Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: 30909 Project Name YEREVAN WATER AND WASTEWATER PROJECT Region EUROPE AND CENTRAL ASIA Sector Water supply (95%);Sewerage (5%) Project ID P087641 Borrower(s) MINISTRY OF FINANCE AND ECONOMY Implementing Agency Municipal Development Project Management Unit Environment Category [ ] A [ ] B [ ] C [X] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [X] S 2 [ ] S 3 [ ] S F [ ] TBD (to be determined) Date PID Prepared December 6, 2004 Date of Appraisal Authorization November 2, 2004 Date of Board Approval February 17, 2005 1. Country and Sector Background Armenia intends to continue improvements in Yerevan's water and wastewater services initiated under its previous Bank-financed Municipal Development Project. The key strategy elements for Yerevan's water and wastewater sector are: · provision of reliable and safe, continuous water supply at affordable cost · reduction of environmental pollution · private operation and management of the service provider · economic regulation by Armenia's Public Services Regulatory Commission · financial stability of water and wastewater utilities. Technical, commercial and institutional issues that determine achievement of Yerevan’s water and wastewater sector strategy include: Technical Significant parameters of Yerevan’s water and wastewater systems are: · 48 percent of the 11.7 m 3 /sec water produced is pumped; · elevation differences require the distribution system to be divided into many pressure zones, with 23 regulating water reservoirs; only 65 percent of total 307,000 m3 reservoir capacity presently is in operation; · water consumption, domestic and non-domestic, is 2.6 m 3 /sec; unaccounted for water is 8.5 m 3 /sec or 77 percent of water produced; · water supply is intermittent for 52 percent of the population; overall average daily water supply is 16 hours; · although over 97 percent of Yerevan is sewered, its wastewater treatment plant has been out of operation for more than a decade. Page 2 In contrast to these difficulties, significant progress has been made in providing better water service. Because of reductions in consumption, pump replacement and rehabilitation, and more efficient systems management, energy consumption--YWSC's biggest expense--decreased from 240 million kWh in 1999/00 to 169 million kWh in 2003/04, a 30 percent reduction. Three districts of Yerevan have been fully sectorized. With extensive production, distribution and consumer metering, accurate determination of unaccounted water now can be made. About half of YWSC customers currently have continuous water supply, whereas prior to 2000, water in Yerevan was supplied on average six hours/day. Water quality also now is better monitored, with modern chlorination equipment and improved security at all water sources. Commercial Customers, metering and collections About 97 percent of Yerevan Water and Sanitation Company's (YWSC's) total 311,000 customers are households. More than 80 percent of households are individually metered; in 1999, only 1000 were. Three-quarters of households are in multi-apartment buildings; 95 percent of these have block meters, while in 1999 only 56 did. As of April 2004, 87 percent of billed water was metered; in 1999, seven percent was. Because of the metering campaign, service improvements, better collection procedures and adoption of a Debt Forgiveness Law, revenue collection increased from 21 percent of amounts billed in 1999 to over 100 percent in 2003. Tariffs and consumptions In April 2004 the tariff for water and wastewater in Yerevan was increased to AMD 90.2/m 3 (including VAT), from the previous AMD 56/m 3 . Prior to widespread metering in 2003-2004, household consumption had been billed at a 250 l/c/d consumption norm. By comparison, metered households now consume 100-120 l/c/d. Total 2003 billed consumption decreased to 97 million m 3 from 112 million m 3 in 2002, and is expected to fall to 57 million m 3 in 2004. Institutional and legal Sector organization According to Armenia's law on local self-government, communities are responsible for drinking water and wastewater services within their geographic boundaries. Supervision of the sector previously was shared among several ministries, but in February 2001, a State Committee for Water Economy (SCWE) was established, covering both drinking water and irrigation throughout Armenia. YWSC is a fully State-owned enterprise with paid-in capital of about US$70 million. Since May 2000, YWSC has been operated under a five-year management contract with an Italian operator, ACEA. SCWE manages Government’s share in YWSC. In December 2003, responsibility for economic regulation of the sector was given to the current Public Services Regulatory Commission. Page 3 Legal framework In 2002 a new Water Code was adopted, which includes possible models for management transfer to the private sector, including trust management, lease and concession. Within this context, Government plans to improve Yerevan's water and wastewater sector by contracting an international water operator for YWSC under a lease. The proposed project will finance investments in YWSC during the first five years of the lease. 