientedmanagement techniques to be used more widely in other areas of the country. This is consistent with therecent policy changes in the sector.

* Long-term Lease or Concession: There are numerous uncertainties surrounding the water supplysystems of Bukhara and Samarkand, including lack of knowledge of the facilities and the capacity ofthe customer base to generate sufficient revenues to operate and rehabilitate the system, lack of privatesector in the utilities sector in the country, slow reforms in the macro-economic framework anduncertainty in the dynamics of the foreign exchange rates, and lack of familiarity with private operatorsin the water supply sector. These conditions would make it unattractive for a foreign operator to makea long-term commitment in the form of a lease or concession contract unless a very high-risk premiumwould be charged. A performance-based service contract is considered at this point the most adequateapproach to involve the private sector as it has attractive features that would increase the likelihood ofsuccess including: (i) lower risk for the operator as there is a fixed operating fee; (ii) relativelyshort-term commitment by the Government to have an opportunity to learn more about the benefits ofprivate sector participation in the sector; (iii) incentives in the service contract for the operator toachieve key improvement targets; and (iv) full delegated management responsibility to the operator andcontrol over an investment fund to cover priority operation and maintenance needs that would facilitatethe achievement of the improvement targets. The Government evaluated various options to involve theprivate sector in the provision of water supply services and rejected the alternative of a long-term leaseor concession.

Scope of project:

* Include Sanitation Component: The limited funds under this Bank operation, directly linked to thesmall borrowing capacity of the vodokanals and municipalities, require a focused operation in the mostcritical part of the systems. An evaluation of the sector indicated that water supply has severalcomponents close to collapse with potentially major negative consequences for the population.Extending the project into the area of sewerage collection and wastewater treatment would lead to anineffective dilution of resources and not bring sufficient and sustainable benefits in neither sector.Furthermore, the expected benefits are expected to be greater by focusing first on water supply and theexpressed preference of the population is for initial improvement in water supply services as indicatedby the Social Assessment results (improving water quality is the first priority in Bukhara andimproving reliability of water supply services is the first priority in Samarkand).

* Include Cultural Heritaze: The initial concept of the project included a component in cultural heritageto restore historical monuments with support by donors in order to develop the tourism industry. Asproject preparation progressed, it became clear that the water supply problems were very urgent andthis area was selected to focus the project objectives in order to have greater benefits with the limitedfunding available. Separate donor programs for the cultural heritage activities were initiated.Additionally, the organizations and skills needed for a cultural heritage component are totally differentfrom those of a water supply component. Including both components would make the project extremelydifficult to implement thereby reducing the likelihood of success.

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Technical approach:

* Traditional Master Plan and Focus on Major System Facilities: The traditional approach of selectinga long-term investment plan during project preparation through a master plan and detailed feasibilitywork was rejected because these conventional supply-driven investment projects are often notconducive to an efficient use of resources both in cost and size due to uncertain information and generalfocus on over-the-ground facilities. The water supply systems of Bukhara and Samarkand face verylarge needs in investments, most of them in parts of the underground system or linked to operationalconstraints, and the decision on the most appropriate sequence of projects requires a data collection andanalysis effort that would be impossible to undertake during project preparation given the existing timeand cost constraints. Additionally, the urgency of the deteriorating situation does not lend itself tolengthy multi-year studies without prompt initial action in the most urgent investments. A traditionaltechnical assistance project would be limited in its ability to implement substantial institutional reformsthe vodokanals and to support the Government's reform policies in the water supply sector.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Two projects closely related to the proposed operation, financed by the French Government in Samarkand(recently completed) and by the Spanish Government in Bukhara Region (including both the city ofBukhara and secondary towns are currently under preparation), respectively. Both projects arecomplementary to the activities implemented in the Bank-financed project. The activities financed by thesetwo projects focus on well-defined equipment replacement (pumping stations, operational equipment) thatcan be identified and designed quickly and related engineering services. The Bank-financed activities willconcentrate on the distribution network and the financial management of the vodokanals.

The Government of Switzerland is processing a US$9.0 million grant to provide parallel financing to theproposed World Bank-financed project. The Grant will provide supplemental resources parallel to theBank-financed Investment Fund (Component 1) for goods and services of Swiss origin. It will also financeindependent technical and financial auditors that would monitor the Operator's performance and prepare thefinancial project and water utility audits.

-| : - | Latest SupervisionSector Issue Project (PSR) Ratings

L___ ___ ___ ___ ____ ___ ___ ___ ._____ j (Bank-financed projects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)UzbekistanSupply of water to rural and urban Water Supply, Sanitation and S Sareas Health

US$75,000,000ID: 9121Signed: 08/97; closing: 12/05

Improvement of solid waste services in Tashkent Solid Waste S STashkent Management

US$24,000,000ID: 49582Signed: 11/98; closing: 12/03

Other ECA countries

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Private Sector Participation in the Armenia: Municipal S Sprovision of water and wastewater Development Projectservices in Yerevan US$30,000,000

ID: 35805Signed: 06/98; closing: 12/03

PSP in the provision of water and Georgia: Tbilisi Water Supplywastewater services in Tbilisi and Sanitation Project

US$TBDUnder preparation

PSP in the provision of water supply in Tajikistan: Dushanbe WaterDushanbe Supply Project

US$15 million (est.)Under preparation

PSP in the provision of water supply in Kazakhstan: NortheastKaraganda, Kokshetau and Temirtau Vodokanal Water Supply

ProjectUS$TBDUnder preparation

Other development agenciesAsian Development Bank - financed Urban Water Supply ProjectUzbekistan US$36 millionRehabilitation of urban water supply inDjizzak, Gulistan and Karshi

Asian Development Bank - fnanced Rural Water Supply projectUzbekistan US$30 million (est.)Rehabilitation of rural water supply in Under preparationselected rural areas of Karakalapakstanand Khorezm oblast

EBRD - financed with grant Andijan City District Heatingcontributions from Reconstruction projectthe Japanese Government and US$15 million (E17.5 millionthe Swiss Government EBRD loan)Uzbekistan US$1.5 million (Japan)Reconstruction of district heating in US$4.0 million (Swiss)Andijan

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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3. Lessons learned and reflected in the project design:

The proposed operation in Bukhara and Samarkand is the second Bank-financed project in the water supplysector in Uzbekistan. The first project, the Water Supply, Sanitation and Health Project, suffered numerousimplementation difficulties and was in unsatisfactory status for more than two years. It was designed toassist communities most severely affected by the Aral Sea environmental disaster, is now in satisfactorystatus and the lessons learned during the restructuring process have been very useful in the preparation ofthe proposed operation. The key lessons learned during the implementation of the project include: (i) overlycomplex designs tackling several sectors (urban water supply, rural water supply, rural sanitation, healthpromotion and hygiene education) in several regions (cities of Nukus and Urgench and rural areas ofKarakalpakstan) with several counterparts (six water agencies), and several co-financing internationalagencies are very difficult to implement; (ii) the activities of international consultants must be discussed inadvance with the Government and their selection and contracting should be done as early as possible and atleast before launching project implementation; (iii) project implementation arrangements must be welldefined and the roles between project coordinators named by the Government and international consultantsshould be clearly identified so that adequate supervision can take place; (iv) officials from the central andlocal government and vodokanal staff should be fully involved in project preparation from the very earlystages; (v) project development objectives should be modest, well-defined, achievable in line with theGovernment reform policies in the sector; and (vi) all agencies in charge of providing counterpart financingshould understand the expected profile so that adequate planning can be made in advance.

The Bank's involvement in the water and wastewater sector in the transition countries is still at itsbeginning and no operations have been completed in the Commonwealth of Independent States (CIS)countries. Some of the water supply projects in the region have suffered from a lack of focus in projectdesign, inadequate or unclear implementation arrangements that cause significant delays, no up-frontconditions to demonstrate commitment, and inadequate understanding by the Govemment of projectobjectives. One of the main lessons in Bank's water sector operations worldwide and in the region is thatpoor quality at entry may result in unrealistic expectations and large disbursement delays, and projects mayfall short of meeting institutional and financial development targets. Among the water supply projects, onlya few operations recently prepared have supported the involvement of the private sector in the provision ofwater and wastewater services.

The important lessons that can be learned from the Bank's general experience in the water supply sector,and in transition economy countries in particular, and that have been integrated in the design of thisoperation are:

* The sustainability of the project depends on a realistic assessment and projection of the minimumfinancial capabilities of the water utilities and the commitment of the participating municipalities tosupport the financial viability of the utilities through higher collection of water fees and commensuratetariff increases.

* The involvement of an international private operator with adequate delegation of managerial,operational, and investment selection responsibilities, combined with clear financial incentives toachieve the performance improvement targets can provide significant benefits.

* Innovative projects like the proposed one requires intensive technical, procurement and managerialBank supervision during project preparation and implementation. Implementation arrangements mustbe clearly defined and understood. Successful project preparation and implementation require a strongPCU supported by an experienced international consulting team with engineering and financialexpertise.

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* The project should support the Government's efforts to implement institutional and financial reforms inwater supply and sanitation sector. The experiences of this project are expected to be used in othercities and other utilities sectors.

* The institutional and policy reforms required for the success of the project need the involvement,commitment and support of the authorities with clear demonstrations of commitment during projectpreparation. This commitment should be demonstrated through the implementation of the first steps ofthe reforms needed for achievement of the project's development objective.

Three Bank-financed projects similar to this operation are currently under preparation in Georgia,Tajikistan, and Kazakhstan, and one is currently under implementation in Armenia. In all these projects, anoperator will be contracted to manage and operate the water supply services (and in some caseswastewater) of urban centers. Although it is too early to evaluate improvements in these projects, similarmanagement contracts (with incentive fees directly linked to performance improvements) in other regionshave resulted in rapid improvements in the quality of service and efficiency of the system. For example, themanagement operator in the Gaza Water Supply and Sewerage Service Improvement Project with aninvestment fund of about US$12 million was able to achieve basically all performance improvementtargets. The experience in the Ammnan Water and Sewerage Management Project initiated in 1999 has beenso far equally positive. The proposed project in Uzbekistan faces similar difficulties to the above projects,particularly those in CIS countries, such as lack of understanding on the side of local government and theutility of the key reforms needed; a possible waning of commitment and interest with the implementation ofpolitically sensitive issues, for example institutional reform and cost recovery; and initial unrealistic andover-ambitious expectations at the local level, particularly in terms of the financial capacity of vodokanalsand the required capacity of facilities.

4. Indications of borrower commitment and ownership:

Launched since 1993 Government's strategy of economic reforms in public utilities sector has beenfollowed and deepened during previous three year period, and includes: (i) decentralization ofresponsibilities to the local authorities; (ii) instituting new pricing and cost-recovery mechanisms; (iii)encouraging private sector participation in developing the country's infrastructure; and (iv) phasedelimination of subsidies, partially compensated by means-tested allocations. Number of programs withinthis concept are implemented, including ongoing improvement in metering of water supply, natural gas anddistrict heating consumption. As a part of the strategy, in December 2000 the Ministry of Public Utilitieswas restructured into an Agency of Public Utilities with the main goal of commercializing the activities ofmunicipal and rural service providers and key functions of the Agency being: (i) coordination of thereforms in the public utilities sector; (ii) acting as regulator and monitoring compliance of the localauthorities and commercial entities with the sectoral legislation; and (iii) attracting foreign investments intothe sector, including establishment ofjoint ventures.

The national government and the regional and local governments of Bukhara and Samarkand have indicatedtheir strong commitment to the necessary reforms associated with the project. All levels of government areconvinced that the involvement of a private operator in the provision of water supply services in Bukharaand Samarkand is the preferred option to improve these services quickly and cost-effectively. This decisionwas agreed after a long process of discussion and review of options by the various government agenciesinvolved, including study tours to countries with similar experiences involving the private sector in theprovision of water supply services and several workshops with key stakeholders in Tashkent, Bukhara andSamarkand.

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The regional and local governments of Bukhara and Samarkand support the need for full cost-recoverythrough increased but affordable tariffs and collections from users. The MMS and the ACS fully supportthis approach as the only option for sustainability of the sector. The first set of tariff increases took place inthe first semester of 2000 (30% in Samarkand and close to 90% in Bukhara where domestic tariffs weresmaller). Since then, the regional govermnents have continued the implementation of measures to supportthe financial recovery of BVK and SVK, both in termns of increases of tariffs and collections, as describedin Section E.2.

The oblasts and the national govermment have divided the regional vodokanals of Bukhara and Samarkandin two organizations, one in charge of the urban areas of the regional capitals, and the other in charge of theremainder of the oblasts. This was a condition to proceed with project preparation, as the achievement ofindependent financial sustainability of the borrowing entity was needed, plus it allowed to focus theinstitutional strengthening activities on a manageable core set of services.

5. Value added of Bank support in this project:

The Bank's specific advantage is its comprehensive approach to economic and institutional developmentissues in Uzbekistan. The Bank has been involved in the reform of public sector enterprises, in particularunder the Institutional Building Technical Assistance Loan (IBTA), and has accumulated a goodknowledge of the respective key institutional and financial issues in the public sector of the country.Through its water supply operations (either ongoing or under preparation) and sector work in other CentralAsian countries (Kazakhstan, Kyrgyzstan, Tajikistan) the Bank has also acquired a strong understanding ofsectoral issues in the region and is therefore in a good position to provide Uzbekistan access to comparativeand relevant experiences.

Additional value added of Bank support in this project lies in: (a) insisting on a comprehensive reformrather than "band-aid" approaches; (b) requiring the introduction of commercial and cost-recovery practicesin water and sanitation services in transition economies; (c) facilitating the selection and contracting of aprivate utility operator for the project implementation; (d) acting as catalyst for various policy and sectorreform decisions; (e) assuring transparency in the selection of the most attractive offer from intemationaloperators through the use of Bank's procurement procedures; (f) ensuring that the Operator is not subjectto political interference or is prevented from doing its work; (g) supporting the project management andimplementation arrangements; (h) providing support to mobilize trust funds for the preparation of theproject; (i) ensuring a continued commitment at various levels to carry out the agreed project activities andreforms in a timely manner; (j) knowledge transfer to local staff on similar experiences worldwide and (k)coordination of capacity building strengthening activities to vodokanals.

Without the Bank's support, the reform program in the water and wastewater sector of Uzbekistan wouldprogress much more slowly, and the condition of water and sanitation services and related public health andenvironmental issues in Bukhara and Samarkand would continue to deteriorate. The funds provided by theBank will allow the financing of investmnents and services to support the project objectives.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):* Cost benefit NPV-US$2.28 million; ERR = 18 % (see Annex 4)0 Cost effectivenessO Other (specify)

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The BVK and SVK have very deficient technical and operational data. This lack of information makes anoptimal up-front identification of all investments before project effectiveness impossible. To ensure themost effective allocation of resources and their highest economic return the specific identification of the useof resources available under the proposed IF will be used to achieve the performance improvement targets(which have been chosen along dimensions such as better water quality, improved levels of water supplyservices, lower operational costs particularly in energy, and improved financial viability). The Operatorwill have the incentives to select the optimal investments to achieve these targets based on the operationaland technical information it collects during project implementation.

Although reliable data for the system's operation is not available, the field measurements and projectionsmade by international consultants as part of a Consumption, Demand and Water System Network Analysisprovide a basis for defining reasonable performance improvement targets that could be expected from theOperator with the funds available. The estimated economic return of the improvements associated with theproject investments and, more importantly, the management improvements have a larger confidence intervalthan would be common for better documented utilities. Nevertheless, a cost-benefit framework was used toassess the financial and economic viability, based on with and without project scenarios. A sensitivityanalysis was used to assess the influence of key variables on the economic viability of the project. Theanalyses evaluates the net present value at a discount rate of 10% and the economic rate of return for theservice contract and the IF. The discount rate used is 10%, which is the World Bank's generally acceptedand used hurdle rate for water supply projects. The key assumptions for the Base Case model include theimprovement performance targets of the service contract, particularly in lower energy costs and increasedoperational efficiency that would result in reduction of water losses and wastage. A major contribution tothe economic benefits would come from the respective programs for reduction of unaccounted for waterand wastage. Current production levels of 700-750 Ipcd are clearly unacceptable and unsustainable,leading to very high costs per unit of water sold, and penalizing non-domestic customers through higherlevels of tariffs than warranted under more efficient operating conditions. If nothing is done to remedy thesituation, water production would have to increase from the current production of 71mm3/year and1 00mm3/year in Bukhara and Samarkand, respectively, to 87mrn3/day and 12 1mm3/day in 2010 to simplymaintain the existing poor level of service. The base case scenario (see assumptions in Annex 4) indicateseconomic rates of returns of 17.1% and 18.6% for Bukhara and Samarkand, and 15.5% and 14.9%financial rates of returns. The difference between the present value of financial and economic flows is aresult of: (i) controls in electricity tariffs (determined by the central Govermment); and (ii) incrementalrevenues due to tariff and collection rate increases that are not accounted for in the economic analysis. Withthis background, a full discussion of the project's economic analysis is given in Annex 4.

The base case scenario analysis does not include other benefits of great importance for the population butdifficult to quantify given the limited data available. Some of these benefits include: (i) avoided copingexpenditures (fetching water and purchasing water tanks or booster pumps in Samarkand, and filtering,boiling and purchasing bottled water in Bukhara), increase in living standards and reduced hardshipsthrough the provision of continuous water supply services (including timesaving to household keepers); (ii)avoided cost of expanding or rehabilitating redundant water production and treatment facilities; and (iii)reduction of the incidence of water-related diseases. Because these economic flows have not been factoredin the analysis, the rates of return obtained are expected to underestimate the total benefits.

2. Financial (see Annex 4 and Annex 5):NPV=US$ 16.07 million; FRR = 15 % (see Annex 4)The evaluation of the vodokanals' financial evaluation at present is speculative given the inadequacy of thefinancial management and reporting practices of the companies. The lack of computerized information and

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inaccurate financial information result in substantial uncertainties in the analysis. The local accountingstandards show the vodokanals as profitable enterprises, despite their current financial crisis. The mainproblems facing BVK and SVK in the area of finance include: (i) tariffs that are below operating andmaintenance costs (and no adequate provision for asset renewal); (ii) low collection of service charges thatresult in ever increasing accounts payable and receivables; (iii) minimal cash collections particularly fromthe budget organizations and industrial consumers that cancel their service fees through a complex andcumbersome clearing system that leaves the vodokanals stranded for cash; (iv) a highly distorted tariffstructure with commercial tariffs about 8-10 times higher than those for domestic consumers; (v)inadequate short and medium-term operating and capital planning; and (vi) insufficient and outdatedinformation about customers that directly affects billing.

The sub-loans for each city were determined through an iterative review process with the centralgovernment, the municipalities and vodokanals. A financial model was set up to evaluate a politicallyacceptable combination of tariff, collection, and reduction of tariff differentials among customers thatwould allow BVK and SVK to move towards basic levels of financial viability. A key variable in thedecision-making process was the estimated monthly water and wastewater bill for a family of average sizein comparison with the average income. This comparison demonstrated to decision-makers that there isroom for tariff increases in the domestic sector without significant impacts on the population.

The main financial goal of the project is to allow BVK and SVK to collect sufficient revenues to cover: (i)operational and basic technical maintenance costs according to operational standards (the latter to berefined as better information on the system's actual situation is collected during project implementation);(ii) interest and other charges on debt service; (iii) counterpart financial contribution as established in theSub-Loan agreement; and (iv) taxes (profit and VAT).

The model was also used to evaluate with all stakeholders the consequences of various scenarios and policymeasures on tariffs and water fees (particularly to domestic customers), specifically: (i) the effect of lowergovernment contribution to the project that would imply higher counterpart contribution to be generated bythe vodokanals from their own revenues; (ii) the effect of transferring the foreign exchange risk to thevodokanals; and (iii) various scenarios to reduce the tariff differential between domestic and non-domesticcustomers. The municipalities and vodokanals selected conservative levels of sub-loans (an intermediatelevel for Bukhara and a low level for Samarkand).

The municipalities and vodokanals selected the financial and commercial areas as one of the key services tobe transferred for management to the Operator. The urgent need to improve the billing, commercial,accounting and financial management systems and practices was recognized as a key area for improvement.The specific actions to move BVK and SVK towards an improved financial situation include:

1. Aggressive reduction of system inefficiencies (water losses, energy inefficiency, low revenue collection,and water wastage) to reduce costs of operations;

2. Implementation of a commercial strategy aimed at eliminating unregistered connections and users, andbuilding trust in the community through better water supply and customer service;

3. A strategic and cost-effective metering policy linked with a customer relations plan aimed at increasingrevenues and reducing wastage;

4. Set up of financial management, accounting, and commercial systems and procedures that will provideindispensable information about costs, revenues, and customers, and allow BVK and SVK to makebetter policy and tariff recommendations to the Government and implement effective commercialactions; and

5. Collection of better information on the fixed assets and current operational situation of the water

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supply system as a first step to have a clear assessment of the maintenance and rehabilitation needs,and to make informed recommendations in the tariff reviews during project implementation.

The above areas will be linked to the performance targets of the service with the intemational utilityOperator to ensure adequate attention to the urgency of BVK's and SVK's financial improvement needs.These activities managed by the Operator in the financial and commercial areas will require sustainedsupport from the Govemment, particularly in the following issues:

1. Periodic review and approval of tariffs based on improved financial and technical information;2. Gradual reduction of cross-subsidies combined with enforcement of the disconnection policy to reduce

fiscal pressure, increase revenue collection from Govemment organizations and industry, and free upresources to design and implement a targeted subsidy policy to the truly poor once better informationon the customer base is available;

3. Gradual reduction of non-cash forms of payment (barter and off-sets);4. Support in the implementation of existing tools to improve revenue collection such as disconnection to

non-paying customers; and5. Continuous support in the resolution of potential difficulties and slow processing with the banking

sector institutions.

Bank's supervision should pay special attention to the areas above to ensure continued Govermnentsupport. Even with the implementation of this strategy, the current situation of BVK and SVK is so poorthat it is unrealistic to expect an immediate improvement leading to full cost-recovery. Close supervision ofprogress and effectiveness of the financial recovery plan, and flexibility to adapt to changing conditionswithin the framework of the service contract are required.

During project preparation, the central Govemment indicated that, in line with national policies for foreignloans to sub-national entities, the foreign exchange risk would be passed on to BVK and SVK (i.e.,sub-loan repayments would be made using the official UZS/USD exchange rate on the day of payment).This policy results in a substantial financial risk for BVK and SVK as the UZS/USD exchange rate isexpected to increase very rapidly once the Goveimnent completes its process to liberalize the foreignexchange rate regime. There are no financial instruments in Uzbekistan that BVK and SVK can use tohedge against this risk. As both the funds from the Credit and the Loan are on-lent to BVK and SVK atIBRD rates, the tariff increases that will be required to absorbs the potentially very high foreign exchangerate increase will probably not be affordable to the domestic consumers of Bukhara and Samarkand. As away to protect the water consumers from unaffordable tariff increases, the Govemment will provide atransparent budget grant to BVK and SVK equivalent to the difference between the amortization paymentsmade to IDA for the Credit, and the amortization payments due to MOF by BVK and SVK, respectively.The financial sensitivity analyses carried out to evaluate the combined effect of the foreign exchange riskand the up-front defined budget grant indicate that the tariff increases needed to achieve the basic financialobjective of the project are affordable. Annex 5 present the results of this evaluation.

BVK and SVK, with the support of the Municipalities of Bukhara and Samarkand, have started beforeproject initiation the implementation of some of the measures in the financial recovery plan agreed duringproject preparation. The main areas of improvement include:

* Domestic tariffs have increased 4 times in Bukhara and 5 times in Samarkand between 1999 and 2000.* The tariff differential between non-domestic and domestic tariffs has been gradually reduced from 8.7

to 4.8 in Bukhara between 1999 and 2000 and from 10 to 4 in Samarkand over the same period.* Collection of billed revenues increased from 79% to 95% in Bukhara between 1999 and 2000, and

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from 65% to 83% in Samarkand.* Cash collection showed modest increases from 20% to 33% in Bukhara but remained stable at 33% in

Samarkand. These low levels are linked to macroeconomic conditions in the country.

The above measures are positive steps forward, although BVK and SVK still face significant challenges toachieve financial sustainability, including lack of adequate provisions for bad debts in the accountinglegislation for utilities, important untargeted subsidies to the population, and insufficient budget allocationfor water fees of institutional customers.

Fiscal Impact:

The project is estimated to cost US$62.33 million, to be financed by an IBRD loan of US$20.00 million, anIDA credit of US$20.00 million equivalent, a proposed Grant from the Government of Switzerland forUS$9.00 million equivalent, and US$13.33 million equivalent from local sources (US$8.0 million from theGovernment and US$5.3 million from BVK and SVK). All taxes and duties for the goods, works andservices required for the project would be financed or exempted by the Government. The IBRD loan will berepaid in 20 years with a five-year grace period. The IDA credit will be repaid in 35 years with a ten-yeargrace period. The reduction of central government expenses related to emergency responses when parts ofthe water supply system collapse (an expense that is expected to become more frequent in the future in theno-project option) will reduce the fiscal impact in coming years. The increased ability of BVK and SVK topay profit taxes and VAT as they progressively improve their financial capacity will partially off-set thefiscal impact of the Government's contribution to the project.

