Report No. 20711-AZ Azerbaijan Water Supply and Sanitation Sector Review and Strategy June 30, 2000 Infrastructure Sector In Cooperation with: Europe and Central Asia Region Committee for Housing and Communal Property World Bank Apsheron Regional Water Company Document of the World Bank CURRENCY EQUIVALENT Currenc Unit = Azerbaijan M at (A2M) Value Date 1 USD = 1 AZM= 31 Dec 1999 4342 AZM USD 0.00023 31 Dec 1998 3890 AZM USD 0.00026 31 Dec 1997 3890 AZM USD 0.00026 31 Dec 1996 4114AZM USD0.00024 31 Dec 1995 4440 AZM USD 0.00023 31 Dec 1994 970 AZM USD 0.00104 GOVERNMENT'S FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ARWC Apsheron Regional Water Company ARRA Azerbaijan Reconstruction and Rehabilitation Agency AZM Azerbaijan Manat BOD Biological Oxygen Demand BOT Build-Operate-Transfer BWD Baku Wastewater Department CAS Country Assistance Strategy CHCP Committee for Housing and Communal Property DRA Demand Responsive Approach DM Deutsche Mark EBRD European Bank for Reconstruction and Development EU European Union FSU Former Soviet Union GBWSR Greater Baku Water Supply Rehabilitation Project GDP Gross Domestic Product IAS International Accounting Standards IDA International Development Association IDB Islamic Development Bank IDPs Internally Displaced Persons IFAD International Fund for Agricultural Development IFC International Finance Corporation IFI International Financial Institution IMF International Monetary Fund KfW Kreditanstalt fur Wiederaufbau LEA Local Executive Authority Lpcd Liters per capita per day MIGA Multilateral Investment Guarantee Agency NGO Non-Governmental Organization O & M Operations and Maintenance SECO State Secretariat for Economic Affairs of the Government of Switzerland UNDP United Nations Development Program UNHCR United Nations High Commission for Refugees USD United States Dollar Vodokanal Water and Wastewater Utility VU Vodokanal Union WHO World Health Organization WUA Water Users Association WTP Willingness to Pay Vice President: Johannes F. Linn (ECAVP) Count Unit Director: Judy M. OConnor (ECC03) Sector Unit Director: Ricardo A. Halperin (ECSIN) Sector Manager: Walter Stottmann (ECSIN) Program Team Leaders: Ede Iijasz/Jan Drozdz (ECSIN) AZORBAYJAN RESPUBLITASI AZERBAIJAN REPUBLIC NAZIRLOR KABINETI YANINDA MINISTRY OF HOUSING AND MONZIL-KOMMUNAL MUNICIPAL ECONOMY AT THE TeSeRROFAT) KOMITOSt CABINET OF MINISTRIES 37M016. 84i i* iliumoI cvi lisc n ovcrninwni*, RAtl, 370016 Tt*. 9-O. 93-.U67 TcItayv 142351 MIILYA Tgt: 9Q.O.n V.3.24A'T Tictayr 14235] MlLYA O6eCUeCeEHe 6030MoaCH, HaAJCENLIX 11 iiocirymwx yciiyr nO BoAocua6uceHm n Kafnnuanu AiR HaCeJICeKS A3epGaiijzana npn3znao EpaopHTCToM H cJionoto 3falJIrR, cTomeR nCpc crpauotE rlpaBmmcTmo IpepiHKHMaeT HeCKOTopLe pc4opmxu s cerCOpe, B JacT0ocTh HCe,Oe apanrmae 3aXo9ta O BoAocHa6xeune U Omouze C7To01bfx BOA. HacTonmSk oTqer ouenwe Teiymee cocronc cerropa BOA,IOCnaGKHHR U xKHaSm3agU a ropoAcxoA H cemLcKofl mecnioca Pecny6mou. 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Bce CTOfOHmi flOAzlM IZOHLEMaT CPOwOcn maaOR 38aAwa, UeffY BOA, H HCOGXKOJHOCTh peCXpM a ceH pe Awr ucpexoxa X ARCmrvyHROV n3wecOnoco6aouy noogy poema, xoTOpWI GyAr CnYZ)1 Hia ROH ]3MY IC TOWILUO HSCCeICHHB, HO U 3KOHOMHtIeCXOPdy pasumxIo A3epfattmcaa. 31 xre 6 no6naroAapn BccxpHe uBsi Ec 3a CoT)pyWfeCTBO B IWWDOTOBK AnEHoro oTqera. flocpe(cnoM HameH pa6cYru B o6cyxAxuft, Mi HUlaJ npoICeoc, KQlOPWl 3aiMe'T MEOrO fCT. Mm RaDeeMcX npoaoncrm Hamuy pa6oTy co Bceoipimm BaUXOM b 3TOM HaSpa8TeHHH. Ilfa;p FacaNos flpcceaTenab KoMBiCTa )Ksurwwo-Kommyuannoro Xolltkcma A3ep6AA^xmcxot PeenyGiu LETTER HASANOV May 12, 2000 The supply of safe, reliable, efficient and affordable water and wastewater services to the population of Azerbaijan is recognized as a priority and a challenge for the country. The Government has undertaken some reforms in the sector, most notably the recent approval of the Water Supply and Sanitation National Law. This Report has evaluated the current state of the water supply and sanitation sector in the urban and rural areas of the country. The evaluation shows that Azerbaijan has a high coverage of water supply in urban areas but the sector faces numerous challenges. This Report deals with very important issues, such as institutional reforms, financial issues, and technical changes needed to achieve a strategy to improve the water supply and wastewater services in urban and rural areas. The recommendations and actions presented in this report will be an useful guide to the Committee for Housing and Communal Property, the local authorities, the water and wastewater enterprises, and the communities in our joint efforts to improve the quality of services and make the systems sustainable. Every group needs to understand the urgency of the task, the value of water, and the need to reform the sector to initiate the change towards a sustainable approach that will not only benefit the urban and rural populations but also the economic development of Azerbaijan. I would like to thank the World Bank for its collaboration in the preparation of this Report. Through our joint work and workshops, we have started a process that will take many years. We hope to continue our work in the World Bank in this endeavor. Shair Hasanov Chairman of the State Committee of Housing and Communal Property Azerbaijan Republic AZERBAIJAN REPUBLIC WATER SUPPLY AND SANITATION SECTOR REVIEW AND STRATEGY CONTENTS EXECUTIVE SUMMARY ................... i . BACKGROUND. 1 II. THE STATE OF THE WATER SUPPLY AND SANITATION SECTOR: MAIN ISSUES AND CONSTRAINTS. 3 A. Population, settlement pattern and poverty distribution. 3 B. Water supply and sanitation service coverage. 3 C. Safety and reliability of water supply services. 4 D. Consumer coping strategies and impacts on the poor. 6 E. Physical condition of water and wastewater systems ..................................... 7 F. Technical efficiency of operations. 8 G. Water resources and environment - linkages to the water supply and sanitation sector .10 H. Sector organization, legal framework and governance relationships .12 I. Financial situation of the water and sanitation sector .16 J. Investment planning and selection .26 K. Similarities with other utility sectors .27 L. Activities of bilateral donors, international financing organizations and non- governmental organizations .28 III. THE NATURE AND DIMENSION OF THE CHALLENGE AHEAD: ELEMENTS OF A WATER AND SANITATION SECTOR VISION .33 IV. STRATEGY FOR SECTOR REFORM AND STRENGTHENING .36 A. Institutional and governance refor .36 1. Greater Baku Area - Autonomous full-service utility with private sector involvement 2. Medium and small urban areas - Autonomous commercially-run utilities under the regulatory control of local government 3. Rural settlement and villages - A demand responsive approach with conmmunity choice, ownership and responsibility 4. Urban fringe and refugee areas B. Financial reform .50 1. Financial viability of urban water and wastewater enterprises 2. Financial viability of the rural water supply and sanitation sector 3. Financing the sector investment through a concerted effort with stakeholders C. Technical reform .59 1. Metering as a tool to reduce consumption, wastage and operational costs and improve revenue collection 2. Improvement of operational efficiency of the system as a means to reduce operational costs 3. Cost-effective selection of investments: A combined path of service improvement with lower unit operational expenses D. Service reform .............................................................. 64 1. Water supply and sanitation services to the poor 2. Standards and level of water supply and wastewater services 3. Human resource capacity needs to improve services 4. Protection of the environment: a service of the sector V. NEXT STEPS TO IMPLEMENT THE SECTOR REFORM PROCESS .............................................................. 71 A. Programs to implement sector reform ......................................................... 71 1. Private sector involvement in the provision of water supply and wastewater services in the Greater Baku area 2. Municipal water supply and wastewater program 3. Rural water supply and sanitation program 4. Policy and human resource capacity program B. Assistance by the World Bank .............................................................. 76 C. Detailed Matrix of Recommendations ......................................................... 77 FIGURES Figure 2.1: Distribution of urban population Figure 2.2: Urban and rural population Figure 2.3: Water availability - selected cities Figure 2.4: Water availability by floor level - Greater Baku Figure 2.5: Water availability by income groups - Greater Baku Figure 2.6: Coping expenditures by income groups - Greater Baku Figure 2.7: Total coping cost composition by income groups - Greater Baku Figure 2.8: Pipe breaks/100 km/year Figure 2.9: Number of secondary and small cities ranked by staff ratio Figure 2.10: Approximate distribution of main water resources Figure 2.11: Water resources institutions Figure 2.12: Collection ratio Figure 2.13: Accounts payable and receivable - consolidated vodokanals Figure 2.14: Accounts receivable ARWC Figure 2.15: ARWC payables to Azeri Energy as a percentage of total payables Figure 2.16: Total collections/annual billings by customer category - ARWC Figure 2.17: Type of revenue collection by customer category - ARWC 1999 Figure 2.18: Number of vodokanals classified by domestic tariffs Figure 2.19: ARWC domestic tariffs Figure 2.20: ARWC Water tariffs 1999 Figure 2.21: Operating expenses/domestic tariff per cubic meter for all vodokanals Figure 2.22: Share of water consumption, revenues, collection and cash by customer category for ARWC 1999 Figure 2.23: O&M Cost Distribution ARWC Figure 2.24: Monthly water fee per capita for all vodokanals 1999 Figure 2.25: Stated willingness to pay as a percentage of income by income group TABLES Table 2.1: CHCP transfers to regional vodokanals Table 2.2: Partnerships and activities of bilateral donors, IFIs and NGOs in the water and sanitation sector Table 5.1: Detailed matrix of recommendations TEXT BOXES Box 3.1: Reforms and challenges of the water supply and sanitation sector Box 4.1: Options for private sector participation in municipal water and wastewater services Box 4.2: Features of main options for private sector participation Box 4.3: Making private sector participation in the water and sanitation sector responsive to the needs of the poor segments of the population Box 4.4: Requirements for successful involvement of the private sector in the provision of water supply and sanitation services in Greater Baku Box 4.5: Water and Wastewater Utility Regulators Box 4.6: Common characteristics of successful water and wastewater enterprises Box 4.7: The perfornance contract, the foundation of utility - municipal government interaction Box 4.8: Benchmarking Water and Wastewater Utilities Box 4.9: Decentralization and community participation Box 4.10: Actions and Responsibilities in the Institutional and Governance Reform in Medium and Small Urban Areas Box 4.11: Reasons why communities should manage implementation of a rural water supply and sanitation program Box 4.12: Measures to increase collections and reduce non-cash payments Box 4.13: Proposed criteria for selection of deserving targets for subsidies in the water supply and sanitation sector Box 4.14: Suggested sequences for selecting priorities and cost-effective investments Box 4.15: Key elements of a wastewater management policy ANNEXES Annex 1: Azerbaijan at a Glance Annex 2: Selected technical data on water and wastewater utilities of secondary cities and small towns Annex 3: Selected financial data on water and wastewater utilities of secondary cities and small towns Annex 4: Selected technical data on water supply systems in rural areas managed by CHCP Annex 5: Selected financial data for ARWC Annex 6: Incidence of water-borne disease in Azerbaijan Republic Annex 7: Organizational structure of CHCP Annex 8: Participants in the May 5, 2000 workshop for review of the Water Supply and Sanitation Sector Strategy Annex 9: Frequently asked questions and answers concerning private sector participation in the provision of water supply and wastewater services Annex 10: References MAPS Map 1: IBRD 30328 - Individual Poverty Rates (1996) Map 2: IBRD 30746 - Principal Water Sources and Treatment Plants for Greater Baku Map 3: IBRD 30747 - Cities with Vodokanals and Rural Areas with Institutional Services i AZERBAIJAN REPUBLIC WATER SUPPLY AND SANITATION SECTOR REVIEW AND STRATEGY EXECUTIVE SUMMARY 1. Azerbaijan's performance in achieving macroeconomic stability and resumption of growth since 1995 has been impressive, yet availability and quality of basic social services have been affected by a drop in Government current expenditure, from 24.7 percent of GDP in 1995 to 20.3 percent in 1998. In the water and sanitation sector, Government subsidies and capital investments have dried up, starving the sector of operating and investment capital and resulting in alarming deterioration of existing systems. In the future, Azerbaijan's growth will be closely linked to developments in the oil sector. Macroeconomic scenario analysis suggests GDP is likely to increase slowly, around two percent, between 1999 and 2002, and then grow very rapidly, close to 17 percent, between 2002 and 2005. With the country's overall opening to market conditions, the Government has undertaken initial institutional reforms in the water supply and sanitation sector, including recent approval of a National Water Supply and Wastewater Law, creation of an independent joint stock company (ARWC) for water supply services in Baku, decentralization of responsibility for municipal water and wastewater services to local government, and merging the agency in charge of rural water supply into the Comrnittee for Housing and Communal Property (CHCP). The State of the Water Supply and Sanitation Sector: Main Issues and Constraints 2. Lack of reliable data makes it difficult to present a precise assessment of water and sanitation service levels and quality. In urban areas and small towns, the population percentage served by piped water supply is relatively high compared to other countries with similar per capita income. Close to 95 percent of households in Baku and other primary cities are connected to piped water supply, and about 83 percent in secondary cities and small towns. Service coverage in rural areas drops off considerably, with about 11 percent of population served with piped systems, although this figure is understated as services provided by collective farms and agricultural enterprises from individual wells or irrigation canals are not included in official statistics. The wastewater network in Baku serves about 78 percent of the population (including internal displaced persons and refugees). At present, only about 50 percent of wastewater in Greater Baku receives treatment; the surplus is discharged untreated, primarily to the Caspian Sea. In other urban areas, wastewater coverage drops to 32 percent. The rural population relies on on-site solutions, primarily latrines and drain fields. 3. Despite high coverage in urban areas, the poor state of facilities, lack of maintenance, and insufficient resources available for operations have made water supply a major concern and source of discontent for the population. The problem has two dimensions-reliability (service interruption and low pressure) and water quality (color, taste, odor, and chemical/bacteriological contamination). Social surveys indicate 87 percent of Baku residents perceive piped water to be unsafe and 81 percent consider water shortages a severe or very severe problem. On average, water is available to individual households in Greater Baku about 22 days per month, four hours per day. Reliability and quality are closely interrelated, with insufficient water pressure a major cause of both intermittent water supply and poor water quality. Household surveys indicate 89 percent of Greater Baku's population does not drink directly from the water tap and between 9 and 13 percent of households report illnesses due to water. The population copes with low water quality through a variety of purification methods, including boiling (97 percent) and settling (81 ii percent). While all Baku households face substantial costs responding to unreliable and low quality water supply, lower income households in particular spend a high percentage of income (as high as 7 percent) on coping strategies. 4. The Greater Baku Water and Wastewater Master Plan shows virtually all system components are in very poor condition and not providing designed levels of service. Although detailed assessment has not been made for secondary cities, small towns and rural areas, inspection of several systems indicates sector infrastructure generally has not received major rehabilitation since the early 1980s and is in dire need of repair or replacement. Problems are rooted in deficient design, poor materials and construction methods, and compounded by insufficient maintenance, repair and timely rehabilitation. Without new funding, sector assets and service quality will continue to deteriorate. Facing these very difficult conditions, water and wastewater sector staff are doing a commendable job keeping systems in operation and trying to deliver water to customers. 5. The sector's technical problems are tied to a financial crisis resulting from: * Low collection of water and wastewater bills. Utilities under CHCP supervision collect about 40 percent of billings and although ARWC has made important improvement in collection (from 31 to 66 percent), its progress has stagnated in the last two years. * Extremely low collection of revenues in cash. CHCP utilities collected only 14 percent of 1998 revenues in cash; ARWC collected only 24 percent. * Tariffs insufficient to cover operation, maintenance and replacement costs. * High cross-subsidy of domestic consumers by other customer categories. Across-the-board price subsidies place heavy burden en Government budget and industry, fail to target the truly poor and encourage wasteful water consumption. The Nature and Dimension of the Challenge Ahead: Elements of a Water and Sanitation Sector Vision 6. The preceding assessment shows a sector moving rapidly toward levels of deterioration that, if not reversed, result in ever clecreasing quality of service and eventual water and wastewater systems collapse, with serious consequence for the well being of Azerbaijan's population. Provision of adequate, reliable, and safe services requires: * rehabilitating or replacing existing plants and networks to prevent systems collapse; * increasing plant and network efficiency to reduce operating costs; * institutional strengthening and capacity building to improve productivity and commercial performance; * expanding water supply and wastewater services to those presently unserved; and * expanding wastewater treatment coverage. 7. The magnitude of required investment is difficult to determine accurately. Rough estimates indicate more than USD 1,500 million may be needed to provide water services on par with Western Europe but with only basic wastewater services. Clearly, improving sector services in Azerbaijan to fully acceptable levels requires a timeframe measured in decades. The immediate challenge is to prevent collapse and restore basic service levels. The pace at which progress can be achieved largely depends on Azerbaijan's ability to: * increase resource mobilization from all sources. Because Government will not be able to contribute significantly, the only realistic financing source will be higher payments from iii consumers augmented by borrowings and grant contributions. Affordability and willingness-to- pay will be limiting factors, given current low collection of low tariffs. * ensure cost effective use of resources. Improved productivity of sector agencies, more efficient operations and scarce resources concentrated on cost effective and highest priority investment opportunities are essential. 8. While immediate action on several fronts is required, a clear strategic vision guided by international best practice is paramount. The proposed water and sanitation sector vision encompasses four key reforms: (i) Institutional and Governance; (ii) Financial; (iii) Technical; and (iii) Service. Institutional and Governance Reform 9. International evidence indicates successful water and sanitation sector management depends on: (i) clear division of functional responsibility among levels of government, the private sector, and other stakeholders; (ii) accountability through central government regulation and incentives for responsiveness to local constituents; and (iii) revenue sources corresponding to functional responsibilities. Given the specific geographical and technical situation in Azerbaijan, there are four distinct segments: * Greater Baku: the water and wastewater systems of Baku, Sumgayit, and Apsheron are technically and geographically linked. Given their size and complexity, optimal systems operation requires an integrated water and wastewater enterprise. Although ARWC is doing an admirable job operating its system and has improved its institutional and technical capacity through implementation of the Greater Baku Water Supply Rehabilitation (GBWSR) Project, it now has reached an improvement ceiling, mainly due to its constraints as a public sector organization. The urgency of water and wastewater problems in Greater Baku requires decisive action to respond to the crisis and mobilize necessary funds. To achieve dramatic improvement in efficiency and effective provision of services, the recommended institutional and governance setting is to recruit an international utility operator to manage the integrated system, with Government regulation ensuring quality of service and protection of consumers. The operator selection process must be transparent and competitive. * Medium and small urban areas: communities with populations larger than 5,000, whose water and wastewater systems require professional management and operation. The recommended institutional and governance setting is for restructured utilities with decentralized responsibility, to manage systems efficiently and strengthen ownership and involvement of the communities served. Regional support service units providing laboratory, engineering staff, planning and commercial systems, and specialized equipment would be available under Government-managed multiple competitive service contracts with the private sector. * Rural areas: communities with less than 5,000 population. Here water supply systems are relatively simple to operate and maintain. The recommended strategy is demand-responsive, with communities making informed choices regarding participation, service level, and delivery mechanism. Communities would own, manage and help finance their facilities; Government would encourage stakeholder participation, set policies and standards, and co- finance facilities. * Urban fringe areas and refugee areas: new settlements next to larger urban areas that are poorly served or have individual solutions. The recommended strategy is situation specific iv and could: (i) expand coverage from an adjacent urban utility or (ii) follow the rural area approach described above. In any case, community involvement is fundamental. Financial Reform 10. Without radical change in financial policies and practices, the water and sanitation sector's future viability and capacity to provide even minimal service will be impossible. Even if oil revenues were used to cover sector investment needs, the present very low maintenance expenditures would yield a new cycle of asset draining and soon return the sector to current levels-or worse. Financial reform must improve resource mobilization and financial viability through rational tariff structures, adequate and transparent subsidy policies, cost-effective investments, and service levels linked to willingness to pay. 11. For urban areas, there is an urgent need for: * Rigorous collection of bills in cash; * Tariff levels for full cost recovery; * Transparent, targeted and efficient subsidies; and * Improved financial management and planning. 12. The rural sector requires a fundamental shift of responsibility. Communities should decide whether to participate and at what level of service, based on willingness to pay capital and operating costs. Communities should set tariffs to meet a system's financial requirements. Government subsidy for rural water supply should be transitional and targeted to communities on a one-time basis. Government should coordinate all sources of finance, and balance urban and rural sector priorities. Technical Reform 13. A major reform in technical aspects of water and wastewater is required to reduce operating costs and improve efficiency through well-selected investments. The technical reform should be based on: * Metering as a tool to reduce consumption, wastage and operating costs, and to improve revenue collection. * Systems efficiency improvements to decrease operating costs, including: (i) reduced network leakage; (ii) improved network hydraulic efficiency; (iii) improved energy efficiency of pumping stations and treatment plants; (iv) maintenance to increase facility life; (v) proper pretreatment of industrial waste; and (vi) appropriate and low cost solutions for urban fringe areas and small and rural communities. * Cost-effective investments, combining service improvement with lower operating expense. Service Reform 14. The fourth key water supply and sanitation reform in Azerbaijan is to change the objectives and incentives of sector providers from construction and planning to adequate and cost-effective customer service. The service reform is based on: v * Improved service to the poor. * Appropriate standards and level of service. Financial resources available for the sector are extremely limited, and only the most urgent and highest priority investments can be made. Innovative, unconventional and interim solutions to problems will be needed. * Development of human resources. While skilled technical professionals perform admirably in keeping old facilities running despite insufficient funds for repairs and replacement, few staff have the experience and skills required to guide the reforms, particularly in non engineering disciplines such as planning, finance and commercial management. * Protection of the environment as a service of the sector. Implementing The Sector Reform Process 15. Proposed institutional, technical, financial and service reforms in the water and sanitation sector will require several years to implement. Four main programs are recommended: (i) Private Sector Involvement in Provision of Water Supply and Wastewater Services in Greater Baku; (ii) Municipal Water Supply and Wastewater Program; (iii) Rural Water Supply and Sanitation Program; and (iv) Policy and Human Resource Capacity Program. 16. Private Sector Involvement in Provision of Water Supply and Wastewater Services in Greater Baku: Implementation of sector reform for Greater Baku would be done through a program to accelerate efficiency and service improvements using an international utility operator under Government supervision. An accomplished international utility already would have faced and resolved similar operational problems and would not be subject to the same constraints and limitations that burden public sector enterprises. Integration of water and wastewater services across Greater Baku would bring significant economies of scale and create greater incentive to attract international operators of the highest caliber. Substantial reforms are associated with involving an international utility operator in Greater Baku and careful preparation is required. 17. Municipal Water Supply and Wastewater Program: Several issues common to water and wastewater utilities in medium sized cities across Azerbaijan would be addressed by a program focused on this sector segment. The program would serve as a transition toward greater private sector involvement in systems management and operation. Because of their number-more than fifty utilities-and the opportunity to learn during program implementation, a phased approach would focus on a set of cities that demonstrate willingness and commitment to reform with specific actions, particularly those supporting financial viability and that perhaps are difficult politically. 18. Rural Water Supply and Sanitation Program: The rural water supply and sanitation segment requires the most assistance (financial, technical, and human resources) and institutional change. The program would be built around basic principles of demand-based provision of service, community ownership and management of water systems, and facilitation by Government. A learning phase would develop and test institutional capacity, and community and private sector participation, before extending the approach nationally. The program would be initiated in districts with progressive communities and local governments interested in taking responsibility for developing their water supply and sanitation services. 19. Policy and Human Resource Capacity Program: Together with programs outlined above, sector stakeholders would benefit from a program of activities including: (i) Government's role as facilitator and regulator instead of direct implementing agency; (ii) understanding, monitoring and serving the needs of the poorest segments of the population; (iii) financial management and accounting of water utilities and community systems; (iv) tariff and subsidy policies; (v) adaptable and appropriate standards and enforcement (environmental, construction, drinking vi water); (vi) procurement and quality control; (vii) information collection and management for investment decisions and policy formulation; and (viii) water utility management. World Bank Assistance Strategy 20. The World Bank has been an active participant in the water supply sector in Azerbaijan since 1994 when the GBWSR project was approved. The project is co-financed with EBRD (USD$61 million dollar-equivalent IDA credit and a USD$23 million EBRD loan). The main project objective is to improve Greater Baku's water supply system through emergency short-term investments and institutional strengthening of ARWC. Given large sector needs in Azerbaijan, the project was envisioned as the first of subsequent operations. As part of its non-lending activities, the World Bank, in collaboration with ARWC and EBRD, organized in June 1999 a seminar on options for private sector participation in water and sanitation services. 21. Consistent with the Bank's Country Assistance Strategy for Azerbaijan, and with recommendations in this note, the main objective of any World Bank assistance would be to support a broad reform effort by Government in one or more sector segments (Greater Baku, secondary cities or rural areas). 22. The World Bank is prepared to continue dialogue with the Government of Azerbaijan on sector reform and to support immediate steps based on recommendations in this sector note. Additionally, the Bank will explore with Government the most appropriate segment (or combination of segments) of the water and sanitation sector where its lending and non-lending instruments can be most effective in supporting strategy implementation. Depending on the specific support needed, instruments used can include loans, guarantees, and equity investments. 23. As several IFIs and donors potentially are interested in the water supply and sanitation sector in Azerbaijan, agreement on a sector policy framework among the Government and the main international and national development financing institutions will achieve better coordination and effectiveness of sector assistance. The World Bank is ready to participate and support this effort. AZERBAIJAN REPUBLIC WATER SUPPLY AND SANITATION SECTOR REVIEW AND STRATEGY I. BACKGROUND Azerbaijan covers an area of 86,800 square kilometers on the southeastern flanks of the Caucasus Mountains, with its eastern portion bordering the Caspian Sea. About 40% of its population of 7.9 million people lives in the capital, Baku. GNP per capita is estimated at USD 490 for 1998. Azerbaijan is one of the oldest oil exporters in the world and is also well endowed with fertile agricultural land and a well-educated labor force [1]. The first four years after independence were characterized by turbulent political and economic dislocation and a conflict over Nagorno-Karabakh. By the end of 1995, measured GDP stood at only 34 percent of its 1998 value. Since 1995 the performance of Azerbaijan in achieving macroeconomic stability and resumption of growth has been impressive. Inflation, which was approximately 1,664% in 1994, fell to less than 1% at the end of 1997 and became negative in 1998. GDP recorded a growth rate of 10% in 1998. The resumption of growth was linked to strong investment in oil and oil-related sectors. Private capital flows linked to oil sector development amounted to almost USD I billion and financed the high level of current account deficits (24.4 percent of GDP in 1997 and 35.8 percent in 1998) [2]. A Poverty Assessment completed in 1997 found that over 60 percent of households are poor, and 20 percent are very poor (classified on the basis of food expenditures). The conflict over Nagorno-Karabakh created a large population of refugees and internally displaced persons (IDPs), estimated at close to 900,000 people, or approximately 12% of the population of Azerbaijan. The Poverty Assessment found that poverty was more severe among the IDPs, with around 75 percent categorized as poor and over 35 percent, very poor [3]. The availability and quality of basic social services have been affected by a drop in Government current expenditures as a percentage of GDP from 24.7 percent in 1995 to 20.3 in 1998. Between 1995 and 1998, total budgetary expenditures on education and health remained low at 5.3 percent of GDP. Although the social indicators in Azerbaijan have traditionally been relatively favorable when compared with the indicators for other countries with similar levels of per capita income, the situation has declined [3]. Annex 1 presents key economic and social indicators for Azerbaijan. In the future, Azerbaijan's growth prospects will be closely linked to the developments in the oil sector. Macroeconomic scenario analysis suggest that GDP is likely to increase slowly, around two percent, between 1999 and 2002, but then to grow very rapidly between 2002 and 2005, close to 17 percent. These projections would be realized only if appropriate economic and financial policies are implemented. A major policy issue is the allocation of the new resources between consumption, investment, and sterilization. Other governments in similar situations have used the increased revenues from oil exports as a substitute for needed increases in domestic taxation or grandiose infrastructure projects with little value. On the other hand, the large needs in infrastructure and social sectors call for a careful and strategic increase in budgetary allocations for investment in these areas. The Government's medium-term reform prograrn consists of: (i) implementing a vigorous program against corruption and reform of public sector management which will be carefully monitored through public oversight; (ii) strengthening public institutions that support markets, protect property rights and regulate the financial sector; (iii) creating a business environment in which incentives, policies and practices are predictable, transparent and 2 non-discrirninatory; and (iv) increasing the efficiency, improving the quality and delivery of basic social services, and particularly, targeting the very poor with carefully designed interventions [2]. In the water and sanitation sector, previous government subsidies and capital investment funding have dried up, starving the sector of both operating and investment capital and resulting in an alarming deterioration of existing water and wastewater systems. Within the context of the country's overall opening to market conditions, the government has undertaken some initial institutional reforms, including the recent approval of a National Water Supply and Wastewater Law, the creation of an independent joillt stock company in charge of water supply services in Baku, the decentralization of the responsibility of municipal water and wastewater services with local governments, and the merging of the agency in charge of rural water supply for some areas of the country into the Committee for Housing and Communal Property (CHCP). In support of the initial reforms in the water supply and wastewater sector, the objectives of this document are to: (i) provide an assessment of the current situation of the sector and diagnose the main sector issues and constraints that prevent better water and wastewater services; (ii) provide options and an agenda to strengthen and implement the reforms already initiated by the Government and to define additional policy reforms aimed at improving the performance of the sector and putting it on a path to sustainable recovery; (iii) provide a strategy for action to implement the reform agenda and raise resources to address the most urgent issues; and (iv) outline the World Bank's strategy for helping the Government of Azerbaijan to overcome the crisis and provide safer and more reliable water supply and sanitation services to their people, particularly the poor. This note is organized in five sections. Section II reviews the state of the water supply and sanitation sector based on the available information. This review includes: (i) technical aspects such as the coverage of services, safety and reliability of water supply, impacts of low services on the poor, the physical condition and operation of the water supply and wastewater systems, linkages of the sector with water resources and the environment; and (ii) institutional and financial issues, such as the sector organization and governance relationships, the financial situation of the sector, and the investment planning policies. The section closes with a review of the activities of bilateral donors, international financial institutions and non-governmental organizations in the sector. Section III proposes basic elements of a water and sanitation sector vision for Azerbaijan. Section IV describes the strategy for sector reform and strengthening aimed at achieving the goals of the sector vision. The strategy is structured around four main reforms: (i) an institutional and governance reform; (ii) a financial reform; (iii) a technical reform; and (iv) a service reform. Given the characteristics of the population distribution in the country and the organization of government institutions, each of the reforms is presented at three levels: (i) the Greater Baku area; (ii) secondary cities and urban centers; and (iii) rural areas. Section V concludes this note with a proposal for four programs to implement the sector reform process and proposals for potential World Bank assistance to the Government in this process. 3 II. THE STATE OF THE WATER SUPPLY AND SANITATION SECTOR: MAIN ISSUES AND CONSTRAINTS A. Population, Settlement Pattern and Poverty Distribution The Azerbaijan Republic has a population of 7.9 million. The growth rate has diminished from 2.0% in 1990 to 0.9% in 1998. A total of 4.1 million (52%) live in urban areas. The population of the capital city of Baku is estimated at about 1.7 million, or about 41% of the total urbanized population. Ganja and Sumgayit are the second and third largest cities with 297,000 and 255,000 inhabitants. There are 23 urban centers with populations between 20,000-100,000 (denoted for purposes of this report "secondary cities"), and 25 towns with populations between 5,000-20,000 (referred in this note as "small towns"). Population agglomerations below 5,000 people are classified as rural settlements. The official statistics indicate a total of 4,200 rural settlements in the country. In the 60 administrative regions of Azerbaijan, the urban population is only 25% of the total population. Figures 2.1 and 2.2 summarizes the population distribution in Azerbaijan. The figures shown above have some degree of uncertainty due to the presence of IDPs and their effects on the demographic situation. Of the 800,000 refugees and IDPs, about 285,000 are estimated to live in Baku and 71,000 in Sumgayit. Close to 50 percent of this population is accommodated in temporary settlements and dilapidated public buildings. The most recent Poverty Assessment showed that IDPs are twice as likely to be very poor as the general population [3]. Figure 2.1 Figure 2.2 Distribution of ltban Population ManarRra Pqxiation LEban 52%/- Piual 480/.in 1998 9Slni o 10,aoAaso 24% 2 ^43% amamo - seca%carylc 9Y 1990 1ISE 20% sir.n Garia Cl 3X8,00 4,111,0fl 6% o/% _ RJ- a211,OTo 3_RtU In terms of geographical distribution of poverty rates, the region of Nakichevan stands out as substantially poorer than the rest of the country with more than 84% of the population being poor. The Central zone also stands out with a poverty rate of 70%. The Southwest and Far Northwest regions appear best off in the regional analysis. Map 1 presents the regional distribution of individual poverty rates [2,3]. B. Water Supply and Sanitation Service Coverage Lack of reliable data makes it difficult to present a precise assessment of water and wastewater service levels and quality. In urban areas and small towns, the percentage of population served by piped water supply is relatively high when compared with the indicators for other countries with similar levels of per capita income. About 95 percent of all households in Baku are connected to the water supply system, about the same level than in primary cities. The 4 piped water supply service drops to about 83 percent in secondary cities and small towns. Service coverage in the rural areas drops off considerably, with about 11 percent of the population served with piped systems. This figure is probably much higher as services currently or formally provided by collective farms and agricultural enterprises often rely on individual wells or irrigation canals and are not included in the official statistics [4, 5]. The wastewater network in Baku serves about 78 percent of the population (when IDPs and refugees are included). At present, only about 50 percent of the wastewater in the Greater Baku area receive treatment, the surplus is discharged untreated primarily to the Caspian Sea through by-passes at the wastewater treatment plants or inter-connections with the stormwater drainage system [6]. In other urban areas, the coverage drops to 32 percent. Of these areas, only about half have facilities for treatment of wastewater (or arrangements with industrial facilities for treatment). However, several of these plants are not operational at the moment. The rural populations rely on on-site solutions, primarily latrines and drain fields. C. Safety and Reliability of Water Supply Services Despite the high coverage of water supply systems in urban areas, the poor state of repair of facilities, lack of adequate maintenance, and insufficient resources available for operations, the reliability and safety of the service is a major concern and source of discontent of the population, as demonstrated by several independent: studies. The National Environmental Action Plan identified the deterioration of water quality, especially of drinking water, both in rural and urban areas, and the related increase in water born diseases, as one of the main environmental problems of the country [7]. The reliability and safety of water services is unsatisfactory by many accounts. Inadequacy of service may be divided in two categories: reliability - service interruptions and low pressure - and water quality - color, taste, odor, and chemical/bacteriological contamination. Household surveys to evaluate the water and wastewater services in Baku were undertaken in the Greater Baku area in 1995 and 1998 and rapid surveys in selected small towns in 1997 [5, 6, 8]. The results of these surveys are consistent in demonstrating the inadequacy and deterioration of services. Among Baku's residents, 87 percent perceive piped water to be unsafe and 81 percent consider the water shortage problems as severe or very severe. Figure 2.3 shows the percentage of population receiving water every day of the month and those receiving 24 hours of water supply when water comes for a sample of cities in Azerbaijan. On average, water is available to individual households in the Greater Baku area about 22 days per month, four hours per day. Additionally, around 80 percent of the population consider that the water supply schedule is violated in one way or another. There is limnited data on the above indicators for other cities outside the Greater Baku area. However, a surrogate indicator is the official target for water distribution per capita in each city. Annex 2 shows that the targets for secondary cities and small towns range from 24 to 340 liters per capita per day, and in 18 of the 60 utilities, the targets are less than 50 liters per capita per day of service. The poor state of the facilities would make even these low service targets unachievable. Another service problem in the Greater Baku area is pressure, which affects particularly households living in multi-story buildings. Insufficient water pressure is one of the most important causes for the unreliable and intermittent water supply as well as poor water quality. About 61 percent of households in the Greater Baku area live in middle floors of multi-story buildings. Overall, 87 percent of the population consider that the pressure level is insufficient. Figure 2.4 shows the variations in water service with floor level. Some of the components of the GBWSR project and other proposed donor-financed investments are aimed at improving this situation in Baku. 5 Figure 2.3 Figure 2.4 Water Availability - Selected Cities VWter AJallability by Floor Level - Greater Bak n % ot population with water every dray au___ Second-Third_Ro_rs____Fourth_Roor_and_Higher O % of population with 24 hours of water axeilability o First Floor * SecondTihird Floors [ Fourth Floor and Higher 90 9 0o .......