2. Objectives The project objective is to provide Yerevan with safe, continuous water supply at affordable cost while reducing environmental pollution. 3. Rationale for Bank Involvement In 1998 Armenia received a US$30 million IDA credit for a Municipal Development Project (MDP) to improve drinking water services in Yerevan. To continue reforms initiated under the MDP, and build on its success, RoA has asked the Bank to finance a second phase of investments. Continuation of support to YWSC would complement a recently approved (FY04) IDA- financed Municipal Water and Wastewater Project (MWWP) for Armenia’s medium and small sized cities. The proposed support from IDA would permit YWSC to continue investments in better service, reduced operating expenses and environmental improvement, with least tariff impact on its customers. Financing these investments from YWSC cash flow would require currently unaffordable tariff increases and without IDA borrowings RoA's budget is unable to provide sector support in the magnitude required. The proposed Yerevan project also complements KfW and USAID activities in Armenia's water and wastewater sector. KfW is financing development of utilities in the cities of Armavir, Vanadzor and Gyumri. USAID has helped develop Armenia's water sector legal framework, is cofinancing the MWWP, and plans a new Water Services Improvement Project for the country. No other donor has been active in supporting water and wastewater in Yerevan. Continuous support and considerable funding still are needed to revive the Armenia's water and wastewater systems. Over the next two decades at least US$150 million will be required for rehabilitation of Yerevan's water and wastewater systems; replacement and renewal of all existing assets would be much more expensive, exceeding US$300 million. An investment program also exceeding US$300 million ultimately will be required for the rest of the country. The Bank's comparative advantage in Yerevan is the experience gained during successful implementation of the MDP. This experience, together with Armenia's need for support from all interested international financial institutions, suggests World Bank should continue to have an important role in improving Yerevan's water and wastewater services. 4. Description Component 1--YWWP Fund Page 4 Specific investments, with cost estimates, have been identified that directly support the project development objective. The operator will analyse these investments and prepare annual investment plans. The three categories of indicative investments are: Energy savings to make water and wastewater services more affordable by · Diversion of water production from pumped to gravity water resources; the diversion will be linked to progress made in reduction of unaccounted for water (mainly physical losses) through distribution system sectorization and rehabilitation/replacement of old/faulty mains; and · Increased gravity water production capacity and replacement of old inefficient pumping plants. Improved system reliability and control to enable safe, continuous water supply by · Rehabilitating storage capacity in water distribution pressure zones; · Realigning transmission mains in areas prone to landslides; · Increasing control over village water supplies; and · Improving distribution system water flow transferability to enable supply from different water sources. Reduced environmental pollution by: · Eliminating wastewater discharge into developed urban area water courses; and · Concentrating wastewater discharge at the existing treatment works for screening and sandtrap primary treatment. Component 2 --Technical Assistance and Training will fund interim operational management of YWSC, project financial and technical audits and PMU incremental operating expenses. Component 3 -- Refinancing of Project Preparation Facility. 5. Financing Source: ($m.) BORROWER/RECIPIENT 2.0 INTERNATIONAL DEVELOPMENT ASSOCIATION 20.0 Total 22.0 6. Implementation Recruitment of the private operator (lessee) is underway. The lessee will be selected on a least cost of tariff bid basis. The lessee will establish a separate company (lease company) for executing an eight-year lease contract. SCWE will become an asset holding company for Yerevan's water and wastewater sector. The lease company will have full use rights of YWSC assets (including those added under the YWWP) and the lessee will be fully responsible for management, operation and maintenance of the water and sewage system in YWSC's entire service area. Technical and operational performance criteria will be defined in the lease contract. The lessee will be responsible for billing and revenue collection and payment of all cash expenses (including debt service, but excluding capital investment). The lessee will be Page 5 responsible for identifying investments to be financed under the YWWP and for managing their procurement, and be responsible for design and supervision of these investments. The lessee will provide funds (specified in the lease contract) for system repair and rehabilitation. The Public Service Regulatory Commission will ensure tariffs agreed in the lease contract are acceptable and approved. A Project Management Board (PMB) chaired by the SCWE chairman will perform top-level (strategic) project management and supervision. SCWE owns