The defined annual zero-net budget grant from the Government to BVK and SVK equivalent to thedifference between the amortization payments made to IDA for the Credit, and the amortization paymentsdue to MOF by BVK and SVK, respectively, will be neutral to the Government budget.

The Government choose a Single Currency LIBOR-based Loan denominated in United States Dollars. Therationale for the choice of currency is that the majority of foreign currency earning of the country is inUnited States Dollars. With regards to the choice of financial product, the Government chose a VariableSpread Loan because in order to take advantage of the Fixed Spread Loan (FSL) features and tocompensate for the additional expenses associated with this product, further calculations, reviews andanalyses of the applicability of the FSL are needed as part of the comprehensive debt management of thecountry.

3. Technical:

The most critical technical issue BVK and SVK face is the enormous amount of losses and wastage ofwater in the system. This translates into poor water quality for Bukhara and deficient and unreliable watersupply service for Samarkand. There is not sufficient technical and operational information on the systems.Therefore, as part of project preparation, a short-term monitoring program of flow and pressure within thedistribution network, water sources, and consumer premises; an assessment of projections of quality ofwater service, demand, consumption; analysis of network state of repair, efficiency losses, definition ofimprovement strategy and identification of immediate investments has been undertaken for the water supplyservice to attain a basic understanding of the current situation. Additionally, a separate analysis of thegroundwater sources and the surface water treatment plants was undertaken. The results of both studiesclearly demonstrate the alarming state of vodokanal's water supply infrastructure and its enormousinefficiencies.

The annual volume of water produced was found to be about 100 million m3 per year in Samarkand and

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70.8 million m3 per year in Bukhara (or about 850 and 660 liters per person served per day respectively).Water networks suffer from excessive leakage. The annual volume of total water loss was found to beabout 48 million m3 per year or 48% (37% of network losses and 11% of apartment plumbing losses) inSamarkand and 28 million m3 per year or about 39% (26% of network losses and 13% of apartmentplumbing losses) in Bukhara, not counting additional water savings that could be achieved through aneffective water demand management program especially in the large number of detached houses withgardens.

None of the two water systems have bulk meters, though Samarkand vodokanal recently installed bulkmeter within the scope of the French loan. Consumers, households, industry and public agencies notaccustomed to water conservation, are not faced with appropriate water tariffs, and waste significantamounts of water. Very few meters are used for metering consumption of industrial, commercial andinstitutional customers, while households remain unmetered at all (only 2% of total number of customers inSamarkand and 4% in Bukhara are metered). The state of maintenance and repair of the existing meters isdeficient.

The preliminary review and assessment of the water systems in Bukhara and Samarkand indicates thatparts of these systems are in very poor condition and require urgent rehabilitation. Mechanical andelectrical equipment in the pumping stations are in need of repair. Pumps in the systems are old and veryinefficient. The treatment plants, though operational, are also in poor state of repair. The pumping mainsand pumps require urgent rehabilitation. Full details on the technical evaluation of the water distributionand treatment systems, including the estimated improvement targets based on the investment fundsavailable, can be found in the Project Files.

The technical challenge of the project is to identify least-cost yet effective solutions to the problems ofnetwork leakage and rehabilitation of water treatment plants, in combination with a demand managementprogram that reduces the enormous losses and wastage in apartment blocks. The minimum technicalinformation available prevents a full definition a-priori of the investments needed. The IF will provide theresources to the Operator to improve the knowledge of the system conditions and operations and to proposeand implement targeted interventions to achieve the targets in the service appendix of the service contract.Annex 2 presents more details about the expected uses of the Investment Fund.

Equipment, materials and construction work to be financed under this project will be required to meetappropriate standards of intemational quality and best practice. Supervision of construction to internationalstandards will be required.

4. Institutional:

4.1 Executing agencies:

The executing agencies of this project are the Bukhara city and Samarkand city Water and WastewaterUtilities (BVK and SVK). The assets of BVK and SVK are owned by the respective Municipalities ofBukhara and Samarkand and although the vodokanals are legally independent and supposedlyself-sufficient enterprises according to their statutes, decisions are heavily centralized. The executingcapacity of BVK and SVK is very limited and they do not have previous experience with World Bankprojects or other IFIs. Pervasive lack of institutional capacity will be a serious issue for the implementationof the project and will need to be addressed through, on one hand, the simplicity of project design, and, onthe other hand, the preparation of an appropriately designed program of training. Technical operationsmanagement and staff are, in general, resourceful in operating and maintaining the systems in an

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environment of increasing resource constraints and constant emergencies, but have had limited exposure tomodem developments and advances in the field and have basically no experience in essential functions forthe operation of utilities such as commercial billing and collection, financial planning, accounting,optimization of network operations, and water demand management programs. The strengthening of BVKand SVK will take place not only through the training program to be implemented by the Operator, but alsothrough the on-the-job training and transfer of know-how that will take place as the Operator manages thewater supply system and the commercial and financial systems. The Operator will manage the existing staffof the water supply and financial departments of BVK and SVK during project execution to fulfill itscontractual obligations and achieve the performance improvement targets required to obtain the incentivefee.

4.2 Project management:

The Municipalities of Bukhara and Samarkand will have oversight responsibility for project coordinationthrough the Project Coordination Committee that has representation from other Government agenciesincluding the MMS, the ACS, State Property Agency (SPA) and the MOF. This Committee will providestrategic direction, ensure policy and facilitate coordination among Government agencies. The Committeehas set up an independent PCU for daily coordination activities and supervision of the Operator, theseresponsibilities being delegated by BVK and SVK to this unit. The PCU is independent from BVK andSVK and will have no subordinate contractual relationship with the Operator as the unit will supervise theimplementation of the SC and the Operator's performance. The project management organization isdesigned to avoid any conflict of interest situations in the decision-making process during projectimplementation.

The PCU is staffed with coordinators in Tashkent, Bukhara and Samarkand, an accountant and supportstaff. The PCU will receive substantial support from an intemational team of technical and financialadvisors (independent from the Operator) to be financed by the parallel Swiss Grant. These auditors willperform periodic performance improvement reviews of the Operator's activities and will assist the PCU tomonitor the service contract. In addition, the PCU will receive training in various aspects of regulation ofcontracts with utility operators, and other government officials will initiate their training in regulatoryactivities. The long-term objective is to train the PCU staff in regulation of utility operations as the countryevaluates options to involve further the private sector in the operation and management of utility services.The regulatory capacity in the country is very limited but its development is expected to be initiatedthrough this project and the regulation of utility services through a SC as a first step.

Under the performance-based service contract, the Operator will have responsibility for management,operation and maintenance of the water supply system in the service area and the commercial operationsand financial management of BVK and SVK, as specified in the service and incentive appendices of thecontract. During implementation of the SC, the Operator will have managerial responsibilities over theBVK and SVK staff that works in the water supply and financial areas and it will have the authority torecommend hiring and firing of employees.

4.3 Procurement issues:

A preliminary evaluation of the BVK and SVK capacity to carry out procurement in accordance with Bankguidelines showed that they are currently not capable and will require substantial support. A procurementcapacity assessment of BVK and SVK has been carried out by the project team and an action plan has beenprepared. The most important procurement action that will take place during project preparation is theselection of the Operator for the service contract. The PCU, the Selection Committee in charge of thisprocurement, and the Coordinating Committee will receive substantial support during this activity in terms

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of continuous on-call assistance and at least two training sessions prior to the receipt of qualifications andbids, respectively.

During project implementation, the Operator will procure, on behalf of BVK and SVK and with theirinvolvement, goods, works and services in accordance with Bank's Procurement Guidelines and support theclient in contract signature. The Operator will prepare and submit to the BVK, SVK and the respectivemunicipalities an annual procurement plan (indicating specific procurement methods as per Annex 6) toprocure goods, works and services. The Bank will also review this annual procurement plan. Once thisprocurement plan is approved, the Operator will implement it and will sign the contracts on behalf of theclient. The Operator will use funds from the IF only for those activities listed in the IF Appendix of theservice contract. No procurement activity related to investments financed by the project will take placeprior to the Operator's arrival. The Operator and any entity affiliated with it are precluded from providinggoods, works and services procured through the IF. The Operator's independence and incentives to improveperformance will reduce the risks of undue pressure to deviate from the Bank's Procurement Guidelines.Specific provisions to avoid potential conflict of interest situations will be incorporated in the servicecontract with the Operator. The Operator is specifically precluded from developing or reviewing biddingdocuments to retain any subsequent operator after the completion of the SC. Bank's support andsupervision during implementation will be key to reduce these risks.

4.4 Financial management issues:

To maintain project accounts and produce reports in accordance with standards acceptable to the Bank, aninterim FMS was established at the PCU. This system will be integrated into the overall financialmanagement system that will be installed by the Operator in BVK and SVK to ensure consistency andadequate reports using the format agreed for Project Management Reports (PMRs). In accordance withOP/BP 10.02, a Bank-accredited financial management specialist reviewed the proposed financialmanagement system in March 2001. Based on this assessment, it was found that the PCU satisfies theBank's minimum financial management requirements. However, the PCU has agreed a set of actions toimprove its financial management processes, as described in Appendix 6.

A Country Financial Accountability Assessment for Uzbekistan is expected to be launched in FY03. As aresult, and in order to mitigate any negative impact on the project due to corruption or fraud, specialattention was focused on financial management issues during appraisal. An assessment of the PCU wascarried out and an action plan for the development of a good financial management system and building upof the financial management capacity at the PCU was carried out. The Assessment can be found in projectfiles. A service contract will be signed by BVK and SVK to hire an operator. A key task of the Operatorwill be the installation of a computerized financial, accounting and information systems for BVK and SVK,the development of adequate accounting procedures, and the introduction of financial planning in theutilities. The goal of this activity is to improve the financial management and planning capacity of theutilities and to provide adequate accounting and financial management information about BVK and SVKactivities. The utilities' financial statements including the project accounts maintained by the PCU will beaudited annually according to IAS and the audits will be submitted to the Bank. The audit of the on-goingWater Supply, Sanitation and Health Project has been satisfactory, as have been the banking arrangementsfor the special account. Although the audits were submitted with delays for the Water Supply, Sanitationand Health Project, the Government has committed to earlier planning for contracting of auditors andcompletion of audits.

5. Environmental: Environmental Category: B (Partial Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

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An initial review of potential environmental impacts and appropriate mitigation measures indicated that theproject activities fall within the Category B as per the Bank's OP 4.01. The project is expected to bringsignificant environmental and health benefits, such as improvements in public health through better qualityand availability of treated water, and improvements in the sustainability of raw water sources throughreductions in losses and wastage. Potential negative effects can be minimized through appropriatemitigation measures, which for this project are basically normal construction and utility operationpractices.

Potential impacts of the project would relate to: (i) inappropriate disposal of water treatment sludge; (ii)safety hazards from chlorination process; (iii) pollution by construction run-offs; (iv) disturbance duringconstruction including dust, noise, vibration, access restriction, closure of roads, and increased traffic; (v)improper disposal of demolition debris; (vi) damage to existing utility services during pipe repairs andinstallation; (vii) safety hazards from construction activities; (viii) spillage of fuel and oil fromconstruction; (ix) damage to trees and vegetative cover; and (x) chance encounters of cultural resources.

The project will not entail any resettlement, expansion of existing facilities or construction of newstructures of significant size. Construction works will predominantly involve pipe replacement, whichincludes pavement demolition, trench excavation, pipe laying, trench filling, and pavement application.Other construction works will be limited to rehabilitation of existing structures such as pumping stationsand specific parts of treatment plants. All works under the investment program are planned to be ofrehabilitation nature, in properties owned by BVK and SVK or rights-of-way assigned to municipalinfrastructure.

In order to ensure adequate implementation of the necessary measures to minimize potential negativeenvironmental effects, an Environmental Management and Monitoring Plan (EMP) satisfactory to the Bankwill be completed with incorporation of public comments. Requirements for the works to be performedfollowing specific provisions in the EMP and good construction practices will be included in the contractsfor rehabilitation and minor works.

In both Samarkand and Bukhara, there are important cultural monuments and architecturally significantmahallas. Specific notification requirements and work stop and rescue procedures will be included in theEMP to respond adequately to chance findings of cultural resources during excavations. The likelihood ofsuch findings is limited as the excavations will be done to rehabilitate existing pipes and equipment inalready disturbed rights of way.

The OP 7.50 applies to the Project as the cities Bukhara and Samarkand are located on intemationalwaterways as defined by paragraph l(a) of OP 7.50 (both cities are located near the Zerafshan river whichoriginates in the Pamir Mountains of neighboring Tajikistan, and one of the four sources of water forBukhara receives water from the Amu Daria river). However, considering the nature of the projectactivities and focus, the exception to the extemal notification requirements of OP 7.50, set forth inparagraph 7(a) of OP 7.50 is fully applicable. The Project involves rehabilitation of ongoing schemes andconstruction that in the team's judgement: (i) will not adversely change the quality or quantity of waterflows to the other riparians; and (ii) will not be adversely affected by the other riparians' water use.

5.2 What are the main features of the EMP and are they adequate?

The EMP includes a description of the legal and administrative framework of the environment sector withspecific application to the project, a description of the baseline conditions, identification of main impacts,specific mitigation measures with implementation and monitoring responsibilities and estimated budget.The provisions in the EMP are adequate to minimize potential negative environmental impacts associated

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with project activities.

The EMP will be implemented by BVK and SVK, under the management of an international utilityOperator. The provisions of the EMP and the applicable local environmental regulations will beincorporated in the service contract to be signed between the Municipalities of Bukhara and Samarkandcities and the international utility Operator. Having an international Operator managing the utility companywill ensure compliance with these measures as well as knowledge transfer.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft:

Draft for public consultation: July 30, 2001 - Final draft August 30, 2001

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

On March 13 (in Bukhara) and March 14-15, 2000 (in Samarkand), the project approach and the technical,financial, institutional, social and environmental aspects were discussed in workshops with keystakeholders, and representatives from responsible ministries and agencies. Multiple environmental andhealth-related issues and questions were discussed at the workshop.

The draft of the EMP was placed for public consultation in public libraries of the cities of Bukhara andSamarkand, the vodokanal offices and other relevant agencies. An announcement was published in a localnewspaper informing about the EMP availability and requesting comments from the general public. Publicconsultation meetings were held on July 5, 2001 in Samarkand and on July 9, 2001 in Bukhara. Commentsreceived from the public and various Government agencies were collected and kept in Project Files.Relevant comments were incorporated in the final version of the EMP.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

Responsibilities for daily monitoring will be part of construction supervision. Compliance with the EMPand monitoring of the impact during the construction phase will be undertaken by an Environmental Officerin the PCU as part of his/her contract supervisory duties, and by the regional departments of the StateCommittee for Nature Protection in Bukhara and Samarkand. The key monitoring indicators of projectbenefits are included in the PSA of the service contract and will be monitored and audited independently bythe international technical team.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

As part of project preparation, a social assessment was carried out by a team of local social scientistsunder the general direction of a senior social scientist from the Bank. Annex 13 summarizes the mainfindings of the social assessment. The main objectives of the social assessment were to: (a) identify socialissues relevant to the proposed investment; (b) identify key stakeholders; (c) evaluate potential impacts ofthe proposed investment on individuals and social groups, particularly the poor and other vulnerablegroups; (d) determine users' willingness pay for water services; (e) develop a framework for publicparticipation in the project; and (f) identify desirable social development outcomes.

The key findings of the social assessment include:

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1. Among the domestic customers who are not satisfied, the main reasons for their dissatisfaction differedbetween cities, and between the old and new parts of each city. In the new part of Samarkand, wherewater quality is considered be relatively good, the main reason was the irregularity of the cold watersupply (81%) and the second main reason was inadequate water pressure (64%). In the old part, themain reason was low water pressure. In the new part of Bukhara, respondents were unsatisfied mainlybecause of insufficient pressure, poor quality, and water supply irregularity. In the old part ofBukhara, dissatisfaction with the water quality was considerably higher. Another finding is that thenumber of hours water is supplied during the day varies by season. While water is supply 24 hours aday to the large majority (90%) in winter and fall, 60% receive it with this regularity summer. InSamarkand, this problem is particularly acute.

2. According to the survey, the majority (70%) of households are paying for water. On average, thewater tariffs are low; 129 soums per month. The fact that about 30% of the respondents did not knowhow much they were paying for water is another indicator that the amount is not large. When allhouseholds costs for water supply and related uses (water tariff, payment for use of public bath,purchase of water, etc.) are added together, the amount (148 soums per month) is one percent ofaverage household income.

3. About three quarters of the residents in both cities would be willing to pay a water tariff of 20soums/person/month for an improved cold water supply system (defined as good quality water; goodwater pressure in water-pipes, and regular 24 hour a day water supply). This amount is equivalent toabout 2 to 2.5 times more than the current amount of 8 soums/person/month). Based on an averagehousehold monthly income of 16,390 soums and an average family size of 5 people, raising the tariff to20 soums/person/month would mean that the average household would be paying about one percent oftheir income on their piped water supply. For the poorest segment of the population with averagehousehold incomes of 5,100 soums or US$34 (official rate) and US$11 (unofficial), however,households would have to pay a larger percentage of their income (about 2 percent) for water.

4. Overall the majority of households expressed dissatisfaction with the vodokanals. The main reasonsaccounting for their dissatisfaction are: poor performance and inadequate response to the requests formaking repairs. However, there are differences between the reactions of residents from Samarkand andBukhara. For example, 70% of households in Bukhara mentioned that they are always informed aboutany changes in water supply schedule (disconnection, change in the quality of water, etc), while lessthan half of the respondents in Samarkand had a similar response (40% said SVK provides thisinformation only on occasion). In both cities, however, there was a significant amount indicating thatthey never receive this information.

The main implications and recommendations of the social assessment include:

1. Priority improvements to the water supply system should take into account differences between the twocities. In Bukhara, improving water quality is the first priority; in Samarkand, the first priority isimproving the reliability of the water supply. Addressing this problem would benefit women andchildren who are responsible for providing the household with water. Improving the regularity of thewater supply would allow them to reduce the amount of time currently spent securing water for thefamily, and use their time in more productive activity or on leisure activities.

2. Public information campaigns should be carried out early in the implementation process to raiseawareness of the need to pay for improving and maintaining the water supply. The campaigns should

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provide information on the nature and timing of project improvements, what it costs to upgrade andmaintain the water supply system, the need for residents to make regular payments to ensure propermaintenance of the system, and the need to conserve water. Informational campaigns shouldincorporate the participation of the mahalla committees as well as Uzbek television stations. The latterhad the highest rating of trust among the public in comparison to other mass media. About 90% ofcitizens watch local television daily and 71% trust this source of information.

3. It is of great importance to establish a public relations department which would be responsible fordesigning and implementing a comprehensive information/communications strategy to provide timelyinformation and respond to questions about the water supply and sewerage services and any expectedproblems and remedies. This department also should provide information to consumers on who to callfor information and how to lodge complaints when necessary.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The project was prepared in close collaboration with the vodokanals, the concerned ministries, regional andlocal governments, local experts, and consumers. Different strategies for consultation and participation ofthese stakeholders were implemented. The interaction with government agencies and vodokanals wascontinuous throughout project preparation.

The social assessment involved a wide range of stakeholders in the following quantitative and qualitativeactivities: (a) background study of available statistics and documents containing data and information onwater supply, sanitation, and related social and economic conditions in both cities during the last 5 years;(b) household survey administered to 800 households (400 per city) administered in June 1999; (c) 50semi-structured interviews with representative of important stakeholder groups; (d) survey of touristsvisiting Samarkand and Bukhara during the months of November and December 1999; and (e) 8 focusgroup discussions (4 per city) involving: (i) representatives of various government and nongovernmentalorganizations related to the project; (ii) women residing in the old and new parts of each city; (iii) men fromold and new parts of the city; and (iv) ethnic minorities (Roma in Samarkand and the Jews in Bukhara).

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

During project implementation, the responsibilities of the Operator under the service contract will include(a) public awareness raising, (b) consumer information, and (c) the establishment of a customer serviceoffice in BVK and SVK and to implement public information campaigns, both of which will be newfunctions for the vodokanals. These activities will provide ongoing mechanisms for consultation andparticipation of consumers in the day to day operations of the utilities. These activities will provide ongoingmechanisms for consultation and participation of consumers in the day to day operations of the utilities andthe improvement program. Without adequate interaction with its customers, the Operator will not be able toachieve the targets in revenue collection increases and other related improvement targets.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

The utility Operator will be responsible for implementing the investments aimed at improving the qualityand reliability of drinking water for the population in the two cities, according to specific performanceindicators and targets to be included in the contract. The Operator will be required, by contract provisions,to carry out the investment program and to manage the utility in such a way that takes into accountconsumer preferences and reactions to service improvements. Specific contract provisions will require theOperator to develop and implement ongoing public information and awareness raising campaigns as well asestablish a customer relations office.

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6.5 How will the project monitor performance in terms of social development outcomes?

The performance of the utility Operator will be monitored on the basis of key performance indicators andtheir corresponding targets for each of the Operator's tasks, including those related to improvement ofwater supply services to users. Parameters to be monitored include water quality, reliability of supply,reduction in water losses, time to repair leaking mains and service connections, number of households withplumbing systems serviced, and results of customer surveys relating to user satisfaction with water supplyimprovements.

The PCU will be responsible for supervising the performance of the utility Operator. In addition,independent technical and financial auditors will be hired to verify the data and performance of theOperator, upon which the incentive fee will be paid.

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7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

Policy ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * NoForestry (OP 4.36, GP 4.36) 0 Yes * NoPest Management (OP 4.09) 0 Yes * No

Cultural Property (OPN 11.03) 0 Yes * NoIndigenous Peoples (OD 4.20) 0 Yes * NoInvoluntary Resettlement (OP/BP 4.12) 0 Yes * NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes * NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The necessary environmental mitigation measures needed to minimize potential negative effects to theenvironment associated with rehabilitation and operational activities of BVK and SVK in their watersupply operations under the management of the Operator will be included in the EMP and be a contractualobligation under the service contract.

F. Sustainability and Risks

1. Sustainability:

The sustainability of the project during the implementation phase depends on the following factors:

* The private Operator is selected through an open and transparent competition to achieve the best pricefor the scope of services requested;

* The private Operator is able to work successfully with the local staff of BVK and SVK and effectivelytransfer managerial, technical and financial know-how;

* The financial resources available to the operator are sufficient to implement the rehabilitation activitiesnecessary to bring noticeable benefits in the quality and reliability of the water services and,furthermore, these benefits are perceived by consumers to be commensurate with the tariff increases;

* The operating revenues of BVK and SVK that the Operator is able to collect are sufficient to cover theoperating and maintenance costs and make the counterpart contributions to the project;

* The populations of Bukhara and Samarkand agree to the increases in tariffs and the vodokanals areable to increase collection efficiency from all user categories; and

* The regulatory environment of all aspects related to the management and operations of the systems(e.g., construction permits, procurement, water shut-off) are flexible and agile enough to allow theOperator to carry out its functions.

