FOR OFFICIAL USE ONLY Report No: PAD3040 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED IDA CREDIT IN THE AMOUNT OF US$49 MILLION PROPOSED IDA SCALE-UP FACILITY FINANCING IN THE AMOUNT OF US$190 MILLION AND A PROPOSED GRANT IN THE AMOUNT OF US$7.8 MILLION FROM SWISS STATE SECRETARIAT FOR ECONOMIC AFFAIRS TO THE REPUBLIC OF UZBEKISTAN FOR A WATER SERVICES AND INSTITUTIONAL SUPPORT PROJECT February 20, 2020 Water Global Practice Europe And Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2019) Currency Unit = Uzbekistan Som (UZS) UZS 9,507.51 = US$1 FISCAL YEAR January 1 – December 31 Regional Vice President: Cyril E Muller Country Director: Lilia Burunciuc Regional Director: Steven N. Schonberger Global Practice Director: Jennifer J. Sara Practice Manager: David Michaud Task Team Leader(s): David Malcolm Lord; Khairy Al-Jamal ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BP Bank Procedure CO2eq Carbon dioxide equivalent CPF Country Partnership Framework CRI Corporate Results Indicator DA Designated Account DDCS Detailed Design and Construction Supervision ESCA Energy Savings Capture Account EE Energy Efficiency EIB European Investment Bank EIRR Economic internal rate of return ESMAP Energy Sector Management Assistance Program ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan EU European Union € Euro FIDIC International Federation of Consulting Engineers FIRR Financial rate of return FM Financial Management GBV Gender-based violence GDP Gross Domestic Product GFDRR Global Facility for Disaster Risk Reduction GHG Greenhouse gas GIS Geographic Information System GWh Gigawatt-hour GWSP Global Water Security and Sanitation Partnership HR Human Resources IDA International Development Association IFCA Investment Facility for Central Asia IFI International Financial Institution IFR Interim Financial Report IFRS for SMEs International Financial Reporting Standards for Small and Medium-Sized Entities IPF Investment Project Financing kg Kilogram kWh Kilowatt-hour MFD Maximizing Finance for Development MHCS Ministry of Housing and Communal Services MoF Ministry of Finance MIFT Ministry of Investments and Foreign Trade MIS Management Information System M&E Monitoring and Evaluation M&V Measurement and verification m3 Cubic meter NPV Net present value NRW Non-Revenue Water O&M Operations and Maintenance OP Operational Policy PAD Project Appraisal Document PBA Performance-Based Allocation PCU Project Coordination Unit PDO Project Development Objective PIE Project Implementing Entity PLR Performance and Learning Review PMC Project Management Consultant POM Project Operational Manual PPL Public Procurement Law PPP Public-Private Partnership PPSD Project Procurement Strategy for Development RMS Results Measurement System SECO Swiss State Secretariat for Economic Affairs STEP Systematic Tracking of Exchange in Procurement SUE State Unitary Enterprise SUF Scale-up Facility TA Technical Assistance US$ U.S. Dollar UZS Uzbekistan Som WPP Water Partnership Program WSS Water Supply and Sanitation WWTP Wastewater Treatment Plant The World Bank Water Services and Institutional Support Project (P162263) TABLE OF CONTENTS DATASHEET ........................................................................................................................... 1 I. STRATEGIC CONTEXT ...................................................................................................... 6 A. Country Context................................................................................................................................ 6 B. Sectoral and Institutional Context .................................................................................................... 7 C. Relevance to Higher Level Objectives............................................................................................. 14 II. PROJECT DESCRIPTION.................................................................................................. 15 A. Project Development Objective ..................................................................................................... 15 B. Project Components ....................................................................................................................... 16 C. Project Beneficiaries ....................................................................................................................... 23 D. Results Chain .................................................................................................................................. 24 E. Rationale for Bank Involvement and Role of Partners ................................................................... 25 F. Lessons Learned and Reflected in the Project Design .................................................................... 25 III. IMPLEMENTATION ARRANGEMENTS ............................................................................ 27 A. Institutional and Implementation Arrangements .......................................................................... 27 B. Results Monitoring and Evaluation Arrangements......................................................................... 30 C. Sustainability................................................................................................................................... 30 IV. PROJECT APPRAISAL SUMMARY ................................................................................... 32 A. Technical, Economic and Financial Analysis ................................................................................... 32 B. Fiduciary.......................................................................................................................................... 35 C. Safeguards ...................................................................................................................................... 37 D. Citizen Engagement, Gender, and Climate Change........................................................................ 40 E. Grievance Redress Mechanisms ..................................................................................................... 43 V. KEY RISKS ..................................................................................................................... 43 VI. RESULTS FRAMEWORK AND MONITORING ................................................................... 45 ANNEX 1: Detailed Project Description .......................................................................... 67 ANNEX 2: Implementation Arrangements and Support Plan .......................................... 84 ANNEX 3: Financial and Economic Analysis .................................................................... 93 ANNEX 4: Project Maps ............................................................................................... 103 The World Bank Water Services and Institutional Support Project (P162263) DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name Uzbekistan Water Services and Institutional Support Project Project ID Financing Instrument Environmental Assessment Category Investment Project P162263 B-Partial Assessment Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date 12-Mar-2020 30-Jun-2027 Bank/IFC Collaboration No Proposed Development Objective(s) The Project Development Objectives are to: (i) improve coverage, quality and efficiency of water supply and sanitation services in selected project areas; and (ii) strengthen the planning and regulatory capacity of the water supply and sewerage sector. Page 1 of 106 The World Bank Water Services and Institutional Support Project (P162263) Components Component Name Cost (US$, millions) Component 1. Sector policy, regulations and institutions 7.80 Component 2. Energy efficiency financing facility 13.00 Component 3. Regional infrastructure investments 220.00 Component 4. Professionalization of participating water utilities 6.00 Organizations Borrower: Republic of Uzbekistan Implementing Agency: Kommunkhizmat Agency PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 246.80 Total Financing 246.80 of which IBRD/IDA 239.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 239.00 IDA Credit 239.00 Non-World Bank Group Financing Trust Funds 7.80 Swiss State Secretariat for Economic Affairs 7.80 IDA Resources (in US$, Millions) Credit Amount Grant Amount Guarantee Amount Total Amount Page 2 of 106 The World Bank Water Services and Institutional Support Project (P162263) Uzbekistan 239.00 0.00 0.00 239.00 National PBA 49.00 0.00 0.00 49.00 Scale-up Facility (SUF) 190.00 0.00 0.00 190.00 Total 239.00 0.00 0.00 239.00 Expected Disbursements (in US$, Millions) WB Fiscal Year 2020 2021 2022 2023 2024 2025 2026 2027 Annual 0.00 8.00 12.00 20.00 40.00 50.00 55.00 54.00 Cumulative 0.00 8.00 20.00 40.00 80.00 130.00 185.00 239.00 INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Water Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ Moderate 2. Macroeconomic ⚫ Low 3. Sector Strategies and Policies ⚫ Substantial 4. Technical Design of Project or Program ⚫ Substantial 5. Institutional Capacity for Implementation and Sustainability ⚫ High 6. Fiduciary ⚫ High 7. Environment and Social ⚫ Moderate 8. Stakeholders ⚫ Low 9. Other Page 3 of 106 The World Bank Water Services and Institutional Support Project (P162263) 10. Overall ⚫ Substantial COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Performance Standards for Private Sector Activities OP/BP 4.03 ✔ Natural Habitats OP/BP 4.04 ✔ Forests OP/BP 4.36 ✔ Pest Management OP 4.09 ✔ Physical Cultural Resources OP/BP 4.11 ✔ Indigenous Peoples OP/BP 4.10 ✔ Involuntary Resettlement OP/BP 4.12 ✔ Safety of Dams OP/BP 4.37 ✔ Projects on International Waterways OP/BP 7.50 ✔ Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Sections and Description Financing Agreement, Schedule 2, Section I.A.4, and Grant Agreement, Schedule 2, Section I.A.4: No later than one (1) month from the Effective Date, the Recipient, through MHCS, shall cause PIE to customize the existing accounting software that will be able to generate reports automatically specifically tailored to the proposed Project needs. Sections and Description Financing Agreement, Schedule 2, Section IV - Other Undertakings: No later than forty-eight (48) months from Effective Date, or any other later date as agreed with the Association, Page 4 of 106 The World Bank Water Services and Institutional Support Project (P162263) the Recipient, through MHCS, shall prepare and publicly disclose the first State of the Sector Annual Report for the calendar year 2023 in form and substance satisfactory to the Association. Sections and Description Financing Agreement, Article IV - Remedies of the Association, and Grant Agreement, Section 4.01(a): The Additional Event of Suspension consists of the following, namely, that the Project Implementing Entity’s Legislation has been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely the ability of the Project Implementing Entity to perform any of its obligations under the respective Project Agreement. Sections and Description Financing Agreement, Schedule 2, Section I.B.1: To facilitate the carrying out of the Project, the Recipient shall make the proceeds of the Financing available to the Project Implementing Entity under a subsidiary agreement between the Recipient, MHCS, the Project Implementing Entity, and each of the Participating Water Utilities and Khokimiyats/Republic of Karakalpakstan respectively, under terms and conditions approved by the Association (“Subsidiary Agreement”). Grant Agreement, Schedule 2, Section I.B.1: To facilitate the carrying out the Project, the Recipient shall make the proceeds of the Grant available to the Project Implementing Entity under a subsidiary agreement (“Subsidiary Agreement”) between the Recipient, MHCS, the Project Implementing Entity, and each of the Participating Water Utilities and Khokimiyats/Republic of Karakalpakstan respectively, under terms and conditions approved by the World Bank. Conditions Type Description Effectiveness Financing Agreement, Article 5.01(a): The Grant Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of this Agreement) have been fulfilled. Type Description Effectiveness Financing Agreement, Article 5.01(b): The PIE has adopted the POM satisfactory to the Association. Type Description Effectiveness Grant Agreement, Article 5.01(b): The Subsidiary Agreements have been executed on behalf of the Recipient and the Project Implementing Entity. Page 5 of 106 The World Bank Water Services and Institutional Support Project (P162263) I. STRATEGIC CONTEXT A. Country Context 1. Uzbekistan is a lower-middle-income, mineral-rich, doubly landlocked country. It has the largest population in Central Asia – 32.96 million as of 20181. Over the past decade, Uzbekistan has maintained high and stable economic growth rates2 and has gradually diversified its economy. Per capita Gross National Income rose from US$560 in 2001 to US$2,020 in 20183. Coinciding with this economic growth, official poverty estimates have declined from 27.5 percent in 2001 to 11.4 percent in 20184, accompanied by equity gains, with B405 incomes growing faster than T60 over the period 2008–2013. These gains relied largely on an economic model driven by the state’s dominance of major productive sectors, and a modest but restricted small to medium-sized business sector. Despite such progress, the economic model’s state- centricity was identified by policymakers as unsustainable in its ability to create more and better jobs for a growing youth population6. 2. In early 2017, the Government of Uzbekistan announced a radical opening and transformation of economic policy towards competitive, market-led, private sector driven approaches. A notable reform included the ‘overnight’ devaluation (September 5, 2017) of the official (fixed) exchange rate of the Uzbek Som against the US Dollar by almost 50 percent, together with a simultaneous relaxation of various foreign exchange controls and restrictions. A move which virtually eliminated the informal currency market within weeks, bringing close to 50 percent of the country’s daily foreign exchange volumes back into the formal banking sector. Other impressive structural reforms include the liberalization of many administered market prices, relaxation of tourist and business visa regimes, an easement of trading restrictions and regulations to improve business climate, and sweeping changes to the tax system that has had a dramatic effect on job formalization in the economy (571,000 new income taxpayers were registered in the first six months of 2019, compared to less than 100,000 in the same period of 2018). 3. Simultaneously, a series of social, political and governance reforms have focused on reorienting the public sector to be responsive, citizen-centric, and focused on delivering high-quality, inclusive public services. To date and in general there has been popular appeal as illustrated by the results of the Listening to the Citizens of Uzbekistan survey7 where 95 percent of respondents expressed support for the reforms. 4. The Government’s vision is to transform Uzbekistan into an industrialized, upper -middle- income country by 2030. But achieving this vision requires a sustained effort to further increase the efficiency of resource allocation and to take advantage of new, high-potential sources of economic growth 1 With annual population growth of 1.7 percent in recent years. 2 Per official estimates, annual GDP growth averaged 7.2 percent between 2000 and 2016. 3 These figures are presented in estimated purchasing-power-parity terms. In current U.S. dollars (Atlas method), Gross National Income per capita rose from US$560 in 2001 to US$2,111 in 2016. 4 The World Bank notes that the methodology for measuring poverty needs to be brought to international standards. Official poverty estimate does not consider nonfood items and the use value of assets. World Bank data sources suggest that the poverty rate at the LMIC line was approximately 9.6 percent in 2018. 5 B40 -Bottom 40 percent of income distribution. T60 – Top 60 percent of income distribution. 6 Official estimates suggest that about 1.5 million people permanently emigrated from Uzbekistan between 1991 and 2013. 7 This survey is a collaborative effort led by the World Bank and the Development Strategy Center in Tashkent. Page 6 of 106 The World Bank Water Services and Institutional Support Project (P162263) and job creation. Factor markets such as land, labor and capital, which are critical to this process, remain firmly under state control. An issue compounded by the slower pace of state-owned enterprise reform, which dominate potential new areas of growth such as chemical and tourism sectors. The limited progress in these areas is largely attributed to the complexity of reducing the state’s role in the economy, bu t nonetheless it remains a reform priority for the Government. Recent progress on other complex issues, such as the modernization of agriculture, demonstrate the continued interest from authorities in maintaining reform momentum despite the agenda entering a more challenging phase. 5. Despite some fiscal transparency limitations, Uzbekistan’s macroeconomic position remai ns stable and has been well-managed through this first phase of reforms. Following almost a decade of fiscal and current account surpluses, both accounts have been in deficit since 2018. A modest fiscal deficit (projected 2019: 2 percent of Gross Domestic Product (GDP)) reflects government efforts to sustain growth through public investment during the transition. The larger current account deficit (projected 2019: 6.4 percent of GDP) is linked to a spike in capital imports following years of import repression. External buffers remain ample - foreign reserves exceed 13 months of import cover, and external public debt remains low at about 23 percent of GDP (about half of which is the result of the exchange rate revaluation in 2017). Inflation has risen to early double-digit levels but is largely due to one-off price adjustments in the economy. 6. The main risk to this relatively positive outlook is the Government’s continued use of subsidized credit to support state-owned enterprises and household economic activity. Credit to the economy grew by 50 percent in 2018 and continued to grow in 2019. Most of this credit is from state-owned banks to fund capital imports to modernize state-owned enterprises. But the continuance of this approach during the transition increases inflationary risks and external imbalances at a time of price liberalization in the economy. It has also stymied efforts to improve monetary policy effectiveness and allocative efficiency in the economy. B. Sectoral and Institutional Context Sectoral Context 7. Uzbekistan is characterized by high water resource dependency8 and scarcity of locally available freshwater resources. If current trends in water usage and population growth continue, Uzbekistan will reach water scarcity levels by 20309. In addition, climate change is having an adverse impact on the regime of formation, volume and quality of water resources in the region.10 Reduction in the total precipitation amount entails decreasing river water levels and increasing concentration of pathogenic organisms in water11. Aridity and drought risks are high, particularly for areas with increased demand and consumption from economic development and population growth. Water scarcity, heat waves and increased frequency of high heat days (Max T>39°C) are the most severe risks from climate change in Uzbekistan12. Adding to 8 Over 80 percent of the country’s water originates in neighboring countries. 9 Uzbekistan Systematic Country Diagnostic, World Bank, 2016, p.47. 10 Third National Communication of the Republic of Uzbekistan under the UN Framework Convention on Climate Change. 2016. Available at: https://unfccc.int/sites/default/files/resource/TNC%20of%20Uzbekistan%20under%20UNFCCC_english_n.pdf 11 USAID. 2018. “Climate Risk Profile Uzbekistan.” Factsheet. 12 World Bank Climate Knowledge Portal. URL: https://climateknowledgeportal.worldbank.org/country/uzbekistan/vulnerability . Last accessed: June 24, 2019. Page 7 of 106 The World Bank Water Services and Institutional Support Project (P162263) this, climatic extremes are very likely to increase in frequency and magnitude13. 8. Careful long-term planning and integrated water resource management is therefore of utmost importance to address these increasing climatic risks, especially considering high and competing water demands from agriculture (about 92 percent of total)14. While agricultural water represents the bulk of nation-wide abstractions, there is an increasing need to better control water demands in urban areas as some rapidly growing cities are becoming significant water users. Traditionally, domestic water supply systems have relied to a large degree on groundwater. However, shallow groundwater resources in many areas have become highly mineralized or polluted with irrigated agricultural discharge. Several regions, including some of the country’s largest cities, rely upon water supplied in bulk through large, complex interregional conveyance systems that transfer water over long distances from remote mountainous catchment areas, large multipurpose reservoirs, or deep regional aquifers. Climate change is expected to cause more severe and prolonged droughts with corresponding decreases in water availability, reinforcing the need for effective planning and adaptation measures for enhanced water security. 9. Access to and quality of water supply and sanitation (WSS) services remains a significant challenge. WSS infrastructure, largely constructed during the Soviet central planning era, has by-and- large exhausted its useful life and requires extensive rehabilitation and renewal. Public expenditure, whilst increasing substantially in recent years, has not kept pace with requirements for asset replacement, maintenance and system expansion. As such, water supply and sewerage infrastructure has deteriorated substantially in many areas. These infrastructure issues, combined with institutional capacity constraints, have resulted in a stagnation or decline in water service quality acutely affecting rural areas, and district towns (or small and medium-sized cities), where most of the population resides15. 