- . .. . .. .. . . 80 7879 - r 70 70 - 57 60 60 60 < 50 50 - 40 - 30 - E 3 2 2WA 30 -~~~~~~~~~~~~~~~~3 20 20 10oj 0 0 Q~~~~~~~~~~~~~~~~~1 Unsatisatr quality % % %W ano #maf Dys #oo Foners Thm CP 00 'OkIf ~~~~~~9 O 14" R~~~eceiving Receiving Fetch of Water ot Water (ntinutes) 'd ~~~~~~~~~~~~~Water Water for Water per Mstth per Day Spent Feery Day 24 Flours Fetching Water Unsatisfactory quality of water is a major source of complaints and concern. The household surveys indicate that 89 percent of the population in the Greater Baku area do not drink directly from the water tap. Between 9 and 13 percent of the households report illnesses due to water. The group of households that has access to water on a daily basis has the lowest reported rate of water-related illnesses. The fear of disease from unsafe drinking water is real. Despite very limited data on distributed water quality, the 1996 data indicated that about 30 percent of the samples did not meet the bacteriological requirements, more than 80 percent did not meet the turbidity standards, and about 78 percent did not meet the residual chlorine requirements [5]. The rehabilitation of the water treatment plants as part of the GBWSR project are aimed at improving this poor record. The availability of drinking water quality data for cities outside Baku is very limited. In recent years the number of cases of water-related diseases such as dysentery and typhoid fever have generally diminished (see Annex 6). However, these numbers may not reflect the total incidences among the poor and the very poor, as the policy of universal health access is, in practice, no longer effective and the poorest segments of the population are no longer able to afford adequate medical care. The results of the Poverty Assessment indicate that nearly half of the respondents who reported being acutely ill in the previous month did not seek treatment, and that - for those who did - over 40 percent of care episodes took place in the patient's home [3]. The Social Assessment for the GBWSR Project shows that reliability and safety of water supply varies by income groups. The poor in general receive lower levels of service and are affected more by the water quality as illustrated in Figure 2.5 [8]. 6 Figure 2.5 Water Availability by Income Groups - Baku 1O3 Income Under 1 00,000 manat * Income Over 100,000 manat 50 45 -- - - - 40 - _ ~~ ~~34 35 - 34 30 25 20 _ _ _ - _ 15-_ |1l 10 5 % with water % with 24 hours of % who report availability every nay water availability illnessess due to of the month water D. Consumer Coping Strategies and Impacts on the Poor The response to the intermittent service of water supply in Baku is to store water. The household surveys indicate that 53 percent of the household already have invested in built-in and/or overhead storage tanks(the cost of which ranges fromUSD30-50) [8]. In addition, 86 percent of the households store water in bathtubs and other recipients [6]. Other coping strategies include obtaining water from neighbors (49 percent of households); buying water from truck companies (13 percent); buying bottled water (5 percent); or installing individual water pumps (12 percent); among others. Households in Baku face substantial costs in responding to unreliable and low quality water supply. Lower income households spend a significantly higher percentage of their income on coping strategies than wealthier families. Figure 2.6 Figure 2.7 Coping Expenditures by Income Groups - Greater Baku Total Coping Cost Composition by Income I8J Groups - Greater Baku [81 -mz Parcentae aof Income Spant on Coping Stratefies 8 . ^ . . . _ _ 1~~~~~~~~~~~~100% -il it..~~~~~~~~~~~~~~90% 7 _ 8........ 0% t V s3[aCotfelmonth 7 H tm~~~~~~~~~~~~~~~~~~~~0 Co., of . 60% *Tank/won 6{ 50% 0coer of Fetching 5 30% lEi~~~~~~~~~~~~~~~~~~~~~~vendors LOBottled water 3- ~~~~~~~~~~~~~0% 2 _ = O~~~~~~~~~~~~~~~~~~~~~~~~~~ X E Income 0- Income 25,000- Income 50,000- Income, E 25,000 manat 50,000 manats t00,000 mariat 100,000 minat Households of varying incomes experience different levels of unreliability and respond in a variety of ways. For example, householcts with higher incomes and higher levels of education are more active in searching for safe solutions to their water supply problems than those with relatively lower levels of income and education. Households headed by women have greater difficulty in coping and appear to expend more labor than capital. 7 The population tries to cope with the low water quality through a variety of purification methods. The most common options at the household level include boiling (97 percent) and settling (81 percent). The financial burden on households associated with water boiling is not as large as expected due to the small tariff and collection levels of energy fees. Although not quantified, the overall cost to society of coping with poor water services is enormous in both economic and social terms. E. Physical Condition of Water and Wastewater Systems The 1998 Water and Wastewater Master Plan for Greater Baku presents an assessment of the state of repair in 1997 of the systems serving the city. The Greater Baku system includes two water treatment plants in Jeiranbatan (constructed over the period 1957-1978) and in Kura (constructed over 1968-1988), the latter located about 140 km south of Baku (see Map 2). The general condition of virtually all components of these facilities is very poor and are clearly not providing the levels of treatment for which they were designed. All water is pumped to the city through a complex system of pumping stations and reservoirs. Most of the pumps and equipment are in very poor condition, so that equipment failure and service interruptions are common. In Baku, there are over 2,500 km of distribution pipes, mostly of unprotected steel. The hilly topography of the city results in a complex system characterized by multiple pumping, little service storage and a lack of effective pressure zoning. A high proportion of the multi-story apartment buildings in Baku do not have roof storage for water and require booster pumping. There are over 460 small booster stations that have been recently transferred from the municipality to the water company for operation and maintenance. A recent assessment of the stations show that they are in very poor condition. Distribution pipes and internal plumbing are generally in a very bad condition, badly corroded and in poor structural condition. The average age of the pipe network is around 40 years. Given the grave state of disrepair of the water supply system in Greater Baku, the GBWSR Project finances physical components aimed at rehabilitating the most critical and urgent components of the system, including the two water treatment plants, major pumping stations, and limited replacement of the distribution network as part of a leakage repair program. The project design recognizes that subsequent investments of significant magnitude would be required to fully rehabilitate the system [9]. The wastewater systems serving the Greater Baku Area comprise 1,100 kilometers of collection network, 22 pumping stations and five treatment plants built in two phases 1924-1934 and 1972-1986. The treatment capacity is insufficient and the surplus is discharged untreated to the Caspian Sea of storage lakes. The collectors are reported to be in poor condition. The poor maintenance and lack of rehabilitation for more than a decade, the excessive flows due to leakage and infiltration, and the low standards of construction and materials are the main technical factors that have caused the poor condition of the system observed today. The cesspools and latrines used in many areas of the city are also a problem due to poor construction, lack of maintenance and the potential for contamination in areas of high water table. Discharges of insufficiently pretreated harmful industrial waste into municipal sewer systems impair the efficiency of the wastewater treatment plants not designed to deal with these loads [6]. While no systematic assessment of the state of repair of the existing water and wastewater systems in secondary cities, small towns and rural areas has been conducted, the inspection of several systems under various reports indicate that much of the infrastructure has not received any major rehabilitation since the late 1970s and early 1980s, and therefore shows signs of decades of neglect and is in dire need of replacement and repair. The mechanical and 8 electrical equipment of the water treatment plants that are in operation is in great need of rehabilitation. The chlorination equipment is in almost all cases in unacceptable condition. Although these systems work in many places, their operation condition constitute a health hazard to the workers. The condition of the distribution networks in small towns has not been assessed systematically, but the reported indicators on the numbers of pipe breakage presented in the following section demonstrate a high level of deterioration linked to poor materials and construction. The wastewater systems is in worse condition than the water distribution. In about 20 percent of the secondary cities that have a treatment system, the wastewater is treated at an industrial plant. These plants are reported to be in very poor condition, particularly the mechanical and electrical equipment. The poor state of the water and. wastewater systems has its root problems in deficient design, use of poor materials and construction methods in the past and insufficient maintenance, repair and timely rehabilitation. All of the problems described in this section have been long in the making, but the deterioration has accelerated in recent years, as the downturn in the economy and severe fiscal constraints have resulted in financial shortages which at the moment do not permit any type of maintenance except the most urgent repairs done with inadequate materials. Water and wastewater infrastructure is being run on borrowed time. In facing these very difficult conditions, the staff involved in the water and wastewater sector are doing a commendable job in keeping the systems in operation and doing their best to deliver water to their customers. Given the lack of funds, the state of repair of the sector assets and with it the service quality will continue to deteriorate. Repair of the most critical components of the existing systems, followed by a prolonged phase of enhanced maintenance and rehabilitation is obviously one of the highest priorities that needs to be addressed. F. Technical Efficiency of Operations Despite lack of reliable data for many operational aspects of the water and wastewater systems, there are some indicators and anecdotal evidence that suggests very high inefficiencies that make the operation of the systems extraordinarily expensive. Examples of the inefficiency of the systems include: High water consumption and wastage by consumers: Lack of metering makes any data on production, consumption and losses highly uncertain. As part of the GBWSR project, master meters have recently been installed in key points of the production and transmission network. Based on the measurements of the first three months of operation of these meters, the volume of water distributed to Baku city is about 11.6 m3/s, which would be equivalent to about 620 liters per capita per day using the number of domestic customers connected to the network. The metered trunk distribution to Sumgayit indicates a level of 860 liters per capita per day'. Estimates made as part of the Master Plan for Greater Baku show an average consumption of 580 liters per capita per day. These values are several times higher than the water consumption in most Western European countries where water utilities generally provide 130-200 liters per capita per day or less with 24 hours of service. The water consumption information provided by water companies in secondary cities is not metered but based on consumption norms and therefore it is of limited value. The norms are used for billing and system design so they can only be used as a general indication of the targets for distribution and level of service. This estimate includes industrial consumption of drinking water but not the volume of dedicated trunk transmission lines for "technical" water for exclusive industrial use. 9 * Excessive leakage from aging and deteriorating piping systems: The level of consumption metering in Baku is limited to the larger industrial and commercial consumers. Therefore, it is not possible to determine the proportion of the very high level of losses that takes place in the distribution network and those that occur inside buildings and housing premises. Given the information on hours of service indicated in Figure 2.3 and the metered production data, the losses in the distribution system can be as high as 50 percent or more, not counting the losses in the internal plumbing of buildings and the wastage of consumers. Household leakage is another main source of water loss in Baku. On average there are 2.1 water leaks in the home of a Baku family, regardless of income. Most water is lost from toilet leaks and bathroom leaks (more than 20 liters per hour), followed by leaks in the kitchen, public pipes and storage units (between 13 and 16 liters per hour) [8]. Another indication of the aging and deteriorating piping systems is the number of pipe breaks per year, shown in Figure 2.8 for various cities in Azerbaijan [5, 10]. The values in this figure can be compared to a range of 15-20 breaks/lOOkrn/yr in well-maintained distribution systems. In 1993 there were about 3,500 main repairs in Baku, many of them running for long periods of time before repair. As part of the GBWSR project, a leakage repair team was instituted in ARWC. The number of breaks detected and repaired increased to about 5,400 in 1999 (as a result of improved pressure in the system) but the average time to repair them was lowered to 4.2 hours, a significant improvement in response time with commensurate reductions in water losses. The data above are only indicative of the leakage and wastage problem as there is limited metering at the household or apartment building level, which prevents from making any firm estimate on the losses in the network, losses in the internal plumbing and actual consumption, and therefore estimating the portion of losses that correspond to the water utility and consumers. * Hydraulic inefficiencies in the conveyance of water through the transmission and distribution system: poorly designed pipe networks with improper sizing of pipes, unclosed loops, improper pressure zoning, direct pumping into the system, system occlusions and bottlenecks, faulty valves, and insufficient storage capacity. * Inefficient, poorly performing water and wastewater treatment plants and pumping stations: high input requirements and poor operations, including energy and chemical inputs, hazardous operation, and overloading beyond their design capacity. * Highly staffed water companies: ARWC has a total of 3,725 employees. The Baku Wastewater Department has a total of 1,184 employees. This level corresponds to about one employee for roughly 350 people receiving water and wastewater services2. Measured by this relationship, staff productivity is much lower than for efficient international water and wastewater utilities that have staff ratios in the range 1,500-3,000 people served per employee. Figure 2.9 presents, for all secondary cities and small towns in Azerbaijan, the distribution of staff ratios. Overall, the water and wastewater enterprises are overstaffed. 2 Information on the number of connections for international comparisons is misleading as the billing system is based on individual consumption norms, rather than connection-based norms at the apartment level. The number of connections provided by vodokanals refer to block-level connections that range from a single household to several hundreds. 10 Figure 2.8 Figure 2.9 Pipe Breaksl100kmlyr Number of Secondary and Small Cities Ranked by Staff Ratio I |Beaks100knmr1 12 - - - - - - - - * * - *- * - - 700 -..._ _....__--- 10 600 500 .8 400 _ 6 300 E 4 200 2- 100 <200 200-350 350-500 500-650 650-1000 >1000 o _, _, ~, _, _. Population Served / (Employees of Water and Hachmas Ganja Salyan Lenkeran Baku Wastewater Companies) G. Water Resources and Environment - Linkages to Water Supply and Sanitation Sector The prevailing climate of the Apsheron Peninsula is dry with annual precipitation of 110- 250 mm per year, falling mainly in early spring and late autumn. Because of these climatic conditions, Baku traditionally has had to rely on distant water sources to satisfy its demand. The Greater Baku system obtains water from three separate sources (see Map 2): (i) the Shollar and Hachmas groundwater sources, located about 180 km north of Baku; (ii) the Jeiranbatan reservoir fed with water transported by the Samur-Apsheron Canal from the Samur River located about 200 km north of Baku on the Russian border. The Canal is also used for the irrigation of 150,000 ha. ARWC pays abstraction charges to the Samur Water Administration. The reservoir acts as a retention presettlement pond, thus greatly enhancing the final quality of the treated water; and (iii) the Kura river with an intake and treatment plant located about 140 km southwest of Baku. The Kura River originates in Georgia and flows through Azerbaijan where it is joined by the Araks River (which originates from tributaries in Iran and Armenia) in route to the Caspian Sea. Both rivers are heavily polluted with high levels of ammonia nitrates, refinery waste products, copper, zinc, and phenol. The turbidity levels are particularly high especially during the spring run-off (the record high was 64,000 mg/I). The reconstruction of the water treatment plant as part of the GBWSR project will allow adequate treatment of the river water for drinking purposes. The excessive water losses and wastage in the Greater Baku area indicate that the existing water sources would not need to be expanded to serve adequately the region. However, it is important to note that the Greater Baku area rely on water from the Samur river that may be subject to potential changes to the international allocation agreement with the Russian Federation, and from sources that are also used for irrigation which in the future may be a cause of conflict among users, particularly in the dry season. The systems of secondary cities and small towns rely for the most part on groundwater sources. Only 14 of the 60 systems rely fully or partly on surface water. Based on the estimated production targets, the surface water supply comprises less than 10 percent of the total production. In some cases, some of these sources are irrigation canals. In rural areas, irrigation canals are frequently used as a source of water for domestic use. Overall, there are some important linkages between the irrigation infrastructure and the water supply sector that depends 11 in some areas on irrigation canals as key sources of water. However, the consumption of municipalities and industries is smaller (14 and 17 percent of total, respectively) than that of irrigation which corresponds to about 69 percent of total surface and ground waters abstracted (but it can be as high as 80-90 percent in the Kura and Araz Rivers during the low flow periods). However, water use figures tend to be inconsistent [5]. The irrigation canals support the cultivation of approximately 1.45 million hectares (nearly 85 percent of the cultivated area). The irrigation infrastructure suffers similar problems to those affecting the water supply sector, including: (i) deterioration of infrastructure and pumping equipment due to insufficient maintenance (operation and maintenance budgets are currently at an estimated 20-30 percent of their needed levels); (ii) high reliance on pumped irrigation (over 500,000 ha), which in many instances would make agriculture uneconomic if the energy were valued at its real cost; (iii) negligible contribution to operation and maintenance expenses by users; (iv) inefficient water distribution and application; and (v) lack of institutional mechanisms for collection and use of water charges and transfer of responsibility to water users [11]. There is a multiplicity of regulatory institutions and monitoring agencies in the water quality and quantity sectors, each of which has a separate database with a restricted sharing of information or coordination of activities. The fragmentation of functions is a key obstacle to the coherent planning of the water resources of the country. The outdated laboratory equipment and lack of support for monitoring activities prevents the collection of information needed for planning and management of the resource. The low flow sustainable yields of the Kura-Araz basin, which supplies close to 80 percent of the water resources of the country, is fully committed, a situation that requires advanced planning to avoid future conflicts among users [5]. As discussed in Section II.B, just over half of the sewage collected in the greater Baku area receives treatment prior to discharge to the Caspian Sea either through by-passes or direct connections to the stormwater drainage system. Some flows pass directly to storage lakes such as Bulbul and Gunligul, which are periodically pumped into the wastewater collection system as constantly rising levels have led to flooding of nearby properties. The wastewater reaching treatment plants generally has low concentration of constituents due to the heavily diluted nature of the wastewater (linked to high levels of wastage) and the low industrial production. The high dilution of the incoming wastewater facilitates the work of the treatment plants and the effluent is of acceptable quality. Figure 2.10 Approximate Distfbution of Main Water Resources Groundw ater 6%/ Sarrur Basin 14% Kura/Araz Basin 80%Y 12 Figure 2.11 Water Resources Institutions Drinking water quality monitoring ARWC, Municipal Water Compalies, CHCP (urban and rural water supply monitoring) Ministry of Health - Centre for Epidemniology and Hygiene (public health monitofing) Planning No overall responsibility Control of wastewater discharges State Committee for Ecology and Natural Resources (surface waters) State Committee for Geology and Mineral Resources (ground waters) Regulation and control of abstraction State Committee for Irrigation and Water Resources (surface waters) State Conmmittee for Geology and Mineral Resources (ground waters) Monitoring State Committee for Hydrometeor,alogy (surface waters) State Committee for Geology and Mineral Resources (ground waters) Flow support from reservoirs Azerbaijan Electricity Company advised by State Committee for Irigation and Water Resources Fisheries State Fisheries Concern There is limited monitoring information on the quality of surface waters and the effect of wastewater discharges. Limited data on water quality of beaches in the Apsheron peninsula indicate that virtually all of the beaches are impacted by unacceptably large concentrations of coliform bacteria for a large proportion of the time. As part of the 1998 Water and Wastewater Master Plan, a rapid evaluation of industrial wastewater was undertaken. While more than one hundred industrial facilities were supposed to have treatment plants in-house, only about one quarter of them were still operational. About half the industries discharge their untreated wastewaters into the environment [6]. Currently, ambient standards for water quality and effluent discharges are overly stringent and not compatible with the current capacity of the environmental management system in the country to encourage compliance. Adherence to those standards will force continued noncompliance, thereby weakening the credibility of environmental protection activities. The National Environmental Action Plan recommended to eliminate the overlapping of responsibilities among environmental management agencies and separation of environmental regulation and control from production activities. Additionally, critical investments are needed to strengthen the agencies' capabilities, particularly in monitoring and laboratory equipment and staff training [7]. H. Sector Organization, Legal Framework and Governance Relationships There are several stakeholders inlvolved in the provision of water supply and wastewater services in urban and rural areas in Azerbaijan. In Baku City, ARWC is responsible for water supply services, while the Baku Wastewater Department under the Baku City Executive Authority is responsible for wastewater. In other urban areas, there are water and wastewater utilities (vodokanals) under the supervision of the Committee for Housing and Communal Property (CHCP) (with the exception of the Nakhechevan Autonomous Republic) and Local Executive Authorities (LEA). The water services in some rural areas were, until recently, the responsibility of AzerKend Rural Water Supply Concern districts (see Map 3 for the location of these districts). However, this organization was recently merged into the CHCP who is undergoing an institutional reorganization. The following description summarizes the roles of each of the above stakeholders. 13 Apsheron Regional Water Company (ARWC): This joint-stock company was established in 1996 in connection with the GBWSR Project. ARWC is responsible for the treatment and distribution of water to Greater Baku, including bulk water supply to the regional vodokanals of Apsheron and Sumgayit. ARWC is under the control and direct supervision of the Cabinet of Ministers. All share capital of ARWC is owned by the Ministry of State Property. In 1999, ARWC had a total of 3,725 employees, including 959 engineers and 243 managers. Beyond the treatment and distribution operations, ARWC has a construction association with 488 employees and a design department with 91 employees. Although ARWC clearly has the highest capacity of all the water and wastewater supply institutions in the country, and it has been further strengthened through the implementation of the GBWSR Project, it still has a large gap with international utilities in terms of management, administration and operation. Although legally independent, it still faces several governance limitations to fulfill its mandate and achieve financial sustainability. In principle, ARWC is self-financing and the domestic and industrial water tariffs are proposed by ARWC and are approved by the Ministries of Finance and Economy, the Antimonopoly Committee and the Cabinet of Ministers. Tariffs for commercial customers are set independently by ARWC. Currently, the Government is transferring to ARWC the ownership and the responsibility for operation and maintenance of about 400 booster pumping stations at the apartment block level, formerly owned by Municipal Housing Enterprises and other enterprises. Baku Wastewater Department (BWD): The wastewater collection and treatment services in Baku are under the responsibility of the Baku Wastewater Department, a self- sustaining independent entity, under the sole control of the Baku City Executive Authority. The assets are not owned by BWD but it is given their use in perpetuity and free of charge. BWD has separate budget and accounting. The General Manager is authorized to approve independently the wastewater tariffs, but in reality this approval requires full discussion with the Baku City Executive Power. BWD has about 1,200 employees of which 235 are engineers and managers. Committee for Housing and Communal Property (CHCP): This Committee is responsible for water, wastewater, public heating, street lighting, and solid waste collection and disposal services, among others. The water and wastewater responsibilities of CHCP in urban areas are executed through the Vodokanal Union (VU), a relatively small unit based in the Head Office, and the municipal water and wastewater enterprises (vodokanals). Annex 7 presents the organizational chart of CHCP. The Committee monitors and supervises all activities of the vodokanals, including management of personnel, evaluation and approval of procurement and investment contracts and budgets, allocation of funds from state investment budgets, evaluation and approval of annual financial statements of vodokanals (which are then consolidated at the national level), assessment of operational and financial performances, and approval of tariffs proposed by vodokanals in coordination with Local Executive Authorities. In addition to the supervisory activities above, the VU also provides technical assistance, including bulk purchasing of equipment and chemicals which are then sold to individual vodokanals. The VU is financed from these sales as well as supervision and technical assistance charges. CHCP has Regional Repair and Construction Units that carry out capital repairs and new facilities that are too large for individual vodokanals to undertake. In the Nakhechevan Autonomous Republic, the Nakhechevan Housing and Communal Services Committee is responsible for the provision, control and management of urban and rural water and sanitation services in the six rayons of the Republic. The Committee supervises four vodokanals. Until recently, the provision of water supply services in rural areas was the responsibility of AzerKend, an independent self-sufficient organization supervised by the Cabinet of Ministers. 14 This organization has recently been integrated into CHCP and a reorganization of the Committee is underway. AzerKend was charged with the provision of water supply services and other rural infrastructure services to less than 500 villages out of the estimated total of 4,200 villages in the Republic of Azberaijan (see Map 3 and Annex 4). In the past, the rural systems were constructed by Azerkend and later transferred to the local concerns (including LEA, cooperatives and industries) or operated and maintained by Azerkend under a contract. With the disappearance of the collective farms, one of the main clients of Azerkend, the financial situation of the organization deteriorated and with it the services provided. The remaining part of the rural population outside the area of responsibility of Azerkend, is served by individual water or supplies of through small local community systems, typically constructed and operated by the Ministry of Industrial Construction or the Ministry of Ifrrigation. Rural sanitation is considered a private household issue. The only government official involvement is through the Epidemiology and Hygiene Center of the Ministry of Health that advises and approves location of latrines through the Regional Offices. Local Executive Authorities (LEA): The principal adrministrative unit in the country is the region (district) which is administered by the Head of the LEA who is appointed currently by the President and has the powers of both a Governor and Mayor. The LEA plays a considerable role in the monitoring, supervision, and control of the vodokanals, as they assume ultimate responsibility for the provision of water and wastewater services and can provide financing for minor capital repair and maintenance work in the systems through their local budgets. The tariffs both in urban and rural areas have to be approved by the Head of the LEA prior to review by the CHCP. Investment budgets are also reviewed by both organizations. LEAs can also execute their administrative powers in day-to-day operational decisions of the vodokanals. Overall, the supervisory and control responsibilities of the LEAs over vodokanals are not very different from those of CHCP. Water and Wastewater Utilities (Vodokanals): The water supply and wastewater services in urban areas outside Baku are provided by 59 utilities (five of which are in the Nakhechevan Autonomous Republic). The populations served by these vodokanals range from 500 to 285,000, serving an estimated total of 1.7 million people (see Map 3 and Annex 2 for specific technical and financial infonnation on these vodokanals). The vodokanals are independent self-financing organizations in charge of all operations, maintenance, implementation of investments, billing, collection, and customer services in their areas of service. As described above, the vodokanals are strictly controlled by both the CHCP and the LEAs, a dual subordination that creates confusion and conflicts. The institutional capacity and productivity of these vodokanals are very limited and are characterized by the following challenges: . Vodokanals are predominantly technical/engineering oriented organizations emphasizing production with insufficient attention to maintenance and efficiency in operations. The past practices of operations focused mainly on production has left a legacy of inadequate attention to maintenance and operational efficiency. The responsibilities of O&M and investment selection and funding were generally separate in the past. The consequence of these policies and practices is a very low level of efficiency and network and plant performance compared to international standards. The current reality of lack of capital funds from the central budget is forcing vodokanals to take creative actions under very difficult circumstances to maintain the systems operational. * Vodokanals are for the most part highly staffed (see Figure 2.9), a result of poor organization and management systems, low individual staff productivity, and the support of non-core activities from construction divisions to social services. Apart from the high level of staffing, 15 the salaries are very low (for example, personnel costs for ARWC in 1999 were only about 8 percent of total costs, and the average monthly salary was AZM 257,000 or about USD 603). As long as levels of pay stay at present low levels, over staffing is more a management than a financial issue. * The skill mix of vodokanals reflects an engineering orientation and there is not sufficient personnel in areas such as planning and financial and commercial management. The latter are generally considered little more than accounting departments for tax purposes. If vodokanals are to transform themselves into organizations resembling those in market economies, deep adjustments to the present staff composition and skill mix will be necessary. * Management systems of vodokanals do not provide reliable information for effective planning and control. The reliance on planned values rather than actual information (both technical and financial) makes it difficult for management to effectively control the organization or plan for the future. Manual information, even for the larger utilities in Baku, Sumagyit and Gangja is the norm. Up to date and reliable drawings of plants or maps of systems are often not available. Actual data (rather than standard or specifications) on operations and plant and network performance is almost non-existent and unreliable. * Management and control of vodokanals is overly centralized and there is insufficient autonomy to maintain and operate the water and wastewater systems. Tariffs are tightly regulated by local governments which in many cases do not seem to have the political courage to increase tariff levels to appropriate levels. The ability to collect is hampered by lack of appropriate strategies and unwillingness to discontinue service to non-paying customers. The lack of autonomy and the dependence on others for vital decisions does not provide the incentives for developing the sense of initiative, creativity, responsibility or accountability which is the foundation of good utility management. Other Government Agencies: Apart from various government organizations involved in the management and for monitoring of water resources, as described in Section II.G, the Ministry of Health is responsible for setting the quality standards for drinking water, monitoring the water quality after treatment and the distribution network through its local Centers for Epidemiology and Hygiene; and for monitoring the quality of sewage discharged to rivers. The lack of adequate equipment and overly strict standards prevents the Ministry from carrying its functions adequately. The State Committee for Construction and Architecture is the Government body responsible for development and enforcement of design and construction standards. Service Industry: The vodokanals rely on a network of state enterprises for design and construction services or, in some cases, on internal departments. For example, ARWC has a design institute, while BWD uses the Design Institute of Engineering and Machinery under the Baku City Executive Authority. Azerkend also had a design institute in its organization. For construction, basically all the organizations involved in the provision of water and wastewater services have a construction department, although other government organizations are periodically invited to participate in construction projects, such as the State Water Construction Concern, the Ministry of Industrial Construction, and the Principal Committee of Irrigation and Water Systems Construction. In general, these enterprises work under a set of dependencies that do not provide sufficient control by vodokanals regarding the quality and price of the services provided. 3 The share of salary costs has varied over the years: while it was 14 percent of operating expenses in 1991, it decreased to 2 percent in 1994 and has been going back up to 8 percent in 1999. 16 Water Users Associations: 'rhe emergence of private farmers has provided an opportunity to let user groups assume the responsibility for the overall water management of their respective farms. The Government has recently introduced legislation to support the establishment of Water Users Associat,ons (WUAs) and the introduction of water charges in 1996. The Farm Privatization Project, financed by the World Bank, has supported the creation of WUAs. Six WUAs have been created and are in charge of operation and maintenance of irrigation and drainage systems, collection of water charges, and water allocation. Collection of water fees has increased to 68 percent in 1998 (although the government still provides a subsidy of 85 percent of water fees). As many of the rural communities use irrigation canals as sources of drinking water, the WUAs will play an increasing role in the supply of these communities [12]. The Consumer: Compared to utilities in market economies, vodokanals have little interaction with clients except for the largest consumers (industrial, budget organizations, and other vodokanals that buy water in bulk) or the consumers that represent an important source of revenues paid in cash (commercial). As the domestic consumer pays a very small fraction of the cost of services, plus in many cases the municipal housing enterprises serve as intermediaries for collection of water fees, the vodokanals do not have the incentives to be responsive to the needs and aspirations of the domestic consumer. Only ARWC, through the implementation of the GBWSR Project, has initiated a reform process in the interaction with consumers. It has maintained a Public Information Campaign and has recently organized a Customer Services Group which is in charge of responding to customer complaints (close to 600 in 1999, its first year of operation). An important recent development in the legal framework of the water supply and sanitation sector is the final approval in October 1999 of the National Water Supply and Wastewater Law. This law was approved after a long discussion process. The support of the sector institutions, particularly ARWC, was fundamental in securing final approval. The sector institutions were very interested in this law, as it is the first comprehensive legal framework that defines their scope of action and provides the tools to improve their financial viability. The most important features of the new law include: (i) the responsibilities of provision of water and sewerage services are given to enterprises; (ii) these enterprises now have the right to cut services to consumers in cases of non-payment or illegal connection; (iii) the management and operation of water supply enterprises will be regulated by a contract with the municipalities they serve; (iv) the relationship between water enterprises and their customers is defined based on financial and service principles; (v) cost-recovery is defined as the main principle of management and operation of water enterprises; (vi) metering of water supply is now clearly recognized as the main method for charging water services and is mandatory for new construction; (vii) consumers are now required to pay for connections to the water supply and sewerage systems; and (viii) the scope of responsibilities of the Cabinet of Ministers remains within issues of national interest, such as the definition of areas of service of regional schemes, management of grants and loans to water supply enterprises, and allocation of funds for emergencies. Even though the law is a positive step forward in defining the responsibilities of water supply enterprises, there are several issues that need clarifications, particularly on the institutions that will be in charge of regulating the sector, and their role with respect to the operators. The law is also vague in relation to the possibility of involving the private sector in the provision of services, although it does not prevent it. In coming months, several regulations will be developed to facilitate implementation and enforcement of the provisions in the National Water Supply and Wastewater Law. I. Financial Situation of the Water and Sanitation Sector A standard feature of the socialist system was that water and sanitation services were provided to domestic customers at very low prices, and the govemment, which controlled a very 17 large share of the national income, provided subsidies in various forms (either as direct transfers or through higher tariffs for industries and budget organizations). The government also paid for most capital improvements. With the transition to a market economy, the expectation was that households will have more income but will have to pay more for the utility services. Now that the government is no longer able to provide the subsidies of the past (there are very few transfers for capital improvements and payment of water fees by government entities is very low), the sector is in the midst of an unprecedented financial crisis. The situation of the rural water supply sector is much worse than the urban sector as the mechanisms for collection of water fees are inadequate and there is low willingness to pay. The main issues of the financial crisis in the urban water supply and sanitation sector are: Very low collection of water and wastewater bills: This is one of the most urgent and alarming problems behind the financial crisis of water companies. Figure 2.12 presents information on collection efficiency for some of the stakeholders in the water sector. On average, the vodokanals under the supervision of CHCP collected about forty percent of their billings in 1998 and 1999. The performance of individual vodokanals varies, and in some cases such as Hachmaz, they are able to collect up to 83 percent. ARWC made important improvements in collection supported by the GWSB Project (from 31 to 66 percent), but its progress has stagnated in the last two years. In 1999, ARWC collected revenues sufficient to cover only about 87 percent of its operational and maintenance expenditures (not counting depreciation expenses). However, a large portion of revenues collected were in non-cash forms, as discussed later in this section. Lack of collection results in very high levels of both accounts receivable and debts to suppliers, as shown in Figure 2.13. For example, the total accounts receivable for all water and wastewater enterprises (not including ARWC) has increased from AZM 85 billion (about USD 22 million) in 1997 to close to 178 billion (about USD 41 million) in 1999. The accounts receivable for ARWC alone reached AZM 456 billion (about USD 105 million) at the end of 1999 closely followed by accounts payable, as shown in Figure 2.14. These receivables are equivalent to about 28 months of billings. The water supply companies are able to continue operation by increasing its payables (see Figure 2.13), and particularly to the energy company. Figure 2.15 presents the percentage of total ARWC payables that the company owes Azeri Energy. The total receivables are an accumulation of previous years receivables, as the enterprises are reluctant to write old debts off. Figure 2.12 Figure 2.13 Collection Ratio Acounts Payabnd Reeb le-ConsolkMed Vodd* 90% J.