The sustainability of the project after implementation depends on the following main factors:

* Improvements in the water supply services and operational efficiency are in line with the increases intariffs and collection through which the population is expected to support the reform of the sector andcontribute to better services;

* The capacity of BVK and SVK to increase its revenues to a level required to cover adequate operation

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and maintenance expenses and continues to grow to allow the water supply companies to cover debtservice and principal repayment;

* The local governments provide the Operator with the enforcement tools to collect water fees;* The central and local governments continue to provide the necessary resources to institutional

customers to pay their water fees;* The Operator not only fulfills its minimum obligations as contracted, but is also able to achieve

significant improvements along the target measures, and thereby demonstrates to the Govemment andthe populations of Bukhara and Samarkand that the experiment with the private sector was successfuland worthwhile and therefore could be continued;

* The management and know-how brought by the Operator is effectively transferred to BVK and SVKpersonnel and leads to fundamental changes in vodokanals' management and operating practices; and

* Arrangements are set in place to ensure continued good management of the water supply services aftercompletion of the project. A specific plan will be prepared after careful analysis of the lessons learnedduring implementation of the project and evaluation of the full spectrum of future options to continuewith private management and operations.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveThe Municipalities of Bukhara and S 1) Up-front increase of tariffs to demonstrateSamarkand do not continue to support the commitment to financial principles of projecttariff level increases necessary for VKs' 2) Intensive monitoring of compliance withfinancial recovery program financial covenants and prompt action in case of

noncompliance3) Adequate collection of financial informationto demonstrate to local authorities need andability for requested tariff increases4) Physical investments designed to have avisible impact on service to make tariffincreases more acceptable to local governmentand consumers5) Implementation of an effective tariff policy

Population awareness of water M 1) Public education campaign included inconservation does not increase and linkage Operator's obligations under SCbetween financial resource needs of BVK 2) Customer relations offices in BVK and SVKand SVK, the increase in collection of tasked with increasing awarenesswater fees and the improvement in service 3) PCU to lead information campaign to thequality is not understood population on benefits of the project prior to

initiationGovernment does not maintain its support S 1) Intensive monitoring of compliance withto the project particularly in regards to the financial covenants and prompt action in case ofpayment of water fees by institutional noncompliancecustomers 2) Gradual reduction of tariff differentials

3) Metering program to demonstrate actualvolume consumed by larger institutionalcustomers

Municipalities of Bukhara and Samarkand S 1) Intensive dialogue and exchange ofdo not give the Operator the necessary experiences between Bank, Municipalities and

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tools and enforcement support to increase Operator to support collection effortscollection 2) Monitoring of financial covenant compliance

3) Adequate provision of infornation to focuscollection efforts on largest debtors4) Clear demonstration of the link between lowcollections and the need for compensationthrough higher tariffs for all consumers5) Training to municipality key staff on tariffsand enforcement mechanisms prior to projectinitiation

Improvement in financial situation of S 1) Intensive monitoring of financial situationvodokanals is not sufficient to adequately and support to find alternative strategies tocover O&M increase revenues as proposed by Operator and

vodokanalsBVK and SVK are not able to acquire S 1) Intensive Bank supervision to supportsufficient autonomy to manage its Operator, BVK and SVK in its process ofoperations on sound commercial autonomous decision making and institutionalprinciples under the guidance of the strengtheningOperatorAn agreement is not reached for adequate S I) Demonstrated success with improved servicesmanagement of the system after project 2) Exchange of successful experiences in othercompletion countries with higher involvement of private

sectorMacroeconomic conditions of the country S 1) Monitoring of economic conditions and Bankdeteriorate to a level that significantly support to adapt project objectives andaffects project implementation implementation strategy

From Components to OutputsGovernment interferes in the Operator's S 1) Use of PMRs and Bank's commitment toprocurement decisions causing delays in provide efficient support to Operator in rapidprocurement of goods and services under procurement reviewsthe Investment Fund 2) Intensive Bank supervision to ensure prompt

review of investment plans by PCU andCoordinating Committee

Counterpart funds are not sufficient or H I) Intensive monitoring of Credit covenants totimely ensure timely Government's contribution

2) Continuous review of BVK's and SVK'sfinancial situation to find alternativesapproaches to increasing revenue to a levelsufficient to provide the necessary counterpartfunds

Project funding is not sufficient to achieve M 1) Continuous monitoring of system datanoticeable improvement in service as collected by Operator and support to proposalsprojected in PSA made to prioritize areas of improvement

2) Bank's coordination of additional financialresources by other IFIs and bilaterals

Operator does not bring all necessary M I) Clear criteria in bidding processskills and experienced staff to manage the 2) Continuous Bank supervision to evaluate

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system skills and experience of Operator's staff in thefield and prompt action taken in case ofinadequacy

Local contractors are not able to achieve M 1) Operator to ensure adequate supervision ofacceptable standards in quality of construction and training if necessaryconstructionOperator, PCU, BVK, SVK and S I) Bank to facilitate discussions and provideCoordinating Committee do not agree or impartial support to all parties to reach promptdelay decisions on proposed annual agreementinvestment plansGovernment agencies not directly involved M 1) Municipalities and Bank to provide supportin the project (such as tax authorities, to Operator, BVK and SVK to reduce suchcustoms, etc.) interfere in project interferenceimplementation or do not provide the 2) Continuous supervision of this issue by Banknecessary construction and operational missionspermitsDisputes between Operator and PCU or S 1) Intensive Bank supervision to avoid longmunicipalities are not resolved promptly discussions without resolutionand cause significant project 2) Well prepared contract to minimize risks ofimplementation delays misunderstandings and disputes

3) Support to PCU and Municipalities withinternational consultants for prompt resolutionof disputes

Overall Risk Rating S

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

The main possible controversial aspects of the Project are:

(i) Tariff increases necessary for BVK and SVK to move towards financial viability are not approved bythe Municipalities or are rejected by the population. The risk is reduced by the up-front demonstration ofcommitment by the Municipalities to increased tariffs before the arrival of the Operator. Future tariffincreases will be accompanied by improvement of services and a public awareness and educationcampaign.

(ii) Measures to improve revenue collection, such as disconnection to nonpaying customers, may becontroversial if implemented without supporting public campaigns.

(iii) Political opposition to private operator due to its foreign origin or the management contract cost. Therisk is reduced by the open discussion and consensus that has been built during project preparation amongstakeholders. Some opposition from political leaders not directly involved in the project could be expectedbut the Govemment and the Bank supervision missions will continue the discussions and exchange ofinformation with various levels of Government to demonstrate the need for such implementation approachand the expected benefits. The improvement of service and an effective customer relations campaign by theOperator should reduce the risk of rejection by the community. Exposure of Government and water utilitystaff to similar experience in other countries would reduce the risk of rejection.

- 35 -

(iv) Project focus on water management and reduction of losses and wastage as a mean to improve services,as opposed to the standard approach of further increasing production capacity. This risk is reduced throughdemonstrated improvements in service and awareness raising and training activities to policy makers andsector specialists.

G. Main Loan/Credit Conditions

1. Effectiveness Condition

* The Loan and Development Credit Agreements have been executed and delivered and all conditionsprecedent to its effectiveness have been fulfilled;

* The BVK and SVK Subsidiary Loan Agreements, satisfactory to the Bank/IDA, have been executedon behalf of the Government and BVK, and on behalf of the Government and SVK, respectively;

* The Service Contract, satisfactory to the Bank/IDA and the Government, has been executed on behalfof BVK, SVK, the Municipalities of Bukhara and Samarkand and the Operator;

* The Government has opened the Project Account on terms and conditions satisfactory to the Bank/IDAin Sum and the Bank/IDA has received evidence that an initial amount equivalent to $20,000 has beendeposited into said Account; and

* The Government has adopted the PIP and the Operational Manual, satisfactory to the Bank/IDA.* An independent Auditor has been selected acceptable to the Bank.

2. Other [classify according to covenant types used in the Legal Agreements.]

Miscellaneous During Project Implementation:* BVK, SVK, and the Regions of Bukhara and Samarkand shall ensure that the SC with the Operator,

satisfactory to the Bank/IDA, is maintained throughout Project implementation.* BVK and SVK shall establish not later than June 30, 2003, and thereafter maintain, a financial

management system, including records and accounts, and prepare financial statements, all inaccordance with accounting standards acceptable to the Bank/IDA, consistently applied, adequate toreflect its operations and financial condition and to register separately the operations, resources andexpenditures related to the Project.

* BVK and SVK shall: (i) by June 30, 2003 have its records, accounts and financial statements(statements of income and expenses); and (ii) by June 30, 2004, have its records, accounts andfinancial statements (balance sheets, statements of income and expenses and related statements) foreach fiscal year audited.

* Except as the Bank/IDA shall otherwise agree, BVK and SVK shall not incur any debt unless areasonable forecast of the revenues and expenditures of BVK and SVK shows that the estimated netrevenues of BVK and SVK for each fiscal year during the term of the debt to be incurred shall be atleast 1.2 times the estimated debt service requirements of BVK and SVK in any future year on all debtof BVK and SVK including the debt to be incurred.

* The Regions of Bukhara and Samarkand shall review, in accordance with the established procedures,the periodic proposals for tariff adjustments submitted by BVK and SVK, at least quarterly; and shallpromptly take action to adjust said tariffs so that BVK and SVK can meet its obligations by collectingsufficient revenues to cover operation and maintenance costs and other expenses. The GoU shall takeall measures necessary to ensure that the necessary tariff adjustments are implemented.

* The Regions of Bukhara and Samarkand, after review of the forecast amount of water consumptionprepared by BVK and SVK, respectively, every six months shall: (a) allocate in the relevant operatingbudgets of budget organizations adequate funds for payment of water fees; and (b) ensure that saidfunds are paid to BVK and SVK.

* The Regions of Bukhara and Samarkand shall: (a) enable BVK and SVK, respectively, to collect water

- 36 -

fees from its customers, including but not limited to disconnection of nonpaying customers; and (b)assist the Operator in the implementation of said collection of water fees.

* The GoU shall, by June 30, 2002, define and initiate the implementation of adequate measures toenable the accounts payable and receivable of BVK and SVK to be reduced to a level that will allowBVK and SVK to conduct properly their financial and commercial activities and to prevent blocking oftheir bank accounts.

* BVK, SVK and the Regions of Bukhara and Samarkand shall: (a) review with the Bank/IDA, not laterthan March 31, 2005, proposals for continued management of the water services of Bukhara andSamarkand upon completion of the Service Contract, with due consideration to various options forpublic and private sector management; and (b) based on the conclusions and recommendations of saidreview take appropriate measures regarding the management of the water services upon completion ofthe Service Contract.

H. Readiness for Implementation

L] 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

1 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

Z 4. The following items are lacking and are discussed under loan conditions (Section G):

The preparation of engineering design and specification documents for the first year's activities will becoordinated and supervised by the operator under the Service Contract currently under bidding as part ofthe operator's contractual obligations, once the first annual investment plan is approved by the Bank andthe Government.

- 37 -

1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.El 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

Ede Jorg jasz- asquez K4otoo Konishi; Hossein RazaJ Kadir T. YurukogluTeam Leader Sector Manager/Director Country Director

- 38 -

Annex 1: Project Design SummaryUZBEKISTAN: Bukhara and Samarkand Water Supply Project

Key Performance. Data Collection Strategy.Hierarchy of.Objectives Indicators ._._. Critical Assumptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Remove inefficiencies in * Increase in level of cost Bank and Country Reports Acceptance by Governmentresource utilization in the recovery of the concept of privatemunicipal services, * Increase in institutional participation ininfrastructure and social capacity infrastructure.services * Increase in competition

among service providers Existence of the right legalo Expansion of privatization framework for increasedof services competition.

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:To improve the safety, quality, * Safety and quality: Periodic Monitoring Reports * Experience from the projectreliability, efficiency and Percentage of microbiological (Quarterly & Annual) will provide confidence andsustainability of the water water quality samples meeting Annual Audit Reports acceptance by the governmentsupply services in Bukhara target values at user points; Bank Supervision Reports to push further with privateand Samarkand * Reliability: Percentage of Independent technical and sector operations in the

customers receiving 24 hours financial audits of operator municipal services sector ina day of adequate water performance other citiesservice up to 100% as per Reports by Management * Increasing interest fromPSA annual targets; Operator local and international* Efficiency: Operational ICR investors and operators in thecosts, reduction of physical Reports from Customer water industrylosses and liters per capita per Relations Office * Strong support institutionalday consumed, and reduction and financial reform of theof kwh/Mm3 of energy water and sanitation sectorconsumed as per PSA annualtargets;* Financial viability: Annualratio of collected revenuesover the sum of operation,adequate maintenance costsand project-related expenses;and* Sustainability: Satisfactionwith water services, andagreement on institutionalarrangement for sustainabilityof project achievements,possibly with even greaterparticipation of the privatesector.

- 39 -

P ; ' | ~~~Key Perforrnance 't' Data Collection Str'ategy.l ..-- -Hierarchy of Objectives | Indicators | _ Critical Assumptions

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:Water distribution network Detailed output indicators are Periodic Monitoring Reports * Improvements in BVK'sand treatment facility presented in the PSA of the (Quarterly & Annual) and SVK's financial resultsoperations improved Service Contract following the are sustainable and allow it to

logframe. Key indicators in Annual Audit Reports continue to operate underthe PSA include: satisfactory conditions and* Network information Bank Supervision Reports maintain an adequate level of

system developed by year 2 O & M.for both cities Independent technical and * The Municipalities of*80% of network with discrete financial audits of operator Bukhara and Samarkandsupply zones established performance continue to support the tariff* % of detected leaks repaired level necessary to achievewithin 2 days as per PSA Reports by Operator BVK's and SVK's financialannual targets viability* % of leaking service * Population awareness ofconnections repaired within 7 water conservation rises anddays as per PSA annual linkage between BVK's andtargets SVK's financial resource* Production metering needs, increase in collectioninstalled by year I of water fees, and* Loss reduction savings in improvement in serviceestablished network zones of quality is understood24,000 m3/d in Bukhara and * Government maintains its45,000 m3/d in Samarkand support to the project* 20% reduction in energy particularly in regards toconsumption in Samarkand payment of water fees byand 15% reduction in institutional consumersBukhara * Municipalities of Bukhara

and Samarkand give theOperator the necessary toolsand enforcement support toincrease collection

BVK's and SVK's financial * Computerized financial, BVK and SVK operational * BVK and SVK acquiremanagement improved accounting and commercial data in periodic monitoring sufficient autonomy to

systems installed and reports (quarterly & annual). manage its operations onoperational by year 1 Reports of technical and sound commercial principles* Accounting procedures for financial independent audits with the guidance of the

BVK and SVK developed and Bank supervision reports Operatorstaff trained by year I Financial statements * An agreement is reached for* IAS financial statements Annual audits adequate management of theprepared by year 2 and Bukhara and Samarkandthereafter water supply systems after* Collection efficiency project completion, includingincreased as per PSA annual possible increase in the role oftargets private sector in the provision

of water supply servicesCustomer service improved * Customer database BVK and SVK operational * Macroeconomic conditions

completed by year I data in periodic monitoring of the country do not* Unregistered connection reports (quarterly & annual). deteriorate to a level that

Reports of technical and

- 40 -

regularized by year I significantly affects project* Public education program financial independent audits implementationimplemented as per PSA Bank supervision reportsannual targets* 100% of apartment blocksand detached houses metered* New contracts with

customers established as perPSA annual targets* Resolution of customerservice complaints as per PSAannual targets

Institutional capacity of BVK * Operations, safety and BVK and SVK operationaland SVK strengthened monitoring manuals data in periodic monitoring

completed by year I reports (quarterly & annual).* BVK and SVK staff trained Reports of technical andin operational, safety and financial independent auditsmonitoring manuals as per Bank supervision reportsPSA annual targets* BVK and SVK financialstaff fully trained incomputerized financial,accounting and commercialsystems and in IAS by year Iand thereafter

- 41 -

I Key Performance. Data Collection Strategy |Hierarchy of Objectives I Indicators I Critical Assumptions

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)1. Investment Fund BVK and SVK progress * Procurement decisions not

1. I Bukhara IF 1.1 US$21.30 million reports delayed and Operator fully1.2 Samarkand IF 1.2 US$25.58 million Bank supervision reports able to procure goods and

2. Performance-Based Service 2. Base fee US$3.65 million Disbursement status reports services under the InvestmentContract Incentive fee US$1.55 Fund3. Consulting services and million * Provision of counterpartProject Coordination Unit 3. US$1.05 million funding is adequate and4. Swiss-financed component timely

4. US$9.00 million * Project funding is sufficientto achieve noticeableimprovements in service asprojects in PSA* Operator brings allnecessary skills andexperienced staff to managethe system* Local contractors are able toachieve acceptable standardsin quality of construction* Operator, PCU, BVK, SVKand Coordinating Committeeagree promptly on theproposed annual investmentplans* Government agencies notdirectly involved in theproject (such as taxauthorities, customs, etc.) donot interfere in projectimplementation and providepromptly all necessaryconstruction and operationalpermits* Disputes between Operatorand PCU or municipalities areresolved promptly

-42 -

Service Standard Appendix - Water Supply Service Contract for Bukhara and Samarkand

DEKS CIF 113WU E [E EAR 1 NEARLY TAR9R'% KE SAD TIARr YEAR I YEAR2 YEAR 3 YEAR4

Bae Year Dla Rexxt

* deve Base Year * QmOpyng BseYearDEaData Report Sandard RepXt

&bys aswrtt%*Date

* devep 01 l (hy Cg Op -a-dandMamntrme StmKhd MbiAmenePhl

PIM -noblDTOM90

Dae

* plpe a * WQ- Op-gMh Sd

mmh r *labtes90Odays affdcS SXe

. dvelp *Qmhy oiawnng Ma-t

Mmli S9d Gwdnuim

Cdefgs *rio ba dw30dysaflerdeSttigD*

* p- a St-w .QWhpyC%- S&cBaE BBush=Plm 9ard Pbn

I .rXWfftdwU24

StFarit Dle

IePnn~~~~~~~~~~Res:pI * Paaiund p lan_ _ _

I nolata§3n 1m 6 r niafbri fff

-43 -

-carry ou a ill * Q( Op-g_

days aftie Fe StinDysftftS

* deip a Staff * cWhOmg StffTm adTm ig and Suamkd Dadovm

Pruw- fnnfsafberde

*mulaiu1Stf *f tatgeofStaff lo/V 30/. lTning mar Tming and

* vdep a Meri * QmLOpetg ntPat 10CU/ IOU,'/oPuynP al- Swbad Pw

rnubmerdn90ds af r the StMDate

. -~ ~~~~ I

amds avos StaM afdfrLmindayoda itadivin; xa ,%,,wd

Guk_

*- *0-3&arbm ir acodacewl

'F--goCI . -oz _wqian d * S udwith reset Dth

Rdiitahm Furd O RqepamaRdubin Fundpinuzuniant

War~l,s(SangdT*igP~am

* dcdV ai art * COSr Scmfrid Wat y _Watard *Oy Sairg and Teig

* xxi Wdmr 30&DsafeiadStar_g

-44 -

F-MWHahamdSa*~Pmg-a

"&&pmi ann .*qcUm9gO~Hi SbOd mdSa*PmimidSai*rlyPT9

dasafterf SrffSgDate

* cry at ta iaing .n wQihy pi(1g ThId Saff IWIW/o IODW%mato eallff Ssxiardkardmfeiynms *%ofstafftain

deyelp an *Q-kmtn -rh-oy SWkd MM*

Mu- day*s mp d}t Swing

Dae

* * hmx . le/o IW

kwrantl ra ting OAPeam *%cfpym

hrd

* pin S9idd iQ-W -g StarddOp-gOpg Rcc,&= Stamid PuCeinftrall

SwnDote

ard NbMbe Sadd uinrteIMmIMI *rrohadla12 M12

nalfaflerde

*bainng on * (y Opalg 11I/° 11o% Refiesh for Rei frerand A ds ndais ffad dstaffand

Maiae * %fsaffual an rrw staff alr new sff

-45 -

*evealfip * 0QuItyOemg EoMmm tMm fPbn Sbad Pbn

ondu aflerduSftnig Date-

*mo* . Sard.Mwunf Plan MmuFnIPbn

* % aduckcn in 20/. roducn N% roductio r 1/ 0tticn 150/oaklion 20%re'rcion

a-eaonnIfauo fitn Bas YYar fi ftm Baw Y frn Ba Year fiurn Bas Yeu0,Spermll -__ ._-cubic ntas) fian BuBase Year

15%axheidi r 2/oanb 101/.l8%ierha d2%thandm 15%anfan Base Year | frn Bw Yer dn BaB Yr hdan Basr Ye- fdun Bam Ycar

Wahs Prt, Tmant, D :nlk and Pm

*ycarry oLe *WatmrQualtyrarrnt a BVK's Staards esablishedwater Ueatn plan Wdlr PSA Swum

23

*de'bkp Water * Quiy°1rg War PargRMgSchell Starlal Sdxxl

daysafer duStagDat

* updatemx ad Q*Op*dg Updla±iWater aw ofa oro rolg oingpule Water Stadad PrannSduPr g Sdchle * a dainx by dxu

*deelpWAw * mlbty madqg Wam q&urcesSurcesrl a Srd PRctim ardand Monitorirg Plan * ate dm90 M Pla

daysafle rdSwaing

*nwrged *-Quakyoxatirg 98% 70% 80%/. 90o/o 98%d&iqnfwion of wauer Stainid

water qt -* Mantin msidl of

I ppm iri distiimmnis

*Pnunagr aeraw~orodlnnexticoffailigsarcs fiaz BamY-ar

- 46 -

* wkeelopa * (tyO g MNni:lanmar= Sdd M

Nlars *rDbWd9 Puw

Stg Date

appgmused Stard

od-- *nolvdml8n1e nxSe lrv dv

* arry a.n v Q *Opgaridpvea Stud

nuiracarve mins auxlxswith

Nbulmove

Facii Data Base ard ratl C x S&rvey

* prepar Facdtis *Qua(y0pirg Faaliis Dla BaseData Base Sd

* Erd atiIn4tuiD aff te

* pree ia *Quhyaseasg h CniCudS& y *Stmd Sawy

nxrfdsarte*rS ltiflng 4Susgtbl

awecksofds Swa±rdFacilitis

daysaflictlahieftgDaft

-47 -

N N

:1

I� *1 d______ Ij I�

_____ I ___

iII' I. �dj I C'Iii _____ I� �II� � III .i�i .h

&=h *-mcratrrzgni

S;ta> _wlf

=mo% rn iI/ 8%C6 .Sa%&)ajfmhx

SWaDta

fig=iehthfimCotY

_

*~~nflpanuzut * imiRaft

s whwade9a%

pmzuIom ~acm&mwthg*eshwafd *nobsxm9

p~~II ~mk2ft fffrtEf1

tedr

* nym whffh*bs-noWwhm%

inOe e

N b-LRhnf

*<gMdnu *wlaaiui

Plnn kaxRqaxl lloE 1l5 Ion 30m i40 In 1251an*c~pR *QhtOadi & i d

*kmofInuadafl Sm9nid

win the apbmble yew 130kmn 20kIa 30kIan 40kIa 40kmn

.s& I*%u l Q . Cy 0g 80%/ 2C%/ 60%/ 80%/ 80%zan SmIXded

*%ofvmxdxk

-49 -

*. sp etyk *-notDlou1 90_

Ph" Dat

*u4da1ONSS *%ofr IcO'/ 3c;%1w% Pbnomlmtdcm b % nnak

nawbLmnea

£0the databas

Hy&-N-ukMoxHW

NdkMo&hmg Smxidm

d3ysdbwril*g

*pmm ofan *roWarlmn12 I_I/ Iwivaified fist n"fu mfiw vesim ofa Sa*n ing D 1tI

un~c of lte m eIaflt

h~kuNk SlaDate

* caib Qntofy g a 9ig DEIC

*aoneion ard * no 1w&& gnn 24 tclo/O leoo- 0_

k~~~~~~~~~~~~~5 -

* 1,miWad * 0ig Ca ..

Mnmm * rKbl=|tiuiMm=anmr Sl n dard *M g0% 11

wats 9~~~atea,oorivat *Qwiliyop.m IOU IOU,/

wugnudw= Sundarmg-md -%ofq %%gtml

c*mvertd

OanrmSai5ev Plan

O~Sc Smdd

Pbnard *-nDbmwdm6

0f6nGw SwtTr g Date

.devepauip *Qi mlsam nutie 9ardrd T-w* RPwan

9mSovie *noI=dw90

M* Edxatminm gim*dblowparl *Q-hyG-irg IGanmu/. axv awnvOnu

Mnft1i~ Sanlz*<-.4>ard d yafb1rdi1Stm*

- 51 -

T� F 'Ii '� iF IIHj i'II � j �h � J�l� I. d III,

F�- �' �' �

U.'

III

*c-ebp .Q4hnsofxiar 9rtBIad

contan -No biethan 30days afiffd SwtngDae

Bi-Mmdy Repxt

*- asnit bihlo * (Q Opmivg i-ManhI RqrsoT9~~~~~~SdI

*Nolaloirhan 15days 9i the " of_ 2nxlhpaiod __

Am Rq)ott

-*int *uQ- y0 A-m R

*No lats d=45d3ys aflrthe aid of

exdi OLEUTt Y5r3

- 53 -

Performance Incentive Compensation Appendix (PICA) of the Service Contract

Under the terms of the Service Contract, the Operator's compensation shall include a fixed base fee, basedon the price quoted in its proposal, which shall basically cover the Operator's management staff andadministrative costs. In addition, the Operator is eligible to be paid a Performance Incentive Compensationup to a maximum of US $1.55 million over the contract period, which is intended to compensate it on thebasis of the extent to which it achieves the thresholds for water system performance improvements set outin the Contract. In this regard, various performance criterion relating to the different services to beprovided by the Operator, have been explicitly spelt out in the Performance Incentive CompensationAppendix (PICA) of the Service Contract. For each criterion, a weight has been assigned according to therelative importance in that contract year. The actual Performance Incentive Compensation to be paid to theOperator for each contract year is calculated as follows:

PIC = Composite Score * 0.2 * Maximum Annual Compensation where:

the Composite Score = total of all the weighted scores for the performance criteria; andthe weighted score for each performance criterion =Criterion Weight * Criterion Value.

Criterion Values are based upon the Operator's actual performance in comparison to performancestandards set out in the PICA under the headings, "Excellent", "Very good", "Good", "Fair", and"Minimum", and allocated corresponding values of 5, 4, 3, 2, or 1 respectively. Further details on themechanics of the incentive compensation to the Operator are presented in the Service Contract.

As the incentive compensation is based on performance improvements on a series of key indicators, theseindicators are directly linked to the Development Objective of the project and to the improvement of waterservices to the population in a sustainable way. The following tables reproduce the criteria, indicators, andtargets for each of the four years of the Service Contract.

- 54 -

Chart 1- BUKHARAPerformance Incentive ObligationsYear 1

Setwvkes Criterion ValueAppeodk Perferrance Criterion units Criteri Excedent Very Good Good Fair POrReference WehW*t 5 4 3 2 1

SA 2.2.1 (1) Development of Plans and Quality and Timeliness 0.30 Completed on Not Not Completed on Notto (27) Programs time with no applicable applicable time but applicableexcluding SA need for requires2.2.1(5) revision to the revision to

substance ofthe the substancedocurnent of the

documentSA 5.2.2(i) Chlorine Residual % reduction of fiiling samples from Base 0.03 78 76 74 72 70

Year (measured for the Contract Year)SA 5.1.7 Energy Management % reduction ofkilowatt hours of 0.07 4 3.5 3 2.5 2

clectricity per m3 of water produced fiomBase Year

SA 7.3(3Xe) Rehabilitation ofWater °/. completion of rehabilitation projects 0.05 14 13 12 11 1 0Treatment Facilities

SA 7.6.1 Physical Loss Reduction m3/day reduction of physical losses 0.10 8000 7500 7000 6500 6000measured from baselines of individual

zonesSA 7.6.2 Water Distribution Main kilometers of Water Distribution Mains 0.03 19 18 17 16 15

Replacement replaced from Starting Date to end of theapplicable Contract Year

SA 7.6.3 Network Zoning % of distribution network divided into 0.05 1 28 26 24 22 20________ _ ~ rklnfb nthydraulically discrete zones

SA 7.7 Networkcloftrroaton %of watertrnsmission and distribution 0.10 38 36 34 32 30System network mapped, verified and object data

entered into databaseSA Computerized Billing and numberofdays aflerthe Starting Date 0.10 l 140 150 160 170 1808.1. 1(1)(b) Collecfion System until the computerized billing and

collection system is in placeSA 8.1.2(f) Conversion of Unregistered number ofdays after the Starting Date 0.05 305 320 335 350 365

Connections until all known unregistered connectionshave been converted

SA Colleteion of new sales to % of new sales to domestic Customers 0.03 89 88.5 88 87.5 878.2.1 (2Xa) domestic Customers collectedSA Collection of new sales to % of new sales to commnercial Customers 0.02 99 98.5 98 97.5 978.2.1(2Xa) commercial Customers collectedSA 8.2.2(a) Domestic Meter Installation % ofapartennt blocks equipped with 0.05 100 96 94 92 90

-Apartment Blocks metersSA 8.2.2(a) Domestic Meter Installation % of detached houses equipped with 0.02 38 36 34 32 30

-Detached Houses meters

In respect ofthe Plans and Programs each plan or program listed in SA Section 2.2.l(l)except forthe Strategic Business Plan and the Subscription Contract shall be given a score of either 5 (Excellent), 2(Fair) or (0) and the average score for all plans and programs shall be multiplied by the Criteria Weight.The average score shall be rounded to the nearest .5 decimal.

- 55 -

Chart 2 - BUKHARAPerformance Incentive ObligationsYear 2

Sersleea -Crtrrion VaneAppendli Performanee Criterion URNS C(rhurla E.celleal Ver Good Good Fair PoorRelerence Weighit 5 4 3 2

j^22 l15j De.ekpn,en i Pl".i dnd QIosIisn.1eIn,e,ne. _ 20 CNor.i a'. _ ._ N_ Compleld on NoiPrgrams Steategic Business time with no applicable applicable time but applicablePlan need for requires

revision to the revision tosubstance of the substancethe documcnt of the

document

SA 5.1.7 Energy Management % reduction of kilowatt hours of 0.05 14 13 12 11 toclectricity per m

3of water produced

from Base YearSA 5.2.1 (i) Chlorine Residual % of reduction or failing samples from 0.05 88 86 84 82 80

Base Year (measured for the ContractYear)

SA 7.3(3)(c) Rehabilitation of Water % completion ofrehabilitation projects 0.10 78 76 74 72 70Treatment Facilities

SA 7.5.2 Reduction in Water Supply %reduction from Base Year of water 0.05 12 11.5 10.5 10Interruptions supply interruptions

SA 7.6.1 Physical Loss Reduction m'/day reduction of physical losses 0.10 22000 21000 20000 19000 18000measured from baselincs of individual

zanes

SA 7.6.2 Water Distribution Main kilometers of Water Distribution Mains 0.03 53 51 49 47 45Replacement replaced from SLarting Date to end of

the applicable Contract YearSA 7.6.3 Network Zoning % of distribution network divided into 0.05 68 66 64 62 60

hydraulically discrete mnesSA 7.7 Nctwork Information System number of months after Starting Date 0.10 20 21 22 23 24

NIS is completed

SA Collection of new sales to % of new sales to domestic Cuslomers 0.10 92 91.5 91 90.5 908.2.1(2)(a) domestic Customers collectedSA Collection ornew sales to % of new sales to commercial 0.10 99 98.5 98 97.5 978.2.1 (2)(a) commnercial Customcrs Customers collectedSA 8.2.2(a) Domestic Meter Installation - number of months to cquip 100/o of 0.05 16 18 20 22 24

Apartment Blocks apartment blocks meters with metenSA 8.2.2(a) Domestic Meter Installation - % of detached houses equipped with 0.02 86 82 78 74 70

Detached Houses meters

- 56 -

- LS -

P'll'I'll 1111-:e'. 0)l60)l0l *P 1.)(0)1

V Pill I 0t P I d Ot n I OI 0 1W00V

solon~~~~~~~~~~~~~V

000tz 0007E ouL ooooL 00 0r1 I1 0lta r wrl J!ozdI!Jl .P" * !arar ...... .... ... Ios p 0l'1;1A0!YL Vs

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Chart 5 - SAMARKANDPerformance Incentive ObligationsYear 1

Sinims Cmiez*m V'alueAppR Eh Pft*"i QAeIN Unl Cn VayGod Good Fak fb.Rfelict Wd& .5 4 3 2 I

SA '.21(l)w D nq aoiPLm a Qkuh aid Tai Tr 0.U0 C.Ts* iict C a Nc Ndn tL Comlksed. NA(27) Ptcamln ime with no apphEable applicable time but applicableexludfing SA need for ires22.1(5) revision tDthe reviaion t

subsance of the subancethe dmnsrct ofthe

doainiat

SA 5.1.7 Enss M-ag-a1 % redicun of Ilowat hs of 0.07 4 3.5 3 2.5 2

electmity per n? water puced frmBase Year

SA 522(i) Nilomine Residual % educion offiling samples fmm 0.03 78 76 74 72 70Base Year (measurse overt e Caiatd

Year)

SA 73(3Xm) WeU FieldRehlabilslaon % ocmionofwell-field 0.02 14 13 12 I 10rehabilitation poject

SA 73(3Xn) Rehiabiltation of Booster %ofbostaerpurningstakris 0.03 28 26 24 20psumping alSIsixi rdhabilitated

SA 7.6.1 PfYSiCal Lss Redaction rnr/day ruction ofphysical kss 0.10 11000 10500 ioooo 9500 9000naeured frm baseEnes ofindividual

SA 7.6,2 Water Disinbuion MLin kilaners of Water Distribution Mains 0.03 24 23 22 21 20R qL nt Mpied finm Sting Date tD end of

the appliable Conbac Year

SA 7.6.3 NlWuk Zaing % ofdistilbution netwck divided 0.05 28 26 24 22 20hydraulkaUyi dslcr zeas_

SA 7.7 Ndwixk Inbirntion System % ofwatert n isimand 0.10 38 36 34 32 30dion nwnekmn,ec veniiedan object data entted into dtabase

SA Corr,uter-d Biluig and iunitrofdays aflier he Stir Dabe 0.10 140 150 160 170 1808.1.1(1Xb) Coectimon Systen urtild Ihe opized biDing and

collectiom system is in place

SA &1.2(f) Coansmon ofunregisthrd nmiberofdays aferthe Sta g Date 0.05 305 320 335 350 365Cbmmons until all lesown uaristered

coecfcns have been omvuted

SA Collection ofnew sleas to % of rew msles Dt dm ic Cuctns 0.03 94 93.5 93 92.5 9282.1(2Xa) udmstic Cus(xners colleced

SA Cdleciion ofnew salS tO % ofnWe sals tomomecial 0.02 80 79.5 79 78.5 7882.1(2Xa) conamaial Cusornes Cutst s collected

SA 82.2(a) 1rsnetic Meter Installation - % of aim it blodcs eq ped with 0.05 100 96 94 92 90ApbnaftBbcs Bees

SA 822(a) Domnesic Meter IlstaDatim - % of detached hIKS equipped with 0.02 38 36 34 32 30Deached Houses meters

In respect ofthe Plans and Prangrm each plan orprogwamn listed m SA Section 22- 1(1) except forthe Strategic Business Plan and the Subscription Contact shall be given a scoe ofeitler 5 (ExcellerA), 2(Fair) or (0) and the average scoe for al plans and pngans shall be multipfied by the Criteria Weightlhe avrage score shall be mrunded to the nearest .5 decimal.

- 58 -

Chart 6 - SAMARKANDPerformance Incentive ObligationsYear 2

Sm les Cnherton ValeAppendh Performn nee Crilerioa uniat Criteria Eacellenl Very Good Good FAir PoorR _ferene Weight 5 4 3 2

;A 2: ,.3ij De,elopmer.t .ol Plani and Qua)ny anJ Tnmel.nes, o .. CComplried On NC-[ Not tC1 MnplrLed .1 NC.1Programs Strategic Business time with no applicable applicable time but applicablePlan need for requires

revision to the revision tosubstance of the substancethe document of the

document

SA 5.1.7 Energy Management % reduction of kilowatt hours of 0.05 14 13 12 1 tOelectricity per m' of water produced

from Base Year

SA 5.2. 1(g) Chlorine Residual % reduction of failing samples from 0.05 88 86 84 82 80Base Year (measured for the Contract

Year)

SA 5.2.3(e) Reduction of Water Supply % reduction from Base Year of watcr 0.05 24 23 22 21 20Interruptions supply interruptions

SA 7.3(3)(m) Well Field Rehabilitation % completion of well-field 0.07 78 76 74 72 70rehabilitation project

SA 7.3(3)(n) Rehabilitation of Booster % of booster pumping stations 0.03 78 76 74 72 70pumping stations rehabilitation

SA 7.6.1 Physical Loss Reduction m'/day reduction of physical losses 0.10 31000 30000 29000 28000 27000measured from baselines of individual

zonesSA 7.6.2 Water Distribution Main kilometers of Water Distribution 0.03 58 56 54 52 50

Replacement Mains replaced from Starting Date toend of applicable Contract Year

SA 7.6.3 Network Zoning % of distribution network divided into 0.05 68 66 64 62 60______________ ~~~~~~~hydraulically discrete zones

SA 7.7 Network Information System number of months after Starting Date 0.10 20 21 22 23 24NIS is completed

SA Collection of new stots to % of new sales to domestic Customc 0.10 96 95.5 95 94.5 948.2.1(2)(a) domestic Customers collected

SA Collection of new sales to % of new sales to commercial 0.10 87 86.5 86 85.5 858.2.1(2)(a) commercial Customer Customers collectedSA 8.

2.2

(a) Domestic Meter Installation - number of months after Starting Date 0.05 16 18 20 22 24Apanment Blocks that I 00% of apartment blocks are

equipped with meten

SA 8.2.2(a) Domestic Meter Installation - % of detached houses equipped with 0.02 86 82 78 74 70Detached Houses meters

- 59 -

Chart 7 - SAMARKANDPerformance Incentive ObligationsYear 3

servie Oakmin Valie

AWpp P eC U(ib Cijiala .xeda Vay God GoodRmee 5Wdg - 4 3 2

SA 5I ' EZ kt-e -

0. rtiuas n fkioouwm haas of (a 0 IfI, I! 17 16 I

elecdiatyperam ofwatrpducedfim Base Yew

SA 521() aloine Residual % n offailin W g m 4sfiom 0.05 94 93 92 91 90Base Year (mnassl for itheChac

Year)

SA 523(e) Rextcim ofWater sly % ion fm Base Yearofwabr 0.15 68 66 64 62 60Irterniions bpbo

SA73(3Xm) Well Fied Rdilablimali n mnber ofo mater Slatig Date 0.05 32 33 34 35 36tooD CMplte 100/oofwdl-field

relatbltilmpon jects

SA 73(3Xn) Relabiliation ofBoae rmmiba ofn n s afterS §ug Date 005 32 33 34 35 36Piapig Sta6om for ohnlefdon

SA 7.6.1 Physical LossRhknim m ?/dayeducion ofhscad eats 0.15 5100X 495C0 48000 465C0 45000n aed fin olas of

ividualzesom

SA7.62 WaterDistibutimntain | kleters ofWaterDistnbnuion 0.08 103 100 96 93 90Rqtiplasrri n Maiaelnsaen d fiom Stag Date to

Ier of athe applicable Cmat Year

SA 7.63 Net%kZaring mMberofnsa after S laing Daoe 0.07 32 33 34 35 36to divide 100% of dis`rulond hicallydsmete

2ones

SAC ectionofnewsalestD | %ofrew sales t stic 0.15 98 97.5 97 %.5 968.1.1(2Xa) dmstic Cuscmsers I Cses o1locted

SA Collection ofnew alesto % ofnew sales to c ounaca 0.10 95 94.5 94 93.5 938.l.l(2Xa) coasmvcial CumeTr Cusfons coUecd

SA 822(a) Dmns&ic Mder na]allion - iranber ofnmths to equip 10o0 of 0.05 32 33 34 35 36Daa hd HRe &tadied h m %wfid rnetms

Chart 8 - SAMARKANDPerformance Incentive ObligationsYear 4

App-edla PerforuaceCrtr . Uli , Crlteia :k VY Owd Goed FRr PeorRelemda . . . . ' dgh*i 511.. - *4_ 3 2 1

SA5.7 EnergyManagement % reduction of kilowatt hours of 0.15 28 26 24 22 20electricity perm

3of water produced

from Base Year

SA 5.2.1 (i) Chlorine Residual % reduction of failing samples from 0.05 100 99.5 99 98.5 98Base Year (measured for the Contract

Year)SA 7.5.2 Reduction in Water Supply % reduction from Base Year of water 0.20 92 89 86 83 80

Interruptions supply intemaptions

SA 7.6.1 Physical Loss Reduction m'/day reduction of physical losses 0.15 53000 51000 49000 47000 45000measured from baselines of individual

zones

SA 7.6.2 Water Distribution Main niunber of months after Sltating Date to 0.15 40 42 44 46 48Replacemnent complete the replacement of 130

kilometers of Water Distribution Maies

SA Collectionofnewsales to % ofnew sales todomestic Customers 0.15 100 99.5 99 98.5 988.2.1(2Xa) domestc Customers collected

SA Collection of new sales to % ofnew sales to commetcial 0.15 100 99.5 99 98.5 988.2.1(2)a) commercial Customer Customers collected

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Annex 2: Detailed Project Description

UZBEKISTAN: Bukhara and Samarkand Water Supply Project

By Component:

Project Component I - US$46.88 millionInvestment Fund (IF)1.1 Bukhara IF - US$21.30 million1.2 Samarkand IF - US$25.58 million

The IF will provide the Operator and both BVK and SVK with the financial resources for investments toimprove Operation and Maintenance (O&M) and support rehabilitation of the water supply system.During the course of service contract implementation, changes in the needs and priorities may requireadjustment of the categories and amounts available in each category in order to meet the performanceimprovement targets. The design of the IF provides for this flexibility that is indispensable to meet theproject objectives. The Operator and vodokanals will develop an annual plan for the use of the Fund to beapproved by the Coordinating Committee (based on the recommendation by the PCU) and the Bank. Thefirst annual plan will be due 60 days after the start date of the contract. Subsequent annual plans will bedue 90 days before the end of the first, second, and third contract years. Any amount not expended in anyparticular year will be carried over to later years. The proposed plan will include: (i) a description of theproposed investments; (ii) estimated costs and expenses; (iii) implementation plan; (iv) procurementschedule; (v) priority analysis; and (vi) any environmental, social, or financial issues of relevance.

The Operator's annual plan for use of IF funds will generally comply with the following categories ofexpenditures for goods and works:

* Rehabilitation of the Water Distribution Systems, including piping and other items generally identifiedwith a water distribution systems, including water pipes, valves, fittings, service connection assemblies,air release valves, blow off assemblies, taps, plumbing fittings, water meters, tools and equipment torehabilitate the piping network, and leak detection equipment and surveys.

* Water Production, Treatment and Pumping Equipment and Structural Rehabilitation of Facilities,including various items of equipment generally identified with collecting, treating and distributing waterfrom the source to the consumers. This includes but is not limited to pumping equipment, spare parts,mechanical and electrical parts, controls and control systems, wells and parts of well systems, wellheadprotection works, chlorination equipment, and structural rehabilitation relating to the operatingequipment or related facilities.

* Bulk and Retail Water Measuring Equipment, including purchase and installation bulk meters andwater pressure gauges at outlets of production sites and distribution reservoirs, and water levelmeasuring devices. New or repaired retail water meters at domestic service connections (apartmentbuildings or blocks rather than individual units).

* Water Supply Technical and Administrative Support Systems. Technical and administrativeequipment necessary to support the operations of the water supply system, including maintenance andconstruction equipment, computer hardware and software, copy machines, office furniture,communications equipment, other administrative equipment and structural rehabilitation required forthe efficient administration of the water supply system.

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* Operations Consumables and Administrative Operations. Items used in the course of effectiveoperation, maintenance, and administration of the water supply system, such as treatment chemicals,consumables for pumping and treatment equipment, maintenance supplies, and temporary labor foremergencies and bonuses.

* Engineering and Supervision Services. Engineering design, construction supervision, technical andrelated assessments to implement the rehabilitation activities under the Investment Fund.

Project Component 2 - US$5.20 millionService Contract - Base fee (US$3.65 million) and Incentive fee (US$1.55 million)

This component would: (i) pay for salaries and expenses of the Operator's core group of management staffwith international experience in the water supply sector who will implement the service contract; and (ii)provide funds for a performance-dependent bonus paid to the Operator for achievement of specific targetsdefined in the service contract. This bonus will provide the incentives necessary to ensure measurableimprovements in reduction of water losses, increase of collection, and increase in water safety among otherfactors specifically defined in the contract. The actual amount of the incentive fee to be paid to theOperator will be determined by the application of a performance factor to the maximum annual incentivefee.

Staff provided by the Operator will include expertise in: (i) general management of water supply utilities;(ii) financial accounting and management, cost accounting and budgeting; (iii) water supply, mechanical,electrical, and environmental engineering; (iv) computer systems administration and database management;(v) customer management, public information and community relations; (vi) maintenance, repair, materialand inventory management; and (vii) human resources development and training.

As summarized in the Performance Service Appendix (Annex 1), the services to be provided by theOperator include:

* operate the facilities to carry out pumping and transport of water from water sources, treatment anddisinfection of water, and distribution and supply of potable water to customers;

* maintain the facilities to an improved standard of maintenance within the resources available anddevelop a maintenance management program for the facilities;

* carry out rehabilitation and repair of the facilities according to procedures of, and using funds from,the Investment Fund so as to achieve the performance improvement targets of the system;

* carry out all billing, collection and customer service functions related to the new and existing customersin the service area, and install and manage a computerized commercial system;

* install and manage financial management and accounting systems;* develop and implement programs for: (i) water quality monitoring; (ii) facility safety deficiencies

correction; (iii) inventory management; (iv) operating and maintenance procedures; (v) energymanagement; (vi) staff training and development; and (vii) commercial management; and

* prepare quarterly, semi-annual and annual reports as specified in the service contract, and PMRs usingformats acceptable to the Bank.

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Project Component 3 - US$ 1.05 millionConsulting Services and Project Coordination Unit

This component would finance: (i) maintenance of the PCU (including staff salaries, incremental operatingexpenditures, travel, training, and related expenses) with skilled staff to facilitate project implementation,coordinate project activities between the Operator, the Municipalities of Bukhara and Samarkand cities andother Government agencies, and supervise the Operator's performance; and (ii) carry out related consultingassignments and studies during project implementation.

A parallel Swiss Grant will finance the services of independent technical and financial auditors to monitorthe Operator's performance in relegation of the service contract obligations and achievement ofperformance improvement targets, and to provide technical and financial analysis in support of the PCU asneeded, and services of financial auditors acceptable to the Bank to carry out annual project and companyfinancial audits.

Project Component 4 - US$9.00 millionSwiss-financed component

The Govemment of Switzerland is processing a US$9.0 million grant to provide parallel financing to theWorld Bank-financed project. The Grant will provide supplemental resources parallel to ProjectComponent 1 described above for goods and services of Swiss origin. It will also finance independenttechnical and financial auditors that would monitor the Operator's performance and prepare the financialproject and water utility audits, as well as complementary consulting services to support the PCU.

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Annex 3: Estimated Project CostsUZBEKISTAN: Bukhara and Samarkand Water Supply Project

- Local Foreign TotalProject Cost By Component US $million US $million US $million

1. Investment Fund (IF) - Bukhara and Samarkand 18.00 25.60 43.602. Service Contract - Base Fee and Incentive Fee 0.58 4.44 5.023. Consulting Services and Project Coordination Unit 0.33 0.65 0.984. Swiss - financed component 0.00 9.00 9.00Total Baseline Cost 18.91 39.69 58.60Physical Contingencies 0.00 0.00 0.00Price Contingencies 1.42 2.11 3.53

Total Project Costs' 20.33 41.80 62.13

Front-end fee 0.20 0.20Total Financing Required 20.33 42.00 62.33

No physical contingencies are applied to Component I (Investment Fund) since all values are budget anddo not cover specific predefined contracts.

Identifiabic taxes and duties are 0 (US$m) and the total project cost, net of taxes, is 62.33 (US$m). Thereforc. the project cost sharing ratio is 64.17% oftotal project cost net of taxes.

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Annex 4: Cost Benefit Analysis SummaryUZBEKISTAN: Bukhara and Samarkand Water Supply Project

Summary of Benefits and Costs:

This Annex reviews the economics of the proposed project. Costs and benefits are assessed from bothqualitative and quantitative standpoints. However, it is important to note that much of the operational,technical and financial data required for the economic analysis is very limited or contradictory whendifferent sources are compared. This lack of data makes the economic analysis speculative to a greatdegree. The data collection systems to be installed by the Operator will provide the necessary informationto allow better assessments of the economic benefits of the project and better design of future operations.The incentives built in the service contract will lead the Operator to optimize the use of the limitedresources available to achieve the performance improvement targets in a cost-effective way.

For the economic analysis presented in this annex, a cost-benefit framework is used to assess the viabilityof the project and its sensitivity to some of the key variables. Given the expected life of civil works underthe capital investment component, the analysis is modeled over 25 years (period 2001-2026). The cashflows are discounted using a discount rate of 10% which is the Bank's typical hurdle rate for water andsanitation projects. The analysis does not examine the project's components as separate exercises as the fullbenefits of the IF would not be achieved without the direction of the Operator under the SC. However, itdoes look at the benefits and costs for each city separately.

Table A4-l shows the estimated net present values and internal rates of return of the project. The mostimportant quantitative benefits under the project are due to:

* Efficiency improvement in the operations of the water supply system, specifically in two areas wherenoticeable benefits are expected. First, the reduction in water losses and wastage (which is a keyperformance target in the SC and is specific of the network conditions in each city - in Bukhara thesavings at the end of the four-year contract are expected to be 35,000 m3/d and in Samarkand 70,000m3/d based on the field monitoring program conducted during preparation of the proposed project).Second, improvement in energv efficiency (another important performance improvement target selectedby the vodokanals and the Government as it is the most important cost factor for SVK and the secondin importance for BVK after purchase of raw water) which is expected to reach 25% of current energyuse by the end of the SC. Although some of the electricity in Uzbekistan is generated domestically, thecountry also imports energy from neighbor countries such as Tajikistan in summer, and sells it toKyrgyz Republic, Tajikistan and Kazakhstan in winter.

* Improvements in quality of service, particularly in Samarkand where 30 percent of the populationreceives water for just two periods of two hours every day, and the rest of the city suffers from verylow pressure and frequent service cuts. The Social Assessment results provided an approximate rangeof the value assigned by the population of Samarkand to the improvement of quality of service. Theperceived value appears to be low when compared to anecdotal evidence of the cost of coping strategiesthat the population must implement as a response to the poor level of service (reservoirs, waterpurchase, time fetching water, etc.).

* The current minimum level of maintenance and sub-optimal management of the water supply systemwill continue in the no-project situation leading to a downward spiral of service that eventually will

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bring the system (or parts of it) to a collapse. The health emergency associated with such situation willimply significant response costs that would be avoided through the strategic project investments and thechange of mentality to a least-cost optimal maintenance strategy. The costs avoided could becharacterized as sporadic (no less than three years in frequency) and of significant value (associatedwith catastrophic damages of the water supply system).

In addition, there are qualitative benefits which are difficult to quantify with the available information.These qualitative benefits include:

* Public health: In Samarkand the lack of continuity in service increases significantly the risk ofcontaminating the water supply network through infiltration from nearby sewage network lines due tonegative pressure. In Bukhara, the water quality is the main problem perceived by the community,particularly in terms of solids and salinity. The effectiveness of the water treatment in these conditionsis not certain. The population respond to the water quality problem with coping strategies such asfiltering and purchasing bottled water.

* Energy costs associated with water boiling: The Social Assessment results indicate that large segmentsof the population boil water as a coping strategy against perceived water quality problems. The cost ofenergy can be substantial.