10. Water Supply, Sanitation and Hygiene data indicates that access to piped connections is relatively high (87 percent), but those that receive safely managed water is considerably lower (59 percent)16. Coverage rates for piped water systems are much lower in rural villages, where existing systems reach around 52 percent of the population17. Water supply access issues in rural areas and district towns are further exacerbated by higher-than-average population growth rates. Furthermore, continuity of service is a common and serious issue across the country, with many systems supplying water for less than 12 hours per day. Outdated and oversized pumps, which lead to high operational costs18, and power outages are often cited as causes of the intermittent services. Intermittent supply in turn leads to more common breakages and resulting leaks. Water quality varies widely within the country; in Tashkent and other large cities water quality is generally compliant with national standards. However, in several district towns water quality has become an issue, with up to 30 percent of water quality samples not compliant, 13 Droogers, P., A.F. Lutz, J.E. Hunink. Future Water. 2017. Climate Risk and Vulnerability Assessment for Western Uzbekistan Water Supply. 14 Water withdrawals by sector are as follows: Irrigation and livestock - 92 percent, Municipalities – 4.5 percent and Industry – 3.9 percent (Food and Agriculture Organization’s AQUASTAT, 2016). Irrigated agriculture contributes 1/3 of the national GDP, 60 percent of foreign exchange earnings, and 45 percent of employment. 15 Approximately 64 percent of the population resides in rural areas (including district towns). 16 Joint Monitoring Program (JMP): Progress on household drinking water, sanitation and hygiene 2000-2017. Special focus on inequalities. New York: United Nations Children’s Fund (UNICEF) and World Health Organization, 2019. 17 Through individual connections to the household. 18 Water supply and wastewater management services in Uzbekistan are energy intensive. In 2017, the water utilities consumed around 640 million kWh of electricity, which represents around 1.2 percent of country’s total electricity consumption. Energy costs for the utilities, at 2017 prices, was around US$ 19.5 million, which is 20 to 50 percent of the utilities total operating costs. Furthermore, such costs will rise as suppressed energy tariffs rise over the coming years. Page 8 of 106 The World Bank Water Services and Institutional Support Project (P162263) with the highest failure rates observed in the Republic of Karakalpakstan. 11. A recently completed Poverty and Social Impact Assessment19 for the sector revealed that around a quarter of those surveyed rely on natural water bodies, one fifth of whom travel 500-1,000 meters to the water source. Moreover, due to intermittent water supplies, pressure and quality problems, connected households typically use multiple sources of water to meet their needs. Consumers often purchase more expensive water from tanker deliveries or obtain untreated water from private shallow wells and / or irrigation canals. Lower-income households have fewer affordable options and are often forced to use irrigation canals, rivers or ponds, and hand pumps in the yards. 12. Compared to water supply, sewerage services are substantially less developed and highly vulnerable to the anticipated impacts of climate change. Built in the 1970s and 1980s in urban areas and largely neglected since then, sewerage infrastructure is in poor condition and continues to deteriorate. Wastewater treatment facilities are also highly degraded – in many cases non-functioning – resulting in pollution of surface water resources. Ten years ago, only 17 percent of the total population in the country was reported to be served by a centralized sewerage system20. Recent data21 show that the situation in the wastewater sector has not improved. In 2016 roughly 3.7 million people (12 percent of the total population) were reported to be served by a centralized sewerage system, most of them in Tashkent city and Tashkent region. In other regions, on average only five percent of the population is connected to a centralized sewerage system. The status of rural sanitation is not well documented and has largely been left to the initiative of households and communities. Most households in rural areas rely on self-built, on- site sanitation – that is, dry pit latrines or, for households with indoor bathroom facilities, septic tanks with on-site disposal. Where households have septic tanks, emptying / servicing them is the responsibility of the Suvokova (or water utility), on a demand basis. 13. Low access and deteriorating water services are a constraint to economic and social development. Poor water, sanitation and hygiene conditions have significant direct and indirect economic, fiscal, health and overall welfare implications. Inadequate and unequal access to WSS is estimated to cost the country an estimated US$635 million per year (or 1.3 percent of GDP)22. These are the coping costs (monetary and time) to secure drinking water; the high costs associated with adverse health impacts (costs to individuals and communities, as well as costs to public health systems); low labor productivity; and lost work days, which place a high burden on households depending on daily wages. Such impacts are most prevalent in rural areas, district towns, and peri-urban areas. Women and school- age children, who are responsible for collecting water for consumption, bear these burdens the most. Moreover, beyond the economic impacts, the decline of water services is becoming a source of social tension and discontent, particularly when seen within a context of broader economic development, rising socio-economic aspirations, and increased citizen engagement and demand for improved public services. 14. Despite these service issues, there have been several areas of improvement related to water service providers, particularly related to operational efficiency. Although Non-Revenue Water (NRW) 19 Social Impact Analysis of Water Supply and Sanitation Services in Central Asia: The Case of Uzbekistan. World Bank. 2015. 20 Asian Development Bank. 2012. Developing of Strategy, Road Map and Investment Program for the WSS Sector of the Republic of Uzbekistan till 2020, Final Report. 21 Data provided by MHCS for the year 2016. 22 Central Asia Water Series – Volume 2: Economic Impact Assessment of Inadequate Water Supply and Sanitation Services in Central Asia, World Bank, June 2016 (unpublished analytical report). Page 9 of 106 The World Bank Water Services and Institutional Support Project (P162263) data23 remain questionable due to a lack of measurement, staff efficiency indicators are relatively good compared to global standards, with around five employees/1,000 connections on average in 2016. Collection efficiency has likewise improved significantly, from between 50-70 percent in 2011 to more than 90 percent in 2018. These efficiency gains have resulted in some performance improvements of the utilities. Overall, financial performance since 2010 has also improved. While in 2010 many of the water service providers were not able to cover their costs, with net losses totaling US$2.5 million24, most service providers are now considered profitable25, albeit marginally – with total net profit amounting to about US$2 million. That said, it is suspected that operational expenses are minimized due to the absence of available funds; measures to reduce costs include limiting service hours to reduce electricity costs, uncompetitive salaries, and the deferment of necessary maintenance. A summary of key performance indicators for the 14 regional utilities, called State Unitary Enterprise (SUE) Suvokovas (Suvokovas)26, is presented in Table 1. Table 1: Suvokova Key Performance Indicators (source: Data of Ministry of Housing and Communal Services, 2018) Performance Indicators Water Coverage Regions Total Metered Non- Staff per production, centralized Collection Revenue population, connection, revenue 1,000 (million water ratio / Costs (x1,000) % water, % connections m3/year) supply, % Karakalpakstan 1,856 42.8 52.4 49.2 40.8 1.20 8.2 0.6 Andijan 3,105 86.3 82.6 7.0 27.1 1.04 2.4 1.0 Bukhara 1,870 56.3 53.5 78.1 28.2 1.03 6.1 0.8 Djizzakh 1,335 22.9 38.5 23.8 22.0 1.01 6.4 1.0 Kashkadarya 3,196 42.2 14.4 7.4 16.7 0.82 9.1 1.0 Navoi 967 15.6 61.7 42.1 12.4 1.03 5.0 1.0 Namangan 2,704 50.4 40.9 83.2 30.3 0.89 7.6 1.0 Samarkand 3,652 63.1 27.6 44.7 20.3 0.95 5.2 0.6 Surkhandarya 2,554 40.4 54.7 39.8 11.8 1.08 5.7 0.9 Syrdarya 824 41.3 48.2 7.6 34.9 1.06 6.0 1.0 Tashkent reg. 2,857 143.4 36.5 58.9 39.1 0.93 8.7 1.0 23 Reported data indicate NRW rates are around 29 percent on average for the year 2016. However, the base data for calculation of this key performance indicator are unreliable due to lack of metering and therefore the level of NRW may have been underestimated. 24 Developing of Strategy, Road Map and Investment Program for the WSS Sector of the Republic of Uzbekistan till 2020, Final Report, ADB, 2012. 25 Based on unverified 2017 data from MHCS. 26 There are 13 regions within Uzbekistan (including the semi-autonomous Republic of Karakalpakstan). Each region has its own Suvokova, plus Tashkent city is an independent Suvokova (14 Suvokovas in total) – legally created in January 2016. A review of 2018 MHCS data indicates that around 17.3 million people (53 percent of total population) access water supply services through the Suvokova. An estimated 6.4 million people (19 percent) receive services from other providers (small scale private operators and community-based organizations) and some 9.1 million (28 percent) have no piped service or reliant of self-supply. Page 10 of 106 The World Bank Water Services and Institutional Support Project (P162263) Fergana 3,666 104.5 76.7 34.8 24.0 1.03 4.4 0.9 Khorezm 1,796 34.7 52.5 89.1 25.7 0.93 7.8 1.0 Tashkent city 2,035 781.7 99.8 53.2 29.8 0.89 6.0 1.0 Note: ‘Good practice’ reference points for benchmark comparisons: (1) metering =>90 percent; (2) non-revenue water =<15 percent; (3) collection ratio => 0.90; (4) staff efficiency =< 5, (6) revenue / costs => 1.1. 15. Recent economic and sector research has identified key challenges and constraints facing the Suvokovas27. These are: (i) availability and reliability of data, (ii) institutional and human resource capacity, (iii) conversion of policies into strategic action plans and implementation, (iv) funding for investments in operational and efficiency improvements, (v) difficulties in transitioning from annual to longer-term (five-year) planning, (vi) tariff policy supportive of conversions from non-metered to metered billing, (vii) consumer awareness for tariff adjustments, and (viii) enabling environment for private sector participation in the water sector. The main ones are described in further detail below. 16. Insufficient operational data covering the Suvokova service area has limited the effectiveness of resource prioritization and allocation plans. A lack of bulk meters on production facilities, transmission and distribution infrastructure, or for consumers presents challenges for Suvokova management to identify key operational inefficiencies (most importantly, water production, sales, and losses) and implement appropriate solutions. Without reliable data, especially with respect to production and consumption, there is a high risk of investment inefficiency – plans tend to focus on capacity expansion, even where other investments would have higher returns both in terms of service delivery and financial results. 17. Tariff-setting policies and procedures have historically not been conducive to sustainable service delivery. National regulations mandated that tariff applications from service providers be prepared and submitted for review and approval by the Ministry of Finance (MoF) on a six-monthly basis. And although under this approach tariffs have steadily increased, they have remained too low28 to cover the real costs of operation and maintenance (O&M) and to allow the Suvokovas (or other service providers) to accumulate enough funds for investment. Furthermore, the prescribed tariff structure, whereby customers without meters are charged based on an unrealistically high assumed level of consumption, removed incentives for the service providers to install meters, as customers almost always consume far less (due to low water availability) than they are billed for. As a result, earlier efforts from the central Government to increase rates of metering have faced resistance, with service providers logically concluding that they cannot afford the resulting reduction in revenue. Where water is available, the lack of customer meters encourages overconsumption and waste from inefficient water and energy usage, further compounding barriers to sustainable services delivery. 18. Inadequate revenues result in low staff wages, reducing the ability of the Suvokovas to hire or keep skilled staff, and perpetuates a cycle of weak O&M. It also prevents the Suvokovas from engaging in long-term planning based on steady, predictable revenues, and instead relegates them to short-term, one-year planning cycles that are dependent on transfers from the central government, which has an understandable focus on service expansion. Given other challenges, this issue risks cementing existing 27Water Sector Reform Diagnostics. WPP-financed technical assistance executed by the World Bank in 2017. 28Average unified tariff for domestic customers in 2016 was 719 UZS/m3 or 0.20 US$/m3 (compared to 93 UZS/m3 or 0.06 US$/m3 in 2010) varying from 0.08 to 0.37 US$/m³. Page 11 of 106 The World Bank Water Services and Institutional Support Project (P162263) inefficiencies, as well as overbuilding based on existing technical norms and consumption assumptions. Institutional Context 19. Public administration in Uzbekistan is highly centralized, with inherent institutional and human resource capacity constraints at various levels. Although gradual adjustments are being made, accountability and transparency remain key governance issues across the country. The WSS sector reflects the broader administrative and governance challenges and has historically suffered from (i) a fragmented institutional framework, (ii) limitations in regulatory monitoring and compliance, and (iii) ineffective coordination and overall planning capabilities. Staff incentives have been low, including low compensation levels and few training and personnel improvement initiatives. 20. The Government recently launched a nationwide reorganization of its WSS institutions and initiated financial and cost recovery mechanisms, with the objective of improving sector governance and utility management, efficiency, and financial sustainability while maintaining affordability. 21. The first phase of the reforms began in January 2016, when the Suvokovas were created through a merger of urban and rural service providers, responsible for both water supply and sewerage services, with assets owned jointly by regional and local governments. The underlying objectives of institutional restructuring were to improve service delivery by consolidating human resources and technical capacity, leveraging economies of scale, and promoting financial sustainability, thus creating companies that generate enough revenues to fund or finance necessary capital investments to improve operational efficiencies and extend services to currently unserved areas. 22. Phase 2 was initiated in April 201729 and focuses on the institutional framework for improved sector policy and governance. Specifically, the second phase resulted in the creation of the new Ministry of Housing and Communal Services (MHCS), the State Water Inspectorate (technical compliance mandate), and the Clean Water Drinking Fund, amongst other elements. The creation of MHCS, with responsibility for oversight of the sector, presented an opportunity to build capacity and knowledge in and of the sector, to establish modern regulatory procedures, and to build a framework for long-term planning, investments, and sustainable operations and maintenance. Phase 3 of the reform, which is due to be launched, aims to support private-sector participation to improve efficiency and leverage private finance for capital investments. 23. In parallel, the Government has initiated the Program for the Comprehensive Development and Modernization of Water Supply and Sewerage Systems, 2017–2021. This five-year State Investment Program30 was enacted through a Presidential Resolution in April 2017 and defines strategic priorities for investments in the WSS sector: (i) integrated measures to improve access of the general public to clean drinking water; (ii) reconstruction and rehabilitation of existing water and wastewater infrastructure; (iii) introduction of modern information and communications technology, including automated billing of water consumption; (iv) introduction of market-based mechanisms for managing water supply and sewerage systems, including on the basis of public-private partnerships (PPPs); and (v) creation of 29Presidential Decree #UP-5017 dated April 18, 2017. 30The State Program, including prioritization of infrastructure investments was developed based on sector analytics carried out during preparation of the WSS Sector Strategy and Road Map, supported by technical assistance financed by the Asian Development Bank. Page 12 of 106 The World Bank Water Services and Institutional Support Project (P162263) conditions for financial and economic sustainability of water supply organizations and improved pricing for services. It furthermore sets out objectives, including a nationwide increase in access to safe and reliable water supply systems, with targets set to between 84-90 percent depending on the region. 24. To achieve these sector development targets, the State Investment Program identifies 36 high- priority infrastructure projects to be initiated within the five-year period, to be implemented by the Kommunkhizmat Agency under MHCS. This is a US$1.35 billion program, of which around 55 percent (US$730.7 million) is earmarked for international financial institutions (IFI) financing31, with the remaining funds to be allocated through the state budget. Around 45 percent of the total investments over this period is planned to go toward improving wastewater management, including collection, conveyance, treatment and re-use. The WSS sector investments are viewed as part of the Government’s support to the development of social services, to improve living conditions, and to support economic development. 25. A sector reform ‘roadmap’ was prepared in 2018, nested under MoF’s umbrella economic reform program developed in close consultation with the World Bank. This helped to guide the planning and prioritization process for medium-term policy and regulatory and institutional reform actions required to accelerate the modernization and transformation of water utility services. Priority reform actions were grouped into six pillars and respond to the key sector challenges discussed above: (1) sector financing and social subsidy mechanisms; (2) planning, monitoring and regulatory capacity; (3) policy, institutional and legislative frameworks; (4) Suvokova operational and service delivery improvements, including corporate governance; (5) integrated water resource management; and (6) sector professional capacity development. 26. The Government’s priorities for development of the sector were reinforced through Presidential Resolution #4040, issued on November 30, 2018. Specifically, this decree tasked relevant agencies to develop and implement new tariff procedures to allow sustainable cost recovery in the sector, complemented by a national water metering program. These two areas – tariff reform and metering – were identified as the highest-priority policy-based actions in the government’s sector reform roadmap. PP#4040 also calls for resource efficiency, the adoption of innovative technologies, improved sector monitoring and accounting, the introduction of international best practices in utility management, including the use of PPPs, and strengthening of human resources in WSS based on international experience. 27. Thereafter, the Government demonstrated its strong commitment to tariff reforms by issuing a new tariff policy on April 13, 201932. This policy and associated procedures aim to transform the planning and tariff setting processes, with the end objective of improving services. Specifically, tariff applications are now aligned with and integrated into the development and costing of medium-term investment and performance plans intended to address identified service improvement needs. Moreover, under the new policy it is envisioned that, over time, revenues generated by tariffs will move toward full coverage of costs, including both operating expenses and capital investments. In conjunction with the new tariff policy, full customer metering is encouraged by the government, with the intention of rationalizing existing consumption “norms” for non-metered customers as actual household consumption is documented. This should facilitate the approval of tariff approvals without the risk of overburdening 31 Including World Bank, Asian Development Bank and Islamic Development Bank, amongst others. 32 Cabinet of Minister Resolution #309. Page 13 of 106 The World Bank Water Services and Institutional Support Project (P162263) unmetered households, and should incentivize the completion of metering programs by the Suvokovas. 