-A- . _ . .. Aw|.PAyaH -0% _ . .. .. .... 50% _ _ _ _ _ _ _ 040% 1K,0 3D. 7t _ , 1P, __ im 94h42% 99 47X 9 593 96; 48X 6 8 8 3 1 997 19CK19 9pCP Source: CHCP,ARWC, [5,13] Source: CHCP 18 Figure 2.14 Figure 2.15 Accounts Receivable ARWC ARWC Payables to Azeri Energy as a Percentage of Total Payables 500,000 ........ ........... 120 450,000 100°- - 400,000 90% 350,000 80° 0 70%~~~~~~~~~~~~~~~~~~0 Z 300,000 * 70% e 250.000 60 o 60%C 200 15= 40 ~~~~~~~~~~~~~~~~40% 30%/ 100.000 2 0 50,000 1D% - 0 0 0% 1993 1994 1995 1996 1997 1995 1990 1994 1995 199B 1997 1998 Source: ARWC, [13] Source: [13] Collection varies by type of customers with commercial, industrial and budget organizations having higher collection rates than domestic customers and wholesale to other vodokanals. Figure 2.16 presents the collection rates for ARWC in 1998 and 1999 by customer category4. Extremely low collection of revenues in cash: Even more alarming than the poor collection ratio is the fact that all water supply and wastewater enterprises receive a very small portion of their revenues in cash. On average, the vodokanals collect only 14 percent of their total revenues in cash. The rest of collected revenues is received either through barter (chemicals, services or goods against water fees) or off-sets (taxes and fines owed to the government against water fees of budget organizations). Again, the level of cash collection depends on the type of customer. The domestic and commercial sectors pay a higher share of their water fees in cash than other customers that pay mostly in non-cash form (barter and off-sets). Figure 2.17 presents the types of collection by customer category for ARWC in 1999. ARWC increased its total cash collection5 from 7 percent in 1995 at the beginning of the implementation to 24 percent in 1999. The cash collected by ARWC in 1999 only represents 32 percent of the total operation and maintenance expenses. Despite this increase, the low cash generation of ARWC and all other institutions in charge of water supply and sanitation makes them financially insolvent and it is not surprising that some vodokanals have difficulties paying the salary of their workers. Figure 2.16 Figure 2.17 Total Collections / Annua IBiNings by Customer Category- Type of Revenue Collection by Customer Category - ARWC 1999 ARWC I C99h & Bank Transfer eBanOer O011t 0199801099 160% 0% --,y 140%8% 120% =70 - _ 61t 01% 100%- _ 0 - K' 00% 3%~~~~~~~~~~~~~~~~~~~~~~~~~5% 3 - L 3E 0, 90os2- St : 0 1 9 2- 80 60%~~~~~~~~~~~~~~~~~~~~~~~~~~~I0 0%~~~~~~~~~~~~~~~~~~~~0 D-freeie IrdwdtOa Badgat C-nrneri.1 Wh.de-le t TC'TAL Dorreain Ir-dsrn1 Badg.t Carrrrer-a Wholesl .. 1 TOTAL Drga-l-ati.oe otherVKW orgVniKa. ons otherVKs 4 The figure shows total collections over billings for the current year. As some customers pay receivables, in some cases the percentage is greater than 100 percent. The commercial system of ARWC does not allow the analysis of the actual portion that the customers pay towards receivables and the portion paid against current bills. 5Total fees paid in cash divided by total billings. 19 The use of barter and off-sets as a practice to pay for water services is not particular to the water sector but rather to all utilities. The combined practice of non-payment and use of non- cash forms of payments has been demonstrated in other countries with a similar system to be fiscally costly, to constraint economic growth, and to have ambiguous welfare effects. Even if low inflation is attained, the presence of non-payments will prevent the country from reaping the benefits while the economic costs may be considerable. Inefficient industries continue to be supported through implicit subsidies provided by the nonpayment and use of barter to cover utility bills (energy, gas, water) that allow these industries to continue operating by avoiding hard budget constraints [14]. The analysis of the effects at the national level of this practice is beyond the scope of this document, but they are expected to be substantial. The Government has taken the decision to initiate the dismantling of the system in 2000. In order to achieve its goals, the Government should ensure that at both the national and local level the water and wastewater bills are paid on time and in cash, while allowing the vodokanals to cut service to non-payers based on the recently approved National Water Supply and Wastewater Law. Tariffs are insufficient to adequately cover operation, maintenance and replacement costs: In the past, operating and maintenance costs for water and wastewater systems were paid for primarily by industrial enterprises, budget organizations and subsidies from government. Financing of capital investments was the responsibility of the state. Domestic consumers paid only nominal fees for these services as part of their housing rent. In principle, tariffs are calculated to cover operation, maintenance and depreciation costs. For example, the total billings for ARWC in 1999 amounted to AZM 193.5 billion (USD 45 million) and the total operating expenditures were AZM 182 billion (USD 42 million)6. The total billings for water and wastewater services for all vodokanals in urban areas in Azerbaijan not including Baku were about AZM 67 billion (USD 15.5 million) and the total operating expenditures were about AZM 69 billion (USD 15.8 million). The fact that tariffs are targeted to cover all expenses is a positive feature of the tariff setting system in Azerbaijan. Additionally, the tariffs are set at the local level taking into consideration the specific needs and operational expenses of each vodokanal, instead of using national averages. However, even if all revenues were fully collected, there are several cost items that are not included or significantly undervalued in the tariff calculation. The procedure used for calculating tariffs has severe flaws in the way "profits" are assigned and costs calculated on past records, outdated or inappropriate norms rather than current needs. One key component that is not included in the tariff calculation is an adequate provision for unrecoverable debts as expenses. Vodokanals keep in their books accounts receivable for several years even if the likelihood of recovering such debts is minimum (see Figures 2.13-14). Tariffs are therefore insufficient to provide enough collection of revenues to cover all expenses. A second key issue in tariff calculation is the use of a low provision for depreciation, linked to inappropriate valuation of assets. Although the situation has improved in recent years (for example, the depreciation expense allowed to ARWC increased from AZM 35 million - USD 0.2 million in 1993 to AZM 33,321 million - USD 7.7 million in 1999), the lack of an adequate fixed asset registry and asset valuation does not allow proper calculation of replacement needs. Other expenses not included in the tariff calculation are the mandated subsidies to certain categories of consumers (e.g., IDPs) that are not paid by the central budget to the water companies, and some tax payments and components of the salaries and benefits paid to workers. Tariffs are not increased periodically and are subject to political interference by different government levels. In Baku, ARWC has not been authorized to increase domestic water tariffs since 1997 and remain at a very low level of AZM 185/m3 (about USD 0.04/m3). Figure 2.18 6 Including a depreciation provision of AZM 33 billion (USD 7 million) 20 presents the evolution of domestic tariffs for Baku since 1993. The variation in domestic tariffs in other cities is significant (from 37 to 700 manats per cubic meter - USD 0.008-0.16/m3) and only partially explained by differences in operational costs. Figure 2.19 presents the distribution of domestic water tariffs for all vodokanals in Azerbaijan. Vodokanals respond to the inadequate tariffs and low collections by delaying payments to suppliers, increasing their accounts payable, and reducing operational expenses (such as energy expenses through reductions in hours of operation, maintenance expenses by deferring rehabilitation and maintenance). For exatnple, ARWC has reduced its materials expenses from AZM 22.5 billion (USD 5.8 million) in 1997 to AZM 10.7 billion (USD 2.5 million) in 1999. At each tariff review, the downward spiral continues as the justification for a tariff increase is weakened with the argument that operational costs have gone down. The outcome is lower quality of service and eventual collapse of the system. Figure 2.18 Figure 2.19 Number of Vodokanals Classified by ARWC Domestic Tariffs Domestic Tariffs - 1999 -U-AZM/m3 ~USD/m3| 1 8 ... .._..200 0.05 16 0.05 14 1S0 0.04 150 ~~~~~~~~~0.04 12 0.03 AM.o10 0.03 0 Z 8 0.02 :0 6 0.02 0.01 2 0 0.00 1993 1994 1995 1997 1998 1999 0 50 150 250 350 450 550 650 More --W-AZM/m3 2 18 24 185 185 18 AZMIm3 ~USD/M3 0.01 0.02 0.01 0.05 0.05 Very high cross-subsidies of domestic consumers by other categories of consumers: One legacy of the socialist system that lhas not yet been changed in the water supply and sanitation sector in Azerbaijan is the high levels of cross-subsidy between categories of customers. By now, most countries in Central Europe have abandoned across-the-board price subsidies because of its very high burden on the budget and industries, lack of targeting to the truly poor, and wasteful consumption practices among households promoted by the low price of water. Figure 2.20 presents the water tariffs charged by ARWC in 1999 for various categories of consumers. While the ratio of budget organization to domestic tariffs has decreased from 7.5 in 1993 to 4.3 in 1999, the ratio of industrial to domestic tariffs has increased from 7.5 to 11.9 in the same period. The new commercial category was created in 1996 and the multiple commercial to domestic has been maintained at 28. However, industries that use water as a key raw material (soda bottling, beer) pay a tariff 225 times higher than domestic consumers. The ratio of average production costs (total operating expenses divide by volume billed) to domestic tariff is 2.28. Figure 2.21 shows the value of this ratio for all vodokanals in Azerbaijan. Water supply and wastewater companies tend to resist changes to the cross-subsidy because of the low collection in the domestic sector. Budget organizations are an important source of revenue through off-sets of taxes and fines. Industries and commercial enterprises are a vital source of revenues and particularly cash, despite their relatively smaller consumption levels. 21 Figure 2.22 sumnmarizes the relative share of water consumption, revenues billed, revenues collected, and cash collected for each category of consumers for ARWC in 1999. Figure 2.20 Figure 2.21 ARWC Water Tariffs 1999 Operating Expenses/Domestic Tariff per Cubic Consumer AZM/m3 USD/m3 Meter for all Vodokanals -1999 Domestic 185 0.04 Average Ratio: 2.08 - Median: 1.45 Budget Organizations Treated 800 0.18 14.00 Untreated 637 0.15 12.00 Industry 10.00 Treated 2200 0.51 8.00 Untreated 637 0.15 Commercial 6.00 Treated 5200 1.20 4.00 Untreated 637 0.15 2.00 Industries using water as key raw material 0.00 - 111 Treated 41,667 9.60 Other water companies - bulk sales Sumgayit 588 0.13 Apsheron 378 0.09 Average Production Cost 422 Figure 2.22 Share of Water Consumption, Revenues, Collection and Cash by Customer Category for ARWC 1999 El Dorrestkc E3 Budget Organizations E3 Industry E1 Omrrercial I Bulk Sales 100% 80% = 60h -= 40%- ZO% -li mIHG 20% Water Consurrption |Water Revenues |Revenue CD[lection |Collection in Cash | B Bulk Sales 23% 26% 14% 1 1 l ai ConrrWercial 0°% 4% 6 7% 19% U Industry 8% | 31% |_31% |_34%_l U Budget Organizations 9°h% 15% | 15% | 17% E3 Dorrnstic 60% 24% | 13% 1 29% l Overall, domestic consumers in Baku received in 1999 a total of AZM 64 billion (about USD 15 million) from the across-the-board price subsidy, of which about AZM 44 billion are billed to industry (67 percent), AZM 13 billion to budget organizations (20 percent), and AZM 7 billion to commercial customers (13 percent). For the entire country, the cross-subsidy to domestic customers in urban areas (not including Baku) is an estimated total of 29 billion (about USD 6.7 million) per year. However, given the low collection, ARWC does not receive these 22 cross-subsidies but it is forced to pass them on to domestic consumers through low tariffs. In 1999, ARWC received only 41 billion of these cross-subsidies (about 64 percent) and most of it through a very large off-set of taxes with the government at the end of the year. Billing is based on high standard consumption norns: Domestic customers are billed by ARWC and all other vodokanals based on standard consumption norms, rather than metered values. In the larger cities with better service, the norms are very high (400 liters per capita per day (Ipcd) in Baku and 340 Ipcd in Sumgayit) when compared with consumption rates in Western Europe of 130-200 Ipcd. Other cities have smaller consumption norms (see Annex 2), but this is a reflection of the low level of service. Lack of metering is one of the causes for high wastage of water, particularly in Baku and Sumgayit. as consumers are charged the same amount regardless of their actual consumption. The high consumption norms per capita have additional negative effects: (i) overdesign of distribution network, pumping capacity and treatment installations to accommodate the theoretical demand; (ii) no incentive to meter domestic consumers, as in many cases the actual consumption is much lower than the non-n resulting in lost revenues; (iii) billing based on per capita norms require detailed housing occupation databases that need more frequent updating than norms based on fixed infrastructure and housing; and (iv) general reluctance of the population to pay for the high level of consumption they are charged, particularly in areas with low levels of service. As part of the GBWSR Project, a pilot domestic installation program was implemented and 5,000 meters were installed. The results of this pilot showed that the plumbing systems do not lend to installation of apartment meters as the internal distribution does not branch at the apartment level but tend to have vertical distribution lines with outlets at each floor. Four or more meters per apartment are needed to measure hot and cold water consumption. Also, the state of disrepair of the internal plumbing systems makes the installation of meters very difficult and usually must be accompanied by extensive repairs. Only about 25 percent of ARWC"s industrial customers and budget organizations are metered; the rest are billed on the incoming pipe diameter. A more aggressive metering campaign to commercial customers is underway and about 1,100 of the 4,500 establishments are metered [151. Metering in other cities is al:tost nonexistent. The technical inefficiency of the operations translates into an expensive cost structure: The high reliance on pumping in the distribution system and the state of repair of the existing system make the cost structure of most of the vodokanals in Azerbaijan, and specifically ARWC, weighted towards energy expenditure. Even though ARWC has tried to get a better control of its energy expenditure and has been able to reduce this component from 70 percent of Operations and Maintenance (O&M) costs in 1995 to about 53 percent in 1998, through a combination of lower energy tariffs and newer pumping equipment, the weight of this component is much higher than in Western utilities, where it ranges from 6 to 35 percent. BWD energy expenditures are as high as 68 percent of tctal operational expenses. Sumgayit vodokanal energy expenses are 54 percent of its operational expenses for distribution (not including water purchases from ARWC). As energy prices in Azerbaijan are still highly subsidized, once energy tariffs get more in line with the actual costs, the O&M costs of water and wastewater utilities in Azerbaijan will increase significantly. There are some exceptions among the vodokanals outside Baku, such as Hachmaz, where energy expenditures are only about 20 percent of total O&M costs, given the technical layout of the system that takes advantage of the surrounding topography and relies on gravity-based distribution. 23 Figure 2.23 O&M Cost Distribution ARWC 1998 1995 8% 1% 3% 4% [Energy i*Material 8% U Water Purchase oj Personnel 1 8%/ 53% 9 {3General Maintenance cO Other 70% Additionally, the lack of metering makes reliable estimates of system losses impossible. ARWC applies, for accounting and tariff-setting purposes an unrealistically low value of 8.9 percent, while the actual value is estimated to be larger than 50 percent. Other vodokanals follow a similar approach given the lack of metering. Most of them assume losses between 1.3 and 15.4 percent7, which is very low. These assumptions translate into tariff calculations that have little to do with the actual technical losses and inefficiencies of the system, and these are passed on to consumers through high consumption norms that include volumes lost in the distribution system. Subsidies to domestic population have several deficiencies: The domestic consumers receive three types of subsidies in Azerbaijan: (i) across-the board household subsidies (funded through cross-subsidies); (ii) price discounts to certain households (such as IDPs); and (iii) no disconnection of delinquent residential customers. The design of each of these subsidies and the application in reality results in low targeting and protection to the truly poor and, at the same time, weakens significantly the financial position of all water supply and wastewater companies [16, 17]. The total monthly water fee for a resident of Baku (calculated based on a consumption norm of 12 m3/month) is AZM 2,200 (USD 0.51). In the socio-economic survey prepared for the 1998 Water and Wastewater Master Plan for Greater Baku, 84 percent of the population sample did not know how much they paid for water [6]. A combination of low water fees and lack of collection enforcement may be responsible for this lack of knowledge. The fees in other cities outside Baku are generally smaller (see Figure 2.24 for the distribution of monthly water fees per capita for all vodokanals). These values can be compared to the average monthly income per capita of AZM 134,000 [4]. The Social Assessment for the GBWSR Project showed that there is a substantial willingness to pay (WTP) higher water fees for a better level of service. Figure 2.25 shows the stated WTP by income groups [8]. The across-the-board household subsidy financed through cross-subsidies from industrial, commercial and budget organizations customers was explained earlier in this section. This subsidy weakens the vodokanals as the low collection from the subsidizing segments of customers force the water company to absorb the burden. Additionally, this subsidy does not distinguish among poor and non-poor segments of the population. As the non-poor segments of 7 Two exceptions are Ali-bayramli and Goychay with assumed losses of 20 and 30 percent, respectively. 24 the population have better access to the service and in general consumer higher volumes than the poor, the share of the subsidy they receive is higher. Figure 2.24 Figure 2.25 Morthly Water Fee Per Capita All Vodokanals 1999 Stated Willingness to Pay as a Percentage of Average: AZM 734 - Median: AZM 466 Income by Income Group (IG) 4,00 0 . 09 7.% ....... ........ .. ... .... ..... ... 0.97.0 35000 0.870 6° - 7~~~~~~~~~~~~~~~.0% 0.70 3,000 ~~~~~~~~~~~~~~~5.01% 0.80 2,500- - 4.0% 0.00 U E 2,000 -0 0.40 ~~3.0% 1,500 0.30 2.0% 1,000 00 0.20 ~~1.0%/ 500 0.10 0 0.00 6 1 (lowest) IG 2 IG 3 IG 4 (highest) The use of merit-based utility price discounts for certain categories of domestic consumers was a legacy from the former Soviet Union. The purpose of many of these privileges was not to reduce poverty but to reward service in certain occupations. The system was eventually overhauled in Azerbaijan and the mandated benefits were limited to IDPs (legally until end of 2000), labor and war veterans, and physically handicapped people. The targeting of this subsidy to the truly poor appears to be effective. However, the Government does not transfer the necessary resources to cover the expenses associated with the provision of these services by the water and wastewater enterprises. This places an important financial burden on the vodokanals. For example, in 1998 ARWC had to provide subsidies for AZM 7.3 billion to privileged consumers (USD 1.7 million, or about 14 percent of the total billings to domestic consumers) for which it did not receive any compensation from the Government. The financial impact of this subsidy on a particular vodokanal depends mostly on the number of IDPs in its area of service. Lack of metering combined with 100 percent subsidies to privileged consumers lead to wasteful consumption patterns, although many of these consumers live in areas with low levels of service. Until the recent approval of the National Water Supply and Sanitation Law, vodokanals did not have the legal right to disconnect non-paying customers. This was one of the key factors for the rampant practice of non payment. By allowing domestic customers to continue receiving water and wastewater services despite non payment of the corresponding fees, the utility is providing a subsidy. Given the low collection rate from the domestic sector, the total subsidy is significant. For example, in Baku domestic consumers only paid 35 percent of water fees in 1999 to ARWC, effectively receiving a subsidy of about AZM 30.6 billion (USD 7.1 million). This subsidy is not specifically targeted to the poor, and anecdotal evidence indicates that collections from the poorer segments of the population in Baku is higher than from the non poor. The impact of the policy of non disconnection on the financial position of water and wastewater utilities is extremely detrimental, leading to the decapitalization of the companies, and reducing the reliability of service to all consumers. Additionally, the water and wastewater utilities pass this subsidy mainly to the energy company that cannot disconnect them for non payment. In the long run, the budget and the consumers will also pay a high price in the form of support to rehabilitate the run-down utilities. 25 Accounting, financial management and commercial systems are inadequate: These systems in all water and wastewater enterprises have several deficiencies that directly affect their financial viability. A key issue that is faced not only by vodokanals but also by other service utilities and industries is the slow transition to International Accounting Standards, (IAS) an initiative that the Government is promoting but requires substantial efforts. The most important problems are [5, 13]: • Accounting is still seen by all water and wastewater companies as a tax-driven exercise rather than a tool for management. There are several distortions that present the water companies as profitable enterprises, while if an adjustment is made to account for doubtful receivables (bad debts) they would be highly unprofitable. In many cases, the book revenue of vodokanals is done on accrual basis while their accounting of expenditures is done based on actual payments rather than on accrual basis. ARWC has taken some positive steps to improve its expenditure accounting system but the financial statements of other vodokanals are difficult to interpret. * Despite the interest and commitment of the Government to promote the use of International Accounting Standards in Azerbaijan, none of the vodokanals prepare auditable accounts based on IAS8. * There are not systems to evaluate the age of accounts receivable, as customer payments received are allocated partially to accounts receivable and the rest to current bills. The valuation of accounts receivable is therefore very difficult. * As accounts are organized to permit Government close control over enterprise expenditures and assure full payment of taxes, all expenditures are rigidly defined to avoid any unforeseen reduction in profit and hence taxes. As a result, more than half the vodokanal's profit (as defined by the national accounting rules) is used to pay for expenditures, such as employee benefits, reserve funds for investments, and other capital costs. For example, interest on loans would not be considered a pre-tax expenditure. This is an important obstacle in obtaining loan finance as lenders would only receive payments from profits. * Reconciliation of records between accounting, economic, and commercial departments is seldom done. The billing systems are inadequate and do not provide enough controls that would prevent errors or fraud. ARWC has developed an in-house computerized billing system that has improved its management of information but it still requires further strengthening. * In some instances, different departments of the same enterprise keep separate accounts and use different rules (for example inventory valuation). ARWC is currently working on integration of all accounting departments from its various units. * Management information is limited and there is no computerized information system. All recording is done manually, with little or no emphasis on standardized forms. * Fixed asset records are generally incomplete, there are few fixed asset registry, and adequate valuation based on physical evaluation of assets and updated information is lacking. These deficiencies translate in inadequate provisions for depreciation and lack of information for planning of rehabilitation and maintenance. * Currently, the financial auditing of vodokanals is guided by Resolution No. 103, approved by the Cabinet of Ministers on August 5, 1996, which establishes the basic principles of conducting an audit at state-owned enterprises. With the exception of ARWC, none of the surveyed vodokanals has experienced a financial audit conducted by an external auditor. 8 ARWC has contracted international audit firms to prepare auditor's report and financial statements since 1995. However, the deficiencies of the accounts and financial management system of ARWC have prevented the auditors from expressing an opinion on the financial statements prepared according to IAS. 26 J. Investment Planning and Selection The water and wastewater enterprises in Azerbaijan are still ruled by a compendium of standards and norms that prescribe in detail how systems should be planned, designed, costed and implemented. There is still a tendency t:o favor large production and expansion of infrastructure at the expense of rehabilitation, maintenance and efficiency improvement. The emphasis is on the stock of water and wastewater infrastructure rather than on the flow and quality of services. This approach translates in the collection of data that is usually based on designs and old master plans rather than on the actual situation, and that is focused on capacity rather than on level of service. Lack of adequate data based on real and actual field information is a common deficiency in every system. The only recent master plan prepared in the sector was for the Greater Baku area in 1998, in the context of the GBWSR Project [6]. In the planning and selection approach, the constraints under which investments were selected and designed were different fi-om those of the current economy. One fundamental difference was the very low cost of energy which promoted excessive pumping, as in many cases provided a solution with lower investment costs. As energy prices start to realign with actual costs, the operational expenses of the systems designed under different criteria have become extremely high. The solution to the pervasive low level of service is generally perceived solely as an increase of production capacity. Additionally, many of the standards and norms still in force require levels of quality (water consumption, stand-by capacity, effluent standards for wastewater treatment, among others) well beyond the current financial capacity of the customers and the country in general. Their rigidity prevents the innovative and creative solutions that are essential for determining cost-effective investment: selection and priority setting. The following examples illustrate this point: * Water use allocation norms: By reqairing very high consumption norms (for example 400 Ipcd in Baku and 340 Ipcd in Sumgayit), every component of the water supply treatment and distribution system, and the wastewater collection and treatment system is overdesigned, as the daily consumption required by each person is much smaller. The standard is conducive not only to higher production than needed but also wasteful consumption practices. * Drinking water standards and monitoring: Most vodokanals have difficulties in meeting drinking water standards, which are as demanding as those required by Western countries. While these standards are certainly a commendable goal, there is little priority on the minimum standards that must be complied with to achieve a minimum acceptable level of safe drinking water. Additionally, the large number of standards would require very sophisticated sampling equipment and personnel (for example, the standards call for collection of about 31,200 samples of drinking water per year in Baku). Lack of prioritization translates into little follow-up of water quality and compliance. * Effluent standards: Ambitious watei quality standards lead to equally ambitious effluent standards for wastewater treatment. The effluent standards required today from municipal water and wastewater enterprises are among the most demanding in the world. The effluent standards are based on the receiving water bodies, which are classified in two categories in Azerbaijan: sanitary/social use and fishing water use. The standards for fishing waters are unrealistic as many of the required parameters cannot be accomplished by any technology in use for domestic and many industrial wastewaters. For example, the standard for Biological Oxygen Demand (BOD) removal is generally set at 3 mg/l for fishing waters and 3-6 mg/l range for sanitary/social use waters. Standards for removal of other pollutants are similarly high. There is no consideration of the specific water body that will receive the effluents and 27 the absolute uniformity of standards requires advanced, costly treatment technology that either is not used in any country for treatment of domestic wastewater or is no longer affordable. Additionally, wastewater treatment plants are designed and built with a chlorine dosing contact tank before discharge of the effluent, a practice that is not needed unless the receiving water is expected to be used for human drinking without treatment, bathing or overhead irrigation of crops eaten raw; and gives rise to harmful organochlorine compounds in the effluent. * Cost estimate standards: The standards used for cost estimation of investment needed are based on old, not updated norms that generally tend to result in overestimation of costs. Any investment proposal should be evaluated with great caution and analyzed carefully as to its cost effectiveness. Under the Soviet system, major capital expenditures were financed through government transfers. Since independence, very little government assistance has been budgeted and even less has been transferred to vodokanals outside Baku. The following table summarizes the government transfers for 1998 and 1999. In the period 1994-1997 the total transfer amount to AZM 236 million (about USD 56,000). For a population served of about 1.7 million, these transfers are clearly insufficient. Table 2.1: CHCP Transfers to Regional Vodokanals (Million AZM - 000 USD) Capital Construction Capital Repair Costs Allocation Actual Transfer Allocation Actual Transfer 1998 AZ4710(USD 182) AZM710(USD 182) AZM420(USD 108) AZM 256 (USD 66) 1999 AZM 1,222 (USD 281) AZM 835 (USD 192) AZM 452 (USD 104) AZM 249 (USD 57) Source: CHCP The above situation may change in the near future if the macroeconomic projections that call for GDP growth of 2 percent in 2000-2002 and then 17 percent for 2003-2005 based on the projected revenues from the oil sector actually realize. The budget is expected to reach a relatively comfortable position around 2002 [2]. However, one important policy issue will be how to allocated these additional resources between consumption, investment and sterilization. The establishment of an Oil Revenue Stabilization Fund has been proposed as a tool to reduce volatility in public expenditures resulting from the instability of world petroleum prices, and to temporarily sterilize foreign exchange earnings to avoid an appreciation of the exchange rate. However, a portion of the oil revenues will probably be used to rehabilitate and expand physical infrastructure[2, 18]. Unless the existing practices of investment planning and selection are changed and other sector problems described in this section are solved, there will be a serious danger to either implement uneconornical investments or to enter into a new cycle of over- designed investments that would eventually run down for lack of adequate maintenance. K. Similarities with Other Utility Sectors The water and sanitation sector faces similar difficulties and constraints as other utility sectors in Azerbaijan. For example, in the electricity and gas sectors, there is a striking contrast between the upstream petroleum sector and the downstream electricity and gas sectors in Azerbaijan. In the petroleum sector, the investment framework is relatively liberal and there has been considerable success in attracting private investment. In electricity generation, transmission and distribution, as well as in gas processing, transmission, storage, and distribution, there has been very little reform and liberalization, and there is no private investment in the electricity and downstream gas sectors in Azerbaijan. There is little doubt that these sectors would be very attractive to private investment with an appropriate policy framework in place. The sector is in 28 clear need of such investment (with the associated technology and know-how) to rehabilitate and upgrade infrastructure and enhanced service efficiency. Under the current policy framework, Azerbaijan's oil and gas wealth is being channeled into enormous subsidies for the economy and the population. Underpriced oil and gas, for which little payment is actually made, is transformed into electricity and gas services provided at tariffs below costs and high levels of non-payment. A rough calculation indicate that SOCAR provides Azerenerji and Azerigas with about US$250 million a year of free gas and fuel (valued and export prices). This represents about twice the Government budget deficit, or 6 percent of GDP. Recorded collections for electricity in Baku are only 28 percent of billings, and for Baku residential customers only 12 percent (on a residential tariff of only about 2 US cents/kWh). The subsidies derived from consuming oil and gas wealth are being supplemented by substantial external credits for the electricity sector with sovereign guarantees (an estimated US$530 million to date), by arrears to suppliers and to the Government budget, and by deferred maintenance. There is a growing realization in the Government and in the energy sector in Azerbaijan, that the current policy framework is not: sustainable. Preliminary reform steps are being taken: some tariff adjustment, initial involvement of the private sector through management contracts, and preparation of restructuring and privatization plans. However, much remains to be done. A sustainable policy framework must be introduced carefully and gradually, if social and economic dislocation is to be avoided. This policy framework would have as key elements: (i) the step-by- step replacement of very poorly-targeted social protection through the energy sector with a much better targeted system: (ii) the promotion of competition where feasible; (iii) the transparent regulation of monopolies in the sector; and (iv) the attraction of suitably-experienced private investors and operators. In any case, privatization of electricity and gas distribution needs prior work on restructuring, regulatory reform and targeting of social protection. Some of the reforms discussed above 'are also needed in the electricity, gas, and district heating, and there are synergies to be gained in a common coordinated approach aimed at the financial sustainability of the energy sector through clear definition of Government's role as regulator of the private sector in the provision of service, and increased collection of revenues. L. Activities of Bilateral Donors, International Financial Institutions (IFI) and Non- Governmental Organizations (NGO) The activities supported by bilateral donors, IFIs and international NGOs can be grouped in two main areas of focus. First, improvement of water supply services in Baku supported by an IDA Credit and an EBRD Loan; and, second, water and sanitation assistance to IDPs and refugees supported by several donors, international NGOs and IFIs. Other World Bank Group activities, particularly in the irrigation sector, include components related to the water supply and sanitation sector. Of particular interest for the water and sanitation sector is a pilot program supported by KfW in the city of Imishli, a 30,000-inhabitants city that currently provides two hours of service. The proposed institutional approach of this project is to establish a joint venture with a German utility operator that would have a 74 percent participation and would take over the operation activities. The proposed financing for this project is a DM 6 million credit. The project is still under preparation but the proposed innovative approach would provide valuable lessons for other towns in Azerbaijan. 29 Table 2.2 presents a comprehensive overview of activities and programs with summary description and objectives. The field office of Save the Children, under the sponsorship of Mercy Corps/USAID Umbrella Grant maintains an updated web page9 with excellent information on activities of bilateral donors and NGOs dedicated to humanitarian activities in Azerbaijan, and with specific activities in the water and sanitation sector. The UNHCR, the EU and other donors work jointly with NGOs as implementing partners in various activities, including construction and rehabilitation of community infrastructure projects. 