* Environmental benefits associated with less water use: The water resources around Bukhara andSamarkand are not particularly abundant. Furthermore, one of the main water sources of Bukhara islocated several hundred kilometers from the city. The reduction in water losses and wastage will bringenvironmental benefits that are difficult to quantify.

* Social benefits associated with improved water supply: In areas of Samarkand with very limited watersupply service, the citizens have to delay activities such as bathing and washing. The low pressure inlarge parts of both cities causes nuisance to the population.

Table A4-1: Summary of Cost-Benefit Analysis - Base Case - Present Value of Flows (million UZS)I | Bukhara SamarkandBenefits 4,923 5,789

Costs 3,619 4,343Net Benefits (NPV) 1,127 1,160

IRR 17.1% 18.6%

The financial evaluation takes into consideration other benefits that are not accounted for in the economicanalysis, such as the increased financial revenues for BVK and SVK associated with the tariff adjustmentsand the collection rate increases. Further details of the financial analysis are presented in Annex 5. Theestimated NPV of the financial value is US$7.72 million for Bukhara and US$8.35 million for Samarkand,with financial rates of return of 15.5% and 14.9% respectively.

Main Assumptions:

The main assumptions imbedded in the economic and financial analysis are directly related to theperformance improvement targets in the SC, specifically in the areas of: (i) reduction targets for waterlosses and wastage; (ii) reduction of energy consumption; (iii) increase in collection of vodokanal revenues;and (iv) improvement in the quality of service in terms of continuity of service, defmed as the percentage ofhours per month that all consumers can draw water from the system. For the specific values used for each

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city in the above parameters, the reader is referred to the PSA in Annex 1. Additional information onwillingness to pay for improved services were taken from the Social Assessment. Further information ispresented in Annex 13.

Sensitivity analysis / Switching values of critical items:

The sensitivity analysis is presented in Annex 5.

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Annex 5: Financial SummaryUZBEKISTAN: Bukhara and Samarkand Water Supply Project

Introduction

A financial evaluation of BVK and SVK was carried out to analyze the key challenges the companies arefacing, their financial structure, operational efficiency, and long-term viability, with particular attention totheir ability to assume the proposed loan and to contribute financially to the project-related expenses. Thefinancial evaluation also analyzed the main financial risk factors that could affect the capacity of BVK andSVK to continue operations and implement the project. This Annex is divided in six sections. Section IIpresents a brief description of the key financial challenges of the vodokanals; Section III describes thestrategic choices made in the financial improvement plan defined in the financial projections of the analysis,as well as in the PSA for the SC operator; Section IV summarizes the operational and financialassumptions of the base-case financial evaluation; Section V presents the results of the financial evaluationand the results of a sensitivity evaluation on the main risk factors that will need close attention duringproject supervision.

It is important to note that the financial analysis is speculative in that much of the required data either arenonexistent or in conflict when different sources are compared; the manual accounting systems areinconsistent and prone with errors; and the transition of vodokanals in Uzbekistan to internationalaccounting standards has not been complete. The financial and accounting procedures of the companies willrequire major improvements through the Operator's directed efforts and the installation of new financialmanagement and accounting systems and procedures. The present financial assessment is based on thelimited information available as prepared by BVK and SVK accounting staff with the support ofinternational consultants. The detailed financial evaluation can be found in the Project Files.

Main Financial Challenges of BVK and SVK

BVK and SVK face substantial financial challenges associated with the following factors:

Low tariffs and verv high tariff differentials: In 1998 water tariffs non-domestic customers (budgetorganizations and commercial consumers) in Bukhara and Samarkand were, respectively, 8.2 and 9.6 timeshigher than those for domestic customers, resulting in a non-targeted subsidy to the population that actuallyreceives services. Table A5-1 shows the water and wastewater tariffs for 1997-1999. As illustrated by theresults of the Social Assessment (see Annex 13), the water fees are a very small proportion of the averageincome. The typical monthly water bill for a family of five in an apartment with hot water and adequatesanitary facilities in early 1999 was about 139 and 189 soums per month in Bukhara and Samarkand,respectively. This amount is less than one percent of the average income, indicating that there is room forrapid increases in tariffs.

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Table A5-1 BVK and SVK Tariffs 1997-1999 (net of VAT)Bukhara Samarkand

Tariffs 1997 1998 1999 1997 1998 1999Water Sums/m3 Sums/m3 Sums/m3

Domestic 0.60 1.50 1.50 0.70 1.50 4.00Budget organizations 2.65 12.29 14.42 11.86 14.40 15.00Commercial and Self- 3.90 12.29 14.42 11.86 14.40 20.83sufficientIndustrial 5.80 12.29 14.42 11.86 14.40 20.83

WastewaterDomestic 0.40 1.00 1.00 0.80 1.10 1.50Budget organizations 1.90 12.29 14.42 11.86 14.40 15.00Commercial and Self- 4.60 12.29 14.42 11.86 14.40 20.83sufficientIndustrial 5.30 12.29 14.42 11.86 14.40 20.83

Low collection of water fees and minimal cash collection: As illustrated in Table A5-2, in 1999 BVK andSVK collected 18% and 27% of its total billings in cash. The rest is either paid through a cumbersomesystem of invoice clearing and compensation with other utilities and customers' own invoices and payments,or simply not recovered at all leading to a total collection level of 56% and 79% of billings for BVK andSVK, respectively. In both cases, the utilities' accounts receivable represent about 7 months of billings.

Table A5-2 BVK and SVK Collection in 1999Bukhara

Total ICollection as Cash Cash Collection asCategory of Customers Revenues Collected % of Billing Collection % of billing

Domestic 55,774 24,537 44% 24,537 44%Budget 161,446 139,644 86% 63,743 39%

Self-sufficient organizations,bathhouses, industry, etc. 276,882 226,202 82%1 9,158 3%

Total 494,102 390,383 79%1 97438 20%

SamarkandTotal Collection as Cash Cash Collection as

Category of Customers Revenues Collected % of Billing Collection % of billingDomestic 110,520 67,022 61% 36,774 330/

Budget 219,512 127,551 58% 45,529 21%Self-sufficient organizations,

bathhouses, industry, etc. 283,339 201,692 71%1 113,903 400/Total 613,371 396,265 65%1 196,206 320/

Low metering, very high water leakage and wastage. and high operating costs: Reliable metering and billingbased on metered consumption is currently rare in both Bukhara and Samarkand (less than 2 and 4 percentof customers are metered and quality of metering system is doubtful due to lack of maintenance). Mostpublic institutions, industrial firms, and commercial customers are supposed to have meters, but they arelargely inoperative. Domestic consumption is billed using standard consumption norms that go as high as300 Ipcd. Lack of metering and payment enforcement results in very high consumption and wastage (asobserved in the field monitoring program - see Section E.3) and therefore water production has to be

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increased, driving up operating costs and safety risks. Largely unpaid water bills also result in very high,and so far unaccounted for, bad debt expenses.

Although current legislation allows tariffs to be determined taking into consideration the actual costs andexpenditures related to the production and sale of water and sewerage services from the previous year, thetariff approval process is subject to political approval and tariffs proposed by BVK and SVK are approvedafter long delays. The apparently low tariffs that have been approved are claim to be related to the very lowinput costs for BVK's and SVK's operating expenses (particularly energy and salaries), but they are also aresult of an ever smaller provision for maintenance and repairs and inadequate accounting records.

Strategic Choices in Financial Recovery Plan

A gradual financial recovery plan for BVK and SVK will be implemented as part of the proposed project.The recovery plan has two main objectives: (i) to achieve at the end of the project a basic level of financialsustainability where BVK and SVK can collect sufficient revenues to cover its operations, basicmaintenance of the water supply system, and debt service; and (ii) to make counterpart contributions to theproject and use this revenue collection capacity at the end of the project to continue the enhancedmaintenance and repairs of the system. Even if these targets are met, BVK and SVK will not have achievedat the end of the project full financial viability, as it will not be able to collect sufficient revenues foradequate maintenance of the wastewater system nor adequate provisions for major repairs of the system.After project implementation, both vodokanals will be in a position to continue its financial improvementwith the support of the Bank, other IFIs or bilateral donors.

The financial recovery strategy is based on the following strategic actions:

* Aggressive reduction of system inefficiencies (water losses, energy inefficiency, low cash collection,and water wastage) to reduce costs of operations;

* Implementation of a commercial strategy aimed at eliminating unregistered connections and users, andbuilding trust in the community through better water supply and customer service;

* A strategic and cost-effective metering policy linked with an effective customer relations platn aimed atincreasing revenues and/or reducing wastage;

* Set up of financial management, accounting, and commercial systems and procedures that will providebetter information about costs, revenues, and customers, and allow BVK and SVK to make betterpolicy and tariff recommendations to the municipal governments and implement effective commercialactions;

* Gradual reduction of cross-subsidies combined with enforcement of the disconnection policy to reducefiscal pressure, increase revenue collection from Government organizations and industry, and free upresources to design and implement a targeted subsidy policy to the truly poor once better informationon the customer base is available;

* Gradual reduction of non-cash forms of payment. As BVK and SVK are just one link in the existingchain of clearance payments, it will be impossible to do an immediate shift to payments exclusively incash. The cash collection increase will focus first on the domestic and commercial sector, and graduallymove to the industrial and government sector;

* Collection of better information on the fixed assets and current operational situation of the watersupply system as a first step to have a clear assessment of the maintenance and rehabilitation needs andto make informed recommendations in the tariff reviews during project implementation; and

* Linkage of the financial recovery strategy with the service appendix in the management contract withthe intemational utility operator to ensure adequate attention to the urgency of BVK's and SVK'sfinancial improvement needs.

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The Municipalities of Bukhara and Samarkand, in support of the financial principles of the project,approved earlier this year a tariff increase of close to 90% in Bukhara and 30% in Samarkand.

Results of the Financial Evaluation and Sensitivity Analysis

Table A5-3 and A5-4 present a summary of the financial projections for the basic financial evaluation forBukhara and Samarkand. Based on the assumptions used in the base-case projections, the tariff increasesrequired to achieve the basic goals of the financial recovery are significant but considered feasible by themunicipal governments of Bukhara and Samarkand. The basic financial evaluation scenario shows that thefinancial recovery plan will require drastic efforts by the Operator with the support of the Municipalities toincrease tariffs, collection and cash collection, and to reduce operational costs and wastage. During projectpreparation, several modeling scenarios were discussed as possible future altematives to achieve thefinancial improvement goals. Based on these scenarios, the municipal governments and the vodokanalsselected a sub-loan size based on a level of tariff increase that was considered politically acceptable. Thechoice in both cities was conservative.

The impact of various key assumptions was analyzed to evaluate their influence on the tariff increasesneeded. The key factors analyzed are: (i) lower collection rates; (ii) reduction in volume sold particularly tocommercial and industrial customers; (iii) faster reduction of cross-subsidy from non-domestic to domesticcustomers; and (iv) different levels of counterpart contribution required from the vodokanal and theGovernment.

The poor quality of the financial data available does not allow for a meaningful risk analysis to determinethe most likely financial outcome of the project or the contribution of different factors to the variousoutcome indicators.

Slower improvements in revenue collection rates: If the collection rates are lower than projected, theincentive fee to the operator would be smaller. Also, the minimum required tariffs to achieve the basic goalof the financial recovery plan will have to be higher, as illustrated in the following table, to comply with thefinancial covenants in the Loan Agreement aimed at improving the financial situation of the vodokanals.

Achievement of target collection rates by end Percentage increase in domestic tariffs required in 2006of project over base case to achieve financial recovery goal

Bukhara SamarkandNo increase in collection achieved 30% 42%

Half the collection increase target achieved 14% 18%

Annual decrease in sales to commercial and industrial customers: A large proportion of BVK's and SVK'srevenues are generated by its non-domestic customers due to the much higher tariffs than those fordomestic customers. Although this tariff differential is planned to be eliminated gradually, it is possible thatthe introduction of effective meter-based billings and further economic deterioration of some of the largerindustries will result in lower non-domestic sales. On the other hand, if the number of small and mediumenterprises and commercial establishments in both cities continues to grow, particularly those associatedwith the tourism industry, the non-domestic sales may increase. The following table analyzes the effects ofthese changes on the minimum required changes in the domestic tariffs to achieve the financial recoverygoal.

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Decrease of sales to non-domestic customers Percentage increase in domestic tariffs required in 2006over project implementation period over base case to achieve financial recovery goal

Bukhara Samarkand-20% 9% 5%-10% 4% 3%10% 4% -3%

Faster reduction of cross-subsidies: Although the Municipalities have indicated their preference for agradual elimination of tariff differentials, there is uncertainty about the speed at which this elimination willtake place. In Tashkent, for example, the cross-subsidy was eliminated in a single step. If this were to takeplace in Bukhara and Samarkand, the domestic tariffs would have to be increased 69% and 134%immediately to achieve the financial viability of BVK and SVK, respectively. A decision to eliminate thecross-subsidies faster would require a careful consideration of a more targeted mechanism to the truly poor,once better information is collected through project implementation.

Different levels of contribution from the vodokanals and the Government: The level of counterpartfinancing from the Government has a direct influence on the minimum required domestic tariffs if all theother assumptions in the base case are kept constant. The following table illustrates the effects of lower andhigher counterpart contribution on the required tariff increases.

Vodokanal Counterpart Contribution to the Project Percentage increase in domestic tariffs required in(Government to contribute difference to achieve 2005 over base case to achieve financial recovery

25% local counterpart contribution) goalBukhara Samarkand

1% -% -29%15% 22% 24%25% 65% 71%

Update post-appraisal:

BVK and SVK, with the support of the Municipalities of Bukhara and Samarkand, have started beforeproject initiation the implementation of some of the measures in the financial recovery plan agreed duringproject preparation. The main areas of improvement include:

* Domestic tariffs have increased 4 times in Bukhara and 5 times in Samarkand between 1999 and 2000(see table below)

* The tariff differential between non-domestic and domestic tariffs has been gradually reduced from 8.7to 4.8 in Bukhara between 1999 and 2000 and from 10 to 4 in Samarkand over the same period.

* Collection of billed revenues increased from 79% to 95% in Bukhara between 1999 and 2000, andfrom 65% to 83% in Samarkand.

* Cash collection showed modest increases from 20% to 33% in Bukhara but remained stable at 33% inSamarkand. These low levels are linked to macroeconomic conditions in the country.

The above measures are positive steps forward, although BVK and SVK still face significant challenges toachieve financial sustainability, including lack of adequate provisions for bad debts in the accountinglegislation for utilities, important untargeted subsidies to the population, and insufficient budget allocationfor water fees of institutional customers.

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Bukhara 1999 Bukhara 2000 Samarkand 1999 Samarkand 2000Domestic tariff (sums/m3) 2.0 8.0 2.0 10.0Non-domestic tariff 17.3 38.3 20.0 40.0(sums/m3)Tariff differential 8.7 4.8 10.0 4.0Collections as % of billings 79% 95% 65% 83%Cash collection as % of 20% 33% 32% 33%billings I_I

Foreign Exchange Risk Allocation and On-lending Terms

In line with national policies for foreign loans to sub-national entities, the central Government will pass theforeign exchange risk to BVK and SVK (i.e., sub-loan repayments would be made using the officialUZS/USD exchange rate on the day of payment) and will on-lend both the IDA Credit and IBRD Loan toBVK and SVK on IBRD conditions (five years of grace and twenty-year repayment period). TheUZS/USD foreign exchange rate is expected to increase significantly once the Government completes theprocess to liberalize the foreign exchange rate regime. As there are no financial instruments available at thecurrent time to BVK and SVK to hedge against foreign exchange rate fluctuations, the associated risk thathas to be absorbed by the utilities will most probably translate into unaffordable tariff increases. In order tosupport BVK and SVK in its reform process aimed at improving water services to the population, theGovernment will provide a transparent budget grant to BVK and SVK. The Government would provide anannual zero-net budget subsidy equal to the difference between: (i) payments made by the Government tothe Association for all charges and principal repayment of the IDA Credit; and (ii) all charges and principalrepayment of the Sub-Loan to be made by BVK and SVK to the Government on terms equivalent to thoseof the IBRD. This arrangement is considered international best practice to provide transparency of thesubsidy and to ensure better accounting and management of the Government's budget. There will be nosuch budget subsidy for the on-lending of the IBRD Loan. If during the IDA Credit repayment period, theinstallments schedule from the Borrower to the Association is modified, then the annual budget subsidy willbe modified accordingly to continue on a zero-net basis.

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Table A5-3 -Base Case Financial Evaluation Bukhara Vodokanal (post-Appraisal update)

Millions of Soums Project Implementaidon Period |2000 2002 2003 2004 2005 2006 2008 2010

Revenues from ServicesWater&wastewater billed revenues 853,992 1,132,588 1,319,417 1,779,400 1,970,294 1,977,783 1,982,575 1,858,430

Revenue CollecdonCollected revenue (soums millions) 810,308 1,079,695 1,263,445 1,712,267 1,906,217 1,925,030 1,942,923 1,821,261Collection ratio (% of revenue billed) 95% 95% 96% 96% 97% 97% 98% 98%Collected cash (soums millions) 283,320 330,061 605,530 945,732 1,232,467 1,430,830 1,774,651 1,803,049Cash collection (% ofrevenue billed) 35% 31% 48% 55% 65% 74% 91% 99O/8

Costs and ExpensesStaffCosts 37,536 37,536 37,536 37,536 37,536 37,536 37,536 37,536Electricity 188,659 188,659 179,226 170,265 161,752 153,664 153,664 153,664Fuel 5,400 5,400 5,400 5,400 5,400 5,400 5,400 5,400Materials 137,218 137,218 164,662 197,594 197,594 424,827 169,931 169,931General operating costs 165,888 165,888 165,888 165,888 165,888 165,888 165,888 165,888Allocations forsocial security 15,013 15,013 15,013 15,013 15,013 15,013 15,013 15,013Non-operating costs 105,703 105,703 105,703 105,703 105,703 105,703 105,703 105,703Another direct costs (refund IEK expenses) - . . - -Depreciation on pre-2000 assets 6,444 6,444 6,444 6,444 6,444 6,444 6,444 6,444Depreciation on post 2000 assets - 68,114 204,343 491,587 778,831 874,579 874,579rotal Costs and Expenses 719,374 892,837 1,057,611 1,457,767 1,636,973 1,663,443 1,693,098 1,621,287

Total Minimum Collected Revenue RequiredOperations and Maintenance Costs 747,704 747,704 762,839 778,614 758,491 965,445 710,549 710,549Profit tax 34,511 57,926 63,809 78,895 83,466 81,092 77,446 50,861VAT on W&WW sales 107,939 94,158 107,252 140,831 151,004 145,722 137,606 114,339Debt service (including fees) 43,678 57,088 139,438 338,768 541,275 1,017,323 945,512BVK project contribution (68,114) 272,458 574,488 574,488 191,496

Total 890.154 875,352 1,263,445 1,712,267 1,906,217 1,925,030 1,942,923 1821261

RevenuesDomestic

Tariff(1999UZS) 5.75 8.34 10.37 15.01 17.93 19.53 23.06 25.55Revenue billed 206,353 220,393 274,205 396,777 473,915 516,349 609,488 675,248

Collection ratio 87% 87% 89% 92% 94% 96%/ 98% 98%Revenuecollected 180,062 192,313 245,159 363,271 444,076 494,930 597,299 661,743

Bill of Family of Five (unmetered)-UZS/month 535 777 966 1,398 1,670 1,820 2,148 2,380

BudgetTariff(1999UZS) 20.80 27.57 31.59 41.79 45.23 44.17 41.50 35.76

Revenue billed 205,845 258,108 295,745 391,217 423,404 413,516 388,518 334,784Collection ratio 97'/. 97% 97% 97% 98% 98% 98% 98%

Revenue collected 199,326 249,934 287,069 380,653 412,960 404,281 380,748 328,088Self-Sufficient Entity 0 0 0 0 0 0 0 0

Tariff(1999UZS) 15.53 27.57 31.59 41.79 45.23 44.17 41.50 35.76Revenue billed 266,075 444,647 509,486 673,956 729,406 712,372 669,307 576,739Collection mtio 97% 97% 97% 97% 98% 98% 98% 98%

Revenue collected 258,400 431,821 495,691 656,900 712,237 696,865 655,921 565,204Industries 0 0 0 0 0 0 0 0

Tariff(1999UZS) 21.08 27.57 31.59 41.79 45.23 44.17 41.50 32.72Revenue billed 175,719 209,440 239,981 317,450 343,569 335,545 315,261 271,659

Collection ratio 98% 98% 98% 98% 98% 98% 98% 98%Revenuc collected 172,520 205,627 235,526 311,443 336,944 328,955 308,955 266,225

TotalRevenue billed 853,992 1,132,588 1,319,417 1,779,400 1,970,294 1,977,783 1,982,575 1,858,430

Revenue collected 810,308 1,079,695 1,263,445 1,712,267 1,906,217 1,925,030 1,942,923 1,821,261Collection ratio 95%1 95% 96% 96% 97% 97%1 98% 98%°

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Table A54. B3ase Case Flnancial Evaluation Samarkand Vodokanal (post-Appraisal Update)

Millions of Souns Peealneetao Period2000 2002 2003 2004 2005 2006 2008 2010

Revenues from ServicesWaterf&astewaterbilledrevenues 857,084 1.293,500 1,475.092 1,981,772 2,200,061 2,167.500 2.440,012 2,319,215

Collected revenue (UZS millions) 738,249 1.146,000 1,342,743 1,851,246 2,106,407 2.124.150 2,391,212 2.272,831Collection ratio (% of revenue billed) 86% 899/. 91% 93% 96% 98% 98% 98%Collected cash (UZS millions) 410,110 585,291 984,250 1,367,998 1,654,489 2,266,642 2,323,402 2,272,831Minimum cash collcction (% of revenuc billed) 36%/ 44% 53% 65% 78% 93% 97% 1000/

StaffCosts 69,686 69,686 69,686 69,686 69,686 69.686 69,686 69,686Electricity 327,289 327,289 327,289 327,289 327,289 327,289 327,289 327,289FuelMaterials 52,738 52.738 52,738 52,738 52,738 158,214 118,661 118,661Repairs fund 70.000 70,000 70,000 70,000 70,000 210,000 157,500 157,500Genenal operating costs 43,650 43,650 43,650 43,650 43,650 43.650 43.650 43,650Allocations for social security 27,874 27.874 27,874 27,874 27,874 27.874 27,874 27,874Tao and mandatory paymcnts (excluding pmfit tax) 11,508 11,508 11,508 11,508 11,508 11.508 11,508 11,508Non,operatingcosts 194,032 194,032 194,032 194,032 194,032 194,032 194,032 194,032Another direct costs (refund JEK expenses) 77,116 77.116 77,116 77,116 77,116 77,116 77,116 77.116Diepreiation on pre-2000 assets 7,059 7,059 7,059 7,059 7,059 7,059 7.059 7,059Depreciation on post 2000 assets . 81,752 245,257 590,013 934,769 1,049,687 1,049,687 1.049,687Total Costa and Expenses 869,444 1,001.197 1,180,797 1,642,138 1.881,378 1,910.232 2.159,702 2,073,513

Operations and Maintenance Costs 796,777 796,777 796,777 796,777 796,777 1,042,253 950,200 950,200Profittax 38.858 44,889 50,203 64,824 69.759 66.315 71,768 61,788VAT on W&WW sales 131,109 88,406 100,235 132,777 143.762 136.096 148.234 126,021Debt servicc (including fees) - 52,424 68.519 167,357 406,597 649,650 1,221,011 1,134,822SVKprojectcontribution 163.505 327,009 689.512 689,512 229,837

Total 966.744 1,146.000 1342,743 1.851,246 2106 407 2,124.150 2,391.212 2,272.831

RevenuesDomestic

Tariff(2000UZS) 5.24 7.43 9.09 13.18 15.90 17.14 22.47 23.99Revenue billed 187,960 327,620 401,073 581,579 701.265 756,022 991,256 1,058,404

Collection Mtio 909' 92% 93% 95% 96% 98% 98% 98%Revenuecollected 169.365 300,381 374.057 551,586 676.169 740,902 971,431 1,037,236

Bill of Family of Five (unmcttered)UZS/month 542 769 941 1,365 1,645 1,774 2,326 2,483

BudgetTariff(2000UZS) 25.27 33.57 36.99 47.67 50.30 46.48 45.71 37.96

Revenue billed 245,367 430,570 474,393 611,465 645,138 596,154 586.235 486,847Collection ratio 87% 89%/. 91% 94% 96% 98%/ 98% 98%

Revene collected 213,843 384,593 434,029 572,704 618,239 584.231 574,510 477,110Self-Sufficient Entity

Tariff(2000UZS) 27.47 33.57 36.99 47.67 50.30 46.48 45.71 37.96Revenue billed 94,247 130,185 143,435 184,879 195,061 180,250 177.251 147,200

Collection ratio 60%h 68% 75% 83% 909/, 98% 98% 98%Revenue collected 56,755 88,233 108,052 153,242 176,420 176,645 173,706 144,256

ndustriesTariff(200OUZS) 27.47 33.57 36.99 47.67 50.30 46.48 45.71 37.96

Revenue billed 249,433 324,791 357,848 461,245 486,645 449.695 442,213 367,242Collection ratio 91% 92% 94% 95% 97% 98% 98% 98%

Revenue collected 225,797 298,870 334,639 438,227 469,636 440,702 433,368 359,897Bathhouse

Tariff(200OUZS) 9.04 8.39 10.27 14.90 17.96 19.37 25.39 27.11Revenuebilled 80,077 80,333 98,344 142,604 171,952 185,378 243,Q58 259.523

Collection ratio 91% 92% 94% 95% 97% 98% 98% 98%Revenuacollected 72,489 73,922 91,966 135,488 165,942 181,671 238,197 254,332

TotalRevenaebilled 857,084 1,293,500 1,475,092 1,981,772 2,200,061 2,167,500 2,440,012 2,319,215

Revenue collected 738,249 1,146,000 1,342,743 1,851,246 2,106,407 2,124,150 2,391,212 2,272,831Collection rtio 86% 89°h 91% 93% 96% 98% 98% 98%

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Annex 6: Procurement and Disbursement Arrangements

UZBEKISTAN: Bukhara and Samarkand Water Supply Project

Procurement

The components of the proposed project, their estimated cost and procurement methods are summarized inTable A of this annex. The procurement methods and prior review thresholds are presented in Table B ofthis annex. Table B 1 summarizes the capacity of the PCU in procurement at the time of preparation of thisPAD and the proposed arrangements for procurement and monitoring. Table B2 presents a procurementplan detailing the packaging and estimated schedule of the major procurement actions.

The project will be financed from the proceeds of the proposed US$20.00 million loan, the US$20.00million equivalent credit, the local expenditure contributions from the Government and vodokanals, and a$9.00 million equivalent parallel Swiss Grant. The total cost of the project would be US$62.33 million,with a total Bank financing of US$40.00 million equivalent. A general procurement notice has beenpublished on the Development Business of the UN on October 16, 2000.

The Operator, as part of the Services to be provided under the SC, shall have the responsibility to carryout, on behalf of the Borrower, the procurement activities and contract signature, of all goods, works andservices financed under the IF, in accordance with the World Bank Guidelines: Procurement under theIBRD Loans and IDA Credits (issued in January 1995, revised January and August 1996, September1997, and January 1999). Consulting Services, technical assistance and training would be procured inaccordance with the Guidelines - Selection and Employment of consultants by World Bank Borrowers,January 1997, revised September 1997 and January 1999. The Bank's Standard Bidding Documents,Request for Proposals and Forms of Consultants' Contract will be used. In order to ensure adequateprocurement capacity, the Operator will be required in the Staff Appendix of the Management Contract toprovide international staff with adequate procurement qualifications.

The establishment of the PCU was initiated by the Municipalities of Bukhara, Samarkand and the Ministryof Macroeconomics and Statistics in November 2000. The responsibilities of the PCU will be: (i) theoverall coordination of the project; and (ii) the supervision of the Operator's performance. The PCU will beassisted by intemational technical and financial auditors. The PCU will have two full time Procurementand Contract Coordination Officers (PCO), one in each city. Competitive selection of this position hasbeen completed. Although all procurement activities for goods and works financed by the Loan (includingthe Immediate Investment Program) will be the responsibility of the Operator, the PCU will be responsiblefor the International Competitive Bidding process (ICB) for the selection of the Operator using Bankguidelines. The PCU will also be responsible for the selection of the international technical and financialauditors financed by the parallel Swiss Grant using specific procurement procedures and requirementsestablished in the Swiss Grant Agreement. In anticipation of the weak capacity of the PCOs to carry outprocurement independently or to supervise effectively the procurement activities of the Operator, a foreignindividual consultant with adequate procurement experience will be brought to support and train the localPCOs. Additional grant funding has been secured to provide two training sessions in Uzbekistan to thePCU before the Pre-Qualification stage and the Bid Evaluation stage for the selection of the Operator. Thistraining will be conducted by a senior international procurement specialist.

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Procurement methods (Table A)

Component 1 - Investment Fund

As described in Annex 2, the specific works, goods, and services to be financed during each year of projectimplementation through the IF will be determined by the operator working jointly with the BVK and SVK.An annual procurement plan will be prepared for review by the Government and the Bank. This plan willinclude a description of the proposed investments, estimated costs and expenses, implementation plan,procurement schedule, priority analysis, and any environmental, social or financial issues of relevance. Theprocurement plan will be based on the hands-on knowledge gained by the operator during theimplementation of the SC. The activities to be financed by the IF will be designed to allow the operationalimprovement targets that will translate into service improvements to the population and that will serve asbasis to determine the incentive fee to the operator. As the specific works, goods, and services to befinanced by the IF will be determined only during implementation, it is impossible to determine ex-ante thespecific procurement activities. Therefore, aggregate ceiling amounts for each procurement method is notpredetermined under the projects, but types of procurement are specifically to be used are specificallydescribed below.

The Bank Procurement Assessment indicates that the Operator and the PCU will operate in a high-riskenvironment. It is recommended that for the proposed project the following thresholds for each contract beused:

* Procurement of Works. Civil works contracts estimated to cost more than US$200,000 will befinanced under ICB. Civil works contracts estimated to cost less than US$200,000 may be procuredusing National Competitive Bidding procedures (NCB). Minor works contracts for urgent repairworks associated with unexpected operational emergencies estimated to cost each less thanUS$25,000 may be procured using three quotations. Given the state of repair of the water supplydistribution system, it is expected that a limited number of emergencies may occur each year thatcannot be handled with the vodokanal equipment. The provision for Minor Works contracts isdesigned to facilitate the response of the Operator to these emergencies so as to be able to restoreservices to the population.

* Procurement of Goods. Contracts for the supply of goods valued at more than US$100,000 will beprocured under ICB. Intemational Shopping (IS) may be used for goods valued at US$100,000 or lessper contract up. National Shopping (NS) may be used for goods valued at US$50,000 or less percontract. The provision for Shopping is designed to allow the Operator to purchase equipment forrapid response to emergency breakdowns in the system and other activities that require rapid response.The Operator will have annual procurement plans for strategic purchase of much needed equipment ina continuous program.

* Procurement of Consulting Services. Recruitment of consulting firms to assist in constructionsupervision, feasibility evaluations and other consulting services estimated to cost more thanUS$50,000 will be carried out under the Quality and Cost Based Selection method (QCBS) inaccordance with the Bank Guidelines. For engineering designs of less than US$200,000 per contractthe Least Cost Selection (LCS) method will apply. Individual Services for surveys and studies relatedto public awareness, community relations, or similar activities may be procured based onqualifications of consultants (CQ) each of contract value less than US$100,000.

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Component 2 - Service Contract

The selection of the international utility operator will be carried out under ICB with pre-qualification. Theissuance of the RFP is a condition of negotiations and the opening of the financial proposals aftercompletion of the technical evaluation is a condition for Board presentation. Completion of contractnegotiations and initialing of the SC is a condition of loan/credit effectiveness.

Component 3 - Consulting Services and Project Coordination Unit

Individual Consultants for assistance to the PCU staff and for short-term advisory and legal services willbe selected based on qualifications in accordance with the Guidelines of the Bank (Section V-IC).

Component 4 - Swiss-financed component

All goods and services to be financed by the parallel Swiss Grant under Project Component 4 will beprocured in accordance with the specific procurement requirements in the Swiss Grant agreement. Theseinvestments will also be included in the annual procurement plan to be prepared by the operator, BVK andSVK and will be jointly reviewed to ensure technical consistency. The procurement of goods and serviceswill be perfonned separately.

Table A - Procurement Methods

Expenditure Category Procurement Method TotalICB | NCB | Olher N.B.F. Cost

1. Investment fund 37.94 8.94 46.88(33.74) (0.00) (33.74)

2. Service Contract 5.20 0.00 0.00 0.00 5.20(5.20) (0.00) (0.00) (0.00) (5.20)

3. Incremental Operating 0.00 0.00 0.75 0.00 0.75Costs (0.00) (0.00) (0.56) (0.00) (0.56)4. Consulting services 0.00 0.00 0.30 0.00 0.30

. ______ _._______ .(0.00) (0.00) (0.30) (0.00) (0.00)S. Front-end fee 0.00 0.00 0.20 0.00 0.20

(0.00) (0.00) (0.20) (0.00) (0.00)6. Parallel Swiss Grant 0.00 0.00 0.00 9.00 9.00

(0.00) (0.00) (0.00) (0.00) (0.00)Total 44.39 17.94 62.33

(40.00) (0.00) (40.00)

1/ Figures in parenthesis are the amounts to be financed by the Bank Loan/Credit. All costs include contingencies2/ Includes civil works and goods to be procured through national and international shopping, consulting services,services of contracted staff of the PCU, training, technical assistance services, and incremental operating costsrelated to managing the project.3/ Includes works, goods and services to be financed by the Investment Fund under annual procurement plansprepared by the Operator, approved by the Bank and in accordance with the Bank's Procurement Guidelines.4/ The total Service Contract fixed fee (est. $3.65 million) is subject to competitive bidding, while the PerformanceIncentive Compensation is not subject to competitive bidding (est. $1.55 million)5/ The Consulting Services do not include the services to be financed by the parallel Swiss Grant. This grant willfinance the Technical and Financial Audits of the operator's performance, the project and water utility audits, andrelated consulting services.6/ Civil works to be funded by local sources as part of the Investment Fund.

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Prior review thresholds (Table B)All contracts awarded through ICB will be subject to prior review by the Bank. For works, the first twoNCB and the first three minor works packages will be subject to prior review. For goods, the first two ISpackages will be subject to prior review. With respect to services, prior Bank review will be required of allterms of reference, irrespective of the contract value. The SC operator will be selected through aprequalification and bidding process with prior review by the Bank. For each contract with a consultingfirm estimated to cost US$100,000 or more, the technical evaluation report will be submitted to the Bankfor its review prior to the opening of the priced proposals. For contracts with individual consultantscosting US$50,000 or more the qualifications, experience, terms of reference and terms of employmentshall be furnished to the Bank for review prior to contract signature. All other contracts will be subject toex-post review by the Bank.

Table B. Thresholds for Procurement Methods and Prior ReviewCategory ICB NCB is NS Other Methods Contracts

Subject toPrior Review

(US$ millions)1. Civil Works1.1 >$200,000 <$200,000 N/A N/A <$25,000Procurement l

Thresholds

1.2 Prior All contracts First two N/A N/A First three 1.44Review

Z. Goods2.1 Procurement >$ 1 00,000 N/A <$ 100,000 <$50,000 N/A

Thresholds2.2 Prior All contracts N/A First two First two N/A 7.42Review3. 1 contract ofManagement US$3.65m -

Contract base fee andUS$1.55m -incentive fee

3.1 Prior Prequalification N/A N/A N/A N/A 4.00Review and bidding

4. QCBS CQ Individuals LCSConsultantsPrior Review >$100,000 TOR >$50,000 >$ 1 00,000,

otherwise TOR otherwise TOR otherwise TOREx-post Review will be conducted on I in 5 contracts during supervision mission.

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Table Bl: Capacity of the Project Coordination Unit in Procurementand Assistance Requirements in Procurement Monitoring System

A Capacity Assessment of the Borrower was carried out during the appraisal mission in June 2001 and the following actionlan has been prepared taking into account the experience gained in similar projects financed by the Bank. The procurement

srangement under the project is that the PCU will procure an international utility operator under a Service Contract beforeproject effectiveness. During project implementation, the Operator will procure, on behalf of BVK and SVK and with theinvolvement, goods, works and services in accordance with Bank's Procurement Guidelines and support the client in contractignature. No procurement activity of goods, works or services financed by the Investment Fund component will take placeefore the Operator is mobilized.

rhe establishment of the PCU was initiated by the Municipalities of Bukhara, Samarkand and the Ministry of Macroeconomicsmd Statistics in November 2000. The PCU will be assisted by international technical and financial auditors. The PCU has two

ill time Procurement and Contract Coordination Officers (PCO), one in each city. Competitive selection of this position haseen completed. All procurement activities for goods and works financed by the Loan and Credit under the Investment Fundvill be the responsibility of the Operator. The PCU will be responsible for the International Competitive Bidding processICB) for the selection of the Operator using Bank guidelines. In anticipation of the weak capacity of the PCOs to carry out thisrocurement of the Operator, a foreign individual consultant with adequate procurement experience will be brought to support

d train the local PCOs. Additional grant funding has been secured to provide two training sessions in Uzbekistan to the PCUfore the Pre-Qualification stage and the Bid Evaluation stage for the selection of the Operator. This training will be

onducted by a senior international procurement specialist. The overall risk assessment is rated as "high risk" because the PCUas no experience in Bank procurement. Accordingly, the prior review thresholds were conservatively established as indicatedn Table B.

rhe Operator will prepare and submit to the Project Coordination Committee an annual procurement plan (indicating specificRrocurement methods in a format acceptable to the Bank) to procure goods, works and services. The Bank will also closelyreview this annual procurement plan. Once this procurement plan is approved, the Operator will implement it and will sign theontracts on behalf of the client. The Operator will use funds from the Investment Funs (IF) only for those activities listed inhe IF Appendix of the service contract. The Operator's independence and incentives to improve performance will reduce theisks of undue pressure to deviate from the Bank's Procurement Guidelines. Specific provisions to avoid potential conflict onterest situations will be incorporated in the service contract with the Operator. Bank's support and supervision duringmplementation will be key to reduce these risks. In addition, the Bank will review at the beginning of the projectmplementation the capacity of the Operator's management team to conduct procurement in accordance with Bank guidelines.Country Procurement Assessment Report status: Are the bidding documentsfor the procurement actionsfor

thefirstyear ready by negotiations:A Country Procurement Assessment Report has not been Procurement actions related to the Investment Fund will beconducted for Uzbekistan the responsibility of the Operator and will only be initiated

after mobilization.TRAINING INFORMATION AND DEVELOPMENT ON PROCUREMENT

Estimated Date of Date of publication of Indicate if there is Domestic Preference Domestic PreferenceProject Launch General Procurement procurement subject to for Goods: for Works, ifWorkshop: Notice: mandatory SPN in applicable:

Development Business: Yes04/02 October 16, 2000 Yes YesRetroactive Financing: No Project Preparation Facility: No | Advance Procurement: NoExplain briefly the Procurement Monitoring System:Fhe Operator, under the obligations of the Service Contract, will have the responsibility, on behalf and with full involvement ohe BVK and SVK staff and members of the PCU, for all procurement activities and contract signatures, and for installationad management of the procurement monitoring system. The PCU, that report to the Project Coordination Committee, willhave a supervisory role and will be supported by technical and financial auditors that will monitor the Operator's performancen its obligations under the Service Contract. All project documentation which requires prior review will be cleared by a PASad the relevant technical staff. Procurement information will be collected and recorded by the Operator, transmitted to thePCU that will submit to the Bank in the quarterly progress reports. This information would include: (a) revised cost estimates'or individual contracts; and (b) revised timing of procurement actions including advertising, bidding, contract award andcompletion time for individual contracts.Cofinancing: Explain briefly the Procurement arrangements under co-financing:A US$9 million equivalent Grant is being processed by the Government of Switzerland for parallel financing of goods andervices of Swiss origin. Independent bidding process will be used to procure goods and services to be financed by the SwissGrant. The donor's procurement requirements and guidelines will be followed for this component.

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SECTION 4: PROCUREMENT STAFFINGlndicate name of Procurement Staff or Bank's staffpart of Task Team responsiblefor the procurement in the Project:Name: Takao Ikegami (PAS), Sr. Sanitary Engineer, (202) 473-2334; tikegami@worldbank.orgExplain briefly the expected role of the Field Office in Procurement:No procurement service support is currently envisioned from the Resident Mission.

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Table 82: Procurement Plan

EstimatedNumber of Estimated Procurement Invitation Submission Contract Contract

Component Type Contracts Cost USSMM Methods to Bid of Bids Signing Completion

A. Investment Fund

Investment Fundactivities with Bankfinancing and To be procured under different schedules betweencorresponding local CW/Goods June 2002 and June 2006 based on yearlycounterpart funds /Services Multiple Total: 37.77 ICB/NCB/Other procurement plan

Procurement Plan Year Procurement plan for the remaining nine months1 for Bank-financed CW/Goods (06/02-04/03) of Year 1 of SC submitted for review toportion /Services Multiple ICB/NCB/Other the Bank within three months of Operator mobilization

Annual Procurement Annual procurement plan submitted by the OperatorPlan Year 2 for Bank- CW/Goods and B&SVK to the Bank for review by end of Year I offinanced portion (Services Multiple ICB/NCB/Other SC for implementation during Year 2

Annual Procurement Annual procurement plan submitted by the OperatorPlan Year 3 for Bank- CW/Goods and B&SVK to the Bank for review by end of Year 2 offinanced portion /Services Multiple ICB/NCB/Other SC for implementation during Year 3

Annual Procurement Annual procurement plan submitted by the OperatorPlan Year 4 for Bank- CW/Goods and B&SVK to the Bank for review by end of Year 3 offinanced portion /Services Multple ICB/NCB/Other SC for implementation dunng Year 4

B. Service Contract SC 1 contract Total: 5.20 ICB Sep-01 Dec-01 Feb-02 May-06

PQ was issued on Apr-01

IncrementalC. Incremental OperatingOperating Costs Costs Multiple Total: 0.75 OtherD. Consulting To be procured on an as-needed basis for PCUServices Services Multiple Total: 0.30 QCBS, CQ, IC assistance outside the Investment FundNotes:IF: Investment FundCW = Civil Works; SC = Management ContractICB = Intemational Competitive Bidding; IS = Intemational Shopping; NS = National Shopping; NBF = Not Bank FinancedQCBS = Quality and Cost-Based Selection; CQ: Consultant Qualificabons; IC = Individual Consultants

The annual investment plans will also include the proposed procurement and investment activities for the parallelSwiss Grant and will be reviewed jointly for technical consistency. The procurement of the goods and servicesfinanced by the parallel Swiss Grant will be done separately under the donor's procurement guidelines.

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Disbursement

Allocation of loan proceeds (Table C)

Table C: Allocation of Loan and Credit Proceeds

Expenditure IDA Credit IBRD Loan Financing PercentageCategory Amount in Amount in US$

SDR millionmillion

BVKWorks 1,950,000 2,420,000 85%Goods 3,060,000 3,840,000 100% of foreign expenditures and

100% of local expenditures (ex -

factory cost) and 50% of localexpenditures for other items procuredlocally

Management 950,000 1,180,000 100%ServicesConsulting Services 450,000 530,000 100%Incremental 110,000 130,000 75%Operating CostsSVKWorks 2,330,000 2,910,000 85%Goods 3,700,000 4,620,000 100% of foreign expenditures and

100% of local expenditures (ex -factory cost) and 50% of localexpenditures for other items procuredlocally

Management 1,140,000 1,410,000 100%ServicesConsulting Services 515,000 650,000 100%Incremental 120,000 150,000 75%Operating Costs

Fee l l 200,000 l 100%Unallocated 1,575,000 1,960,000

Total 15,900,000 20,000,000

Use of statements of expenditures (SOEs):

Project funds will be initially disbursed under the Bank's established procedures, including SOEs.Disbursements made on the basis of SOEs will be as follows for each expenditure category: (a) goodsunder contracts costing less than US$100,000 each; (b) works under contracts costing less than US$200,000 each; (c) services under contracts less than US$100,000 each for consulting firms, and less thanUS$50,000 each for individual consultants; and (d) recurrent costs, under such terms and conditions as theBank shall specify. Supporting documentation for SOEs will be retained by the Borrower, be madeavailable to the Bank during project supervision, and be audited annually by independent auditors

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acceptable to the Bank. Disbursements for expenditures above these thresholds will be made againstpresentation of full documentation relating to those expenditures.

The Operator, as part of the Services to be provided under the SC, will consolidate project information forall components and prepare quarterly PMRs including financial report, project progress report andprocurement management report, for project monitoring and reporting for submission to the Bank throughthe PCU. The reporting system would support the application of the PMR-based disbursements, to bemade at the mutual agreement of the Government and the Bank.

Special account:To facilitate disbursements against eligible expenditures, four Special Accounts (SAs), including two BVKspecial accounts (one for IBRD loan proceeds and the other for IDA credit proceeds, respectively), and twoSVK special accounts (one for IBRD loan proceeds and the other for IDA credit proceeds, respectively),will be established in commercial banks to be maintained and operated by the PCU under terms andconditions satisfactory to the Bank.

The IBRD/IDA would, upon request, make authorized allocations of US$0.5 million into each of the SAs.For the IDA Credit, initially the allocation for the BVK IDA Special Account and the SVK IDA SpecialAccount would be limited to US$0.25 million until disbursements have reached SDR 2 million, at whichtime the full authorized allocations could be claimed. Applications for the replenishment of the SA wouldbe submitted on a monthly basis, or when about 20 percent of the initial deposit has been used, whichevercomes first. The replenishment applications will be supported by the necessary documentation, inaccordance with Bank guidelines, including the SA bank statements and a reconciliation of the bankstatements to the project's accounting records. The PCU, with the support of the Operator, will beresponsible for the appropriate accounting of project funds provided under the Credit, for reporting on theuse of these funds, and for ensuring that audits of the financial statements are submitted to the Bank.Accounting for Special Account transactions and for all other project-related accounts will be maintained inaccordance with the World Bank Financial Accounting Reporting and Auditing Handbook, January 1995.The SA would be audited annually by independent auditors acceptable to the Bank.

Financial Management:

To maintain project accounts and produce reports in accordance with standards acceptable to the Bank, aninterim FMS was established at the PCU. This system will be integrated into the overall financialmanagement system that will be installed by the Operator in BVK and SVK to ensure consistency andadequate reports using the format agreed for Project Management Reports (PMR). In accordance withOP/BP 10.02, a Bank-accredited financial management specialist reviewed the proposed financialmanagement system in March 2001. Based on this assessment, it was found that the PCU satisfies theBank's minimum financial management requirements. However, the PCU has agreed to take the followingactions to improve its financial management processes.

* Prior to Effectiveness, the selection of the auditor for the Project shall be completed, acceptable to theBank, for the audit of the project financial statements.

* Prior to Effectiveness, the Bank will approve the operational manual.* PCU will be able to prepare the following reports by Effectiveness on the interim system. (i) sources

and uses of funds; (ii) Use of funds by project activity; and (iii) the reconciliation of the SpecialAccount. Once the new system is installed by the Operator and the interim system is integrated into thenew system, the PCU will produce full PMR by June 30, 2003

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* Nine months after the start date of the Operator, to have in place a financial management system forboth BVK and SVK, which would also integrate the interim financial management system that has beenestablished at the PCU.

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Annex 6B: Financial Management Assessment Report - December 2001

UZBEKISTAN: Bukhara & Samarkand Water Supply Project

1. Executive Summary and Conclusion

A review of the Financial Management arrangements for the project was undertaken in March 2001 todetermine whether the financial management arrangements within the PCU are acceptable to the Bank. It isconcluded that the PCU currently satisfies the Bank's minimum financial management requirements.The financial management arrangements at the PCU are considered capable of satisfactorily recording alltransactions and balances, supporting the preparation of regular and reliable financial statements,safeguarding the entities' assets, and are subject to auditing arrangements acceptable to the Bank. Asummary of financial management assessment and conclusions are as follows:

Financial Management Assessment Rating Comments1. Implementing Entity Satisfactory PCU. Is staffed with experienced people.2. Funds Flow Satisfactory Operation of the SA in related projects

have been good. Local project accountswill be opened for counterpart funding,and such funding will be provided as acondition of Effectiveness

3. Staffing Satisfactory Experienced accountant.4. Accounting Policies and Procedures Satisfactory Appropriate financial manual and policies

have been formulated. These will be furtherenhanced by the Utility Operator.

5. External Audit Satisfactory The project will be audited by auditorsacceptable to the Bank. On-going Water andSanitation project has been audited and givena clean opinion.

6. Reporting and Monitoring Satisfactory PCU prepares reliable PMRs (on a test basison the interim system)

7. Information Systems Satisfactory Interim system in place. This system will beintegrated into the main system to beimplemented by the Utility Operator

Overall Financial Management SatisfactoryRating

2. Project Description Summary

The project would consist of four components:

Component 1: Investment Fund. This component would finance essential short-term expenditures (suchas materials, equipment, vehicles) and a least-cost capital investment program (including associatedengineering and construction supervision services) aimed at improving the operations of the water supplysystem and the services to the population by achieving the performance improvement targets in the service

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contract. The Operator, together with BVK and SVK staff, will propose the investments that are requiredto optimally re-structure and rehabilitate key components of the systems (such as sections of the waterdistribution networks and block distribution systems, specific components of the treatment plants, pumpingstations), implement a demand management program, and set up financial management, accounting andcommercial systems.

Component 2: Service Contract. This component would finance the costs related to the service contract.These costs include a base fee and a performance-based fee to be paid to the private Operator based onachievement of targets defined in the contract. The Operator would be given full responsibility formanaging the investment program, operating the water supply system, and developing and implementingthe demand management program and the commercial (billing and collection) and financial managementdepartments.