28. It is within this sector and institutional context that the proposed Water Services and Institutional Support Project has been prepared. Accordingly, through strategic infrastructure and institutional support activities, the project will build upon and leverage recent changes in the sector, the Bank’s deep existing engagement, and lessons from on-going projects in order to assist the Government to institutionalize sustainable models for improved WSS services in both urban and rural areas. This will involve activities to support and consolidate sector reforms and to strengthen the institutions and regulatory environment at national and regional levels. The project design responds to strong demand from the Government, is informed by poverty and sector analytics, and has been developed to leverage and complement activities of other IFIs and donors (including European Investment Bank (EIB), European Union (EU), Switzerland’s State Secretariat for Economic Affairs (SECO), Asian Development Bank (ADB), Islamic Development Bank and others). C. Relevance to Higher Level Objectives 29. Water services are an integral part of the Bank’s support toward the twin goals of ending extreme poverty and promoting shared prosperity. Current economic costs of inadequate WSS are high and affect sustainable development of the country. Moreover, inadequate WSS can have longer-term impacts on human capital accumulation, cognition, educational outcomes and welfare. There is a direct link between access to improved water services and the incidence of water-borne diseases and public health. Improving access reduces coping costs, leads to time savings and increases productivity – wide economic impacts with disproportionate and direct benefits to the poor. Women and children are among those who benefit most from access to improved services. Furthermore, it is well recognized that the reliability of water infrastructure services is a key factor affecting industrial productivity, efficiency and competitiveness. As such, improved water supply as an infrastructure service will help to facilitate economic growth and creation of jobs. 30. The project directly supports the Government’s commitment to Sustainable Development Goal No.6: to achieve universal and equitable access to safe and affordable drinking water, sanitation, and hygiene by 2030. Bringing more reliable water to households, particularly in villages and district towns where most of the poor live, enhances their quality of life by: (a) reducing the time and effort – especially of women and children – to collect water; (b) reducing the incidence of waterborne diseases and associated healthcare costs; and (c) avoiding costs associated with poor service delivery. Moreover, target communities will secure environmental and health benefits generated by project interventions because of improved sanitation services. In addition, the project will contribute to building the country’s climate change mitigation and adaptation capacity in WSS, in line with its commitments under the United Nations Framework Convention on Climate Change and will undertake several activities that directly address the risk of droughts and potentially floods. Such activities include, among others, treatment of domestic and industrial effluents discharged to rivers in selected project areas, promotion of energy-saving technologies in WSS aimed to reduce electricity consumption and greenhouse gas emissions, outreach activities to promote water saving among the population, effective water resource management, and enhancing investment planning and resilience capacity of MHCS and water utilities. Page 14 of 106 The World Bank Water Services and Institutional Support Project (P162263) 31. The project will contribute to higher-level objectives of the Government and the Bank, including Performance and Learning Review (PLR) of the Country Partnership Framework (CPF) for Uzbekistan for the period FY16-FY20 (Report No.126078-UZ), discussed by the World Bank Board of Executive Directors on June 26, 2018,33 Focus Area 2 – Reform of select state institutions and citizen engagement as adjusted in the PLR. Development of the social sector is defined as one of five Government priorities for 2017- 202134 as a key driver for human development and welfare. In the context of economic and population growth, the Government recognizes the need to improve access to safe drinking water and quality of WSS services, especially in rural areas, through infrastructure rehabilitation/reconstruction, advanced information technologies, energy- and water-use efficiency, and creation of a conducive environment for financial and economic sustainability of water utilities35. The project’s design is fully aligned with the Government’s sector program. II. PROJECT DESCRIPTION A. Project Development Objective PDO Statement 32. The Project Development Objectives (PDO) are to: (i) improve coverage, quality and efficiency of water supply and sanitation services in selected project areas; and (ii) strengthen the planning and regulatory capacity of the water supply and sewerage sector. 33. In the context of this project, part (ii) of the PDO specifically refers to enhancing the mandated functions of the Ministry of Housing and Communal Services, including their planning and regulatory oversight of the water supply and sewerage sector. This will include building capacity for monitoring and evaluation and citizen engagement for increased transparency and accountability of service providers. PDO-Level Indicators 34. Key results towards the specific PDO will be measured using the following indicators: • People provided with access to “improved water sources” (including female); • People provided with access to “improved sanitation services” (including female); • Continuity of water supply (hours per day) in participating water utilities; • Water samples compliant with safety standards (percentage); • Reduced energy consumption (kilowatt-hour (kWh)) per cubic meter of water supplied and cubic meter of wastewater treated under the project; and • State of the Sector Annual Reports prepared and publicly disclosed. 35. Intermediary indicators are set out in the results framework to measure progress against contributing infrastructure and institutional activities under each Component (see Section VI.) 33 The CPF was revised following the PLR in June 2018. 34 Approved by Presidential Decree #UP-4947 dated February 7, 2017. 35 Resolution #PP-2910 of the President of the Republic of Uzbekistan of April 20, 2017. On Program of Comprehensive Development and Modernization of Water Supply and Sewerage Systems for 2017-2021. Page 15 of 106 The World Bank Water Services and Institutional Support Project (P162263) B. Project Components National Approach – Rationale and Overview 36. The World Bank has been substantially engaged within Uzbekistan’s water supply and sanitation sector through a series of projects, including those recently completed or on-going: (1) Syrdarya Water Supply Project (closed June 30, 2019); (2) Bukhara and Samarkand Sewerage Project; and (3) Alat and Karakul Water Supply Project. These projects, with IDA financing equivalent to US$322 million, have focused on increasing access and improving service quality within the project districts (both urban and rural), through infrastructure financing and support to the utilities. 37. At the central level, the Bank’s engagement has focused on strategic policy advice and economic and sector work designed to shape and support key aspects of the sector development agenda. The Government’s recently launched sector reform program has demonstrated that such support has yielded results, with many of the Bank’s policy recommendations included in the current reform program36. The Bank is viewed as a trusted partner resulting from the consistency and quality of support, both through operations and advisory services and analytics. 38. The project will build upon the existing engagement and harness positive momentum generated by the reforms. It will be anchored within MHCS and facilitate a potentially transformative engagement, whereby financing is directed to priority policy, institutional, and infrastructure activities at both the national and regional levels - accelerating progress towards the long-term sectoral development objective, i.e., universal access to sustainable water services. 39. This project has been designed as a platform through which financing and technical assistance from other IFIs and bilateral partners has been leveraged and strategically aligned. The umbrella program of investments includes: (i) this project – a US$49.0 million credit from IDA, US$190.0 million financing from the IDA Scale-up Facility (SUF), with a US$7.8 million37 recipient-executed grant co- financing from SECO, (ii) a €100 million parallel financing loan from EIB and (iii) a €10 million technical assistance (TA) grant from the EU’s Investment Facility for Central Asia (IFCA) executed by EIB in parallel. 40. SUF financing has been mobilized for the proposed project in view of its transformative impact on the sector and for more than 500,000 people, who will benefit directly from safe and reliable water supply and sewerage services. The SUF financing (US$190 million) is blended with IDA credits (US$49.0 million) and the SECO grant (US$7.8 million) to improve the overall level of concessionality. The SECO grants will be administered by the World Bank as part of this project and will co-finance important technical assistance activities under Components 1, 2 and 4, supporting achievement of PDO. The co-financing arrangements with SECO build upon a long and productive collaboration between the two institutions within Uzbekistan’s water sector and will further reinforce recent progress made under the on-going projects for corporate development of the water utilities. 41. The EIB loan will be directed towards other high priority regional infrastructure investments, and 36 The recently adopted tariff policy (Cabinet of Ministers Resolution # 309 of April 13, 2019) was included a policy prior action under the Sustaining Market Reforms in Uzbekistan Development Policy Operation (P168280). 37 The Grant Agreement is for an initial amount of US$ 4 million. Remaining US$ 3.8 million will be provided in installments after 2022, if and as such subsequent amounts are made available to the World Bank by the donor. Page 16 of 106 The World Bank Water Services and Institutional Support Project (P162263) the IFCA TA grant will support strengthening of institutional and implementation capacity for effective program management. A breakdown of costs per Component of this IDA- and SECO-financed project is presented in Table 2. Table 2: Summary of Project Costs and Financing Allocations Source / Amount (US$ millions) IDA SECO Cost (US$, National Project Components millions) Performance- Scale-up Based Grants Facility (SUF) Allocation (PBA) Component 1: Sector policy, regulations and 7.8 6.0 1.8 institutions Sub-Component 1.1. Support for sector reforms 4.8 3.0 1.8 Sub-Component 1.2. Project management and 3.0 3.0 - preparation of future investments Component 2. Energy efficiency financing 13.0 10.0 3.0 facility Sub-Component 2.1. Financing facility 10.0 10.0 - Sub-Component 2.2. TA for Energy Efficiency 3.0 3.0 (EE) management Component 3. Regional infrastructure 220.0 30.0 190.0 - investments Sub-Component 3.1. Karakalpakstan 78.0 10.0 68.0 - Sub-Component 3.2. Syrdarya region 76.0 10.0 66.0 - Sub-Component 3.3. Kattakurgan of Samarkand 66.0 10.0 56.0 - region Component 4. Professionalization of 6.0 3.0 3.0 participating water utilities TOTAL COSTS 246.8 49.0 190.0 7.8 42. The lending instrument for this project is Investment Project Financing (IPF), to be implemented over a seven-year period. Selection of IPF was based on its flexibility and suitability to incorporate financing for a broad range of activities, including several specific investments, technical assistance, and capacity enhancement measures. 43. Project preparation was in part financed by a US$400,000 grant from the Europe and Central Asia Region Capacity Development Trust Fund, which enabled consultants to be engaged for necessary preparatory work (including engineering designs). Project preparation also benefited from studies, technical assistance and expert opinion supported by the Global Water and Sanitation Program (GWSP), Energy Sector Management Assistance Program (ESMAP) and the Global Facility for Disaster Risk Reduction (GFDRR). Page 17 of 106 The World Bank Water Services and Institutional Support Project (P162263) 44. The project design ensures continuity of engagement, consistent policy and institutional approaches, along with enhanced coordination. This will also support sustainability of the World Bank- financed multi-sectoral and regional development projects including the Medium-Size Cities Integrated Urban Development Project (P162929) and Prosperous Villages Project (P168233) both of which include water supply and sanitation infrastructure investments. 45. The proposed project is structured in four complementary Components. A summary of activities to be financed under each Component is provided below, additional details are provided in Annex 1. Component 1: Sector policy, regulations and institutions (US$7.8 million – IDA PBA US$6 million and SECO US$1.8 million) 46. This Component will finance activities (goods and services) at the national level designed to strengthen policy and regulatory frameworks and institutional capacity to advance sector reform and promote sustainable service delivery. The interventions will target key stakeholders, including MHCS as the lead ministry responsible for sector development. It is envisioned that this Component will foster the enabling environment in which Suvokovas, and other service providers operate, aligning it with utility- level interventions to sustain performance improvements support under the other project Components. 47. This Component has been structured around the Government’s sector development strategy and reform roadmap and is informed by previous analytical and advisory services38. Component 1 activities are grouped under two sub-components as described below. 48. Sub-Component 1.1: Support for water supply and sewerage sector reforms (US$4.8 million – IDA PBA US$3 million and SECO US$1.8 million) will finance a slice of the Government’s national water metering program (IDA US$3.0 million) and expert advisory services and technical assistance targeting priority areas of reform and institutional strengthening (SECO US$1.8 million). The World Bank’s involvement in the national water metering program will help to sustain momentum and provide technical backstopping behind this important area of reform, which will ultimately increase resilience to climate change through efficient water use and leading to improving water security. It will strengthen the design and implementation of the metering program, including targeting strategies and other technical, social and operational sustainability considerations39. 49. Identified focus areas for SECO-financed technical assistance include: (i) establishment of a national sector monitoring and benchmarking system for tracking and analyzing performance of water service providers40; (ii) support for the roll-out and enhancement of medium-term planning and tariff setting procedures to enable tangible service improvements and operational sustainability41; (iii) carrying 38 including: Social Impact Analysis of Water Supply and Sanitation Services (Central Asia Water and Energy Program), Uzbekistan Water Sector Reforms Diagnostics and Support Plan (WPP), Technical Support to Water Sector Reforms (GWSP), and Building Climate Resilient Water Services (GFDRR) 39 It is MHCS’s intention to roll-out the use of smart meters, but such an approach requires careful consideration of several technical and operational issues. 40 This system will be established to cover a range of service provider models, including the Suvokovas, private sector and larger community-based operators. 41 This would include direct technical assistance to selected Suvokovas to prepare medium-term tariff applications, including aspects of medium-term operational impacts and the establishment of realistic water consumption norms for unmetered customers. Technical assistance may also be provided to local governments to assist in their review of Suvokova financial and Page 18 of 106 The World Bank Water Services and Institutional Support Project (P162263) out of national-level communications, citizen engagement and public awareness strategies and tools to improve social and gender inclusion and effectiveness of reform actions; (iv) provision of training for the sector professional development and capacity-building activities and strengthening of MHCS’ training institute to institutionalize sector professional development and capacity building; (v) knowledge exchange and support to MHCS for improved sector coordination including support for preparation of State of the Sector Annual Reports; and (vi) capacity building for water utility financial management, accounting and reporting. In addition to the above, this sub-component may also support policy and regulatory enhancements to mainstream integrated water resource management and green growth practices into policies and leverage private sector participation. 50. Sub-Component 1.2: Project management and preparation of future investments (IDA PBA US$3 million) will finance project management-related activities, including monitoring and evaluation (M&E), project and entity audits, training, safeguards and fiduciary management, beneficiary satisfaction surveys, managing a beneficiary feedback mechanism, including a grievance redress mechanism, and all associated project operating costs. It will also support preparation activities for future projects, including feasibility studies that specifically incorporate climate change risks and vulnerabilities for the next phase of priority water supply and sewerage infrastructure and institutional investments and environmental and social assessments. 51. Whilst the IDA credit will finance all core management and operational expenses of the project, including costs of the Project Coordination Unit (PCU), project management capacity will be further reinforced through the EU IFCA TA grant. Such TA will be primarily directed towards strengthening implementation arrangements, through the engagement of a qualified Project Management Consultancy firm. Component 2: Energy efficiency financing facility (US$13 million – IDA PBA US$10 million and SECO – US$3 million) 52. The principal objectives of this Component are to: (i) develop and implement a facility for financing of cost-effective investments in EE in the Suvokovas; and (ii) provide technical assistance to develop the capacity of the Suvokovas, PCU and MHCS to assure its sustainable usage. Financing through this facility will be independent of the central government’s investment planning cycle and budget allocations, to be used on demand, thereby allowing acceleration of progress towards sector development objectives. Furthermore, the facility will contribute to the accomplishment of the Suvokovas’ medium- term performance improvement plans and improve financial management and accountability of the utilities by building their capacity to identify and implement additional EE improvement projects. The Component will support investments that yield net EE gains and enhance the client’s ability to mitigate climate change while also building resilience, including climate change mitigation (greenhouse gas reductions, for example) and adaptation activities (such as drought resilience, water savings, renewable energy utilization). This Component consists of two sub-components as outlined below. 53. Sub-Component 2.1: Financing facility (IDA PBA US$10 million). This sub-component will finance physical investments, including eligible goods and works, for improving EE within the sector, accessible to all 14 Suvokovas. The eligible investments will include (i) replacement of inefficient pumps with efficient pumps; (ii) leak reduction; (iii) load management by shifting pumping loads from peak to off-peak operational performance and their understanding of financial challenges. Page 19 of 106 The World Bank Water Services and Institutional Support Project (P162263) electricity tariff periods; (iv) improved metering and monitoring; (v) optimizing the operation of multiple pumps; (vi) reducing and leveling pressures in the distribution network; (vii) installation of variable speed drives on pumps; (viii) use of renewable energy (such as solar power and biogas from sludge) for pumping or for energy generation to reduce purchased energy costs; and (ix) other EE and cost reduction measures, as further defined in Annex 1 and approved by the World Bank. Moreover, the financing facility will encourage use of renewable energy sources and application of climate-smart technologies. These activities will also contribute to increased water security through more efficient delivery, and thus increased resilience to climate change. 54. The cost savings resulting from these investments will be identified and set aside in an Energy Savings and Capture Account (ESCA). The investments will be repaid through ‘captured’ energy cost savings over defined payback periods. The funds returned to ESCA will then be utilized for additional investments within the sector, including future EE activities (and eventually operate as a revolving fund for the sector beyond the lifetime of the project). Through this approach a sustainable financing mechanism will be created, substantially leveraging the impacts of the initial IDA ‘seed’ investments allocated under this Component. 55. Sub-Component 2.2: Technical assistance for energy efficiency management (SECO US$3 million) will provide technical assistance for energy audits, monitoring and verification, communications and outreach and capacity building activities to support the start-up and sustainable implementation of this facility and ensure that the investments achieve the expected EE results and gains. 