9 http://www.azerweb.com/ Table 2.2 Partnerships and Activities of Bilateral Donors, IFIs and NGOs in the Water and Sanitation Sector Institution Project/Program Objective Water Supply and Sanitation Partners Government Target Group Sector Activities Agencies World bank Group - Greater Baku Water * Emergency short-term * Water demand EBRD Apsheron * Entire population Ongoing Supply Rehabilitation improvements to restore water management Regional of Baku City (and Project (USD 61 supply to Baku, in particular * Operations and Water bulk supply to million equivalent the poorer elements of the maintenance improvement Company other loan) population; * Water supply communities of * Improve water supply system improvements the Greater Baku as a whole * Institutional capacity area) * Provide the basis for longer building of ARWC term planning and recovery Farm Privatization * Accelerate program for land * Rehabilitation of critical IFAD Ministry of * Farms in the Project privatization and farm community infrastructure, Agriculture raions of Barda, restructuring through farm particularly reliable water Salyan, Udjar, privatization support services, supply which has been Lenkoran, rchabilitation of main irigatior, idenitified as ihe criiicai hachmaz and water supply and drainage need in most project farms, Sharur works, and community as part of the USD 1.04 development program million Community o Development Program * Creation of Water Users' Associations (USD 1.46 million) Pilot Reconstruction * To facilitate the repatriation * Rehabilitation of small UNDP ARRA * IDPs Project and of IDPs scale infrastructure, UNCHR a Small-scale water Supplemental Credit * To raise their standards of including water supply and supply projects living through voluntary sewerage facilities. To have been resettlement, establishment date close to 150 wells and completed in and strengthening of six pumping stations have Agdam, Fizuli, supporting government been repaired and are fully Terter, agencies, demining and operational; 120 additional Nakhichevan, and reconstruction of areas wells and two pump Geranboy affected by the conflict, and stations planned for 2000 donor and NGO coordination Institution Project/Program Objective Water Supply and Sanitation Partners Government Target Group Sector Activities Agencies World Bank Group - Rehabilitation and * Rehabilitation of first 50 km * Samur-Apsheron Canal is a State * Agriculture Planned Completion of of Samur-Apsheron Canal key source of drinking Irrigation production areas Irrigation and Drainage and improvement of canal water for Greater Baku Committee along Infrastructure Project management (see map 2) rehabilitated * Completion of 31 km of the * As part of project canals Mill-Mugan Collector Drain preparation: (i) * Rehabilitation and Development of Water completion of irrigation and Users Associations Support drainage infrastructure Program; and (ii) review of * Institutional strengthening legal framework related to water EBRD Greater Baku Water See above description Supply Rehabilitation Project (USD 23 million loan) SECO Proposed Baku Water * Improvement of water supply * Rehabilitation of block- ARWC * Population of Government of Supply Project infrastructure at block level level booster pumping Baku Switzerland in Baku stations KfW Open Program for * Infrastructure rehabilitation * Rehabilitation of water * IDPs Infrastructure (DM 5 for refugees and IDPs supply and sewerage W million grant) infrastructure Proposed pilot program * Improvement of water supply * Rehabilitation of water CHCP, * City of Imishli for Imishli services to the city supply infrastructure Vodokanal * Management and operation of vodokanal by an international utility operator IBD Irrigation project * Reconstruction of Mil- * Rehabilitation and State Mugan Collector and Khan- construction of irrigation Irrigation Arkh branch of Samu- and drainage infrastructure Committee Apsheron Canal that is used by some communities as source of drinking water Institution Project/Program Objective Water Supply and Sanitation Partners Government Target Group Sector Activities Agencies Bilateral Donors/ Benevolence * Humanitarian relief and * Construction of wells Regions of Agdash International NGOs International support to IDPs and Gabala Foundation CARE - CASPIAN * Construction of latrines USAID Regions of Kurdemir, Program (Community and water hand pumps in Imisli, Saatli and Action for Shelter and rural IDP settlements Beylegan Public Infrastructure * Improvement of basic Assistance Needs), community infrastructure GR3 Project and CDF * Support to creation of (Community Water Users Associations Development Fund) EU * Rehabilitation of drinking ARRA Region of Agdam water supply system HAYAT * Construction of latrines UNHCR Region of Sabirabad International Rescue * Improvement of water Region of Ageabedi Committee supply infrastructure in 58 settlements Relief International * Construction of water Regions of Agdas and supply infrastructure Ageabedi (communal water taps) and latrines Tacis * Rehabilitation of Water ARRA Regions of Fizuli and Supply Systems Agdam Oxfam * Construction of communal Regions of Yevlakh, water infrastructure and pit Goranboy, latrines Mingashevir and Agdam 33 III. THE NATURE AND DIMENSION OF THE CHALLENGE AHEAD: ELEMENTS OF A WATER AND SANITATION SECTOR VISION The preceding assessment shows a sector moving rapidly towards levels of deterioration that, if not reversed, will result in ever decreasing quality of services and eventual collapse of the existing water and wastewater systems with serious consequences for the well being of the population of Azerbaijan. The provision of adequate, reliable, and safe services to the people in the Region will require investments in the following areas: * replacing and rehabilitating existing plants and networks to prevent premature collapse; * increasing the efficiency of operations of plants and networks to reduce future operating costs; * institutional strengthening and capacity building to improve the productivity of utility management, administration and operations and commercial performance; * expanding water supply and wastewater services to those people presently unserved; and * expanding waste water treatment coverage. It is difficult to estimate with any degree of accuracy the magnitude of the investments that may be needed. Very rough estimates indicate that more than USD 1,500 million may be needed to provide a level of water services close to the one found in Western Europe but with a basic level of wastewater services. Clearly, improving the provision of services in Azerbaijan to fully acceptable levels will require a timeframe measured in decades. The immnediate challenge in the country is actually to prevent collapse and get back to adequate basic levels of service. The pace at which progress towards better water supply and wastewater services is achieved will depend largely on the ability of Azerbaijan to: * increase resource mobilization from all sources: given that government budgets will not be able to contribute significantly, the only realistic source of financing will be higher payments by consumers augmented by resources provided by public and private lenders and grant contributions. Affordability and willingness-to-pay constraints will be limiting factors for resource mobilization as domestic consumers currently pay only a fraction of the cost of services they receive and the collection of water fees from other consumers is very low. * ensure the most cost effective use of resources: improving the productivity of sector agencies and efficiency of operations, and concentrating scarce resources on cost-effective and highest priority investment opportunities. The only way to respond to this challenge will be through an urgent paradigm shift in the sector. The management of the water supply and wastewater sector has not yet completely changed from its legacy of inefficiencies and huge state subsidies that made the provision of services an entitlement to the people without considerations of their needs and preferences. With the breakdown of the old system, the state subsidies, no longer affordable, have disappeared and with them the resources needed to maintain and operate systems properly and to invest in system expansions and improvements. While some important reforms have taken place - most importantly, maintaining the decentralizing sector responsibility, continuing tariff policies based on the principle of cost recovery, and approving the National Water Supply and Wastewater Law. - disabling sector policies, inefficient management and operations still exist in Azerbaijan. The sector agencies believe that insufficient availability of financial resources is the only constraint for future sector development. However important, it is by no means the only one. Political authorities on all levels, the sector community and consumers find it very difficult to deal with new realities. Many of them do not understand or fail to acknowledge the seriousness of the crisis and harbor unrealistic expectations. There is still a wide belief that the crisis is temporary 34 and can be sclved within the old system of sector management. This old system cannot be a blueprint for the future, as its very basis, the subsidy based entitlement system is no longer affordable nor desirable. A new paradligm of sector management is desperately needed to overcome present systemic shortcomings in sector, policy and practices. A new set of principles such as local control, management responsibility and accountability, productivity and efficiency, capacity building, and consumer involvement and responsibility need to be introduced to rescue the sector from collapse and to put it onto a development towards sustainability. Sector reform and capacity are essential. Investment assistance without reform content provides temporary solutions that do not bring sustainable results, misuse scarce resources and only postpone reforms. Raising the funding needed and using the scarce resources in the most cost effective way possible also require changes to present sector policies and practices and institutional restructuring and strengthening. Fundamental changes in outlook and sector objectives should be considered to allow national and local governments, sector institutions and consumers to respond effectively and appropriately to the challenge ahead. Water enterprises and other sector institutions need to be restructured and strengthened to do their job better in the future. Diffused and overlapping responsibilities in managing water and wastewater systems inhibit coordinated and cost-effective use of scarce resources. P'resent planning and design practices do not promote concentrating resources on priority needs and minimizing costs. Ambitious and inappropriate norms and standards need to be reconsidered. Financial and accounting systems, the way budgets are set and executed and tariffs determined prevent transparent and efficient management of financial resources. It will also require the strengthening of the sector's support industry to enable it to provide better equipment, materials and contracting and consulting services. In the end, success will depend on the ability of the Government and the sector community to make the consumer understand that it is only through their financial contribution that services can be improved to the level they want. Immediate action is required in several fronts under a clear strategy based on a vision of where the water supply and sanitation sector ought to be. This vision should be shared by all stakeholders and the Government should take the initiative to publicly air the serious issues facing the sector and the steps that must be taken to address them. In searching for a way to overcome the present crisis of the sector, international best practice may serve as a guide. There are certain general elements that are common to successful water and wastewater enterprises worldwide and there are some basic policy and institutional elements needed to support the development of the sector. The achievement of the water and sanitation sector vision will require the implementation of four key reforms: (i) an Institutional and Governance Reform; (ii) a Financial Reform; (iii) a Technical Reform; and (iv) a Service Reform. These four reforms are closely interrelated and each of them have specific challenges that will be developed in detail in the rest of this document. Based on best international practice, while taking into account the present physical, econornic, and social conditions of Azerbaijan, the following table summarizes for ease of presentation the key challenges of the program of sector reform and strengthening. 35 Box 3.1: Reforms and Challenges of the Water Supply and Sanitation Sector Institutional and 1. Strengthening the sector's institutional/regulatory framework and capacity Governance Reform to enable the development of stronger and better coordinated sector institutions on all levels that can discharge their obligations more efficiently 2. Making communities and individual consumers key stakeholders in sector development and introducing demand, community responsibility and willingness to pay as the main criteria for future sector development 3. Increasing the involvement of the private sector in all aspects of the management and operation of water and wastewater systems as the most effective means of promoting economic efficiency in the sector 4. Facilitating the development of a stronger private support industry that l______________________ helps the sector to provide better services Financial Reform 1. Improving resource mobilization from all sources 2. Achieving financial viability of sector institutions based on the principle of cost recovery from consumers subject to affordability and willingness to pay considerations 3. Ensuring consistent focus and coordination of international aid and financing Technical Reform 1. Utilizing limited resources in the most cost-effective mix of institutional strengthening, maintenance, network and plant rehabilitation and efficiency improvements, and carefully analyzed expansions if truly needed Service Reform 1. Making the sector responsible and accountable to the poor segment of the population 2. Choosing the level of service and design standards affordable and responsive to the users 3. Strengthening the human resource capacity of all aspects of sector management and operations 4. Meeting national goals of environmental protection and use of natural resources 36 IV. STRATEGY FOR SECTOR REFORM AND STRENGTHENING This Chapter presents the recommendations and guiding principles for each of the four reforms for the sector, organized according to the main themes or challenges to be confronted under each reform. A. Institutional and Governance Reform The international evidence indicates that there are three key elements to achieve effective and efficient management of the water and sanitation sector: (i) a clear division of functional responsibilities between levels of government, the private sector, and other stakeholders; (ii) clear accountability that encompasses both regulation by central government and incentives for responsiveness to local constituents; and (iii) revenue sources corresponding to functional responsibilities. On the one hand, Government - both national and local - sets the policies and provides the legal, regulatory, and in some cases financial support under which the service is to be delivered to consumers. On the other, service providers manage and operate water supply and sanitation services in the most cost-effective way. Given the specific geographical and technical situation in Azerbaijan, there are four distinctly different segments: * Greater Baku area: the cities of Baku, Sumgayit, and Apsheron and others in the Apsheron Peninsula have water and wastewater systems that are technically linked and within close geographical proximity. Given the size and complexity of these systems, their operation requires an integrated water supply and wastewater enterprise. The recommended institutional and governance setting would involve an international utility operator selected in an open and transparent competition, charged with the operation of the whole water supply and wastewater system, with regulation by the Government to ensure quality of services and protection of consumers. The selection of the utility operator would be done in an international, open and transparent selection to ensure the highest possible benefits to the population of Baku. - Medium and small urban areas: communities with populations larger than 5,000 and water and wastewater systems that require professional management and operation. The recommended institutional and governance setting would require restructured vodokanals with responsibilities decentralized to the lowest appropriate level to efficiently manage the systems and to introduce more ownership and involvement of the communities served. As some of the vodokanals will not have the capacity to support a full-fledged water supply and wastewater operation with their own laboratory, engineering staff, planning, commercial system, and specialized equipment, the Government would facilitate the provision of these services under contract to the private sector managing centralized support service units at a regional level. Service contracts would not be under exclusive selection but would promote as much competition as possible. * Rural areas: usually communities with less than 5,000 with water supply systems that are simple to operate and maintain would require a demand-responsive approach where communities make informed choices regarding their participation, service level, and service delivery mechanisms. The communities would own, manage and help to finance their facilities. The Government facilitates the process by encouraging stakeholder participation, setting policies and standards, and co-financing facilities. * Urban fringe areas and refugee areas: new settlements that develop either next to larger urban areas and are poorly served or served with individual solutions. The approach would depend on the specific situation and can be: (i) expansion of coverage from adjacent urban utility to 37 this area if the existing capacity is sufficient; or (ii) an institutional approach as the rural areas described above. In any case, the involvement of the community in the selection of the approach is fundamental. The following sections provide specific suggestions for the institutional and governance reform at each of the four levels within the context of the guidelines principles outlined above. 1. Greater Baku Area - Autonomous Full-Service Utility with Private Sector Involvement The water supply and wastewater sector in Greater Baku is facing enormous challenges, as described in Chapter I. The ability of the sector to provide services to the population is being jeopardized by a rapid deterioration of physical systems; very large investment needs that the Government is not in a position to provide; outdated technology; limited managerial and financial skills; and an extremely difficult financial situation. ARWC is doing an admirable job in maintaining operation of the systems and has improved its institutional and technical capacity through the implementation of the GBWSR Project. However, they have reached a ceiling in their improvements, mainly due to the constraints that a public organization faces. With substantial and sustained support ARWC could, over the long-term, implement the necessary reforms to improve its performance and transform itself into a well-run utility able to provide good-quality services to the population of Baku. The time that BWD and the vodokanals of the Apsheron Peninsula would need to implement the necessary institutional changes would much longer than that required by ARWC as their capacity is lower. However, the urgency of the water supply and wastewater problems in Greater Baku requires a decisive action to respond to the crisis and to mobilize the necessary funds needed. The ability of the public sector to respond with the urgency required is limited. The experience worldwide has demonstrated that only the private sector can rapidly achieve under tight time and resources constraints dramatic improvements in the efficiency and provision of services and, at the same time, strengthen the institutions to serve the population in the most cost-effective way. It is only through the private sector expertise, capacity and independence that the needed changes in management and operation of the water supply and sanitation systems in Greater Baku would take place and result into better services for the population. The characteristics of the water supply and wastewater systems in the Greater Baku area provide an opportunity for the Government to gain economies of scale and leverage the capacity of an international utility operator of the highest quality to improve the services. There are several benefits that can be expected from a contract with a private utility operator: * Higher efficiency and know-how: A pre-qualified operator with experience in managing water and wastewater systems of a size comparable to Greater Baku would have solved similar problems and can bring quick and appropriate solutions that would translate into noticeable improvement of services to consumers. The efficient and effective introduction of systematic control procedures, well-targeted investments focused at critical bottlenecks of the system would be the responsibility of the private operator under the contract. * Improved financial performance through higher collection efficiency and cost reduction: One key benefit of involving a qualified operator would be a significant improvement of the commercial performance of the water and wastewater company through the introduction of control procedures aimed at improving collection and reducing fraud, new billing and collection systems, updating of cadasters, reduction of illegal connections, and better consumer relations. The utility operator would not be subject to the political constraints of a public enterprise if the Government fully supports the involvement of the private sector and 38 does not interfere with unreasonable delays in tariff setting decisions, approvals of investment plans, and resolution of contract disputes, for example. The improved financial performance of the company would free budget resources to finance more investments or use the funds for other projects of high priority. * Additional sources of fmance: The capital needs to rehabilitate and improve the water supply and wastewater services in the Greater Baku area are enormous and the Government does not have the capacity to raise the necessary funds alone, or these funds may be used in other sectors where public involvement is indispensable. The private sector can mobilize financial resources that will be supported by the operational surpluses of the operation. * Separation of regulation and operation: By delegating the management and operation of the system to an experienced utility operator, the Government can focus on the supervision of the agreed improvement targets for the quality of service and consumer charges. The regulation and achievement of targets will gain in openness and transparency. Numerous examples demonstrate that entrusting service management and operation into private hands can lead to greater efficiency and often lower costs, but the private sector cannot perform miracles either. Private sector operators, just like public water utilities, need an enabling environment to succeed. If put into the same straight jacket of norms, regulations and dependencies as ARWC, BWD and other vodokanals today they will not be able to perform well. The private sector can only succeed if it can bring to bear the advantages it has over the public sector. This would include the freedom to select, develop and pay employees unimpeded from civil service laws, apply its technical knowledge of operating systems, and make resource allocation decisions and implement investment plans uninhibited by outside forces. Just like public vodokanals, the private operator needs a predictable and stable resource base; without resources even the best operator can do very little. If in charge of billing and collections, the private sector needs the full support of the Government, including the ability to impose effective sanctions - a rigorous shutoff policy for non payment, for example - to guarantee payment. Clear and transparent contractual agreements are needed which spell out unambiguously the operator's obligations and responsibilities with the insurance that local government will honor its part of the bargain. Two areas of specific interest to the international private sector investors would be the commitment of the Government, demonstrated through up-front actions, to raise tariffs to adequate levels and to support the enforcemnent of the recently approved National Water Supply and Wastewater Law to increase collections. Reciprocally, the Government needs a clear contract to ensure that the responsibilities of the private operator can be monitored carefully. An international, open and transparent competitive process is crucial to get the best proposal that qualified utility operators can offer and therefore obtain the highest benefits to the population and other consumers in Greater Baku. Furthermore, a competitive process would increase the credibility of the process. Private firms prefer negotiated contracts without competition as it is in their economic benefit to do so. Competitively procured contracts result in lower costs, better qualified operators, and contracts that have wider public acceptance. Depending on the specific situation of the country and the area of service, there are several options for participation of a private utility in the provision of water supply and wastewater services. The main options and their features are described in Boxes 4.1 and 4.2. The selection of the specific approach to be followed requires more careful evaluation and study that go beyond this strategy. Options with less involvement of the private sector require more capital investment contributions from the Government and do not provide the level of incentives for the private operator to bring as quickly as possible the service improvements. On the other hand, in 39 the options with higher involvement of the private sector, such as concessions, the operator brings capital investments but water fees have to provide the financial resources for these investments. Annex 9 discusses the prefefred options for Greater Baku given its current situation. In summary, service and management contracts, although useful arrangements that can provide some benefits, would only bring improvements at a slower pace and more limited scope than options with higher involvement of the private sector. A BOT is not adequate as the rehabilitation of the water treatment plants will be completed under the GBWSR Project. Total divestiture or sale of the assets would require significant legislative changes that may not be feasible at this point. The options to be analyzed further are either a lease or a concession. Annex 9 examines these options and their expected benefits in more detail. Box 4.1: Options for Private Sector Participation in Municipal Water and Wastewater Services Private utility operators can be employed to manage, operate and provide investment capital for the development of water and wastewater services in different ways. These vary by scope and the extent of responsibility and risk assumed by the private firm and the contracting authority: Service Contract - Outsourcing: The utility or the Government contracts a private firm to carry out specific tasks such as leak detection, meter reading, water quality measurements. Subcontracting is advisable for activities that experience peaks (e.g., construction) or lack sufficient scale of operational activities, like water quality monitoring or vehicle fleet maintenance. Duration of contract: short. Management Contract: The Government contracts a private firm to manage and operate the entire water and wastewater system. Compensation for the private operator is usually cost-plus-fee with an incentive component. Local government retains commercial risk and investment responsibilities. This may be the fastest and surest way to "jump start" poorly performing utilities. Duration of contract: about 5 years, renewable. Lease Contract: The Government contracts a private firm to manage, operate and maintain the entire water and wastewater system at a contracted cost per mn3 of water sold. The operator collects tariffs to cover its cost and surcharges for certain basic funding investments. The Government retains asset ownership and remains responsible for system expansion and replacement of major assets and recovers part or all of its costs from its own share of user charges. Duration of contract: 5 -10 years. Concession: The Government contracts a private operator/investor to take over the management of the entire water and wastewater system, including investments, at a contracted cost per m3 of water sold. The private operator/investor bills and retains tariffs for the concession period. After the concession period assets revert to LG. Duration of contract: 20 - 25 years. Build-Operate-Transfer (BOT): The Government contracts a private operator/investor to finance the construction and then operate a facility, a water treatment plant, for example, at a contracted price. After the contractual period, the facilities revert to LG ownership. Duration of contract: 20 - 25 years. Full private ownership The Government sells of all utility shares to private investors. A national agency regulates the performance of the utilities. Price and performance contracts are reviewed periodically. Duration of Contract: no limit, although deal can be revoked for poor performance. Joint- local government, private sector - venture companies The joint venture may either own the assets or (most often) be given a franchise by the local government, as in a lease or concession arrangement described above. Although there are conflict of interest concerns - local government is both regulator and part owner - joint ventures seem to be politically attractive, as local government retains a greater measure of control. 40 Box 4.2: Features of Main ptions for Private Sector ation Option Service Management Lease BOT Concession Asset Sale Contract Contract Asset Public Public Public Private then Public/ Private Ownership _ Public Private Operations Public/ Private Private Private Private Private and Private Maintenance Capital Public Public Public Private Private Private Investment Finance Commercial Public Public Shared Private Private Private Risk__ _ _ _ _ Operations Shared Shared Private Private Private Private Risk Public Tariffs Tariffs Leasing Tariffs less Concession Sales price, Revenues fee, taxes fee fee, taxes taxes Private Service Management Tariffs less Fee Tariffs less Tariffs Revenues fees fees plus leasing fee concession incentive fees fee Duration 1-2 3-5 8-15 20-30 25-30 Indefinite Examples India Gaza, Poland Malaysia Argentina England and (Madras) Amman, (Gdansk), (Johor) (Buenos Wales Trinidad and Guinea, Australia Aires) Tobago Senegal (Sydney) Philippines I _____________ ._________ ___________ ____________ (M anila) The roles of the various stakeholders in the water supply and sanitation sector in Greater Baku would change under the proposed institutional arrangement. The Government (both the Central Government and the local governments) would not be involved in the day-to-day management and operation but would instead monitor the performance of the utility operator. The Government would take its responsibility to regulate more seriously and in a more effective manner than the current approach with public water and wastewater enterprises. The clearer distinction between a private operator and the regulator helps to eliminate political interference in the operation of services. The utility operator will be hold accountable to the performance targets and other conditions established in the contract, including provision of finance depending on the form of their involvement. Consumers should play an enhanced role as the private operator should be dedicated to satisfy the needs and desires of the consumers in accordance with their willingness to pay. Consumers should also receive adequate information about the performance of the utility operator and understand the reasons for the water fees they are asked to pay. The poorest segments of the population should be particularly protected and the involvement of a private operator can bring specific benefits under a well-designed approach (Box 4.3) 41 Box 4.3: Making Private Participation in the Water and Sanitation Sector Responsive to the Poor Segment of the Population The involvement of a private utility operator in the provision of water supply services can be seen with apprehension by domestic customers, particularly the poorer segments of the population, as they may view the private operator making profits in an unregulated environment. The contract and regulations can be designed to ensure access of the poorest segments of the population. For example: Make standards less rigid and focus on outcomes: Technical standards for provision of water supply set at very high levels become expensive barriers to improve the service to poor households that would be willing to pay for a level of service that is affordable to them and provides the ultimate goal of public health and safety and poverty alleviation. Rethink interconnection: In areas with micro-entrepreneurs providing water, the Government should not cut off their services but integrate them into the contract through appropriate tools or facilitate discussions between the private operator, community groups, and alternative providers. Support improvement of access to the water network: In many areas of Greater Baku there are deficiencies in the connection to the water supply network (for example internal plumbing systems of buildings) that are beyond the responsibility of the water utility. These problems are more common in areas inhabited by the poor. The Government should evaluate the best mechanisms to support the repair of these components of the system to ensure provision of water supply to the final consumers, such as better access to microcredit. Source: [19] Currently the water supply and sanitation presents important but not insurmountable barriers to the involvement of private operators in the provision of water supply and sanitation services in the Greater Baku area. There is little awareness among various levels of government and consumers of the potential gains from the private-public partnerships with clear roles and responsibilities in the sector. Additionally, collection and lack of financial viability are a significant deterrent. Finally, there is lack of information and capacity needed to negotiate and monitor complex arrangements. These barriers may create apprehension and concern among government officials and consumers and lead to a perception of higher risk for potential private utility operators. However, these barriers in Azerbaijan can be overcome by taking into account the lessons from experience in other countries. Some of the key factors for successful involvement of a private utility operator in the provision of water and wastewater services in Greater Baku are described in Box 4.4. Box 4.5 presents the basic principles for adequate regulation and monitoring of contracts with the private sector for the provision of water and wastewater services. The Government has taken the decision to join the water and wastewater service providers in Baku to consolidate skills and reduce staff numbers, improve services, simplify billing and collection, improve the financial situation of the sector, and coordinate planning efforts in both institutions. The 1998 Water and Wastewater Master Plan for Greater Baku presents an action plan for the consolidation of the service providers in the Apsheron peninsula. 42 Box 4.4: Requirements for Successful Involvement of the Private Sector in the Provision of Water Supply and Sanitation Services in Greater Baku 1. Define Clearly the Objectives: The Government should develop a clear vision of the strategic objectives and their relative importance. These objectives are likely to include improved operational efficiencies and cost reduction, service modernization, rehabilitation of the existing infrastructure, and mobilization of private capital for new investments. The early definition of the strategic objectives will facilitate the selection of the most appropriate instrument for involvement of the private sector and the preparation of the bidding process. 2. Build Internal Consensus on a Specific Option: The most adequate option for Greater Baku needs to be agreed by the Government and other stakeholders (city officials, public opinion, employees of ARWC, BWD and other vodokanals). Description of the options and strategic objectives to build consensus is a key step that should not be overlooked in the rush to get into details of the contract and reaction to unsolicited proposals, which eventually resulls in delays, frustration and dissatisfaction at later stages. 3. Adopt Realistic Targets for Service Levels, Standards, Investments and Tariffs: Adopting realistic service objectives and standards and describiiig them in the contract and bidding documents is essential for obtaining responsive, comparable bids. All investments should be rigorously evaluated and its implications on the tariffs and financial viability of the water and wastewater enterprise should be studied carefully. 4. Deal with Labor Issues Early On: The employees may be apprehensive of the involvement of the private sector. However, experience has shown that the operators tend to retain a large proportion of the existing workers and wages usually go up. Even so, the very purpose of private participation is to enhance productivity which often will mean doing a better job with fewer people. Many of the tasks currently performed by the water and wastewater enterprises in Greater Baku should be outsourced. Even without the involvement of a private utility operator, the Government will sooner or later be confronted with tough labor decisions and will have to balance the interests of the workers with those of the entire population demanding better services. As part of the process to involve the private sector in the provision of water and wastewater services, social safety plans should be prepared. Additionally, international experience has shown that employee participation in the water and wastewater company through an ESOP promotes further incentives to improve profitability as employees benefit financially in a direct way from these improvements. 5. Ensure that the Private Operator has the Freedom to Perform Well and Appropriate Regulation is in Place: The Government should understand the level of freedom it is necessary for the private operator to| deliver its obligations. Also, it must create and legally allow the regulatory structure to supervise the operator. 6. Use a Transparent, Competitive Process to Select the Private Utility Operator: Competition is crucial to get the best proposal the market can offer and to increase the credibility of the process. Private firms often prefer negotiated deals without competition. Competitively procured contracts are likely to rcsult in lower costs, better qualified operators and transparency. International experience has shown that competitive bidding can be as quick as direct contracting. 7. Retain Expert Independent Advice: Contracting a private utility operator is a difficult task requiring very specific experience which is currently not extensively available in Azerbaijan. Therefore, it is necessary that the Government retain the assistance of experienced legal, technical and financial advisors of the highest international quality for the preparation of the contract and bidding documents and for the full duration of the contracting process. Their tasks should include: investment program, financial analysis to determine cost and tariff implications, definition of regulatory arrangements, employee transfer or compensation arrangements, assistance in the bidding process, and continuing advice through negotiations and closure with the selected operator. 43 Box 4.5: Water and Wastewater Utility Regulators A key factor in the successful implementation of private sector involvement in the provision of water supply and wastewater services is the creation or strengthening of the local capacity in the Government to negotiate, monitor and regulate contracts, regardless of the form of private sector involvement (see Box 4.1). Higher levels of involvement of the private sector require stronger capacity on the Government's side. Service and Management contracts are easier to regulate in the spectrum of options, particularly when the contracts are designed to simplify monitoring and reduce uncertainty. However, even in simpler cases, the Government must set up a monitoring agency or official with the skills and budget to perform its functions, and the necessary integrity, independence and autonomy. For higher levels of private sector involvement, such as concessions or divestitures, the Government should set up a utility regulatory agency as long before privatization as possible. The utility regulation has three aims: (i) to protect consumers; (ii) to support investment by protecting investors from arbitrary action by government; and (iii) to promote economic efficiency. The key to achieving efficiency lies in the choice of a regulatory mechanism to oversee the firm's performance. Good mechanisms protect consumers from high prices and low quality. But they also safeguard the legitimate interest of water companies to earn enough revenue to make a reasonable profit. New regulatory agencies face significant challenges, as they must learn complex technical issues and define new and difficult working relationships with political authorities, regulated firms, consumers, and other stakeholders. To meet these challenges, regulators must have adequate training not only in law, finance and economics, but also in negotiation analysis and media relations. When setting up a regulatory agency the Government must take into consideration the following issues: Regulatorv agency's decisionmaking structure: If the utility reform process goes beyond a single sector, a multilateral agency (water, gas, electricity, etc.) offers advantages as it pools regulatory human resources, increases resistance to regulatory capture and political interference, and improves the consistency of decision across sectors. The decisionmaking structure should have mechanisms to allow consumers, regulated firms and other stakeholders to present their views and to present appeals. Resources: A regulatory agency's effectiveness is determined largely by the adequacy of its human resources and financial resources. In countries with limited human resources can contract out tasks such as collection and processing of data on company performance. Sufficient financial resources from their own sources are needed to ensure the autonomy of regulatory agencies. Relying on budgetary transfers controlled by politicians is a threat to regulators' independence. Predictable use of discretion: Careful provisions must be made in contracts to deal with unexpected events over the life of the contract to renegotiate aspects of the contract, and to adjust contractual terms over time. These provisions can turn out to be even more important to success than the initial terms of the contract. Accountability: Accountability requires transparency in the regulatory agency's decisionmaking process, as well as clear, simple procedural rules, such as deadlines for decisions, requirement for nonpolitical reviews of decisions, processes to ensure opportunities to express views, and rules to allow removal of regulators in cases of proven misconduct. Source: [26-32] 2. Medium and Small Urban Areas - Autonomous Commercially-Run Utilities Under the Regulatory Control of Local Government Roughly a quarter of Azerbaijan population (1.7 million people) live in secondary cities and small towns. Despite heavily centralized rnanagement of the vodokanals which are responsible for providing water supply and sanitation services in these areas, they have never received particular attention from the national government, and suffered from notorious underfinancing resulting in unreliable services, lack of adequate coverage, and inefficient management. Decades of dependency from the central budget left vodokanals not only in the terrible physical shape, but also inflicted them managerial apathy and rendered powerless. 