Component 3: Consulting Services and Project Coordination Unit. This component would support thePCU including salaries, training, and incremental operating costs; and various consulting services oftechnical, legal and financial nature.

Component 4: Swiss-financed component. The Government of Switzerland is processing a US$9.0million grant to provide parallel financing to the World Bank-financed project. The Grant will providesupplemental resources parallel to Project Component I described above for goods and services of Swissorigin. It will also finance independent technical and financial auditors that would monitor the Operator'sperformance and prepare the financial project and water utility audits, as well as complementary consultingservices to support the PCU.

3. Country Financial Management Issues

A CFAA for Uzbekistan is expected to be launched in FY03. From a financial management perspective,the project is considered high risk due to the following reasons:

* Financial risk associated with both BVK and SVK* Weak financial management systems and lack of qualified staff at both BVK and SVK* Public perception of corruption in the country

These risks are considered manageable, based on the experience of other Bank financed projects, whereproper procedures have been established. As a result, and in order to mitigate any negative impact on theproject due to corruption, lack of proper systems and training, special attention was focused on financialmanagement issues during appraisal. An assessment of the PCU was carried out and an action plan for thedevelopment of a good financial management system and building up of the financial management capacityat the PCU was planned and is being carried out. A service contract will be signed by BVK and SVK tohire a consulting firm (Service Operator). A key task of the Operator will be the installation of acomputerized financial, accounting and information systems for BVK and SVK, the development ofadequate accounting procedures, provide training for the staff and the introduction of financial planning inthe utilities. The goal of this activity is to improve the financial management and planning capacity of theutilities and to provide adequate accounting and financial management information about BVK and SVKactivities. The utilities' financial statements including the project accounts maintained by the PCU will beaudited annually according to IAS and the audits will be submitted to the Bank. The audit of the on-goingWater Sanitation and Health Project has been timely and satisfactory, as have been the bankingarrangements for the special account.

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4. Financial Management System Assessment

4.1 Project Management and Coordination

The PCU has been established under the authority of the provinces of Bukhara and Samarkand as thegovernment level responsible for the provision of water supply services. The PCU will report to aCoordination Committee that will have representatives from the local governments and key agencies of thecentral government (MOF, ACS, State Committee on Property and MMS). The Coordination Committee,headed by the MMS, will meet at least quarterly to review the progress of the project and to approve theannual procurement plans prepared by the operator, BVK and SVK. The Coordination Committee will alsoprovide the forum to discuss policy issues of the water sector related to project implementation, particularlyon financial matters. The PCU would be responsible for: overseeing day-to-day project activities and theimplementation of the service contract; coordinating with BVK, SVK, the Operator, the Municipalities ofBukhara and Samarkand, project financial management; monitoring performance indicators duringimplementation of the service contract; and carrying out all coordination and supervisory functions relatedto project implementation.

4.2 Staffing of the Accounting/Finance Function

The PCU is fully staffed and operational and has received training during project preparation, particularlyon the Service Contract documents. The accountant has visited other Bank financed project PIUs, withestablished systems to gain hands-on experience on Bank requirements. Under the proposed administrationand coordination structure the PCU is in no way subordinate to the Operator and no payments to the PCUstaff will be channeled through the Operator

4.3 Accounting and Internal Controls

Operational procedures and guidelines for project financial management will be documented in anOperational Manual, encompassing all levels of project management and administration. A draft has beingprepared by the PCU. The Bank has reviewed the manual and given its comments. The PCU willincorporate these comments, and the Bank will approve the manual prior to Effectiveness. The Manualincludes financial management procedures and staffing, identification of accounting and auditing standardsand procedures used for the project, project reporting and monitoring, procurement procedures, proceduresfor cash management and the format of project management reports. This manual is project specific. Theoperator will prepare separate manuals for both BVK and SVK for their operational procedures, includingall accounting and control functions, and up-date the project manual if required.

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4.4 Computerized Accounting Systems

A project specific interim financial management system has been established at the PCU. This system iscapable of providing accurate and timely information regarding project resources and expenditures,including planning, internal controls, accounting and financial reporting and audit arrangements relating tothe project. Once the Service Contractor is selected and has started work, the SC will introduce newfinancial management systems for both BVK and SVK. The interim system at the PCU will be integratedinto the newly established systems at the vodokanls. If the interim system has to be up-graded to beintegrated into the new system, the Operator will also do this. A Bank FMS will inspect the systems onceinstalled, to ensure that they meet Bank requirements. Till such time, the project accounts will be kept onthe interim system and is based on a Chart of Accounts drawn-up by the appraisal mission with theassistance of the PCU. The Chart of Accounts will accommodate the proposed project to capture sourcesand uses of funds, assets and liabilities in sufficient detail to satisfy PMR-based reporting requirements.Cash basis accounting will be applied. The proposed system will, in addition to producing periodic andcumulative budgeted and actual expenditures, link the financial data to measures of output andprocurement activities of the project. The Project Monitoring Reporting (PMRs) formats were discussedand agreed with the PCU

4.5 Conclusion

It is concluded that the PCU has a financial management system which will meet the Bank's minimumfinancial management requirements because:

* The PCU has implemented an acceptable interim computerized accounting system* The PCU has drafted an operations manual describing the accounting policies and procedures, internal

controls, delegation of responsibilities and authorities, transaction flows, which will be approved by theBank as an Effectiveness condition

* The PCU has an accountant acceptable to the Bank.

5. Project Management Reports

The PCU will maintain accounts of the Project and will ensure appropriate accounting of the fundsprovided. It has been agreed that the PCU will be responsible for designing appropriate Project monitoringreports (PMRs) and preparing PMRs on a quarterly basis. The PMRs include:

* Project Sources and Uses of Funds* Uses of Funds by Project Activity* Project Balance Sheet (where appropriate)* Special Account Statement Plus Local Bank Account Statement

By September 30, 2002, PCU will prepare PMRs incorporating all components, categories andperformance indicators, which are acceptable to the Bank.

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6. Financial Risk Analysis

From a financial management perspective, the proposed Project is considered a high-risk project. Asummary of the consolidated risk assessment for the project is as follows:

Risk Rating Comments

Inherent Risk1. Country Financial Management High As no CFAA has been conducted, theRisk comments are based on experience gained from

on going projects. There is generally lowfinancial management capacity andaccountability in the public sector.

2. Project Financial Management Substantial Timely counterpart funding could be a majorIssues issue.

3. Banking sector High Is considered weak. The sector is receivingtechnical assistance under a Bank financedproject to enhance its capacities andcompetence.

4. Perceived corruption High Corruption is prevalentOVERALL INHERENT RISK High

Control Risk1. Implementing Entity Moderate PCU staff experienced in Bank financed

projects2. Funds Flow High Operations of the SA is not expected to be a

problem. Counterpart funds will be depositedin the Project Account to be opened ascondition of effectiveness.

3. Staffing Moderate Experienced staff4. Accounting Policies and Procedures Moderate A manual has been prepared. Will be enhanced

once the Operator has assumed its managementrole.

5. Intemal Audit N/A6. Extemal Audit Moderate Based on on-going project, not expected to be a

problem.7. Reporting and Monitoring Moderate Formats and systems are in place. To be

further enhanced once the Operator has takenover the running of the utility.

8. Information Systems Moderate Interim system is in place. The Operator willinstall FM systems for both vodokanals.

Overall Control Risk Moderate

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The following financial management risks could adversely affect project implementation:

* Funds Flow: Local contributions could be a problem. In order to mitigate this problem, the Borrowerwill advance a portion of the local contribution to the two local accounts. This is a condition ofEffectiveness.

7. Financial Performance

A financial evaluation of BVK and SVK was carried out to analyze the key challenges the companies arefacing, their financial structure, operational efficiency, and long-term viability, with particular attention totheir ability to assume the proposed loan and to contribute financially to the project-related expenses. Thefinancial evaluation also analyzed the main financial risk factors that could affect the capacity of BVK andSVK to continue operations and implement the project. The summary is contained in Annex 5 of the PADand details are in the project files. The poor financial perfornance are related to several factors, amongthem: (i) Low tariffs and very high tariff differentials, (ii) low collection of water fees and minimal cashcollection; and (iii) low metering, very high water leakage and wastage and high operating costs. It isimportant to note that the financial analysis is speculative in that much of the required data either arenonexistent or in conflict when different sources are compared; the manual accounting systems areinconsistent and prone with errors; and the transition of vodokanals in Uzbekistan to internationalaccounting standards has not been complete, which will be in effect from January 1, 2002. this is expectedto be completed by the Operator. The financial and accounting procedures of the companies will requiremajor improvements through the Operator's directed efforts and the installation of new financialmanagement and accounting systems and procedures. The present financial assessment was based on thelimited information available as prepared by BVK and SVK accounting staff with the support ofinternational consultants.

8. Auditing Arrangements

Audit Arrangaements. The PCU, with the support of the Operator, would be responsible for ensuring thatthe Project financial statement, Special Accounts (SA), and Statement of Expenditures (SOEs) are auditedby an independent auditor, acceptable to the Bank, in accordance with International Auditing Standards(IAS). The PCU will maintain responsibility for the management of project funds and the Special Account.They will monitor and keep track of the use of funds. The audit will cover all funds related to the project,including counterpart funds, for all project components. The annual audit will be carried out in accordancewith the Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank. Theaudited financial statements, the special accounts, and SOEs of the preceding fiscal year will be sent to theBank within six months of the end of the fiscal year. Appointment of the independent auditors will be acondition of effectiveness. In addition, the financial statements of both BVK and SVK will be audited andsent to the Bank along with the project audit.

9. Disbursements

Disbursements. Disbursements from the Loan will be made based on traditional disbursement methods(i.e., from the Special Account with reimbursements made based on Statements of Expenditures (SOEs)and full documentation, and direct payments from the Loan Account). The proceeds of the World Bankloan will be allocated in accordance with Table C of Annex 6.

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Disbursement of the loan proceeds will be administered by the PCU. The loan is expected to be fullydisbursed over five years. Disbursements from the Bank Loan and IDA Credit would be made on thetraditional system (reimbursements with full documentation and against Statements of Expenditure (SOE),and direct payments. Disbursements based on PMRs will be considered after the Operator hasimplemented the main FM system and the Bank is satisfied with the quality of the PMRs.

10. Special Account

To facilitate disbursements against eligible expenditures, four Special Accounts (SAs), including two BVKspecial accounts (one for IBRD loan proceeds and the other for IDA credit proceeds, respectively), and twoSVK special accounts (one for IBRD loan proceeds and the other for IDA credit proceeds, respectively),will be established in commercial banks to be maintained and operated by the PCU under terms andconditions satisfactory to the Bank.

11. Agreed Action Plan for the PCU

It is concluded that the PCU currently satisfies the Bank's minimum financial management requirements.There is however a number of actions that the PCU have agreed to take to improve its financialmanagement process.

Action Deadline

1. Establishment of an interim financial management system Done

2. Design reporting requirements (draft PMR template and drafinancial statements) for review by the Financial Management Specialist. Done3. The PCU will appoint an independent auditing finn, acceptable to the Prior to EffectivenessBank, to perform the annual audits of the its financial statements.4. Approve the project operational manual Prior to Effectiveness

5. PCU to prepare Reports IA, lB and the SA reconciliation 09/30/2002

6. PCU to prepare full PMRs Nine months after theOperator has startedwork. Scheduled forJune 30, 2003

12. Impact of procurement arrangements

The PCU will be assisted by international technical and financial auditors. The PCU will have two full timeProcurement and Contract Coordination Officers. Competitive selection of this position has beencompleted. Although all procurement activities for goods and works financed by the Loan (including theImmediate Investment Program) will be the responsibility of the Operator, the PCU will be responsible forthe Intemational Competitive Bidding process (ICB) for the selection of the Operator using Bankguidelines. The PCU will also be responsible for the selection of the international technical and financialauditors financed by the parallel Swiss Grant using specific procurement procedures and requirementsestablished in the Swiss Grant Agreement. In anticipation of the weak capacity of the PCOs to carry outprocurement independently or to supervise effectively the procurement activities of the Operator, a foreignindividual consultant with adequate procurement experience will be brought to support and train the local

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PCOs. Additional grant funding has been secured to provide two training sessions in Uzbekistan to thePCU before the Pre-Qualification stage and the Bid Evaluation stage for the selection of the Operator. Thistraining will be conducted by a senior intemational procurement specialist.

13. Financial Covenants

The following are the covenants relating to financial matters:

* The Borrower has opened the Project Account on terms and conditions satisfactory to the Bank/IDA inSum and the Bank/IDA has received evidence that: (i) the Borrower has deposited into said Account aninitial amount equivalent to $150,000; (ii) BVK has deposited into said Account an initial amountequivalent to $50,000; and (iii) SVK has deposited into said Account an initial amount equivalent to$42,000;

* The Borrower has adopted the PIP and the Operational Manual, satisfactory to the Bank/IDA;* The Govemment will submit to the Bank, commencing upon Credit effectiveness, a quarterly Project

Progress Report not later that 45 days after the end of each quarter outlining progress made in theimplementation of each project component, as well as the problems encountered and how they are beingaddressed and project monitoring reports (PMRs).

* The Govemment will cause the PCU to have its records, accounts and financial statements auditedeach year, commencing with the accounts for the year ending December 31, 2002.

14. Supervision Plan

The reports of the progress of the project implementation will be monitored in detail during supervisionmissions. PMRs will be reviewed on a regular basis by the project FMS and the results or issues followedup during the supervision missions. Financial audit reports of the project and PCU will be reviewed andissues identified and followed up. The project FMS would monitor the agreed action plan to ensureappropriate actions have been implemented by PCU.

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Annex 7: Project Processing ScheduleUZBEKISTAN: Bukhara and Samarkand Water Supply Project

Project Schedule Planned ActualTime taken to prepare the project (months)First Bank mission (identification) 09/19/1998Appraisal mission departure 02/15/2001 02/26/2001Negotiations 11/30/2001 12/17/2001Planned Date of Effectiveness 05/15/2002

Prepared by:

Bukhara Water and Wastewater Utility (BVK)Samarkand Water and Wastewater Utility (SVK)Governments of Bukhara Oblast and CityGovernments of Samarkand Oblast and CityBukhara/Samarkand Project Coordination Unit (PCU)Ministry of Macroeconomics and Statistics (MMS)

Preparation assistance:

PHRD Grant of US$601,000

Bank staff who worked on the project included:

Name SpecialityEde Jorge Ijjasz-Vasquez Program Team LeaderWalter Stottmann Former Sector LeaderMotoo Konishi Sector LeaderRinat Iskhakov OperationsJanis Bernstein SocialTakao Ikegami ProcurementHiran Herat Financial ManagementChristophe Bosch EconomicsHannah Koilpillai DisbursementZoe Kolovou LegalPiotr Krzyzanowski EnvironmentTamara Noel Program Assistance

Country Team:Kiyoshi Kodera, Former Country DirectorDenis De Tray, Country DirectorDavid Pearce, Resident RepresentativeKazuko Ogawa, Country Officer

Peer Reviewers:Jan Janssens, Water Lead Specialist, SASINWilliam Kingdom, INFWS

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BVK and SVK Team:Bakhodir Khodjaev Deputy Minister of

Macroeconomics andStatistics, PCC

Alexander Mironenkov Department Head, Ministry ofMacroeconomics and

Statistics, PCCRasul M. Osnonov Director, BVKShukhrat E. Rakhmanov Director, SVK

Consultants Advisors to BVK and SVK:Bristol Water Water Distribution NetworkGunnar Demoulin Water TreatmentRene Costa FinanceMartti Lariola InstitutionalJudy Wilson Legal, Service ContractSheila Marnie SocialIrina Shinkarouk FinancialKonrad Wutcher Wastewater

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Annex 8: Documents in the Project File*UZBEKISTAN: Bukhara and Samarkand Water Supply Project

A. Project Implementation Plan

1. Bukhara and Samarkand Water Supply Project, Draft Project Implementation Plan

8. Bank Staff Assessments

1. Project Concept Document* - May 2000

2. Aide-Memoire of Preparation Mission* - March 2000

3. Financial Management Assessment - March 2001, updated December 2001

4. Agency's Procurement Capacity Assessment - October 2001

C. Other

1. Samarkand and Bukhara Proposed Performance-Based Management Contract Report*, Blake, Casselsand Graydon - July 1999

2. Assessment Report and Investment Strategic Concept for Bukhara Wastewater Facilities, FinalReport*, Konrad Falko Wutscher - August 1999

3. Assessment Report and Investment Strategic Concept for Samarkand Wastewater Facilities, FinalReport*, Konrad Falko Wutscher - September 1999

4. Water Supply, Sanitation and Cultural Heritage in Samarkand and Bukhara cities, Social Assessment*,Center for Social Research "Expert-Fikri" - September 1999

5. Preparation of a Program for Improving the Efficiency of Water Production Facilities*, GunnarDemoulin - October 1999

6. Institutional Review of Samarkand and Bukhara Water and Wastewater Utilities*, Martti Lariola -December 12, 1999

7. Financial Assessment Report*, Rene Costa - January 2000

8. Project Preparation Workshop Materials* - March 13- 15, 2000

9. Demand, Consumption and Water System Network Analysis, Final Report*, Volumes 1-3, BristolWater Consultancy Services - July 2000

10. Service Contract and RFP for the Selection of the Operator, September 2001*Including electronic files

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Annex 9: Statement of Loans and Credits

UZBEKISTAN: Bukhara and Samarkand Water Supply Project06-Feb-2002

Difference between expectedand actual

Original Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Revd

P046043 2002 RUR ENT SUPPORT 36.14 0.00 0.00 36.14 0.00 0.00

P050508 2000 URBAN TRANSPORT 29.00 0.00 0.00 28.22 6.39 0.00

P009131 1999 FIN INST BLDG 25.00 0.00 0.00 18.17 6.81 0.00

P009125 1999 HEALTH I 30.00 0.00 0.00 18.47 13.89 0.00

P055159 1998 ENT INST BLDG 28.00 0.00 0.00 23.13 13.72 0.00

P009121 1998 RURAL WS & SAN 75.00 0.00 0.00 42.41 3.41 0.00

P049582 1998 TASHKENT SOLID WASTE 24.00 0.00 0.00 14.77 11.07 0.93

P009122 1995 COTTON SUB-SECTOR IMPROVEMENT 66.00 0.00 0.00 12.67 12.67 12.67

Total: 313.14 0.00 0.00 193.98 67.96 13.60

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UZBEKISTANSTATEMENT OF IFC's

Held and Disbursed PortfolioDEC-2001

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1996 ABN AMRO Uzbek 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.001999 Asaka Bank 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001997 Core Pharm 2.68 0.50 0.00 0.00 2.68 0.50 0.00 0.001999 NBU-SME 15.00 0.00 0.00 0.00 0.58 0.00 0.00 0.002000 SEF Asia Granite 1.65 0.00 0.00 0.00 1.20 0.00 0.00 0.001999 SEF Elma Cheese 0.58 0.00 0.00 0.00 0.58 0.00 0.00 0.001997 SEF Fayz 1.33 0.50 0.00 0.00 1.33 0.50 0.00 0.002001 SEF Hamkorbank 0.00 0.00 2.00 0.00 0.00 0.00 0.00 0.002001 SEF Parvina 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.001995/00 UZBEK LEASING 0.00 0.90 0.00 0.00 0.00 0.90 0.00 0.00

Total Portfolio: 31.24 2.30 3.00 0.00 6.37 2.90 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

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Annex 10: Country at a Glance

UZBEKISTAN: Bukhara and Samarkand Water Supply ProjectEurope &

POVERTY and SOCIAL Central Low-Uzbekistan Asia Income Development dlamond

2000Population. mid-vear (millions) 24.7 475 2.459GNI Per caPita (Atlas method, USS) 620 2,010 420 Life expectancyGNI (Atlas method. US$ billions) 15.3 956 1.030

Average annual growth, 1994-00

Population (%) 1.6 0.1 1.9Labor force (%) 2.7 0.6 2.4 GNI .' Gross

Most recent estimate (latest year available, 1994.00) per - primarycapita enrollmentPovertv (% of population below national poverty line)Urban population (% of total population) 37 67 32Life expectancy at birth (years) 70 69 59Infant mortality (per 1, 000 live births) 19 21 77Child malnutrition (% of children under 5) 19 .. Access to improved water sourceAccess to an imoroved water source (% ofD opulation) 85 90 76Illiteracv (% of population age 15-) 1 3 38Gross primarv enrollment (% ofschool-ape population) 100 100 96 Uzbekistan

Male 100 101 102 Low-income groupFemale 100 99 86

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Economic ratlos'

GDP (at indicative exchange rate, USS billior .. .. 8.7 7.7

Gross domestic Investment/GDP .. 32.2 17.8 11.1 TrdExports of goods and services/GDP .. 28.8 35.7 44.1 radeGross domestic savings/GDP .. 13.2 17.3 16.6Gross national savings/GDP .. .. 15.9 13.5

Current account balance/GDP .. .. -1.9 2.4 Domestic - n tInterest oavments/GDP .. .. 2.0 3.2 savings InvestmentTotal debt/GDP .. .. 54.6 56.7Total debt service/exPorts .. .. 17.7 26.5Present value of debt/GDP .. .. 54.7 56.1Present value of debt/exports .. .. 151.5 125.9

Indebtedness

1980-90 1990-00 1999 2000 2000-04(average annual growth)GDP .. -0.5 4.4 4.0 2.4 UzbekistanGDP Percapita .. -2.4 2.9 2.9 1.0 Low-income groupExports of qoods and services .. -1.2 -8.1 9.2 4.3

STRUCTURE of the ECONOMY

(% of GDP) 1980 1990 1999 2000 GDP Growth (%)Agriculture .. 32.8 33.5 34.9 _Industry .. 33.0 24.6 23.0 2-

Manufacturing .. .. 10.5 9.7Services .. 34.3 41.9 42.1 -2 9s 97 go 59 oo

Private consumption .. 61.4 62.1 63.7 ^ rGeneral government consumption .. 25.4 20.6 19.7 d GDPImports of goods and services .. 47.8 36.3 38.6

1980-90 1990-00 1999 2000 Growth of exports and Imports (%)(average annual growth)Agriculture .. 0.1 5.9 3.2 3 0

Industrv .. -3.2 4.0 1.9 20

Manufacturing .. .. .. ..

Services .. 0.3 3.7 6.0 x0 9

Private consumption .. .. .. .. -2DGeneral government consumption .. ..

Gross domestic Investment .. . .. . -E xports _ lmportsImports of goods and services .. -3.3 -8.0 -5.8

Note: 2000 data are preliminary estimates.

The diamonds show four key indicators In the countrv tin bold) compared with its income-group average. If data are missing, the diamond willbe incomolete.

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Uzbekistan

PRICES and GOVERNMENT FINANCE1980 1990 1999 2000 Inflation (%)

Domestic Prices(% change) 400

Consumer prices .. 3.1 29.1 25.0 300

Implicit GDP deflator .. 4.0 44.0 44.3 200 -

Government finance '°° 0(% of GDP, includes current grants) o ICurrent revenue .. .. 29.3 28.5 95 96 97 98 99 M

Current budget balance 4 7 55 - GDP deflator ^ CPIOverall surplus/deficit .. .. -2.6 -2.1

TRADE1980 1990 1999 2000 Export and Import levels (USS mill.)

(US$ millions)

Total exports (fob) .. .. 2.790 2.935 5.coCotton fiber .. .. 833 897Gold .. .. 810 809 4000

Manufactures .. .. 205 205 3.000

Total imports (cif) .. 2.841 2.696 2.000 16 Food 408 361Fuel and enerov .. .. 67 113 1 000Capital qoods .. .. 1.394 1.044 N S N r "

Export Price index (1995=100) .. .. 79 88Import Price index (1995=1 .. .. 92 93 EExports UI.portsTerms of trade (1995=100) .. .. 86 95

BALANCE of PAYMENTS1980 1990 1999 2000 Current account balance to GOP (%)

(USS miloions)Exports of goods and services .. .. 3.099 32383 4

moorts of ooods and services .. .. 3.144 2.962 2

Resource balance . .. -45 422 _

Net income .. .. -168 -251 94 95 00Net current transfers .. . 49 13 -2

Current account balance .. .. -164 184 4

Financing items (net) .. .. 263 -87 -6Changes In net reserves .. .. -99 -97

Memo:Reserves including gold (USS millions) . 1,242 1.273Indicative exchange rate (localfUSS) .. .. 245.6 416.7

EXTERNAL DEBT and RESOURCE FLOWS1980 1990 1999 2000

(US$ millions) Composition of 2000 debt (USS mill.)Total debt outstandinq and disbursed .. . 4.737 4.344

IBRD . . 203 217IDA 20 0 G:282 A:

217C: 27

Total debt service .. .. 555 904 0,238IBRD .. .. 12 17IDA .. .. 0 0

Composition of net resource flowsOfficial grants .. .. 15 16Official creditors .. .. 380 240 F: 1934 E: 1,546Private creditors .. .. 689 -75Foreiqn direct investment .. .. 121 75Portfolio equitv - ° 0

World Bank programCommitments .. .. 25 29 A- IBRD E -BilateralDisbursements .. .. 28 31 B -IDA D- Other multilateral F -PrivatePrincipal repavments ,, . C -IMF G- Short-termNet flows .. .. 27 26Interest paVments .. .. 11 12Net transfers .. .. 16 14

Development Economics 1117102

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AdditionalAnnex 11

BVK and SVK Benchmarking Core Indicator Values

The World Bank's Benchmarking initiative is aimed at facilitating the sharing of cost and performanceindicators between utilities and between countries. Utility managers and other stakeholders can draw onthis comparative information to help them strengthen the performance of the water supply and sanitationsector. The initiative addresses the key barriers to sharing that previously existed, namely, a lack ofconsensus on which indicators to use, a lack of consistent data definitions, and a lack of routes by which toshare the results. The World Bank maintains the information provided by various utilities athttp://www.worldbank.org/html/fpd/water/topics/bench. A minimal set of indicators have been developedbased on extensive discussion with partners around the world. These are called the core indicators. Aspart of project preparation, an effort has been made to collect as much information as possible to evaluatethese indicators. Despite the significant data limitations and major inconsistencies, this set will serve as thefirst step to benchmark the performance of SVK and BVK through project implementation. The datacollection and monitoring system that will be put in place by the Operator will support the refinement ofthese indicators in the water supply system. The following table presents the estimate at the time ofappraisal of the Core Indicators, with notes about major data limitations. The basic data used forcalculation of the indicators can be found in the Project Files. All information used to calculate thesenumbers should be used cautiously given the severe data limitations.