56. PCU will engage an experienced EE Consultant with technical assessment, financial transactions, and professional management capabilities. This EE Consultant will work in coordination with MHCS and will have the responsibilities for identifying, assessing and designing the EE options, managing the implementation of these options and verifying the cost savings. The EE Consultant will also be responsible for technical assistance for capacity building of the Suvokovas and MHCS to ensure sustainability of the model. The design of this facility was supported by technical assistance financed through ESMAP and is further elaborated in Annex 1. Component 3: Regional infrastructure investments (US$220 million – IDA PBA US$30 million and IDA SUF US$190 million) 57. This Component will finance resilient infrastructure investments to expand access, improve efficiency and quality of water services in targeted areas within three regions of Uzbekistan42. The Component will finance goods, works and services (including engineering design and construction supervision) and will include civil and electrical/mechanical installations for water supply production (boreholes, well-fields, intakes, , water treatment plant, etc., as well as disinfection and pumping as required), and transmission and distribution (networks, storage, meters, etc.) to households, along with sewerage collection, conveyance, treatment and disposal / re-use facilities. These installations will help the country to adapt to the anticipated impacts from climate change, namely preventing groundwater contamination to increase water security, reducing the impacts of flooding, and improving water supply reliability to communities facing increasing climate risks. 58. Each subproject eligible for financing under this project has been defined under a separate sub- 42 Priority subprojects (and regions) included under this Component correspond with the State Program for the Comprehensive Page 20 of 106 The World Bank Water Services and Institutional Support Project (P162263) component, to be implemented by the Kommunkhizmat Agency and their PCU in close coordination with the respective regional Suvokova. The subprojects are integrated within the Government’s broader regional socio-economic development programs designed to stimulate economic growth, quality of life and accelerate poverty reduction. Component 3 will comprise the following sub-components, each of which also includes the costs of consultancy services for detailed engineering design and construction supervision to support PCU, Kommunkhizmat Agency, and participating water utilities in preparation and oversight of infrastructure works in project areas. 59. Sub-Component 3.1: Reconstruction and expansion of sewerage systems in selected subproject areas within Nukus, Takhiatash and Khodjeyli of Karakalpakstan (IDA PBA US$10 million and IDA SUF US$68 million). This will finance: (i) rehabilitation and reconstruction of four wastewater treatment plants (WWTPs) in Nukus, Takhiatash and Khodjeyli with estimated capacity of 56,400 cubic meters per day; (ii) rehabilitation of pumping stations; (iii) rehabilitation of around 67 kilometers of sewage networks, which accounts for 35 percent of the existing sewage network in the cities; (iv) construction of new pumping stations; and (v) construction of around 96 kilometers of new sewer lines including house connections to expand service coverage. The subproject is expected to improve the quality and coverage of sewerage services for around 231,700 beneficiaries (including around 120,880 people through new connections) residing in the subproject areas43. These investments will improve the environment by preventing surface and groundwater contamination, livability and public health in these sensitive areas located within the south Aral Sea basin. 60. Sub-Component 3.2: Improving water supply and sewerage systems in selected subproject areas within Syrdarya region (IDA PBA US$10 million and IDA SUF US$66 million). This sub-component will finance: (i) reconstruction of water intake facilities with estimated capacity of around 36,400 cubic meters per day; (ii) reconstruction of about 32 kilometers of transmission mains and 171 kilometers of water supply networks; (iii) construction of around 128 kilometers of new water supply networks, (iv) installation of bulk and customer water meters; (v) reconstruction/rehabilitation of wastewater treatment plants, pumping stations; and (vi) construction of estimated 105 kilometers of sewer networks (at least part of which will be zero-energy gravity-based sewers), and house connections in five towns44 of Syrdarya region. The subproject is expected to improve water supply service for around 242,500 residents (including around 60,500 people through new connections), covering the three remaining districts of the Syrdarya region which were not included under the recently closed Syrdarya Water Supply Project. The sewerage investments will provide improved services for around 63,700 people (including 59,700 through new connections) in the project areas. On-site sanitation facilities (septic tanks and improved pit latrines) will be promoted for the remaining part of the population not connected to the centralized sewerage system. Development and Modernization of Water Supply and Sewerage Systems, 2017–2021. This Program was enacted through Presidential Decree #UP-5017 dated April 18, 2017 and defines strategic priorities for investments in the WSS sector and their sources of financing (for example, IDA, ADB, etc.). The basis for the infrastructure investment prioritization process was established during earlier ADB-financed TA for preparing a WSS Sector Strategy and Road Map with vision till 2020. 43 The proposed sewerage investments under sub-component 3.1 are planned and designed to manage an expected increase in domestic and industrial wastewater resulting from the rehabilitation of the water supply systems in the project areas - financed under the on-going Asian Development Bank’s Western Uzbekistan Water Supply System Development Project (RRP UZB 50259) approved in 2017. 44 Bayaut, Dekhkanabad, Pakhtaabad, Syrdarya, and Sardoba. Page 21 of 106 The World Bank Water Services and Institutional Support Project (P162263) 61. Sub-Component 3.3: Reconstruction of water supply and sewerage systems in Kattakurgan town in the Samarkand region (IDA PBA US$10 million and IDA SUF US$56 million). This will finance: (i) rehabilitation of water intake facilities in Kattakurgan town; (ii) rehabilitation and reconstruction of pumping stations; (iii) rehabilitation of about 22 kilometers of transmission mains and reservoirs, and (iv) the rehabilitation and extension of an estimated 180 kilometers of distribution network including water meters. Under this sub-component, the WWTP and sewerage pumping stations in Kattakurgan will also be reconstructed, along with rehabilitation and extension of about 57 kilometers of sewerage networks. This subproject will directly benefit around 91,800 people (including 23,300 people through new connections) residing in and around Kattakurgan town, 90 percent of which (around 85,000 people) will have access to sewerage services. Component 4: Professionalization of participating water utilities (US$6 million - IDA PBA US$3 million and SECO US$3 million) 62. Component 4 will finance activities (goods and services) designed to support and strengthen the capacity of participating water utilities – SUE Department for Operation of Interregional Trunk Main Tuyamuyun-Nukus (Karakalpakstan), Syrdarya and Samarkand Regional SUE Suvokovas, engaged under Component 3 of the project. This Component will be flexible and allow for emerging needs of utilities to be considered and supported throughout the lifetime of the project. It will build upon the results of other on-going institutional strengthening and corporate development activities and help to advance lagging actions introduced under recent reforms, including those defined under Cabinet of Ministers’ Resolution #306. 63. Based on institutional assessments carried out to date, it is anticipated that the following activities may be included: support for (1) introduction of medium-term service improvement planning tools; (2) development of tariff structures (and associated communications campaigns) that incentivize Suvokova performance, encourage rational use of water resources, improve consumer equity, and support sustainable cost recovery; (3) NRW reduction management plans with potential EE gains – equipment, training and creation of District Metering Areas; (4) enhancing internal Suvokova governance arrangements to improve performance incentives for managers and staff (with specific consideration of gender-related issues) and employment opportunities for women; and (5) diagnostics of participating water utilities performance, operational maturity and investment plans. Gender enhancement plans will be developed to improve gender balance in the Suvokova staffing, especially in managerial, operational and technical positions. Other supporting activities which may be financed, as needed, include pilots for online monitoring of wastewater discharges from industrial areas, introduction of modern billing and accounting systems, automated water balance and asset management systems, Geographic Information System (GIS) / Management Information System (MIS), and consumer information and complaints management systems. 64. The IDA funds allocated under this Component (US$3 million) will be primary allocated for the purchase of necessary goods and equipment (approximately US$1 million per utility) to support the participating water utilities’ corporate development activities (for example, bulk flow meters required to establish District Metering Areas. The SECO funds (US$3 million) will be used to engage consultants to support the above professionalization and capacity-building activities at the utility level. These activities, combined with the larger infrastructure investments under Component 3, will lead to concrete results – advancing progress towards universal access to better-quality and more resilient water services in the Page 22 of 106 The World Bank Water Services and Institutional Support Project (P162263) respective regions. C. Project Beneficiaries 65. The project is expected to directly benefit around 536,400 people residing in the project areas45 comprised of 74,300 households benefitting from water supply infrastructure works and 84,500 households benefitting from sewerage infrastructure works. Beneficiaries include mostly existing customers who will benefit from improved quality and reliability of water and sewerage services. Around 83,800 people will gain access to piped water supply (around 18,600 households) and 219,000 people – to sewerage (48,700 households) services through new connections. 66. Institutional beneficiaries include MHCS, Kommunkhizmat Agency and three participating regional water utilities in the Republic of Karakalpakstan, Syrdarya and Samarkand regions. In addition, up to 11 other water utilities will benefit by accessing the EE financing facility and national water metering program. Other activities focusing on enabling environment (Component 1) will support the entire sector through better management, monitoring and investment planning capacity of MHCS and improvement of the regulatory framework for operational and financial sustainability. 45 Defined as those areas where the infrastructure activities will be implemented under Component 3. Page 23 of 106 The World Bank Water Services and Institutional Support Project (P162263) D. Results Chain Figure 1: Project Results Chain Page 24 of 106 The World Bank Water Services and Institutional Support Project (P162263) E. Rationale for Bank Involvement and Role of Partners 67. Although other IFIs provide support to the water and sanitation sector, the investment needs far exceed funds available and to date, emphasis has been given primarily to infrastructure investments. Through this project, the Bank intends to support the Government of Uzbekistan more holistically to achieve their longer-term vision for development of the sector. This will include increasing stakeholders’ understanding of the need for financial sustainability and cost recovery – an area broadly neglected so far. The design of this operation also builds upon and incorporates lessons learned from completed and on-going investment projects in the sector and introduce technical and financing innovations to accelerate impacts associated with the proposed next generation of projects. 68. The Bank has been engaged in a long-term cooperation with the Government and has been actively supporting the design and implementation of both the sector and broader economic and administrative reforms. The Bank is coordinating its activities with development partners in the country and developed a fruitful partnership with SECO and Swiss Agency for Development and Cooperation through co-financing of the on-going projects in the water sector. The policy and institutional focus of the project has strengthened the degree of collaboration with several development partners, catalyzing financing from EU and EIB and further commitments from SECO. Collaboration with EU and SECO under the Central Asia Water and Energy Program will complement the efforts on capacity building under the project by supporting and leveraging knowledge exchange among line ministries, regulators and water utilities in the Central Asian region. F. Lessons Learned and Reflected in the Project Design 69. Several lessons from on-going and completed IDA-financed projects in Uzbekistan have been incorporated into the project design and implementation arrangements. The portfolio of World Bank projects in Uzbekistan have to a degree been affected by some country systemic issues including, frequent regulatory and institutional changes which at times have slowed project-related decision making resulting in lengthy procurement and cumbersome clearance processes. In addition, the water projects have historically struggled with understaffed implementing entities and institutional and human resource capacity limitations more generally. Such issues have been considered in the project design, particularly through a focus on strengthening implementation arrangements as presented in detail in Annex 2. Specifically, the design of this project includes arrangements to reinforce staffing and the organizational capacity of PCU, including additional positions covering all aspects of the project. The proposed implementation arrangements also involve a consolidation of responsibility, accountability and decision making under the Kommunkhizmat Agency. These two design features, along with the additional consultancy support (including introduction of a Project Management Consultant), shall enable more efficient and effective project implementation, mitigating observed risks and building institutional implementation capacity over the long term. 70. Lessons were also derived from the Independent Evaluation Group’s analysis of WSS projects,46 other relevant global analytical work and country-focused technical assistance, as described further 46Independent Evaluation Group. 2017. A Thirst for Change: The World Bank Group’s Support for Water Supply and Sanitation, with Focus on the Poor. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/29345 License: CC BY 3.0 IGO.. Page 25 of 106 The World Bank Water Services and Institutional Support Project (P162263) below. 71. The World Bank’s Utility Turnaround Framework47 emphasizes the role of the governance framework and enabling environment as a core pillar for turning around and enhancing utilities’ performance. As experience has shown, utilities can become trapped within vicious cycles, where inefficient practices became a norm. The project is designed to break such cycles by putting a strong focus on institutions, policies and regulations at national level which will create and foster an environment where the water utilities can effectively improve their services to existing customers and expand their operations service areas. The enabling environment will encourage management autonomy, accountability, customer orientation, efficiency, and ultimately facilitate the development of financially independent and creditworthy utilities. 72. Activities under Component 1 are aligned with sector priorities and will help improve the enabling environment for better performance of utilities. The new medium-term planning, monitoring and regulatory procedures, will help to manage water resources, reduce inefficiencies, improve customer services, support professional development for utility staff, integrate climate resilience and adaptation measures, and importantly align identified priorities with available financing. Moreover, the project will address one of key challenges of the sector – water pricing for service delivery. The proposed measures under Component 1 are designed to improve financial viability of water utilities by helping them gradually move to full-cost recovery. 73. Energy costs were identified as a major constraint for water utilities in improving operational efficiency, being one of the highest cost elements. Therefore, EE improvements are included as a core Component of the project to be implemented at national level. The concept of Component 2 was developed through extensive consultations with stakeholders including government agencies and commercial banks. While the EE credit facility (intermediary financing through commercial banks) was successful for EE improvements under the Uzbekistan Energy Efficiency for Industrialized Enterprises, this approach was determined to be not feasible at this stage for water utilities, because of the banks’ reluctance to provide debt financing to water utilities without government guarantees and the MoF’s reluctance to provide such guarantees in the context of poor financial performance of water utilities and lack of collateral. Other financing options based on international experience were considered that could be potentially applicable to Uzbekistan. They included: (i) direct lending to Suvokovas; (ii) energy savings capture; (iii) EE funds; (iv) public or Super Energy Service Company; and (v) partial risk guarantees. A key issue identified was the limited institutional capacity (i) in Suvokovas to identify, assess and implement EE options, and (ii) within MHCS to develop and manage the necessary financial transactions and to measure and verify energy savings. It was also apparent that the creation of a new entity for managing an EE fund or a partial risk guarantee facility may require substantial legislative and regulatory changes and would take a long time. 74. The use of energy savings capture model was agreed as a positive step towards sustainable financing options facilitating reduced need for budget support enabling EE investments. The principle of capturing and reinvesting energy cost savings will help a greater number of water utilities to access financing for EE investments thus making it a more sustainable model than direct lending. This approach was successfully used in EE projects in Montenegro, Hungary and Serbia. To address the capacity issue, 47Soppe, Gerard, Nils Janson, and Scarlett Piantini. 2018. “Water Utility Turnaround Framework: A Guide for Improving Performance.” World Bank, Washington, DC. Page 26 of 106 The World Bank Water Services and Institutional Support Project (P162263) technical assistance coupled with targeted capacity building will be critical to enhance the enabling environment and capacity of PCU and utilities. An EE consultant will support PCU in implementation and monitoring to capture benefits. 75. The Independent Evaluation Group’s analysis48 of WSS projects indicated that adequate monitoring systems and benchmarking along with beneficiary feedback are important to increase transparency of information, accountability of water utilities and provide incentives for better services. The project will set up a sector monitoring system that will provide reliable evidence base for benchmarking and for service delivery improvements. Bulk and customer metering included in the project will further improve the accuracy of data about water production, distribution and consumer demand. Communication and citizen engagement will be an integral part of all service improvement activities and will be essential during tariff increases. 76. Clear responsibilities of implementing entities and coordination among key stakeholders involved in project implementation are important for successful implementation of an investment operation. In the current institutional context, the water utilities have little financial and decision-making autonomy and limited incentives for improved service delivery. Under the project, it is proposed that PCU under MHCS will have primary responsibility for the project implementation and coordination with key stakeholders. Kommunkhizmat Agency and PCU will oversee civil works contracts and will transfer completed assets to utilities. Consultancy support and capacity building will be provided to PCU and Kommunkhizmat Agency. Capacity for implementation will be strengthened through an augmented PCU structure and through the engagement of qualified consultancy firms, as described further below. III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 77. The project institutional and implementation arrangements have been informed by the World Bank’s experience in the WSS sector in Uzbekistan. The key institutions involved in the implementation of the proposed project are MoF, the Ministry of Investments and Foreign Trade (MIFT), MHCS, the Kommunkhizmat Agency under MHCS at the national level, and regional SUE Suvokovas and provincial governments at the local level. While the recipient of the IDA credits and SECO grant will be the Republic of Uzbekistan represented by MoF, the project will be implemented under the responsibility of MHCS as the government entity mandated for development of the water and sanitation sector. MHCS will provide strategic policy guidance and oversight, will have direct inputs into all national-level activities under Component 1 and coordinate with concerned ministries, agencies, the Suvokovas and provincial governments. 78. Overall institutional and implementation arrangements are illustrated in Figure 2. The role of each institution is presented in detail in Annex 2 and a summary of key aspects of the institutional implementation arrangements is provided below. 48Independent Evaluation Group. 2017. A Thirst for Change : The World Bank Group’s Support for Water Supply and Sanitation, with Focus on the Poor. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/29345 License: CC BY 3.0 IGO. Page 27 of 106 The World Bank Water Services and Institutional Support Project (P162263) Figure 2: Institutional implementational arrangements 79. The Kommunkhizmat Agency which rests under the MHCS, is mandated for implementation of investment projects in Uzbekistan’s WSS sector. The Agency and its PCU will be primarily responsible for project implementation, and accordingly will enter into a Project Agreement with the World Bank and a Subsidiary Agreement with MoF. These Agreements will govern the legal roles and responsibilities of the Agency. For Works implementation, the Kommunkhizmat Agency will act as the Employer under the contracts and assets will be handed over to the Suvokova upon satisfactory completion. 80. The existing PCU, established under the Kommunkhizmat Agency, implements two on-going water supply and sanitation projects in Uzbekistan (Bukhara and Samarkand Sewerage Project, and Alat and Karakul Water Supply Project)49. Under the proposed project, PCU will be expanded and supported by international and local consulting firms to facilitate project management, design and construction supervision and support implementation of EE investments. Component 1 and 2 Coordinators will focus on and work exclusively towards advancing relevant activities, including the technical assistance for institutional strengthening and reform. PCU will be responsible for day-to-day project management including procurement, financial management, disbursements, monitoring and evaluation, safeguards management, audit management, quality and compliance oversight, and progress reporting. PCU will monitor and coordinate project activities including communications with the Bank and government agencies. The organizational structure of PCU is presented in Annex 3. 81. PCU will be supported by the Project Management Consultant (PMC), EE Consultant and Detailed Design and Construction Supervision (DDCS) Consultant. The consultants will be contracted by PCU and will have specific responsibilities to be described in their terms of reference. PMC will be an international firm to be financed through the IFCA grant, staffed with a team of international specialists50 who will work side-by-side with PCU on daily basis to support overall management of the project. PMC will also assist PCU in project implementation and activities at national level under Component 1 and at local level under Component 4. PMC will also be tasked with training and professional development activities to ensure strengthening of the Kommunkhizmat Agency’s institutional capacity for investment planning, design and implementation. 49 These projects are scheduled to close on December 31, 2020, and June 30, 2020 respectively. 50 Including specialist support for procurement, contract management, safeguards management, technical design review, financial management, reporting, and monitoring and evaluation amongst others. Page 28 of 106 The World Bank Water Services and Institutional Support Project (P162263) The DDCS Consultant to be financed through the IDA credit will provide support to PCU and Kommunkhizmat Agency in advancing the designs and implementation of the infrastructure subprojects under Component 3. The consultant will carry out the remaining detailed engineering designs, prepare technical specifications, cost estimates, procurement documentation, and other associated support to enable timely tendering and contract award. During construction, the Consultant will act as the Engineer (employers’ representative) under contracts based on International Federation of Consulting Engineers (FIDIC) and carry out supervision and contract administration procedures with reference to quality, cost and time controls to support implementation of the infrastructure activities. The Consultant will also be tasked certain activities to support management of environmental and social safeguards procedures to help ensure compliance with the World Bank’s policies and procedures. The DDCS Consultant will work closely with technical-engineering staff of PCU, Kommunkhizmat Agency and Suvokovas. 82. The EE Consultant to be financed through the SECO grant will facilitate implementation of Component 2 and provide technical and consultant support to PCU. The EE Consultant will be responsible for energy auditing, identification of EE measures, selection of equipment and service providers, development of technical solutions, supervision of the project implementation and measurement and verification of the energy and cost savings. The EE Consultant will also build the capacity of PCU, MHCS, and Suvokovas in development of EE strategy, EE technologies and options for Suvokovas, detailed energy audits, EE financial analysis, measurement and verification of the results of EE investments. The EE Consultant will coordinate its work with the Component 2 Coordinator of PCU and will work closely with the MHCS and Suvokovas. 83. PCU branches will be established in regional centers of selected project areas and will be located within the premises of the water utilities. Regional branches led by a local coordinator shall employ engineering, institutional, safeguards and administrative staff. Regional branches will be responsible for coordination of local level activities under Components 3 and 4. 84. Samarkand and Syrdarya Regional State Unitary Enterprises (SUE) Suvokovas and Department for Operation of Interregional Trunk Main Tuyamuyun-Nukus (Karakalpakstan) will be institutional beneficiaries of Components 3 and 4 of the projects. Each of these three Suvokovas have experience with implementation of IDA-funded projects. Responsibilities for promoting household connections and communication/engagement with consumers will rest with the Suvokovas, who will also coordinate with local authorities (Khokimiyats and Council of Ministers of Karakalpakstan) and other stakeholders and ensure land is properly allocated (if required) for the project purposes and in compliance with the Bank’s safeguards policies. The MoF intends to sign the respective Subsidiary Agreements with each of the participating water utilities and Khokimiyats/Council of Ministers of Karakalpakstan respectively for purposes of reimbursement of the cost/value of the assets, as well as the transfer of the respective assets. 85. A development partner group will be established to enhance coordinated and communications in support of the broader program. This partner group will be a platform for high-level strategic guidance and will serve to enhance synergies and collaboration, to ensure effective communication, programming and alignment of various activities and approaches. All activities under the broader program will be implemented in a consistent approach (including common standards for technical aspects, safeguards and fiduciary controls), in accordance with procedures defined in a shared Project Operational Manual (POM). The Kommunkhizmat Agency and their PCU will prepare joint semi-annual progress reports, to be shared among all the program partners. In addition, there will be combined and coordinated implementation Page 29 of 106 The World Bank Water Services and Institutional Support Project (P162263) support missions and associated reporting (e.g. Aide Memoires, etc.). The development partner group will be established and led by MHCS and will include World Bank, SECO, EU, EIB and others. Component 1 of the project will also provide logistical and administrative support to MHCS for hosting regular sector coordination meetings, which will be inclusive of all active development partners. B. Results Monitoring and Evaluation Arrangements 86. A M&E system will be implemented as part of the project design. PCU will be responsible for (i) monitoring the performance of the project towards achievement of its objectives; (ii) progress of civil works and institutional activities in the regions with timely identification of bottlenecks during implementation; and (iii) regular monitoring of the progress under Components 1 and 2. PCU includes a full-time M&E Specialist, who will with support of PMC, integrate results under all Components and coordinate data collection and analysis with MHCS for Component 1, EE Consultant for Component 2, Kommunkhizmat Agency and PCU regional branches for Components 3 and 4. At the local level, PCU regional coordinators will be responsible for collecting and analyzing data and reporting on the progress of activities in the regions to the M&E Specialist. PCU will prepare semi-annual reports which will reflect project progress based on performance indicators defined in the Results Framework. In addition, PCU will prepare monthly reports to track progress of civil works and quarterly reports to highlight key issues in implementation and inform about environmental and social safeguards compliance, and proposed mitigation measures. The M&E Framework will be an integral part of the POM. 87. PMC will provide support to PCU in designing and setting up an appropriate M&E system at central and local levels covering the entire program of activities. PMC will also strengthen the capacity of PCU, PCU regional officers and MHCS staff in M&E of the investment projects and sector monitoring. For Component 2, PCU will engage the EE Consultant who will design and implement the verification and monitoring system to the capture and record energy savings and related results indicators under Component 2. Baseline surveys will be conducted during the feasibility studies and will be available at the start of project implementation. A follow-up assessment will be conducted prior to project closure. 88. A key aspect of the results monitoring will be the consumer satisfaction surveys for water services. They will be conducted before and after project interventions to assess satisfaction levels and measure attributable outcomes of the project. Moreover, support will be provided to MHCS under Component 1 to institutionalize a sector-wide monitoring system. This will involve development of the monitoring system to track and analyze performance of service providers towards measuring sector developments / improvements and progress towards achievement of the sustainable development goals for water supply and sanitation. C. Sustainability 89. Sustainability is a core principle which has been integrated into the design of this project at several levels. It includes careful consideration and planning to address a range of important factors to enable continuity of reliable, affordable and adequate quality water supply and sanitation services, as follows. 90. Social Sustainability. Involvement of the community, local governments and other key stakeholders in project preparation and during implementation will more likely result in locally acceptable Page 30 of 106 The World Bank Water Services and Institutional Support Project (P162263) and sustainable technical and institutional solutions. Critical to social sustainability will be the enhancement of service delivery and a demonstration that services meet customer expectations and needs, through a transparent and efficient process. The project will support community consultation and participation, processes which will help to create a sense of ownership over the activities. Communication and public awareness programs will be implemented to support knowledge, attitude and behavioral changes targeted towards a range of drinking water and sanitation issues, and citizen engagement mechanisms will be introduced to enhance accountability and recourse. 91. Institutional Sustainability: The overarching goal for improving water sector governance is to create a coordinated and responsive institutional framework, where the roles and responsibilities of actors are clear. This will facilitate the creation of an enabling environment for service providers—utilities and communities— through which quality and affordable services can be provided to households and businesses. The project will provide capacity building and technical assistance for the national and regional entities supporting a range of policy and institutional activities aligned with and embedded within the Government’s own sector reform program. 92. Financial Sustainability. The project aims to improve the financial situation of the Suvokova by supporting efforts to increase revenues, such as medium-term tariff adjustments, collection improvements and service expansion, and minimize operating costs. Efficiency gains introduced through the project’s strong focus on non-revenue water management and energy efficiency in particular will help to control costs. Moreover, the Suvokova will benefit through improved commercial systems (including financial management, accounting and reporting), technical skills, and customer relations. The objective is to enable these operators to provide affordable services of acceptable quality, which satisfy customer expectations and allow enough financial revenues to be generated and sustained over time. The enabling environment will also be improved through financial regulation and institutional strengthening. Specifically, the project will support the capacity of MHCS to manage the planning, tariff setting and regulatory processes. This will include support for implementation of Government’s recently adopted tariff policy51, based on modern practices of applying consumption-based, cost-reflective tariffs which consider operating and maintenance costs and include a reserve for asset replacement over time. 93. Technical Sustainability. The project will apply technical design standards and methods, which will support operational sustainability. This will include careful consideration of water source options (quality, quantity, security / climate resilience, and operational implications), life-cycle costs and operational capacity constraints. The selected infrastructure investments will help to consolidate the institutional reforms, in which provision of technical services for maintenance and repair can be introduced in a viable way. In addition, the focus on the modernization of technical standards and designs will provide water supply and wastewater management systems that can be managed efficiently and operate reliably; meeting customer demands for levels of service and affordability. 94. Environmental Sustainability: The project design has integrated principles of environmental sustainability. Specifically, this includes assessments of sustainable yields, water source protection, water conservation, and systems to support safe collection and disposal of wastewater and sludge. Moreover, the project will finance several activities supporting climate change adaption and mitigation. 51The recently adopted tariff policy (Cabinet of Ministers Resolution #309 April 13, 2019) was included a policy prior action under the Sustaining Market Reforms in Uzbekistan Development Policy Operation (P168280). Page 31 of 106 The World Bank Water Services and Institutional Support Project (P162263) 95. It is intended that the project provides comprehensive support at the national level, related to sector policy, planning, and regulations, and at the regional level, to enable or create conditions for sustainable water and sanitation service delivery in the project areas beyond the lifetime of the project. IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis Technical 96. The Bank has reviewed and confirmed that the proposed investments reflect Government priorities and are aligned with strategic sector principles addressing key technical and service issues. Planned investments focus on optimizing the use of existing systems and improving operational efficiency, including metering, reduction of NRW, and energy savings. Such efficiency improvements will allow Suvokovas to meet increasing demands associated with population growth, even in the face of increasing water scarcity. Detailed engineering designs for the proposed subprojects will be prepared considering infrastructure sustainability, climate risks, population and economic growth. 97. The IDA-financed infrastructure investments, identified based on pre-feasibility level studies, aim at expanding access and improving the efficiency and quality of water supply and wastewater services in three regions, namely in the Republic of Karakalpakstan, Syrdarya and Samarkand regions. These subprojects will directly enhance the quality of life of more than 536,400 people, and sustainably improve public and environmental health in across the broader project areas extending benefits widely. 98. Feasibility studies, and detailed engineering designs for year one investments (equivalent to around US$41.0 million), are under preparation by international engineering consulting firms and will be completed prior to project effectiveness, to ensure readiness for implementation. 99. The proposed investment measures are based on technically sound concepts, supported by engineering investigations and designs and consider operational capacity constraints and life-cycle costs to promote project sustainability. Detailed cost estimates will be prepared by the consultants for the investment measures proposed in the Priority Investment Program in accordance with the standards and requirements of local legislation and based on experience from recent and applicable tenders. The proposed contract packaging draws upon the Project Procurement Strategy for Development and considers potential technical and procurement risks and geographical constraints, and where possible seeks to increase efficiency through economies of scale (by grouping similar investments into larger packages) and innovative procurement (for example design-build-operate contracts for the larger wastewater treatment plants). 100. The terms of reference for three key consulting services (PMC, EE Consultant, DDCS Consultant) have been initiated in advance and procurement processes will be launched early, to ensure immediate start-up of such activities soon as the project becomes effective. Detailed design and construction supervision services to support PCU, Kommunkhizmat Agency and Suvokovas in preparation and oversight of infrastructure works in the three subproject areas with a total value of US$9 million are foreseen. DDCS Consultant will prepare the remaining detailed engineering designs (not included in the scope of work for feasibility study consultants) and will act on behalf of the Employer as the Engineer under FIDIC-based Page 32 of 106 The World Bank Water Services and Institutional Support Project (P162263) contracts. It is expected that consultancy services for detailed design and construction supervision will start immediately upon effectiveness. 101. The investment measures and consultancy services will particularly focus on reduction of NRW, which shall include not only physical infrastructure replacement, but more importantly capacity building for establishing water balances and water loss reduction. Further, the scope of work will include tasks related to the improvement of the Suvokovas in asset management. The consultants will consider the impact of climate change on the water demand development and a specific climate adaptation action plan shall be prepared and implemented to ensure sustainability of the proposed measures. Finally, consultants should propose in its option analysis innovative technologies which are well adapted to the needs and the capacities of the concerned Suvokovas and should support its implementation. Economic and Financial Analysis 102. Economic Analysis: Economic analyses have been carried out separately for the water supply investments and the wastewater investments of the project and analyzed on the basis of investments and benefits by Suvokova and for the project as a whole. For the water supply investments, the analysis incorporated (i) capital investment and estimated changes in operating costs; (ii) time savings to beneficiaries of water-supply investments, resulting from beneficiaries no longer having to access water from relatively distant sources; (iii) reductions in direct beneficiary costs of treating existing water sources (i.e., boiling); and (iv) reduced health costs resulting from reduced incidence of diarrhea and infectious hepatitis. With respect to sewerage investments, analyses incorporated (i) capital investment and estimated operating costs; (ii) reduced costs for beneficiary households; and (iii) estimated economic benefits of reduced pollution resulting from sewage discharge. Economic internal rates of return (EIRRs) have been calculated based on the streams of costs and benefits over a period of 30 years (combined implementation period and operational period), as well as the investments’ net present values (NPVs), based on a discount rate of six percent. 103. The estimated EIRR for the project as a whole is calculated to be 17 percent, with an NPV of US$255 million. The majority (87 percent) of project benefits are related to reductions in pollution resulting from investments in sewage collection and treatment. Nine percent of benefits are due to improved or expanded water supply, while four percent of benefits are related to benefits to households in areas with improved sewerage services. 104. Because of the high value of the benefits of pollution reduction resulting from the investments in sewerage infrastructure, as well as the reconstruction nature of much of the investments in water investments, the economic returns to sewerage investments are noticeably higher than for water supply. For this reason, when analyzing economic returns by Suvokova, the economic returns to investments in Karakalpakstan (which does not include water supply investments) are significantly higher than the investments in Syrdarya or in Samarkand (Kattakurgan). The EIRR of the investments in Karakalpakstan are estimated to be 29 percent (with an NPV of US$225.5 million). The EIRR for investments in Syrdarya are estimated to be 8.4 percent, with an NPV of US$15.2 million, while the investments in Samarkand are estimated to result in an EIRR of 6.9 percent, and an NPV of US$4.8 million. Further details on the assumptions and results are provided in Annex 3. 