44 To convert vodokanals from welfare basis to financially sustainable service providers the following principles should be followed: (i) transformation of present vodokanals into independent "corporatized" utilities regulated by local governments; (ii) gradually turning water and sanitation utilities into financially self sufficient institutions through tariff reform and better collection; (iii) reforming past investment policies by introducing least cost strategies giving preference to network rehabilitation and efficiency enhancements; (iv) bringing in the consumers as a participating party in utility decision making; and (v) introducing private sector participation and competition on all scales in the management and operation of water and wastewater systems as well as a strong sector support industry - consultants, suppliers, contractors - that provide quality services at a competitive price. Box 4.6: Common Characteristics of Successful Water and Wastewater Enterprises Successful water and wastewater enterprises worldwide share the common characteristics. Accepting these principles and creating the conditions for making them work, may lead to the development of an efficient water and wastewater sector that can provide adequate services at a reasonable cost: * Autonomy in all aspects of management and operation of systems by the enterprise, including planning, financing, and implementing investments; . A clearly defined regulatory framework by government that holds water companies to high standards of efficiency, but allows professional management that is insulated from undue political interference; * Financial self-sufficiency gained through the collection of tariffs that are sufficient to meet all financial needs (operational, maintenance, investmr.,ent, and debt service); . A strong sense of public service and consumer orientation; * Access to a convenient source of credit for financing investments; and * Reliance on a strong, competitive private sector from which to obtain quality support services. The institutional and governance reform in the medium and small urban centers would include the following important elements: - Full decentralization of the water and wastewater sector to the municipal level of government by confirming the exclusive responsibility of municipal governments for the provision of water and wastewater services, the authority to set tariffs and the obligation for social protection of poor consumers. * Transforming vodokanals into autonomous commercially-run utilities under the regulatory control of local Government: Existing contractual relationships between vodokanals and the CHCP and LEAs are confusing and one sided to provide a clear definition regarding performance expectations. The state-level vodokanals should be restructured and decentralized to the lowest appropriate level to efficiently manage water and wastewater systems. * Introducing a more enabling regulatory relationship between municipal governments and the water and wastewater utilities: International experience suggests that multi-year performance contracts (Box 4.7) that define the respective responsibilities and authorities of the two parties with monitorable performance targets and actions can greatly improve the relationship and understanding between local government and a utility. The new water and wastewater utilities should be given a corporate identity for autonomy, such as the joint stock company status, which has been tested in Azerbaijan with ARWC. The status would provide 45 the maximum level of autonomy possible and allow parties other than government to acquire an interest and responsibility for the utility. The partition of asset ownership, with the municipal government retaining ownership of production assets and utility owning operating assets would be the best arrangement in the present situation. Box 4.7: The Performance Contract, the Foundation of Utility - Municipal Government Interaction The Performance Contract is a formal, multi-year contract between a utility and a municipal government committing the utility to achieve monitorable targets concerning level and quality of service, management and operational efficiency, finances, and investments; and the municipal government to support the utility in reaching these goals, for example, through granting timely tariff increases or making a contribution for investments. Performance contracts are negotiated for several years ahead, for example, 5 years; they should be "living" documents. While the strategy conveyed in these contracts should not be subject to change, periodic revisions may be necessary to reflect unforeseen developments. The contract should include dated quarterly, semi-annually or annually, targets, regarding: . Institutional efficiency gains, staff reductions, staff training; * Introduction of improved management and control systems; . Arrangements for better customer service and commercial operations; . Improvements in operational efficiency: metering, lowering of water consumption through demand management; decreasing losses through leak management, reduction of unaccounted-for-water; cost targets for administration, maintenance and operation; . Revenue estimates, including tariff levels, preferably defined through indexed formula; and * Annual investment levels, outline of investment strategy and specific investments. * Clarifying the role of the central Government: The Central Government would set the ground rules for sector management by: (i) establishing the legal and regulatory framework for stakeholder responsibilities, authorities and interaction; (ii) regulating inter-municipal relations, for example, policies and principles for water resources management, irrigation canals, environmental protection, and drinking water standards; (iii) defining strategic policies and development objectives, including investment strategies, cost recovery, and resource mobilization; (iv) ensuring consumers protection against misconduct by local governments and utilities; (v) monitoring sector development; (vi) providing assistance to utilities and local governments in areas such as capacity building, financing facilities, and intemational assistance coordination; and (vii) collecting and analyzing information for evaluating the performance of different utilities to ensure high efficiency, low price and high quality of service (Box 4.8). The Government should not impose exclusive rights of supply of goods and services to utilities, but rather promote competition and facilitate market creation [25). Box 4.8: Benchmarking Water and Wastewater Utilities Inter-utility performance comparison is needed in the water and sanitation sector, because the water sector offers limited scope for competition, since the network of pipes in a major element of the total cost of water and can be operated efficiently only as a monopoly. The Government needs a mechanism to encourage efficiency despite the monopoly. The key to achieving this efficiency is to design rules that give the agency in charge of regulation better information about the appropriate price of water. Firms operating in sectors with competition are under constant pressure to improve performance. Water utilities without adequate control mechanisms do not feel this pressure. Once mechanism is the use of benchmarking, the periodic collection and dissemination of information on a key set of performance indicators. The performance comparisons across utilities with similar characteristics provide a tool for utility managers to identify areas for improvement and realistic targets, for government to monitor and adjust sector policies and programs, for regulators to ensure that customers get good service at a fair value, and for consumers to allow their 46 informed participation in the sector. Provisions of comparative information in the water sector has improved worldwide in the 1990s, as ccuntries have privatized service delivery and started building regulators capacities. The World Bank has developed a start up kit for benchmarking water and sanitation utilities with a core set of indicators in categories such as coverage, water consumption and production, unaccounted for water, metering practices, pipe network performance, cost and staffing, quality of service, billings and collections, financial performar,ce and capital investment. Source [33, 34] Making consumers key participanis in future sector development: Contrary to the past, the consumers should be actively involved in the utility's affairs and the regulatory process. These include: (i) placing consumer representatives on the executive boards of utilities; (ii) allowing public input from non-governmental interest/advocacy groups in the definition and negotiation of performance contracts between utility and municipal government; and (iii) encouraging open communication via the media, TV, radio, and newspapers. The initiative for improved services should be generated through a demand based approach, where the consumers collectively choose the level of service based on their willingness to pay for these services (Box 4.9). Utilities should adopt a policy of consumer outreach by routine sharing and disclosure of information of interest to the public such as annual audited performance and financial statements, benchmarking their performances, undertaking special-purpose public campaigns-for example on water conservation or the need to pay bills; and in general keeping an open house policy to ac(uaint the public with its operations. Utilities should, as matter of highest priority, create a consumer-friendly commercial system that produces clear and correct bills and can deal effectively with consumer inquires and concerns. Box 4.9: Decentralization and Community Participation A review of worldwide experiences with community development programs suggests that decentralizing responsibility for infrastructure to subnalional levels of government and actively involving local beneficiaries can improve infrastructure provision. For example, per capita water production costs for a group of developing countries are four times as high in centralized as in decentralized systems and are lowest when decentralization is combined with centralized coordination. Decentralization can increase accountability and transparency: * Local monitoring can be very effective for ensuring that officials perform diligently. Sanctions can also be imposed on defaulting or free-ridJing community members. Community sanctions are hard to ignore because of the longstanding relationships involved. The close interactions and relations of trust within communities can help make development projects more sustainable. * Decentralization makes it easier for people to obtain information on budgets and on use of funds, thus increasing the transparency of public actions and reducing corruption. In addition to increasing awareness of budget constraints and th, need to shape political demands accordingly, this kind of decentralization helps communities hold local leaders accountable for performance. Enhanced public accountability, through local choice of leaders, local control of finances, and other forms of local responsibility is a critical factor in the success of local management of infrastructure. Another is involving beneficiaries directly in infrastructure management, for example, by offering them choices among investments and technologies and ask them to contribute to these investments in cash or in-kind. Both of these factors are integral parts of many demand-driven community projects. * Increasing the involvement of the private sector: The small size of the secondary cities makes them today generally unattractive to private operators and investors. This may be overcome by introducing the easier t:ypes of private sector participation such as service or management contracts with an operator, who may work in several municipalities. Individual cities and towns would be fully responsible for their water and sanitation facilities. They would, through their water and wastewater utilities, provide maintenance and operation 47 functions up to their capacity, but would delegate, under contract with the service providers, those functions which they cannot perform efficiently themselves. Such functions could include billing, laboratory analysis, engineering services, planning, or major repairs. By contracting out specific services, the utilities can gain specialist skills and benefit from economies of scale. They can build financial viability, and experience in private-public partnership, paving the way for more ambitious forms of private sector participation such as leases or concessions in the future. Goods and services required by water and wastewater utilities which have previously been provided by state-owned engineering and design offices, equipment manufacturers and civil work contractors, now can be procured on the basis of competition. Small city and town utilities would charge and collect revenues from tariffs to pay for maintenance and operations and for services rendered by the specialized firms on a cost covering basis. The recent experience in Baku with the implementation of small works in the GBWSR Project using local contractors under strict and independent construction supervision has demonstrated the benefits of this approach in terms of quality, speed, and cost-effectiveness. Box 4.10: Actions and Responsibilities in the Institutional and Governance Reform in Medium and Small Urban Areas Vodokanals: Main entity responsible for provision of water and wastewater services. Independent agency operating under a performance contract with municipalities Private Sector: Efficient provider of services to vodokanals at a regional level, including billing and collection, laboratory analysis, engineering services, planning major and small construction, training, supervision of construction. Municipality: Owner of asset, responsible for tariff setting and compliance with performance contract signed between vodokanals and municipality. Central Government: Regulator, policy maker, consumer protection provider of assistance to vodokanals and municipalities in capacity building and access to financial resources, collector of benchmarking information. Consumers: Active participants in the sector with representation in executive boards of utilities, and engaged in two-way communication with sector agencies. 3. Rural Settlements and Villages - A Demand Responsive Approach with Community Choice, Ownership and Responsibility The water supply and sanitation sector in rural areas requires an urgent and substantial institutional and governance reform to confront the under-investment, low coverage, poor participation and insufficient support. The incorporation of the former Azerkend into the CHCP provides an opportunity to reframe the institutional approach to the water and sanitation sector in rural areas. Experience throughout the world has demonstrated that providing water supply services to rural communities is only successful if it relies on community responsibility, initiative and self-help (Box 4.11). The institutional and governance reform in the water supply and sanitation sector in rural settlements and villages would include the following elements: The community at the center of the rural water and sanitation services: The communities would own, manage and help to finance the services. For this purpose, villages would form a representative Water User Association (WUA) that is responsible for planning, implementation and management of the community water supply facilities. The development of the services would be based on a demand responsive approach (DRA) where communities make informed choices regarding their participation, service level, and service delivery 48 mechanism. The WUA would be comprised of local citizens and would be independent of the WUA concerned with irrigation which tend to have different interests and priorities. However, in some situations, the two WUAs may be coordinated and streamlined in order not to overstretch limited human resource at the community or village level. The legal framework should recognize the autonomy of community-elected WUAs to operate, set tariffs, manage funds, make hiring decisions, and contract and supervise works and services independently of the local government. * Government's role to change from implementing agency to coordinator: Under the new institutional and governance approach for the rural areas, the Government acts as a coordinator. Under this key role, the Government will: (i) encourage and facilitate stakeholder participation; (ii) set the policies and strategies that allow the demand-responsive approach to work and monitor their implementation; (iii) articulate and disseminate policies, regulations and programs; (iv) provide and strengthen the legal framework for community access to water resources (in close coordination with the irrigation agencies), ownership of assets, and registration of WlUAs; (v) facilitate assistance and capacity building to local levels of government and communities; (vi) obtain internal and external funds to support the sector and sets the conditions for efficient and cost-effective channeling of funds; and (vii) monitor and evaluate use of funds, outputs, and all aspects of implementation to ensure transparency, accountability and fairness in decision making. The Government should not drive the implementation, impose what communities receive services, how the works and goods are contracted, provided and procured, sei1ect the level of service, or manage the funds at the local level. These are all activities where the communities must take the lead. - The private sector and NGOs as service providers: The institutional reform of the rural water supply and sanitation sector should include as priority issue the development of strategies aimed at creating a favorable environment and incentives for participation of NGOs and private sector (particularly local entrepreneurs) in a wide range of support activities, that include supply of spare parts, equipment, and services, civil works, consulting services, supervision of construction, dissemination of information, social intermediation, and training of communities. The fostering of a competitive environment that would allow communities to access a range of providers of goods and services for all aspects of project implementation instead of mandatory use of government agencies for design, procurement, and construction is necessary to achieve low cost and high quality of service. * Extend the institutional responsibility of the Government to cover all rural areas of the country: Currently, the institutional responsibility of CHCP (formerly the responsibility of Azerkend) is limited to a portion of the rural areas of the country (see Map 3). The rest of the rural areas would equally need the support of the Government to improve their water supply and sanitation services. A rural water agency or a rural infrastructure agency with national responsibility is needed to achieve development of the sector. The responsibilities of such agency would be as regulator and coordinator, while the local government and the communities would act as implementors. * Include sanitation and hygiene education as a key component of all rural water supply programs: Currently, the rural sanitation is considered a household issue. In order to achieve the full economic and health benefits of the rural water supply programs, the Government in its facilitator role should include sanitation and hygiene education not through investments (with the exception of demonstration projects) but rather through public awareness, hygiene education, and strengthened private sector ability to construct facilities. The Government agencies in charge of education or health in rural areas may be tasked with this responsibility in close coordination with the rural water agency. 49 * Coordinate rural water supply activities with other rural infrastructure sectors: There are common activities in a demand responsive approach where the communities take the leadership in implementation across various rural infrastructure sectors. By allowing communities to choose between infrastructure options rather than only between technologies of water supply, the responsiveness to demand increases. This approach does not necessarily mean that one agency has to be in charge of all rural infrastructure sectors, but the social mobilization activities can be shared among various sectors. For example, the private sector or NGOs under contract with the Government would work with communities to identify priorities across different sectors. The activities under a rural water supply program would focus on communities that identified this infrastructure sector as a priority. Such approach should increase synergies across sectors, reduce social mobilization costs, and reduce biases in priority making by communities. So far these principles have not been part of the country's sector management policies. Their introduction will require careful rethinking of past strategies and decisive change in approach. A new attitude is needed by both the Government and village commnunities. Both stakeholders have to accept that in view of the severe fiscal constraints, community self-help is the only way to improve services. Many rural communities are in fact taking the initiative to improve the water supply situation due to lack of government's presence in their regions. This is an encouraging development that should be fostered and promoted. The institutional and governance changes proposed in the rural sector are the most difficult to implement of the four levels described in this strategy, but the urgency of the problems and the poverty levels of the regions require a clear and decisive plan of action. Box 4.11 Reasons Why Communities Should Manage Implementation of a Rural Water Supply and Sanitation Program • Incentives are in the right place: The community, and not the project, has the greatest incentive to make sure the goods and services received correspond to what the community wants. When the Government hires the service provide, it becomes the client and not the community. . Lower costs: International experience has shown that when communities manage the implementation of project, costs decrease by 30 to 50 percent. The transparency and speed of contract implementation increases. The willingness to pay for services increases when the community controls the spending of the funds. . Government is poorly equipped to meet growing demand: If the Govermnent wants to expand coverage in the rural sector in the entire country, a centralized supply agency, with limited delegation, will not be able to move quickly. When communities see the results of effective demand-responsive programs, the demand for service increases very rapidly and the implementation of the program moves faster. . Capacity building: Learning by doing is especially important in the implementation of rural water supply and sanitation programs. The community will need the skills it learns from implementation to manage and sustain the services once the project is completed. * Communities want to be involved: This is one of the basic principles which underlies the demand- responsive approach. Choice and sustainability are linked to willingness to pay and the ownership of the facilities. Source: [20] 4. Urban Fringe and Refugee Areas With the support of UN Agencies, international donors and NGOs that responded swiftly to the humanitarian crisis generated by the conflict over Nagorno-Karabakh, the situation of the 800,000 refugees and IDPs was stabilized and their minimum needs were met. However, as time passed and the prospects for a political settlement took longer than expected, many IDPs took 50 steps to improve their living conditions and incomes. Many of them looked for employment in and around Baku and other larger cities, A smaller number of IDPs was able to return to their forner homes in liberated areas. As a result, the number of IDPs and refugees living in camps has gone down to about 100,000 and in public buildings to about 300,000. However, their living conditions are dismal and continue to depend on donations for survival. They are among the poorest people in Azerbaijan and their access to water supply and sanitation services is quite limited [21] . The Government, the World Bank, UNHCR and UNDP agreed to promote self-reliance and local settlement, without prejudice to an eventual return when conditions permit. The water supply and sanitation in refugee camps is under better control than in the public buildings used for accommodation. As the temporary housing situation becomes more permanent, the appearance of urban fringe areas inhabited by IDPs and migrants from rural areas in search of better economic opportunities in Baku wi.l increase. Also, as communities are rebuilt in liberated areas, the water supply and sanitation se:rvices will need reconstruction. Poorly or underserved new communities located on the fringe of urban centers or in reconstructed areas have several options to organize their water supply and sanitation situation, including: * Turning over full responsibility for system expansions, maintenance and operations to the adjacent utility: This is especially useful if systems are physically interconnected; a drawback of this choice may well be that this utility does not have the financial resources nor the capacity to respond effectively. * For smaller communities, construction and maintenance of systems following the community self-help scheme: This may involve the purchase of bulk water from an adjacent utility, but retaining maintenance and operation responsibilities for the local system with the possibility of contracting out certain administrative and operational functions. Also, it may involve new systems. In either case, the institutional and governance approach recommended for the rural sector is fully applicable in this situation. In the meantime, the role of NGOs and relief agencies will continue to be invaluable in the supply of water and sanitation services, as it is described in Section II.L. The reconstruction activities of water supply and sanitation services should follow the same principles of the demand-responsive approach described in this section B. Financial Reform Estimating a reasonably correct cost for improving water supply and wastewater services in Azerbaijan to adequate levels in both urban and rural areas is exceedingly difficult, because of unreliable or inconclusive information on: (i) population figures, expected growth, and geographical distribution; (ii) present service levels; (iii) the state of repair of existing systems: (iv) lack of reliable unit cost data for rehabilitating existing systems and expanding services; (v) the definition of what constitutes adequate service; (vi) the time frame in which these improvements are to be accomplished; and (vii) the pace at which structural reforms to the sector management and efficiency improvements can be accomplished. The 1998 Water and Wastewater Master Plan for Greater Baku, prepared as part of the GBWSR Project implementation, estimated the investments needs in the Greater Baku area to be about USD 600 million for improvement of the water supply system over a 15- year period (with about USD 350 million for more urgent investments) and USD 450 million for the wastewater system. A very rough estimate of the investment levels required to arrest the decline of the systems and provide the urban population in 51 Azerbaijan with a modest, but safe level of water supply would be about USD 140 million. This amount would not be enough to provide 24 hours of service to evety resident but simply to rehabilitate existing systems, ensure basic treatment of water, and provide water by stand posts to unserved population. The cost of the expansion of the wastewater collection network to cover the urban areas depends on the technologies used but would be substantial in any case. The estimation of the needs for treatment would require more extensive analysis, as in many areas there is industrial capacity for treatment that is currently unused and may be rehabilitated. In other areas, the treatment of wastewater would need new facilities. The information necessary to determine the specific needs is not available at the moment. The needs for rural water supply are even more difficult to estimate as the standards of service would be directly linked to the willingness of communities to pay for these services. A rough estimate of USD 120 million would be required for the initial investments to provide a very basic level of service. Additional resources would be required to improve sanitation in rural areas. The high levels of poverty in the rural areas require a well-designed strategy that combines targeted subsidies, adaptable standards, and full involvement of communities to contribute financially to operations and maintenance of the systems. The above estimates should be taken only as a rough indication of the enormous needs the country is facing and they represent a major challenge compared with present investment levels close to zero. More importantly, even if additional revenues from the oil sector were used to cover these investment needs, the very low levels of expenditures for maintenance and operation would translate into a new cycle of asset draining and the situation in the sector would return to current levels or worse in a few years. Without a radical change in the financial policies and practices of the water supply and sanitation sector, its future viability and its capacity to provide a minimum level of service will be impossible. This section presents some guiding principles for a financial reform of the sector based on the key issues identified in Section 11.I. The financial reform should be aimed at improving the resource mobilization and the financial viability of the sector through rational tariff structures, adequate and transparent subsidy policies, cost-effective investments, and linkage of service level to willingness to pay for the service. The water and sanitation sector in Azerbaijan already has some key elements to support the financial viability of the sector, such as the policy that identifies full cost recovery from consumers as the only viable means of financing the sector, the responsibility of users to pay for the service they receive, and other elements included in the National Water Supply and Wastewater Law. The proposed financial reform of the sector is based on these building blocks. This section is divided in four parts. The first part focuses on actions needed to improve the income of urban water and wastewater enterprises; the second section discusses the need to improve the cost-effective utilization of scarce investment resources; the third section proposes an approach to improve the financial viability of the rural water supply and sanitation sector; and the fourth part reviews the role of the various stakeholders in the financing of the sector. 1. Financial Viability of Urban Water and Wastewater Enterprises a. Rigorous Collection of Bills in Cash Low collection of water and wastewater fees and payment in non-cash forms (barter and off-sets) is the most critical and complex issue facing the water and sanitation sector today in Azerbaij an. The benefits of the financial policies of the sector are curtailed by this issue and all utilities in the country are facing a crisis of such proportions that cash receipts are barely sufficient to cover salaries. The policies that have allowed barter, off-sets and non-payment of 52 utility bills are beyond the water and sanitation sector but directly affect its financial viability and have trapped vodokanals in a web of ever increasing arrears and receivables. Utilities are forced to provide an implicit subsidy to industries that do not pay or use non-cash forms of payment. The Government of Azerbaijan has declared its intention to dismantle the barter and off-set system. The leadership of the Government is crucial in lending credibility to this process. The reform to move away from low collections and non-cash payments require a concerted effort between the Government and the vodokanals in getting out of the nonpayment trap. The discussion on the best approach to dismantle the system at the national level goes beyond the strategy for the water and sanitation sector and requires coordinated action with other utility sectors. Box 4.12 summarizes the basic rneasures are recommended in the process of increasing collections and reducing non-cash payments. Box 4.12: Measures to Increase Collections and Reduce Non-Cash Payments Government: . Create political consensus at all levels of government about the need for dismantling the system that allows for non-payment of water fees and use of non-cash forms to settle payments . Make adequate budget allocations and ensure the payment in cash for water and wastewater fees of budget organizations . Promote use of water meters and water use reduction to decrease consumption of budget organizations and facilitate payments of water fees in cash * Support vodokanals in the implementation of service cuts to non-payers * Establish mechanisms to follow closely the accumulation of accounts receivable in vodokanals with respect to each budget organization and industry and support decisive and prompt action to ensure prompt payment in cash . Insist on prompt tax cash payments (VAT and profit tax) from vodokanals and resist the continuation of off-setting taxes for water fees of budget organizations . Proceed rapidly with social reforms in the context of a well-targeted social safety net . Implement mechanism to eliminate arrears to vodokanals and control accounts payable as a condition for financial assistance from central government Vodokanals: * Set up system for monthly follow up of maj or debtors . Resist payments in non-cash forms . Implement the disconnection policy particularly for non-paying institutional consumers, as allowed by the recently approved National Water Supply and Wastewater Law * Reduce barter and increase transparency: (a) terminate use of intermediaries for procurement of inputs and sale of outputs; and (b) adopt procurement rules based on open competitive bidding * Enhance cash collections and ensure fair and timely distribution of collections along the supply chain Source: [14] In order to improve collections from domestic and commercial consumers, the Government and vodokanals should consider the following measures: * Make vodokanals directly responsible for billing and collection: but provide the tools and incentives for doing so, including the development of billing and collection systems (possibly considering outside assistance from private billing and collection agencies) and the improvement of databases used for billing (i.e., connections and residents) * Define a clear strategy for direct billing: In cases where housing administration are still operational, the vodokanal may rely on these organizations for collection of fees. However, many of these housing administrations are in disarray and the little cash they can get from domestic consumers is not transferred to vodokanals but used for the survival of the organization. The distorted incentives for low collection still exist and vodokanals may 53 increase cash receipts by going into direct billing and collection, even if the associated costs of such system are higher. * Establish mechanisms to facilitate payment of water and wastewater bills: The use of altemative methods of payment, ranging from collectors, dedicated windows in vodokanal offices to bank accounts would facilitate payments from domestic consumers. * Service cut-off. is a last-resort but essential part of any effective commercial policy aimed at increasing collection. * Decisive action to identify illegal and unregistered connections: Vodokanals should design and implement a continuous monitoring program to identify customers (particularly domestic and commercial) that are not in the billing system. Other measures that would improve collection of domestic fees, such as metering, development of commercial systems, and subsidies are discussed below in this section. b. Tariff Levels for Full Cost Recovery To be able to eventually provide adequate services to consumers in a sustainable manner, water and wastewater utilities have no choice but to charge tariffs that cover all costs for operation, maintenance and capital investments. The current regulations for tariff setting have the key elements to support the necessary means to finance the water and sanitation sector. However, there are some issues that require further refinement. The following principles may be considered in formulating and implementing the changes needed to achieve the goals of the financial reform of the sector. Any tariffs for water and wastewater services should be fair. They should reflect true recovery costs, openly demonstrated by the utility, and reflect cost-effective management, operations, adequate maintenance, and investments. Tariffs should be equitable, not imposing a burden to any consumer group. Industries should pay for the water they use and not be expected to subsidize domestic consumers. They should also expect to assume costs for the necessary treatment of their wastewaters so as not to impose a burden on domestic consumers. Finally, tariffs should be responsive to the needs and demands of consumers. Utilities need to understand and have better information regarding income, expenditures, and ability and willingness of consumers to pay for various levels of service * Move gradually towards full cost recovery tariff levels particularly in the domestic sector: Current domestic tariffs are not sufficient to cover operation and maintenance costs. For a large portion of the population higher rates are socially feasible and may be acceptable if people are convinced that service improvements will depend primarily on their contributions. The magnitude of cost covering tariffs will vary greatly among communities depending on a variety of factors such as: (i) water resource quantity and quality characteristics; (ii) efficiency of management and administration; (iii) level and quality of service provided or to be provided; (iv) state of repair of existing systems; (v) operational characteristics and costs of plants and networks; (vi) cost effectiveness of investments; (vii) level of collections; (viii) amount of cross subsidy from industrial to domestic consumers; (ix) the time frame in which investments are to be accomplished; (x) conditions attached to credit; and (xi) external financial assistance. Realistic business planning and financial projections are needed to yield the present and future tariff levels that need to be charged. Such planning will be an iterative process to find a match between affordable and acceptable tariff levels and service level and quality. Understandably, consumers will be reluctant to pay more for water and wastewater services even if they can afford it because of their lack of trust in vodokanals. The development of a new cooperative and open relationship between consumers and vodokanals will be very important to gain the 54 support of the consumer who needs to understand the cost-efficient use and improved services associated with the water and wastewater tariffs. * Move towards a tariff structure that promotes less wastage: The existing high cross-subsidies between non-domestic and domestic consumers and the lack of metering are two key factors in the very high level of water wastage and the weak financial situation of vodokanals. The redesign of the tariff structure needs to take into consideration efficient mechanisms to protect the poor (discussed in the following section) and introduction of metering as a tool to reduce consumption, wastage and operational costs and improve revenue collection (see Section IV, C.1). * Maintain tariff setting authority at the local level4 increase frequency of tariff reviews and reduce political interference: The current policy in Azerbaijan is to set tariffs at the local level. This policy should be maintained, as the cost of providing water and sanitation services varies greatly among communities. Likewise affordability and willingness to pay is different from locality to locality. Setting tariffs nationally or regionally leaves some communities with tariffs that are too high and others that are too low. It may be better to let the community decide which level of tariffs and thereby the level of service it is willing to support. The choice as to level of service is possible particularly outside of the large city centers where the population can choose between different options: house connection, yard tap or stand post. Unfortunately, the current tariff reviewv process is very slow, not frequent enough, and subject to political interference. Liberating the process from these shortcomings is indispensable. The Government should establish mechanisms to control the cost-efficiency of the operations of vodokanals but in return should commit to frequence and fair review of tariffs. * Include all costs in the tariff calculation and avoid the trap of lowering maintenance costs: As discussed in the review of the financial situation of the sector, the response of vodokanals to low tariffs combined with low collection and cash payments is to lower expenses, beginning with maintenance. The evaluation of costs for calculation of tariffs should include adequate provisions for maintenance, ideally linked to the actual valuation of assets of the vodokanal or in the transition period to proxies based on reasonable standards. Additionally, the tariff calculation should include an adequate provision for unrecoverable debts as expenses closely linked to the policies of reduction of nonpayment, and financing costs of long-term loans taken by the vodokanal to implement its rehabilitation program. c. Transparent, Targeted and Efficient Subsidies The high levels of poverty in Azerbaijan require the design and implementation of a subsidy policy to support the poorest segments of the population that are not able to pay the water fees needed to reach a minimum adequate level of service and quality. The high levels of poverty, particularly in the rural areas require a well-designed subsidy system. Ideally, the financial reform would move in parallel the required price increases for provision of water supply and sanitation services with compensatory payments targeted to the poor [24]. Although the Government has taken some positive steps, such as reducing the number of domestic customer categories that receive mandated subsidies 'many of them related to professional occupation) and now the subsidies are mostly limited to IDPs and war veterans, the current subsidy policies still impose an unfair burden on the budget organizations, industrial and commercial consumers, and the vodokanals themselves. Currently, there are three main subsidies in the water and sanitation sector: (i) no disconnection of non-paying domestic customers; (ii) large cross-subsidies between categories of customers; and (iii) unfunded subsidies mandated on the vodokanal that is forced to provide water free of charge to certain customers. The subsidy policy for the water and sanitation sector requires a reformulation based on four elements: (i) an explicit statement and clear 55 justification of the chosen social objective; (ii) well-defined target groups to ensure subsidies are received by those who truly need them and those willing to help themselves; (iii) a procedure ensuring a mechanism for collecting the necessary resources and transferring them to the vodokanal in cash; and (iv) a transparent and easy to administer mechanism for allocating funds to the target group. As the need for subsidies is not exclusive of the water and sanitation sector, the Government should take an integrated view at the subsidy policy for all utilities, particularly as some of the most effective subsidy mechanisms are not always tied to a single service but to the integrated household needs. As Azerbaijan moves ahead with reforms in the various utility sectors, the overarching objective should be to address the social impact of the utility price adjustments. The Government should evaluate carefully an approach to subsidies that is not sector-specific such as non-earmarked cash transfers. These usually have two main forms: (i) cash benefits provided only on the basis of the poverty status of the households, assessed in different ways; and (ii) cash benefits provided on the basis of categorical eligibility (e.g., targeted child allowance). This approach to subsidies would require a significant commitment of the Government and even though it may have an important fiscal cost, this cost is typically below the cost of across-the-board price subsidies which is used today in Azerbaijan. In order to improve the financial viability of the vodokanals and the level of service, a policy of non-earmarked subsidies should be accompanied by a clear disconnection policy to non-paying customers. Additionally, such policy would allow domestic tariffs to be assessed at higher levels and not held hostage to the capacity of the poorest segment of the population In secondary cities and small towns where the administrative capacity to provide a targeted subsidy does not exist and where a large segment of the population is poor, an alternative approach is to provide direct contributions by the Government for capital investment to service providers. These transfers should be linked to the willingness and demonstrated commitment to reform at the local level. Given the limited coverage of metering in Azerbaijan, some forms of subsidies that have been shown to be effective in other countries, such as life-line blocks, are currently of limited application. However, as the metering of water sales increases, the life-line blocks provide a viable alternative to provide subsidies to the poor and reducing at the same time wastage of water. The Government should adopt a policy that gradually reduces the differential between customers categories. For budget organizations, it translates into a forced subsidy that is unfunded and not transparent. For industries and commercial customers, it is a tax that is not equitable and in the end not sustainable as many industries will find alternative sources of water or will simply not pay the fees. The reduction of the gap between industrial and household tariffs should be initiated, but with caution. Mobilizing resources is still the most important task for now, and decreasing industrial tariffs too quickly may make the chance for financial recovery even more difficult. A good policy might be to keep tariffs for industry at present levels and let other tariffs catch up over time. The immediate task at hand is to develop a subsidy mechanism that assures that scarce funds are targeted carefully to deserving recipients and support only undertakings that are of highest priority and cost effectiveness. It is most important that the Government apply clear and transparent criteria as to the objectives, targets of the subsidies and the conditions that need to be met to qualify for subsidies (Box 4.13). The provision of subsidies could become an important vehicle for sector adjustment and strengthening. Communities should be competing for scarce subsidy on the strength of their willingness to reform and do the best they can do to help themselves. 56 Box 4.13: Proposed Criteria for Selection of Deserving Targets for Subsidies in the Water Supply and Sanitation Sector * The poorest segment of the population. i.e., support small towns, villages, poor urban fringe areas and IDPs; * Those communities that have done everything possible to help themselves: i.e., they have maximized their internal resource generation by increasing tariffs to the level affordable to the population and are collecting their bills; * Investment costs only for sector institutions that meet maintenance and operation costs adequately; * The highest priority, most urgent and least cost investments oriented towards improving system efficiencies and improving waters services; * Minimum levels of safe service quality. in rural communities and on the fringes of the urban centers, such investments would primarily be for providing water of safe quality through stand posts; * Part of investments: a substantial portion should come from the community through tariffs, direct contributions or through labor and provision of materials and equipment wherever this is possible and appropriate; and * Sector institutions that are willing to) embrace reform and are committed to strengthen their productivity and institutional caacity. d. Improved Financial Management and Planning One of the main obstacles to dealing realistically with tariffs and costs and the financial position of urban water and wastewater enterprises is the present accounting system and financial reporting conventions which provide a distorted and misleading picture of the enterprise's real financial position, creating the impression of viability while in reality they are in severe financial trouble. If the water and wastewater utilities are to develop into efficient, financially viable institutions, operating in a market economy, these regulations will need to be replaced with International Accounting Standards (LAS). The Government of Azerbaijan is currently in the process of changing its accounting standards towards LAS. These changes cannot be introduced for water and wastewater utilities alone. In the meantime, it is possible to amend the regulations to allow for more flexible interpretation. Additionally, it is advisable for the water and wastewater utilities to adapt an international system for accounting and presentation of financial statement in parallel with the state-required present revenue formula. This statement would help the utility management understand better the real financial position of the utility and allow realistic long-term financial planning. The experience of ARWC in the preparation of financial statements according to LAS would be valuable to other vodokanals. 