Tajikistan - Dushanabe Water Project

Report No. PID8145 Project Name Tajikistan-Dushanbe Water Region Europe and Central Asia Region Sector Urban Water Supply Project ID TJPE57883 Borrower(s) Government Of Tajikistan Implementing Agency Dushanbe Vodokanal - Dvk Date PID Prepared September 14, 1999 Projected Appraisal Date July 15, 2000 Projected Board Date September 12, 2000 1. Country and Sector Background With a 1997 per capita GDP of only about US$ 330, Tajikistan is the poorest CIS country. Not more than some seven percent of the country's land resources are arable while the rest consists of mountainous areas. Agriculture contributes to about 25 percent of GDP and 50 percent of employment. About 30 percent of Tajikistan's total population of about 6 million inhabitants live in urban areas and over half of them in Dushanbe, the capital city. The country became independent in 1991 as a result of the breakup of the former Soviet Union. In 1992 broke out a civil war which, at varying degrees of intensity, continued until 1997 when a peace agreement was signed in June of that year. This agreement provided the basis for the development of a program of economic recovery and political stabilization which has been supported by the Bank, the IMF and the international donor community and which despite some temporary setbacks and occasional but isolated flare ups of violence has been holding together. Dushanbe has a population of about 800,000. (Note, however, that since (a) no census has taken place since 1989, prior to independence; and (b) a likely effect of the civil war was to accelerate rural migration to the, relatively, safer urban centers, Dushanbe's actual population may be higher than indicated in official statistics. A new national census is planned for the year 2,000). In line with the urban infrastructure investment policies and standards of the former Soviet Union, Dushanbe as the capital of an autonomous Soviet republic was provided with a water supply and sewerage system that ensured, according to official statistics, a service coverage rate of close to 90%. Investment for, and operating cost of, the services was, like in the case of other basic services, largely covered by subsidies from the center. Tariffs were set on the basis of social considerations and had no link with the cost of service operations whose efficiency was always severely limited by inadequate design and extremely poor quality of installations and equipment. After Tajikistan's independence in 1991, the generous inter-republican budget transfer system came to an end and the outbreak of civil war in 1992 sent the economy into collapse, and expenditure for covering even minimal operation and maintenance requirements were curtailed. This, in turn, accelerated the deterioration in the physical conditions of  water treatment plants and the distribution network. The effects of successive severe floods accelerated this deterioration in 1992, 1993, 1996 and 1998. As a result, water supply in Dushanbe has become highly unsafe, unreliable and inefficient as demonstrated by successive outbreaks of typhoid fever that took place in the past few years each claiming several hundreds of victims; service cutoffs that are a common occurrence in all areas of the city and can last from a few hours to several days; and the fact that Dushanbe's gross per capita production of treated water is about three times that of a city of comparable size in the Western hemisphere with probably close to 70 percent of produced water lost through network leaks, defective sanitary appliances and/or wastage by consumers. Institutionally, delivery of water supply and sewerage services is a responsibility of the Dushanbe municipality which owns the Dushanbe Water and Sewerage Company (Dushanbe Vodokanal-DVK) a, financially and administratively autonomous public sector enterprise which operates, in principle, on a commercial basis, though at this point it is largely insolvent and cannot meet its responsibilities. The preliminary information available regarding the water and sanitation services in Dushanbe indicates that, like in other CIS countries, the main issues include: - Poor conditions of facilities and equipment: Although the reported portion of the population with access to water supplies is close to 90 , only a fraction benefits from permanent reliable service. The water and wastewater networks and treatment plants are in a state of severe disrepair due to poor planning, inadequate design, low quality of materials and equipment used, and, above all, lack of appropriate periodic maintenance and repairs. - Inefficient operations: For the same reasons above (inadequate design, poor quality of materials, and lack of maintenance), water treatment plants and distribution equipment (pumping stations) operate inefficiently and perform badly in terms of cost/output ratios, especially in regard to energy consumption. Losses due to network leakage are estimated to reach up to 70%, especially in areas of high seismicity. - Financial non-viability: Unrealistically low tariff levels (USD$0.004/m3 equivalent for domestic consumers) combined with poor collection rates (20% overall but only 2% from domestic consumers and about 40% of collection received in kind) put water utilities (but other utilities as well) into a financially unviable