105. Financial Analysis: Longstanding issues related to cost recovery and tariff levels within the Suvokovas prevent the effective use of existing operating and cost structures to calculate a traditional Page 33 of 106 The World Bank Water Services and Institutional Support Project (P162263) financial analysis, in which a financial internal rate of return (FIRR) is calculated. Instead the existing financial and operational data has been used, combined with estimates of the operational results of the project investments, to calculate changes in tariffs that would be necessary for the Suvokovas to meet operational cost-recovery ratios of at least 1.0. This approach provides an indication of minimum levels of tariff increases to meet full operating costs including depreciation (see Annex 3). 106. The results demonstrate that substantial tariff increases are required both for water supply and sewerage services, under both the ‘with’ and ‘without’ project scenarios. This is due largely to a very low existing tariff base52 and the currently suppressed costs basis - including under investment in asset maintenance. Such issues are well known within the sector and have been addressed recently through the introduction of new Government regulations, including Cabinet of Minister Resolution #309 (April 13, 2019) which adopts the policy of full cost-recovery and introduces new methodologies and procedures for integrated planning and linked medium-term tariff setting and adjustments. Under this approach and over time, revenues generated by tariffs will move towards full coverage of costs for providing efficient and improved water supply and sewerage services. 107. Project affordability assessments indicate that with such tariff increases, the combined bills for household water supply and sewerage services will remain below affordably thresholds53, even for the poorest households (bottom 20 percent) where adjusted bills are conservatively projected to represent around 5 percent of monthly household incomes. 108. Greenhouse gas accounting: The economic analysis was also undertaken incorporating net greenhouse gas (GHG) emissions resulting from the project. For both water supply investments and sewerage investments, with-project GHG emissions are believed to be lower than without-project emissions, and therefore there is a net reduction in emissions. That said, in both cases the reductions are small enough that there is practically no change in the NPVs or the EIRRs. This applies for both the low and the high shadow price of carbon. Additional information is provided in Annex 3. 109. Maximizing Finance for Development (MFD). The design of the project is considered “MFD- enabling”, with a strengthened policy and regulatory environment which will support private sector participation in WSS. In particular, it is likely to enable, in the medium term, commercial borrowing on the part of the Suvokovas, as their operations and finances become more transparent, and as their revenues include to levels that enable them to borrow for capital investments and rehabilitation. Moreover, it responds to and aligns with Government policy of leveraging private sector participation. Soft activities – such as strengthening of information and monitoring systems, capacity building, the introduction of medium-term delivery planning, metering, professional development contracts, and NRW reduction programs – will bring participating utilities closer to creditworthiness. Furthermore, the project will seek to maximize finance for development in future by enabling blending and leveraging domestic commercial finance where possible for EE improvements under the financing facility (Component 2). 52 2019 tariffs for water supply in the project areas ranged from US$0.04 - 0.08 / m3, tariffs for household sewerage range from US$ 0.03 - 0.06 / m3 53 Set at 5 percent of household income. Page 34 of 106 The World Bank Water Services and Institutional Support Project (P162263) B. Fiduciary Financial Management 110. Financial Management Arrangements. The PCU under the Kommunkhizmat Agency will be responsible for financial management of the project. PCU is already responsible for financial management (FM) tasks under the on-going projects and are thus familiar with their responsibilities including submission of quarterly unaudited interim financial reports (IFRs) and audited annual project financial statements, to the World Bank. 111. PCU currently has an FM specialist and a project accountant. The existing FM staff has knowledge and experience in implementing Bank-financed Projects. Considering expected heavy work-load during the implementation of this proposed Project, the PCU will hire an additional dedicated disbursement specialist during implementation of this Project. 112. The POM will describe in detail the internal controls, budgeting, external auditing, financial reporting, and accounting policies and procedures as relevant for project specific activities. The PCU will manage project payments and maintain project accounting records, which would be segregated for this project. The existing accounting software, 1-C, is to be customized for accounting and financial reporting purposes of the proposed project, to be completed within 30 days after project effectiveness. The annual audited financial statements together with the auditor’s opinion and the Management Letter will be provided to the World Bank within six months after the end of each fiscal year and at the closing of the project. The PCU will be responsible for selection and appointment of the project auditor, per a term of reference acceptable to the Bank, and the financial audit will be financed from the credit proceeds. 113. Financial Management Risk Assessment. The appraisal stage assessments determined that the FM related fiduciary risks are High, based on historical performance and observed weaknesses with regards to internal controls, flow of funds, budgeting, accounting, reporting and auditing. Key FM related risks include: (i) late documentation of advances, (ii) late submission of both projects and entities audit reports, and (iii) late submission of un-audited interim financial statements. Moreover, recent auditor’s management letters for the PCU also signaled some internal control issues, including contract monitoring procedures, internal verifications and approvals, accounting and reporting aspects. 114. For successful implementation this project, efforts are required to strengthen and promote FM capacity of the PCU. Risk mitigation measures integrated into the project design include: (i) customizing the “1C” automated accounting system to better support project accounting and reporting; (ii) ensuring strict adherence to policies and procedures in POM to be developed for the proposed project; and (iii) increasing the capacity of the FM staff, by adding an additional position within the PCU and providing support through the PMC. 115. Disbursement Arrangements. The disbursement arrangements will follow the traditional disbursement mechanism, including direct payments, replenishments of a Designated Account (DA), and reimbursements. PCU will open the DA in U.S. dollar in a financial institution acceptable to the World Bank and a transit account in Uzbek Som as may be necessary, and both accounts will be used only for the inflow of project funds and payment of eligible expenditures. PCU will oversee planning the project disbursements and preparation of withdrawal applications and making payments. PCU will manage all Page 35 of 106 The World Bank Water Services and Institutional Support Project (P162263) contracts under this project including all payments under all contracts and PCU will manage payments on operating costs. Procurement 116. Applicable Procurement Framework: The activities under the project will be subject to the “Procurement Regulations”. All procurement of contracts will be conducted through the procedures as specified in the World Bank’s Procurement Regulations for IPF Recipients - Procurement in Investment Project Financing Goods, Works, Non-Consulting and Consulting Services, dated July 2016, revised November 2017 and August 2018 (the Regulations). The procurement and contract management processes will be tracked through the Systematic Tracking of Exchange in Procurement (STEP) system. 117. Procurement Risks Assessment: Procurement capacity assessment was performed by the Bank using the Procurement Risk Assessment and Management System (P-RAMS). The key risks concerning procurement for implementation of the project include systemic weaknesses in the areas of: (i) weak implementation capacity in project implementation units and inefficient procurement processes; (ii) delays in procurement processes resulting from the complex and time-consuming Government internal approval of procurement decisions; (iii) poor capacity, practice and tools for efficient contract management and monitoring; and (iv) procurement malpractices and weak integrity safeguards particularly in the water sector. 118. Risk mitigation measures include: (i) strengthen and promote consolidation of overall procurement capacity of the implementing entities and particularly for technical specifications preparation and efficiency of managing procurement processes; (ii) engagement of international specialists to support procurement processes for large and high value contracts for Works and Design, Supply &Installation contracts; (iii) clear definition of decision-making processes, accountability and integrity safeguards for procurement decisions (as set out in the POM); (iv) put in place an efficient contract management mechanism, including the tracking of key performance indicators. The procurement related fiduciary risk is assessed as Substantial. 119. Project Procurement Strategy for Development (PPSD) and Procurement Plan: The preparation of the PPSD was initiated at early stage of the project preparation with extensive support by Bank procurement staff. The PPSD informed the preparation of the Procurement Plan for the first 18 months of project implementation. The PPSD includes a detailed Procurement Risk Analysis and actions to mitigate the procurement risk that is being rated as substantial. If followed properly, and the risks are mitigated, a lower risk rating might be upgraded during project implementation. Conclusions of the PPSD reveal that for market analysis for large value packages which constitute more that 80 percent of the project’s financing there is a competitive market both at local and international levels with sufficiently large number of contractors, manufacturers, and suppliers. The nature of the civil work contracts is not particularly complex, and a good level of competition is anticipated among national and international companies. The PPSD and resulting Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity. 120. Use of National Procurement Procedures: All contracts for goods, works and consultancy services following national market approach shall use the procedures set out in the Public Procurement Law (PPL) dated April 2018. The provisions of the PPL are consistent with the World Bank Procurement Regulations Section V – Para 5.4 National Procurement Procedures subject to a few conditions specified in the PPSD. Page 36 of 106 The World Bank Water Services and Institutional Support Project (P162263) Further improvement of the 2018 legal and regulatory framework is being carried out by the Government. The on-going reform activities include the development of a new PPL and its implementation regulations as well as a full-fledged e-procurement system. The World Bank is being providing support and advice to GOU on the development of this new framework and will update the assessment of the National Procurement Procedures that will be adopted for the national competition procurement approach under the project. Moreover, the Bank procurement team has recently undertaken a rapid market analysis of the Uzbekistan local construction industry with the main objective to develop an appropriate and updated knowledge and understanding of the national construction sector in Uzbekistan and the actual capacity of the local contractors in participating and implementing construction contracts in the country under Government, IFIs, or private sector funded investment projects. The findings will allow the agencies involved in the procurement of civil works to develop procurement approaches that would encourage increased participation of national contractors in bidding processes. It will also help the Bank to update the selection of procurement approaches and update methods’ thresholds for civil works in Uzbekistan and consequently promote an increased use of the National Open Competition approach. C. Safeguards Environmental Safeguards 121. The project is rated as “Category “B” in accordance with the Bank’s Operational Policy (OP)/Bank Procedure (BP) 4.01 on Environmental Assessment. Applicable environmental safeguard policies for the project include: Environmental Assessment (OP 4.01), Physical Cultural Resources (OP 4.11) and Projects on International Waterways (OP/BP 7.50). 122. Environmental Assessment (OP 4.01): The project will not finance any activities with significant or irreversible environmental impacts. While the environmental impact of the proposed project will be largely positive, some adverse mainly construction related impacts may be generated. The identified positive environmental impacts of the project include (i) improved water management and efficiency through replacement of leaking pipes and production systems, installation of bulk and individual meters, together with support for improved operations; (ii) the overall water consumption will be less than actual quantities and original design/planning estimates due to efficiency gains; (iii) contribution to protecting ground and surface water resources by rehabilitation of wastewater treatment plants and sewerage network; (iv) improved citizens’ skills and awareness in planning and implementation of local activities, with particular attention to environment protection, and (v) sustainable management of improved infrastructure by utilities, which will bring environmental and social benefits related to natural resources management. 123. The potential estimated environmental issues associated with the medium scale construction activities for local communities will be limited, temporary nuisances may include: (i) increased pollution due to construction waste; (ii) generation of dust, noise, and vibration due to the movement of construction vehicles and machinery; (iii) associated risks due to improper disposal of construction waste and asbestos, or minor operational or accidental spills of fuel and lubricants from the construction machinery; (iv) impacts on soil and air quality as well as possible temporary effects to the local vegetation (trees) or landscape; and (v) improper reinstatement of construction sites upon completion of works. These potential environmental impacts are readily identifiable, small in scale, and minimal in impact and can be effectively prevented, minimized, or mitigated by including into the work contracts specific Page 37 of 106 The World Bank Water Services and Institutional Support Project (P162263) measures to be taken by contractors under close supervision of compliance by PCU. Use of construction materials that are hazardous to human health (for example, asbestos and asbestos contained materials) will not be permitted. Asbestos contained waste will be collected, transported and finally disposed by applying special protective measures in accordance with hazardous waste handling standards and using procedures given in the World Bank Group Environmental, Health and Safety Guidelines. Furthermore, health and safety hazards to workers from the management of chlorine used for disinfection and other contaminants will be mitigated through training to workers on how to handle hazardous materials. Potential risks associated with the management and disposal of sediments and sludge generated by water treatment operations, are to be managed through regulated disposal at a permitted site. 124. Physical Cultural Resources (OP 4.11): Majority of the project infrastructure activities are in built- up areas and within existing rights of way and therefore potential impacts on physical cultural resources are minimal. However, as the feasibility studies and designs progress, potential impacts on physical cultural resources will be reviewed in detail to determine if specific management plans are required for subprojects under preparation. Where needed, such plans will be prepared as part of Environmental and Social Management Plan (ESMPs) during the project implementation. All contracts related to earthworks will include chance find procedures. 125. Effective measures have been put in place under the project to address and closely monitor safeguards issues. An Environmental and Social Management Framework (ESMF) for the project consistent with Environmental Assessment (OP 4.01) requirements was prepared by PCU and found satisfactory by the World Bank. The ESMF public consultations were held on November 11-13, 2019 – including participants from each subproject area. Feedback from the consultations was reflected in the revised final document, disclosed both in-country and on the World Bank website on November 27, 2019. 126. ESMF will be incorporated into POM. Each activity to be financed under the project will be reviewed for safeguards risks in line with OP 4.01 and must obtain the clearances required by Uzbekistan national regulations and the World Bank. 127. Environmental and Social Impact Assessments/ESMPs will be prepared depending on the scale of the subproject and based on the screening criteria provided in the ESMF for each subproject and cleared by the Bank. Implementation of environmental mitigation and compliance measures for on-going projects is carried out by the contractors (construction firms) and monitored by consultants, Suvokova and PCU staff. This practice will continue under this operation, with strengthened arrangements. During implementation, PCU will have overall management responsibility for ensuring that the measures indicated in ESMP are being properly performed. PCU, in collaboration with the Suvokova and local authorities, will perform the environmental monitoring during both construction and operation phases, as specified in the monitoring plan of ESMP. Appropriate training on Bank safeguards will continue to be provided to local officials, contractors, and community representatives. 128. The project will not finance Category-A activities, will not support activities that target natural habitats or protected sites, and will prohibit those activities that can cause a significant loss or degradation of any critical natural habitat. The environmental screening process will check for the presence of physical cultural resources. In addition, chance find procedures will be included in all works contracts. 129. Institutional Safeguards Arrangements: PCU will be responsible for safeguards management under the proposed project. PCU will need to establish appropriate systems and hire qualified personnel Page 38 of 106 The World Bank Water Services and Institutional Support Project (P162263) to increase their capacity for environmental and social safeguards management. Furthermore, PCU will need to broaden their capacity for safeguards management through engaging and training new staff in this field. 130. Projects on International Waterways (OP/BP 7.50): OP 7.50 is triggered because the project will finance rehabilitation, improvement, additions and expansions to drinking water supply and wastewater management systems located within the transboundary basin of the Syr Darya and Zarafshan rivers. However, project interventions are not expected to adversely affect water quality or quantity flows to other riparian states. Infrastructure rehabilitation and modernization and water supply management improvements is expected to increase system efficiency, thereby generating water savings and providing users with a reliable water supply. Further, the project aims to improve efficiency of water use and to substantially reduce technical losses and high-water consumption rates. Leakages will be reduced through infrastructure rehabilitation and replacement which will help conserve ground and surface water resources. Water conservation will be promoted through improved demand-management measures, i.e., replacement of continuously running communal stand pipes, replacement of communal stand pipes with household stand-pipes, and installation of individual meters. Given the nature of project activities, the project will not (i) cause appreciable harm to the other riparian states as it will not adversely change the quality or quantity of water flows, and (ii) will not be appreciably harmed by other riparian state’s possible water use. 131. Upon request, the Bank, on behalf of the Government of Uzbekistan, notified other riparians of the project. The other riparian countries did not raise any comments or objections to the project. On December 28, 2019, the Regional Vice-President for Europe and Central approved to proceed with finalization of project preparation. Social Safeguards 132. Project preparation benefited from analysis of outcomes and lessons learned from the on-going projects. The project is expected to have positive social impacts such as improved water accessibility, hygiene, and sanitation standards in the project communities, which in turn have positive impacts on the quality of life, especially of women, children and vulnerable groups. Improved sanitation practices and greater awareness of the population is expected to have a trickle-down effect on the health situation of the population. The main project beneficiaries include residents of the participating communities. At the same time, awareness raising campaign and greater involvement of civil society, local and national level governance institutions will ensure a broader project impact and change in cultural practices in hygiene and sanitation. 