2. Financial Viability of the Rural Water Supply and Sanitation Sector The demand for water supply and sanitation services in the rural areas is enormous but there has been little service expansion and the overall situation has continuously deteriorated in the last years. The Government's resources to the sector are minimum and are certainly nor adequate even for stopping the decline of services. The only solution to this situation is to establish financial policies that support the demand-responsive strategy where.communities pay part of the capital cost in proportion to the cost of facilities, and all operations and maintenance costs. Even under this approach, the financial resources needed to provide adequate water services to all rural areas are enormous. T'his area can be a beneficial use of resources from the Oil Fund. However, financial leverage from communities is necessary and this would require a major change of perception in the rural communities, as water is still viewed in many cases as a service that should be provided free of charge by the Government. Furthermore, communities will be reluctant to pay for a low quality of service over which they have no influence or control. The critical situation has motivated some communities to take control of the problem and 57 improving their water services, but in most cases they are constrained by lack of financing and resources. The limited resources that the Government can dedicate to the water and sanitation sector in the rural sector, particularly with the future availability of oil resources, should be targeted to communities that demonstrate commitment to the principles of the demand-responsive approach, particularly in regards to the financial approach. The main features of this approach are [21]: * Communities decide if they want to participate and their preferred level of service (house connection, yard tap, stand post, communal systems, etc.) based on willingness to pay and contribute financially to the project. * The communities pay the full cost of maintenance and operations of the systems they select. • The communities set their own tariffs but should be designed to meet the financial requirements of the system. Tariffs should be directly linked to the costs of services. Communities that are able and willing to pay can decide on a higher level of service. * The communities need detailed information on costs of construction as well as operation and maintenance to allow for informed choice, and seek to reduce investment costs through lower cost options and more efficient delivery mechanisms. * Robust financing mechanisms (both public and private) should be set up and financial intermediation options (such as household microcredit for on-site sanitation) should be explored to increase internal resource mobilization. * Private sector's role can go beyond financial intermediation and construction. This expanded role should be allowed in areas with community's acceptance to include service providers in charge of the water supply infrastructure tariff collection, and O&M. The regulatory system should provide the opportunity for the private sector to service rural communities. * The communities should receive support to strengthen their financial management and resource mobilization capacity, particularly for major repairs that go beyond the routine maintenance, and for service expansion that would track their improvements in standards of living. * Government subsidies for rural water supply systems should be transparent and based on pre- determined criteria reflecting the level of contributions that communities are willing to make, poverty, and basic needs, among others. As discussed above, communities must commit to cover operations and maintenance and a portion of investment, the rest will be covered by Government subsidies as a one-time contribution (rather than continuous subsidizing of operations and maintenance costs). A widespread information campaign will be required to ensure that all communities are given a fair opportunity to access the resources. * Subsidy programs for household sanitation are generally not sustainable, however targeted subsidies may be appropriate to demonstrate approaches and stimulate demand. * An important role of the Government is to ensure efficient use of resources. Communities should be provided with the tools and training to strengthen their financial management capacity to ensure transparent use of funds. The supervision of use of funds by WUAs (where they are set up) and other implementors should be done by both the central Government and the recipient communities. 58 3. Financing the Sector Investments Through a Concerted Effort with Stakeholders Ideally, investments in water and sanitation are met by a combination of cash flow from urban utilities or contributions from the community members in rural systems, private equity, government grants, and prudent borrowing from commercial sources. Every water and wastewater utility requires access to long-term financing as otherwise the impact on tariffs would be unsustainable. However, the current financial weakness of vodokanals and the absence of long-term domestic credit facilities make it impossible for vodokanals to have the needed access to credit. The Government should take the leadership to coordinate all possible sources of financing available in a concerted strategy targeted to the requirements and objectives of the needs in the urban and rural context. The following sources of financing should be coordinated: * International Financing Institutions (IFIs): The IFIs, such as the World Bank, EBRD, IDB and ADB are potentially interested in providing finance for investments in both urban and rural water and wastewater infrastructure and technical assistance. In some cases, the IFIs may provide funding or equity to support a private utility operator for Greater Baku. They can make loans for rehabilitation of existing systems as well as technical assistance, but financing of administration and operating 'costs would remain the responsibility of the utilities. The suggestions made in this report regarding tariffs, collections and financial management and reporting that are essential for bringing about the financial recovery of utilities are also a prerequisite for accessing international funding for investments. The Government may consider using its guarantee authority to mobilize foreign loans from official multilateral, bilateral and possibly private sources to augment the limited locally available financial resources. The capacity of international lending institutions, however, will not be sufficient to deal directly with all utilities in secondary cities and small towns that need financing and would be interested in reform. While the IFIs can work directly with a few selected utilities in a first pilot phase, financial assistance to the rest of utilities requires an intermediary arrangements. The Government would take a coordinating role to channel the funds to utilities committed to the principles of reform defined in this strategy. * International Donor Agencies: Several donors are active in Azerbaijan, particularly in assisting refugees and IDPs. In the future, these international donor agencies may be interested in supporting water supplv and sanitation programs in rural areas and continued support to the return of IDPs to their former places of origin. In using international aid, however, the Government should ensure that such aid is well coordinated and enhances rather than detracts from the Government's sector adjustment path. Specifically the Government should insist that aid, no matter wheie it comes from, be consistent with the sector strategy. Although some assistance may be given on a grant basis, the severity of the sector crisis demands that any resources are stretched to the extent possible so that as many people as possible benefit. Donors should be discouraged to provide funding for installations that are clearly inappropriate and cannot be maintained and operated by the means of the recipient community. Moreover, any assistance should not duplicate efforts and thereby dilute the impact of the resources available. For instance, in the institutional area, setting up a program of village water supply initially set up with the assistance of one international agency could be replicated in another area. Careful and determined coordination of donor assistance is an exceedingly important obligation by the Government to ensure that a maximum of benefit is derived from such assistance. * Private sector: Although it is common to emphasize the private sector's role in the water and sanitation infrastructure as one of supplying finance, one of the key advantages of the involvement of private utility operators is their role in improving management. At this 59 moment in Azerbaijan, the low levels of cost recovery, the reliance on non-cash forms of payment, and the difficult institutional arrangements in the sector would not promote large investments from the international private sector. However, with increasing involvement of the private operators as proposed in this strategy the knowledge and understanding from the Government and the private sector will increase and with it the level of financing that can be leveraged from the private sector. IFIs have guarantee instruments that can facilitate the involvement of the private sector and the level of investments. * The Government: The limited financial resources that the Government is currently able to put in the sector are clearly insufficient. Therefore, they should be used to leverage financing from other sources, promote reform in the sector, and support the communities that are willing to contribute to the reform process. The Government should also modify its subsidy strategy along the lines discussed in this document. Even if the availability of financing for investments in the sector increases with the expected revenues from the oil sector in coming years, it would be an error to use these funds independently from a reform program and a clear strategy to support the poorest segments of the population that are willing to help themselves. The reform process should be initiated without delay with pilot programs that can be rolled out when oil-related revenues become available. * The Consumer: The basic block and source of financing of the sector will be the consumer. The consumer is a pivotal stakeholder in the revitalization of the country's water supply and sanitation sector. Government on all levels need to clearly communicate to the population the new sector financing policies and subsidy policies. It is easier to increase and collect tariffs, if people fully understand and believe that the Government no longer has the resources to take care of the sector, that the future quality of service will depend on the willingness of the consumer to take on the responsibility for their systems, including the obligation to pay for services received. Perhaps the most difficult leap of faith for the consumer is to accept the obligation of paying higher tariffs now for poor service, while investing in improved services which might still be years away. All stakeholders need to realize that tariffs need to be increased and collections improved before any service improvements will be realized. The notion that tariffs can only be increased after consumers have noticed improvements would be self defeating. Consumers have to realize that only their immediate contribution will enable water utilities to initiate the investments needed for improving services. C. Technical Reform Increasing the revenues collected by water and wastewater utilities through better collection, less payments in non-cash forms, adequate tariffs, and effective subsidies will not be sufficient to transform vodokanals into self-sufficient financially viable enterprises. A major change in the approach to the technical aspects of water and wastewater systems is required to reduce operational costs and improve efficiencies through well-selected investments. This section presents some of the guidelines to be followed in defining a cost-effective strategy of investments. 1. Metering as a tool to reduce consumption, wastage and operational costs and improve revenue collection Given the high percentage of operational costs that is spent on energy costs in all vodokanals of Azerbaijan, a reduction in water wastage and consumption will result in improved levels of service for sectors of the population that currently receive insufficient water, and eventually in savings in operational costs as less water needs to be treated and pumped to serve the same number of customers. One of the most effective tools to reduce water wastage and 60 consumption is to have a tariff policy based on metered consumption. In transition countries of Central and Eastern Europe, the introduction of consumption-based billing and increases in tariff levels had led to an astounding decline in water wastage and consumption. For example, cities in Poland, the Czech Republic and the former German Democratic Republic have seen water consumption decrease by more than half or more in just a few years. By reducing water consumption in Greater Baku to Western European levels of about 150 lpcd or less, the water utility will be able to provide a better service and reduce operational costs. The following recommendations should be taken into consideration in designing effective demand management programs: * Metering is essential, but not sufficient: Demand management requires metering of consumption. Metering alone is, however, not enough to induce people to use less water, unless accompanied by: (i) consumption based billing which relates the cost to the amount of water consumed; (ii) tariff levels sufficiently high to induce consumers to use less water; and (iii) rigorous collection of bills. * A metering program should not be initiated without immediate adjustment to the tariff policies and consumption norms: As the current consumption norm for domestic consumers in Baku is 400 Ipcd, the metered consumption for most users will show a smaller value. Only flagrant cases of wastage will measure consumption levels higher than 400 lpcd. Before initiating a metering program, the tariff levels and consumption norms should be changed so that the unmetered consumption goes down to a lower level and the tariff increases maintaining the water fee charged per month. With the introduction of metering, domestic consumers that waste water will see an increase in their water bills and will have an incentive to reduce wastage and consumption. At the same time, the utility will not be adversely affected by the introduction of metering. By carefully designing this change in consumption norm and tariffs before rolling out the metering strategy, the utilities and the Government will face less opposition later on from the consumers. * Adoption of cost effective metering strategy is needed: The installation of meters requires an investment that should be commensurate with the expected benefits. A metering strategy should start with the installation of meters for the larger consumers and those that are known to waste large volumes of water. While industries, public organizations and free standing, single-family houses (particularly those with gardens or small agricultural plots) should be metered individually, metering of inidividual units in large apartment complexes is neither practical nor justified on cost-benefit grounds. The only technically, financially and administratively viable option is block metering, i.e., to meter and bill the entire block, or if possible each stair well, for actual consumption and apportion the water bill among apartments. The metered bill would be charged either to the housing association or condominium association, and divided according to the housing rules so as to use peer pressure to reduce wastage, particularly in lower floors. * Consumption based billing requires a much more sophisticated commercial infrastructure than the past billing based on norms. Utilities introducing consumption based billing will have to install new commercial systems and train people in its use. Also meter reading and maintaining and repairing meter will require extra capacity and resources. Private enterprises can provide these services to utilities in secondary cities to gain economies of scale and reduce operational costs. The Government can also provide support for the development of commercial systems that can be implemented at the local level for utilities to facilitate standardization and reporting. 61 * Consideration of intermittent service and metering: As many areas in Baku and other cities currently have intermittent service, metering in this situation is more difficult and needs a different strategy. * Public motivation and advocacy campaign: The consumers should understand that the water fee is directly related to their consumption and wastage and therefore they can, through their own action of conserving water, influence the future level of fees. This change of attitude requires an education effort. Utilities have to undertake campaigns that cost money and know-how. * In areas served with stand post spillage should be avoided through careful management and maintenance: A strategy used successfully in many countries is to contract out the management of metered stand posts to individuals who pay the metered cost for water and recover their cost by selling water individual consumers for a fee. Such an arrangement would have two positive outcomes. One is that the individual in charge of the stand post will ensure that there is no spillage and water loss from the system. The other is that water from stand posts is actually paid for. • Limiting or carefully controlling water consumption from house connections and yard taps: It appears to be common practice that costly water is used for livestock watering and garden irrigation in many urban areas of Azerbaijan. This practice reduces the availability of water to others particularly in the growing season. Households that want to use water for these purposes should be metered and pay the full price for the water consumed. Or, if metering is not possible, communities should carefully regulate such water use through self policing arrangements. 2. Improvement of Operational Efficiency of the System as a Means to Reduce Operational Costs Another way to spend scare resources cost effectively is to make the best use of existing plants and networks before spending resources on system expansions. Specific measures that should be explored first include: * Increasing the Supply of Water through the Reduction of Network Leakage: Leak repair is among the most urgent and cost-effective investments opportunities. Reducing the present level of losses from more than 50 percent and possibly as high as 70 percent to a more acceptable level will require a long term strategic approach and commitment. Reducing leakage involves repair of leaks through replacement, repair or relining of pipes and pressure reduction. Cost-effective investment decisions depend on a thorough understanding of how the pipe network functions and reliable information on the magnitude, location, and nature of leaks and the pressure distribution in the system. Beyond fixing the most obvious leaks, leak management is a permanent activity requiring a sustained management commitment and appropriate institutional capacity. Cost effective interventions are based on careful analysis and ranking of investment interventions. International experience shows that there are no quick fixes for leak reduction. Much could be gained from assistance by consultants specializing in the area of leak management. * Improving the Hydraulic Efficiency of Pipe Networks: Unbalanced pressure zoning, incomplete loops, system occlusions and bottlenecks, faulty valves, and poor operations reduce the capacity of many systems. Zones of excessive pressure contribute to increased leakage. Pumping stations, because of inappropriate designs and poor equipment, use more 62 energy than necessary. All these deficiencies reduce system capacity and drive up energy costs. There is obviously great scope for improving the conveyance capacity and efficiency of transmnission and distribution systems through removal of occlusions and bottlenecks and the introduction of better pressure zoning. Adding storage capacity may help improve network efficiency and raise capacity. Many utilities in market economies are expending large efforts to improve the efficiency of their networks, thereby reducing operating costs and postponing system expansions. Cost-effective interventions, however, always depend on a good understanding of the network and its functioning and requires computer modeling to arrive at optimal results. Improving the Efficiency and Redtucing Energy Consumption of Pumping Stations and Water and Wastewater Treatment Plants: Many water and wastewater treatment plants suffer from high input requirements and poor operations compared to plants in Western Europe and North America. Better equipment -- more efficient pumps, process layout, chemical dosing, aeration in wastewater treatment plants - as well as better process design and control could reduce costs and at the same time produce higher-quality output. Retrofitting plants with more energy-efficient equipment is clearly among the most cost-effective strategies for reducing operating cost. Improvingl the capacity and efficiency of these facilities requires, however, superior knowledge and careful analysis of the existing situation and reasons for poor performance. Specialty consultants will be needed to assist utilities in rehabilitating, retrofitting and improving the efficiency of plants as well as reorganizing better operational and monitoring practices after the plant has been refurbished. * Improving Maintenance to Increase the Life of Facilities: Faced with very low cash collection, all utilities in Azerbaijan are spending less than 1% of the value of fixed assets on maintenance, i.e., routine preventive care of plants and networks. With the current financial crisis there is almost no maintenance. Studies on infrastructure in market economy countries indicate that an annual maintenance expenditure of about 2-3% of asset value is necessary to maintain facilities in good operazing condition. The present value of such annual maintenance levels amounts only to 20-30% of the original investment cost. In other words, failure to maintain facilities requires major reconstruction or replacement at a cost that may be five times as high as the present value of annual maintenance expenditures. Clearly, utilities would be well advised to place increased emphasis on maintenance. Adequate maintenance in the long run will save resources by reducing system downtime and by giving facilities a longer useful life. * Reducing labor as a means to increaise efficiency and reduce costs: As shown in Figure 2.9 and discussed in Section HF, vodokanals are overstaffed, not only in their core activities but also as they maintain departments in areas that are not central to their daily operations, such as design, construction, and even hotels and ancillary facilities. Maintaining these high staffing levels result in high operational costs that must be reduced if vodokanals are to reach financial viability and provide services at a lower cost. * Ensuring Proper Pretreatment of Industrial Waste: Insufficiently pre-treated industrial wastewater entering municipal sewer systems impairs functioning of wastewater treatment plants and may also introduce toxic materials into the environment. Therefore, efforts are needed to better control industrial discharges and hold industries to their obligation to provide adequate pretreatment of their wastes. The problem may be less severe with the drop in industrial production, but by the same token, most industries are pressed to lower operational costs and pre-treatment is one of the areas where vodokanals can reduce costs. 63 * Finding appropriate and low cost solutions for urban finge areas and small and rural communities: The traditional house connection based system of water supply and water borne sewerage is not affordable to these communities. In this situation, a gradual improvement in the level of service delivery should be considered. The choice of the solution will depend on the community's capacity and willingness to pay for services. Communities may begin in water supply with stand posts and as they become more prosperous graduate to yard taps and eventually house connections. Where appropriate the use of hand pumps should be considered. * Considering appropriate sanitary solutions when choosing a water supply system: The choice of sanitary solutions depends to a large extent on the level of waters service. A water system with house connections in densely populated urban requires costly traditional water borne sewerage facilities, while stand posts generate less wastewater that could be disposed of through septic tanks and infiltration fields. * Including source protection in investment planning: to combat the growing threat of source pollution, investments to protect water sheds, and well fields may be required to preserve or improve the supply of a good raw water supply. 3. Cost-effective Selection of Investments: A Combined Path of Service Improvement with Lower Unit Operational Expenses To meet the investment needed to provide adequate services for all will require many years. In the meantime only the most essential investment needs can be fulfilled. Making careful choices and priority setting will be essential to obtain the largest benefits from the invested resources. Sector institutions may want to consider the following prime objectives in the selection of investment priorities and concentrate funding for interventions that: * improve the safety and reliability of water supply services, with special emphasis given to communities with existing or latent public health problems that can be traced to deficient water services; and * reduce operating costs by investing in high pay back investments, for example in demand management, leak reduction and energy savings. To ensure the identification of the most cost-effective investments the utilities should: * Begin with a careful assessment of the present system and its functioning: Only a good understanding of the problems and its causes will lead to cost effective investment decisions. For example, a prerequisite for cost effective leak management is good knowledge of the amount, nature and location of leaks, pressure and the state of repair of pipes. Unless investment decisions are taken with full knowledge and analysis of these variables, investment selections may not be cost effective. * Completing works in progress, although tempting, may not be a priority. These may be based on assumptions that may no longer be valid (slower growth of water demand, for instance) or technologies and equipment selected may no longer be appropriate (high energy installations, for example) or there may be other investments of higher priority. For example, it would not make much sense to complete a wastewater treatment plant, if the available resources are not even sufficient to upgrade the water system to a level acceptable to the population. A common temptation is to complete transmission lines to increase availability 64 of water. However, in many cases the need for additional water supply is not apparent given the very high level of wastage, leakage, and consumption. * Concentrate resource use to complete projects as soon as possible: A water treatment plant or a new pipe line generates benefits only after it has been completed. The old practice of spreading investment funds over too many projects should be abandoned. Utilities should initiate investments only after its full financing has been assured. * Use least-cost analysis to determine expansions: Planning for capacity expansions should be undertaken only after feasibility studies have identified least-cost solutions. Box 4.14: Suggested Sequences for Selecting Priorities and Cost-effective Investments Selection of Priorities Selection of Cost-effective Investments Institutional strengthening and capacity Increase maintenance expenses to adequate _] building _ level Improving water supplies (for its health Rehabilitate existing assets in worst condition benefits and increase in collections) and perform efficiency improvements to Appropriate sanitation services (to reinforce plants and networks: reduction of energy, health benefits through a good water leakage, industrial pollution. V supply) VOnly after existing system has been taken to Wastewater treatment optimum efficiency, consider capacity expansion D. Service Reform The fourth key reform needed in the water supply and sanitation sector in Azerbaijan is a reform that changes the objectives and incentives of the sector providers from construction and planning to providers of adequate and cost-effective services to their customers. The service reform is discussed in this section along four main themes: (i) service to the poor; (ii) standards and level of water supply and wastewater services; (iii) human resource capacity needs to improve services; and (iv) protection of the environment as a service of the sector. 1. Water Supply and Sanitation Services to the Poor Many of the tough reforms needed in the water supply and sanitation sector are not taken using the poor as an excuse. Affordability is mentioned as the main reason for maintaining domestic tariffs low but the lack of financial viability of vodokanals is one of the key factors in the deterioration of services that force the poor to find and pay higher prices for altemative sources of water. The poor are affected proportionally more than the non-poor for lack of services and spend a significant portion of income coping with the deficient services (see Section II.D). At the same time, the poor do not have a voice in the planning of the sector and key decisions in the sector are taken without consultation. Service standards are set at very high levels (piped connections with very high consumption norms for design) that are not affordable and, as a consequence, the poor do not receive even basic levels of service. A key component of the water supply and sanitation strategy for Azerbaijan should be to ensure that all sector institutions are responsive and accountable to the poor segment of the population. In this service reform, the following guiding principles are suggested: * Understand the needs of the poor: Lack of information in the sector linking the service deficiencies and poverty is a stumbling block for developing a strategy that is responsive to 65 the needs of the poor. Appropriate institutional arrangements should be developed to gather the necessary baseline information, identify vulnerable groups, and monitor access of the poorer communities to water and sanitation services. The sector institutions should reach out to the poor communities to understand what they could afford to pay, test out new service alternatives that may reduce the costs, or seek joint agreements where the communities, who had not paid for the services in the past, could pay, or use and maintain the systems in the future. * Make specific policies and set rules to target the poor communities and vulnerable groups: Given the large service gaps in the country and the need to improve the financial viability of utilities, the sector institutions should resist the temptation to serve only the more affluent segments of the population and leave aside those sectors that cannot afford the high level of service mandated by the technical standards. As part of the service reform of the sector, specific policies are needed to target the poor with adequate standards that are affordable and with targeted and transparent subsidies. In the case of involvement of the private sector in the provision of water supply and wastewater services in Greater Baku, there should be clear and specific rules in the contract regarding services to the poor (see Box 4.3). The sector reform should not be a vehicle for growing inequalities between income groups in Azerbaijan. * Give a voice to the poor in the sector: A key dimension of poverty is the lack of voice and power to change the current situation. As consumers are asked to carry the financial burden for sector development, the sector institutions and the Government must establish clear and specific arrangements to give a voice to the consumers, particularly the poor in the sector. In the urban areas, creating two-way communication links with non-governmental and advocacy groups with an interest in water and wastewater issues and representing the poor. Decentralization of water and sanitation services as proposed in this strategy usually leads to improvement in provision and maintenance of services as a result of higher accountability. In rural areas, the proposed institutional reform that would give communities ownership and responsibility for operation and maintenance of the facilities, should include mechanisms to ensure involvement of minority and disadvantaged groups in the community. - Support the creation and capacity building of membership-organizations that engage the poor: The work of these organizations will be very valuable in the formulation and implementation of policies and interventions in the water and sanitation sector both in rural and urban areas. * Subsidies should be designed to benefit the truly poor: As the sector moves towards cost- recovery and strict collection of revenues in cash, the subsidy system should be designed and put in place to ensure protection of the poor and to maintain the financial viability of the sector. By the same token, the perception that water provided by the sector institutions should be free must be changed. * Recognize strong cross-sectoral linkages of the sector with hygiene and education programs: When designing programs targeted to the poor, particularly in rural areas and urban fringe areas, the full economic and health impact of improved water supply services are often not achieved due to lack of attention to hygiene education and sanitation. * Women participation: As women in Azerbaijan are the primary users of domestic water, an essential component of the strategy to understand and respond to the needs of the poor should be to involve women in the decision-making process. A clear targeted effort to reach, 66 motivate, involve, train and empower women should be part of the sector reform to make the institutions responsive and accountable to the poor. 2. Standards and Level of Water Supply and Wastewater Services Financial resources available for the sector will be extremely limited for some time to come. Only the most urgent and highest priority investments can be made. This will require making choices among competing investments. Innovative, unconventional and partial solutions to a problem will be needed. Present technical norms and standards and design practices, many of them demanding costly interventions, are not compatible with this approach and should be adjusted: * Drinking water quality standards are demanding in terms of the biological and chemical/physical standards that must be met. Investing in water treatment that would meet all of these standards may in many cases be prohibitively expensive and preclude funding for other important investments needs. While the bacteriological safety of the water through disinfection should always be assured, the cost implications of other treatment should be optional depending on the availability of resources. * System design standards regarding parameters such as water consumption, pressure, minimum pipe sizes, stand by capacity, planning horizons, should be suspended and tailored to each specific situation. * Standard designs for water and sanitaion systems should be reviewed carefully and if found too expensive or inappropriate replaced with innovative and less costly designs and technologies. * Standards for wastewater treatnent: Present requirements for effluent standards are clearly not affordable; they should be relaxed to avoid investments of questionable justification and priority; while communities struggle to provide a rudimentary level of water supply, they should not be required to divert funds for costly secondary treatment and nutrient removal. * Quality and level of service, particularly for areas that are currently not served, should be governed by affordability and effectiveness. A working hand pump is more effective than an electric or Diesel pump that cannot be maintained for lack of resources. A stand post is better if house connections are not affordable. In the rural sector, the current standards and regulations may prevent the development of private sector and alternative delivery options. The rural water supply sector requires adaptable service levels tailored to the needs, ability and willingness to pay of the communities. The range of technology options should be expanded to include low-cost technologies (hand pumps, gravity flow systems, ventilated improved pit latrines), building on existing resources in the community. The success of the proposed demand-responsive strategy relies on an adequate flow of information on all possible options and a competitive environment that allow communities to access a range of providers of goods and services for all aspects of the project regardless of the level of service the community chooses. Full understanding of the technical and financial implications of the options is indispensable for an informed choice that is sustainable in the long term. Programs to demonstrate simple technologies for wastewater and excreta disposal and treatment should be part of interventions in the rural sector [22]. 67 3. Human Resource Capacity Needs to Improve Services The pace of the proposed institutional, financial and service reform of the water supply and sanitation sector will depend on the presence of leaders in Government and the sector community that can take on the responsibility of shaping and implementing the changes that are needed. There are many highly skilled technical professionals often doing an admirable job of keeping old facilities running in spite of insufficient funding for repairs and replacement. But, there are few who have the experience and skills required to lead the reforms. Building institutions takes time and sometimes involves restoring entire professions in areas essential to a well-functioning market economy. There is an urgent need for skills in non engineering disciplines such as planning, and financial and commercial management. For present utilities to transform themselves into well managed and efficiently administered organizations, deep adjustments to the present staff composition and skill mix will be necessary. Above all, the adoption of a new management culture and organization based on personal accountability and initiative and in which non-engineering activities are given equal, if not higher, prominence is crucial. Developing a human resource capacity that will bring about the reorientation of sector development policies and practices and the introduction of modern utility management systems and skills and new planning strategies and processes will take time, but should be initiated immediately. Programs of capacity building may include efforts to: • expose selected sector personnel to international experience and best practices through programs of study abroad and participation in international seminars, conferences and study tours; e reorient academic and vocational training to reflect modern sector management methods and practices; and - develop and disseminate to the sector community teaching materials - text books, guidelines, case studies - that describe best practices. The development of human resource capacity cannot be limited to the technical personnel of vodokanals, but should include all stakeholders in the sector to strengthen their ability to be active participants. The urban and rural sectors have different needs and emphasis that should be reflected in the development of human resource capacity. The key areas of training and capacity building include: * Utilities: financial management, accounting, commercial systems, tariff analysis, management of utilities, technologies for reduction of operational costs (such as leakage management), low-cost options for water supply and sanitation, procurement, contracting, supervision, and quality control. * CHCP: regulation of utilities, program management, donor and international financing coordination and management, policy development, facilitation and social intermediation, financial management, interaction with communities and outreach, demand-responsive approach, protection of the poor. * Central and local governments: regulation of utilities, tariff setting, subsidy design and administration, poverty analysis. * Civil society in urban areas: community participation in the sector, sector reforms and implications on the community (e.g., metering, increase in tariffs, investments) * Private sector, universities, and NGOs: bidding process, business skills, social intermediation, low-cost technological options for water supply and sanitation, quality control, hygiene education, training and education. 68 * Rural communities: technology and service options for water supply and sanitation; organization of WUAs; planning, implementation, operation and management of community water supply facilities; contracting and supervision; financial management; and hygiene and sanitation. The human resource capacity strengthening of each stakeholder may require different tools ranging from formal courses and training, to public outreach, to targeted social intermediation programs. In the small towns and rural areas, the following guidelines are recommended: * training should include innovative tools and methodologies and learning-by-doing approaches; * community outreach, intermediation and training are needed before, during and after the construction of facilities; * selection of trainers and community development works should be done in a cost-effective and competitive manner, with the community involved in the contracting process, as appropriate; and * training should be time-bound, output and impact oriented, with performance monitoring and targets to measure capacity and achieve goals. 4. Protection of the Environment: A Service of the Sector The water supply and sanitation sector in Azerbaijan has a major role to play in the protection of natural resources and the environment in the country, and it should be considered one of the services the sector provides. However, the water supply and sanitation sector is only one of the stakeholders in the water management and environmental protection sector and as one of the users of the resource should not be in charge of regulation. The need for more coordinated planning, regulations, and policies in the water management and environmental protection areas is clear. A detailed evaluation of the water resources management and environmental protection sector in Azerbaijan is beyond the scope of this document. Nevertheless, the following guidelines are suggested for incorporating the protection of the environment in the operation, policies, and strategic planning of the water and sanitation sector: * Unattainable norms and standards: The water resources management and environmental protection policies in Azerbaijan are based on a set of rigid standards and norms that are currently unattainable given the limited financial resources. These norms, originally defined optimistically by a central bureaucracy that was concerned about the quality of the water supply, but insufficiently concerned with technical and financial aspects of managing the sector, have become largely meaningless, as the economic condition of the country currently does not allow the large investments in water resources development and pollution control that would be required. The unwanted consequence of existing standards is that they have become so complex, unaffordable, and unenforceable that often even logical and useful standards are ignored or treated too lightly. For exarnple, ambient water quality standards are fixed thereby preventing any priority-based strategy for gradual water quality improvements over time. The effluent standards required today from vodokanals are among the most demanding in the world. A possible option to move away from the trap of low enforcement linked to unattainable standards is the gradual, phased and priority-based investment strategy for cleaning up water resources endorsed by the governments of Central and Eastern Europe (Box 4.15). 69 Box 4.15: Key Elements of the Wastewater Management Policy The recent political changes in the Central and Eastern European (CEE) countries have resulted in an accelerated and sometimes disorganized decentralization in the area of wastewater management. As a result, the planning and construction of a wastewater treatment plant in most of these countries now involves several central government ministries, the regional governments, and the local government. Operation and maintenance responsibilities are generally being transferred to local authorities. Centralized strategic and financial planning by the state has been almost completely abandoned, and state subsidies are generally absent-sometimes replaced by newly established environmental and water funds supported by polluter fees. Coinciding with these political changes, the construction of a large number of wastewater treatment plants was initiated in recent years (there are more than 1,000 partially constructed plants in the CEE countries). However, most of these plants still suffer from faulty designs and, particularly, significant over-sizing-sometimes by as much as 100 percent-as a result of past practices in forecasting treatment needs and an uncoordinated local perspective in the planning process. The key elements for the successful development and implementation of a wastewater management policy should be: (a) the acceptance of water resources as an economic good, considering the economic impact of pollution impairment of its uses in the selection of priorities; (b) the recognition of the fact that the real authority and capability for implementing a wastewater management policy lies, not with any particular agency, but with the stakeholders collectively; and (c) the empowerment provided by the stakeholders to a lead agency to provide the data and information necessary for the different stakeholders to understand the economic implications of wastewater management decisions, with technical credibility to mediate in disputes resolution and lead to optimized solutions, all of it at the appropriate geographical scale, which is normally-but not necessarily always-the river basin. Source: [23] * A need for effective water management in the country: The approach to the water quantity and quality management in the country should be: (i) integrated, linking social and economic development with ecological concerns and a river basin perspective treating land and water as part of one system; (b) cost-effective, by regarding water as an economic good with an effort to achieve efficient and equitable use and to encourage conservation and protection of resources; and (c) participatory, involving users, planners and policy-makers, with decisions taken at the lowest appropriate level and including public consultation and stakeholder involvement. The water supply and sanitation sector as a key stakeholder in the water resources management sector should be an active participant in the policy discussions and a supporter in the implementation of the agreed policies. * Pool resources for investments on priorities, "Hot Spots": The challeinge is to deterrnine how scarce resources available for investments can be allocated to obtain optimal benefits in terms of downstream water use and environmental concerns. In place of the present uniform ambient water quality and effluent standards approach, it would be more cost effective to pool resources to concentrate investments on removing the most urgent pollution discharges, i.e., "hot spots." A pollution hot spot denotes discharges that have a particularly negative effect on the value of a water resource, for example: toxic waste discharges from industry, pollution upstream of raw water intakes; or pollution to areas of special environmental concern, like nature reserves or tourist areas. Most likely, hot spots are associated with toxic industrial wastes or large-scale domestic pollution from large cities. Domestic waste discharges from smaller cities most likely don't fall into the hot spot category. Once identified, hot spots can be ranked in terms of the severity of their impact on downstream water quality and use. It follows that scarce investment resources available for wastewater treatment should be allocated in accordance with a list of ranked hot spots. 70 * Avoid investments in advanced treatnent: Unless special justification directly linked with an identified hot spot exists, investments in advanced treatment should be avoided as the marginal benefits of wastewater treatment tend to diminish with its marginal cost. The resources advanced treatment would require can probably be applied more effectively by supporting lower-level treatment where none exists today. * Implement a cost-effective approach to municipal wastewater treatment plants: including: (i) upgrade existing plants rather than expanding or building new ones; (ii) reduce the hydraulic load on wastewater treatment plants by diminishing water wastage and consumption and infiltration/inflow into the sewer system; and (iii) use appropriate and proven technology, particularly with respect to sludge stabilization and disposal, to increase plant reliability and reduce operating and investment cost. * Strengthen control of discharges from industry both into municipal wastewater systems and the environment: Industrial discharges into municipal wastewater systems demand special attention, as many industrial wastewater discharges contain toxic organic substances or heavy metals cannot be treated in municipal wastewater treatment plants. Additionally, the benefits of municipal wastewater treatment may be lost if nearby industries discharge their untreated wastewaters into the environment. * The role of utilities in the water management and environmental protection sector should include: (i) active participation in the sector bringing the perspective of a key consumer of the resource; (ii) within the limits of economic justification and affordability, maintain and upgrade the performance of their existing treatment plants to meet reasonable practice standards; (iii) reach agreement with environmental authorities on a realistic and affordable phased plan for treating all wastewater and the appropriate handling and disposal of sludge; and (iv) with the assistance of municipal and regional environmental authorities, come to more secure arrangements with industry to ensure adequate pretreatment of industrial waste entering municipal wastewater systems. 71 V. NEXT STEPS TO IMPLEMENT THE SECTOR REFORM PROCESS A. Programs to Implement Sector Reform Process The implementation of the proposed institutional, financial and service reforms in the water and sanitation sector will require several years to implement. Given the current organization of the sector, the different stakeholders involved and the scope of the proposed reforms, the process could be implemented along three main programs of action: (i) Private Sector Involvement in the Provision of Water Supply and Wastewater Services in the Greater Baku Area; (ii) Municipal Water Supply and Wastewater Program; and (iii) Rural Water Supply and Sanitation Program. Many of the sector reforms proposed in this document have already been made in many countries in the world. Consequently, international expertise and financial assistance will be crucial for the Government in its effort to strengthen the sector. The international donor community, including multilateral and bilateral international financial institutions stand ready to contribute to the Government's efforts in all stages of the reform and capacity building process. Several of these institutions have already pledged assistance, others are interested. A concerted effort by the Government to work with these institutions, within the context of a credible reform effort, holds the prornise of raising considerable amounts of concessionary aid that the Government could channel to the sector to begin addressing the most urgent investments needs. The resources provided by the international donor community, however, will only cover a small part of the entire investment needs for the sector. It is therefore imperative that these funds are spent as frugally as possible such that they bring maximum effect in terms of improving the safety of services, efficiency of operations and transfer of know-how. They also should be used as a vehicle for encouraging resource recipients to initiate the reforrns outlined in the previous chapter. The main conditions and criteria under which these funds are provided by the Government should include selecting beneficiaries which are, in exchange for support, willing to help themselves to the maximum extent possible. Although three programs are described for the water and sanitation sector, the Government should be selective on the activities it chooses to implement. The following sections outline the scope of each program framed within a specific sector segment. In choosing the programs to implement, the Government should take into consideration criteria such as: (i) areas where a potential for a public health disaster are greatest; (ii) areas where implementing agencies, responsible government agencies, and consumers are ready to commit to the reforms proposed; (iii) windows of opportunity where the local conditions are adequate for testing new approaches to service delivery to the poor and underserved areas; and (iv) areas where the limited government resources can be leveraged with private sector financing or where as part of program implementation the private sector is promoted. 1. Private Sector Involvement in the Provision of Water Supply and Wastewater Services in the Greater Baku Area Past experience with private sector participation in Eastern Europe and around the world indicates that this is likely to alleviate substantially the financial and operational difficulties of the water and wastewater services in the Greater Baku area. The implementation of the sector reform for the Greater Baku area would be done through a program based on private operation and management with the ultimate goal to bring efficiency to the water and wastewater sector and improve services to the consumers. A private operator with extensive international experience would already have faced and resolved similar operational problems and could be expected to 72 improve the performance of the merged water and wastewater enterprises in the area. Furthermore, an international operator would not be subject to the same constraints and limitations that a public enterprise like ARWC and BWD face. The integration of all services for the Greater Baku area would bring signif.cant economies of scale and create greater incentives for participation of international utility operators of the highest caliber and experience. Given the substantial reforms associated with the involvement of a private operator in Greater Baku, a careful preparatory process is needed. This preparation process would involve the following steps: * Create the legislation to allow operators to recover costs and have operational autonomy, among other things. Some of these fundamentals were resolved through the recent approval of the new National Water Supply and Wastewater Law. Some others may be needed and will be identified specifically during program preparation; * Request technical assistance support to IFIs for preparation of the program; * Contract with competent advisors for Phase I that would prepare a study to evaluate possible models for public private partnerships and would allow the Government to select the approach for private sector participation best suited to the circumstances of the Greater Baku area; * On the basis of the recommendations of Phase I, contract with advisors for phase II to work out the procedural, technical, operational and financial details for bidding of private sector partners and the selection of the winning bidder. The advisors would prepare draft contracts as part of the tender documents; - Initiate the creation (or strengthening of an existing Government unit) to be the regulator of the contract to be signed with the private operator and to supervise the improvements in performance and achievement of targets; i If any changes to the regulatory firamework are identified during Phases I or II, the Government and local authorities implements these changes as applicable to the Greater Baku area; * The bidding process for the competitive selection of the private operator is announced; and * The advisors would assist the Government in the selection and negotiating process until contract signing. The contract would give the operator the incentives to perforn efficiently within the rules of the contract and under the controls of the existing regulation. International experience with private sector participation indicates that the whole process of evaluation and decision on best options, contract bidding and award is likely to take up 18 to 24 months from the date at which an in-principle decision to involve the private sector has been taken. As the GBWSR Project is expected to be completed by December 2001, the decision to proceed with the preparation of the studies without delay. 2. Municipal Water Supply and Wastewater Program The Government, with the preparation of this sector strategy, has initiated a broad discussion on the strategic steps for the future development of the institutions and service providers. The implementation of the proposed approach requires fundamental changes on the 73 institutional and financial fronts that would take several years. As there are several common issues among all vodokanals in medium size cities in Azerbaijan, a separate program focused on this segment of the sector is recommended. This program would be aimed at improving the services provided by the water and wastewater utilities of secondary cities outside the Greater Baku area, based on the principles and guidelines presented in this document. The program would serve as a transition period towards greater involvement of the private sector in all aspects of management and operation of the systems. As there are more than fifty vodokanals, the capacity of the Government to initiate a program with all of them at the same time is limited. Also, there are several lessons to be learned in the particular context of Azerbaijan that can only be discovered through implementation. Finally, the CHCP nor any of the vodokanals have worked before with IFIs and they are unfamiliar with their guidelines and procedures. Therefore, a phased approach to the implementation of the sector reform is recommended by focusing on a set of cities that demonstrate up front their willingness and commitment to reform with specific actions particularly on areas that would support the financial viability of vodokanals and that are politically more difficult to take (such as increases in tariffs, collections and cash collections from budget organizations and industries). The Government would request the assistance of the IFIs and the international donor community to obtain the funds for program implementation. These funds could be a powerful tool for convincing sector institutions, local governments and consumers to accept and implement the adjustments. The level of funding that would be received by a particular vodokanal would be determined by its financial capacity based on the political commitment to tariff increases and rigorous collection while considering the consumers' willingness and ability to pay. The program can also promote innovative approaches within the framework of the sectoral reform. These innovations can be lead by local initiatives and based on specific circumstances that would move some vodokanals faster in the process of reform towards the ultimate goal of increased participation of the private sector. Cities where communities get involved in the ownership, management and operation of the simpler systems, or NGOs and private sector actors take responsibility over support activities to the sector, or where new ways are developed to provide and improve access for disadvantaged groups would be supported by the program. The design of these innovative pilots would be facilitated by the group through dissemination of international best practices and experiences. The experience of the pilot project being implemented with the support of KfW where a private operator is charged with the management and operation of a vodokanal would be of great importance for the program. As part of the program for municipal water and wastewater in medium-size cities, the central and local governments would receive extensive assistance to develop the human resource capacity needed in its new role of facilitator, coordinator and regulator. The preparation process for this program would involve the following steps: * Continue the discussion initiated with the preparation of this document with vodokanals of secondary cities in Azerbaijan on the basic principles of the sector reform and elicit interest and commitment to the program's principles and approach. Establish a minimum set of reforms that the interested vodokanals have to implement prior to consideration in the program preparation activities; * Request technical assistance support to IFIs and donor countries for preparation of the program; 74 * Establish as soon as possible an interdisciplinary group within the responsible government agency (CHCP) for coordination of program preparation; * Explore with participating cities their interest and commitment to try innovative approaches to the provision of water and wastewater services through significant community involvement and ownership, private sector actors and NGO involvement in all aspects of operation, and technological options to extend the service to disadvantaged groups; * Contract with competent advisors the necessary studies (technical, financial, social, environmental, etc.) for those cities that have complied with the conditions for participation. These studies should not be traditional long-term investment plans including master plans and detailed feasibility work because these conventional supply-driven investment projects are not conducive to an efficient use of resources both in cost and size, and the lack of specific actual information in the vodokanals is very limited to make any reasonable long-term definition of investments. Instead, the advisors would analyze the financial capacity of vodokanals under reasonable plans with initial steps that would be taken as conditions for participation in the project; and the technical advisors would prepare a limited list of urgent investments along with a detailed program for technical assistance to give the vodokanal experts the support of international consultants and the time and resources needed to understand the present short comings of existing facilities, to identify, analyze and compare alternatives and then to set priorities and finally decide on truly least cost and priority investments. The technical assistance activities would also help to develop tools and methodologies to analyze and overcome the most significant stumbling blocks in the sector (for example, commercial systems, leakage management, community involvement and outreach, metering strategies). At the same time, the collection of technical and financial data of the first set of vodokanals would be strengthened in preparation for greater involvement of the private sector; * The advisors would also evaluate the most appropriate strategy for involvement of the private sector in the sector which should be, at a minimum, in charge of designs, construction, supervision, supply of parts, community intermediation, among others; and * Cities and vedokanals that comply through the self-selecting process with the necessary conditions and improvements would be invited to participate in the program. 3. Rural Water Supply and Sanitation Program The rural water supply and sanitaLtion sector is the segment that requires more assistance (both financial, technical, and human resource capacity) and institutional changes. The specific approach for a rural water supply ancd sanitation program would require further analysis, particularly in its relation with other rural infrastructure needs. Within the water supply and sanitation sector, the program should be built around the basic principle of demand-based provision of services, community ownership and management of water systems, facilitation of the government. It is recommended that a learning phase involving build-up and testing of the institutional capacity and community and private sector participation is implemented before the approach is rolled over at a national level. Again, the program should be initiated in districts with communities and local governments that are progressive and are interested in taking responsibility for developing the water supply and sanitation services in their regions. An approach where the Government would facilitate the mobilization of communities and a selection of the groups that demonstrate up-front their commitment to the program strategy and guidelines (including, among others acceptance of responsibility for ownership, management and operation 75 of systems, financial contribution to capital costs and coverage of all operation and adequate maintenance costs) is the most appropriate. At present the existing institutional arrangement in Azerbaijan cannot initiate immediate implementation of such program in rural areas, and the capacity of the former Azerkend integrated into CHCP is limited in the areas that are most needed for the success of the project, including community mobilization, dissemination of appropriate technologies, interaction with NGOs and private sector actors, mobilization of international funds, and policy and legal reforms. The preparation of a rural water supply and sanitation program would involve the following steps: * Initiate the institutional reforms needed to implement the program, such as clarifying the responsibilities of the central Government and the specific agency that would facilitate the development of the rural water supply and sanitation sector on the entire territory of Azerbaijan; * Explore with donor countries and lFIs interested in supporting the approach described in this strategy and define a joint and coordinated support program; * Define and implement a technical assistance/program preparation program that would, among other activities: (i) support the government agency in charge of the program to develop the human resource capacity needed for implementation; (ii) promote the program among communities; (iii) build capacity at the district level among communities, private sector actors, and NGOs to prepare for the program participation; and (iv) prepare and test tools and methodologies for the demand-responsive approach model; * Establish as soon as possible an interdisciplinary group within the responsible government agency for coordination of program preparation. Establish a steering conmmittee with involvement of NGOs, community representatives, local governments, and private sector to ensure broad involvement of all stakeholders in program preparation; and * Contract with competent advisors and NGOs the necessary facilitation and preparation activities to have a group of communities with demonstrated commitment ready to start activities when the program is initiated. 4. Policy and Human Resource Capacity Program In parallel or as part of the three programs outlined above, the sector stakeholders would greatly benefit from a program of activities aimed at improving the policies of the sector and the human resource capacity in areas identified in this document as important factors for reform in the sector. These areas include: (i) the role of the central Government as facilitator and regulator instead of direct implementing agency; (ii) understanding, monitoring and attending to the needs of the poorest segments of the population; (iii) financial management and accounting of water utilities and community systems; (iv) tariff and subsidy policies; (v) adaptable and appropriate standards and enforcement (environmental, construction, drinking water); (vi) procurement and quality control; (vii) information collection and management for investment decisions and policy formulation; and (viii) management of water utilities, among others. IFIs and donor countries can provide assistance as part of the other sector programs or as independent policy and human resource capacity activities. 76 B. Assistance by the World Bank The World Bank has been an active participant in the water supply sector in Azerbaijan since 1994 when the GBWSR project was approved. This project is co-financed with the EBRD (USD$61 million dollar-equivalent IDA credit and a USD$23 million loan from the EBRD). The main objective of the project is to improve the water supply system of Baku through emergency short-term improvements and institutional strengthening of ARWC. Given the very large needs in the water supply and sanitation sector in Greater Baku, this operation was envisioned as a first intervention to be followed by another operation and funds were included in the project for its preparation. As part of its non-lending activities, the World Bank, in collaboration with ARWC and the EBRD, organized a seminar on the options for private sector participation in water and sanitation services on June 1999. This strategy note is the second non-lending activity of the World Bank in the water and sanitation sector. Persuaded that the reformns suggested in this note will help Azerbaijan to provide adequate and affordable water and sanitation services to its people, the main objective of any assistance by the World Bank would be to support a broad sector reform effort by the Government in a particular segment of the sector (Greater Baku, secondary cities or rural areas). Such approach supports the Bank's three-pronged strategy as identified in the CAS, which is based on: (i) an agenda for radical reform of public sector institutions; (ii) a strengthened regulatory and business environment for private sector development (particularly in the non-oil sectors); and (iii) investment in social development, including targeted poverty alleviation measures. The World Bank is prepared to continue its dialogue with the Government of Azerbaijan on sector reform and to support the immediate steps based on the recommendations made in this sector note. Additionally, the World Bank will explore with the Government the most appropriate segment (or combination of segments) of the water and sanitation sector where its lending and non-lending instruments car, be most effective in supporting the implementation of this strategy. The instruments that can be used, depending on the specific support needed, include loans, guarantees, equity investments, and political risk insurance. In the case of water supply and wastewater services in Greater Baku, the type of instrument depends on the degree of involvement of the private sector. For higher levels, such as a concession, a combination of instruments of the various financial organizations can be considered, including loans and equity investments from the International Finance Corporation (IFC), political risk insurance from the Multilateral Investment Guarantee Agency (MIGA) and possibly IDA credit to finance investments targeted at the poorest segments of the population that would not provide the return on investments required by the private sector. For the secondary cities and the rural areas, the most appropriate instrument would be a standard IBRD loan that would support the sector reform effort through funding of technical assistance and capacity building programs to assist the Government in further defining and beginning to implement the necessary sector reforms. The implementation of reforms may require the design and implementation of learning projects before rolling out at the national level the reforms. The specific scope, objectives and area of the country would need to be discussed and agreed with the Government. 77 Apart from the lending instruments of the World Bank, the implementation of the reforms described in this note may require further assistance through non-lending services, particularly informal short-notes and policy documents on specific topics. Additionally, the World Bank Institute can provide training programs in topics such as economic regulation of water utilities. As there are several IFIs and donors potentially interested in the water supply and sanitation sector in Azerbaijan, it would be important to get an agreement on a sector policy framework arnong the Government and the main international and national development financing institutions to achieve better coordination and effectiveness of sector assistance. The World Bank is ready to participate and support this effort. Selectivity is important in defining the next steps of the World Bank support to the water and sanitation sector in Azerbaijan. The Bank stands ready to support the Government in its effort to bring safe and reliable water supply and sanitation services to the people of Azerbaijan as expeditiously and cost-effectively as possible. This strategy note is a living document and will be updated periodically to refocus the sector strategy as new developments emerge and lessons from implementation of various initiatives are learned. The World Bank is willing to continue supporting the periodic updating of this strategy. C. Detailed Matrix of Recommendations Table 5.1 presents a detailed matrix of recommendations with the responsible party identified and the timeframe for implementation. Institutional and Governance Reform Recommendation Responsibility Timeframe 1. Greater ]Baku Area - Autonomous Full-Service Utility with Private Sector Involvement Objective: to bring rapid improvements in efficiency and quality of service to the water supply and wastewater services of Greater Baku by involving an experienced private utility operator selected competitively 1.1 Legalframework: Finalize and initiate enforcement of legislation to allow utility operators (both public and private) to Central Urgent recover costs and have operational autonomy. government 1.2 Selection of high-quality utility operator: Request technical assistance support to IFIs; contract with competent advisors; Central Short term complete selection of contract form to involve the private sector; prepare bidding documents (including financial and government technical evaluations); use a transparent and competitive process to select utility operator 1.3 Supervision of contract with Operator: Strengthen the capacity of the Government to supervise the contract with the utility Central Short term operator selected; establish agile mechanisms to ensure smooth supervision of the contract and resolution of disputes government and continuous 1.4 Labor: Set up a system to reduce number of employees in water and wastewater enterprises; prepare severance and social Central Short and protection packages; foment creation of small support enterprises for the sector government medium term 1.5 Public awareness: Implement a widespread public awareness campaign to educate the public about the benefits expected Central Short term from the involvement of a private utility operater in the provision of watcr and waste-wutci services, the rapid government improvements they expect to receive and the need to pay their water fees 2. Medium and Small Urban Areas - Autonomous Commercially-Run Utilities Under the Regulatory Control of Local 00 Government Objective: To improve the services provided by the water and wastewater utilities of secondary cities outside the Greater Baku area by initiating a transformation process of these utilities into financially self-sufficient institutions that will eventually be able to attract the private sector to participate in their operation and management 2.1 Decentralization: To implement a full decentralization program of the water and wastewater sector to the municipal level Central and local Medium term of government by confirming the exclusive responsibility of municipal government for the provision of water and government wastewater service, the authority to set tariffs and the obligation for social protection of poor consumers 2.2 New vodokanal structure and role: Improve existing relationships between vodokanals and the CHCP and LEAs; use Central and local Short term performance contracts as a key element of the interaction between utilities and municipal government; implement government, and benchmarking of utilities' performance as key regulatory tool to improve services to the population vodokanals continuous 2.3 Clarify role of Central Government: Set clear roles for the Central Government by establishing an adequate legal and Central Short and regulatory framework. Central Government to be responsible for: (i) inter-municipal regulations; (ii) strategic policies government medium term and development objectives; (iii) consumer protection; (iv) monitoring sector development; (v) providing assistance; and (vi) coordinating financial resources 2.4 The role of consumers: To involve consumers in the sector through: (i) participation in executive boards of utilities; (ii) Municipal Continuous allowing public input into the definition of performance contracts of utilities; and (iii) encouraging open communication government and and disclosure of utilities' performance vodokanals 2.5 Increase involvement of private sector: Regional services (such as billing, laboratory analysis, engineering services, Vodokanals Short term planning, and major repairs) should be done by the local private sector and continuous 3. Rural Settlement and Villages - A Demand Responsive Approach with Community Choice, Ownership and Responsibility Objective: To implement an urgent and substantial institutional and governance reform to confront the under-investment, low- coverage, poor participation and insufficient support in the rural areas that has resulted in extremely low levels of service. 3.1 Communities at the center of the rural water and sanitation sector: Make the necessary institutional and regulatory Central and local Urgent and changes to allow communities to own, manage and help to finance the water supply services through Water User government, continuous Associations communities 3.2 Transform role of Government to program coordinator: The Government will set the policies and strategies that allow the Central Urgent demand-responsive approach to work and monitor their implementation; set up the legal framework for community government ownership of assets and registration of WUAs; provide technical, institutional, and financial assistance; and coordinate donor and IFIs resources 3.3 The private sector and NGOs as service providers: Involve these stakeholders in a variety of activities from civil works to Central and local Short term social intermediation and training of communities government and and communities continuous 3.4 Sanitation and hygiene education: In order to achieve the full economic and health benefits of the rural water supply Central and local Short and program, include sanitation and hygiene education activities not through investments but rather through public awareness, government and medium term education and demonstration initiatives communities Financial Reform Recommendation Responsibility Timeframe 1. Urban Water and Wastewater Utilities Objective: to provide the necessary financial resources to rehabilitate the systems, reach an adequate level of maintenance, and operate the systems in order to provide adequate and affordable water supply and wastewater services to all customers 1.1 Rigorous collection of water and wastewater fees in cash: Resolve the low collection of water and wastewater fees and Central and local Urgent payment in non-cash by: (i) making vodokanals directly responsible for billing and collection, define and implement a government and clear strategy for billing and metering; (iii) set up an effective subsidy program to the truly poor; (iv) cut-off services to vodokanal non-paying customers; and (v) identify unregistered and illegal connection 1.2 Tariff levels for full-cost recovery: Periodically revise tariffs to a fair, equitable, and responsive level to provide sufficient Local government Urgent resources to utilities to cover operations, adequate maintenance and rehabilitation expenses, by: (i) moving gradually towards full cost recovery particularly in the domestic sector; (ii) maintaining tariff setting at the local level; (iii) moving towards a tariff structure that promotes water conservation; and (iv) including all costs (particularly provisions for bad debts and adequate levels of maintenance) in the tariff 1.3 Transparent, targeted and efficient subsidies: Change the current untargeted subsidy system of high cross-subsidy Central and local Short-tern between non-domestic and domestic consumers and the prevalent non-payment attitude, to a subsidy that targets the truly governments poor 1.4 Improved financial management and planning: Implement in vodokanals Government program to change towards Central Short and International Accounting Standards and modify accordingly tax code and tariff setting mechanisms government and medium term vodokanals 2. Rural Water Supply and Sanitation Sector Objective: Establish financial policies that support the demand-responsive strategy to the rural water supply sector by having communities contribute part of the capital cost in proportion to their preferred level of service, and all operations and maintenance costs, while the Government effectively and rationally distributes targeted subsidies 2.1 Government role changed: The increased oil revenues in coming years can effectively be used to expand rural water Central Short and supply coverage but even with increased resources, the needs are so large that communities should be asked to contribute government medium term financially. The subsidies for rural water supply systems should be transparent and under clear pre-determined criteria. 2.2 Community to contributefinancially as owner offacilities: Communities as new owners and operators of facilities to Communities Short and decide on preferred level of service based on their willingness and ability to contribute financially to the project, and medium term cover operations and maintenance costs. 2.3 Private sector and NGO to facilitate financing: to support communities by training in financial management and resource Central Short and mobilization, and by providing robust financing mechanisms and financial intermediation options Government, medium term private sector, NGOs and communities 2.4 Information campaign: As part of the rural water supply program, implement a broad information campaign to ensure all Central and local Short and potentially interested communities are fully aware of the financial conditions and benefits of the program government medium term Technical Reform Recommendation Responsibility Timeframe ° Objective: to reform the approach to the technical aspects of water and wastewater systems to reduce operational costs and improve system efficiency and quality of service through well-selected investments 1. Metering as a tool to reduce consumption, wastage and operational costs and improve revenue collection: To develop and Vodokanals and Short and implement a metering strategy accompanied by: (i) a new billing approach based on metered values; (ii) tariff levels rural communities medium term sufficiently high to induce consumers to waste and use less water; and (iii) rigorous collection of bills. The metering program should not be initiated without an immediate adjustment to the tariff policies and consumption norms. The implementation of the metering strategy should be staged beginning with the largest consumers and areas of high wastage. In rural areas, the communities should be trained on the benefits, operation and maintenance of meters and their direct relation to financial resource collection. 2. Improvement of operational efficiency to reduce costs: To increase supply of water by reducing network leakage; to Vodokanals and Continuous improve the hydraulic efficiency of piped networks; to reduce energy consumption of pumping stations and treatment rural communities plants; to enhance maintenance expenses in order to increase life of facilities; to ensure proper pretreatment of industrial wastewater; to find appropriate and low cost solutions for urban fringe areas; to consider appropriate sanitary solutions when choosing the technical specifications of a water supply system; and to include source protection in investment planning 3. Cost-effective selection of investments: to concentrate funding in the water supply and sanitation sector on: (i) improving Vodokanals Continuous the safety and reliability of water supply services; and (ii) reducing operating costs by investing in high payback investments. To avoid long construction periods and complete projects as soon as possible. To use least-cost analysis to determine expansions (if truly needed) Service Reform Recommendation Responsibility Timeframe Objective: to change the objectives and incentives of the water and wastewater service providers from construction and planning to providers of adequate and cost-effective services to their customers 1. Services to the poor: To avoid using the excuse of the poor to delay implementation of the necessary financial reform. Central and local Short term Instead, to improve the information on the needs of the poor in water supply services; to make specific policies and to set government and and rules to target the poor communities and vulnerable groups; to give a voice to the poor in the sector; to design subsidies to vodokanals continuous benefit the truly poor without penalizing the vodokanals; to involve the women in the sector. 2. Set up adequate standards for water supply and wastewater services: To avoid overly strict and unfeasible drinking water Central Short and quality, facility design, wastewater treatment, and level of service (particularly consumption norms) government medium term 3. Improve human resource capacity of the sector: particularly in financial aspects of utilities, modern technology to reduce Central and local Urgent and operational costs and improve efficiency and level of services, regulation of the sector, policy development, facilitation, government, continuous demand-responsive approaches, community participation, and private sector development. vodokanals, rural communities, private sector and NGOs 4. Consider protection of the environment as a service of the sector: To improve planning, regulations, and policies in the Central and local Medium term water management and environmental protection and to make them more coordinated with the policies and reforms of the government and and water supply and sanitation sector, including reform of unattainable norms and standards, set up of an effective water vodokanal continuous management at a national level, and to pool resources for investments in the critical environmental priorities (avoiding °° investments in advanced treatment). To strengthen control of effluent discharges from industry both into municipal wastewater treatment systems and into the environment. To strengthen environmental capacity in vodokanals Annex1 Page 1 of 2 ANNEX 1: AZERBAIJAN AT A GLANCE PcMWERaYnd SOCII CenIrsi Law.- A=rbWuIMe Asia income I eMopniert daiirnd log Pop&ifaUon, nmd-year (rrivias) 7.9 473 3,515 Ut e e>petancy GNP percaptta (AbIas nx&Wt US$t 490 2.190 520 GNP (AU smoft L5$Wkc) 3,9 1,039 1,844 Avarge WmOA WV l992.9 Laborfs (M(914 1.5 0.6 1.9 GNP _ _Gross ~~~ 92-96) ~~~~~~~~~~~per 0rolesi FvR-ty (%lotpq.atirnbebwrtiwmt-fportylir-) 88 LJrbanpoN.ation, (%o(toWpqxi4a&0) 57 68 31 LUfepoa-cyatbrth (yeas) 71 69 63 itrarsn-ortASy (Pee 1,0001AeLifrfJ) 20 23 69 Child natraition (0/0cddVJkknQt?5) 10 Access to safe v%eter Acoess to sae met (% .o'pqiakfr~) 74 Illiteracy (% 0o(p piAtkr age 15,-) .. 4 32 GcEspnn"ryWrInwt (%0f$1kV&pA1*r ICE 102 102 -bi- rMie 102 101 113 Lomtinrrxnwgmro Femrale 105 99 102 KEY ECOONMC RATIOS aid LON.TEWTF0V 1977 1987 1997 19ow Econcric ratios' GDP aMiLA.$tUit) -. R 3.4 3.9 Gross duiMstc invesfrraWGOP.. 37.0 40.0 Eotaois of grodcs ard wcsarIo/GCP .29.9 24.5 Trade Gcecm ftigsc savJnWsGDP . . 12.3 5.6 Gross nalonal swvigsGDP . 13.2 6.8 Current aaont balanca/GIDP .. . -2.6 34, Irteres paynrals'GDP 0.0 0.3 0.2 lrIvestnient Total debt/GDP -. . 14.6 151 Svig Total debtrvic6e'aqpott (. . 6 8.7 Present valu Of debt/GDP . . 10.2 Presr Ivaueof debt/exports . . 31.9 1977407 19689 1997 199 19994 (av'eragexrnla/got4# GOP -. -11.5 58 10.0 a9 zea GNJPpercapft - -12a5 a9 8.7 27 Loavrimmrgro Exports ofg0ods andservice . 