situation and allows them to continue to operate only by resorting to the build up of inter-enterprise arrears. The lack of capacity of the State and local governments to finance investments and the minimal funding for symbolic maintenance results in a self- reinforcing trend to further degradation. A key issue - which applies to other local utilities as well - is the need to reverse the population's still prevailing view that water supply (and/or other basic public services) are a basically free commodity. If a minimum level of services is expected, it is necessary to raise the awareness among consumers that the cost of services must be recovered. Steep and sudden changes in tariffs or the introduction of enforced payment for services and other measures geared to increase customer discipline are likely to face some resistance and risk lagging implementation as they will have to take place in an political environment that is still extremely fragile and prone to unexpected crises and flare ups of violence. But it is clear that continued service in the medium term is - 2 -  only possible by putting DVK on financially viable basis through higher tariffs and better collections. - Lack of human resource capacity: One of the effects of the civil war was the abrupt departure of many technical staff previously in charge of utility operations. While the staff currently responsible for water supply operations demonstrate great resourcefulness in keeping the dilapidated systems alive and running (albeit at a low level of quality), there is an urgent need to upgrade the managerial and technical skills of existing staff. Responsibility for the delivery of water supply and sewerage services in Dushanbe (and other cities in Tajikistan) has been decentralized to the municipal authorities (hukumat), and the Government has relinquished virtually all of its responsibilities in the management of the sector. The Dushanbe Municipality - whose precarious financial situation mirrors that of the Government and the country as a whole - has been unable to muster the financial resources required to ensure a minimal level maintenance program and develop a medium- and long-term rehabilitation strategy for DVK (and other local utilities as well). In the past few years, water supply in Dushanbe has survived, to a large extent, thanks to financial or-in kind contributions from external donors (GTZ, USAID, ICRC) which have provided spare parts for pumping stations and chlorine supplies, the latter, primarily, in response to the periodic and severe outbreaks of typhoid fever which have occurred periodically since 1991. Such outside assistance has only been marginally successful for lack of local capacity. 2. Objectives The main objective of the proposed project is to help the Dushanbe Municipality and DVK begin addressing the most critical deficiencies of water supply services and to initiate the process of transforming DVK into a viable utility. Specifically, the project would assist DVK in improving the quality and reliability of water supply through: (a) reducing technical water losses by rehabilitating deteriorated network sections as well as improving network design and operations; (b) conceiving and implementing a program of effective demand management to reduce excessive water consumption and wastage; (c) repairing and/or replacing energy-inefficient and broken down pumping systems; and (d) increasing the quality of water by rehabilitating key elements (e.g., filter beds) of the existing water treatment installations. In parallel to these technical measures, the project would help DVK prepare and initiate implementation of a reform program of its management system with a view to: (a) increase its revenue through tariff adjustments, better bill collection, and reduction of arrears; and (b) improve its technical and commercial management efficiency. These actions along with the proposed investments would be implemented through a performance-based management contract between DVK and an experienced private utility operator. Given the limited financial resources available to finance the management contract, the responsibilities of the operator and the incentive mechanisms in the contract would be specific and limited to: (i) improving the performance and introducing more efficient operation of the water supply treatment and distribution system; (ii) conducting a program of demand management; and (iii) introducing and implementing managerial, commercial and financial systems in DVK. Given the advanced state of deterioration of DVK's systems and services, the severe shortage of resources, and the extremely weak management and operational capacity, the proposed project aims at reversing the present downward trend and helping to create the initial conditions for -3 -  sustainability. If this project is successful, private sector involvement is expected to continue at a higher level of commitment and risk than possible today. 