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Indicator Concept Unit SVK I BVK Source/NotesCOVERAGE - . - _ _:

I Water coverage Population with easy access to water % 76.31% 97.57%services (either with direct serviceconnection or within 200 m of astandpost)/total population under utility'snominal responsibility, expressed inpercentage.

2 Sewerage Population with sewerage services (direc % 27.83% 45.06%coverage service connection)/total population

under utility's notional responsibility,expressed in percentage.

WATER PRODUCTION AND CONSUMPTION3 Water production Total annual water supplied to thFe Ipcd 854.83 662.70

distribution system (including purchasedwater, if any) expressed by populationserved per day; by connection per monthand by household per month.

_ ____________ ______________________________ m3/conn/m 212.2115 117.6518m3/hh/m n.a. n.a. Data on households

is not available.

4 Water Total annual water sold expressed b Ipcd 444.51 401.55consumption population served per day; by connection

per month and by household per month.

m3/conn/m 110.35 71.29=________________________________ _ m 3/hh/m

5 Metered wate Total annual metered water consumed Ipcd n.a. n.a. Data on meteredconsumption expressed by metered population served population is nol

per day; by metered connection pe available.month and by metered household pemonth.

_ ____________ ______________________________ m3/conn/m 2668.91 1316.79m3/hh/m n.a. n.a. Data on metered

households is noavailable.

UNACCOUNTED-FOR WATER6 Unaccounted-for- Difference between water supplied andc% 48% 39%

Water water sold expressed as a percentage ofnet water supplied; as volume of water'lost' per km of water distribution networkper day; and volume of water 'lost' penwater connection per day.

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I Indicator I Concept |Unit SVK BVK Source/NotesMETERING PRACTICES

7 Proportion of Total number of connections with % 2.11% 4.01%connections thal operating meter/total number oare metered connections, expressed in percentage.

8 Proportion o Volume of water sold that is metered/total % 51.12% 74.11%water sold that is volume of water sold, expressed inmetered percentage.

PIPE NETWORK PERFORMANCE9 Pipe Breaks Total number of pipe breaks per year breaks/km/y 2.495 1.151

expressed per km of the wate r.distribution network; and per number owater connections.

breaks/conn 39.96 11.98/yr. I

10 Sewerage Total number of blockages per year blockages/k n.a. n.a. Data on number oBlockages expressed per km of sewers; and pei m/yr. blockages per yea

number of sewerage connections. is not available.

blockages/c n.a. n.a.I_ _ _. onn/yr.

COST AND STAFFING11 Unit operational Total annual operational expenses (O&M US$/m3 0.05 0.05

cost expenses less depreciation)/Total annual soldvolume sold.

Total annual operational expenses (O&M US$/m3 0.026 0.030expenses less depreciation)/Total annual producedvolume produced.

12 Staff/OOO's Water Total number of staff expressed as per # 12.9 7.3 Number oconnections thousand water connections; per employees with the

thousand water and sewerage relevant mainconnections; per 000's water service activity per 1000population and per 000's water and connections insewerage service populations. Bukhara and

Samarkandrespectively is: fowater connections11 and 10, fosewerageconnections - 80and 13.

Staff/OO's W&S 10.2 7.1connectionsStaff/OOO's water 1.6 1.3population served

Staff/000's W&S 1.2 0.9population served

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Indicator Concept Unit SVK BVK Source/Notes13 Labor Costs as a Total annual labor costs (including % 14.82% 14.44%

proportion o benefits) expressed as a percentage oOperational Costs total annual operational costs.

14 Contracted-out Total cost of services contracted-out to n.a. n.a. No informationservice costs as a the private sector expressed as a about costs oproportion o percentage of total annual operational services contracted-operational costs. costs (O&M costs less depreciation). out is available.

QUALITY OF SERVICE . . _

15 Continuaty of Average hours of service per day fo Hrs/day 24 24service water supply.

16 Complaints aboul Total number of W&S complaints pe % of W&S n.a. n.a. No informationW&S services year expressed as a percentage of the conn. about number o

total number of W&S connections. W&S complaints isavailable.

17 Wastewater Proportion of collected sewage that is% n.a. n.a. Althoughtreatment treated by at least primary treatmen wastewater

(including screening). treatment plants areoperational, it isunclear the % thatactually is treatedannually.

BILLINGS AND COLLECTIONS18 Average Tarif Total annual operating revenues (W&S) US$/m3/yr. 0.07 0.09

W&S expressed by annual amount of watesold; by number of connections and byhouseholds served.

US$/conn./y 77.04 74.10rUS$/hh/yr. n.a. n.a. No information

about number ohouseholds isavailable.

19 Total revenue per Total annual operating revenues pe % 1.04% 1.50%population population served/National GDP peserved/GDP pe capita, expressed in percentagecapita

20 Residential fixed Any fixed component of the residential US$/conn./y n.a. n.a. Based on norms ocharge tariff (total amount) and as a proportion o r. water consumption

the average tariff per connection pe (if not metered), thisyear. charge varies by

households anddepends on numbeof persons in it andfeatures of the in-home and yard (iany) plumbingsystem.

= _____________ %_______________________________ _________ n.a. n.a. _______n a _n_a

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Indicator Concept Unit SVK BVK Source/Notes21 Ratio of non- The average charge (per m3) to non- % 520.75% 961.33%

domestic domestic (industrial, etc.) customers(industrial, etc.) to compared against the average chargedomestic (per m3) to domestic (residential)(residential) customers.charges

22 Connection The cost to make residential pipe US$ and % n.a. n.a. Information oncharge connection to the water system and the GDP - water connection charges

sewer system measured in absolute is not available.amount and as a proportion of nationalGDP per capita. I

US$ and % n.a. n.a.GDPsewage

23 Collection period Year-end accounts receivable/Total Months 4.9 2.8annual operating revenues expressed inmonthequivalent of sales.

FINANCIAL PERFORMANCE

24 Working Ratio Total annual operational expenses/Total 0.68 0.56annual operating revenues.

25 Debt Service Total annual debt service expressed as a % n.a. n.a. Data on annual debtRatio percentage of total annual operating service is not

revenues. available.

CAPITAL INVESTMENT26 Investments Total annual investments expressed as a % n.a. n.a. Data on annual

percentage of total annual operating investments is notrevenues; and per (water) capita served. available.

= ____________ ________________________________ U S$/c n.a. n.a.27 Net Fixed Total annual net fixed assets per (water) US$/c 5.29 2.96

Assets/capita capita served.

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i1 8:1 SI VI ml 21 dii isi tl i1 i1 itl tl i|l -i| i|oi1 | T VI I I 1, T-I I~ -I -, NJ -I I. NJ I3 I T T8k I-: Is Id T8 | II1 -1TIII1B 1N' ¢1 'I p0 U) H illi l NU 1BNu| 2'2l ltll'li,B||B

- = 0 * ~~~~~~~~~~~'C 'a.' ,c ~~~~~~~~~~~~1[ [-

......~~~~........... .. . .............. ... . ... .. -.. .I . I ..................... .. ....... ............... . ............. . . . . ... .. .... ... ....... ............... ..................................... ...............

fi~~~~~~ jj' U).'SW' 5 0 I o M I A O

R, - ~~~~~~~~~~ -2 ot 01 91; 0~~~~~~~~~~~~~~~~~~~~~0EL~~~~ Z

1 my1 lS ; | I p- in-__.___~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ --------___ ._._ ................ ...... ........... .. ....... ..... .. ....... ...... _.__.__......_._._._.___._._._._._._ ..... ......... .. ... .. ..... ___.___._ ........ _._._ ....... __.__ ----- -.

._ . __ I E.

___._ ______._._.__ ___._.__._ ......................... _ ___ __._ ........ _ _ ___ _._ .... __ ____ .... _ _. _.................._... .._.................... ._..._

__ _________ _ _ .............. __ _ __ ____ ..................... _. _____...... ...... ........... ....._._........................_..... ..............._... .... ......._.._. ............... . .__.__. .._..... ...... ...... ......... .....

-_________ .__.____.______ _._ .__ _. _ ................................. _.__ ._ ____ _________._ _ __.______.___ _ .___.________. I .

II a,~~~~~~~~~~~~~~~~~~~~~~~~~I _ _ _ _ _ _ _ _ _ _ _ _ _ _~~~~~~~~~~~~~~~~~

- - 01~~~~~~~~~~~~~ ....

U I~~~~~~~~~~~~~~~~~...... . ........ .. . ............. ... ..... ....... . ....... ..... .. ...... .... .....

AdditionalAnnex 13

Summary of Social Assessment

As part of project preparation, a social assessment was carried out by a team of local social scientistsunder the general direction of a senior social scientist from the Bank. The main objectives of the socialassessment were to: (a) identify social issues relevant to the proposed investment; (b) identify keystakeholders as well as their water supply-related needs, interests, and likely effects on the proposedinvestment; (c) evaluate potential impacts of the proposed investment on individuals and social groups,particularly the poor and other vulnerable groups, so that any possible adverse impacts that might resultfrom the investment can be eliminated or at least mitigated, and to ensure that vulnerable groups are notexcluded from receiving project benefits; (d) determine current spending for water and sanitation and users'willingness to contribute in cash or in-kind for water supply improvements; (e) develop a framework forpublic participation in the project; and (f) identify desirable social development outcomes and to establishthe basis for social monitoring and evaluation during project implementation. It is expected that the socialassessment, combined with results from the financial analysis, will provide elements to better define thebest strategy to serve the poor, to increase revenue collection, to increase tariffs within affordable limits,and to evaluate options and policies to provide a safety net for the poorest segments of the population.

The social assessment involved a wide range of stakeholders in the following quantitative and qualitativeactivities: (a) background study of available statistics and documents containing data and information onwater supply, sanitation, and related social and economic conditions in both cities during the last 5 years;(b) household survey administered to 800 households (400 per city) administered in June 1999, (c) 50semi-structured interviews with representative of important stakeholder groups, (d) survey of touristsvisiting Samarkand and Bukhara during the months of November and December 1999; and (e) 8 focusgroup discussions (4 per city) involving: (i) representatives of various government and nongovermmentalorganizations related to the project; (ii) women residing in the old and new parts of each city; (iii) men fromold and new parts of the city; and (iv) ethnic minorities (Roma in Samarkand and the Jews in Bukhara).

Main Findings

Stakeholders. The main stakeholders are: (a) users of the water supply and sanitation services whichinclude residents of the historic and new parts of the two cities and all income and ethnic groups,commercial and industrial entities, institutional users (for example, schools, medical establishments); (b)organizations responsible for water supply and sanitation including (i) the municipalities (city khokimiyats)of Samarkand and Bukhara; (ii) BVK and SVK, the agencies responsible for potable water supply andsewerage in the cities; (iii) AvtoDorMekhBaza, an enterprise responsible for solid waste managementincluding the emptying of cesspits, and (iv) Zheks, the local housing office responsible for apartmentbuilding maintenance and repair; (c) local organizations such as the (i) mahalla committees, and (ii) NGOs(for example, local branches of EcoSan Foundation, Samarkand Craftsmen Association); and intemationalinstitutions. Among residents in the two cities, the majority of the minority population (Russians, Jews,Gypsies, Bukhara Jews, Tajiks) live in the old parts of both cities, where sewerage and water supplysystems are outdated in comparison to those in the modem city districts. In the gypsy mahalla located inSamarkand, there are no water pipelines and residents obtain water from wells in their yards or those oftheir neighbors. Nonetheless, the team of local social scientists indicated that the poor conditions in thesemahallas also exist in other areas.

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While key stakeholders share a common interest in the improvement of water supply and sanitation), thereare some conflicts among them. The main one is between the Khomiyats and the water companies. TheKhokimiyats want to retain control over service prices by prohibiting the water supply companies toincrease the tariff and by arbitrarily establishing the profitability rate for the latter. The water companies,by contrast, want to raise prices to cover costs and increase profits. In addition, there are conflictsbetween water users and the water companies related to the difficulty of the water agency to recover debtsfrom residents.

Consumer Satisfaction with Water Supply Conditions. Practically all households have access to pipedwater, and the majority (64%) are satisfied with their water supply. Among those who are not satisfied, themain reasons for their dissatisfaction differed between cities, and between the old and new parts of eachcity. In the new part of Samarkand, where water quality is considered be relatively good, the main reasonwas the irregularity of the cold water supply (81%) and the second main reason was inadequate waterpressure (64%). In the old part, the main reason was low water pressure. In the new part of Bukhara,respondents were unsatisfied mainly because of insufficient pressure, poor quality, and water supplyirregularity. In the old part of Bukhara, dissatisfaction with the water quality was considerably higher.Another finding is that the number of hours water is supplied during the day varies by season. While wateris supply 24 hours a day to the large majority (90%) in winter and fall, 60% receive it with this regularitysummer. In Samarkand, this problem is particularly acute. One of the reasons for the irregularity of thewater supply can be traced to the behavior of water users who allow water to run continuously from thetaps and use unlimited amounts to water their land plots.

Household Income and Willingness to Pay for Water. According to the survey, the majority (70%) ofhouseholds are paying for water. On average, the water tariffs are low; 129 soums per month. The factthat about 30% of the respondents did not know how much they were paying for water is another indicatorthat the amount is not large. When all households costs for water supply and related uses (water tariff,payment for use of public bath, purchase of water, etc.) are added together, the amount (148 soums permonth) is one percent of average household income. If all expenses related to water and sanitation (whichincludes solid waste collection) are added together, the total does not exceed 1.2% of household income.

About three quarters of the residents in both cities would be willing to pay a water tariff of 20soums/person/month for an improved cold water supply system (defined as good quality water; good waterpressure in water-pipes, and regular 24 hour a day water supply). This amount is equivalent to about 2 to2.5 times more than the current amount of 8 soums/person/month). Not more than about a quarter of thetotal sample would pay 40 soums/person/month or four times the current rate; and only about 8 percentwould pay 60 soums/person/month or 6 times the current rate. The maximum monthly fee that peoplewould be willing to pay for an improved system of water supply is 30 soums/person/month. Nonetheless,15 percent of the households in Samarkand, and 22 percent of the households in Bukhara would not agreeto pay even 20 soums per person. This unwillingness could be traced to their lack of trust that the servicewould actually be improved, and the general feeling that the water will continued to be supplied even if theydo not pay.

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At the time of the survey, the water tariff was established on the basis of the number of household memberswith a fixed tariff applied to each family member. About 40% of the respondents supported the idea ofmaintaining this system, while the same percentage thought that it would be better to base the tariff on theactual quantity of consumed water. Another group supported a cross-subsidy arrangement. Therespondents also indicated a preference to pay their bill on a quarterly basis or once a year. In Samarkand,close to half indicated a preference for paying on a monthly basis. While about half of the respondentswould agree to install a water meter, very few (22%) would agree to pay for 5,000 soums for itsinstallation. Almost half of those willing to install the device would pay 1,500-1,600 soums for itsinstallation.

Affordability. Based on the findings of the household survey, the populations of the two cities are stableand have low incomes. Average household income is 16,390 soums (US$109.27 at official rate and $36 atunofficial rate). In Samarkand, the average household income is 16,031 soums (US$106.87); in Bukhara,the average household monthly income is 16,751 soums (US$111.67). The lowest 20% of the householdsin the two cities have an average monthly income of 5,100 soums (US$34 at official rate and US$11unofficial). On average, the population spends about 60% of their income on food; however, respondentsin Samarkand are spending a higher proportion (about 70%) than those in Bukhara (50%). [Note: at thetime of the survey, the official exchange rate was 150 soums to 1 US dollar; the curb market rate was 460soums to a dollar.] Based on an average household monthly income of 16,390 soums and an averagefamily size of 5 people, raising the tariff to 20 soums/personlmonth would mean that the average householdwould be paying about one percent of their income on their piped water supply. For the poorest segmentof the population with average household incomes of 5,100 soums or $34 (official rate) and $11(unofficial), however, households would have to pay a larger percentage of their income (about 2 percent)for water. It also should be remembered that while this amount is not unaffordable, the poor would bepaying more for piped water proportionately than the higher income groups. This amount also does notcover other water and waste management-related expenses (i.e., public shower or bath, garbage collection)that households will continue to be required to pay.

Sanitation/Sewerage. Although official data indicate that 69% are connected to the central seweragesystem, the survey indicated that only 44% of households in Samarkand are connected, and in Bukhara,59% are connected. Sanitary conditions are particularly unsatisfactory in the old parts of the cities whereonly one quarter of the households are connected to the central sewerage. In these areas, there are placeswhere the sewers run right up to the surface, creating unhealthy environmental conditions conducive tospreading disease. In the new districts, however, the majority of households are connected; 88% inBukhara, and 63% in Samarkand. Among households that are not connected, most discharge liquid wastesinto a cesspit, while about 20% discharge liquid wastes directly into the street or yard. The latter situationis more common in Samarkand (27%), particularly in the old part of the city, than in Bukhara where only4% indicated that this was the case. Notwithstanding these poor sanitary conditions, the experts believethat the majority of the population have resigned themselves to the deteriorating sanitary conditions asreflected in the finding that only about half of the survey respondents expressed a willingness to pay forconnection to the central sewerage. This response is not uncommon where incomes are low and thepopulation is primarily concemed about having enough income to feed their families.

Willingness to Pay for Sewerage. Among the households using cesspits, only about half are ready to payfor the service with the percentage a bit higher in Samarkand (59%) than in Bukhara (46%). On average,people in Samarkand would pay 3,610 soums to connect; in Bukhara, they would pay 2,960 soums.Among respondents living in homes without a connection, however, half indicated that they would bewilling to contribute manual labor instead of money for a house connection. The largest number (61%) of

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households willing to pay for the connection to the central sewerage live in the old part of Samarkandwhere there is a large number of earthen cesspits, and the largest number of households discharging liquidwastes directly into the street.

With regard to the size of payment, households indicated a willingness to pay on average 3,224 soums.Samarkand people are willing to pay more than in Bukhara (3,610 soums versus 2,960 soums). The largestamount could be paid by' the residents of the old part of Samarkand -- 3,882 soums from each household.In Bukhara, however, only about half of the respondents indicated a willingness to pay for connection to thecentral sewerage system. The reason is probably the lack of money, since the degree of satisfaction withthe sewerage system is about the same both in Samarkand and Bukhara. Nonetheless, almost half of therespondents not currently connected to the sewerage system indicated a willingness to contribute their ownmanual labor for connection rather than paying cash.

Institutional Issues. Overall the majority of households expressed dissatisfaction with the vodokanals. Themain reasons accounting for their dissatisfaction are: poor performance, inadequate response to therequests for making repairs, and demanding money for work that should be done free of charge to theresidents. However, there are differences between the reactions of residents from Samarkand and Bukhara.For example, 70% of households in Bukhara mentioned that they are always informed about any changes inwater supply schedule (disconnection, change in the quality of water, etc), while less than half of therespondents in Samarkand had a similar response (40% said SVK provides this information only onoccasion). In both cities, however, there was a significant amount indicating that they never receive thisinformation.

Cultural Heritage. In both Samarkand and Bukhara, there are important cultural monuments andarchitecturally significant mahallas. Appropriate measures will need to be established to ensure protectionof these structures and neighborhoods, and any cultural artifacts encountered in the course of implementingproject improvements.

Implications and Recommendations

Priority improvements to the water supply system should take into account differences between the twocities. In Bukhara, improving water quality is the first priority; in Samarkand, the first priority isimproving the reliability of the water supply. Addressing this problem would benefit women and childrenwho are responsible for providing the household with water. Improving the regularity of the water supplywould allow them to reduce the amount of time currently spent securing water for the family, and use theirtime in more productive activity or on leisure activities.

The social assessment findings indicate that there are some areas within the older parts of the two cities thatdo not have any access to piped water. To maximize the benefits of the investment to all residents,particularly the low income ethnic population living in these areas, the project could include provisions toensure the extension of the water supply network to these neighborhoods. It may be possible to lower thecosts by allowing residents to provide manual labor instead of cash.

Because the majority of respondents indicated that they would not be willing to pay more than 2 to 2.5times more than they are currently paying for an improved water supply system, public informationcampaigns should be carried out early in the implementation process to raise awareness of the need to payfor improving and maintaining the water supply. The campaigns should provide information on the natureand timing of project improvements, what it costs to upgrade and maintain the water supply system, theneed for residents to make regular payments to ensure proper maintenance of the system, and the need to

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conserve water. The public information campaigns should be designed so as to take into account thedifferences between the two cities. In Samarkand, for example, the public information campaign shouldfocus on improvement of the regularity of the water supply and increase of water pressure. In Bukhara,where water quality is the main problem, the main emphasis should be directed to the need to improvewater quality.

If water meters will be installed, the public information campaign should explain how they work and theadvantages of switching to a quantity-based tariff system. In light of public resistance to paying for theinstallation of the water meter, the authorities should consider: (a) including the cost into the new tariffupon completion of the system upgrading, and (b) allowing residents to pay for the installation on credit assuggested by participants in the focus group discussions.

Informational campaign should incorporate the participation of the mahalla committees as well as Uzbektelevision stations. The latter had the highest rating of trust among the public in comparison to other massmedia. About 90% of citizens watch local television daily and 71% trust this source of information.

The public awareness raising programs should stress the link between improved water and sanitation andincreased income from tourism. The social assessment revealed that there is a large portion of thepopulation in both cities believing that developing tourism will benefit the city by generating revenue andimproving quality of life. On this basis, the public information and awareness raising program shouldemphasize that Samarkand and Bukhara are cities of global significance and increasing the numbers oftourists depends in large part on having adequate public services and a clean environment, and that newhotels and restaurants cannot be constructed without adequate water supplies and connection to a properlyfunctioning central sewerage system.

Designing appropriate schemes for household in-kind contributions requires follow-up public participationwork with mahalla committees and residents. The social assessment revealed that there is a relatively highdegree of willingness to participate in improving conditions through voluntary work rather than byproviding financing. During the household survey, for example, half of the households agreed to contributemanual labor. The tradition of the common labor ("khashars") practiced in mahallas could be of greatassistance in this case. The mahalla committees can be instrumental in organizing community meetings todiscuss various schemes for household participation in improving the sanitation system. Another source ofassistance could come from private business.

The social assessment findings suggest that improvements in water and sanitation in the two cities shouldbe accompanied by a program of hygiene education. In carrying out such an educational campaign, it isnecessary to pay special attention to the direct link between health and productivity to water supply andsanitation conditions.

The findings of the social assessment related to consumer satisfaction highlight the importance ofestablishing a public relations department which would be responsible for designing and implementing acomprehensive information/communications strategy to provide timely information and respond toquestions about the water supply and sewerage services and any expected problems and remedies. Thisdepartment also should provide information to consumers on who to call for information and how to lodgecomplaints when necessary.

To promote stakeholder participation throughout implementation, the establishment of projectimplementation committees under the auspices of city Khokimiyats should be considered. The committeeswould include representatives of all stakeholder groups and participate in decision making on all issues

conceming this project. The committee should include representatives of the Khokimiyats of each city, (b)SVK and BVK, (c) Avtodormehbaza, (d) city department on architecture and planning, (e) city healthservice departments, (f) local departments of education, (g) chairmen of mahallya committees, (h) localorganizations involved in architectural and/or cultural preservation, and (i) the media. A mechanismshould be provided to ensure that the views of government representatives do not outweigh those of othermembers on the grounds of their positions.

The project should include periodic social monitoring to ensure that the project is achieving expected socialdevelopment outcomes, and meeting the water supply needs of local consumers. The monitoring alsoshould be carried out to identify any issues affecting key stakeholders that may arise in the course ofproject implementation. The social monitoring data should be disseminated on a regular basis to keystakeholders. Possible mechanisms for data distribution are: (a) monthly reviews; (b) detailed quarterly orsix-months reports presenting social monitoring data; and (c) local television programs and publications inthe local press.

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