53.6 22.1 6.2 STFNUCTLIFE of the ECONOMY (1/- of GDP) ~ ~~~1977 1987 1997 1998 Gkowth rates of output aid invwuerstmet Agicultur . . 22.1 20.9 IndLusty . .. 42.4 46.3 Mt acuaduring . .. 9.6 7.2 500 servc . . 35.6 32.7 Private comjnTition . .. 75.6 83.4 6x 93 94 95 97 9, General gewnt crsunption .. 12.1 11.0 Irrports of goods and sermces .. 54.5 58&9GD (a-eage xeg-)1977.97 1988.98 1997 1998 Growth rates of expoirts and inWports(% Agricuture . -6.7 3.9 60 indugtry .. 16.8 19.9 40 Maiferactuiring .. -64.8 -17.7 { Serviess. 8.9 0.9 20 Prvate cnwrrpnon .. -11.3 12.7 c Genera gvenTarrfl xnsurrpon . .. 26.7 -7.4 93 9 95 m 97 98 Gos dme0fc irvesfrrerl . . 34.8 151 -2 lirports of goods and serAices . .. 15.7 20.6 -- q"B s inowls Cross riationlal prcdtx ..11.5 5.9 9.9 Note: 1998 data are preirinarsy estirEates. -The darm-jds shnwtfour kLy irdostors in ftie untry (in borQ csnWede Wthu it ircrre-grot average. If data ar misa~ng, the darrersi WII be inoorrpletea Annex 1 Page 2 of 2 - A2 - PRICES and GOVERNMENT FINANCE 1977 1987 1997 1998 Inflation (%) Domestic prices 1,o (% change) tOSO Consumer pices .. .. 0.5 .. 1,000. Implicit GDP deflator .. .. 6.2 -5.7 sr, - Government finance (% of GDP, includes current grants) 93 94 95 96 97 90 Current revenue . .. 19.7 17.3 -50o Current budget balance .. .. 0.2 -2.3 - GDPdeflator CGPl Overall surplus/deficit .. -1.7 -4.2 TRADE (UJS$ millions) 1977 1987 1997 1998 Export and import levels (US$ millions) Total exports (fob) .. .- 808 678 2.000 Crude oil from new fields .. .. 16 133 Petroleum products .. .. 464 285 1,500. Manufactures .. .. 78 57 Total imports (cit) .. .. 1,444 1,791 OD0 - Food . .. 181 175 nj Fuel and energy . 79 63 Capital goods . .. 475 791 Export price inde*1995=100) . .. 103 66 92 93 94 95 96 97 go Import price indeg1995=100) .. .. 99 95 *Exports * Imports Terms of trade'1995=100) .. 104 69 BALANCE of PAYMENTS 1977 1987 1997 1998 Current account balance to GDP ratio (%o) (US$ millions) Exports of goods and services .. .. 1,150 1,010 10. Imports of goods and services .. 2,101 2,425 l Resource balance ., -951 -1,415 o Net income . .. -9 -13 -10- Net current transfers 45 64 -20 - Current account balance . . .. -916 -1,364 -30-- Financing items (net) .. .. 1,079 1,291 -3 Changes in net reserves .. .. -163 74 -40- Memo: Reserves including golpJS$ millions) .. .. 467 449 Conversion ratE(DEC, local/US$) 0.2 4,451.3 4,058.3 EXTERNAL DEBT and RESOURCE FLOWS 1977 1987 1997 1998 (US$ millions) Composition of total debt, 1998 (US$ millions) Total debt outstanding and disbursed .. .. 504 593 IBRD .. . 0 0 F 25 IDA .. .. 116 178 E:11 Total debt service 77 91 D: 178 IBRD IDA 1 Composition of net resource flows Official grants . . .. 30 Official creditors . . . 25 1 Private creditors .. .. 8 17 Foreign direct investment .. . 1,051 948 Portfolio equity I 0 c: 303 World Bank program A- IBRO E - Bilateral Commitments .. 0 40 B - IDA D - Other multilateral F - Pivate Disbursements .. . 55 63 C - IMF G - Short ter Principal repayments .. .. 0 0 Net flows .. .. 55 63 Interest payments .. .. 0 1 Net transfers .. .. 55 62 Development Economics 9/22/99 ANNEX 2: SELECTED TECHNICAL DATA ON WATER AND WASTEWATER UTILITIES OF SECONDARY CITIES AND SMALL TOWNS Water Sewerage Town name Source of Water Design Capacity Population Target level of Availability of Availability of Availability and Type of Systems (000 served (000) service (Ipcd) water treatment Sewerage Collection of Wastewater m /year) (1) (2) plant (3) System Treatment (4) Agchabedi 7 artesian wells, underground 288 26.5 30 NO NO NO water (Garhar river) Agdash Turyan river - drainage system, 601 24.4 67 NO YES OWN 6 artesian wells Agstafa 6 artesian wells, underground 315 10.5 82 NO YES NO water _ Agsu Girdiman and Agsu rivers, 750 15.3 68 NO NO NO surface water (Girdiman channel)_ Ali-Bayramli Kura river through Demiryol 10,120 62.9 95 NO YES NO channel(treated water) _ Apsheron ARN1WC 1,752 35.0 137 NO YES BWD Astara Astara river, drainage system 500 13.2 29 NO NO NO Balaken Siltik and Gara rivers, 6 artesian 300 8.9 92 NO NO NO wells _ Barda 48 artesian wells on Terter river 2,246 32.0 41 NO NO NO Beylagan 2 artesian wells (due to war Mil 420 13.2 13 NO NO NO channel closed) _ . Bilasuvar Azizbeyov channel (Araz river) 804 19.7 19 NO NO NO Chalilabad 6 artesian wells 500 27.0 60 NO NO Dashkesen Underground and surface water 500 10.6 40 NO YES NO Devechi ARWC 1,380 19.8 137 ARWC NO NO Gakh Gimrikh river -drainage system 450 12.0 64 NO NO NO Ganja Underground water,167 artesian 20,499 285.6 140 NO YES OWN wells Gazakh Agstafa river - drainage system, 1,123 19.6 35 NO YES OWN underground water, 15 artesian wells Gebele underground water, 462 13.5 40 NO NO NO Demiraparan river, drainage 9 system, 7 artesian wells ._CD _ Gobustan Gozlu river, drainage system 65 2.1 95 NO NO NO _ x 0 4s1 ANNEX 2: SELECTED TECHNICAL DATA ON WATER AND WASTEWATER UTILITIES OF SECONDARY CITIES AND SMALL TOWNS Water Sewerage Town name Source of Water Design Capacity Population Target level of Availability of Availability of Availability and Type of Systems (000 served (000) service (lpcd) water treatment Sewerage Collection of Wastewater _ ____________________________ m3/year) (1) (2) plant (3) System Treatment (4) Guba Gudnal river, drainage system, 1,267 21.7 75 NO YES CANNERY underground water, 1 artesian FACTORY hole Gusar Gusar river -drainage system, 2 660 14.8 70 NO YES CANNERY artesian wells FACTORY Imayilli Ah-Oh river -drainage system, 252 12.7 82 NO YES OWN underground water, 4 artesian wells Imishli 4 artesian wells 27 775.4 74 NO NO NO Jardimli Vilesh river - drainage system, 196 3.6 3 1 NO NO 8 artesian wells Jevlakh Kura river - pumping, 10 428,100 48.1 85 YES YES OWN ______ __ artesian wells Kedebey Underground and surface water 204 7.2 35 NO NO NO Khachikabul ARWC 1,146 21.8 127 ARWC NO NO Khachmaz Underground water, Gudman 1,242 28.7 162 YES CANNERY river - drainage system FACTORY Khanlar Ganja river -drainage system, 694 16.0 110 NO NO underground water Khili Kura river (without treatment 38 3.6 70 NO NO NO Khizi Underground water, Samur- 540 6.5 50 YES NO NO Apsheron channcl (treatment) Khudat 4 artesian wells 264 11.1 99 NO NO Koranboy Kura river - surface water 385 6.4 147 YES NO NO (treatment), 19 artesian wells Koy-chay Underground water, 13 artesian 1,100 32.5 120 NO YES OWN wells Kurdamir Shirvan channel (treatment) 321 15.8 52 YES YES OWN Lenkeran Bashir river (treatment), 5 1,100 28.9 110 YES YES OWN artesian wells .DD >e L erik Surface water (Zuvan river) 97 0.5 30 YES NO NO 0 ANNEX 2: SELECTED TECHNICAL DATA ON WATER AND WASTEWATER UTILITIES OF SECONDARY CITIES AND SMALL TOWNS Water Sewerage Town name Source of Water Design Capacity Population Target level of Availability of Availability of Availability and Type of Systems (000 served (000) service (lpcd) water treatment Sewerage Collection of Wastewater m3/year) (1) (2) plant (3) System Treatment (4) Mingechevir Kura river (treatment) 19,036 93.3 183 YES YES OWN Naftalan Underground water, 16 artesian 780 8.2 158 YES OWN ________________ wells _ Neftchala concession 15.2 YES NO Oguz underground water 270 5.2 65 NO NO Saatli Surface water (Araz river) 180 15.0 28 NO NO Sabirabad Kura river 1,801 14.2 186 YES OWN Salyan Kura river (treatment) 1,113 30.9 125 YES YES OWN Samukh 27 artesian wells 500 4.9 50 NO NO Shamakhi Underground water, Pirsaat 443 25.7 26 NO NO river - drainage system Sheki Surface and underground water, 4,650 5,805.0 217 YES YES OWN 15 artesian welis Shemkir Cheyir river -drainage system, 1,440 29.0 70 NO NO underground water, 6 artesian wells Siyazan ARWC 1,396 19.5 116 YES OWN Sumgayit ARWC 72,267 241.6 340 ARWC YES PARTIAL __________ ________ INDUSTRY Ter-ter 17 artesian wells 1,100 13.2 94 NO NO Tovuz Underground water, 7 artesian 430 13.6 25 YES NO wells Uchar Uchar and Demiryolu rivers, 910 15.0 24 NO NO Shirvan channel Zakatala Tala river -drainage system, 14 632 18.5 75 NO YES OWN artesian wells Zerdab Surface water (Kura river) 253 58.0 9 YES NO NO Zeynalabdin ARWC 3,079 17.0 ARWC YES NO Tagiyev town _ e_ _ Nakchivan Republic m D Nakhchivan city 4,830.0 | 63.0 76.7 YES I YES OWN rx Julfa 2,160.0 36.0 60.0 YES YES OWN ANNEX 2: SELECTED TECHNICAL DATA ON WATER AND WASTEWATER UTILITIES OF SECONDARY CITIES AND SMALL TOWNS Water Sewerage Town name Source of Water Design Capacity Population Target level of Availability of Availability of Availability and Type of Systems (000 served (000) service (Ipcd) water treatment Sewerage Collection of Wastewater m3/year) (1) (2) plant (3) System Treatment (4) Ordubad 540.0 41.0 13.2 NO NO NO Sharur city 565.0 7.0 80.7 NO YES OWN Shahbuz 300.0 20.0 15.0 NO NO NO Sharur region 200.0 111.0 1.8 NO NO NO Notes: (1): There is no metering of production and the only information available corresponds to the original capacity of the systems per their original designs. The actual production capacity is in most cases smaller than the stated capacity. (2): This number is usually called consumption per capita. However, the prevalent lack of metering means that this number is actually a target for level of service based on design capacity and population served. As the actual water production is smaller, this target should be seen as a higher limit (3): This column refers only to water treatment plants and not to disinfection facilities. Cells with ARWC indicate that treated water is provided by ARWC (4): Information on operational situation of treatment plants was not available X r mP -Ps 0 4- ANNEX 3: SELECTED FINANCIAL DATA ON WATER AND WASTEWATER UTILITIES OF SECONDARY CITIES AND SMALL TOWNS Total billings Total Domestic Operating Domestic Average Total Billings Total Domestic Operating (OOOAZM) Billings Expenses Tariffs Operation Cost (000AZM) Billings Expenses ._________ ___ ~(OOOAZM) (OOOAZM) (AZM/m3) (AZM/m3) (1) (000AZM) (000AZM) Agchabedi 111,877 45,840 130,659 493 714 Agdash 213,880 71,400 212,680 700 477 40 - 40 Agstafa 39,932 25,966 38,988 76 81 14 8 13 Agsu 70,274 27,769 69,574 231 271 Ali-bayramli 984,840 431,759 1,174,199 120 326 766 110 540 Apsheron 369,231 104,860 357,500 40 119 510 230 480 Astara 45,939 14,595 45,589 103 152 Balaken 42,193 16,575 41,919 95 129 Barda 679,832 569,974 676,132 305 330 Beylagan _ _ _ ___ Bilasuvar 297,901 110,856 294,961 315 421 Dashkesan 107,150 65,926 105,092 166 179 55 31 53 Devechi 636,646 211,954 615,964 199 469_ Gakh 135,787 27,635 132.524 142 33111 Ganja 7,174,081 957,900 7,124,941 133 569 1,148 604 1,130 Gazakh 124,480 26,032 124,480 46 100 42 17 42 Gebele 39,830 6,250 39,620 37 154 Gedebey 51,047 - 50,979 - 283 Geranboy 94,208 36,529 93,978 214 252 Gobustan _ _ _ __ Goychay 419,660 151,020 328,096 510 399 76 20 75 Guba 393,802 113,741 392,754 204 296 175 70 173 Gusar 213,013 100,361 209,571 285 318 91 53 90 Imishli 129,860 24,300 127,720 76 195 Ismayilli 46,547 14,823 46,455 110 201 19 9 19 Jalilabad 155,220 30,000 143,720 240 303 _ - Khachmaz 261,522 94,446 213,248 __ 89 108 95 37 64 Khajikabul 731,153 219,232 696,251 259 470 Khanlar 375,500 141,977 365,542 226 380 Khili 18,958 11,484 18,405 191 167 Khizi . _ 9,678 _ _ Khudat 56,744 60,571 44,963 188 105 Kurdamir 163,607 32,331 161,739 274 613 34 11 34 0 Lenkeran 215,567 79,006 209,372 148 197 92 32 90 D x Lerik 13,620 4,900 31,374 89 241 . _ o _ ANNEX 3: SELECTED FINANCIAL DATA ON WATER AND WASTEWATER UTILITIES OF SECONDARY CITIES AND SMALL TOWNS Total billings Total Domestic Operating Domestic Average Total Billings Total Domestic Operating (OOOAZM) Billings Expenses Tariffs Operation Cost (00AZM) Billings Expenses (OOOAZM) (OOOAZM) (AZM/m3) (AZM/m3) (1) (OOOAZM) (OOOAZM) Mingechevir 1,196,736 217,495 967,349 38 69 1 0 1 Naftalan 202,617 80,814 202,415 334 368 89 30 89 Oguz 89,280 34,923 69,089 233 293 Saatli 84,166 31,605 76,595 200 269 Sabirabad 1,094,623 410,400 1,094,223 600 678 82 38 82 Salyan 437,000 306,800 433,770 487 542 154 96 154 Shamakhi 179,907 61,775 178,572 249 429 63 22 62 Shamkir 144,854 57,056 143,354 78 124 Sheki 288,636 141,072 270,021 77 88 67 42 63 Siyazan 905,160 261,134 904,695 350 639 61 - 61 Sumgayit 44,540,933 3,106,035 45,094,388 84 686 7,829 186 6,725 Tagiyev 2,579,614 236,412 2,558,210 185 612 236 15 183 Terter 249,405 102,188 244,699 236 285 Tovuz 163,590 90,971 160,421 186 208 31 21 27 Ujar 329,185 95,642 303,908 360 375 Yardimli 66,407 8,000 60,407 63 263 Yevlakh 157,773 78,886 1,556,433 105 1,292 68 22 67 Zagatala 238,885 125,570 238,845 350 408 86 30 86 Zardab 122,361 57,724 120,199 326 483 1 III. Nakchivan Republic Nakhchivan 168,031 87,500 167,808 33 35 80 41 80 city, Julfa 40,135 41,000 40,116 36 19 14 0 14 Ordubad .1,500 1,500 1,500 3 3 Sharur 20,250 8,600 20,236 75 36 20 0 20 Shahbuz 20,267 400 19,241 3 64 Sharur region 26,867 - 24,667 - 123 1 Notes: Financial data for 1998 (1) Calculated based on unmetered billed volumes (2) No information on collection or cash collection available OQ 0 x 0 ANNEX 3: SELECTED FINANCIAL DATA ON WATER AND WASTEWATER UTILITIES OF SECONDARY CITIES AND SMALL TOWNS CHCP Financial Data (MM AZM) Accounts Value of goods and Estimated Estimated Value of goods Estimated Cash Cash Accounts receivable for services provided Collection Collection and services Collection Collected Collection payable for services provided (inc. VAT) Ratio (exc. VAT) Ratio Ratio goods and services CHCP-1997 85,613 78,123 CHCP-1998 132,548 95,261 48,326 51% 79,486 41% 11,783 15% 121,651 CHCP-1999 178,159 94,433 48,823 52% 78,693 42% 12,599 16% 160,340 CHCP Financial Data (MM USD) Accounts Value of goods and Estimated Estimated Value of goods Estimated Cash Cash Accounts receivable for services provided Collection Collection and services Collection Collected Collection payable for services provided (inc. VAT) Ratio (exc. VAT) Ratio Ratio goods and serviccs 1997 22 0 0 20 1998 34 24 12 20 3 31 1999 41 22 11 18 3 37 Notes: This table shows integrated financial data of water and wastewater utilities of secondary cities and small towns, as provided by CHCP. x X tD IX ANNEX 4: SELECTED TECHNICAL DATA ON WATER SUPPLY SYSTEMS IN RURAL AREAS MANAGED BY CHCP (FORMERLY MANAGED BY AZERKEND) Groups of water supply system Year of Design Capacity of Population Number of construction Systems (000 served settlements m3/year) (1) served Khachmaz (Khachmaz district) 1978 22,000 100,000 30 Ucar (Ucar and Goycay districts) 1981 16,500 100,000 30 Sabirabad (Sabirabad and Saatli districts) 1980 47,100 280,000 80 Salyan (Salyan, Neftchala and Beylagan districts) 1985 50,000 240,000 40 Lenkeran (Lenkeran and Astara districts) 1987 40,000 60,000 30 Naxchivan (Sederek, Sherur, Babek and Ordubad districts) 1981 48,900 250,000 70 Gazakh (Gazakh and Akstafa districts) 1988 10,000 70,000 30 Karabakh (Ter-Ter, Agdara, Yevlakh and Barda districts) 1987 8,500 45,000 16 Gakh (Gakh district) 1987 10,000 40,000 20 Mil (Imishli, Beylagan, Fizuli, Chabrayil and Zangilan 1981 74,200 350,000 130 districts) Shirvan (Kurdamir and Sabirabad districts) 1987 50,000 40,000 20 South Salyan winter grassland water supply 1988 4,500 Centre Shirvan winter grassland water supply 1985 6,200 Imishli-Saatli winter grassland water supply 1986 4,200 Imishli-Beylagan winter grassland water supply 1986 4,000 Notes: (1): There is no metering of production and the only information available corresponds to the original capacity of the systems per their original designs. The actual production capacity is in most cases smaller than the stated capacity. (D ANNEX 5: SELECTED FINANCIAL DATA FOR ARWC Year Accounts Accounts Billings Accounts Collected Collection Cash Cash Accounts % of Total Receivable Payable (MM Receivable as Revenues Ratio (%) Collection Collection Payable to Payables Owed (MM AZM) (MM AZM) Months of (MM AZM) (MM Ratio (%) Azer Energy to Azeri Energy AZM) Billing AZM) (MM AZM) 1993 686 406 1,411 6 1994 12,391 11,032 18,870 8 7,165 38% 7,300 66% 1995 86,186 129,439 177,075 6 55,265 31% 11,769 7% 111,987 87% 1996 210,626 252,071 204,801 12 93,660 46% 15,037 7% 201,727 80% 1997 270,256 350,811 200,163 16 132,212 66% 39,883 20% 273,262 78% 1998 390,151 476,649 199,550 23 129,610 65% 33,457 17% 333,334 70% 1999 456,651 197,009 28 130,509 66% 47,159 24% Year Accounts Accounts Payable Billings Collection Cash Accounts Payable Receivable (MM (MM USD) (MM USD) (MM USD) Collection to Azer Energy USD) (MM USD) (MM USD) 1993 3 2 7 1994 13 11 19 7 8 1995 19 29 40 12 3 25 1996 51 61 50 23 4 49 1997 69 90 51 34 10 70 1998 100 123 51 33 9 86 1999 105 45 30 11 P)> x 0n ANNEX 5: SELECTED FINANCIAL DATA FOR ARWC ARWC Tariffs (AZM/m3) Year Domestic Domestic Budget Org Industries Commercial (USD/m3) 1993 2 0.01 15 15 1994 18 0.02 150 315 1995 24 0.01 800 1785 1996 150 0.04 800 1785 4200 1997 185 0.05 800 2200 5200 1998 185 0.05 800 2200 5200 1999 185 0.04 800 2200 5200 IV. ARWC Collection by Type of Customers 1998 1999 Domestic 31% 36% Industrial 100% 74% Budget organizations 70% 136% Commercial 87% 115% Wholesale to other VKs 44% 36% TOTAL 66% 66% ARWC Collection for 1999 (MM AZM) Collected Cash & Bank Barter Offset Cash & Bank Barter Offset Transfer Transfer Domestic 16909 13585 42 3281 80% 0% 19% Industrial 45075 15883 1720 27470 35% 4% 61% Budget organizations 40712 8250 121 32340 20% 0% 79% Commercial 9488 8821 282 384 93% 3% 4% Wholesale to other VKs 18323 545 1680 16024 3% 9% 87% TOTAL 130507 47084 3845 79499 36% 3% 61 % e d Oq ND 0 ANNEX 5: SELECTED FINANCIAL DATA FOR ARWC ARWC Expenses (MM AZM) Total Energy Material Water Personnel General Depreciat Other Purchase Maintenance ion 1995 140,267 97,209 12,557 10,937 8,553 4,027 1737 5,247 1996 191,680 99,228 19,152 18,164 11,916 12,406 6559 24,255 1997 198,713 95,276 22,502 28,129 12,760 8,731 22009 9,306 1998 196,499 87,384 19,066 28,813 14,948 12,689 32569 1,030 1999 182,150 73,212 10,7521 33321 ARWC Expenses (% of Total) 1995 100% 69% 9% 8% 6% 3% 1% 4% 1996 100% 52% 10% 9% 6% 6% 3% 13% 1997 100% 48% 11% 14% 6% 4% 11% 5% 1998 100% 44% 10% 15% 8% 6% 17% i% 1999 100%1 40%[ 6%1 0%[ 0%t 0%[ 18%- 0% ARWC Expenses (MM USD) 1995 31.59 21.89 2.83 2.46 1.93 0.91 0.39 1.18 1996 46.59 24.12 4.66 4.42 2.90 3.02 1.59 5.90 1997 51.08 24.49 5.78 7.23 3.28 2.24 5.66 2.39 1998 50.51 22.46 4.90 7.41 3.84 3.26 8.37 0.26 1999 41.95 16.86 2.48 0.00 0.00 0.00 7.67 0.00 x 0 Mi Annex 6 ANNEX 6: Incidence of Water-Borne Disease In Azerbaijan Republic Nature of Infection 1994 1995 1996 1997 1998 Typhoid 105 84 76 34 18 Bacterial dysentery 1,655 1,173 761 606 533 Viral hepatitis 12,880 76,878 6,259 8,423 4,335 Ascariadiasis 40,715 33,599 33,731 31,641 Trichthephalidos 20,568 16,626 15,193 14,277 Enterobiasis 40,344 44,260 35,724 35,095 Hymenalepidosis 782 542 167 77 Source: Ministry of Health Annex 7 ANNEX 7: ORGANIZATIONAL STRUCTURE CHCP First Deputy Chairman Deputy Chairman Deputy Chairmana Economic and Labor and Technical Household Accounting Human Social Protect. Renovation Communal and Report. Recourses Financial Dept Dept Dept Propertv D Dept Dept 12 38 Assembly - Technical PU 185 Nakchivan State CHCP 2106 98 3846 71 Specialized Construction Trust for Ganja 4 Azer Water Cannel & Repair PU 303a | city 32 70 Specialized Construction Installation I Heating Power Distribution PU 822 Department for Lenkeran 50 2689 DprmnfoLekan41 1247 Specialized Repair Construction Trust for I Industrial Repair/Construction PU 1125 Mingachevir 30 Administration of Enterprises under I Project Repair Construction Umon f 376 1 construction 8 Sabirabad Uo r I Samukh r egion Flower Growing Small I Project Research Institute 38 Enterprise 5 70 _ nerrs State Inspection on Small Ships 18 Asphalt Concrete Plant in Mingechavir 10 State Administration on Technical 43 Standards and Property Rights 465 PUs & Communal Enterprise Plants of 114 Registration 2051 Household Communal Property in cities & 8306 regions of the country 12628 Specialized Construction-Installation PU for Baku city __ 1st row Number of enterprises 2nd row Total number of employees 3rd row Annual turnover PU - Production Union NUMBER OF CHCP OFFICE STAFF: 32 Note: All water and wastewater activities are under the Azer Water Channel and Repair PU Annex 8 ANNEX 8: PARTICIPANTS IN THE MAY 5,2000 WORKSHOP FOR REVIEW OF THE WATER SUPPLY AND WASTEWATER STRATEGY 1. Shair Hasanov, Chairman, the Committee for Housing and Communal Property 2. Oktay Asadov, President, Apsheron Regional Water Company. 3. Enver Manafov, Head of Urban Department, the Cabinet of Ministers 4. Etiram Mamedov, Deputy Chairman, the Committee for Housing and Communal Property 5. Mamed Aliyev, General Director, "Azerwaterchannelrepair" PU 6. Telman Agayev, Vice-President, Apsheron Regional Water Company. 7. Farukh Dadashov, Head, Capital Construction Department, the Ministry of Economy 8. Mekhman Shekheliyev, Head of Division, the Ministry of Finance 9. Namik Gasanov, Department of Natural Monopolies, the Antimonopoly Committee 10. Ibrgim Ashrafov, Department of Natural Monopolies, the Antimonopoly Committee 11. Rafael Akhundov, Deputy Chairman, the Irrigation Committee 12. Akif Mustafayev, Head of Department, the Irrigation Committee 13. Elmir Abdullayev, Investment Planning Manager, Agency for Reconstruction and Rehabilitation of Areas 14. Gardashkhan Alyiyev, Head of the Directorate of Constriction Enterprises, the Committee for Housing and Communal Property. 15. Khidayat Guliyev, Head of Production Department, the Committee for Housing and Communal Property. 16. Tevfik Yaprak, Resident Representative in Azerbaijan, The World Bank 17. Nicolas Mathieu, Senior Country Officer, Azerbaijan Country Team, The World Bank 18. Jan Drozdz, Infrastructure Program Team Leader on Azerbaijan, The World Bank 19. Ede Ijjasz, Water Supply and Sanitation Specialist, The World Bank 20. Farid Mamedov, Operations Officer, The World Bank Annex 9 Page 1 of 5 ANNEX 9: FREQUENTLY ASKED QUESTIONS AND ANSWERS CONCERNING PRIVATE SECTOR PARTICIPATION IN THE PROVISION OF WATER SUPPLY AND WASTEWATER SERVICES This Annex summarizes in a question and answer format some of the key recommendations for the institutional reform in Greater Baku, as discussed in Section IV.A.1 of the Strategy. 1. What are the most common reasons for involving the private sector in the provision of water supply and wastewater services? The Government would have four main reasons for contracting the water supply and wastewater services in Greater Baku wi.th private operators. First, a private operator will bring higher efficiency and know-how. An international utility operator would have solved similar problems to those currently facing Greater Baku. Also, it would not face the same constraints of ARWC and BWD as public enterprises. The value of information and managerial experience in the water supply and wastewater industiy is very high. Second, through the higher efficiency in collections and in reduced costs, a private operator will be able to produce operational surpluses where government monopolies are currently operating under significant deficits that either require operational subsidies or result in a rundown of infrastructure assets until their collapse; Third, a private operator will also bring its own sources of finance. Under a lease contract, the operator finances working capital that may amount to about 5% of the fixed assets replacement cost. Under a concession contract, the private concessionaire is responsible for all new investment. Fourth, the separation between regulation and private sector providers will likely make the Government function better as regulator and become more vigilant regarding the relationships between quality of service and consumer charges. A private operator contract will bring out the analysis and allocation of risks that are often absorbed (and usually not very well attended to) by the government operators. 2. What are the basic ingredients for successful implementation of private sector participation in the water supply and wastewater services of Greater Baku? There are five key factors for success. First, a strong sustained political support. Overcoming entrenched interests in the status quo, making substantial changes in institutional arrangements, dealing with possible staif redundancies and administering complex contracts all require strong political leadership. Second, the prospect of a sustainable cash flow from the operation of the water supply and wastewater services is a necessary condition to attract qualified international operators. For this reason, a predictable tariff regime is the single most important factor for prospective bidders when they consider entering into a lease or concession agreement. This requires that for the contract period, tariffs (sometimes supplemented by targeted subsidies) are sufficient to cover operating costs anid the lease fee or an adequate return on investments in the case of concessions. Therefore, the tariff adjustment mechanism is clearly specified in the contract with the private operator. Third, worldwide experience has repeatedly demonstrated that the most efficient way to get both the best price and the most qualified operator is through international competitive bidding. Further, because of the experience gained with the large number of contracts now initiated across the world, the bidding process is now often completed in under 12 months. Fourth, one of the most effective methods to ensure performance of the operator is to clearly define in the contract document specific targets for performance. The operator should know in advance that there are both incentives for exceeding the specified targets, as well as sanctions for failing to meet the agreed minimum levels of performance. Fifth, the regulation of the operator's contract should be done on a periodic basis and emphasize meeting the contract standards and verifying the monitoring indicators. This implies that the Annex 9 Page 2 of 5 regulatory agency in Azerbaijan would have a small, but competent, staff supported by private companies specialized in monitoring performance and certifying compliance with contractual requirements. The regulatory agency would not be in charge of sector policies, which are most properly handled by higher levels of government. 3. What are the preferred private sector options for Greater Baku? As discussed in Section IV.A.1, the proposed Government strategy to merge the provision of water and wastewater services under a single company would be beneficial, as there will be significant economies of scale and the planning can be rationalized. The integration of other urban centers in Greater Baku to the contract with the private sector would also be greatly beneficial, as these systems are effectively integrated into the water production and treatment of Baku city. With a larger service area, private international operators of higher quality and experience would be attracted to invest in the Greater Baku system. As part of the preparation of this strategy, the various options for private sector participation (as summarized in Box 4.2) were analyzed in the context of Greater Baku. The service and management contract options are not recommended in the Greater Baku context. Based on the Bank's international experience, it appears that such contracts would be too costly (around US$3 million per year in fees) and would transfer very limited risks to the private sector which will bring no investment money. A BOT option is also not recommended. The only possible investments that could fall under this category would have been the rehabilitation of the water treatment plants or a transmnission line. As these investments are not required because they are included in the Greater Baku Water Supply Rehabilitation Project, the BOT option is not adequate to solve the main problems of Greater Baku, namely the water distribution network and the financial viability of the company. The two remaining options (lease and concession) are reconmmended for further analysis in the Greater Baku context. Under a lease, the Government remains responsible for further capital investment, but the private utility operator manages and operates the system. The operator is in charge of day-to-day operations, directly manages the cash collected, supervises employees, and is remunerated on a fixed fee financed from the revenues generated, often with a performance bonus based on achievement of pre-defined targets. Lease contracts are typically of 8 to 15 years of duration. A lease arrangement is Baku requires tariffs to be raised at least to the point where operating and adequate maintenance expenses are fully covered. As the current tariffs only cover basic operations and minimum maintenance expenses, an increase would be required as well as a pre-defined review mechanism to ensure adequate resources of the water company. Additionally, a commitment from the Government to pay water fees for budget organization and the authorization to disconnect non-paying customers are also pre-conditions for success. As the improvements that a lease arrangement is expected to bring in terms of reduced operational costs are substantial, the increase in tariffs would not be very large (tracking inflation after the first few years) provided the collection rate is significantly increased. Under a lease arrangement, the Government still has to make substantial contributions to capital investment as this is not the responsibility of the private operator in this type of contract. A concession is a long-term contract (usually 20-30 years) under which the operator is responsible for capital investment and operating and maintenance of the system. It has been used with success in several countries (for example France, Argentina, Philippines) but requires tariffs sufficiently high to cover operating expenses, capital costs, and a return on capital to the operator. As opposed to the lease contract, the Government is not responsible for providing funds for capital repair, but the private investors arrange the financing and construction or rehabilitation of the system. This may be attractive to the Government that would not be subject to the fiscal Annex 9 Page 3 of 5 pressure of providing capital funds but it would require higher tariffs from customers receiving water supply and wastewater services. A concession contract is more attractive to the private sector but it requires higher levels of commitment from the Government and confidence in the ability of the private sector to bring substantial benefits to the service and investment funds to the system, as it has done in other countries. Under a concession contract, the private sector has greater incentives to perform better than in a lease contract in order to recover the investments made in the system. A concession arrangement needs substantial strengthening of the regulatory capacity of the Government that would require technical and financial assistance to monitor compliance of the operator with its contractual obligations. 4. What will happen to the employees of ARWC and BWD under a contract with the private sector to provide water supply and wastewater services in Greater Baku? There are several options. The contract can stipulate that the private operator would provide voluntary cash separation packages to reduce staffing levels and operating costs. International experience has shown that a thriving private support industry (including engineering services, construction, supervision, etc.) develops when a private utility operator is contracted. These new small companies are usually formed by former employees of the water and wastewater company and they absorb a large portion of the labor force reduction. 5. How will the private operator be paid? Under a lease contract, the operator will receive no fixed management fees but will recover its costs from revenues collected. There will be an incentive bonus, based on achievement of performance targets, which could be a percentage of surplus revenues. The remainder of the surplus will be used to pay for debt service of capital investment. Under a concession contract, the operator recovers all its costs (including financing costs of the capital investments) and an adequate return from the collected revenues. 6. What will happen to the average tariff? Under a lease contract, the average tariff should be increased to cover adequate operating and maintenance costs. If the Government supports the private operator to improve the collection of the water and wastewater fees, the average tariff increases required after the first few years would only need to cover inflation. However, the Govemment has to contribute to capital investments from its general budget. Under a concession, the average tariff would be higher than in a lease contract to cover the financial requirements of the capital investment program. The resources that the Government would have used under a lease contract to finance investments could be targeted to protect the poor and ensure adequate water supply services to them through a well-targeted subsidy program. As the private operator would have greater incentives to perform better in a concession contract, the improvements and hence the economic benefits would be greater than in a lease contract. The effect on the domestic tariff would depend on the policies to reduce the current cross-subsidy between non-domestic (industry, budget organizations and commercial customers) and domestic consumers. 7. How will the private operator be selected? Why is an international bidding process required? How long will it take? Will there be international utility operators interested in investing in Azerbaijan? The international experience has shown that competitively procured contracts are likely to result in lower costs, better qualified contractors and greater transparency. Direct contracts have often failed as the Government does not get the best offers, and the lack of transparency Annex 9 Page 4 of 5 generally results in resistance from the public to the contract. Experience has shown that competitive contracting can be as quick as direct contracting. With the decisive support of the Government, the entire process would take 18-24 months from the initiation of bidding documents and the set up of the regulatory agency to the initiation of the contractor's activities. The Bank experience in the region confirms that many international operators will be interested, some of which have already visited Baku to explore opportunities for involvement in the water supply and wastewater sector. 8. What will be the operator's service area? What scope of services will be included in the contract? Given the technical connections between the various water supply systems in the Apsheron Peninsula and the benefits that would bring a single contract (economies of scale, attractiveness for foreign investors of higher quality), it is recommended to have a service area that includes Baku City, Sumgayit, and other cities in the Apsheron Peninsula connected to the bulk water supply system and are served by treated water from plants under ARWC's operation. The close relationship between water and wastewater services, the need for integrated planning, and the economies of scale that can be gained (particularly in terms of billing and commercial services, planning, contracting, etc.), it is recommended to include both services in the contract with the utility operator. The operator's scope of work will include: water networks, reservoirs, water treatrnent plants, transmission lines, wastewater collection networks, and wastewater treatment plants, customer billing and collection of water fees, and all aspects of management of the water and wastewater enterprise. In addition, the operator will provide a continuous training program for local staff. 9. Who will own the assets in the lease and concession contract options? The assets will continue to be owned by the Government as there will be no change of ownership. All physical investments made by the Operator under the concession contract with its financing would revert to the Government after completion of the contract. 10. What is expected to happen if the current financial situation of ARWC continues? What will be the effects on the water supply services in the Apsheron Peninsula? In recent years, ARWC has invested in capital repairs less than one percent of the total estimated value of their physical assets. This is clearly insufficient to maintain the system in operation. Given the current state of the network, an investment level of capital repairs of at least 4-5 percent of the asset value is needed in an enhanced rehabilitation program. The lack of adequate financial resources (as a result of low tariffs and collections particularly in cash) results in a situation where ARWC is providing services by running down the existing infrastructure assets. If ARWC continues with this trend, the result within a few years will be a continuous decrease in the quality of service and eventual collapse of parts of the system, starting with the districts of the city that are currently receiving a few hours of service per day. 11. Based on international experience, what improvements can be expected in Baku City with the involvement of a private sector operator? The improvements will depend on the type of contract that will be signed with the operator. A concession contract, given its longer-term period than the lease contract, provides incentives for the Operator to improve performance faster and to make investments of higher quality that will bring benefits over a longer period of time. However, even with a lease contract Annex 9 Page 5 of 5 with sufficient investment resources put forward by the Government is expected to achieve the following benefit targets in the latter years of the contract. Item 1999 In Years 8/10 Estimated Annual Financial Impact to of Lease water company (billion AZM/million Contract USD) (est. at 1999 cost levels) Unaccounted for Water 70% 35% 25.5 / 6.4 Collections as percentage of 66% 95% 57.1 / 13.2 billings % of population receiving water 29-43%(') 95% N/A every day % of population receiving water 14-41% 90% N/A for 24 hours per day % of samples that do not meet 30% 0.2% Significant economic/health benefits bacteriological requirements (estimated) % of population that boils tap 89% 30% Significant benefits to the economy water due to reduction of energy consumption (1) Depending on area of the city (see Figure 2.3) 12. How will the Government ensure the performance improvements are actually achieved by the Operator? The Government will supervise compliance with the contractual clauses as agreed with the Operator in the contract. The Operator would be required to periodically provide essential data on the performance of the system, such as: (i) continuity of water supply (hours of service per day for each area of the city); (ii) bacteriological quality of drinking water; (iii) metering coverage; (iv) metered production in cubic meters per day; (v) metered consumption in cubic meters per day (and hence water losses in the system); (vi) wastewater volumes treated; (vii) quality of effluent discharged; (viii) collections as a percentage of billing; and (ix) number of employees; among others. The data provided will be audited by an independent auditing firm. The audited information would have several uses, not only to ensure compliance with the contract clauses, but also to determine the necessary tariff increases, inform the community about the efficiencies achieved, compare the efficiency of the Operator with other countries or other cities in Azerbaijan, to improve the data base of the system and further improve its efficiency, and to demonstrate to lenders and investors of the creditworthiness of the water and wastewater enterprise. Annex 10 Page 1 of 2 ANNEX 10: REFERENCES [1] The World Bank, 1999. Azerbaijan Country Brief. External Affairs. [2] The World Bank, 1999. Azerbaijan Republic, World Bank Group Country Assistance Strategy, Memorandum of the President. [3] The World Bank, 1997. Azerbaijan, Poverty Assessment (in Two Volumes). [4] State Statistical Committee of Azerbaijan Republic, 1999. Statistical Yearbook of Azerbaijan. [5] Apsheron Regional Water Company, 1997. National Water and Wastewater Sector Policy Study. Prepared by PADCO within the scope of the Greater Baku Water Supply Rehabilitation Project. [6] Apsheron Regional Water Company, 1998. Water and Wastewater Master Plan for Greater Baku. Prepared by Montgomery Watson within the scope of the Greater Baku Water Supply Rehabilitation Project. [7] The Government of Azerbaijan and the World Bank, 1998. National Environmental Action Plan. [8] The World Bank, 1995. Azerbaijan: Baku Water Supply Rehabilitation Project Environment Department Paper 017, Social Assessment Series. [9] The World Bank, 1995. Staff Appraisal Report: Azerbaijan Republic - Greater Baku Water Supply Rehabilitation Project. [10] Apsheron Regional Water Company, 1999. Greater Baku Water Supply Rehabilitation Project. Quarterly Report 17. [11] The World Bank, 1999. Azerbaijan: Proposed Rehabilitation of Irrigation and Drainage Infrastructure Project, Project Information Document. [12] The World Bank, 1996. Azerbaijan: Farm Privatization Project - Staff Appraisal Report. [13] Apsheron Regional Water Company, 1996-1999. Apsheron regional Joint-Stock Water Company (ARWC) Audit Reports and Financial Statements. Prepared by Price Waterhouse (1995-1997) and KPMG (1998). [14] The World Bank, 1999. Dismantling Russia's Nonpayment System: Creating Conditions for Growth. [15] Apsheron Regional Water Company, 1999. Review of the Billing and Collection Activities, prepared by Allplan with funds provided by TACIS within the scope of the Greater Baku Water Supply Rehabilitation Project. [16] The World Bank, 2000. Maintaining Utility Services for the Poor: Policies and Practices in Central and Eastern Europe and the Former Soviet Union Draft. Annex 10 Page 2 of 2 [17] The World Bank, 1999. Price and Subsidy Policies for Urban Public Transport and Water Utilities in Transition Economies. ECSIN Working Paper No. 5, prepared by Slobodan Mitric. [18] International Monetary Fund, 1998. Dealing with Azerbaijan's Oil Boom. Finance & Development, Volume 35, Number 3. [19] The World Bank, 1999. Reaching the Urban Poor with Private Infrastructure. Viewpoint 188, prepared by Penelope Brook Cowen and Nicola Tynan. [20] The World Bank, 1998. Giving Communities Choice is Not Enough! Community Water Supply and Sanitation Conference, prepared by Jennifer Sara. [21] The World Bank, 1999. Memorandum of the President. Proposed Supplemental Credit for the Pilot Reconstruction Project. [22] The World Bank, 1999. Key Design Principles for Community Water and Sanitation Services. [23] The World Bank, 1999. An Integrated Approach to Wastewater Treatment. Prepared by Manuel Marino and John Boland. [24] The World Bank, 1996. From Plan to Market - World Development Report. [25] Inter-American Development Bank, 1999. Spilled Water: Institutional Commitment in the Provision of Water Services. [26] The World Bank, 1996. Regulating Water Companies. Viewpoint 77, prepared by Michael Klein and Timothy Irwin. [27] The World Bank, 1997. Getting the Private Sector Involved in Water-Wheel to do the Poorest of Countries. ViewpointlJ2, prepared by Penelope Brook Cowen. [28] The World Bank, 1997. Designing Regulatory Institution for Infrastructure sessions from Argentina. Viewpoint 114, prepared by Antonio Estache. [29] The World Bank, 1997. The Private Sector in Water and Sanitation. How to Get Started. Viewpoint 126, prepared by Penelope Brook Cowen. [30] The World Bank, 1997.. Utility Regulators - The Independence Debate. View Point 127, prepared by Warrick Smith. [31] The World Bank, 1997. Utility Regulators - Roles and Responsibilities. Viewpoint 128, prepared by Warrick Smith. [32] The World Bank, 1997. Utility Regulators - Decision making Structure, Resources and Start-Up Strategy. Viewpoint 129, prepared by Warrick Smith. [33] The World Bank, 1999. Benchmarking Water and Sanitation Utilities. A Start-Up Kit. Transportation, Water and Urban Development Department: Water and Sanitation. [34] Asian Development Bank, 1997. Second Water Utilities Data Book, prepared by Arthur C. McIntosh and Cesar F. Yniquez. IBRD 30328 RUSSIAN ~~~~~~~~~~~~~~~~~AZERBAIJAN G E 0 R G I A EKN FEDERATION T.Ka INDIVIDUAL POVERTY RATES ~~~~~IZAGATAtA w ~~~~~~~~~~~~~~(Percent Poor, 1996) GAKHl A ~ T~~~~~~~~~~ Ddi~~~~~~~~~~~~~~~~~~~~~~~h- -A~~~~~~~ NENAINl BUDRE 6MAlay~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O 45-'. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ WI ~~~~~~~~~~~~~~~~~~~~~OCA ARMENI A~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~URIE IKZKSA KW-' A )R - ' '.FNDERATION RILOMPIRS TURK eYa :Z RUSSIA ISLAMIC REPUBLIC OF IRAN cl*pw~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ILAI EREPIO A5TARA~~~~~~~~~~~~~~~~~~~~~~~~~~IA 0 25 50 7S~~~~~~~~~~~SRANAABRP0IA *,,?.,AZERBAJIYJ19N IBRD 30746 To Tbilisi1"a 1~ w To KayOkent SHOLLAR GROUND AZER . 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