3. Rationale for Bank's Involvement Except for the Islamic Development Bank, which is potentially interested in participating in the project, no other external donor is currently active in the water supply (and/or other local utilities) in Tajikistan except in small-scale emergency relief operations (GTZ, USDAID, ICRC, various NGOs). Switzerland, however, has shown a strong interest in the project and has provided a CHF 300,000 (USD 200,000) grant for project preparation. The Bank's specific advantage is its comprehensive approach to economic and institutional development issues in Tajikistan as exemplified by the CAS process and its close cooperation with IMF. The Bank has been involved in the reform of public sector enterprises under IBTA I and SAC I and has therefore an extensive knowledge of the respective key institutional and financial issues in the public sector which allows it to minimize the risks that would otherwise arise from a piecemeal approach. Through its water supply operations (either ongoing or under preparation) and sector work in neighboring CIS countries (Kazakhstan, Kyrgyzstan, Uzbekistan) the Bank has also acquired a strong understanding of sectoral issues in Central Asia and is therefore in a good position to provide Tajikistan access to comparative and relevant experiences. Additional value added of Bank support in this project lies in: (a) requiring the introduction of commercial and cost- recovery practices in water and sanitation services in transition economies; (b) facilitating the selection and contracting of a private utility operator for the project implementation; (c) acting as catalyst for various policy and sector reform decisions; (d) assuring transparency in the selection of the most attractive offer from international operators through the use of Bank's procurement procedures; (e) supporting the project management and implementation arrangements; and (f) providing support to mobilize trust funds for the preparation of the project. 4. Description The project will consist of two main components: (a) emergency repair of, and/or rehabilitation works for, the water treatment plant and the water distribution network, demand management program; and installation and operation of an appropriate commercial and financial management system; and (b) a management contract. Additionally, the project will finance the operating costs for the Project Coordination Unit, technical studies, technical and financial audits, supervision of construction, and refinancing of a PPF. 1. Investment Program 1.(a) Water treatment plan rehabilitation 1.(b) Distribution network rehabilitation and repair 1.(c) Demand Management commercial/financial management operations. 2.Mangement contract 3. Other 3. (a) PIU operating costs -4-  3. (b) Technical Studies. 5. Financing Total ( US$m) Government 3.6 IBRD IDA 15 Total Project Cost 18.6 6. Implementation The proposed project would be implemented over a period of four years (2000 - 2004). The project would be implemented under the overall responsibility of the Dushanbe Municipality by the Dushanbe Water Supply and Sewerage Company (Dushanbe Vodokanal -DVK), which, to this effect, will create, within its structure, a Project Coordination Unit (PCU) staffed by DVK personnel and supported, during the preparation phase of the project, by consultants funded by Swiss grant financing, and reinforced during the implementation phase of the project by qualified foreign consultants financed by the Credit, unless grant funding can be identified. Among the responsibilities of the PCU is to supervise the performance of the management operator. DVK's capacity to make investment decisions and implement the project successfully is extremely limited and relying solely on DVK would pose an unacceptable risk. The management operator would take on the responsibility of implementing the investments, including designs, procurement and supervision of construction. All procurement would be done in accordance with Bank guidelines. Bank funding for investments would be available through an investment/operating fund and released only for investments proposed by the operator subject to Bank and DVK review and agreement. The definition, preparation and bidding for the management contract as well as detailed arrangements for project coordination and administration will be defined during project preparation with the assistance of a consultant with extensive experience in these matters. Credit funds will flow through on-lending arrangements from the Ministry of Finance to DVK with an appropriate guarantee from the Dushanbe Municipality. The Credit would be transferred to DVK under specific terms to be defined during project preparation. During project preparation, a Financial Management Specialist will carry out a financial management assessment. A financial management system for the Project account will be installed with the help of a specialized consultant before effectiveness. A more advanced project monitoring system (covering procurement, disbursement, physical progress, and financial management) will be installed by the management contractor. 7. Sustainability The sustainability of the project benefits will essentially depend on DVK's capacity to increase and then maintain its revenues at the level required to cover adequate operation and maintenance expenditure and on the success of the management contract in terms of reaching performance targets and improving the human resource capacity of DVK through effective project - 5-  implementation, improved DVK's operations, and training programs. Commitment to these dramatic changes is still being developed. The sustainability of the project during the implementation phase depends on the following factors: - The idea of bringing in a foreign operator is fully accepted and a contract is fashioned in a way that clearly articulates and aligns the incentives of both parties. Thus, it is crucial that the preparation of the contract documents is done openly and transparently with full participation and understanding of the Tajiki counterparts. To provide credibility, it is likewise essential that the operator is selected through an open and transparent competition, not only to achieve the best price for the scope of services requested, but also to ensure that the process of selecting the operator is beyond any suspicion; - The private operator is able to work successfully with the local staff of DVK, effectively transfers managerial, technical and financial know-how, and is given the freedom needed to employ sound management and operational practices; - The operator is fully committed and has the capacity to meet its contractual obligations under the difficult local conditions it will face; - The population of Dushanbe agrees to the increases in tariffs and DVK (with the help of the private operator) is able to increase collection efficiency from all user categories; - The operating revenues that the operator is able to collect grow to be sufficient to cover the operating and maintenance costs of DVK; and - The regulatory environment of all aspects related to the management and operations of the systems (e.g., construction permits, procurement, and water shut-off) are flexible and agile enough to allow the operator to carry out its functions unimpeded by political or other counterproductive interference. The sustainability of the project after implementation depends on the following main factors: - Improvements in the water supply services and operational efficiency are in line with the increases in tariffs and collection through which the population is expected to support the reform of the sector and contribute to better services; - The operator not only fulfills its obligations as contracted, but is also able to achieve significant improvements along the target measures, and thereby demonstrates to the Tajiki officials that the experiment with the private sector was successful and worthwhile and therefore could be continued; - The management and know-how brought by the operator is effectively transferred to DVK personnel and leads to fundamental changes in DVK's management and operating practices; and - Arrangements are set in place to ensure continued good management of the water supply services after completion of the project. During project preparation, the Bank will conduct discussions with the Tajikistan authorities concerned to obtain assurances that prior to the completion of the project, a specific plan is in place for the continued management of DVK. This plan would be decided after careful analysis of the lessons learned during implementation of the project and evaluation of the full spectrum of future options to continue with private management and operations possibly through a higher risk involvement, as probably the only option to sustain the gains of the project. -6-  8. Lessons learned from past operations in the country/sector The project is the Bank's first operation in the water sector in Tajikistan and therefore cannot build up on previous experience. The Bank experience in Tajikistan in general is still limited, particularly as far as infrastructure investment operations are concerned, and has been concentrated primarily on emergency operations (the Post Conflict Emergency Reconstruction Project and the Emergency Flood Assistance Project). The lessons that can be learned from the ongoing Bank operations include the following: (a) a need for high- level support and political commitment from the outset for both policy reforms and project design; (b) acknowledgement that institutional reforms will require significant time to be achieved; and (c) emphasis from the beginning on project staff development and training to improve the overall understanding of issues of water utility and project management issues. A project similar to this operation is currently under preparation in Uzbekistan. In that project, an operator will be hired under a management contract to manage and operate the water and sanitation services of the cities of Bukhara and Samarkand. The project in Dushanbe faces similar difficulties to the proposed project in Uzbekistan, such as lack of understanding on the side of government and the utility of the key reforms needed; a possible waning of commitment and interest once politically sensitive issues, for example institutional reform and cost recovery, are being dealt with; initial unrealistic and over-ambitious expectations; and a tendency to discuss investments first and keep institutional and financial matters for later. During project preparation a series of irreversible up- front actions will be agreed with the government for implementation before negotiations and effectiveness, such as agreement on a financial recovery plan, implementation of the required tariff increases, and the selection of an operator through an international competitive process. Nevertheless, the proposed project in Tajikistan faces even more difficulties than the proposed project for Bukhara and Samarkand, in terms of the financial viability of DVK, technical and operational capacity of its staff, lower affordability of high water tariffs by some segments of the population, and higher political risks. Among the lessons that can be learned from the Bank's general experience in the sector, and in transition economy countries in particular, and that are applicable to the case of this project are the following: - Project preparation requires strong involvement and ownership by the Borrower, the project executing agencies and other parties concerned, particularly in transition countries, where the need for reform, the unfamiliarity with the Bank's procedures, and the lack of a strong private sector, are more pronounced than in other client countries. The preparation of this project will require intensive and close work with the client and continuous interaction to ensure an adequate understanding of the reforms and the consequences of not implementing them with conviction. - The project scope will be based on a realistic assessment and projection of the financial capabilities of the utility and the commitment of the municipalities and oblasts to support a revenue increase program based on higher tariffs and collections. During project preparation, a financial plan will be agreed with a specific tariff increase program. The implementation of the first steps of this program will be defined as conditions to proceed - 7-  with the various milestones of project preparation. - Institutional strengthening programs for weak public utilities based on technical assistance programs have proven to be ineffective. The basic approach of this project will be to initiate the path towards institutional strengthening and financial viability through the involvement of a private operator with adequate delegation of managerial and operational responsibilities, combined with clear incentives to achieve the performance targets. The strengthening of DVK will take place through implementation of the project, particularly the operational improvement programs under the management of the private operator, and through specific training programs that the operator will undertake not only as a condition of the management contract but also to ensure achievement of the targets used to determine the bonus fee. - Conventional investment projects based on preparation of long-term master plans and detailed engineering designs for all components of the system prepared prior to project initiation tend to result in inefficient use of resources and unrealistic implementations schedules, and to have rigid mechanisms for allocation of resources. The investments will be proposed and implemented by operator who will collect information on the system as part of its contractual obligations, and will therefore be in a better position to propose the most adequate investments. The immediate investment program to be initiated by project effectiveness will ensure that the project is front- loaded with a group of well-defined components with clear benefits. - Project readiness is fundamental to achieve the project objectives and avoid delays in disbursements. In order to ensure adequate project readiness, the following steps would be taken during project preparation: - definition of the Immediate Investment Program ready by appraisal; final designs and bidding documents ready by Negotiations; bidding completed by Effectiveness; - establishment of PCU by, or prior to, appraisal; - draft documents for the management contract ready by appraisal; pre-bid conference held and bid package completed by Negotiations; and contract signed as a condition for first disbursements; and - expected increases in tariffs and collections achieved in accordance with financial improvement plan by negotiations and other milestones agreed during project preparation. - Innovative projects like the proposed one require intensive technical, procurement and managerial Bank supervision during project preparation and implementation. - A key lesson learned is that the implementation arrangements must be clearly defined. During project preparation a Project Operational Manual will be completed and agreed prior to negotiations, with clear arrangements for project implementation, including the responsibilities of the PCU, the operator, and DVK management. Successful project preparation and implementation require a strong PCU staffed with a core group of specialists fully involved in the project from the beginning and assisted by experienced consultants both in a long-term basis and in short-term assignments. - The institutional and policy reforms required for the success of the project need the involvement, commitment and support of the authorities with - 8 -  clear demonstrations of commitment during project preparation. Implementing the first steps of the reforms needed prior to project implementation will not only demonstrate the government commitment but will also facilitate the transition to private sector management and operation of the water and wastewater systems. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues There are no major issues 11. Contact Points: Task Manager Felix A. Jakob The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202)473-7073 The InfoShop The World Bank 1818 H Street NW. Washington DC. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending September 17, 1999. -9-