all shares of YWSC, and the chairman of the SCWE will sign the lease contract on behalf of RoA. Ministerial stakeholders in the project are to be represented on the PMB. Operational monitoring and supervision of the project will be carried out by the Project Management Unit (PMU), which will work daily with the lessee to streamline decision-making. The PMB will review schedules and investment programs developed by the operator, and provide overall assurance that implementation activities are consistent with project goals, and that they are efficient and economic. The lessee contract specifies in detail respective rights and obligations of the PMB, the PMU and the operator. Project funds will flow from (i) the Bank, either (a) via a Special Account, which will be replenished by withdrawal application, or (b) by direct payment by withdrawal application, and (ii) the Government, via the Treasury at the Ministry of Finance and Economy (MoFE) by request of the PMU. Both Bank and Government funds will be managed solely by the PMU. All YWWP procurement financed by the Bank will follow Bank guidelines. The lease contract will not be financed by the Bank, but the Bank will ensure: · procedures used in lessee recruitment fulfill RoA's obligation to cause the YWWP to be carried out diligently and efficiently, and will result in selection of a lessee with necessary professional qualifications; · the selected lessee will carry out the lease in accordance with the agreed contract; · the scope of lessee services and tasks is consistent with project needs. 7. Sustainability Factors likely to be critical for sustainability of project benefits are: · continued improvement of Armenia's economy, with less unemployment and higher average wages, in order to generate sufficient funds to improve sector services; · continued strong sector leadership by SCWE; · regulator approval of contracted tariffs; · reduced operating costs through system efficiency improvements (specifically, reduced energy costs) and increased service levels to minimize costs to consumers; and · increased RoA funding of low-income family assistance program to offset costs of increased water and wastewater tariffs. Page 6 If factor outcomes are favorable, project benefits should be sustained without Government budgetary support for operation and maintenance of Yerevan's water and wastewater sector. Until Armenia's average incomes are a multiple of current levels, capital expenditures will continue to be unaffordable from utility revenue alone, and long-term financing will remain necessary. 8. Lessons Learned from Past Operations in the Country/Sector The proposed project benefits directly from Yerevan's successful experience with a management contractor recruited under the MDP. For the proposed YWWP, RoA has elected to intensify private sector involvement and competitively recruit an operator for YWSC under a lease contract. Now that YWSC has made significant quality of service improvements and tariff collections have improved markedly, project participants appreciate the need to strengthen the company's financial sustainability with appropriate tariff increases and bids for the lease will include the operator's required tariff. For simplicity in implementation, the proposed project incorporates Bank "expenditure eligibility" guidelines; all project disbursements 1 will be financed 90:10 by IDA and RoA. To ensure availability of counterpart funds, funding requests for each year will be prepared by the lessee and submitted to Government in advance of RoA budget preparation. 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP / GP 4.01) [X] [ ] Natural Habitats ( OP / BP 4.04) [ ] [ X] Pest Management ( OP 4.09 ) [ ] [ X] Cultural Property ( OPN 11.03 , being revised as OP 4.11) [X] [ ] Involuntary Resettlement ( OP / BP 4.12) [ ] [ X] Indigenous Peoples ( OD 4.20 , being revised as OP 4.10) [ ] [ X] Forests ( OP / BP 4.36) [ ] [ X] Safety of Dams ( OP / BP 4.37) [ ] [ X] Projects in Disputed Areas ( OP / BP / GP 7.60) * [ ] [ X] Projects on International Waterways ( OP / BP / GP 7.50) [ ] [ X] The proposed project is rated environmental category FI (Financial Intermediary) according to World Bank Operational Policy OP 4.01, because the exact investments will be defined during project implementation. The project will not present land acquisition or resettlement issues because works will be on property owned by YWSC, or on municipal land or rights-of-way assigned to municipal infrastructure. 1 Excluding refinance of the Project Preparation Facility. * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 7 Because of Yerevan's antiquity, chance finds of cultural or historical assets during construction are possible, in which case appropriate mitigation measures will be implemented (spelled out in the EMPF); no adverse impact is expected. Page 8 10. List of Factual Technical Documents Consultant (Fichtner) reports Concept paper (‘Presentation of the project and lease contract concept’) Environmental Assessment / Environmental Management Plan Social Assessment 11. Contact point Contact: Brian Steven Smith Title: Sr Financial Analyst Tel: (202) 473-2656 Fax: (202) 614-2656 Email: Bssmith@worldbank.org 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop