Uzbekistan - Water Supply, Sanitation, and Health Project

Document of The World Bank Report No. 15968-UZ STAFF APPRAISAL REPORT REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT April 17, 1997 Infrastructure, Energy and Environment Division Country Department III Europe and Central Asia Region  CURRENCY EQUIVALENTS Currency Unit = Sum I Sum = US$0.017 US$1 = 58.2 Sum (as of March 1997) AVERAGE EXCHANGE RATES Sum per US$1 (end of year) 1994 25.1 1995 35.5 1996 55.0 UZBEKISTAN FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AK-KK - Agrovodokanal Karakalpakstan Mid - Millions of liters a day ASPERA- Aral Sea Project for Environmental and MCS - Ministry of Communal Services Regional Assistance MMR - Maternal Mortality Ratio ARI - Acute Respiratory Infections MoA - Ministry of Agriculture CBO - Community-Based Organizations NGO Non Governrmental Organization CWUA - Community Water User Association NS - National Shopping DD - Diarrheal Diseases O&M - Operatt .nd Maintenance DTP - Diphtheria, Tetanus, Pertussis OECF - Overseas economic Cooperation Fund ECOSAN- Local environmental NGO of Japan EKOS - Electrodialysis water desalination plants PED - Planing and Engineering Design EPOS - Local consulting firm PHRD - Japanese Policy and Human Resource FSU - Former Soviet Union Development grants GDP - Gross Domestic Product PIU - Project Implementation Unit GIS - Geographic Information System PMS - Project Management and Supervision g/il - Grams per liter SA - Special Account GoJ - Government of Japan SES - Sanitary Epidemiological Services GoU - Govemment of Uzbekistan SOE - Statement of Expenses GTZ - Gesellschaft fir Technische STW - Sewage Treatment Works Zusammenarbeit TCMA - Territorial Communal Services IBRD - World Bank Amalgamations ICB - International Competitive Bidding TOR - Terms of Reference IERR - Internal Economic Rate of Return UNDP - United Nations Development Program IMR - Infant Mortality Rate UNEP - United Nations Environment Program IPWG - Interagency Project Working Group UNICEF - United Nations Children's Fund IS - International Shopping USAID - U.S. Agency for International JICA - Japan International Cooperation Development Agency VK-KK - Vodokanal Karakalpakstan KfW - Kreditanstalt fir Wiederaufbau WHO - World Health Organization KC - Kolkhoze Committee WTW - Water Treatment Works lcd - Liters per capita per day LIB - Limited International Bidding Mcm - Millions of cubic meters Vice President: Johannes Linn, ECAVP Director: Yukon Huang, EC3DR Division Chief: Jonathan C. Brown, EC3IV Task Manager: Roger Batstone, EC3IV  REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT TABLE OF CONTENTS I. INTRODUCTION .........................................1 A. Country Context ...............................................1 B. Regional Context .............................................. 2 C. Sectoral Context and Institutional Framework ...............................................5 D. Reform Strategy ..............................................9 E. The Govenment's Objectives and Strategy .............................................. 10 F. Bank's Role and Strategy .............................................. 11 G. The Bank's Experience in the Sector .............................................. 12 I{. Role of Other Donors .............................................. 13 II. PROJECT SETTING ........................................ 15 A. Background .............................................. 15 B. Overview of Social Assessment ............................................... 20 C. Pilot Projects .............................................. 24 D. Other Issues .............................................. 28 III. THE PROJECT ........................................ 31 A. Project Origin and Formulation .............................................. 31 B. Project Objectives and Description .............................................. 32 C. Project Costs. .............................................. 35 D. Project Financing .............................................. 36 e. Financial Analysis .............................................. 36 F. Economic Analysis .............................................. 41 G. Project Benefits .............................................. 45 H. Project Risks .............................................. 45 I. Environmental Impact .............................................. 46 IV. PROJECT IMPLEMENTATION AND SUPERVISION ........................................ 47 A. Overall Organization .............................................. 47 B. Performance of Existing Organizations .............................................. 47 C. Implementation of Components ............................................... 50 D. Procurement .............................................. 53 E. Disbursements .............................................. 56 F. Special Account .............................................. 57 G. Project Monitoring .............................................. 58 H. Accounting, Auditing and Insurance .............................................. 59 V. AGREEMENTS AND RECOMMENDATION ......................................... 60  VI. ANNEXES ...................................................................... 63 A. DETAILED PROJECT DESCRIPTION AND COST ESTIMATES ........................................... 64 B. PROJECT IMPLEMENTATION ...................................................................... 72 C. ESTIMATED DISBURSEMENTS AND PROCUREMENT PLAN ........................................... 84 D. HEALTH DATA ...................................................................... 87 E. ENVIRONMENTAL ANALYSIS ................... ................................................... 89 F. WATER RESOURCES AND WATER QUALITY ...................................................................... 95 G. PROJECTED WATER DEMAND ...................... ................................................ 101 H. SUPERVISION SCHEDULE AND PERFORMANCE MONITORING INDICATORS ........ 107 I. ANALYSIS OF OPERATIONS OF EXISTING WATER PRODUCTION AND DISTRIBUTION AGENCIES ...................... ................................................ 116 J. FINANCL4L ANALYSIS ...................................................................... 131 K. ECONOMIC ANALYSIS: METHODOLOGICAL ASPECTS AND RESULTS ..................... 159 L. DOCUMENTS TO BE SENT TO THE PROJECT FILE ........................................................... 184 This report is based on the findings of an pre-appraisal mission which visited Uzbekistan during September and October 1996. The mission comprised Messrs./Mme. Roger Batstone (Task Manager and Principal Environmental Engineer, EC3IV), Rita Cestti (Economist, TWUWS), Joana Godinho (Public Heaith Specialist, EC3HR), Johanngeorg Renkewitz (Financial Analyst, consultant), Mike Blackbum (Engineer, consultant), and Craig Leisher (Environmental Writer, consuitant). Messrs.lMme. Andrew Macoun (MN2NE), Mike Gaam (TWnvS), and Julie Viloria (ASTHR) were the Peer Reviewers. Messrs. Jonathan Brown, Marc Blanc, and Yukon Huang are respectively the managing Division Chief, Projects Adviser, and Department Director for the operation.  REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Uzbekistan. Implementing Agency: State Committee for Forecasting and Statistics (Goskomprognostat) Beneficiaries: Goskomprognostat, the Ministry of Communal Services, and the municipal governments, the water utilities, the Sanitary Epidemiological Services, and the Centers of Health in the Republic of Karakalpakstan and Khorezm Oblast. Poverty: Program of Targeted Interventions. Amount: US$75.0 mnillion. Terms: Repayment in 20 years, including 5 years of grace, at the Bank's standard interest rate for variable LIBOR-based US Dollar single- currency loans. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Onlending Terms: Not applicable. Financing Plan: See para. 3.16. Rate of Return: 17.9 percent IERR for 100 percent of the total project cost. Staff Appraisal Report: 15968-UZ. Maps: IBRD No. 28255 and 28256. Project ID Number: UZ-PA-9121.   REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT I. INTRODUCTION A. Country Context Geography, Population and Climate 1.1 The Republic of Uzbekistan is situated in the heart of Central Asia and has a land area of 447,000 km2. With a population of 22.2 million, it is the most populous of the five Central Asian republics, and the only one to have common borders with all the others, but none with Russia. Uzbeks account for 71 percent of the population, the other main ethnic groups being Russians (9 percent), Kazaks and Tajiks (4 percent each), Karakalpaks and Tatars (2 percent each), and Turks, Persians and Koreans (1 percent each)'. The country's birth rate is high (3.5 percent), with half the population being under 19 years of age and about 60 percent living in rural areas. Uzbekistan consists of 12 provinces (Oblasts) and the Republic of Karakalpakstan. 1.2 Uzbekistan has a predominantly desert continental climate, with generally low annual rainfall. About 60 percent of the Republic's surface consists of steppe, desert, and semi-arid land, the rest being fertile valleys around major rivers. Only 10 percent of the land is cultivated, of which 95 percent is irrigated by two major river systems, the Amu Darya and the Syr Darya, both of which flow into the Aral Sea. Despite the land's semi-arid characteristics, agriculture is the principal economic activity in Uzbekistan, with cotton accounting for 40 percent of all agricultural production in 1992. The Macroeconomic Setting 1.3 Uzbekistan has been a slow reformer amongst the FSU countries, achieving independence in 1991 but not adopting a program of economic stabilization and reform that could be supported by the World Bank and the IMF until late 1994. After severe deterioration of macroeconomic balances in 1993 and into 1994, the Government initiated a program in 1995-supported by the IMF's Systemic Transformation Facility (SDR100 million) and subsequently by a fifteen month stand-by arrangement of SDR124.7 million and an IBRD Rehabilitation Loan (US$160 million)-to stabilize and liberalize the economy. Under this program, many prices were freed and those which remained subject to control were adjusted; and state orders, except cotton and grain, were eliminated. External trade was somewhat liberalized, with export and import licenses and bans reduced. Privatization of small-scale enterprises, establishments and housing was carried out. Subsidies were reduced, and budgetary transfers to state enterprises were eliminated. 1.4 As a result of tightened monetary and fiscal policies, 1995 and the first half of 1996 witnessed moderately successful stabilization performance; the budget deficit was reduced from i Population figures are based on the 1989 Census.  -2- 18 percent of GDP in 1993 to under 4 percent in 1995; inflation declined from almost 1,300 percent in 1994 to about 115 percent in 1995; and the current account strengthened from an 8 percent of GDP deficit in 1993 to a rough balance in 1995. GDP declined by just over 5 percent cumulatively in 1994 and 1995 as the Government maintained firm control over the production and financing decisions in the economy. This was facilitated by a production and export structure that largely insulated the country from the collapse of FSU trade. Progress on the structural reform agenda, however, was disappointing. Little progress was made on liberalization of cotton trade, land reform, farm restructuring, and medium- and large-scale privatization. 1.5 During the last half of 1996, both stabilization and structural reform programs suffered reversal as poor harvests of grain and cotton (which are the key import and export commodities respectively) generated strong pressures on the exchange rate, foreign exchange reserves, and the fiscal accounts. The Govermment responded by intensifying exchange and trade restrictions and by expanding credit through the budget, leading to higher inflation and a widened fiscal deficit for 1996, and forcing depreciation of the official exchange rate by over 25 percent. As a result, the IMF's 15 month stand-by arrangement expired in March without the third review completed. B. Regional Context 1.6 Since the 1960s, increasing use of the Amu Darya and Syr Darya rivers for agriculture, particularly cotton growing, has resulted in greatly reduced volumes of water entering the Aral Sea and excessive contamination from leached salts and agricultural chemicals. The diversion of water from the Aral Sea was an ecological disaster. In 1960 the Sea was the fourth largest inland lake in the world. Since then it has shrunk to less than half its original size because of the greatly reduced river inflow from the Amu Darya and Syr Darya rivers as a result of heavy withdrawals for irrigation. The desiccation of the Sea has resulted in the loss of its fishing, tourist, and shipping industries, the destruction of the ecosystem of the Sea and deltas, the blowing of salts from the exposed seabed, and a severe depression of the region's economy. 1.7 Aral Sea Program. The Central Asian Republics of Uzbekistan, Turkmenistan, Kazakstan, Kyrgyz Republic, and Tajikistan are involved in the Aral Sea Program, which was designed in cooperation with the United Nations Development Program (UNDP), the United Nations Environmental Program (UNEP), and the Bank to improve environmental, social, and economic conditions in the region. The Bank has taken a leading role in the development and implementation of the Program, including donor coordination, technical assistance to all projects, and capacity building assistance to regional institutions. 1.8 At a meeting of the Heads of Governments ofthe five Aral Sea states in February 1994, it was decided to include the Uzbekistan Water Supply, Sanitation and Health Project in the Aral Sea Program presented to an international donor's conference held in Paris in June 1994. At this conference, it was decided that the World Bank would take the lead in preparing a project focusing on the two regions of Uzbekistan most severely affected by the Aral Sea crisis: the Republic of Karakalpakstan and Khorezrn Oblast.  - 3 - 1.9 Water Supply, Sanitation and Health Projects. The Aral Sea Basin Program includes the proposed Uzbekistan Water, Sanitation and Health project, as well as two other similar projects in Turkmenistan and Kazakstan. The three projects aim at: (a) rapid provision of safe water for drinking and household use; (b) rapid provision of appropriate sanitation facilities; and (c) raising the population's awareness to the role that water and sanitation play in improving health, thereby promoting proper use of facilities and insuring long-term sustainability. These projects involve intersectoral cooperation and community participation strategies, were designed to complement United States Agency for International Development (USAID), the Japanese Overseas Economic Cooperation Fund (OECF) and the Japan International Cooperation Agency (JICA) activities in the area, and are coordinating closely with United Nations Children's Fund (UNICEF). The projects focus on distribution systems, rural water supplies, and utility management, while USAID funds water sources, water quality and treatment plants. During preparation, the projects conducted needs assessments, followed up by focus groups discussions, as well as feasibility studies and pilot projects. 1.10 Population. The Republic of Karakalpakstan accounts for 37 percent of Uzbekistan's land area and has a population of 1.37 million, most of whom live in the Amu Darya delta area. Approximately 50 percent live in very small rural communities associated with state and collective farms. By contrast, Khorezm Oblast occupies only 1.4 percent of Uzbekistan's area, but due to intensive cultivation and irrigation, it supports an almost similar size population of 1.17 million, of wvhom more than 75 percent live in very small rural communities. The ethnic structure of the population in the two regions is also quite different, with Karakalpakstan having almost equal numbers of Uzbeks, Karakalpaks, and Kazaks, while 95 percent of the population in Khorezm Oblast are Uzbeks. The average family size in Karakalpakstan is 7.6, compared to 7.1 in Khorezm Oblast (both are above the national average of 6.9). 1.11 Socio-Economic Conditions. The pro ect area in the Aral Sea Basin has traditionally been one of the poorest parts of Central Asia . The environmental crisis and recession suffered by all these countries since the breakdown of the Soviet Union have only exacerbated that poverty. Karakalpakstan is the poorest region of Uzbekistan, with a significant percentage of the population living below the absolute poverty level. The most striking result of the recent needs assessment survey of 951 households representing 100 rural communities in the region indicates that 93 percent and 78 percent of the family budget is spent on food in Karakalpakstan and Khorezm Oblast, respectively. Average monthly family income in November 1994 from all sources, including garden plots and livestock, was 567 Sum (US$23) for Karakalpakstan and 695 Sum (US$28) for Khorezm Oblast. Another key finding of the needs assessment was that the majority of households (about 65 percent) mentioned lack of food, particularly flour, as their most important problem. About 59 percent considered the lack of money to buy food products to be their second most important problem, and about 25 percent said that their third most important problem was lack of water. Notwithstanding the poor economic conditions, only 4 percent of the households surveyed expressed a desire to leave the area. 2 GDP per capita in Central Asia ranges from US$490 to US$1,680. For Uzbekistan as a whole it is US$850.  -4 - 1.12 Health Status. The health status of Karakalpakstan's and Khorezm Oblast's population is poor, with birth and death rates generally worse than the national average. However, according to the health authorities in Karakalpakstan and Khorezm Oblast (province), in the last five years there has been a significant decline in the infant mortality rate (IMR) and the maternal mortality ratio (MMR), as well as in acute intestinal diseases and hepatitis A. In Karakalpakstan, the declines in IMR and MMR were attributed to a decline in the birth rate (about 30 percent in the past five years), and to a family planning program implemented by the Ministry of Health. 1.13 Infant and Maternal Mortality Rates. The infant mortality in Karakalpakstan in 1995 was 30.8 per 1,000 live births, a decline of 40 percent over the past five years. In Khorezm Oblast, it was 26 per 1,000 births, a 30 percent decline since 1991. The main causes of infant mortality are acute respiratory infections, diarrheal diseases, and perinatal causes. Karakalpakstan has the highest maternal mortality ratio in Uzbekistan at 53 per 10,000 live births in 1995, while Khorezm Oblast's rate was 25.4 per 10,000 births. In the last five years, maternal mortality in Karakalpakstan declined by about 50 percent, and in Khorezm Oblast by 46 percent. Hemorrhaging, abortion, infections, and toxemia are the most frequent causes of death. Birth intervals are usually shorter than two years, and 7 to 12 percent of newborns are low birth-weight (less than 2,500g). Almost all deliveries take place in hospitals or maternity houses, and the cesarean section rate is 16 percent in Karakalpakstan. Maternal mortality and morbidity can be significantly reduced safe motherhood programs. 1.14 Incidence of Communicable Diseases. Acute respiratory infections (ARI), diarrheal and parasitic diseases, tuberculosis, hepatitis A, typhoid and paratyphoid are important problems in the project area. Karakalpakstan's incidence of tuberculosis is twice the national average. ARI (mainly pneumonia) is the most serious health problem affecting 0-14 year-old children, while diarrheal disease is the second most important cause of death among children in the area. However, the incidence of acute intestinal disease has decreased over the last five years by about 40 percent in Karakalpakstan, and about 25 percent in Khorezm Oblast. The incidence of hepatitis A has decreased by 46 percent in Karakalpakstan, and by 12 percent in Khorezm Oblast. 1.15 Significant outbreaks of diphtheria, polio, and measles have occurred since 1992 due to the breakdown of immunization coverage. The United Nations International Children's Fund (UNICEF) has been collaborating with the Uzbek Government to restore optimal levels of immunization in the region. Still, Karakalpakstan has vaccination levels much less than optimal, among other reasons due to the failure of the cold chain and shortage of diphtheria vaccines in the area. In 1994, the immunization coverage for children one year of age was of 52 percent for measles and 43 percent for Diphtheria, Tetanus and Pertussis (DTP). 1.16 Malnutrition, Anemia and Goiter. Malnutrition, anemia, and goiter are all significant problems, with UNICEF reporting that about 10 percent of children suffer from mild or moderate malnutrition. A study conducted in Muynak (in Karakalpakstan) found that 26 percent of children suffer from stunted growth. According to Uzbekistan's Ministry of Health, 90 percent of  - - women in Karakalpakstan and 71 percent of children suffer from anemia3. These problems are related to traditional dietary practices, as well as to poverty aggravated by the breakdown of the Soviet Union. Malnutrition can be divided into general nutrition deficiencies attributable to inadequate breast feeding and food consumption, and micronutrient deficiencies such as of iron (causing anemia) and iodine (causing goiter). Breast feeding rates are rapidly declining. Iron deficiencies are associated with low consumption of iron-rich foods, while recently rising iodine deficiency is attributed to the unavailability of iodinated salt, which used to be subsidized from the Soviet Union's central budget. C. Sectoral Context and Institutional Framework General 1.17 A number of different government agencies and ministries have responsibility for the provision of water and sewerage services in Uzbekistan. At the national level, responsibility for municipal potable water and sewerage services rests with the Ministry of Communal Services (MCS). Two separate departments of this ministry, one for the municipal water and sewerage agencies (Vodokanals) and one for the inter-regional trunk pipeline agencies, are in charge of overall supervision and management, including sector planning and regulatory aspects. Water and sewerage services in Uzbekistan's rural areas fall within the jurisdiction of the Ministry of Agriculture (MoA), which oversees and coordinates the activities of the regional rural water agencies (Agrovodokanals) through its department of Agrovodokanals. The setup is similar in the Republic of Karakalpakstan, where its Ministries of Communal Services and of Agriculture directly oversee the operations of the regional municipal water and sewerage agency (Vodokanal) and the regional rural water agency (Agrovodokanal). 1.18 Before Uzbekistan became independent, the public water supply in urban areas was the responsibility of a central organization under the Ministry of Housing and Public Services, "UzVodokanal", and in rural areas of "Agrovodokanal" under the Ministry of Agriculture. Since independence, the former Ministry of Housing and Public Utilities was reorganized as the Ministry of Communal Services (MCS), and the functions and responsibilities of UzVodokanal were delegated to the regional govermments and their local subordinate agencies. The parent ministry of the Vodokanals became MCS. Since the reorganization, the main objectives and tasks of MCS have been the development and implementation of state policy for urban water and sanitation; the development of concepts, programs and strategies for the expansion of water supply and sanitation systems; the assistance of enterprises and agencies of the MCS during the transition to a market economy and the gradual transformation of these entities into joint-stock and other forms of legal entities. 1.19 In the past, the central authorities in Uzbekistan's capital of Tashkent exercised strong control over all activities associated with the production and distribution of water. Recently, responsibility for overseeing the distribution of water was delegated to the provincial level, with the central government still overseeing all aspects of the treatment and transport of surface water 3 The study conducted in Muynak found that 38 percent of 10 to 14 year-old and 65 percent of 15 to 29 year- old females are anemic.  -6- from large reservoirs, including its delivery to distributing agencies. Branch offices of the Ministry of Communal Services of Uzbekistan are attached to provincial administrations (Khakims), being referred to as the Territorial Communal Services Amalgamations (TCMA), since they also cover gas distribution and urban transport. The deputy governor (Khakim), together with the TCMA, oversees the regional municipal water and sewerage agencies, the Vodokanals. In the Republic of Karakalpakstan, its Ministry of Communal Services directly oversees the Vodokanal. Rural water agencies in Uzbekistan (the Agrovodokanals) are also controlled by the provincial authority through the deputy governor, with assistance from the MoA. 1.20 The inter-regional water supply pipeline systems are managed by separate entities under MCS and in the project area serve both the Republic of Karakalpakstan and Khorezm Oblast. The respective names of these enterprises are "Enterprise for the Repair and Maintenance of the Tuyamuyun-Nukus Inter-regional Water Pipeline" and "Entity for the Repair and Maintenance of the Tuyamuyun-Urgench Inter-regional Water Pipeline." The two entities are responsible for operating the main water supply pipelines and water treatment plants at the Tuyamuyun reservoir and sell the piped water to the Vodokanals and Agrovodokanals, which distribute the water through secondary and tertiary networks to domestic, industrial, and commercial consumers. The Vodokanals also operate and maintain separate water supply and treatment facilities and pumping stations. All capital construction for the main pipelines and for the distribution and treatment facilities is provided from the central government budget, and the operation and maintenance costs of the bulk water agencies are also highly subsidized by the central government. The highly subsidized water supplied by the inter-regional pipeline entities (which is a higher cost source than from local treatment plants) provides a perverse incentive for the Vodokanals to source their water supply from these pipelines, rather than operating their own local facilities, even though they could nomially produce water of an acceptable quality. The Government recognizes this problem and has adopted a policy of gradually reducing the subsidy and increasing consumer tariffs. However, it faces certain constraints because of the difficult economic conditions in this region. 1.21 The following institutions listed below, with accounts separate from the Government ones, would be involved in the project. Khorezm Oblast 1.22 Tuyamuyun-Urgench is the bulk provider of water from the Tuyamuyun system to the water distribution agencies, serving mainly Khorezm Oblast (Khorezm Vodokanal and Agrovodokanal), as well as some small centers located on the left bank of the Amu Darya River in the Republic of Karakalpakstan. Receiving subsidies from the government budget, Tuyamuyun-Urgench is an organization within the Ministry of Communal Services. 1.23 Khorezm Vodokanal is responsible for water distribution in the urban areas of Khorezm Oblast. It receives 70 percent of its water from the regional bulk supplier Tuyamuyun-Urgench, and 30 percent from its own wells. The Khorezm Vodokanal is a government organization within the portfolio of the Ministry of Communal Services. Its operations are grouped into 10 branch  -7- offices serving the rayons (districts), and the head office serving the city of Urgench. All accounting, billing/collection, and financial operations are centralized in the head office, with the exception of the branch in Druzhba which performs all operations by itself and reports to the head office. 1.24 Khorezm Agrovodokanal is in charge of the rural water system in Khorezm Oblast. It receives about 96 percent of its water from the bulk supplier Tuyamuyun-Urgench and 4 percent from its own sources. Khorezm Agrovodokanal is within the portfolio of the Ministry of Agriculture, and its operations are grouped into 11 branch offices (including the head office) responsible for daily operations, including billing, collecting, and accounting. Republic of Karakalpakstan 1.25 Tuyamuyun-Nukus is the bulk producer and supplier of water from the Tuyamuyun system to the water distribution agencies in the Republic of Karakalpakstan (Karakalpakstan Vodokanal and Agrovodokanal). Tuyamuyun-Nukus receives subsidies from the government budget and is an organization within portfolio of the Ministry of Communal Services of Uzbekistan. 1.26 Karakalpakstan Vodokanal is the agency in charge of water distribution in the urban areas of Karakalpakstan. About 55 percent of its water comes from the regional bulk supplier Tuyamuyun-Nukus with 45 percent from its own wells and surface sources. Karakalpakstan Vodokanal is a government organization within the portfolio of Karakalpakstan's Ministry of Communal Services. Operations are organized into 17 branch offices in the rayons, with the head office serving the city of Nukus. All accounting, billing/collection, and financial operations are centralized in the head office. 1.27 Karakalpakstan Agrovodokanal is responsible for water distribution in the rural areas of Karakalpakstan. It receives about 13 percent of its water from the bulk supplier Tuyamuyun- Nukus and 87 percent from its own surface and ground sources, which include some 300 desalination plants. Water is distributed to collective farms, through metered connections, which in turn redistribute the water to the population living on the farm, to government agencies, commercial establishments, and some domestic house connections. Since Karakalpakstan Agrovodokanal covers a part of its operating and maintenance expenses from government subsidies, it is a budget organization within Karakalpakstan's Ministry of Agriculture. Operations are grouped into 11 branch offices serving the 15 rayons, each responsible for its daily operations (including billing). Operational Constraints for Vodokanals and Agrovodokanals 1.28 The were recent discussions on the reorganization of the sector agencies in the project area. The Government is considering one option whereby the sector agencies would be reorganized into two regional agencies in charge of bulk water production and conveyance, water distribution and sewerage, with one in charge of the installations in the Province of Khorezm and the other one in the Republic of Karakalpakstan. Agreement with the Government was reached at negotiations that it will, for the purpose of consolidating responsibilities for water production  -8 - and distribution in the Project area: (a) by January 1, 1998 prepare andfurnish to the Bank, for its review and comments, a plan for restructuring of the water agencies; and (b) implement such plan, taking into account the Bank's comments thereon, in accordance with a time-schedule agreed upon with the Bank. 1.29 Considerable constraints have affected the water agencies' performance in their transition to a market-based economy. The constraints were in the following areas: (a) operational independence; (b) financial performance; (c) operational control and management; and (d) lack of a utility management system. 1.30 Operational Independence. Close supervision by the local authorities, combined with a lack of funds for proper management of a water utility, have created a very difficult management environment, not conducive to initiative or to achieving operational independence. The agencies lack sufficient tariff autonomy, and the approval process requires approval by the governor and the concurrence of the local representation of the Ministry of Communal Services and the Ministry of Finance. Tariffs for domestic water supply are set by the governor, which, in an effort to mitigate the impact of tariff increases on the family budget, has led to a widening difference between the domestic tariff levels and those for other consumers. Although tariffs are raised regularly for category II and III customers (commerce and government agencies, and collective farms and industry) with the objective of generating sufficient revenues to cover operation and maintenance expenses, the resulting income is insufficient for proper management and maintenance. 1.31 Financial Performance. High levels of accounts receivable from the main customer categories (collective farms, industry and government agencies) and the sporadic payment of water bills caused by the harvesting cycle have led to a precarious financial situation that cannot be sustained over a long period. Employee morale is adversely affected by the occasional non- payment of wages for two months or more. Unable to collect due water bills in time, these agencies are forced to carry high accounts payable, in particular to the power company. 1.32 Operational Control and Management. With depleted inventories and insufficient funds, only the most urgent repairs and maintenance are being carried out. While critical plant machinery is still functioning, a large part of the vehicle park and the specialized repair equipment is inoperational. Telecommunications for the transfer of operational information often have to rely on the public telephone system, with all its shortcomings. Radio telecommunications, essential for operating and managing the facilities, are often out of order due to a lack of adequate preventive maintenance. A lack and/or depletion of necessary equipment, tools and spare parts, combined with poor organizational and operating methods, have caused the systems to fall well below normal operating standards. Increasing numbers of leaks, combined with faulty and broken-down bulk meters, prevent effective management of operations. 1.33 Lack of a Utility Management System. The existing cash-based, manually-operated accounting system cannot in its present form be used as a management tool. Basic accounting  - 9- information, which goes beyond routine statements, is extremely difficult to extract, and the results are often dubious. Although routine audits are undertaken by government inspectors, these are concerned with the proper use of government funds and therefore lack the degree of scrutiny required for a commercial undertaking. D. Reform Strategy 1.34 The picture that arises from the assessment of the interactions of the various government agencies and ministries in Uzbekistan's water and sewerage sector is one of institutions coping with the demands caused by the transition process from a very centrally-controlled and managed system to a more transparent one that will give the local authorities a greater share in water resource planning and development, as well as make them fully responsible for operation. To ensure that these functions are undertaken and that the water agencies become more efficient and more responsive to satisfying the needs of customers, proper institutional and organizational conditions will need to be created. This should be achieved through the following program: (a) improving the demand management, investment strategy, and tariff policies; (b) designing an environment conducive to reform; (c) creating an appropriate institutional framework; and (d) establishing internal capability to manage reform. 1.35 Demand Management, Investment Strategy, and Tariff Policy. Considerable investments were made in the past three decades to bring water in sufficient quantities and at a reasonable quality level to the population living in the project area. The underlying investment policy was primarily concerned with the quantitative aspects, i.e., to produce and convey large quantities of water to the population without a proper analysis of the associated costs, assessment of alternatives, and consideration of water demand management aspects. This led to enormous investments both in production capacity and in the conveying system, and to excessively high operating and maintenance costs requiring substantial subsidies for pumping water against a head of up to 310m. Contributing to this development was the lack of a tariff policy based on economic principles, inadequate metering of consumption, and investment decisions being undertaken without the identifying least-cost solutions. Low prices discourage water conservation and increase demand and investments. 1.36 There are already encouraging signs, both at the central government level and at the local level, that indicate a shift away from the previous investment strategy and a move towards one that bases investment decisions on the cost of developing and operating alternative sources of supply. Such policies should in the future not only reduce the cost of constructing and operating water and sewerage facilities, but also lead to better management of water resources. The proposed project will be the first example in the water supply sector in Uzbekistan that has applied, on a large scale, economic principles in selecting, designing and operating water supply systems. 1.37 To ensure that future investment decisions are made by systematically evaluating the economic cost of alternatives and that pricing policies are pursued on the basis of economic efficiency considerations, a tariff study will need to be undertaken. The objectives of such a study would be to: (a) outline the principles of water sector tariff setting policies; and (b) apply  - 10- these principles in defining a tariff structure for the water and sewerage agencies in the project area. Agreement was therefore reached at negotiations that the GoU would, through the Project Implementation Unit (PIU): (a) undertake the tariff study referred to above under terms of reference which shall have been agreed upon with the Bank and which shall provide, inter alia, for the completion of said study by June 30, 1998; (b) furnish to the Bank, for its review and comments, the findings and recommendations of said study, promptly upon the completion thereof; and (c) prepare, by December 31, 1998, on the basis of said study and the Bank's comments thereon, and put into effect, by December 31, 2000, a tarif structure for water and sewerage services in the Project area which shall provide for the determination of said tariffs at such levels as shall enable each water agency (or any successor thereto) to generate revenues sufficient to cover its operation and maintenance expenses, working capital requirements and a reasonable portion of the cost of its investment program. 1.38 Environment Conducive to Reform. The GoU's future role in the water and sewerage sector should concentrate on coordinating, regulating, and overseeing functions, rather than on direct involvement in the management and the operation of the water agencies. The recent delegation to the local level of the function of supervising the operations of these agencies is the first step in this direction. Furthermore, the GoU decision to phase out by the year 2000 all operating subsidies has sent the right signals to the managers of the water utilities to manage and control their operations properly, and also encouraged them to evaluate the costs of alternative sources of supply. This will ultimately lead to a reorganization of the water and sewerage entities, in which responsibility for operations rests with the local entities and where the management environment provides incentives to managers to take charge and be held accountable for the overall management and corporate planning processes of the utilities. 1.39 Establishing Internal Capability to Manage Reform. The transition from centrally- controlled water supply operations to those managed at Oblast (provincial) level should be considered as only the first step, with the ultimate objective of entrusting the management of the water and sewerage activities to competent managers in charge of the operations of the existing water and sewerage entities. The technical assistance program would provide funds to implement: (a) in-house training; and (b) familiarization programs for senior staff. E. The Government's Objectives and Strategy 1.40 In the late 1980s, Government authorities in Uzbekistan launched a program to improve the social and productive infrastructure in rural communities, a major part of this being the provision of safe drinking water. Because of the greater need for these public services and the large adverse effects of the Aral Sea crisis in the Republic of Karakalpakstan and Khorezm Oblast, the Government has allocated approximately 30 percent of its piped water program budget to this region, amounting to approximately US$130 million over five years. Good progress has been made in achieving the Government's goals and Phase I of this three-phase program is almost complete, although in the past two to three years the pace of construction has slowed down considerably. Recent concern over widening inequities between urban and rural areas has led the Government to seek ways of further accelerating the development of rural areas through the provision of social and productive infrastructure. A resolution of the Council of  Ministers to this effect was passed in January 1994, and a special working group chaired by the First Deputy Prime Minister was created to prepare a development program up to the year 2000. 1.41 This group's report, submitted to the Council of Ministers in November 1994, concludes that while Uzbekistan as a whole ranks favorably among comparable middle/lower middle income countries, there are large geographical disparities due to the previous urban bias, and in the rush to meet overall targets, the tendency of planners was to concentrate on areas where it is easier and less costly to provide infrastructure. This situation applied particularly to water supply and sanitation services in the western part of the country, which includes the Republic of Karakalpakstan and Khorezm, Bukhara, and Navoi Oblasts. The UNDP's Uzbekistan Human Development Report independently identifies similar priorities for funding by international donor agencies. 1.42 Health Sector Reforms. In the health sector, the Government's objective is to improve the health status of the population, with a special emphasis upon maternal and child health. At the same time, the health sector is, like the rest of the economy, under unprecedented pressure to change its organization and financing. Key elements of reform include the decentralization of management and financing, privatization of pharmacies, permitting physicians to establish private practices, reducing the number of hospital beds, and shifting day care beds, where appropriate. Recent achievements include reducing inefficient parts of the health sector and the initiation of re-training of general practitioners. However, both the Sanitary-Epidemiology Services, responsible for water quality monitoring and sanitation and hygiene surveillance, and the Centers of Health, responsible for health promotion and education, have not been reformed so far, maintaining the same structure and functions that they had previously F. Bank's Role and Strategy 1.43 The proposed project was specifically included in the current World Bank's Country Assistance Strategy.4 This strategy is designed to: (a) support macroeconomic stabilization along with structural and sectoral reforms; (b) strengthen market incentives, particularly in agriculture and energy; and (c) protect vulnerable groups through establishment of an effective safety net and more efficient service delivery. In addition, the Bank's strategy is to provide support to ensure or expand access to basic social services which are largely poverty alleviation focused. Bank support also would be directed at strengthening the Government's institutional capacity and acting as a catalyst for aid mobilization. 1.44 The Bank's role in the social infrastructure sector is to support Government efforts to improve the health of rural populations in the western regions of the country, which are most severely affected by the consequences of the Aral Sea crisis and which are the most poorly served with regard to water supply, sanitation and hygiene. As a result of these considerations and priorities, the Bank responded with a Pilot Water Supply Engineering Project (approved by the Board in September 1996 and declared effective in February 1997), to be followed by the 4 See Country Assistance Strategy for the Republic of Uzbekistan, March 3, 1995. A new Country Assistance Strategy will be issued in FY98.  -12- full-scale Water Supply, Sanitation and Health Project, as agreed during the June 1994 donor conference in Paris. 1.45 The Bank's role in the health sector in Uzbekistan is to support Government efforts to improve the population's health, during a transition to a market-oriented economy. In November 1994, the Government requested that the World Bank prepare a lending operation to support health sector reform. G. The Bank's Experience in the Sector 1.46 Together with the Pilot Water Supply Engineering Project, this would be the first lending operation in the social infrastructure sector in Uzbekistan. Two other Bank projects are under implementation: the Institution Building Technical Assistance Project (Ln. 3560-UZ); and the Cotton Sub-Sector Improvement Project (Ln. 3894-UZ). The cotton project implementation has been delayed in this case because of delays in setting up the Project Implementation Units, unfamiliarity with the requirements of internationally-financed projects, and the Government's preoccupation with the transition process. Although the Pilot Water Supply Engineering Project was declared effective several months late (in February 1997), the experiences gained under the pilot project are being incorporated into the proposed project on an on-going basis and have helped appreciably in areas such as building local expertise in procurement and project management. 1.47 Lessons highlighted in the Bank's Europe and Central Asia Department 1994 Annual Report on Portfolio Performance in Russia and Central Asia focus onI: (a) the challenge of identifying a consistent counterpart team with sufficient authority to move the project forward; (b) the difficulty of coordinating among key government agencies on critical issues; (c) the importance of setting up PIUs early in the project cycle and the training of their staff in Bank procurement and disbursement procedures and requirements; and (d) the importance of involving local institutes in project design and preparation. Reviews of lessons learned from water supply and sanitation projects world wide show that, despite efforts at capacity-building for the public institutions concerned, few lower income countries achieved acceptable levels of performance for their public water and sewerage utilities, and that the financial performance of these utilities was equally poor. Some of the reasons for these deficiencies include: (a) lack of clear sector policies; (b) lack of management and financial autonomy; (c) inexperience in project implementation; and (d) lack of participation of users and other stakeholders in the decision-making process. 1.48 To the extent possible, these lessons have been incorporated into the preparation and design of the project through: (a) an extensive social needs assessment survey, which was completed with the participation of local institutes; (b) implementation of community-based pilot projects for water supply and distribution and for health, hygiene and sanitation5, which will be carried out during project preparation; (c) an Interagency Working Group has been set-up to provide overall leadership of the project, while Goskomprognostat has been selected as the lead Government agency; (d) a PIU established in the context of the Pilot Water Supply Engineering 5 A PHRD grant has been obtained to fmance two community-based sanitation, health and hygiene pilot projects in Karakalpakstan and Khorezm Oblast, which are being carried out by a Swiss NGO consortium.  - 13 - Project will supervise all project preparation and implementation activities; (e) through the PIU, the Government has executed the Kuwait Fund-financed project preparation feasibility study and is executing the PHRD-fimded pilot demonstration activity; and (f) local institutes and NGOs will be contracted to assist in all these project preparation and design activities. H. Role of Other Donors 1.49 National and international organizations are cooperating with the Government in designing and implementing short- and long-term strategies aiming at improving the environment and health in the Aral Sea zone. However, cooperation and coordination among international agencies (UNDP, UNICEF, WHO, and the Bank), bilateral agencies (USAID, JICA, OECF, KfW, GTZ) and NGOs (EPOS, ECOSAN) need to be improved. 1.50 UNICEF is implementing the Aral Sea Project for Environmental and Regional Assistance (ASPERA), aiming at improving maternal and child health, nutrition and hygiene education, primary education, water and sanitation, and special projects that include, for instance, enhancing the capacity of the Uzbek NGO ECOSAN. ASPERA is a three million dollars initiative developed between 1995 and 1999, and that among other things, provides a package of cost-effective health interventions, such as immunization, and treatment of the sick child (ARI and diarrheal diseases, DD) in Uzbekistan, Turkmenistan and Kazakstan. In 1995, ASPERA provided: (a) basic medical supplies and equipment, school supplies, portable water testing laboratories, vaccine cold-chain equipment; and (b) technical assistance for workshops on DD and ARI in children, Baby Friendly Hospital Practices, appropriate distribution and correct use of medical supplies and equipment down to the feldscher level, use of portable water testing laboratories and development of strategies for their effective use to improve drinking water quality, as well as translations on the use and treatmnent protocols for essential drugs supplied. 1.51 WHO is assisting the Government of Uzbekistan in developing the National Environmental and Health Action Plan. WHO is also seeking funds to open an office in Nukus for water quality assessment, training of local authorities, and immediate and long-term research activities on environmental factors. 1.52 Bilateral agencies are also active in the area. USAID has been developing activities closely related with this proposed project, namely: (a) providing equipment for water quality monitoring to Sanitary Epidemiological Services (SES) laboratories in Nukus and Urgench; (b) training in health education, data handling, and geographical information systems; (c) rehabilitating the Tuyamuyun reservoir and treatment plant; and (d) conducting demographic and health studies by Center for Disease Control. The proposed project would involve health professionals trained by the USAID program in project implementation. 1.53 GTZ and KfW, in cooperation with the Uzbek NGO EPOS, are also involved in training health professionals, procurement of equipment and contraceptives, installation of operational regional warehouses, intensifying and improving information, education and communications and media activity concerning family planning and sexually transmitted diseases, monitoring, and conducting knowledge, attitudes, and practices research. Until 1998, KfW will be  -14- distributing contraceptives, pharmaceuticals, biotechnological equipment and spare parts to public health facilities. Some countries are also financing small desalinization units, but their effectiveness and sustainability have been questioned: they were not found to be cost-effective and are prone to bacteriological contamination.  -15- REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT II. PROJECT SETTING A. Background 2.1 Water Sources. The principal source of water for the project area has historically been the Amu Darya River and its associated irrigation canals, augmented by groundwater in areas far from the river. As the quality and quantity of the river water deteriorated in the 1960s, alternative sources and offiake arrangements were developed to try to ensure both availability and reasonable water quality, and these were inevitably more distant from the towns than the existing water supply systems. 2.2 These concerns resulted in the development of the main source for both Karakalpakstan and Khorezm Oblast on the Amu Darya river upstream of the Tuyamuyun barrage, some 220 km upstream of Nukus, and 80 km upstream of Urgench. Major treatment and transmission facilities have been developed to supply treated water from this point to the individual supply systems. Recent improvements in raw water quality resulting from the reduction in use of pesticides and fertilizers upstream have meant that the river downstream of the Tuyamuyun barrage is once again a viable water source, and new treatment works have been constructed since the late 1980s extracting water downstream of the barrage. 2.3 The Tuyamuyun main reservoir has a gross retained volume of 2,340 million cubic meters (Mcm), and is used largely for irrigation purposes and for hydropower. The barrage controls the irrigation systems supplying not only the Republic of Karakalpakstan and Khorezm Oblast, but also the Vilayet of Dashowuz in Turkmenistan. There are also three other reservoirs with a gross storage volume of 5,460 Mcm linked to Tuyamuyun which form part of the same system. These are at present primarily used for irrigation, although there are plans to use one of the reservoirs, Kaparas, for potable use only. For comparison, the maximum possible annual raw water requirement for potable use from Tuyamuyun is 580 Mcml, compared with the mean annual river flow immediately upstream of Tuyamuyun of 32,600 Mcm. Being on opposite sides of the Amu Darya river, both the Republic of Karakalpakstan and Khorezm Oblast have separate water supply intakes and treatment works at Tuyamuyun, with present capacities of 175 million liters per day (Mld) each. 2.4 Groundwater sources provide approximately 25 percent of the piped water supply in Karakalpakstan, and 3 percent of that for Khorezm Oblaste. The water is mainly obtained from shallow aquifers adjacent to, and hydraulically linked to, either the river or irrigation canals. Water quality is therefore highly dependent on the quality of the surface water, and there are Assuming current design capacity of both Tuyamuyun-Nukus and Tuyamuyun-Urgench systems is doubled. 2 Source: Tables 10.1.1 and 10.1.8 of the Binnie and Partners Final Report.  - 16 - restrictions on extraction at certain times of year as a result. Deeper aquifers are also used in more remote areas, but the salinity is noticeable, and desalination is uses for potable water. 2.5 Water Quality. Much of the irrigation water extracted from the river upstream is returned as drainage water, containing pesticide and fertilizer residues and other contaminants. The excessively high usage of pesticides in the period prior to 1989 had a significant adverse effect on water quality, which could not be addressed by conventional water treatment. Following the marked reduction in use of fertilizers and pesticides after 1989, raw water quality has improved considerably, although salinity is higher than WHO recommended limits during March and April. This cannot be reduced by conventional water treatment plants, but has no impact on health as confirmed by recent studies. Other parameters are acceptable or within the levels that can be treated by normal water treatment processes. 2.6 Water from the shallow aquifers can be of good quality, and as a result of the natural filtration provided by the aquifer, requires no treatment apart from disinfecting. However, because the aquifers are linked to surface waters, when surface water quality is poor, groundwater extraction is restricted to avoid deterioration in quality. This limits the usefulness of groundwater as a base supply. Because surface water quality is best in the months of July and August, ground water is particularly suitable as a means of meeting peak summer demands. 2.7 The salinity of the water from the deeper aquifers west of the Amu Darya varies between 23 and 132 grams per liter (g/l), and this is seldom used as a water source. To the east of the river, the salinity range is 1 to 30 g/l, with the majority being below 4 g/l, and this is used to supply a population of 57,000 in collective and state farms after desalination. 2.8 The Tuyamuyun-Nukus System. The Tuyamuyun-Nukus system supplies treated water from the Tuyamuyun reservoir to urban and rural areas on the east bank of the Amu Darya as far north as Takhtakupyr. The treatment plant is located on the north bank of the Amu Darya, and treats up to 175 Mld. The process used is pre-sedimentation, followed by coagulation and flocculation, rapid gravity filtration, and disinfection. Provision has been made for dosing alum to aid coagulation, but chronic shortages of chemicals result in ineffective settlement and carry over of suspended solids to the filters, thereby reducing the performance of the filters, and leading to turbid filtered water. This then requires excessive doses of chlorine to guarantee disinfection. Chlorine is also often in short supply, with the result that the final treated water is often inadequately disinfected. 2.9 The 220 km treated water pumping main to Nukus is 1,400 mm in diamneter and made from bitumen coated, unlined steel pipes. The pipeline has been operational since 1989, and it is reported that no bursts have occurred. There are no intermediate pumping stations, and the single pumping station at the treatment works operates at 32 bar pressure to deliver the design flow to Nukus, resulting in very large energy costs. Any increase in capacity will require booster pumping, and construction of two stations commenced several years ago but is halted for lack of funds. 2.10 The pumping main discharges into ground level balancing reservoirs at Nukus South and North distribution centers. The water is blended with water from the Nukus treatment works at the southern distribution center.  -17 - 2.11 The Nukus water treatment plant takes water from the Kizketken Canal close to the control structure on the Amu Darya river. The treatment process is similar to that of the Tuyamuyun plants, and it suffers from the same problems. In addition, recently it has been impossible to obtain correctly graded filter sand, with the result that the sand is often washed out of the filters, rendering the filtration process useless and thus reducing the effectiveness of the chlorinating process. The plant has a capacity of 65 Mld, and supplies water to the Nukus distribution system, after blending with water from the Tuyamuyun system. 2.12 The northern distribution center supplies Tuyamuyun water to the Nukus distribution system, and also to urban and rural areas north of Karakalpakstan through a transmission main system comprising 113 km of steel pipelines between 1,000 mm and 530 mm in diameter. The demands of central Karakalpakstan take priority over the northern towns, with the pumping being controlled by the southern distribution center. The transmission system delivers water to a number of distribution centers, which consist of a receiving reservoir, a pumping station to pump into the individual town or settlement distribution systems, and chlorinating facilities. 2.13 UzTransGaz Systems. There are two water treatment plants at Takhiatasch and Kungrad on the west bank of the Amu Darya owned and operated by UzTransGaz. These plants provide water for cooling and sealing the booster pumps on the gas pipeline to Kazakstan, and also supply water to Vodokanal and Agrovodokanal for domestic use. The plants are linked by a transmission main, but are not connected to the east bank system. The treatment facilities, whilst similar to those elsewhere, are better constructed, operated and maintained, possibly as a result of the easier access to chemicals and spare parts that the finances of UzTransGaz permits. 2.14 The treatment plant at Takhiatasch was constructed in 1989 and has a current capacity of 60 Mld. An extension is under construction which will increase the capacity to 240 Mvld. This work is 90 percent complete, and is expected to be commissioned shortly. The current output of the treatment works is sold to Vodokanal Karakalpakstan for use in Khodjeili and Takhiatasch. The future increase in output will be used by UzTransGaz or part will be available to the Vodokanals, depending on the outcome of on-going negotiations. 2.15 The Kungrad plant has a capacity of 70 Mld and uses the Amu Darya as a source. An unusual feature of the plant is that the intake pumping station, located 3 km from the river on an irrigation canal, pumps into a 20 km long approach channel to the works, which operates as a settlement basin. The treatment process then includes filtration and disinfection only. The filter beds operate as upflow units, rather than conventional downflow units, but nonetheless, the performance appears satisfactory, unlike at other plants with rapid sand filters. Approximately 30 percent of the output is sold to Vodokanal Karakalpakstan and Agrovodokanal Karakalpakstan, at a rate of 10.55 Sum/m3 (mid 1996), the balance being used by UzTransGaz for the gas pipeline. 2.16 The Tuyamuyun-Urgench System. The intake for this system is located on the south bank of the Tuyamuyun reservoir, and pumps to the treatment plant some 10 km away. The plant is of a similar design to that serving Nukus, with the same capacity (175 Mld of treated water), although records suggest that the Urgench plant is operated at a consistently higher output than the Nukus plant. Treated water is pumped from the treatment plant to the distribution center in Urgench through a 1,200 mm diameter steel main 80 km long. There is a major offtake  - 18- approximately midway to Urgench, which supplies water to the rayons of Bagat, Yangiaryk and Khiva. 2.17 The water source for the Urgench treatment plant is the Shavat Canal, the main irrigation canal for Khorezm Oblast. It has a current capacity of 50 Mld, but due to a number of process problems (inadequate settlement in sedimentation basins, lack of proper filter sand) the quality of the treated water is unsatisfactory. An extension has been partially constructed, but work has been at a standstill for the past five years due to lack of finance. 2.18 After blending the Tuyamuyun water with the local supply at Urgench, the water is pumped to the Urgench distribution system and also through trunk mains south west to Khiva, and north west to Yangibazar, Gurlen and Mangit. 2.19 Other Surface Water Sources. There are a number of other smaller treatment plants that use the irrigation canals as sources, but in general these are small works, with only basic treatment (settlement, with no chemical dosing, filtration or chlorination). These supply only local communities and are being abandoned once supplies are available from the Tuyamuyun systems. 2.20 Groundwater Sources. The shallow groundwater systems require only chlorination before being used for potable use. However, owing to the restrictions on extraction to maintain quality, and political pressure to utilize the costly Tuyamuyun system, surface water sources are usually used in preference to groundwater. At present the estimates of available groundwater resources vary significantly, and further studies are required to accurately assess the resource and draw up operating rules to optimize its use. 2.21 Deeper aquifers, containing brackish water (salinity up to 30 g/l) are used in areas where other sources are not available. The water is treated using Russian-made EKOS electrodialysis package plants, operated by a collective or state farm, and supplied to consumers for a few hours per day. A total of 319 units were installed, commencing in 1989. Although most units are still operational, spare parts are scarce, and thus the efficiency and output of the units is reduced. 2.22 Distribution Systems. The transmission main systems described above deliver bulk water to distribution centers, operated either by Vodokanal, where the center supplies an urban area, or Agrovodokanal where the center supplies a state or collective farm. The primary function of the distribution center is to pump the treated water into distribution, and to rechlorinate the water. The former function is carried out reasonably successfully given the difficulty in obtaining spare parts, but chlorination is rarely carried out, either because of a shortage of chlorine or because of equipment failure or both. 2.23 There are 935 km of urban and 2,530 km of rural distribution pipework in Karakalpakstan, and 807 km and 2,150 km in Khorezm Oblast. These figures include secondary transmission mains (downstream of the distribution centers) but exclude house connection pipework. The condition of the urban networks is poor, with many of the systems being unable to withstand even 4 bar pressure (up to 50 bursts per day are reported in Nukus if the pressure reaches this level), which restricts the amount of water that can be pumped into the systems, and  -19- therefore affects levels of service. Pressures are in general insufficient to provide water above the ground floor level in blocks of flats. 2.24 The rural networks appear to be in generally better condition, which may be due to less aggressive groundwater. The cast iron pipe, which comprises the majority of the rural systems, is expected to have a life of 48 years, and the locally-produced steel pipe, primarily used in the tertiary distribution system, is expected to have a useful life of only 8 years, requiring periodic replacement. The operators have expressed dissatisfaction with asbestos cement and plastic pipework, but failures of these pipes are probably due to inappropriate pipe laying practice rather than material deficiencies. 2.25 Storage capacity within the systems is extremely limited. In urban systems there is usually no storage apart from the balancing reservoirs provided at the distribution centers, and all water is pumped into the systems. The rural systems often have small elevated storage tanks in the system, but this usually serves to limit pumping pressures only, and provides no useful storage to balance diurnal demand variations or cover interruptions in supply. 2.26 Service Levels. Urban and rural service levels of piped water supply are given in Tables 2.1 and 2.2. The service levels include those who have access to the piped water systems, either through full house connections, yard taps, or access to standpipes. 2.27 Neither urban nor rural Table 2.1: Urban Water Supply Coverage domestic consumers are metered, Karakalpakstan Khorezm water charges being levied on the Population 632,000 363,000 basis of house/plot sizes, number of Population served 483,700 312,000 animals owned, and the type of Percentage served 76.5% 85.9% connection. The charge is derived Number of connections 63,600 53,200 from a consumption "norm" for the level of water using appliances and a Table 2.2: Rural Water Supply Coverage fixed rate per cubic meter. Industrial K and commercial consumers are Populatio 722,000 900, metered and charged at much higher Population s29,000 457,000 ratethandometic onsuers.Population served 298,000 457,000 Percentage served 41.3% 50.8% 2.28 Deficiencies in the levels of service are widespread and include: (a) low pressures in urban areas, which means that occupants of blocks of flats above the ground floor often have no access to water within the flat, and outlying areas receive limited supplies, particularly in summer; (b) the low pressures, combined with frequent bursts, give a significant risk of contamination of the piped supplies by groundwater. The low levels of chlorination are insufficient to safeguard water quality; and (c) intermittent supplies are common in urban areas.  -20 - 2.29 Unaccounted-for Water. Indirect methods have been used to estimate the level of losses in the urban distribution systems as 30 percent3, which, whilst high, is not excessive for this type of location. However, because the systems are operated intermittently at very low pressures, leakage levels at more normal pressures would be excessive, and a significant amount of system rehabilitation would be required before pumping pressures could be increased to a level which would provide a normal minimum of 1.5 bar in the distribution system. 2.30 As a result of the intermittent system operation, consumers often leave taps on in order to maximize the amount of water they receive. Leakage from pipework within houses and blocks of flats is also thought to be high, but there is no firm data available to support this. Moreover, due to inadequate insulation of cold-water pipes, taps are kept open during the winter time to prevent pipes from freezing. Because billing is based on a flat rate according to the category of user, there is no incentive for consumers to reduce wastage or leakage within their properties. 2.31 Metering has been considered and is favored by the operating authorities in Karakalpakstan and Khorezm Oblast. However, at the present time the cost of installing meters and setting up organizations to read and maintain the meters, together with the difficulties in setting up and operating billing and collection systems, require further study to either confirm the economics of metering or to design another system of demand management. This has been included as a component of the proposed project. Metering is not practical if water supplies are intermittent. As tariffs are increased to more realistic levels, metering will become more viable, and possibly welcomed by consumers, since it will give them control over their expenditure. B. Overview of Social Assessment 2.32 This project is the first in the water and sanitation sector in Uzbekistan to use social assessments and community participation activities during preparation to identify priorities from the perspective of the main beneficiaries and stakeholders and thereby influence the design of the project and its implementation. Five social assessments were carried out during the course of project preparation starting with: (a) a social needs assessment of households in rural areas of Karakalpakstan and Khorezm Oblast in communities with populations of less than 20,000 people, which was followed by; (b) an urban area social assessment focusing on the two main urban centers of Nukus and Urgench; (c) a water vendor and willingness-to pay survey; (d) a salinity taste tolerance assessment and survey of household water sources and water quality; and (e) a hand pump user survey and water quality assessment. In addition, two community participation activities were initiated. The first was to prepare community-managed water supply pilot projects, which are being funded by KfW and the World Bank-financed Pilot Water Supply Engineering Project. The second was the Community Based Sanitation, Health and Hygiene Pilot Project, funded under two PHRD grants and being implemented by the Swiss NGO consortium Helvetas/Swiss Red Cross/SKAT. 2.33 The main findings of the social assessments that have important implications for project design and implementation are as follows: * The surveys indicate that the first priority of households in rural as well as in urban areas is food or money to purchase food. After satisfying this need the next highest priority is 3 JICA Final Report, October 1996.  -21 - improved water supply. A key finding of the rural social needs assessment is that rural households in Karakalpakstan spend on average about 90 percent of their monthly household income on food, while in Khorezm Oblast with a slightly higher income level of living the corresponding amount is about 80 percent; * The four main sources of household water for communities in the project area are: (a) treated piped water to stand pipes, yard or household connections; (b) hand pumps; (c) hand dug wells; and (d) untreated open water sources such as rivers, irrigation canals and lakes. Table 2.3 summarizes the results of surveys of household water sources for major urban, rural and peri-urban areas in Karakalpakstan and Khorezm Oblast. There are very marked differences among urban areas, rural villages, and peri-urban areas served by vendors. Many consumers use more than one source of water so total percentages can exceed 100. Urban areas in both regions have a high level of access to piped water even if they are in rural settings, whereas rural villages rely very heavily on hand pumps and hand dug wells. In Karakalpakstan there is also a greater dependence on untreated sources in rural villages mainly provided by water vendors. This suggests that the highest priorities for improved water supply under the proposed project are: (a) areas served by water vendors; and (b) rural villages extracting untreated water from open sources. These are mainly located in Karakalpakstan, but consumers there are the least able to affordpiped water. Table 2.3: Water Supply Sources (in percent) Karakalpakstan Khorezm Oblast Pipeline Hand Hand- Open Pipeline Hand Hand- Open pump dug well sources pump dug well sources Urbana 98.7 0 1.2 0 97.4 5.9 0 0 Urban b 94.5 0 1.0 1.9 99.4 2.7 1.0 0 Rural Towns C 84.8 3.6 7.1 23.5 88.2 19.6 7.9 4.0 Rural Townsd 78.6 7.1 3.6 17.8 100 32.7 12.2 2.0 Rural Villagese 19.7 36.4 32.1 35.9 43.9 37.0 27.7 3.6 Rural Villagesf 10.1 56.3 22.7 13.4 22.0 54.5 25.8 0 Peri-urban (vendors) g 5.0 0 0 95.0g n.a. n.a. n.a. n.a. Note: Percentages may add up to more than 100 because residents usually use more than one water source. a. From the Salinity Taste Tolerance Assessment (1995), which included large urban areas as well as rural towns and villages in its scope. b. From the Urban Areas Social Assessment (1995), which included only Nukus and Urgench. c. From the Needs Assessment, (1994); rural towns with populations less than 20,000. d. From the Salinity Taste Tolerance Assessment, (1995). e. From the Needs Assessment, (1994). f. From the Salinity Taste Tolerance Assessment, (1995). g. Source of vendor delivered water. h. Includes people who do not know where the delivered water comes from. * The survey results also show a large variation in the level of service for piped water supplies between major urban areas and rural towns and villages. On average piped water is available in rural towns and villages in Karakalpakstan for approximately 3 hours a day, and for approximately 4.8 hours a day in Khorezm Oblast. In major urban areas approximately 70 percent of households have running piped water 24 hours a day in summer, increasing to 85 percent in winter. However, the main problem is in apartment buildings on floors higher than the second floor, where less than 40 percent have access  - 22 - to a 24 hr per day piped water supply in the summer months. The situation is worse in Urgench than in Nukus. In focus group meetings, domestic piped water consumers in peri-urban and rural areas were demanding a higher level of service, but indicated little confidence that the water utilities could provide an improved level of service. Consumers are mainly coping with interuptions by storing water in household containers. Even in the major urban areas household storage is practiced by 90 percent of households in Nukus and 75 percent in Urgench. Consumers in rural areas also access other sources of water to supplement their piped water supplies. Evidence from the surveys and other investigations indicate that the water pressures in the secondary and tertiary pipeline distribution systems have to be restricted because of the need: (a) for rehabilitation of the existing networks due to lack of maintenance; (b) for additional investmnents to link sections of the network to additional pumping capacity; and (c) for improved means of controlling freezing of tertiary distribution pipes during the cold winter months, including street stand pipes, as well as yard and household connections. All of the surveys, focus group meetings and the stakeholder's meeting confirmed that consumers are very concerned about the quality of the water they are using for drinking and cooking purposes. The main complaints are the water quality parameters that affect the taste and aesthetic qualities of the water, although participants at the stakeholder's meeting frequently raised concerns about contamination from agricultural chemicals. The most frequently noted complaints were salinity (salty taste), suspended solids (muddy appearance) and the smell (indicating bacteriological action). There are more frequent complaints of suspended solids and smell in the summer months, while complaints regarding salty taste are more or less constant throughout the year. This is consistent with raw water quality which is more turbid in summer. Analysis of household water quality and water supply sources carried out during the surveys and by the Japanese International Cooperation Agency (JICA) consultants show that pathogenic bacteriological contamination is of most concern from a health perspective. Due to the high level of suspended solids in the piped water supplies (often at a much higher level than in hand pump and hand dug well samples) chlorination of this water is often ineffective, thus allowing the transmission of pathogenic bacteria. The hand pump survey also recorded pathogenic bacteria in samples from this source. The JICA consultant surveys showed no evidence of contamination from agricultural chemicals. * The majority of the respondents in Nukus and Urgench (90 percent in Nukus and 73 percent in Urgench), almost all of whom are using piped water, treat their drinking and cooking water by using various methods such as settling, filtering and boiling. These are the simplest methods, which do not require the use of additional water treatment devices. Such simple methods of treatment are practical since householders cannot afford to buy more sophisticated devices. The water quality results indicate that the Nukus piped water is of better quality than Urgench water. Sixty-seven percent of the respondents in Nukus and 61 percent in Urgench boil their water, while 85 percent in Nukus and 52 percent in Urgench settle their water prior to use. This difference in the use of settling could be due to the fact that a greater percentage of Nukus residents are storing water. The storage vessels act as settling tanks to reduce the suspended solids in the water. Filtering is not  - 23 - common in either city; 5 percent in Nukus and 9 percent in Urgench filter their water before using it. * As Table 2.4 shows, there is a much higher level of satisfaction with the quality of water from hand pumps and hand dug wells (on average about 75 percent satisfied), than the "treated" water from the piped water system (about 50 percent satisfied). Since the salinity of water from the hand pumps and hand dug wells is higher than in the piped water supplies, the consumers are mainly dissatisfied with the high suspended solids content in the piped water supplies, particularly during the summer months. An important focus of the project would, therefore, be to solve the maintenance and operational problems in the water treatment plants that are impairing the effectiveness of the treatment process which is causing high suspended solids concentrations in the treated piped water. The surveys also show a high level of satisfaction with hand pumps and hand dug wells. There will be many rural villages in the project area, where it will be more appropriate to increase the access to these water supply sources than to supply piped water at much higher investment and operating cost. Table 2.4: Level of Satisfaction with Water Supply Sources (in percent) Karakalpakstan Khorezm Oblast Urban Salinity Taste Water Urban Salinity Taste Water Areas Tolerance Vendors Areas Tolerance Vendors Source Surveya Survey Surveyb Survey Survey Survey Pipeline 60 41 71 49 54 n.a. Hand pump n.a. 81 n.a. 0 67 n.a. Hand-dug well n.a. 70 n.a. n.a. 83 n.a. Open sources n.a. 67 20 n.a. n.a. n.a. a. Gives the satisfaction with the quality of water, not the overall satisfaction. Also, percentages for water sources other than the pipeline are not given because of the low number of respondents using those sources. b. Percentages here are given according to the source of the water delivered by vendors. c. Because of the small sample size, percentages are not given. d. Here, sample size is small, so this percentage must be approached carefully. * At the time of the salinity taste tolerance survey in November 1995 the salinity of the piped water supply was at an intermediate level in the typical range of 0.6-1.5 g/14 between summer and winter conditions, while the average salinity of water from hand pumps and hand dug wells was higher in the range 1.5-2 g/l. However, the salinity of the shallow ground waters down to 10 m, that are the source of water for the hand pumps and hand dug wells is relatively constant throughout the year. Thus while consumers of piped water and of hand pump water have similar levels of complaints about the salinity of their water sources, the hand pump consumers are willing to tolerate a higher level of salinity, because it is more or less constant throughout the year and they become accustom to the taste. 4 Salinity is measured as the dry residue content in the water sample - i.e., as the total dissolved solids.  - 24 - Table 2.5: Average Salinity (grams/liter) Karakalpakstan Khorezm Oblast Salinity Taste Hand Pump Salinity Taste Hand Pump Tolerance Monitoring Tolerance Monitoring Source Survey Survey Survey Survey Pipeline 0.92 n.a. 0.93 n.a. Hand pump 1.52 2.00 1.48 1.70 Hand dug well 1.48 n.a. 1.44 n.a. a Other sources 0.99 n.a. 1.50 n.a. a Includes open sources such as rivers, irrigation canals and such. However, the low number of households using these sources prevent obtaining statistically representative results. The current Uzbekistan Water Quality Standard for salinity is 1.0 g/l, while the WHO guideline limit for drinking water is 1.5 g/l. However, there is no evidence of health effects of drinking water with the salinities typically found in surface and ground waters in the project region. The limit should be based, therefore, on consumer taste tolerances. A salinity taste tolerance survey was carried out in 642 urban and rural households in Karakalpakstan and Khorezm Oblast to determine a tolerable level of salinity to consumers in the project area. The tolerable limit that the majority of consumers would accept was found to be approximately 2.0 g/l. On the basis of these results it would be appropriate to adopt a limit of 2.0 g/l for hand pump and hand dug well water sources and 1.5 g/l for piped water supplies, which may be subject to larger variations in salinity throughout the year. These are the design water quality limits for salinity that have been adopted for the project. C. Pilot Projects 2.34 The Social Needs Assessment and focus/roundtable discussions conducted between November 1994 and May 1995 identified the need to develop and test small-scale pilot projects with community-based approaches for achieving improved access to good quality water supply services. 2.35 Water Supply and Distribution Pilot Project. Between July and September 1995, nine projects were identified, ranking from water supply developments and tertiary distribution systems to irrigation systems to replace piped drinking water. These pilot projects will benefit about 40,000 people in rural and peri-urban areas of the Republic of Karakalpakstan and Khorezm Oblast. Last year, KfW approved a grant of DM1.5 million to implement some of these projects, arLd the Bank management has agreed to finance another of them through the Pilot Water Supply Engineering Project (Ln. 4090-UZ). 2.36 The primary justifications for the execution of small-scale water supply projects are: (a) to improve the design and implementation arrangements of the full-scale project through a "learning-by-doing" piloting approach and by incorporating community participation into the planning and implementation process for water supply and distribution; and (b) to develop and test joint financing schemes to improve the financial viability of the formal water utilities and the sustainability of their investments.  -25 - 2.37 The key lessons derived so far during the preparation phase of these pilot projects can be summarized as follows: * Consulted households are demanding more reliable level of services as well as water of consistently high quality, and have expressed their willingness to pay for it at levels much higher than currently perceived by local authorities. Those who rely on water vendors (often of poor quality) and are paying high prices have agreed to even pay more for higher quality water. * Local authorities are becoming less apprehensive and more supportive of the new demand-driven approach introduced by the pilot projects since it demonstrates the need and willingness of people to pay for the service, making future water price increases more acceptable and easier to undertake. Local authorities have recognized the advantages of the new approach in terms of removing the myth among the population that the provision of clean water is a government's responsibility and shall be provided at highly subsidized prices. * iThe community consultation approach, a first-time experience for the formal water utility in the Republic of Karakalpakstan, has facilitated the water utility and the community to work together, and has helped to achieve the most beneficial solution to the water problems of the Kizketken community. In initial meetings with the community on the design options for the pilot project, community members expressed a strong preference for a self-managed water supply scheme, because they believed the water utility would provide a poor level of service if it was to install and manage the scheme. However, when the community was provided with information on the advantages and disadvantages and the costs of the various schemes, they finally agreed with the option to link the community with the main water supply pipeline based on the huge cost savings and the new image projected by Vodokanal. The initially hostile reaction from the community and much apprehension from the Vodokanal perspective appears to be turning into a trustworthy partnership. * Community participation in the design of the pilot projects is putting pressure on local authorities responsible for the water supply sector to give greater attention to the scale and cost of projects. When communities were asked to bear part or all of the cost of providing water supply services, they immediately started questioning current design criteria, aiming to find ways to cut costs. In one pilot project, the community has decided to lower the design parameter of 350 liters per capita per day used by the formal water utility to only 150 liter per capita per day, based on their perceived water needs. In another pilot project, the community has influenced the lowering of the minimum diameter of the tertiary distribution network from 150-175 mm to 100 mm. * Consulted communities welcome the idea of presenting a menu of technical options and levels of services, and allow them to make well-informed decisions. Their decisions are largely motivated by their perception of benefits in relation to costs. For example, one community has favored yard connections over standpipes and house connections.  - 26 - Households consulted in the survey appeared to be willing and fully committed to participate in the financing of the pilot project investments through community in-kind labor contribution such as voluntary labor for earth-moving works and laying of distribution networks pipes equivalent to 3-5 percent of project cost, or in-cash at-front contribution equivalent to 50-100 percent of their monthly income, or both. Communities are also ready to spend up to 3-4 percent of their monthly income to cover the operation and maintenance costs of the provision of water supply services, which is three times the current water charge. 2.38 Pilot Community-Based Sanitation and Health Projects. Project identification in October 1994 led to the formulation of community-based sanitation and health pilot projects serving to develop and test methodologies and define investment requirements to improve health, hygiene and sanitation in rural communities in Karakalpakstan and in Khorezm Oblast. The results of the pilot projects form the basis of the low-cost rural sanitation and health component. The objective of the pilot projects is to test improved low-cost latrine designs and community- based approaches to promote the demand for better sanitation and hygiene practices. 2.39 The Government of Uzbekistan selected the Swiss NGO Helvetas/Swiss Red Cross to carry out the community-based sanitation, health and hygiene pilot projects. The first phase of the pilot projects started in March 1996. The pilot rural community sanitation projects have identified the lack of well-designed and maintained sanitary facilities and good hygiene practices as the most pressing threats to the population health. The pilot projects have combined the construction of improved on-site sanitary facilities with a campaign to inform and educate the population about the proper use and maintenance of those facilities, as well as general hygiene education. New latrines of different designs, which are a major improvement over existing, unsanitary units, have been installed in the communities for demonstration purposes, while local artisans have been trained to construct such facilities using locally-available materials at a low cost. In addition, simple handwashing facilities have been installed adjacent to the improved toilets, which are a simple yet effective means of conducting basic hygiene. 2.40 Helvetas/Red Cross developed the first rural sanitation projects in two communities, Keigili in Karakalpakstan and Shavat in Khorezm. In each community, stakeholder groups were selected, and workshops were conducted to discuss options for community organization. Under the first phase of the pilot projects, the following activities were carried out: (a) construction of four types of improved on-site latrines and installation of hand washing basins; (b) training of local artisans in the construction of the latrine substructure, including the concrete slab; (c) training of local community health workers and school teachers in the provision of health education to individual householders, students and children; (d) offer of grants to participating households to cover up to 60 percent of the total construction cost of the latrine, including the costs of superstructure; and (e) set up and test a voucher scheme for providing direct subsidies to the beneficiaries. 2.41 Ten model latrines were developed during this phase, and schemes for implementation were tested at the collective farmn level. While the construction of latrines and installation of handwashing facilities are relatively inexpensive means of providing the rural population of Karakalpakstan and Khorezm with sanitary facilities, and households in the pilot project areas  - 27 - have expressed their willingness to take part in the financing of such facilities, their cost is still above the means of most households in the area. The grant financing scheme has been devised by Helvetas to assist households in financing the improved latrines and handwashing facilities, which will also provide employment to local artisans. 2.42 The second phase of the community-based pilot projects started in August 1996 and ended in February 1997. The second phase extends the pilot projects to a total of six communities, representing a wider variety of socio-economic situations that allowed for testing more water, sanitation and hygiene alternatives. About 160 improved latrines were constructed during this phase, and implementation arrangements are being further tested and developed at the local level. The construction of improved latrines and installation of handwashing facilities in the rural and urban communities is not restricted to individual households or groups of households, but has been extended to public facilities such as schools, primary community health care centers (rural polyclinics and hospitals), canteens, and public places (e.g., markets). Under the pilots, Helvetas is testing various ways of ensuring that these facilities are continually maintained and kept in a sanitary condition. The pilot projects are concentrating on disseminating the experience to neighboring communities and communities in other rayons, using the most appropriate and effective means of communication, including the mass media. 2.43 The third phase, for which funding is now being sought, would start in May 1997, and would be concluded four months later. During this phase, the pilot projects would aim at: (a) fulfilling about 50 percent of the demand for low-cost sanitation facilities in the six communities where the projects are being developed; (b) rehabilitating pilot public baths; (c) test project implementation arrangements at the district level; and (d) further testing the dissemination strategy to neighboring collective farms and districts. 2.44 The pilot projects have been testing the applicability of the latest concepts and lessons learned from community-based rural hygiene, sanitation and health activities elsewhere in the world for incorporation into the project. The pilots are necessarily small scale and test particularly those elements of project design and implementation in which stakeholder participation is most needed. The principal points of departure in project demonstration are: community initiative, full beneficiary involvement, small scale intervention, maximum impact, nominal cost-recovery, maximum local professional and other staff input, and private enterprise development. 2.45 Some of the lessons learned during implementation of the pilot projects were the following: first, there is a high willingness among the rural population to improve their current sanitation practices; second, households are willing to make substantial financial contributions for the construction of the improved latrines; third, the low-cost technology options being promoted under the pilot projects are now being recognized by local specialists working on sewage treatment as alternatives to high-cost central treatment systems. 2.46 Additional lessons learned thus far from the pilot projects include: (a) Karakalpakstan and Khorezm Oblast are different socially and economically, and different strategies need to be followed in each region; (b) the pilot projects identified the need for capacity building of health services, namely SES and Centers of Health, and for coordination of relevant sectors (health, water and sanitation). The existing structures should be reinforced, while parallel structures such  -28 - as those created by the project (PIUs) should be kept small; (c) health education materials and methods are generally very poor and need to be improved, and community health workers also need to be trained in participatory methods; (d) public buildings need proper sanitation infrastructures. The pilot projects raised awareness among public officials about the relevance of improved sanitation and hygiene and willingness to co-finance low-cost sanitation technologies. Therefore, the rural sanitation component should cover sanitation in public buildings (schools, health services) as well as households; (e) public baths also need to be rehabilitated, but should be privately operated; (f) the ventilated-elevated latrine model is the most popular of the four that were tested during the pilot projects, and therefore, it is the one expected to be mass produced during implementation; (g) the pilot projects are testing and will make recommendations concerning quality control, as well as the administration of a land coupon system to subsidize rural sanitation; (h) the pilot projects identified the need for legislation that will promote small enterprises (e.g., the workshops where the latrine slabs are produced) as well as for local training in planning and management. D. Other Issues Riparian Issues 2.47 The international waterway involved here is the Amu Darya river. Catchments feeding into the river are located in four republics: Kyrgyz Republic, Tajikistan, Afghanistan and Uzbekistan. The river flows along the border of Afghanistan into Turkmenistan and then Uzbekistan where it discharges into the Aral Sea. Thus, riparians on the Amu Darya are: Tajikistan, Kyrgyz Republic, Afghanistan, Uzbekistan and Turkmenistan. The Tuyamuyum Reservoir on the Amu Darya river (the main source of water supply for the project) is located in Turkmenistan. 2.48 In 1992 and 1993, the riparians of the Amu Darya river (excluding Afghanistan but including Kazakstan which, although not a riparian on that river, is contiguous to the Aral Sea and shares other water resources with countries in the Region) entered into international agreements which established the legal and institutional framework for addressing the Aral Sea Crisis. An Action Plan of investments to improve the ecological situation in the Aral Sea region was formulated and accepted by all Central Asian states in a meeting in Nukus in January 1994. The present project was developed in fulfillment of said Action Plan and as a component of it. 2.49 The agreements concluded within the framework of the Aral Sea program, provide an adequate framework for the parties (which include all riparians on the Amu Darya, in addition to Kazakstan, but excluding Afghanistan) to exchange information and views and to cooperate on matters concerning their common water resources. Each of the riparians is represented on the regional bodies established to oversee and implement the Aral Sea Program. 2.50 As all riparians (excluding Afghanistan) have been involved in the preparation and implementation of the Aral Sea Program and were informed of and had consented to the Action Plan referred to above, of which the project is a component, no further action of formal notification is required. 2.51 Regarding Afghanistan, it should be noted that the chaotic political situation in that country accounts for its non-inclusion in the agreements establishing the regional institutional set  - 29 - up in 1992 and 1993. Notification of Afghanistan has proved problematic as a result of the present collapse of the governmental system and the lack of a government exercising effective control in the country. Uzbek officials indicated that their attempts to engage Afghanistan in discussions of matters of common interest, including water issues, have elicited no response because of the political situation there. They confirmed during negotiations of the proposed loan their intention to bring Afghanistan into discussions of water issues, once a functioning government there is restored and welcome any efforts by the Bank in this direction. In response, the Bank is currently attempting, in the larger context of the Aral Sea Program, to seek formal communications channels through which information on water investment related to that program and of interest to Afghanistan may be officially conveyed to it. It should be added that, although Afghanistan is not currently a member of the regional arrangements set-up in 1992 and 1993 on water, the proposed project is not expected to have any adverse impact on its position vis-a-vis other riparians of the Amu Darya river, given: (a) the minimal amount of additional water required from the Amu Darya for operation of project facilities; and (b) the position of Afghanistan as an upper riparian on the Amu Darya in relation to Uzbekistan and Turkmenistan. 2.52 Immediately related to the project are the arrangements concluded between Uzbekistan and Turkmenistan. These consist of two agreements: the first dates January 16, 1996, and primarily provides for: (a) ownership by Uzbekistan, for compensatory payments to be agreed upon, of water facilities located in Turkmenistan, including the Tuyamuyun reservoir and related canals; (b) allocation on equal basis between Uzbekistan and Turkmenistan of the Amu Darya flows, measured from a certain point; (c) a commitment by both parties to make joint investments to increase the amount and improve the quality of water flow into the Aral Sea (e.g., land reclamation, rehabilitation of river bed, construction of collectors); and (d) a commitment by the parties to settle their differences through conciliation and negotiations. The second agreement is dated April 17, 1996, and is of technical nature and intended to implement the first agreement. Thus, it includes a schedule of the quarterly payments to be made by Uzbekistan to Turkmenistan in compensation for use by the former of water facilities located in the latter and requires the maintenance of Working Commissions to settle issues of water/land uses. 2.53 The arrangements referred to above between Uzbekistan and Turkmenistan, the parties materially affected by the project, have been reviewed by the Bank's Legal Department and found to be adequate. In sum, Turkmenistan is not only informed and consenting to the project but has also standing contractual arrangements with Uzbekistan to deal with allocation of water and use and operation of common water facilities. Dam Safety 2.54 Water to be delivered under the project is extracted from the Tuyamuyun Hydro System. A preliminary study has been completed by an independent international expert who inspected the reservoir system and found it well constructed and safe. The dam and related structures are the critical features on which the availability of water of the project depends. Therefore during negotiations agreement from the Government of Uzbekistan was reached that it will ensure that: (a) the dam of the Tuyamuyun Hydro System is inspected annually in accordance with sound engineering practice by independent expert(s) in dam safety approved by the Bank; (ii) the report and recommendations of such expert(s) is forwarded to the Bank for its review and comment  - 30 - within three months of each annual review; and (iii) any appropriate remedial action recommended by such expert(s) is promptly taken.  - 31 - REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT III. THE PROJECT A. Project Origin and Formulation 3.1 Background. This proposed project forms Component 5.1 of the Aral Sea Program, drawn up to address the environmental impacts of the Aral Sea crisis. The project was specifically intended to improve the health of the population in the region affected by the crisis by investing in water and sanitation infrastructure. Prior to the identification mission in October 1994, the perceived problems were excessive concentrations of pesticides and fertilizers in the raw water, together with other health hazards (such as airborne dust from the exposed bed of the Sea), and a lack of adequate sanitation. 3.2 Project Preparation. Project identification in October 1994 led to the formulation of two concurrent project preparation activities: an overall project feasibility study; and rural sanitation, health and hygiene pilot projects serving to develop and test low-cost latrine designs and participatory methodologies and define investment requirements to improve health, hygiene and sanitation in rural communities of Karakalpakstan and Khorezm Oblast. The results of the pilot projects form the basis of the low-cost water supply and rural sanitation subcomponent of the proposed project as well as the urban and rural health and hygiene subcomponent. 3.3 The existing water supply infrastructure, including the large centralized schemes, were developed for reasons that were considered to be valid at the time, but in the present climate are not as appropriate. The poor condition of the infrastructure accentuates the problem facing the operating organizations, in that operating costs of the schemes are very high, and tariffs are maintained at artificially low levels. Cost recovery is low, and there is a continual decline in the infrastructure condition. In order to fully address these issues, a long-term investment in excess of US$1,000 million would be required. It was concluded that: (a) the cost of this program would exceed all available resources for a single lending operation; and (b) the current weak performance of the organizations involved, including poor maintenance practices, low tariff levels and lack of clear organization and direction, would preclude consideration of such a large program without partial institutional restructuring and financial reforms. A phased development program was therefore preferred, with this project focusing on the immediate needs. 3.4 A JICA-sponsored consultant team carried out a detailed study of the water supply investment needs of six major cities in the project area to the year 2015. The findings of the JICA study were used extensively in the proposed project's feasibility studies. 3.5 Participatory Approach. The Project would incorporate results from the five social assessments that were carried out during project preparation, as well as the participatory approaches developed and tested by the community-based water supply and distribution pilot projects and the sanitation and health pilot projects. Project implementation participatory activities would further contribute to: (a) increase ownership of beneficiaries of the new and improved facilities and services that are provided; (b) introduce government agencies responsible  -32 - for the provision of water supply, sanitation and health services to the benefits of stakeholder consultation and participation in decision making concerning improvements and expansions of these services; and (c) gain a better understanding of cultural, social, socio-economic and community organizational factors that will lead to the selection of the most appropriate and sustainable interventions in the sector. 3.6 Specifically, the Sanitation, Health and Hygiene component would be demand-driven. Through the community-based rural committees, decisions would be made about the identification, design, implementation, operation and maintenance of the low-cost alternative rural water supply and sanitation schemes. Stakeholders (rural communities, community-based organizations, local and regional governments, and water, sanitation and health services, as well as national government agencies and other institutions that were involved in project preparation) would be involved in participatory implementation activities such as health promotion and education activities, and the intersectoral committee that would assist project development. Water User Association will be set up in the urban areas to facilitate water loss reduction and conservation and to negotiate and collect water tariffs from domestic consumers. The Water Supply Engineering Pilot Project's Kizketken component will test and refine this approach prior to its full scale implementation in the two regions. Further details are given in Section IV. 3.7 The Project. Whilst both water supply and sanitation are in need of major investments over the long term, the first priority of the Government is to improve the water supply service. It recognizes that improved sanitation, in the form of waterborne sewerage systems is desirable, but also that this is a costly process, and must in any event follow on from the provision of safe and reliable water supplies. It also recognizes that local water sources and supply systems are an acceptable and economic means of addressing local problems, and can be complementary to the large centralized systems previously favored. Given the size of needed water and sanitation improvements, the strategy adopted was to divide the improvements into two distinct operations with the first one concentrating on urgent rehabilitation measures for existing water supply and sewerage services, capacity building efforts, institutional reform, and the implementation of a program of sanitation and health measures. The follow-up operation would then build on the experience of this operation and deepen institutional reform while at the same time providing financing towards supply and sewerage system expansion. B. Project Objectives and Description Project Objectives 3.8 A project to improve the water supply, sanitation and health of the population of Karakalpakstan and Khorezm Oblast was identified as part of a wide-ranging package of projects prepared by the donor community in support of the Aral Sea disaster zone. The project has two objectives. The first is the provision of safe drinking water along with improved hygiene education and sanitation facilities for the Republic of Karakalpakstan and Khorezm Oblast. Specifically, this objective would decrease the incidence of water-borne diseases among the population, particularly diarrheal diseases among children. The second objective is to strengthen institutional capacity for management, operation and financial performance of the regional water supply and sanitation utilities as well as the regional Centers of Health and the Sanitary Epidemiology Stations.  - 33 - Project Description 3.9 Project Components. The proposed project comprises four main components: (a) water supply and distribution; (b) sanitation, health and hygiene; (c) technical assistance; (d) project management, design and supervision; and (e) refinancing of the Pilot Water Supply Engineering Project. The cost given below include contingencies. 3.10 Water Supply and Distribution (US$68.2 million or 68 percent of total base cost). This component has four main subcomponents: (a) Main Pipeline Supply System (US$38.8 million). This item would: (i) replace or rehabilitate where appropriate, sections of the distribution systems in Karakalpakstan and Khorezm Oblast; (ii) rehabilitate two water treatment plants; (iii) expand one water treatment plant; (iv) rehabilitate five ground water sources; (v) build additional trunk pipelines in Karakalpakstan; and (vi) rehabilitate the rural distribution centers in Karakalpakstan and Khorezm Oblast. (b) Development of Local Water Supply and Distribution Systems (US$21.0 million). The subcomponent would: (i) provide spare parts for about 300 desalinization units in Karakalpakstan as well as training for the operators of the desalinization plants; (ii) rehabilitate and develop ground water sources in Karakalpakstan and Khorezm Oblast (including the Chalysh wellfield); and (iii) expand demand-based rural water supplies in Karakalpakstan and Khorezm Oblast. (c) Water Demand Management and Loss Reduction (US$3.3 million). Wastage of water is high, particularly in the urban areas, due to a lack of incentives to conserve water at the level of water users. The low water price for domestic consumers and the absence of metering encourage inefficient use of water. This subcomponent would be implemented by a water utility with ample experience in demand management. The subcomponent has two items: (i) metering trials to test different approaches to metering water usage along with a consumer awareness program to provide practical advice on means of reducing losses and optimizing water use; and (ii) funds to define and implement the most economic means of leakage reduction. (d) Equipment for Operation and Maintenance (US$5.2 million). The Vodokanals, Agrovodokanals and the bulk water suppliers face severe difficulties in maintaining the water supply systems due to a shortage of equipment and materials. This subcomponent would address this by providing equipment which would be identified by the Institutional Strengthening Consultant and the Demand Management Consultant. There are two items in this subcomponent: (i) identification and purchase of small equipment, tools and spares; and (ii) identification and purchase of major equipment. 3.11 Sanitation, Health and Hygiene Component (US$11.2 million or 11 percent of the total base cost). This component has three subcomponents: (a) Rural Sanitation (US$2.0 million). This component would promote construction of improved latrines (elevated ventilated latrines) through the participatory approach developed during the pilot project, and installation of hand washing facilities in  - 34 - selected households, schools, primary health care services (feldscher stations, and rural polyclinics), canteens and public places in selected collective farms. The community-based kolkhos committees would make decisions about the identification, design, implementation, operation and maintenance of the sanitation schemes to be put in place The subcomponent would provide around 7,500 improved latrines and handwashing facilities, covering about 5 percent of the rural population in both regions. The subcomponent would cover about 80 percent of the construction costs, and beneficiaries would cover the remainder. The subcomponent would include training of district managers who would supervise the implementation of the component. This subcomponent would also provide equipment, transportation, consultant services and training, namely of collective farm committee members and other staff in management and low-cost sanitation. (b) Health Promotion and Hygiene Education (US$4.0 million). This subcomponent would cover health promotion and hygiene education of the urban and rural populations of Karakalpakstan and Khorezm Oblast. As such, it complements the sanitation and hand pumps subcomponents of the proposed project, and is an integral element of the overall strategy for improving health and hygiene among the population through community-based approaches. Health specialists would assist the kolkhos committees in developing and implementing the health promotion and education activities. The subcomponent would also cover the costs of an intersectoral committee that would aim at reviewing and assisting project activities. (c) Water Quality Monitoring and Strengthening of SES (US$5.2 million). The principal objective of this subcomponent is to improve water quality monitoring, and sanitation and hygiene inspection of households and communal facilities in Karakalpakstan and Khorezm Oblast. Health specialists would participate in community-based activities, assisting the kolkhoz committees in improving water supply, sanitation, and health in rural communities. In addition, the institutional and organizational efficiency of the Sanitary Epidemiological Services (SES) would be enhanced by improving the quality of health and water quality data collection, analysis and reporting, and integrating the data reporting for the region into the project's Geographic Information System (GIS) on a demonstration basis. 3.12 Technical Assistance Component (US$8.2 million or 8 percent of total base cost). This component has three subcomponents: (a) Institutional Strengthening of Water Utilities and Bulk Providers (US$6.7 million). This subcomponent would address the present deficiencies in the six organizations involved in providing water and sewerage services to the project area. It is expected that in the near future these will be combined into two regional organizations, which will improve the situation, but even so, significant assistance will be needed. The item would consist of: (i) a program for carrying out regularly preventive maintenance; (ii) a program for monitoring and reducing operating costs; (iii) a program for reduction and management of accounts receivable; (iv) design and operation of a utility accounting system, including cost accounting; and (v) in-house  -35 - and foreign training programs. The program includes consultancy services and training of trainers. (b) Tariff Study (US$0.6 million). This subcomponent would finance a water and sewerage tariff study, which would lay the foundation for the introduction of new water and sewerage tariff rates for the various consumers groups. It includes consultancy services for the formulation and implementation of the new tariff structure and office equipment. (c) Refinancing of Feasibility Study (US$ 0.8 million). This subcomponent would refinance the Kuwait Fund's Project Feasibility Study. 3.13 Project Management, Design and Supervision Component (US$8.4 million or 8 percent of total base cost). This component would cover the costs of project management, project design, and construction supervision by the Project Implementation Unit, with advice and assistance from foreign consultants. Included in this component are consultant services, staffing of the PIU including the Director in Tashkent, the regional representatives, the GIS section and support staff. 3.14 Refinancing of Pilot Water Supply Engineering Project Component (US$5.0 million or 5 percent of total base cost). The pilot project components would be refinanced by the proposed project as agreed with the GoU in the Pilot project. Upon the effective date of the proposed project, the Bank would withdraw from the Loan Account and pay to itself all amounts required for repayment of the principal amount of the pilot project loan withdrawn and outstanding and all interest and other charges due thereon. Thereupon the pilot project loan would be canceled. The Pilot project funded the construction of a self-managed water supply scheme in the peri-urban areas of Nukus and the preparation of detail designs and bid documents by foreign consultants. C. Project Costs 3.15 The total cost of Table 3.1: Summary of Project Cost Estimates the project, including an (US$ million) allowance for physical Local Foreign Total % Foreign % Total and price contingencies Exch. Base Cost of US$16.0 million, is Water Supply and Distribution 19.90 48.30 68.20 71 68 estimated at US$117.0 Sanitation, Health and Hygiene 2.79 8.42 11.21 75 11 million, of which about Technical Assistance 0.06 8.11 8.16 99 8 US$90.2 million or 77 Project Manage. & Supervision 0.10 8.32 8.42 99 8 percent represents the Refinancing of Pilot Project -- 5.00 5.00 100 5 foreign exchange Total Base Cost 22.85 78.15 101.00 77 100 component. The cost estimates were prepared Physical Contingencies 2.38 6.68 9.06 74 9 by consultants and Price Contingencies 1.61 5.33 6.94 77 7 reviewed during pre- Total Project Cost 26.84 90.16 117.0 77 116 appraisal based on a survey of construction costs undertaken during project preparation. These costs were then compared with the cost estimates in the October 1996 JICA consultant study were found to be similar. The estimated cost per component is summarized in Table 3.1. Price  - 36 - contingencies on the foreign exchange rate are based on an average estimated inflation rate of 3.0 per year during the duration of the project. It is also assumed that the exchange rate will on average maintain purchasing power parity during the project implementation period. Price contingencies on the local cost (expressed in US$) are based on the same foreign inflation rate. Physical contingencies of 5 percent for consultancy services and 10 percent for civil works and equipment were included. Base costs are expressed in February 1997 prices. D. Project Financing 3.16 Table 3.2 sets out the project Table 3.2: Financing Plan financing plan. An IBRD loan of (US$ million) US$75.0 million is recommended for (Uca milion) the proposed project. This would L provide about 64 percent of total project IBRD 6.5 68.5 75.0 64.1% costs including applicable VAT taxes. Fud 4.2 15.7 19.8 17.0% The oan ouldbe mde t th Kuwait Fund 4.2 15.7 19.8 17.0% The loan would be made to the KW34 60 9481 Government of Uzbekistan under the KfW 3.4 6.0 9.4 8.1% standard terms for a US Dollar- GoU 2.7 9- 12.7 10.9% denominated single currency loan and T 2 90. 1 100.0 would provide for a maturity of 20 years including 5 years of grace. Additional funding would be provided under their respective lending terms by the Kuwait Fund for Social and Economic Development, and the Kreditanstalt fir Wiederaufbau (KfW). While not included in this financing plan, it is possible that other donors such as the Japanese OECF and the Swiss Government would finance other high priority investments that were identified in the project feasibility study. They could not be included as co-financing partners in this project as definite commitments had not been made at the time of loan negotiations. Given the need to go ahead as soon as possible with project implementation for improving the water, health and sanitation of the affected population, and in view of the different locations of the components to be financed by the co-financing agencies, there is no justification for foreseeing a condition of cross effectiveness for the availability of financing from the different agencies. The Government contribution would cover applicable taxes and duties, which represents VAT payable at the time of payment for goods and services. E. Financial Analysis 3.17 Insufficient income and high levels of accounts receivable prevented the water utilities in the project area from operating at the desired level of efficiency, maintaining the installations, and providing water of reasonable quality at the required pressure. The stated tariff-setting policy of covering operating and maintenance cost including depreciation should over the past three years have achieved the covering of all cost of the two Vodokanals (Khorezm Oblast and Karakalpakstan) and Agrovodokanals (Khorezm Oblast and Karakalpakstan). This did not, however, take place. With the exception of the Karakalpakstan Agrovodokanal, where the Government contributed an operating subsidy equal to about 28 percent of the operating and maintenance cost, only the operating costs of the other three water-distributing agencies were covered, with insufficient funds left for covering the full cost of regular maintenance. Because of past inflation and the low book value of assets, nominal depreciation did not reach replacement values. Maintenance, if performed at all, was sporadic and addressed only the most urgent operational requirements, in order to ensure that the systems did not collapse. The situation was  -37 - no better at the Tuyamuyun-Nukus and Tuyamuyun-Urgench bulk water suppliers. While the government provided these two agencies with substantial operating subsidies (about 80 percent), insufficient funds meant maintenance was reduced to the basic minimum to ensure continued operations. 3.18 Specifically, the water production and distributing agencies achieved the following levels of cost recovery, and received the following subsidies as detailed in Table 3.3. Table 3.3: Cost Recovery and Government Subsidies Cost Recovery Bulk Supplier 1993 1994 1995 1996a Tuyamuyun-Nukus n.a. 17% 14% 21% Tuyamuyun-Urgench 43% 14% 10% 18% Government Subsidies (in '000 Sum) Tuyamuyun-Urgench 690,000 7,065 69,300 44,000 Tuyamuyun-Nukus 986 10,063 71,200 21,200 Agrovodokanal- Karakalpakstan 194,000 1,598 26,622 6,567 Total 884,968 18,726 167,122 71,767 w First quarter. 3.19 The table above shows that the two bulk water suppliers (Tuyamuyun-Nukus and Tuyamuyun-Urgench) covered only a fraction of their costs. In comparison to previous years, when the amount and percentage of the government subsidy increased, a turnaround occurred in the first quarter of 1996. To what extent this can be sustained remains to be seen. Given the high levels of subsidy (between 83 percent and 90 percent in the years 1994 and 1995), it is doubtful that the stated government policy of eliminating all operating subsidies to the potable water sector can be achieved by the year 2000. 3.20 The tight cash situation of the water utilities resulted in an almost total depletion of stocks. Only minimum levels of operating supplies are left, and with the exception of some pumps that were acquired long ago, not many spare parts can be found. Bank overdrafts or credit facilities are not being used, because the high interest rate (100 percent p.a.) makes any borrowing prohibitively expensive. The severity of the cash squeeze forced some of the water utilities not to pay wages for two months or longer. Furthermore, the suppliers of the utilities, primarily the power company, are being paid late with delays of up to six months. 3.21 The main cost element of the two bulk suppliers over the past four years has been the cost of power, representing more than 55 percent of total cost, with materials/chemicals as the next important cost item for Tuyamuyun-Urgench, and wages for Tuyamuyun-Nukus. Given the design of the system, it is unlikely that the power cost would change much in the future. The major cost element for the water distributing agencies in Khorezm Oblast was fuel (again due to the cost of pumping), followed by wages. The water distributor Vodokanal in Karakalpakstan had the highest personnel cost, followed by the cost of chemicals/materials. Allocations to the repair fund were high in relative terms for all water-distributing agencies, but the level of repairs and maintenance performed was insufficient for normal operations, as determined by the mission. The main reasons for the frequency of repairs and its high cost is the lack of regular preventive maintenance.  -38 - Bifing and Collection 3.22 Large-volume consumers of all water-supplying agencies are billed monthly based on meter reading. As a number of meters are either faulty or out of order, the water consumption is measured by alternative means such as hours of pumping and pipe diameter. Each year, the water agencies negotiate with these customers a water sales contract, which specifies the volume of water to be supplied, the tariff, and (in some cases) payment arrangements. In case of non- payment of the consumer's water bill, these arrangements provide for the direct payment by the consumer's bank to the water agency (provided the bank account has a sufficiently high balance, which is not always the case). 3.23 Water supplied to domestic customers is not metered. The monthly water consumption is assessed on the water usage profile of the customer, which includes the number of people, water- using appliances, area of plot, type and number of animals, etc. The assessed water consumption determines the monthly tariff and is registered in each customer's water book, which contains monthly payment coupons. Customers then settle their water bill by paying the monthly coupon at the agency's offices. All operations are performed manually, and only Khorezrn Vodokanal has recently started to use a computer, but only for some limited analyses of water bills. In view of the need for a constant water supply to the large farms, industry and vital communal services, only the supply to domestic customer's is cut off in case of non-payment. 3.24 Accounts receivable are high, Table 3.4: Accounts Receivable by Agency as indicated in the Table 3.4. As the Days of Outstanding Water Bills 1993 1994 1995 1996 bulk water suppliers provide watere mostly to the two Vodokanals and the Tuyamu-Urgench 6 59 15 43 two Agrovodokanals, their accounts Khorezm Vodokanal 168 141 153 254 receivable (as measured in the days of Khorezm Agrovodokanal 308 244 216 682 outstanding water bills) would Tuyamuyun-Nukus 0 139 113 77 normally be very small in comparison Karakalpakstan Vodokanal 15 163 146 505 to the distributing agencies, who serve a muh lager nd vriedcustmerKarakalpakstan Agrovodokanal 0 92 88 166 .a much larger and varied customer 't' "' 6 M base. Nevertheless, their accounts First quarter. receivable was high in the past, reflecting their inability to collect the water bills from the distributing agencies, since they themselves have serious difficulties in receiving timely payments from their customers-not so much from the small, individual water users, who pay promptly, but from the large farms and associated processing industries. This structural problem stems from the region's economic structure, whereby the large farms and associated processing industries are closely linked to the harvesting cycle, with receipt of cash only at the time of the sale of the harvest and of the processed products. The limited finances of the entities' and their limited experience in financial management would require an adaptation process over a number of years, until water services are paid on a regular basis. Finally, government agencies' water bills are also not paid promptly, increasing the accounts receivable and hence the cash shortage of the agencies. Tariff Structure 3.25 While domestic (category I) consumers pay only a part of the full cost of the service (varying from 10 percent to 62 percent), the tariff for category II and III customers (commerce,  -39 - government agencies, industry, and farms) is set at three times the Vodokanals' water production cost. This tariff policy, in particular the practice of increasing the water tariffs to category II and III substantially more than those of category I, thus enlarging the cross-subsidy, has already resulted in decreased water sales to industry and service. There are at present no incentives that would lead to water conservation on the part of the highly-subsidized domestic consumers. Details of tariffs and cost recovery can be found in Table Jl of Annex J. 3.26 An abnormality exists presently in the tariff for water supplied by the Uzbekistan Gas Pipeline Company (UzTransGaz) to the Vodokanal and Agrovodokanal in Kungrad, situated on the left bank of the Amu Darya River in Karakalpakstan. This tariff of 10.55 Sum/m3 is based on the average cost for supplying technical water for its own operations at very high pressure (up to 45 bar), while the water supplied to the public utilities would require only a pressure of 6 bar. As energy costs are approximately 80 percent of UzTransGaz's total operating costs for water supply, the water companies are presently negotiating a tariff with UzTransGaz that reflects the real cost of supplying water to the utilities. Future Financial Performance 3.27 The future financial performance of the utilities would depend to a large degree on the combined efforts in: (a) reducing water waste by the consumers through water demand management measures; (b) reduction of system losses though a leak detection and repair program; (c) timely collection of water bills; (d) control and reduction of operating expenses; and (e) developing less costly sources of water supply than those operated under the Tuyamuyun bulk water transfer scheme. This program can best be implemented with a change in the corporate policy of the water agencies, for which the implementation of the technical assistance program would be instrumental. 3.28 Financial projections were prepared by extrapolating the limited data base over the next ten years and assuming reduction in accounts receivable, increases in water sales by about 3 percent per annum, containment of operating expenses, gradual build up of inventories, and execution of a regular maintenance program. This analysis concluded that even with a program of maintaining present bulk water production levels, cost containment, and tariff adjustments in compensation for inflation, Government operating subsidies would be required at the level indicated below. Table 3.5: Assessment of Operating Subsidies Payable to Tuyamuyun-Urgench & Tuyamuyun- Nukus ('000 sum) 1996 1997 1998 1999 2000 200) 2002 2003 2004 2005 2006 Government Subsidy 304,796 444,918 559,237 682,537 808,663 953,045 1,105,709 1,314,770 1,488,024 1,691,930 1,949,683 Reduction of Gov. Subsidy 91,037 384,662 517,281 625,264 718,231 755,553 828,092 706,790 752,367 818,740 817,672 Total Gov. Subsidy less Payments by 213,759 60,256 41,956 57,273 90,432 197,492 277,616 607,980 735,657 873,190 1,132,011 Vodokanals and Agrovodokanals Total Gov. Subsidy less Payments by 81% 14% 7% 8% 10%/o 19% 23% 43% 47% 49% 55% Vodokanals and Agrovodokanals in % of cash operating cost  -40 - Tariffs 3.29 Should the reorganization of the six water agencies into two regional ones in charge of water production, distribution and sewerage (para. 1.29) take place in the near future, the resulting economic setup should ensure that the least cost sources of water production would be used. 3.30 The financial assessment carried out so far of the two Vodokanals and the two Agrovodokanals concluded that continuation of the present financial policies would not achieve any degree of sustainability in the near future. Although some data indicates that present tariff levels at the distribution level cover operating and maintenance expenses as well as limited depreciation, the recent mission found that regular maintenance does not take place because of insufficient funds, that stocks have been depleted to levels incompatible with proper operations, and that depreciation is calculated on non revalued assets, which because of past inflation is low. Furthermore, substantial arrears have resulted in such cash shortages that employees were not paid for two months or more. Given this background and considering the poverty level of the population, which spends between 70 percent and 90 percent of its income for food purchases, following Bank guidelines that would foresee full cost recovery would not be the right approach. Instead, sufficient flexibility should be built in to the design of the covenants. Therefore it is proposed to foresee that initially tariffs should be set at such levels that would permit covering: (a) from the beginning, the full cost of operations, and changes in working capital requirements (including those resulting from the build up of inventories); and (b) an increased proportions over time of the cost of maintenance (established according to a maintenance plan to be designed by consultants). 3.31 Future tariff adjustments would have to be practical and equitable. Therefore a tariff policy study should be undertaken, which would have as objectives to: (a) lay down the principles of a practical and equitable tariff structure; (b) define the parameters for achieving the financial viability of the entities tariffs; (c) outline efficiency pricing principles; and (d) prepare such a structure. Given the importance of the applied tariff policy, agreement was reached at negotiations that until the implementation of the tariff structure referred to in paragraph 1.37, the Government would: (a) cause each water agency for water distribution (or any successor thereto) to set tariffs at levels that would enable the water agency to generate revenues sufficient to cover its operation expenses, working capital requirements and a progressively increasing proportion of its maintenance cost; and (b) cause each water agency for water production to set tarifs at levels that would enable it to generate revenue sufficient, when added to subsidies provided to cover the pumping costs, its operation expenses, working capital requirements and a progressively increasing proportion of its maintenance cost.  -41 - 3.32 Accounts Receivable. Accounts receivable are forecast to go Table 3.6: Projected gradually from a high 150 days of outstanding average daily billings Average of down to 60 days by the year 2002 as Table 3.6 indicates. Outstanding Water 3.33 As the water distributing agencies can only pay the bulk water Brofec Avg D of suppliers upon payment of their water bills, this linkage would not Outstanding Water Bills permit much improvement in the accounts receivable of the bulk 1996 150 water suppliers. With the payment of water bills by the large farms 1997 135 and the industries linked to the harvesting cycle, reducing the accounts receivable can only be achieved over time and would 1998 120 depend to a large extent on diversification of the economic activity 1999 105 and the access to affordable credit facilities. In order to ensure the 2000 90 financial viability of the water utilities, it is essential that accounts receivable be reduced to acceptable limits. 2001 75 3.34 While in the past no great difficulties were experienced with 2002 _ 60 payment of due water bills by domestic customers, this was, however, not the case for the large farms, industry and government agencies. To ensure in the future timely payment of water bills by these customer groups, agreement with the Government was reached at negotiations that it would cause the water agencies to adopt and enforce procedures for the gradual reduction of their accounts receivable for water supplies to farms and industrial establishments, including the use of contractual provisions in the annual contracts with such consumers requiring monthly payment for services supported by a bank guarantee, so that accounts receivable for water supply to farms and industrial establishments would not exceed, on average, the equivalent of: 135 days of billing by the end of the year 1997, 120 days of billing by the end of the year 1998, 105 days of billing by the end of the year 1999, 90 days of billing by the end of the year 2000, 75 days of billing by the end of the year 2001, and 60 days of billing by the end of the year 2002 and each subsequent year. To meet this requirement, appropriate amounts would have to be included in the budget of each agency. Therefore agreement was reached at negotiations that the Government would ensure that: (a) each water agency prepare a draft budget for each year, and a forecast of its projected water sales to each institutional consumer for the following calendar year, together with a statement of the total outstanding water bill of such institutional consumer; and (b) the draft annual budget for each institutional consumer would include allocations adequate to cover the amounts forecast and outstanding for water sales. F. Economic Analysis 3.35 Beneficiaries of the Project The immediate impacts of the project would be a safe and reliable water supply services for about 1.53 million people. The project would also directly benefit about 50,000 inhabitants with improved sanitation facilities. Table 3.7 presents a breakdown by region of the population that would benefit from the implementation of the project.  - 42 - Table 3.7: Beneficiaries of the Project (in thousand inhabitants) Rehabilitation NewAccess to NewAccess to Area of Existing Safe Water Improved Water Supply Supply Sanitation Karakalpakstan Republic Urban Population Kizketken peri-urban settlement - main pipeline 25.0 7.0 Nukus except Kizketken - main pipeline 176.0 Beruni and Turtkul - main pipeline 65.3 Rural Population Beruni and Turtkul - main pipeline 64.3 Other rural areas - main pipeline 233.8 Populations with desalination units-local water sources 56.9 Other rural areas - local water sources 108.5 160.0 On-site sanitation - rural and peri-urban population 25.0 Subtotal 600.2 296.6 25.0 Khorezm Oblast Urban Population Urgench - main pipeline 136.0 Rural Population Rural areas - main pipeline 457.2 Rural areas - local water sources 42.0 On-site sanitation - rural and peri-urban population 25.0 Subtotal 593.2 42.0 25.0 Total Beneficiaries 1,193.4 338.6 50.0 3.36 Apart from above impacts, the water supply component would also provide additional water supply to serve industrial, institutional and commercial users. The additional volume of piped water to be sold to these consumers by the year 2002 has been estimated at 6.2 million cubic meters, representing 22 percent of incremental sales volume. 3.37 Furthermore, the project would help to strength the institutional capacity of the various agencies working in the sector aiming to optimize the use of existing infrastructure and local water sources, improve planning and project design capacity, increase productivity and efficiency, and reduce water losses and waste. For example, it is expected that the project would be able to satisfy an incremental demand of 28.8 million cubic meters of water by year 2005, with an increment in production capacity of only 13.1 million cubic meters. Some economies of scale are also expected to be gained by the integration of the various agencies into a single unit. Through the implementation of the demand management component, the proposed project would encourage water conservation on domestic consumers. 3.38 Least-Cost Solution. The project has selected the most economic alternatives to improve the overall provision of safe water and the environment conditions of urban and rural populations. Demand management and leakage reduction programs were selected over other alternatives to increase production capacity. Development of local sources (e.g., groundwater lenses and irrigation canals) for water 'production would allow to reduce the excessive  - 43 - operational costs of having to pump water from the Tuyamuyun reservoir. Improved on-site sanitation facilities were preferred over centralized waterbome sewerage systems in rural areas. 3.39 Economic Costs. The economic analysis was conducted using the average market rate of exchange applicable in February 1996, i.e., US$1.00 = Sum 36. Because the total investment costs of the proposed project are expected to be incurred in foreign exchange (e.g., dollars), no conversion factors were used for local financial costs. Similarly, no conversion factors were used for foreign financial costs. It was considered inappropriate to use a shadow exchange rate different from the market rate. Value added taxes, estimated at 17 percent of project costs, were excluded from total costs. Physical contingencies estimated at 5 percent (technical assistance) and 10 percent (non-technical assistance) of project costs were included in the economic costs. 3.40 Operating costs were estimated on the basis of current production costs per cubic meter of water, with adjustments to reflect economies of scale in administration and labor costs due to the consolidation of the sector and the economic cost of power (US$0.07 per KwH). Average variable costs per cubic meter of water produced were assumed as follows: US$0.19 for piped water supply in both urban and rural areas, US$0.67 for potable water from existing desalination units in the "without project" scenario and $0.56 in the "with project" scenario, and US$0.03 for water from hand pumps. The average variable cost of piped water reflects the use of local sources, which would be blended with Tuyamuyun water to satisfy incremental demand. 3.41 Economic Benefits. Benefits were assessed for each type of beneficiary. The starting point for estimating benefits was the "Willingness to Pay" survey carried out under the Social Needs Assessment in November 1994. This was complemented by the "Water Vendors" survey, the "Taste Tolerance Survey," and the "Hand Pump" survey carried out during the preparation phase of the project. Data availability allowed a detailed estimation of benefits for different beneficiaries. 3.42 Economic Rates of Return. The analysis assumed an average project economic life of 30 years after construction. The replacement costs of those components with a shorter life span such as the pumps and motors for the pumping stations, and the filters and the pumps for the hand pumps, were included in the cost strearn. Although the life span of the pipelines and distribution networks is about 40 years, no residual values were included in the calculation. Cost and benefit streams were calculated for the "without project" situation and the "with project" situation. 3.43 The various subcomponents of the proposed project including the technical assistance were packaged together to define 10 individual schemes, 6 water schemes in Karakalpakstan, 3 individual schemes in Khorezm and 1 sanitation scheme in both regions. Table 3.8 summaries the net direct economic benefits for the various types of beneficiaries used in the base case scenario.  -44 - Table 3.8: Net Direct Economic Benefits by Beneficiary (in US$ February 1996 prices per month) Cost Savings by Not Having to: Beneficiary Fetch Buyfrom Boil Consumer Total Water Vendors Water Surplus Benefits Urban household with new piped supplies 0.25 0.23 0.16 1.66 2.31 Urban households with improved piped supplies -- -- 0.16 0.49 0.64 Rural households with new piped supplies 0.48 -- 0.16 2.01 2.62 Rural households with improved piped supplies -- -- 0.16 0.93 1.09 Rural households with new desalination 0.39 -- 0.16 0.17 0.78 Rural households with improved desalination 0.05 -- -- 0.33 0.38 Rural households with new hand pumps 0.08 -- -- 0.36 0.44 Rural households with improved hand pumps 0.12 -- -- 0.11 0.23 3.44 Sensitivity Analysis. Several risks that would jeopardize the successful implementation of the project and effect its economic return were identified. They included: (b) reduction in benefits because waste and losses would not reduce to the levels proposed under this project, reduction in production costs do no materialize, assumptions regarding cost savings of not having to boil water and not having to buy water from vendors are over-optimistic, and time savings of not having to fetch water are less than expected; (b) increase in costs because of unexpected expenditures, and higher operations and maintenance (O&M) costs; and (c) a lag in benefits because of construction delays. 3.45 Two sensitivity analyses were carried out for the proposed project. The first one is a deterministic one, and assess the impacts on the economic rate of return of: (a) an increase in investment costs of 15 percent above contingencies already included in the base case; (b) a decrease in benefits of 15 percent; and (c) a one-year delay in beginning the implementing the project. The second analysis is a risk-based sensitivity analysis. Given the high degree of uncertainty surrounding the data used in the evaluation, it was considered appropriate to carry out a risk-based sensitive analysis using the @RISK simulation packages, which uses a Montecarlo probabilistic approach. The results of the analysis are summarized in Table 3.9 and Table 3. 