133. Involuntary Resettlement (OP 4.12): Project activities related to the rehabilitation of existing and/or reconstruction of water supply and sewerage infrastructure (Component 3) in the project areas and investments for EE improvements under Component 2 are likely to have temporary and permanent land-acquisition implications. The nature of impacts and extent of interventions are currently unknown and will become clearer once the final designs of subprojects become available. Therefore, OP 4.12 Involuntary Resettlement has been triggered and a Resettlement Policy Framework prepared for the project. The Resettlement Policy Framework provides guidance on the preparation of resettlement action plans during project implementation. If any impacts will be identified, an individual resettlement action plan will be prepared for each subproject consistent with the policy framework and submitted to the Bank Page 39 of 106 The World Bank Water Services and Institutional Support Project (P162263) for approval before the subproject is accepted for Bank financing. The Resettlement Policy Framework public consultations were held on November 11-13, 2019 - including participants from each subproject area. Feedback from the consultations was reflected in the revised final document, disclosed both in- country and on the World Bank website on November 27, 2019. D. Citizen Engagement, Gender, and Climate Change Citizen Engagement 134. Project design and implementation will draw upon and be guided by results from consultations, citizen satisfaction surveys and grievance-redress mechanism to ensure that citizens are engaged throughout the project cycle. Communities within the project areas will be engaged to ensure that the needs of vulnerable households are considered. Community committees will be established with representation of women, disabled, disadvantaged and other vulnerable groups and hold regular meetings to discuss project implementation, access to information, quality of services provided by Suvokovas, and provide proposals/suggestions. Suvokovas have complaints handling systems in place that will be reinforced through corporate development activities under Component 4. The project will also establish a grievance redress mechanism to record and address consumers’ complaints related to project implementation to improve accountability of Suvokovas. 135. As part of Components 1 and 4, the project will promote service-oriented management that will include feedback from consumers on the services provided to them. A communication and citizen engagement strategy developed at the national level will help create the interactive space between MHCS, Suvokovas, and citizens to discuss performance and satisfaction surveys, project issues, and agree on joint measures at local level and establish the procedures for two-way communication with citizens in WSS on key service issues and areas of reform (including tariff adjustments and water conservation through metering and demand management). Some of the citizen engagement undertakings would be supported through technical assistance under Component 4. Satisfaction with the service improvements will be tracked at the project start, at midterm and upon completion. The survey will cover five key themes: turbidity, water pressure, safety, service continuity, and customer service of the Suvokova. In addition, the survey will assess awareness about the project and satisfaction with the quality of citizen engagement process. To increase Suvokovas’ accountability, results of the surveys and action plans for service improvements and reports by Suvokovas on implementation of such plans will be discussed at customer and stakeholder engagement meetings. The project’s results framework includes indicators to measure progress in key consultation and engagement activities. State of the Sector Annual Reports will be publicly disclosed, including a section related to the performance of citizen engagement activities. Gender 136. Women represent more than half of the population of project beneficiaries. Women are generally responsible for household activities including water collection and treatment, meal preparation, washing dishes, laundry, child care and sanitation. A 2015 World Bank study54 estimated that 1.5 times as many women as men participate in collecting water who, among other things, report lower back pain from repetitive lifting and moving heavy containers. Furthermore, time spent for this activity is significant, due 54 Social Impact Analysis of Water Supply and Sanitation Services in Central Asia: The Case of Uzbekistan. World Bank, 2015. Page 40 of 106 The World Bank Water Services and Institutional Support Project (P162263) to long distances to the nearest water sources (for example, standpipe or canals). Women (and children) spend on average 22 person-hours per month collecting water as well as additional time boiling water for drinking, heating water for laundry and bathing.55 Hand laundry takes almost the same amount of time. Women are usually responsible for hygiene and sanitation in the households including disposal of solid and liquid domestic waste. Inadequate and poor-quality services negatively impact women’s economic opportunities. Time saved from fetching water and hand laundry can be utilized for income-generating activities, self-education or social activities. 137. Women are underrepresented in WSS sector staff at all levels. When employed, women in Suvokovas are typically assigned to domains traditionally considered for females such as accounting, finance, customer relations, and laboratories. The ADB study (2018)56 reported that only 10 percent of employees in the central apparatus of MHCS and 5 percent of employees in the Kommunkhizmat Agency are represented by women. A similar disparity exists in regional Suvokovas: 7 percent (Samarkand), 11 percent (Syrdarya) and 15 percent (Karakalpakstan) with very low level at managerial positions (around 0.3-0.5 percent)57 and in operation and maintenance (manual labor). These numbers are significantly lower than global averages, where a recent World Bank Report (2019)58 shows that 18 percent of utility employees are women, while female engineers and managers each make up a 23 percent share of the workforce. The share of engineering and technical staff in regional Suvokovas is higher, and reflective of global averages: 20 percent in Samarkand Suvokova, 23 – in Syrdarya Suvokova, and 1959 - in Karakalpakstan. 138. The project will focus on closing two gender gaps: (i) eliminate disproportional time-use burden on women in project areas and (ii) advance opportunities for employment. Under Component 3, the activities will provide better conditions for women reducing their time spent on fetching water through improving existing and new connections to piped potable water supply systems within their homes or yards. The project will directly benefit around 41,900 women mostly in Syrdarya region, who can effectively use time saved collecting water to generate additional income. Women across the subproject areas will also receive access to centralized sewerage systems that will improve hygiene and sanitation practices and will contribute to their sense of safety. The project will address the second gap by developing Gender Enhancement Plans for the respective sector institutions. The project will take steps to integrate gender approaches in corporate governance and increase gender diversity. Human Resources (HR) policies, guidelines and procedures of participating water utilities will be reviewed on gender responsive recruitment, job descriptions, job advertisements, professional development and promotion, flexible work arrangements. Based on the assessment, the project will develop sex-disaggregated HR databases in three participating water utilities and Gender Enhancement Plans. Such plans should include assessment of gender inclusion, potential for enhancement, HR policies, incentives to recruit women or increase their capacity and other interventions and pre-requisites to improve gender balance in the utility staffing, especially in managerial, operational and technical positions. The project will also make sure that capacity-building activities will be equally accessible to women and men and will offer gender-awareness 55 Asian Development Bank. 2018. Uzbekistan Country Gender Assessment. Update. 56 Ibid. 57 Number of female managers in participating Suvokovas: four female managers in Samarkand Regional Suvokova, three – in Syrdarya Regional Suvokova and seven – in Karakalpakstan. 58 World Bank 2019. Women in Water Utilities: Breaking Barriers. 59 Suvokova data as of October 2019. Page 41 of 106 The World Bank Water Services and Institutional Support Project (P162263) trainings and targeted leadership and communication trainings for women. 139. The project includes results indicators to monitor these actions. Service satisfaction surveys will provide data on the level of women’s satisfaction with the quality of services, time savings from collecting water and hand laundry and how the time saved is used in other household and economic activities in service satisfaction survey. Time savings for women that will benefit from new connections will be monitored at baseline, midterm and completion. The project will also seek to ensure that project committees conduct outreach with women’s groups and involve women in consultations, project committees and any other community-based social accountability roles, i.e., monitoring and oversight. Under Component 1 and 4, the design and implementation of awareness campaigns will include a central role for women’s groups. This approach acknowledges that women are often powerful agents of change at the household level; provide an important gender perspective to the issues; and give voice to women in the community. 140. Gender-based violence (GBV). The project is anticipating insignificant labor influxes, most workers are expected to be mobilized locally or other regions of Uzbekistan. However, many subprojects will be implemented in remoter areas (including small district towns and rural villages), where awareness and GBV-related support services may be limited. The capacity of PCU staff and contractors to adequately address GBV issues is also expected to be weak. The project will undertake awareness-raising measures to sensitize all direct and contracted workers and members of beneficiary communities on GBV-related risks. A code of conduct with clear enforcement measures will be prepared for the project, which all project staff and contractor employees will sign. The code of conduct will be widely publicized in beneficiary communities and around specific civil works sites. Project and contractors’ ESMPs will include provisions to minimize GBV-related risks, including separate, safe, and easily accessible facilities for women and men, and visible display of signs around the project sites that indicate intolerance for any behaviors that could be associated with GBV. The project will ensure that safe and confidential channels for reporting GBV-related concerns will be made available to project workers and communities. Climate Change 141. Climate change is expected to have considerable impacts in dry years and summer months when competition over water resources increases. Higher temperature, more frequent, severe, and prolonged droughts, and shifts in precipitation will further strain already scarce water resources. The project will provide safe water and sanitation services that will be robust and designed to accommodate expected climate change impacts. Given water security issues, the design of infrastructure investments has considered potential impacts of climate change on water supply and demand through protection of existing groundwater, water conservation, advanced wastewater treatment for reuse, and increased storage capacity, amongst other factors that will increase water security and thus resilience to climate change. The project will promote efficient use of water resources through contribution to the national water metering program, supporting the implementation of the new tariff policy, targeted NRW reduction attributable to physical losses to reduce stress on existing water systems, and enhanced sector-wide monitoring. Non-physical Components will include training programs for improved water resource management in the face of climate change and to strengthen climate change adaptation capacity of water utilities. Furthermore, the EE Component will increase access to new technologies and contribute to a reduced carbon footprint. Page 42 of 106 The World Bank Water Services and Institutional Support Project (P162263) 142. In addition to completing the Bank’s climate and disaster risk screening process, a pilot climate and vulnerability and risk assessment was carried out for Samarkand city during project preparation, with financing support provided by GFDRR. This technical assistance informed additional adaptation measures related to demand management that could be implemented at low or no cost. These recommendations will be integrated into medium-term investment and performance plans and piloted under Component 4 and scaled up at national level through development of regional WSS master plans, including drought preparedness plans, for all participating water utilities. 143. Global public goods and climate change: Better management of water resources will continue to be even more important in Uzbekistan to ensure water security as water scarcity and excessive depletion of groundwater stocks worsen. This project aims to promote climate resilience among participating water utilities by encouraging uptake of international good practices of efficient water supply management, active leakage management, reducing NRW, and enhancing energy use efficiency. The project will contribute to climate change adaptation and mitigation through water and energy savings. Climate change impacts are projected to affect availability of water resources in Uzbekistan, further aggravating the water situation in the participating provinces. The proposed project will improve water distribution efficiency, optimize operations, enhance asset management capabilities, and control water demand. These activities ultimately contribute to more efficient use of water resources and building more resilient water supply utilities against the future climate change risks and vulnerabilities. From the improvement of water services in Syrdarya region and Kattakurgan only, the project has the potential to save around 3.350 million cubic meters of water per year, reduce electricity consumption by about 7.80 GWh per year and contribute to reduction of 3,947 tons of CO2eq per year. In addition, the project will contribute to the protection of environment and water resources through the collection and treatment of wastewater in Syrdarya region, Kattakurgan and four towns of Karakalpakstan. The project will contribute to further reduction of 2,182 tons of CO2eq per year from wastewater service improvement. More details are included in Annex 1. E. Grievance Redress Mechanisms 144. Communities and individuals who believe that they are adversely affected by a World Bank- supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service. Grievance Redress Service ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the World Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service, please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance- redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. V. KEY RISKS . 145. The overall risk rating for the proposed project is assessed as Substantial. This rating reflects significant challenges associated with implementation of ambitious sector reforms and project activities, Page 43 of 106 The World Bank Water Services and Institutional Support Project (P162263) institutional capacity constraints, the fiduciary environment, and sustainability of investments which are linked to the progress of reforms. 146. Risks related to sector strategies and policies are Substantial. Despite establishing a strong and genuine platform for reform, launched partly in response to citizen demands for improved services, achievement of the proposed long-term sector development objectives will remain a challenge. Successful consolidation and implementation of the reform process will require effective Government leadership and coordination, along with sustained support from the Bank. There is a risk that achievement of the sector reform objectives will take longer than anticipated, and recent progressive actions may decelerate and the current drive for results, now stimulated by strong political support, may fatigue. Moreover, the process of reform is vulnerable to changes in Government staff, policies, political leadership, and other external factors beyond the control of the implementing agencies. Such issues have been considered in the design of the project and complementary Bank instruments, including the Development Policy Operations and trust funded technical assistance activities have been used to leverage and sustain the reform program. Moreover, the project design has some inbuilt flexibility in the approach to respond to emerging issues as they arise throughout the lifetime of the project. 147. The technical design of the project is forward-looking and ambitious. The risk rating under this category is therefore Substantial. The proposed project will involve, for the first time, a deep project level engagement at the national level with the newly established MHCS. Furthermore, the financing facility introduced under Component 2 is also an untested innovation for the sector. To minimize potential technical design risks and support readiness for implementation, substantial upfront preparatory work has been carried out to identify appropriate mitigation measures and clearly define institutional support activities along with roles and responsibilities. In this regard, project preparation benefited substantially from a programmatic series of technical assistance activities focused on the sector reform / institutional strengthening, EE and climate resilience agendas, financed by GWSP, ESMAP and GFDRR respectively. 148. Institutional capacity for implementation and sustainability is rated High due to inherent capacity constraints. To support the release of centralized ‘bottlenecks’ and capacity constraints, implementation arrangements have been strengthened through the introduction of a comprehensive package of consultancy services (including PMC and EE Consultant) along with restructured and reinforced PCU arrangements, which include regional branch offices to facilitate Suvokova and local government involvement and ownership. Moreover, during the preparation process key roles and responsibilities at the central and regional level have been clearly defined and agreed up front. Furthermore, due to the persistent issue of generating enough revenues to enable adequate maintenance, the long-term sustainability of the proposed investments may be at risk as the transition towards financial autonomy of the Suvokova will likely require adjustments to the tariff structure. These actions are largely dependent upon the broader sector context and progress of sector reforms which are addressed as part of the project design. 149. Combined fiduciary risks are rated High (procurement risks are substantial and financial management risks are high). Further details of the fiduciary risk assessment and mitigation measures are presented in Section IV. Page 44 of 106 The World Bank Water Services and Institutional Support Project (P162263) VI. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: Uzbekistan Water Services and Institutional Support Project Project Development Objectives(s) The Project Development Objectives are to: (i) improve coverage, quality and efficiency of water supply and sanitation services in selected project areas; and (ii) strengthen the planning and regulatory capacity of the water supply and sewerage sector. Project Development Objective Indicators RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 7 Improve coverage, quality and efficiency of water supply and sanitation services in selected areas People provided with access to improved 0.00 0.00 0.00 0.00 9,000.00 32,000.00 56,000.00 76,000.00 83,800.00 water sources (CRI, Number) People provided with access to improved water 0.00 0.00 0.00 0.00 4,500.00 16,000.00 28,000.00 38,000.00 41,900.00 sources - Female (RMS requirement) (CRI, Number) People provided with access to improved water 0.00 0.00 0.00 0.00 7,200.00 24,400.00 43,700.00 56,500.00 60,500.00 sources - Syrdarya region (Number) People provided 0.00 0.00 0.00 0.00 1,800.00 7,600.00 12,300.00 19,500.00 23,300.00 Page 45 of 106 The World Bank Water Services and Institutional Support Project (P162263) RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 7 with access to improved water sources - Kattakurgan (Number) People provided with access to improved 0.00 0.00 0.00 0.00 4,200.00 38,400.00 83,000.00 155,500.00 219,000.00 sanitation services (CRI, Number) People provided with access to improved sanitation 0.00 0.00 0.00 0.00 2,100.00 19,200.00 41,500.00 77,750.00 108,500.00 services - Female (RMS requirement) (CRI, Number) People provided with access to improved sanitation 0.00 0.00 0.00 0.00 2,300.00 22,600.00 50,900.00 79,000.00 120,900.00 services - Karakalpakstan (Number) People provided with access to improved sanitation 0.00 0.00 0.00 0.00 1,100.00 9,600.00 18,400.00 48,200.00 59,600.00 services - Syrdarya region (Number) People provided with access to improved sanitation 0.00 0.00 0.00 0.00 800.00 6,200.00 13,700.00 28,300.00 38,500.00 services - Kattakurgan (Number) Page 46 of 106 The World Bank Water Services and Institutional Support Project (P162263) RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 7 Continuity of water supply (hours per day) 11.00 11.00 11.00 11.00 12.00 14.00 15.00 16.00 24.00 in participating water utilities (Number) Percentage of water samples compliant TBD - - - 80.00 85.00 90.00 95.00 98.00 with safety standards (Text) Reduced energy consumption 0.00 0.00 0.00 0.00 3.00 6.00 10.50 14.50 17.50 (Percentage) Per cubic meter of water supplied 0.00 0.00 0.00 0.00 4.00 8.00 14.00 17.00 20.00 (Percentage) Per cubic meter of wastewater treated 0.00 0.00 0.00 0.00 2.00 4.00 7.00 12.00 15.00 (Percentage) Strengthen the planning and regulatory capacity of the water and sewerage sector State of the Sector Annual Reports No No No No Yes Yes Yes Yes Yes prepared and publicly disclosed (Yes/No) PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 7 Component 1. Sector policy, regulations and institutions Page 47 of 106 The World Bank Water Services and Institutional Support Project (P162263) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 7 Water meters installed (Number) 0.00 0.00 0.00 10,000.00 20,000.00 30,000.00 40,000.00 50,000.00 50,000.00 Sector-wide monitoring and benchmarking system established and No No No No Yes Yes Yes Yes Yes operational (Yes/No) Medium-term investment and performance 0.00 0.00 1.00 3.00 6.00 9.00 12.00 12.00 12.00 improvement plans developed and implemented (Number) Communication and citizen engagement No No No No Yes Yes Yes Yes Yes strategy developed and adopted (Yes/No) Number of audited annual financial statements prepared by participating water 0.00 0.00 0.00 0.00 3.00 3.00 3.00 3.00 6.00 utilities in accordance with IFRS for SMEs (Number) Component 2. Energy efficiency financing facility Utilities accessing Energy Efficiency Facility under the 0.