10. Table 3.9: Results of a Deterministic Sensitivity Analysis Scenario Internal Economic Rate of Return Karakalpakstan Khorezm Both Base Case 17.6% 18.2% 17.9% Costs increase by 15% 15.2% 16.2% 15.7% Benefits decrease by 15% 10.9% 12.9% 11.9% Project delays by one year 15.4% 16.1% 15.7%  -45 - Table 3.10: Results of the Risk-Based Analysis Subproject Min Mean Max Rural sanitation, Karakalpakstan and Khorezm 2.4% 2.7% 3.1% Rehabilitation of Urgench piped water supply, Khorezm 5.7% 10.2% 13.8% Rehabilitation of rural desalination units, Karakalpakstan 4.1% 10.8% 17.4% Expansion in rural areas with local water sources, Khorezm 6.9% 11.0% 15.4% Expansion in rural areas with local water sources, Karakalpakstan 5.9% 12.0% 16.7% Kizketken piped water supply, Karakalpakstan 7.2% 12.3% 17.8% Rehabilitation of Nukus piped water supply, Karakalpakstan 7.4% 12.6% 16.9% Beruni and Turtkul piped water supply, Karakalpakstan 10.0% 17.7% 26.1% Rehabilitation of rural piped water supply, Khorezm 18.6% 25.3% 33.9% Rehabilitation of rural piped water, Karakalpakstan 21.5% 32.6% 46.1% All water schemes in Karakalpakstan 11.8% 17.5% 24.4% All water schemes in Khorezm 12.8% 18.2% 24.5% All schemes in Karakalpakstan and Khorezm 12.3% 17.8% 24.5% G. Project Benefits 3.46 The main benefits of the project would be more access to improved, adequate, safe and reliable water supply services for about 1.12 million people living in rural areas and 0.41 million people living in urban areas The project would also directly benefit about 50,000 inhabitants in rural and peri-urban areas with improved sanitation facilities. The project would improve the health and productivity of these populations. H. Project Risks 3.47 Various categories of risks are associated with the implementation of the project. These relate to the risk of: (a) completing the construction of the facilities on time and at the forecast cost; (b) building up the required capacity of the institutions to properly manage and maintain existing facilities and those to be constructed under the project; (c) lacking the capacity to pay by the benefiting population for the improved services; (d) achieving timely payment of water bills by large customers and governments agencies; and (e) the Government's reluctance to continue with the implementation of reforms. Should all these risks occur simultaneously, the adverse impact on the implementation of the project could be severe. This, however, is unlikely to happen. Considerable safeguards are built into the project for mitigating the risks. First, the project cost estimates include adequate provisions for price and physical contingencies. Second, strong project management with the support of experienced consultants would be in place at project start. Third, a _omprehensive technical assistance and corporate development program with training, to be implemented through a twinning arrangement and with the assistance of experienced consultants, should ensure that staff and management not only become familiar with modem utility management practices, but more important, apply these. Fourth, implementation of water conservation measures should diminish water waste in the future and lead to a reduction in operating expenses. Fifth, reinforcement of existing budgetary regulations should lead to the timely payment of water bills. Sixth, an annual project review would make it possible to take  - 46 - corrective actions, if necessary; and finally the proposed set of monitoring indicators and strong supervision should help realize the objectives of the proposed project. I. Environmental Impact 3.48 Environmental Assessment. Preparation of the project has included environmental studies consistent with the applicable procedures of the Government of Uzbekistan and the provisions of World Bank Operational Directive 4.01, "Environmental Assessment." In accordance with these procedures the consultants have prepared an environmental analysis, complying with the requirements of a category B project (see Annex E). The project is intended to implement a series of urgent schemes to improve the viability and operation of the water supply and sanitation sectors. The overall impact would be a substantial improvement in public health and quality of life while maintaining or improving the quality of regional water resources. 3.49 The project activities involve primarily rehabilitation of the existing pipelines and treatment plants by repairs, replacement or provision of spare parts and equipment. New constructions are limited to the completion of suspended civil works, development of alternative water sources, and modest expansions of the water mains and distribution networks. Impacts on traffic flow and problems of noise and dust from construction activities would be temporary and suitable mitigation measures would be taken to minimize these impacts. The project has a sewerage component consistent with the water supply schemes to handle any increases in sewage flow. The project also has a sanitation component integrated with a health and hygiene education program to enable maximum improvements in public health. Adverse environmental impacts of the project are therefore insignificant as compared to the overall benefits.  - 47 - REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT IV. PROJECT IMPLEMENTATION AND SUPERVISION A. Overall Organization 4.1 At present six organizations are responsible for management and operation of water supply systems in the project area. These comprise the bulk water suppliers (Tuyamuyun-Nukus and Tuyamuyun-Urgench), the Vodokanals, and the Agrovodokanals in each region. The GoU have recently initiated discussions with the concerned parties to reorganize the water agencies in each region. During negotiation it was agreed that a restructuring plan for these agencies would be produced for the Bank by January 1998. 4.2 The Project Implementation Unit (PIU) within the State Committee for Forecasting and Statistics (Goskomprognostat) would be responsible for the overall coordination of project implementation. It would administer the loan agreements negotiated with project cofinanciers, and would support the execution of the respective project components by the unified water utilities. It would be assisted by foreign consultants (the Project Management and Supervision (PMS) consultants) in the management and supervision of construction of the project components, and by the Planning and Engineering Design (PED) consultants for detailed engineering design and bid document preparation. 4.3 The PIU was established within Goskomprognostat in a capacity building effort during the preparation of the Pilot Water Supply Engineering Project, with funding from the Dutch Consultants Trust Fund, and is now fully operational. Goskomprognostat has a central coordinating role between the different ministries and other Government organizations, and this role makes it an ideal location for the PIU, to facilitate the coordination between the various regional and local agencies affected by this project, which have had no prior involvement in externally-funded projects. In addition, an Interagency Project Working Group (IPWG), with representation from senior officials from agencies participating in the project, has been advising Goskomprognostat throughout the preparation of the project and will continue to assist it throughout implementation. 4.4 In addition to overall coordination, the PIU would be responsible for common implementation functions such as project accounting, procurement, disbursements, consolidation of quarterly and annual progress reports, annual work programs and budgets. The PIU has appointed directors and established regional offices in Nukus, Karakalpakstan and Urgench, Khorezm which would act as local coordination agencies and facilitate the coordination between different Government agencies at the local level for all components. B. Performance of Existing Organizations Existing Structure 4.5 Overall Responsibility. The existing structure for project identification, design, implementation and operation in Karakalpakstan and Khorezm Oblast is highly complex, with different organizations having apparently overlapping responsibilities. Organization charts are included in Annex B. There are three main organizations with overall responsibility for water  - 48 - supply and sewerage, which are: (a) the Khakimiat (Council of Ministers in Karakalpakstan), with responsibility for water supplies in the urban and rural centers; (b) the Ministry of Agriculture, which is responsible for rural water supplies; and (c) the Ministry of Communal Services, which has some responsibility for water supplies in the urban and rural centers, and full responsibility for the development of the regional water supply systems. 4.6 Project Planning. Project implementation is based on the master plan prepared for the region some years ago, which aims to provide the whole population with piped water at an estimated cost of over US$1 billion. Project planning is carried out annually, based on this plan and the amount of funds likely to be available for each calendar year, by three separate offices in each region. For Karakalpakstan these are: (a) the Vodokanal for urban and rural centers; (b) the Directorate of Priaralye for rural water supplies; and (c) the Managing Office for Operations and Development of Regional Water Treatment Systems for the Tuyamuyun-Nukus pipeline system. The organizations in Khorezm Oblast are broadly similar except for the planning organization for urban and rural centers, which is the Managing Office for Capital Construction, rather than the Vodokanal. These organizations then commission designs, usually from the same design institute for each organization, and supervise construction. There is little or no consultation with the majority of the water supply operators during this process, the exception being Vodokanal Karakalpakstan, which plans and manages its own projects. This is the only organization which appears to carry out the majority of the functions expected of an implementing agency. 4.7 Construction. Construction is carried out by a limited number of governmental organizations, who usually operate in a particular area only, such as rural water supplies or urban water supplies. These organizations are usually state-owned enterprises that were formerly construction departments of various ministries such as the Ministry of Construction. Contracts are awarded based on the designer's cost estimate in 1991 rubles; there is no tendering process, and construction agencies are paid according to the cost estimates, with labor costs indexed to take account of inflation, and material costs paid at actual cost. Materials are usually provided by the client, and there is often difficulty in obtaining imported materials such as pipes, resulting in lengthy project delays. Problems often arise because the clients frequently exhaust their annual budget by September, and the construction organizations are often not paid until the following year's budget allocation becomes available, between February and April. 4.8 High rates of activity are often reported: Karakalpakstan Priaralye had an annual pipe laying program of 500 km up to 1993. Since then the rate has fallen to 150 km each year, but even this figure is misleading: in 1996 126 km of pipeline have been laid, but this is mainly relaying of pipelines which have been installed some years ago but never used, and now are deemed to require rehabilitation/relaying. Around 80 percent of the pipes can be reused during rehabilitation, so the Priaralye achieves its annual targets despite the fact that there is a shortage of pipes. 4.9 Construction Supervision. Supervision is carried out by the management organizations, but these usually have very few supervisory staff and typically one staff member supervises between 5 and 20 projects. These supervisors are also responsible for measurement of the works completed each month for payment purposes, so although the organizations claim that they are responsible for quality control, and check that the work complies with the design, it is apparent that the actual level of quality control is minimal. The capability within these organizations for supervision of construction of the components of this project, without external assistance, is  - 49 - clearly extremely limited. In addition, these organizations have no experience of working with international contractors or contract conditions, and competitive bidding by contractors is a new concept to them. It is difficult to visualize these organizations playing a significant role in implementation of the proposed project without training. At handover of projects there is usually a representative of the operator and the managing organization present to witness final testing of pipelines. 4.10 Operations. Operation is the responsibility of three agencies in each area: (a) Tuyamuyun-Nukus and Tuyamuyun-Urgench for the bulk water supply systems; (b) the Vodokanals for the urban and rural centers; and (c) the Agrovodokanals for the rural areas. The performance of these organizations over the past several years has been impaired by insufficient and inadequate equipment, a lack of funds, a shortage of supplies, ever-rising power costs, and to some degree over-staffing. The capital works program has been dictated by a centrally developed plan, which does not consider the needs of the region, or the ability of the regional organizations to finance, operate or maintain the systems provided. Moreover, the separation between the planning, design and execution of capital schemes means that the operators are often provided with schemes which cannot be operated, for example distribution systems in rural settlements where the trunk main linking the distribution system to the main pipeline has not been completed because materials are not available. This is particularly marked in the case of the Agrovodokanals: in Karakalpakstan it was reported by the Directorate of Priaralye that 600 km of distribution pipelines had been laid, but could not be commissioned because the associated trunk mains had not been completed. 4.11 Water tariffs are set at a very low level, partly because they are dictated by political expediency and the perceived ability of the population to pay, rather than the financial requirements of the operators. This fiuther hinders the operating organizations, and the combination of low tariffs and lack of resources to maintain the large scale projects provided for the regions, means that the condition of the systems is in a state of continual decline. Nonetheless, these organizations, or the combined organizations after the proposed reorganization, would be responsible for operating and maintaining the new systems. 4.12 Obi Hayet. This organization is a joint stock company in which the GoU at present holds a majority stake. Obi Hayet is predominantly a contracting organization, with a design capability, but are moving into the operations field. Obi Hayet has been appointed the implementing agency, and eventual operator for the Pilot Water Supply projects funded through Kreditanstalt fir Wiederaufbau (KfW) and have also been given the authority by the GoU to install and operate rural water supply schemes in other Oblasts of Uzbekistan. Their contracting arm is strong and has more commercial ability than the other contracting organizations, although at present they have little experience of operating water supply systems. Proposed Technical Assistance 4.13 Given these serious deficiencies in the local organizations, technical assistance has been included in the project, first to ensure that the project is sustainable in the longer tern, and second to ensure that project implementation is carried out in accordance with the Bank's and other cofinancier's requirements. The proposed organization of the Technical Assistance components related to the contract packages to be implemented is shown in the Project Implementation Plan.  - 50 - 4.14 The first requirement would be fulfilled primarily by the PMS consultants, who would provide the international expertise required by the implementing organizations at the regional level. They would utilize largely local staff to carry out the construction supervision for the majority of the Water Supply component, and would be responsible for organizing and carrying out training programs for the local staff to provide familiarity with international contract procedures prior to commencement of implementation. They would also assist the PIU to monitor and coordinate other consultancy assignments. The Sanitation and Health Consultant would be responsible to the PIU/PMS consultants for the implementation of the Sanitation and Health component, including developing technical specifications for procurement of goods under the individual subcomponents. 4.15 In order to assist the operating agencies in the longer term, three consultancies are planned: an Institutional Strengthening program; a Demand Management and Loss Reduction program; and a Tariff Study. In addition, the role of the Sanitation and Health Consultants would include institutional strengthening and capacity building in this sector. Draft Terms of Reference were discussed and agreed with the GoU during the pre-appraisal mission in October 1996. C. Implementation of Components 4.16 Overall Management of Implementation. Annex B shows the proposed organization for implementation of the project. The PIU would be responsible to Goskomprognostat for the project implementation, and they would be assisted by the PMS consultants and the PED consultant. The PIU would coordinate the consultants responsible for the Sanitation, Health and Hygiene component, the Institutional Strengthening Program, and the Demand Management Program. Specifications for procurement for works, goods and services under these contracts would be provided by the consultants, assisted by the PED consultants. 4.17 The PED consultants would overlap with the detailed engineering designs for the full scale project funded under the Pilot Water Supply Engineering Project and assist the PIU in contract bidding and supervising works for the pilot project. They would also be responsible for supervising, inspecting and monitoring the quality of the construction of works and the installation of equipment to ensure compliaice with drawings and specifications. 4.18 The PMS consultants would assist the PIU to manage the tender process, carry out bid evaluations, and finalize the contracts for the subsequent goods and works packages including obtaining approvals or no objections from the Bank and other cofinanciers. Most of the contracts would be fully engineered by the PED consultant prior to bidding and award. The Project Implementation Plan indicates where the other consultants would have an involvement in the procurement process, generally in specifying the goods or works to be provided and preparing the necessary technical specifications, but with the actual procurement process being handled by the PIU and PMS consultants. A step-by-step outline for procurement of International Competitive Bid works is included in Annex B. 4.19 A project launch workshop would be held soon after the loan becomes effective, with the participation of the PIU staff and key officials of the different Government agencies, to provide a sound understanding of the project, proposed implementation arrangements and Bank's and other cofmancier's procedures and practices. 4.20 Water Supply Component. Bank experience and practice encourages implementation of the project components by the ultimate operators, so as to foster ownership and ensure that  - 51 - training is being provided during the construction and installation phase. Supervision and management of the works contracts would be carried out largely by the PMS consultants, but with the active participation of the regional Vodokanals. The PMS consultants would be encouraged to recruit local staff (on secondment) jointly with the PIU from the current construction supervisory organizations as far as is possible, for the duration of the project. The secondment of staff would build up ownership of the new installations by these agencies, train staff during project implementation, and eventually lead to the building up of a capital works division within each of the water utilities. In accordance with existing practice, upon completion of the works, they would be turned over to the water utilities and included in their asset base. This arrangement is considered to be the most effective one for project implementation, since it would utilize existing experience, be only slightly different from existing procedures, and build up ownership. 4.21 In order to improve the level of service, increase cost recovery, and reduce water losses, urban and rural communities would be encouraged to form Community Water User Associations (CWUAs). The scheme is being introduced and tested initially in the Kizketken settlement under the Pilot Water Supply Engineering project. The 30,000 residents of this community have selected a committee of eight members with two women representatives to negotiate with the Vodokanal on all aspects of project design, implementation and operation, as well as the setting and collection of tariffs. Bulk metering is being introduced on a trial basis and the CWUA will be responsible for collecting tariffs and monitoring excessive water usage and water losses in the system. They will represent the community in pressing the Vodokanal to provide the level of service commensurate with the higher level of tariffs that they have negotiated with this agency. Experience gained in this community would be applied to extend the scheme to communities throughout the region. 4.22 Demand-based Rural Water Supplies. In Khorezm Oblast this component would be financed by the German aid agency KfW and implemented by Obi Hayet, which would also operate the schemes on behalf of the communities. Rural communities would be selected based on their willingness to pay for the improved water supply. They would be expected to cover the full O&M cost of the schemes which would be designed and costed with the full participation of the selected communities according to the level of service that they specify. As in the case of the urban areas, the rural communities would form CWUAs to represent them in negotiations with Obi Hayet for project implementation and operation. They would also be responsible for collecting water tariffs and monitoring excessive water use and water losses. The Republic of Karakalpakstan rural water supply component would be managed by the Sanitation, Health and Hygiene component consultant in close coordination with their other activities. The detailed implementation arrangements would be similar in the two regions and are spelled out in more detail in Annex B. 4.23 Sanitation, Health and Hygiene Component. This component would cover the rural portion of the project area and be demand-driven. Results of the five social assessments and of the sanitation, health and hygiene pilot projects developed during project preparation, and from Bank-financed projects developed elsewhere, such as the Nepal Rural Water Supply and Sanitation Project, the Peru Social Investment and Compensation Fund Project, and the India Uttar Pradesh Rural Water Supply form the basis of the design of this component. Participatory activities would aim at: (a) increasing ownership of the new and improved facilities and services  - 52 - that are provided by involving rural communities in planning, designing, implementing, operating and maintaining low-cost water supply, and sanitation and hygiene schemes; (b) introducing government agencies responsible for the provision of water supply, sanitation and health services to the benefits of stakeholder consultation and participation in decision making concerning improvements and expansions of these services; and (c) gaining a better understanding of cultural, social, socio-economic and community organizational factors that would lead to the selection of the most appropriate and sustainable interventions in the sector. 4.24 The Republic of Karakalpakstan and Khorezm Oblast are divided into 15 and 11 rayons (or districts) respectively, which are governed by local administrations known as Hokimiats. Within each rayon are a number of state or collective farms called Kolkhozes, and within each Kolkhoze there are distinct communities known as Auls. The numbers of each vary from rayon to rayon, for example, in Kegeyli Rayon (Karakalpakstan) there are 6 Kolkhozes and 131 Auls, while in Shavat Rayon (Khorezm Oblast) there are 12 Kolkhozes and 80 Auls. The Kolkhozes form separate administration units responsible not only for agricultural production, but also for the social and economic welfare of its communities. In each Kolkhoze participating in the project, a Kolkhoze Committee (KC) would be formed consisting of the Director (Reis), chief doctor, Aksekal (Aul community leader), and other community representatives. The KC would approve and coordinate project activities in each Kolkhoze and selects and advises the Kolkhoze Operational Group, composed of a senior nurse, chief of the construction brigade, a school teacher or nurse, and if possible a representative of SES. The Kolkhoze Operational Group assists construction teams, Aul nurses involved in health promotion and education, and school teachers and nurses to develop project activities in each Kolkhoze. 4.25 The KC liaises with the Hokimiats of the rayon to promote the project activities proposed in their Kolkhoze and to arrange project financing. A Rayon Project Manager in each Hokimiat would coordinate and oversee the project activities in the respective rayon. Both the KC and Rayon Project Manager would be assisted by an Interregional Project Management Unit (IPMU) consisting of the Sanitation, Health and Hygiene component consultant and up to ten local consultants. 4.26 Through the Kolkhoze Committees, rural communities would make decisions about the identification, design, implementation, operation and maintenance of the low-cost alternative rural water supply and sanitation schemes. Stakeholders (rural communities, community-based and other non-governmental organizations, local and regional governments, and water, sanitation and health services, as well as national government agencies and other institutions that were involved in project preparation) would be involved in participatory implementation activities such as health promotion and education activities, and the intersectoral committee that would assist project development. 4.27 The Kolkhoze Committees, who run the rural collective farms in the project area, would prepare, participate in the implementation, operate and maintain subprojects to improve water supply, sanitation and hygiene in their communities. The community-based water supply, sanitation and hygiene subprojects would have the following stages: (a) Preparation. The component would finance subprojects to install hand pumps, and other low-cost water supplies, latrines and handwashing basins, and health promotion activities, as well as to develop micro-enterprises which could produce  - 53 - inputs for the project. The Kolkhoze Committees would identify and prepare the subprojects, and would submit them to the Hokimiats. Preparation costs can be financed retroactively by the component, up to 10 percent of the total cost of the subproject. (b) Appraisal and Selection of Subprojects. Subprojects would be appraised and selected on a competitive basis by the Hokimiat, assisted by one representative from each Kolkhoze Committee, on the basis of transparent eligibility and selection criteria. Such criteria are included in the Project Operational Manual that will be prepared by the Sanitation, Health and Hygiene Consultant, and include: (i) type of proponent; (ii) type of project; (iii) budget; and (iv) time frame. The selection criteria include: (i) technical quality of the proposal; (ii) proportion of community co-financing; (iii) community participation in operation and maintenance arrangements; and (iv) sustainability of the subproject. (c) Financing. Each Hokimiat would be allowed to approve subprojects up to an annual financial allocation established on the basis of a formula described in the Project Operational Manual. (d) Implementation. Subprojects would be executed by community-based organizations (CBOs), other non-governmental organizations (NGOs), and local private contractors. Payments would be made directly from the PIU to the contractors on the basis of authorizations from the Hokimiats. (e) Technical Assistance. The PIU would retain the services of a consulting firm (the Sanitation, Health and Hygiene Consultant) that would assist KCs and Hokimiats in preparation, appraisal and selection, financing, and implementation of the subprojects. (f) Monitoring and Evaluation. The PIU would retain the services of an independent consultant to carry out an ex-post evaluation of a sample of subprojects. Such evaluation would use a mix of beneficiary assessment and economic analysis. 4.28 Technical Assistance Components. The technical assistance to water agencies would be implemented directly by the water agencies, in close coordination with the PIU. This would foster a sense of ownership of the proposed project within the agencies themselves and is essential if the technical assistance is to be successful. During negotiation it was agreed that by October 1, 1997 the Borrower would: (a) tender, negotiate, and sign the consultancy assignments for Institutional Strengthening, and Sanitation, Health and Hygiene components; (b) issue the invitation for bids for the Tariff Study; and (c) complete the bidding documents for the first year investments to be financed under the loan. D. Procurement 4.29 General. The majority of the project construction packages would be procured through International Competitive Bidding (ICB). International and National Shopping (IS/NS) or three written quotations would be used to procure small items of equipment or civil works respectively. All IBRD-financed components, including consultants' services, would be procured in accordance with the provisions of the Guidelines for Procurement under IBRD Loans and IDA Credits published in January 1995 and revised in August 1996, and the Guidelines for the  - 54 - Selection of Consultants by World Bank Borrowers dated January 1997. Standard Bidding Documents and Standard Contracts for consultants and other documents issued by the Bank would be used as appropriate for civil works, goods and services to be procured. A general procurement notice was published in Development Business on March 16, 1997 advising contractors and consultants of the likely contracts to be awarded under the project. Procurement of the non-Bank-financed portions of the project would be done under the guidelines and procedures of the cofinanciers. 4.30 The procurement arrangements for the project components are described below, and are summarized in Table 4.1. Detailed procurement arrangements indicating the number of procurement packages, their value, and the method are presented in Annex C. Table 4.1: Procurement Arrangements (US$ million) " Project Element ICB NCB Other"' N.B.Fh' Total Works 53.23 1.67 9.06 9.42 73.38 (27.95) (1.43) (7.74) -- (37.12) Goods 4.29 -- 7.04 -- 11.33 (3.66) -- (6.04) -- (9.70) Consultancy Services and Training -- -- 26.46 0.83 27.29 (23.18) -- (23.18) Refinancing of the Pilot Project -- -- 5.00 -- 5.00 (5.00) -- (5.00) Total 57.52 1.67 47.56 10.25 117.00 (31.61) (1.43) (41.96) -- (75.00) a! Figures in parenthesis are respective amounts financed by the IBRD. b/ N.B.F. = Not Bank Financed. sf Other = short list, national and international shopping, simnplified NCB, and linited intenational bidding. 4.31 Civil Works. The majority of the civil works contracts proposed would have a value in excess of US$1 million and would be procured through ICB procedures. The rehabilitation of existing desalination units (US$1.2 million) would be procured by Limited International Bidding (LIB) since there are only a few firms with the requisite experience and expertise. National Competitive Bidding (NCB) would be used for works contracts estimated to cost less than US$1 million per contract up to an aggregated amount not to exceed US$5 million. 4.32 Minor works for community-based rural water supply, sanitation and health promotion activities, estimated to cost less than US$200,000 up to an aggregate amount of US$10 million, would be procured through quotations from local contractors or community-based societies under fixed-price contracts awarded following the soliciting and evaluation, under standard simplified national competitive bidding procedures satisfactory to the Bank, in response to a written invitation. 4.33 Goods. Procurement of goods would be either through ICB, IS or NS, the method of procurement being dependent on the value of the package and the type of goods to be purchased.  - 55 - For contracts for goods, to be awarded on the basis of ICB, the Borrower may grant a margin of preference of 15 percent or the amount of applicable customs duties, whichever is lower, to qualified domestic manufactures of goods in accordance with the IBRD procurement guidelines dated January 1995 and revised August 1996. Because of the limited availability of the particular equipment in Uzbekistan, the majority of the goods are expected the be sourced internationally. 4.34 ICB procedures would be used for goods estimated to cost US$300,000 or more. IS would be used for procurement of goods between US$300,000 and US$50,000, up to an aggregate level of US$6.0 million, and would require quotations from at least three suppliers from at least two eligible countries. NS procedures for contracts up to US$50,000 each would be used for locally available, off-the-shelf equipment and furniture items of small value and standard specifications up to an aggregate total amount of US$900,000. 4.35 Consultant Services. Five consultant services for the Bank-financed portions of the project would be selected through short lists of experienced international firms, in accordance with IBRD Guidelines for use of consultants, Guidelines for Selection of Consultants by World Bank Borrowers published by the World Bank in January 1997. 4.36 IBRD Prior Review. Prior review would be required for all civil works and goods contracts procured through ICB or LIB. Prior review would also be required for the first two NCB and simplified NCB works contracts and the first two IS and NS procured contracts for goods, and all consultancy contracts over US$100,000 for firns and US$50,000 for individuals. Letters of invitation, evaluation reports, proposals and negotiated contracts for these consultancy contracts would be pre-reviewed by the Bank. Other contracts would be subject to selective post- award review. 4.37 Reporting. The PIU would collect procurement information and report to the IBRD and other cofinanciers as appropriate for each contract award. In addition, information on the status of procurement under the project would be reported quarterly.  - 56 - Table 4.2: Procurement Thresholds (US$ thousand) Description Type of Procurement Prior Review Contract Value Works ICB All >1,000 NCB First two contracts 200 to 1,000 Simplified NCB First two contracts <200 Goods ICB All >300 IS First two contracts 50 to 300 NS First two contracts <50 Consulting Services Finns All >100 Firms TOR only up to 100 Individuals All >50 Individuals TOR only up to 50 E. Disbursements 4.38 The project is expected to be disbursed over a period of eight years, from mid-1997 to mid-2005, with an anticipated completion date of June 30, 2005. A closing date of December 31, 2005 is proposed. The disbursement profile was established using the Bank's past experience in the execution of similar projects. Forecast disbursements are shown in Annex C. Disbursements would follow normal World Bank and cofinancier's procedures and would be made against eligible categories of project expenditures by: (a) special commitments in support of letters of credit issued by the Borrower's bank in favor of foreign suppliers of goods; (b) direct payment to suppliers; and (c) reimbursement of eligible expenditures for payment already made by government agencies. 4.39 The Bank loan would be disbursed against the categories shown in Table 4.3. Table 4.3: Disbursement Categories (US$ million) Category Amount Expenditures to be Financed Civil Works 42.0 - 83% Equipment and Material 10.0 100% of foreign expenditures 100% of local expenditures (ex-factory cost) 83% of other items procured locally Consultant Services 9.0 100% Refinancing of the Pilot 5.0 100% Unallocated 9.0 Total 75.0  - 57 - 4.40 Disbursement would be fully Table 4.4 Estimated Disbursements documented, except (US$ million, IBRD fiscal year) that Statements of FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 Expenditures would Annual 1.50 5.00 6.00 13.00 18.00 17.00 10.00 4.50 be used for: (a) Cumulative 1.50 6.50 12.50 25.50 43.50 60.50 70.50 75.00 contracts for civil works, and equipment, costing less than US$300,000 equivalent; and (b) contracts for individual consultants and training programs costing less than US$50,000 equivalent and for consulting firms costing less than US$100,000 equivalent. All other disbursements would be fully documented. Full documentation in support of SOE would be retained by the PIU for at least two years after loan closing. This information would be available for review by Bank missions during project supervision and by auditors. The minimum application size for payments directly from the loan account or for issuance of Special Commitments is 20 percent of the special account authorization. Minimum application size until aggregate disbursements reach US$10.0 million would be US$200,000 and thereafter US$600,000. F. Special Account 4.41 In order to facilitate disbursements, a Special Account (SA) would be established by the PIU in a commercial bank on terms and conditions satisfactory to the Bank. The selected bank should have: (a) significant foreign correspondence network covering all currencies; (b) reasonable capacity and experience for issuing letters of credit, for making direct foreign payments and other international transactions; (c) the capacity to perform a wide range of banking services at local branches, including cash payments, transfers to other domestic banks, issuance of debit notes, application of conversion rates from foreign currencies; (d) the capacity to maintain adequate accounts for the SA as required by the World Bank and provide monthly bank statements to the PIU; (e) willingness to issue a Comfort Letter to assure that amounts deposited in the SA would not be set off or otherwise seized or attached to satisfy amounts due to a commercial bank by the Borrower; and (f) willingness to charge competitive rates for their services and provide reasonable interest income on the balances held. During early stages of the project, the initial allocation of the Special Account would be limited to US$1.0 million. However, when the aggregate disbursements under the loan have reached the level of US$10 million, the initial allocation may be increases up to the authorized allocation of US$3 million by submitting the relevant Application for Withdrawal. Replenishment applications should be submitted at least every three months and must include reconciled bank statements as well as other appropriate supporting documents. To facilitate disbursements, a Project Account would be established not later than October 1, 1997 in the currency of the Borrower, and maintained until project completion. The Project Account would be drawn upon to meet payments required in said currency in respect of contracts under the project. The Borrower would insure regular replenishment of the Project Account so that the balance of the amount in deposit therein shall be maintained on average at the equivalent of not less than US$300, 000.  -58 - G. Project Monitoring Mid-Term Review 4.42 The project would involve a number of Uzbek agencies, who so far have had limited experience with the implementation of internationally-funded projects and have not been exposed to the construction of large capital works. The risks inherent in the scope of the project and its location are substantial. In order to mitigate this risk, strong supervision would be required. As supervision tends to be more focused on specific aspects, there is the need to foresee a comprehensive mid-term review. This review would be conducted jointly by the Borrower and its agencies as well as the Bank and would include: (a) assessing the progress and success in implementing the project in relation to the planned targets; (b) reviewing the progress made in achieving the planned institutional modifications; (c) examining the improvements in overall operational performance in terms of water production, sales, maintenance, and staffing; (d) assessing the financial situation of the benefiting agencies, including tariff levels, cost recovery, accounts receivable, and inventory management; and (e) reviewing billing and collection, improvements in the accounting system, including applicable procedures. In view of the importance of the review, agreement was reached at negotiations that the Government would: (a) prepare, under terms of reference satisfactory to the Bank, andffurnish to the Bank, on or about April 15, 2000, a report integrating the results of the agreed monitoring and evaluation activities, on the progress achieved in the carrying out of the project during the period preceding the date of said report and setting out the measures recommended to ensure the efficient carrying out of the project and the achievement of the objectives thereof during the periodfollowing such date; and (b) review with the Bank, by June 15, 2000, or such later date as the Bank shall request, the report referred to above, and, thereafter, take all measures required to ensure the efficient completion of the project and the achievement of the objectives thereof, based on the conclusions and recommendations of the said report and the Bank views on the matter. Supervision and Monitoring 4.43 Implementation of the project would rest with the PIU. Unfamiliarity with the procedures of international lending agencies and the complexity and dispersion of the project would require considerable supervision efforts. Table 1 in Annex H sets out the supervision activities, which would require a total of 117 staff weeks until project completion. 4.44 With the completion of the execution of each component, management and operational responsibility would shift to the bulk water suppliers, the Vodokanals, and the Agrovodokanals. The technical assistance consultants would be required to draw up an operational action plan that would specify activities, training needs, responsibilities, outputs, time-lines, and performance measuring indicators which should help to ensure that the facilities would be operated according to acceptable standards. This operational action plan would be updated quarterly and would be included in the quarterly progress reports. 4.45 Success in project implementation would be measured against physical and financial performance targets as shown in Annex H. Agreement was reached at negotiations that the Government would ensure that: (a) the PIU and the agencies covered under the project would compare at stated intervals the actual performance for each of the target indicators against the appraisal estimate; (b) this comparison be included in the project progress report to be forwarded to the Bank on a quarterly basis; and (c) remedial actions be outlined if there is  -59- significant difference between the target andforecast values and a timetable be preparedfor the implementation of these actions. H. Accounting, Auditing and Insurance 4.46 Accounting. The water utilities are presently using a double entry cash-based accounting system that does not avail itself as a tool for proper utility management. Parallel to this accounting system, another system of records exists, which has its origins in the requirement of a planned economy with its objective to provide data on the actual performance in comparison to the planned values. As these systems are inadequate for sound financial and operational management, there is a need to design, implement, and operate an accounting system that would meet these requirements. Agreement was therefore reached at negotiations that the government would cause: (a) each water agency to contract consultants for the design and implementation of a utility accounting system under terms of reference to be agreed with the Bank which would provide, inter alia, that the system design be completed by December 31, 1998; and (b) the water agencies (or any successors thereto) could operate their respective utility accounting systems not later than July 1, 1999. 4.47 Auditing. Existing agreements related to the Pilot Water Supply Engineering Project stipulate that the PIU within Goskomprognostat have its accounts (including the project's accounts, the operations of the special account, and the use of statements of expenditures) audited annually by independent auditors acceptable to the Bank; and forward the audited accounts, together with the auditors' statement, to the Bank not later than six months after the end of its fiscal year. This agreement is restated in the proposed lending arrangements. As the project would cover the bulk water supplier Tuyamuyun-Urgench, Khorezm Vodokanal, and Khorezm Agrovodokanal in Khorezm Oblast, and the bulk water supplier Tuyamuyun-Nukus, Karakalpakstan Vodokanal, Karakalpakstan Agrovodokanal, and the Public Health Unit in the Republic of Karakalpakstan, agreement was reached at negotiations that the Government would ensure that each of those agencies would: (a) engage independent auditors acceptable to the Bankfor the annual audit of its financial statements, the project's accounts; and (b) forward the audited accounts, together with the auditors' statement, to the Bank not later than six months after the end of its fiscal year. 4.48 Considering that the water agencies have so far not been audited by non-government auditors, it is essential that they become familiar early on with the audit requirements, so that the audit can be completed in the foreseen time limit. 4.49 Insurance. With the exception of third-party liability insurance, none of the water and sewerage agencies covered under the project carries any other insurance policy, as Government agencies have so far covered the risks as self-insurers. Workers' compensation is arranged partly through the state-run pension system, and partly through the unions' social program to which every worker belongs. In the absence of an established insurance market in Uzbekistan, it is at present impossible to obtain insurance coverage for a variety of risks at reasonable premiums. Agreement was reached at negotiations that the Borrower would cause each water agency to: (a) complete and review with the Bank; by October 15, 1998, an assessment of its requirements for insurance; (b) prepare, on the basis of such review, a plan for insurance of its assets and operations against such risks and in such amount as shall be consistent with appropriate practices; and (c) implement such plan commencing January 1, 1999.   -60 - REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT V. AGREEMENTS AND RECOMMENDATION 5.1 During negotiations agreement was reached: (a) that the GoU would: (i) for the purpose of consolidating responsibilities for water production and distribution in the Project area: (a) by January 1, 1998 prepare and furnish to the Bank, for its review and comments, a plan for restructuring of the water agencies; and (b) implement such plan, taking into account the Bank's comments thereon, in accordance with a time-schedule agreed upon with the Bank (para. 1.29); (ii) (a) undertake the tariff study referred to in paragraph 1.38 under terms of reference which shall have been agreed upon with the Bank and which shall provide, inter alia, for the completion of said study by June 30, 1998; (b) fiurnish to the Bank, for its review and comments, the findings and recommendations of said study, promptly upon the completion thereof; and (c) prepare, by December 31, 1998, on the basis of said study and the Bank's comments thereon, and put into effect, by December 31, 2000, a tariff structure for water and sewerage services in the Project area which shall provide for the determination of said tariffs at such levels as shall enable each water agency (or any successor thereto) to generate revenues sufficient to cover its operation and maintenance expenses, working capital requirements and a reasonable portion of the cost of its investment program (para. 1.38); (iii) ensure that: (a) the dam of the Tuyamuyun Hydro System is inspected annually in accordance with sound engineering practice by independent expert(s) in dam safety approved by the Bank; (b) the report and recommendations of such expert(s) is forwarded to the Bank for its review and comment within three months of each annual review; and (c) any appropriate remedial action recommended by such expert(s) is promptly taken (para. 2.55); (iv) establish a Project Account not later than October 1, 1997 in the currency of the Borrower, and maintained until project completion. The Project Account would be drawn upon to meet payments required in said currency in respect of contracts under the project. The Borrower would insure regular replenishment of the Project Account so that the balance of the amount in deposit therein shall be maintained on average at the equivalent of not less than US$300,000 (para. 4.41).  - 61 - (v) by October 1, 1997: (a) tender, negotiate, and sign the consultancy assignments for Institutional Strengthening, and Sanitation, Health and Hygiene components; (b) issue the invitation for bids for the Tariff Study; and (c) complete the bidding documents for the first year investments to be financed under the loan (para. 4.28); (vi) have the PIU accounts (including the project's accounts, the operations of the special account, and the use of statements of expenditures) audited annually by independent auditors acceptable to the Bank, and forward the audited accounts, together with the auditors' statement, to the Bank not later than six months after the end of its fiscal year (para. 4.47); and (vii) (a) prepare, under terms of reference satisfactory to the Bank, and furnish to the Bank, on or about April 15, 2000, a report integrating the results of the agreed monitoring and evaluation activities, on the progress achieved in the carrying out of the project during the period preceding the date of said report and setting out the measures recommended to ensure the efficient carrying out of the project and the achievement of the objectives thereof during the period following such date; and (b) review with the Bank, by June 15, 2000, or such later date as the Bank shall request, the report referred to above, and, thereafter, take all measures required to ensure the efficient completion of the project and the achievement of the objectives thereof, based on the conclusions and recommendations of the said report and the Bank views on the matter (para. 4.42). (b) the GoUwould ensure the water agencies (or their successor organizations) would: (i) (a) cause each water agency for water distribution to set tariffs at such levels as would enable said water agency to generate revenues sufficient to cover its operation expenses, working capital requirements and a progressively increasing proportion of its maintenance cost; and (b) cause each water agency for water production to set such tariffs at such levels as shall enable it to generate revenue sufficient, when added to subsidies provided to cover the pumping costs, its operation expenses, working capital requirements and a progressively increasing proportion of its maintenance cost (para. 3.31); (ii) along with the Public Health Unit in the Republic of Karakalpakstan,: (a) engage independent auditors acceptable to the Bank for the annual audit of their respective financial statements, as well as the project accounts; and (b) forward the audited accounts, together with the auditors' statement, to the Bank not later than six months after the end of its fiscal year (para. 4.47); (iii) adopt and enforce procedures for the gradual reduction of water agencies accounts receivable for water supplies to farms and industrial establishments, including the use of contractual provisions in the annual contracts with such consumers requiring monthly payment for services supported by a bank  - 62 - guarantee, so that accounts receivable for water supply to farns and industrial establishments shall not exceed, on average, the equivalent of: 135 days of billing by the end of the year 1997, 120 days of billing by the end of the year 1998, 105 days of billing by the end of the year 1999, 90 days of billing by the end of the year 2000, 75 days of billing by the end of the year 2001, and 60 days of billing by the end of the year 2002 and each subsequent year (para. 3.34); (iv) (a) prepare a draft budget for each year, and a forecast of its projected water sales to each institutional consumer for the following calendar year, together with a statement of the total outstanding water bill of such institutional consumer; and (b) the draft annual budget for each institutional consumer would include allocations adequate to cover the amounts forecast and outstanding for water sales (para. 3.34); (v) (a) prepare a utility accounting system, referred to above, under terms of reference to be agreed with the Bank which provide, inter alia, for completion of said preparation by December 31, 1998; and (b) the adoption and operation by the water agencies (or any successors thereto) of their respective utility accounting systems not later than July 1, 1999 (para. 4.46); and (vi) (a) complete and review with the Bank, by October 15, 1998, an assessment of its requirements for insurance; (b) prepare, on the basis of such review, a plan for insurance of its assets and operations against such risks and in such amount as shall be consistent with appropriate practices; and (c) implement such plan commencing January 1, 1999 (para. 4.49). 5.2 Recommendation. With the above agreements and conditions, the proposed project would be suitable for a Bank loan of US$75.0 million to the Republic of Uzbekistan.   VI. ANNEXES   -64 - ANNEX A REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT ANNEX A A. DETAILED PROJECT DESCRIPTION AND COST ESTIMATES A. Project Description 1. Project Components. The proposed project comprises five main components: (a) water supply and distribution; (b) sanitation, health and hygiene; (c) technical assistance; (d) project management and supervision; and (e) refinancing of the Pilot Water Supply Engineering Loan. All costs shown below include contingencies. 2. Water Supply and Distribution (US$68.2 million or 68 percent of total base cost). This component has four main subcomponents: (a) Main Pipeline Supply System (US$38.8 million). (i) Rehabilitation of Piped Water Systems in Urban and Rural Centers in Karakalpakstan (US$6.1 million). This item would replace, or rehabilitate where appropriate, the sections of the urban distribution systems in Karakalpakstan, which are prone to failure or have excessive leakage. It would include the replacement of pipelines ranging from 150 mm to 400 mm and rehabilitation of 13 existing water distribution centers, in particular chlorination facilities. This item would allow reduction of losses and maintenance costs, and improve water quality by reducing the risk of groundwater inflow to the system. In addition, higher pressures within the distribution system would be achieved, which in turn would allow continuous water supplies to more consumers. (ii) Rehabilitation of Piped Water Systems in Urban and Rural Centers in Khorezm Oblast (US$4.6 million). This item would replace, or rehabilitate where appropriate, the sections of the urban distribution systems in Khorezm Oblast, which are prone to failure or have excessive leakage. It would include the replacement of pipelines ranging from 150 mm to 400 mm and rehabilitation of 14 existing distribution centers, in particular chlorination facilities. As in the previous item, this subcomponent would allow reduction of losses and maintenance costs, and improve water quality by reducing the risk of groundwater inflow to the system. In addition, higher pressures within the distribution systems would be achieved, which in turn would allow continuous water supplies to more consumers. (iii) Rehabilitation of Nukus Water Treatment Works (WTW (US$3.1 million). The existing water treatment work has a capacity of 65 Mld, but cannot produce water of satisfactory quality. This item would improve the performance of the filtration stage in particular, to provide water of a quality sinilar to the Tuyamuyun pipeline water, allowing blending of both waters at the treatment  ANNEX A -65 - works. The resulting reduction of turbidity would allow effective chlorination of the treated water pumped into the Nukus distribution networks'. (iv) Rehabilitation of Urgench WTW (US$3.1 million). The existing water treatment work has a capacity of 50 Mld, but at present because of the ineffective settlement and lack of suitable filter sand, the treated water if of poor quality. This item would allow for the rehabilitation of the treatment works, and provision of spare parts and chemicals to permit continued satisfactory operation of the plant. (v) Expansion of Urgench WTW (US$10.2 million). This expansion would increase the capacity of the water treatment works from 50 mld to 100 mld. (vi) Provision of Additional Trunk Pipelines in Karakalpakstan (US$8.5 million). This item would link the towns and small rural communities of Beruni, and Turtkul Rayons to the main Tuyamuyun piped supply system. It would involve the supply and laying of 26 km of 400 mm diameter pipelines. The item also includes the installation of 12.0 km of 800 mm diameter pipeline to link the North and the South water distribution centers in Nukus. This link would allow transfer and blending of Tuyamuyun water and surface water after rehabilitation of the Nukus WTW, increasing the utilization of the lower cost local source. (vii) Rehabilitation of Rural Distribution Centers in Karakalpakstan (US$1.9 million). Fourteen existing distribution centers would be rehabilitated, through installation of new pumps, generators and chlorination facilities (where necessary). (viii) Rehabilitation of Rural Distribution Centers in Khorezm Oblast (US$1.3 million). Ten existing water distribution centers would be rehabilitated, through the installation of new plant and equipment, including chlorination facilities. (b) Development of Local Water Supply and Distribution Systems (UJS$21.0 million). (i) Rehabilitation of Existing Desalination Units in Karakalpakstan (US$1.0 million). The approximately 300 EKOS electrodialysis units installed in Karakalpakstan would be provided with a supply of spare parts including membranes, pumps, control panels and other equipment. This subcomponent would also include a technical assistance element to cover operation and maintenance of the units. The plants would supply 15 percent of the rural population. I (ii) Rehabilitation of Chalysh Groundwater Intake in Khorezm Oblast (US$3.5 million). The current output of this source is 13.4 Mld, which is partially pumped into the Urgench distribution center. The potential capacity of the groundwater lenses has been recently estimated at 70 Mld. This item would maximize the High turbidities greatly reduce the effectiveness of chlorination, which presents a health hazard to consumers. In addition it makes the water much less palatable and causes staining of clothes during washing.  -66- ANNEX A potential usage and bring the total capacity to 60 Mld through the installation of 30 additional production wells as well as pumping and chlorination facilities to allow the source to deliver to the Khorezm trunk distribution system. (iii) Rehabilitation and Development of Groundwater Sources in Karakalpakstan (US$3.0 million). This item would rehabilitate groundwater intakes at four locations, Chimbay, Kegeily, Turtkul and Beruni. It would bring their total capacity to 5 Mld, 1 Mld, 8 Mld, and 6 Mid, respectively. This would allow an increase water supply to these rayons of 20 Mld, and would allow the lower cost groundwater to be used in place of Tuyamuyun water. (iv) Expansion of Demand-based Rural Water Supply in Karakalpakstan and Khorezm (US$13.5 million). This item would provide appropriate water supply systems in rural areas, generally using local sources, and requiring a significant element of cost recovery from the participating community and their full involvement in project design implementation and operation through Kolkhoze Committees. It would include an element of consultancy to determine the communities to be served, and carry out design and supervision work. The Kolkhoze Committees would make decisions about the identification, imnplementation, operation and maintenance of the alternative water supplies. (c) Water Demand Management and Loss Reduction (US$3.3 million). The objective of this subcomponent is to reduce leakage, wastage and other losses to economically acceptable levels. This would reduce the operating costs of the water utilities and improve levels of service to all consumers. Wastage of water is high, particularly in the urban areas, due to a lack of incentives to conserve water at the level of water users. The low water price for domestic consumers and the absence of metering encourage an inefficient use of water. This subcomponent would be implemented with the assistance of a water utility with ample experience in demand management. The component has two items: (i) Demand Management. Various methods of demand management would be developed in conjunction with the Vodokanals, Agrovodokanals and consumers, and tested by field trials to determine their effectiveness and economic and financial feasibility. Methods would include metering, including metering of blocks of flats, and selected residential areas with either individual or communal meters. The results of these trials would allow a decision to be made on whether or not a metered-based tariff system is viable in the near future. Consumer education and awareness programs would be developed and tested, and other approaches, such as replacing defective internal plumbing fittings in selected areas would be investigated. Physical work would be carried out by the Vodokanals and Agrovodokanals, with materials and equipment provided through this subcomponent. The results of the work would be combined to form a demand management program which would be implemented by the Vodokanals and Agrovodokanals.  ANNEX A -67 - (ii) Leakage Reduction. Leakage in the distribution systems is at present kept under control by restricting pressures, and reducing hours of supply. As supply hours are increased, and system rehabilitation carried out, a rational leakage control strategy would need to be implemented. This item would define the most economic policy, and assist the Vodokanals and Agrovodokanals to implement this. (d) Equipment for Operation and Maintenance (US$5.2 million). The Vodokanals and Agrovodokanals and the bulk water suppliers face severe difficulties in maintaining the water supply systems due to a shortage of equipment and materials. This subcomponent would address this by providing equipment which would be identified by the Institutional Strengthening Consultant and the Demand Management Consultant. There are two items in this subcomponent: (i) Small Equipment, Tools and Spares (US$1.5 million). These would be identified by the Demand Management consultant, and would comprise equipment and materials required for the demand management subcomponent as well as for the general operation of the distribution systems. The requirements would be confirmed following inventory checks of existing stocks, and stocks to be provided under other components of the project. (ii) Major Equipment (US$3.7 million). This would be identified by the Institutional Strengthening consultant, and would include major items of operating and maintenance equipment (cranes, hydraulic excavators, pipeline cleaning vehicles) and also mechanical and electrical equipment to complete the control center for the Tuyamuyun-Nukus pipeline. 3. Sanitation, Health and Hygiene Component (US$11.2 million or 11 percent of total base cost). This component would improve sanitation, health and hygiene in Phase 1 through the installation of low-cost rural water supplies (in the form of hand pumps), household latrines and improved toilets in schools and markets, as well as through health promotion and hygiene education. The capabilities of the Sanitary Epidemiological Services (SES) would be improved, allowing better monitoring of drinking water quality and sanitation and hygiene practices and facilities. The subcomponent would build on the participatory approach developed and tested by Helvetas/Red Cross during project preparation and would be implemented through a consultant. Phase 2 would include improvements to urban sewerage systems, as well as continuation of the Phase 1 activities. (a) Rural Sanitation (US$2.0 million). This would promote construction of improved latrines (elevated ventilated latrines) developed through the participatory approach during the pilot project, and installation of hand washing facilities in selected households, schools, primary health care services (feldscher stations, and rural polyclinics), canteens and public places in selected collective farns. The kolkhos committees would make decisions about the identification, design, implementation, operation and maintenance of the sanitation schemes to be put in place. The subcomponent would provide around 7,500 improved latrines and handwashing facilities, covering about 5 percent of the rural population in both regions. The  -68 - ANNEX A subcomponent would cover about 80 percent of the construction costs, and beneficiaries would cover the remainder. The subcomponent would include training of district managers who would supervise the implementation of the component. This subcomponent would also provide equipment, transportation, consultant services and training, namely of collective farm committee members and other staff in management and low-cost sanitation. (b) Health Promotion and Hygiene Education (US$4.0 million). This subcomponent would cover health promotion and hygiene education of the urban and rural populations of Karakalpakstan and Khorezm Oblast. As such, it complements the sanitation and hand pumps subcomponents of the proposed project, and is an integral element of the overall strategy for improving health and hygiene among the population through community-based approaches. Health specialists would assist the kolkhos committees developing and implementing the health promotion and education activities. The subcomponent would also cover the costs of an intersectoral committee that would aim at reviewing and assisting project activities. This subcomponent would includc: (i) Institutional Strengthening of Regional Health Centers. To promote healthy sanitation and hygiene practices in the project area, it would be necessary to strengthen the Centers of Health in Nukus and Urgench through training, improved communication and information systems, and outreach capabilities. Tlheir role is particularly significant in the promotion of breast feeding and early diagnosis of water related diseases, as well as safe drinking water, hygiene, and health practices. The item includes rehabilitation of the Center of Health buildings in Nukus and Urgench, provision of equipment, furniture and vehicles, training of trainers, and a study tour to Estonia Health Promotion Services. (ii) Training of Community Health Workers. The Centers of Health in Nukus and Urgench would have an important role in training and supervising the community health workers who would be the primary contacts with individuals and community organizations for promoting the installation of improved latrines, and in health and hygiene education. (iii) Health Education Activities. The Regional Health Centers would be involved in managing a grant fund to promote on a competitive basis the provision of health education activities by NGOs and private organizations. The Centers would also manage funds to cover publication and communication costs (e.g., leaflets, newsletters, newspaper space, and radio and TV time). (iv) Study of Knowledge, Attitudes and Practices Related to Water, Sanitation And Health The subcomponent would also cover the study of knowledge, attitudes and practices in Karakalpakstan and Khorezm, which would contribute to monitoring project progress and impact in both regions. (v) Intersectoral Committee for Water, Sanitation and Health. This subcomponent would cover the costs of an intersectoral committee that would aim at reviewing and assisting project activities. The PIU in Tashkent would be  ANNEX A -69- responsible for the secretariat of this committee, which would meet at least twice a year. (c) Water Quality Monitoring and Strengthening of SES (US$5.2 million). The principal objective of this subcomponent is to improve water quality monitoring, and sanitation and hygiene inspection of households and communal facilities in Karakalpakstan and Khorezm Oblast. In addition, the institutional and organizational efficiency of the Sanitary Epidemiological Services (SES) would be enhanced by improving the quality of health and water quality data collection, analysis and reporting, and integrating the data reporting for the region into the project Geographic Information System (GIS) on a demonstration basis. This subcomponent would involve the following activities: (i) Improving Water Quality Monitoring and Sanitation and Hygiene Surveillance (US$1.4 million). This item would include reviewing standards for water quality monitoring, and adopting modem monitoring programs. It would also review sanitation and hygiene rules, namely rules for sanitary inspection and chlorination of rural water supply, rules for food preparation and handling (restaurants, canteens), rules for emptying latrine pits, and for safe disposal or composting of pit contents, as well as for safe disposal of garbage. It would include the provision of vehicles to each district SES, equipment and supplies, consultant services, and training. (ii) Upgrade SES laboratories (US$3.1 million). This would include civil works to rehabilitate the regional and district (24) laboratories, provision of furniture and laboratory equipment, water testing equipment (including portable testing kits and equipment for testing by the membrane filtration method), local and foreign consultancy services, and training in water quality monitoring. (iii) Improving Health Data Collection, Analysis and Reporting (US$0.7 million). This includes selection of reliable and valid indicators for monitoring the water, sanitation and health situation in Karakalpakstan and Khorezrn Oblast and measurement of project inputs, outputs and outcomes; and creating an updated health infornation system in the two regions. Part of the item would involve the setting up of a Geographic Information System (GIS) for health data, which would involve: (i) agreeing on water, sanitation and health indicators to be included in the GIS; (ii) electronic transmission of data from Nukus and Urgench (SES) to Tashkent (SES and Goskomprognostat); and (iii) reporting and dissemination. This item would provide computers, communication equipment, software, consultant services, and training. Epidemiological studies on the impact of water and sanitation on health would also be funded under this item. 4. Technical Assistance Component (US$8.2 million or 8 percent of total base cost). This component has three subcomponents: (a) Institutional Strengthening of Water Utilities and Bulk Providers (US$6.7 million). This subcomponent would address the present deficiencies in the six organizations involved in providing water and sewerage services to the project area. It  - 70- ANNEX A is expected that in the near future these would be combined into two regional organizations, which would improve the situation, but even so, significant assistance would be needed. The item would consist of: (i) a program for carrying out regularly preventive maintenance; (ii) a program for monitoring and reducing operating costs; (iii) a program for reduction and management of accounts receivable; (iv) design and operation of a utility accounting system, including cost accounting; and (v) in-house and foreign training programs. The program includes consultancy services, training of trainers (six topics with six participants each). (b) Tariff Study (US$0.6 million). This subcomponent would finance a water and sewerage tariff study, which would lay the foundation for the introduction of new water and sewerage tariff rates for the various consumers groups. It includes consultancy services for the formulation and implementation of the new tariff structure and office equipment (four computers and software). (c) Refinancing of the Feasibility Study (US$0.8 million). Refinancing of the Kuwait Fund-financed project feasibility study. 5. Project Management, Design and Supervision (US$8.4 million or 8 percent of total base cost). This component would cover the costs of project management, project design, and construction supervision by the Project Implementation Unit, with advice and assistance from foreign consultants. Included in this component are consultant services, staffing of the PIU including the Director in Tashkent, the regional representatives, the GIS section and support staff. 6. Refinancing of Pilot Water Supply Engineering Project Component (US$5.0 million or 5 percent of total base cost). The pilot project components would be refinanced by the proposed project as agreed with the GoU in the Pilot project. Upon the effective date of the proposed project, the Bank would withdraw from the Loan Account and pay to itself all amounts required for repayment of the principal amount of the pilot project loan withdrawn and outstanding and all interest and other charges due thereon. Thereupon the pilot project loan would be canceled. The Pilot project funded the construction of a self-managed water supply scheme in the peri-urban areas of Nukus and the preparation of detail designs and bid documents by foreign consultants.  ANNEX A -71- Table Al: Detailed Project Cost Estimates Base Including Contingencies % % Cost Foreign Local Total Foreign Total Cost WATER SUPPLY Main Pipeline to Urban and Rural Areas Rehabilitation of Nukus water supply system 6.12 5.33 1.94 7.27 73.3% 6.2% Rehabilitation of Urgench water supply system 4.59 4.00 1.45 5.46 73.3% 4.7% Rehabilitation of Nukus WTW 3.06 2.67 0.97 3.64 73.3% 3.1% Rehabilitation of Urgench WTW 3.06 2.67 0.97 3.64 73.3% 3.1% Expansion of Urgench WTW 10.20 6.92 4.99 11.91 58.1% 10.2% Additional tunk mains, Karakalpakstan 8.47 6.13 3.84 9.97 61.5% 8.5% Rehabilitation of rural distribution centers, Karakalpakstan 1.94 1.49 0.77 2.26 66.0% 1.9% Rehabilitation of rural distribution centers, Khorezm 1.33 0.96 0.58 1.55 62.3% 1.3% Subtotal 38.76 30.18 15.51 45.69 66.1% 39.1% Local Sources Water Supply Rehabilitation of desalination units 1.02 0.85 0.34 1.19 71.8% 1.0% Rehabilitation and expansion of Chalysh groundwater-KF 1.53 1.42 0.39 1.82 78.3% 1.6% Rehabilitation and Expansion of Chalysh groundwater-WB 1.94 1.59 0.67 2.26 70.4% 1.9% Rehab. & Development of groundwater in Karakalpakstan 2.96 2.35 1.09 2.46 68.0% 2.9% Expansion of rural water supply, Karakalpakstan-WB 5.53 5.56 0.94 6.50 85.5% 5.6% Expansion of rural water supply, Khorezm-KfW 8.00 5.96 3.46 9.42 63.3% 8.1% Subtotal 20.98 17.75 6.90 24.64 72.0% 21.1% Demand Management and Loss Reduction-WB 2.02 2.21 0.11 2.33 95.1% 2.0% Demand Management and Loss Reduction-KF 1.24 1.50 0.00 1.50 100.0% 1.3% Equipmentfor Maintenance and Operation Minor Equipment 1.53 1.53 0.26 1.79 85.5% 1.5% Major Equipment 3.67 3.66 0.62 4.29 85.5% 3.7% Subtotal 5.20 5.19 0.88 6.07 85.5% 5.2% SANITATION, HEALTH AND HYGIENE Rural Sanitation 1.98 1.05 1.27 2.33 45.3% 2.0% Health Promotion and Hygiene 4.01 3.76 0.82 4.58 82.0% 3.9% Improving Water Quality Monitoring 1.38 1.51 0.07 1.58 95.3% 1.4% Upgrading SES Laboratories 3.12 2.53 1.06 3.59 70.5% 3.1% Improving Data Collection, Analysis and Reporting 0.72 0.81 0.02 0.83 97.9% 0.7% Subtotal 11.21 9.66 3.25 12.91 74.8% 11.0% TECHNICAL ASSISTANCE Institutional Strengthening Program 6.72 7.55 0.06 7.61 99.2% 6.5% Refinancing of Feasibility Study-KF 0.83 0.83 0.00 0.83 100.0% 0.7% Tariff Study 0.61 0.72 0.00 0.72 100.0% 0.6% Subtotal 8.16 9.10 0.06 9.16 99.3% 7.8% PROJECT MANAGEMENT AND SUPERVISION-WB 6.36 7.09 0.12 7.21 98.3% 6.2% PROJECT MANAGEMENT AND SUPERVISION- KF 2.06 2.48 0.00 2.48 100.0% 2.1% REFINANCING OF PILOT PROJECT 5.00 5.00 0.00 5.00 100.0% 4.3% TOTAL PROJECT COST 101.00 90.16 26.83 116.99 77.1% 100.0%  -72 - ANNEX B REPUBLIC OF UZBEKISTAN WATER SUPPLY, SANITATION AND HEALTH PROJECT ANNEX B B. PROJECT IMPLEMENTATION A. Outline Procedure for Processing ICB Contracts (Kizketken Pilot Project as an example) Contract Negotiations . World Bank (WB) publishes a Specific Procurement Notice (SPN) for the proposed contract in Business Development. 2. Planning and Engineering Design Consultant (PED) prepares the tender design and standard bidding documents to WB requirements. 3. The Project Implementation Unit (PIU) prepares a list of bidders which have responded positively to the SPN and sends the bidding documents and list of bidders to the WB for its "no objection" (NO). 4. The WB notifies the PIU of its NO or its conditional NO subject to recommended revisions to the bidding documents. 5. The PIU makes the revisions and sends the bidding documents to the list of bidders. 6. On the specific date of bid opening, all bids that have been receive are opened by the PIU according to the procedures outlined in the WB Procurement Guidelines. 7. The PIU arranges for the bids to be evaluated by a Bid Evaluation Committee consisting of representatives of Goskomprognostat, Ministry of Communal Services, Govermment of Karakalpakstan, Karakalpakstan Vodokanal (the "Owner") and the PED. 8. The Evaluation Committee makes its evaluation and selects the successful bidder, and the PIU prepares the evaluation report and sends it to the WB with the proposal from the successful bidder for its NO. 9. The WB reviews the evaluation report and proposal from the successful bidder and issues its NO or asks for more information if not satisfied. 10. Once the PIU receives the Bank's NO, it notifies the bidders of the outcome of its evaluation and invites the successful bidder to begin negotiations on a specific date. ii. A small negotiation team consisting of Goskomprognostat, Ministry of Communal Services, Karakalpakstan Vodokanal, and the PED will negotiate the final contract with the successful bidder. The contract is initiated by Goskomprognostat, the Ministry of Communal Services, and the Karakalpakstan Vodokanal and signed by the successful bidder. 12. The PIU sends the final contract to the WB for its NO. 13. After the WB NO is received by the PIU, it is signed by Goskomprognostat, the Ministry of Communal Services and the Karakalpakstan Vodokanal and becomes effective. 14. Copies of the signed contract are submitted by the PIU to the successful bidder, WB, Goskomprognostat, the Ministry of Communal Services and Karakalpakstan.  ANNEX B -73 - Contract Supervision 1. The contract will be supervised by a small construction supervision team consisting of the Project Management and Supervision Consulting Engineer (PMS) as head of the team, a Vodokanal construction supervisor, and Karakalpakstan Government construction supervision representative. The team will evaluate the quality of construction according to the specified standards and norms and construction process in confirmation of construction progress payments. The PMS Engineer will be responsible for resolving any minor disputes between the contractor and the Owner (Karakalpakstan Vodokanal). 2. The team will carry out regular inspections as specified in the contract and will submit reports in the PIU on contract implementation. The contractor will submit invoices to the PIU as specified in the contract. It will be the responsibility of the PIU to verify that the construction supervision team has approved the quality and quantity of the work performed by the contractor according to the terms of the contract. If it is satisfied, it will prepare a disbursement application (along with verification signed by the construction supervision team) for signature by Goskomprognostat and will forward the disbursement application to the WB's Loan Disbursement Department through the Resident Mission in Tashkent. 3. When the WB receives the disbursement request, it checks the information against the contract and if satisfied, transfers the funds to the contractor's bank account as specified in the disbursement application.  - 74 - ANNEX B B. Proposed'Implementation Arrangements for the Demand-Based Rural Water Supplies 1. Application or Initial Proposal or Request. Applications, proposals or requests may come in from different sources: the local administration (e.g., Kolkhoze administration,, grassroots initiative, implementing agencies, or government administration. The application s may come in on a 'walk-in basis' or in batches. Registration of the application has to take place in order to allow for follow-up and monitoring. Also, a confirmation has to be given to the source of the application. 2. Check Competence of the Project Owner. Is the application rehabilitation or a new system? 3. Check with Eventual Implementing Agencies. A check should be made whether the location is already soinewhere on the agenda of another agency which have the same or related fields of work (water supply, sanitation, hygiene education). Forces may be joined or, in the case of another agency already addressing the project, a decision is to be taken who will take care of the location. Additionally, a check should be made whether other development efforts are under way which are not related to water supply. Too much attention from different sources for the same location should be avoided as it may be confusing and putting too much stress on the population. This check may lead to the rejection of the project. 4. Check Water Supply Master Plan. Collect information about the medium and long- term planning regarding water supply for that location; what kind of water resources are indicated, main pipeline, ground water, etc.? 5. Field Visit 1: Reconnaissance Visit made by the Project Team. It is essential to build up a small, reliable and sufficiently representative bridge head within the project location. Therefore, it is proposed to establish a Water Users Association (WUA). This WUA needs to be actively involved from the start. It will represent the community but may also be the local partner of the project in communications with the community and execution of local assignments. Its activities would include: (a) check application or proposal realism; (b) re-check project's competence, based on field situation; (c) determine current water use practices and existing supply systems; (d) determine the range of technical possibilities; and (e) organize and establish a WUA (as the local steering committee). 6. Collect Additional Required Information. Collect information on the topography, demographics, health situation, and geo-hydrology. 7. Decide Whether Reconnaissance Visit is Sufficiently Successful. Outcomes would be, positive, go ahead with the next steps and activities, rejection of the project, or additional information or measures are required, decision pending and redo previous steps. 8. Field Visit 2: Outlining Made by the Project Team. Discuss with groups of men, women and local leaders water needs, affordability, contributions from the community, community organization. Offer, discuss and test acceptance of various technical possibilities, levels of service, cost of these, organizational consequences and measures. Establish a good idea about the future operating agency (who can in principle become the operator, also alternative organizational set-ups).  ANNEX B -75 - 9. Generate Variants. Based on the findings of the outlitiing visit, a set of variants should be drawn-up: a low variant, an intermediate variant, and a high variant (different service levels/technologies and hence different levels and arrangements of resources and organizations). The purpose is to generate and elaborate the variants on the technical, economic, social ad organizational main aspects, arriving at a so called 'functional design.' The functional design would give the participants in the project a reasonable idea of what they may expect and enable further decision making. Generating these variants is the primary task of the project team, assisted by for exatnple the envisioned operator if so required. Indicate or outline of each variant: (a) service levels (what type of supply, volume, quality); (b) technical systems (hardware); (c) investment, operational cost, total cost, least cost; (d) organizational setup and measures for operations; (e) further activities and work plan for implementation; and (f) tasks and responsibilities of the involved parties. 10. Field Visit 3: Discuss Variants. The variants (function designs) have been discussed with the representation of the beneficiaries target group as well as the eventual operator(s). This would include, seeking understanding on the variants, seeking consensus, and deciding whether (a) there is sufficient consensus and ground to continue elaboration of a variant or alternatively, (b) to redo the variants step with additional information or (c ) aborting the project 11. Formal Agreement on the Functional Design. In case of consensus, the plan, responsibilities and arrangements concerning the preferred variant have been formalized. This formal agreement is to be drawn up among the project, the target community representatives and the operator. This formal agreement is to be seen as a joint plan which needs further approval to proceed with a detailed design. 12. Seeking Approval with Competent Authorities (Regional Government, Water Utilities, Goskomprognostat). Does this functional design fit in the whole project framework (financing, implementing agencies, consultant support, approach, type of technology, etc.)? Is sufficient financing available for investment and eventual operation? Is there sufficient organizational capacity to implement this? Negative responses of the competent authorities may require re- doing certain steps or alternatively, abandoning the project. 13. Preparation of Detailed Design. Once formal approval has been given for the functional design, a detailed design can be made. This detailed design would consist of: (a) Technical. The traditional technical design and preparation for construction activities and results that is among other things: (i) drawings; (ii) bills of quantities; (iii) construction and manufacturing instructions; (iv) work planning; and (v) tender documents.  -76- ANNEX B (b) Operator's Organization. Setting up and preparation of e organization of the operator would include: (i) organizational design; (ii) human resources development (training); (iii) budget and budget control systems; and (iv) institutional development work plan. (c) Community Organization. Activities in order to prepare and organize the community: (i) work plan for community organization (determines who will do what, when and how); (ii) details on information campaign concerning service level, proper use of water; (iii) details on information campaign concerning paying for water, billing and revenue collection; (iv) details on public tap organization (user groups, caretaking arrangements); and (v) details on community contribution during construction (material, labors). 14. Discussion of Detailed Design. The detailed design has to be discussed with the involved parties (project, community, operator, authorities) and where necessary, adjusted. 15. Approval of Detailed Design. Once the whole detailed design package has been approved, the project would move to the next phase, implementation. The carious technical and organizational work plans can be elaborated and implemented. The detailed design approval can be laid down in an agreement among the project implementing agency (and/or operator), the community, and the competent authorities. 16. Construction Phase. The activities and sequence during the construction phase would be determined during the planning phase. Construction phase is not limited to technical activities regarding the technical infrastructure but would also include organizational and social activities. The contents of the activities would heavily depend on the outcome of the planning process. It is therefore not opportune to give a step-by-step process for the construction phase.  --- -- m m m U '-^' .......... .. t.... E _... _ .. .....-.... qU _-rn-rn----- =-- - - = = = = =- l ISE 10b1 80t OfZO "1 660t 66D2 6601 S0 S6 91 ----------- -o.lequamaldulI ----