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 8.00 project (Number) Kilowatt hours saved through energy 0.00 0.00 8,000.00 16,000.00 24,000.00 32,000.00 40,000.00 48,000.00 70,000.00 efficiency measures (Number (Thousand)) Component 3. Regional infrastructure investments Page 48 of 106 The World Bank Water Services and Institutional Support Project (P162263) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 7 Households directly benefitting from water supply infrastructure 0.00 0.00 0.00 0.00 8,200.00 23,250.00 37,350.00 59,250.00 74,300.00 works under the project (Number) Households directly benefitting from water supply infrastructure works 0.00 0.00 0.00 0.00 6,200.00 15,650.00 24,150.00 41,750.00 53,900.00 under the project - Syrdarya region (Number) Households directly benefitting from water supply infrastructure works 0.00 0.00 0.00 0.00 2,000.00 7,600.00 13,200.00 17,500.00 20,400.00 under the project - Kattakurgan (Number) Households directly benefitting from sewerage infrastructure works 0.00 0.00 0.00 0.00 1,200.00 9,800.00 24,500.00 56,200.00 84,500.00 under the project (Number) Households directly benefitting from sewerage infrastructure works 0.00 0.00 0.00 0.00 700.00 5,600.00 13,300.00 31,500.00 51,500.00 under the project - Karakalpakstan (Number) Households directly 0.00 0.00 0.00 0.00 300.00 1,500.00 6,700.00 12,400.00 14,100.00 benefitting from Page 49 of 106 The World Bank Water Services and Institutional Support Project (P162263) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 7 sewerage infrastructure works under the project - Syrdarya region (Number) Households directly benefitting from sewerage infrastructure works 0.00 0.00 0.00 0.00 200.00 2,700.00 4,500.00 12,300.00 18,900.00 under the project - Kattakurgan (Number) Wastewater collection and treatment capacity 6,100,000.00 6,100,000.00 6,100,000.00 6,100,000.00 6,600,000.00 10,500,000.00 15,800,000.00 23,300,000.00 24,900,000.00 (Cubic meters/year) Wastewater collection and treatment capacity - 4,500,000.00 4,500,000.00 4,500,000.00 4,500,000.00 4,800,000.00 7,400,000.00 11,000,000.00 14,600,000.00 15,500,000.00 Karakalpakstan (Cubic meters/year) Wastewater collection and treatment capacity - 400,000.00 400,000.00 400,000.00 400,000.00 500,000.00 1,000,000.00 1,600,000.00 3,400,000.00 3,800,000.00 Syrdarya region (Cubic meters/year) Wastewater collection and treatment capacity - 1,200,000.00 1,200,000.00 1,200,000.00 1,200,000.00 1,300,000.00 2,100,000.00 3,200,000.00 5,300,000.00 5,600,000.00 Kattakurgan (Cubic meters/year) Percentage of customer satisfaction TBD - - - 50% 55% 60% 65% 75% with the quality of water supply services Page 50 of 106 The World Bank Water Services and Institutional Support Project (P162263) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 7 (Text) Percentage of women satisfied with the quality of TBD - - - 50% 55% 60% 65% 75% water supply services (Text) Reduction in person- hours per month spent by women and girls 0.00 0.00 0.00 0.00 2.00 4.00 10.00 16.00 20.00 collecting water in selected project areas (Number) Component 4. Professionalization of participating water utilities Non-revenue water (Percentage) 50.00 50.00 50.00 50.00 50.00 46.00 42.00 38.00 35.00 Increase in budget allocation for the professional 0.00 0.00 0.00 0.30 0.80 1.00 1.20 1.40 1.60 development of the utility staff (Percentage) Number of Gender Enhancement Plans 0.00 0.00 0.00 0.00 1.00 2.00 3.00 3.00 3.00 adopted (Number) Customer and stakeholder engagement meetings to discuss results of satisfaction surveys 0.00 0.00 3.00 3.00 3.00 6.00 6.00 6.00 9.00 and Participating Water Utilities' action plans for service improvements (Number) Page 51 of 106 The World Bank Water Services and Institutional Support Project (P162263) IO Table SPACE UL Table SPACE Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection PCU reports. This indicator measures the This indicator measures the number of people in cumulative number of project areas of people who benefited from Syrdarya region and People provided with access to improved improved water supply Semi-annual PCU reports Kattakurgan in PCU water sources services that have been Samarkand region who constructed through benefited from operations supported by the improved water supply World Bank. services through new connections. PCU reports. This sub- indicator This indicator measures the measures the cumulative number of number of people who benefited from People provided with access to women in improved water supply Semi-annual PCU reports PCU improved water sources - Female project areas services that have been (RMS requirement) who constructed through benefited operations supported by the from World Bank. improved water supply services Page 52 of 106 The World Bank Water Services and Institutional Support Project (P162263) through new connections. PCU reports. This sub- indicator measures the number of people in Number of people in project project areas in People provided with access to areas in Syrdarya region Semi-annual PCU reports Syrdarya region who PCU improved water sources - Syrdarya who benefited from benefited from region improved water supply improved water supply services under the project. services through new connections. PCU reports. This sub- indicator measures the number of people Number of people in project in project areas in areas in Kattakurgan who People provided with access to Semi-annual PCU reports Kattakurgan who PCU benefited from improved improved water sources - Kattakurgan benefited from water supply services under improved water supply the project. services through new connections. The indicator measures the PCU reports. The cumulative number of indicator measures the people who benefited from number of people People provided with access to improved improved sanitation Semi-annual PCU reports benefiting from PCU sanitation services facilities that have been improved sanitation constructed through facilities through new operations supported by the connections. World Bank. People provided with access to The indicator measures the Semi-annual PCU reports. Reports PCU improved sanitation services - Female cumulative number of This sub- Page 53 of 106 The World Bank Water Services and Institutional Support Project (P162263) (RMS requirement) people who benefited from indicator improved sanitation measures the facilities that have been number of constructed through women in operations supported by the project areas World Bank. who benefited from improved sanitation facilities through new connections. PCU reports. This sub- indicator measures the number of people in Number of people in project project areas in People provided with access to areas in Karakalpakstan who Semi-annual PCU reports Karakalpakstan PCU improved sanitation services - benefited from improved benefiting from Karakalpakstan sanitation services under improved sanitation the project. facilities through new connections. This sub-indicator measures the number Number of people who of people in project People provided with access to benefited from improved areas of Syrdarya Semi-annual PCU reports PCU improved sanitation services - sanitation services under region benefiting from Syrdarya region the project in Syrdarya improved sanitation region. facilities through new connections. Page 54 of 106 The World Bank Water Services and Institutional Support Project (P162263) PCU reports. This sub- indicator measures the number of people in Number of people in project project areas in People provided with access to areas in Kattakugan who Semi-annual PCU reports Kattakurgan benefiting PCU improved sanitation services - benefited from improved from improved Kattakurgan sanitation services under sanitation facilities the project. through new connections. PCU reports. Data are collected by PCU with This PDO indicator relates to support of the Detailed the quality of water services Design and and measures the number Construction Continuity of water supply (hours per day) of water supply service Annual PCU reports PCU Supervision Consultant in participating water utilities hours per day to consumers in project areas in in participating water Syrdarya region and utilities in selected project Kattakurgan in areas. Samarkand region. PCU reports based on Percentage of water the information samples that meet water Participating provided by safety standards for drinking Percentage of water samples compliant Semi-annual Water Participating Water PCU water in project areas in with safety standards Utilities' data Utilities on the results Syrdarya region and of water quality tests in Kattakurgan in Samarkand project areas. region. Average of percentage Participating reduction in energy Semi-annual Water PCU reports PCU Reduced energy consumption consumption (kWh) per Utilties' cubic meter of water operational Page 55 of 106 The World Bank Water Services and Institutional Support Project (P162263) supplied and wastewater data treated Participating Reduction in energy Water consumption (kWh) per Semi-annual Utilities' PCU reports PCU Per cubic meter of water supplied cubic meter of water operational supplied. The baseline is data 1.25 kW/h/m3. Participating Reduction in energy Water Per cubic meter of wastewater consumption (kWh) per Semi-annual Utilities' PCU reports PCU treated cubic meter of wastewater operational treated. data “State of the Sector Annual Report” means an annual analytical report to be prepared by MHCS for the water supply and sanitation sector by the end of each calendar year, providing comprehensive analysis of the water supply and State of the Sector Annual Reports Annual MHCS PCU reports PCU sanitation sector reflecting prepared and publicly disclosed data from the monitoring and benchmarking system, including, but not limited to, the following: (i) progress towards achievement of United Nations Sustainable Development Goals No.6 related to water and sanitation adopted in 2015 Page 56 of 106 The World Bank Water Services and Institutional Support Project (P162263) and the Government’s strategic goals in water supply and sanitation; (ii) assessment of sustainability of water and sanitation services in terms of access, quality, and efficiency; (iii) benchmarking of service providers; (iv) analysis of sector financing including cost recovery of water utilities, sources of financing for capital investments and future needs; (v) progress in sector reforms; and (vi) analysis of remaining sector challenges and action plans. "Publicly disclosed" means State of the Sector Annual Reports are made public and available at MHCS website. ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Number of consumer water Semi- MHCS PCU reports PCU Water meters installed meters installed as part of annual the national program. Sector-wide monitoring and Institutionalization and Annual MHCS PCU reports PCU benchmarking system established and operationalization of a Page 57 of 106 The World Bank Water Services and Institutional Support Project (P162263) operational sector-wide monitoring and benchmarking system of water supply and sanitation to measure sector performance and sustainability in Uzbekistan and progress towards the sustainable development goals for water supply and sanitation. "Established" means the system is developed and populated with baseline data. "Operational" means the system is used to inform investment planning and decision-making in the sector. Number of utilities that developed and implemented medium-term investment and Participating Medium-term investment and performance improvement Annual Water PCU reports PCU performance improvement plans plans aligned with Utilities developed and implemented investments costs and available financing that integrate climate resilient measures. Development of the communication and citizen Communication and citizen engagement Annual MHCS PCU reports PCU engagement strategy. strategy developed and adopted "Adopted" means approved by MHCS for WSS through a Page 58 of 106 The World Bank Water Services and Institutional Support Project (P162263) national regulation, decree or sector strategy. Number of audited annual financial statements consistent with IFRS for small and medium-sized entities (SMEs). The audit of annual financial statements At mid- Participating Number of audited annual financial prepared by three regional term and Participating water water statements prepared by participating participating water utilities at the utilities' audited annual PCU utilities' water utilities in accordance with IFRS for in accordance with IFRS for project financial statements reports SMEs SMEs shall be conducted by closing. an independent private auditor firm acceptable to the World Bank, on terms of reference acceptable to the World Bank, at mid-term and at project closing. Number of utilities that that applied to the Energy Energy Efficiency Financing Facility Semi- Efficiency Utilities accessing Energy Efficiency PCU reports PCU and implemented energy annual Consultant Facility under the project efficiency and climate reports technologies through this facility. Energy efficiency Cumulative energy (kWh) audits and per year saved through Semi- PCU and Energy Efficiency Kilowatt hours saved through energy energy PCU reports introduction of energy annual Consultant efficiency measures efficiency efficiency measures under investment Component 2. plans Page 59 of 106 The World Bank Water Services and Institutional Support Project (P162263) This indicator measures the number of households with metered connections to water supply systems which were Households directly benefitting from Semi- rehabilitated/constructed in PCU reports Reports PCU water supply infrastructure works under annual project areas in Syrdarya the project region and Kattakurgan town of Samarkand region. Both existing and new connections are considered for this indicator. Number of households in project areas in Syrdarya region connected to water supply systems which were rehabilitated/reconstructed Participating Households directly benefitting from Semi- under the project. The water PCU reports. PCU water supply infrastructure works annual number of households utilities' data under the project - Syrdarya region connected to rehabilitated/reconstructed water supply systems includes both existing and new metered connections. Number of households in project areas in Kattakurgan connected to water supply Participating Households directly benefitting from systems which were Semi- water PCU reports. PCU water supply infrastructure works rehabilitated/reconstructed annual utilities' data under the project - Kattakurgan under the project. The number of households connected to rehabilitated/reconstructed Page 60 of 106 The World Bank Water Services and Institutional Support Project (P162263) water supply systems includes both existing and new metered connections. Number of households in the selected project areas connected to sewerage Households directly benefitting from systems Semi- PCU report PCU reports PCU sewerage infrastructure works under the rehabilitated/constructed annual project under the project. This number include both existing and new connections. Number of households in project areas in Karakalpakstan connected Participating Households directly benefitting from to sewerage systems Semi- water PCU reports PCU sewerage infrastructure works under rehabilitated/constructed annual utilities' data the project - Karakalpakstan under the project. This number include both existing and new connections. Number of households in project areas in Syrdarya region connected to Participating Households directly benefitting from sewerage systems Semi- water PCU reports. PCU sewerage infrastructure works under rehabilitated/constructed annual utilities' data the project - Syrdarya region under the project. This number include both existing and new connections. Households directly benefitting from Number of households in Semi- Participating PCU reports PCU sewerage infrastructure works under project areas in Kattakurgan annual water the project - Kattakurgan connected to sewerage utilities' data Page 61 of 106 The World Bank Water Services and Institutional Support Project (P162263) systems rehabilitated/constructed under the project. This number include both existing and new connections. Participating Volume of wastewater water Wastewater collection and treatment appropriately collected, Annual utilities' PCU reports PCU capacity treated and disposed in operational cubic meters per year. data Volume of wastewater Participating appropriately collected, water Wastewater collection and treatment treated and disposed in Annual utilities' PCU reports PCU capacity - Karakalpakstan cubic meters per year in operational project areas in data Karakalpakstan. Volume of wastewater Participating appropriately collected, water Wastewater collection and treatment treated and disposed in Annual utilities' PCU reports PCU capacity - Syrdarya region cubic meters per year in operational project areas in Syrdarya data region. Volume of wastewater Participating appropriately collected, water Wastewater collection and treatment treated and disposed in Annual utilities' PCU reports PCU capacity - Kattakurgan cubic meters per year in operational project areas in data Kattakurgan. Percentage of survey Three Percentage of customer satisfaction with Surveys PCU reports PCU responses “satisfied” or surveys for the quality of water supply services above for the cumulative each Page 62 of 106 The World Bank Water Services and Institutional Support Project (P162263) total responses in a Participatin customer survey, carried out g Water by each Participating Water Utility, first Utility for the customers at the end directly benefiting from the of the first project. The survey will year, cover five key themes: second at turbidity, water pressure, midterm safety, service continuity, review and and customer service of the the third - Participating Water Utilities. at the These key themes will be project considered in measuring the closing. level of satisfaction. The surveyed samples from each location will be proportionate to the number of direct beneficiaries, disaggregated by male and female respondents and reflects the percentage of female population of the concerned Participating Water Utility. Percentage of women in Three project areas who respond surveys for “satisfied” or above in the each cumulative total responses Participatin Percentage of women satisfied with Surveys PCU reports PCU in the customer survey, g Water the quality of water supply services carried out by each Utility, first Participating Water Utility. It at the end also indicates that they of the first receive project information year, Page 63 of 106 The World Bank Water Services and Institutional Support Project (P162263) through consultations and second - at participate in the midterm improvement of the review and services. the third - at the project closing. Reduction in number of person-hours per month spent on average by women in rural project areas in Surveys/interviews at Syrdarya region. ADB gender baseline and assessment in Uzbekistan completion. The survey (2018) indicated that on At baseline Reduction in person-hours per month Surveys/inter should also indicate PCU and Participating average time spent by and spent by women and girls collecting water views how time savings were Water Utility women for delivery of water completion in selected project areas used by women in Uzbekistan is 22 person- (households or hours per month. The economic activities). average time spent by women in rural project areas will be determined through a survey by the end of Year 1. Participating Semi- Non-revenue water in three Water PCU reports PCU Non-revenue water annual Participating Water Utilities. Utilities' data Percentage increase in the Participating Increase in budget allocation for the budget allocation for the Annual Water PCU reports PCU professional development of the utility professional development of Utilities' data staff the Participating Water Utilities' staff out of total Page 64 of 106 The World Bank Water Services and Institutional Support Project (P162263) operating costs. Number of gender enhancement plans adopted. The plans should include assessment of gender inclusion, potential for enhancement, HR policies and other interventions and prerequisites to improve gender balance in the Participating Water Utilities' Participating staffing, especially in the PCU and Participating Number of Gender Enhancement Plans Annual Water PCU reports managerial, operational and Water Utilities adopted Utilities' data technical positions. Gender enhancement plans will set targets for the share of females in technical managerial positions. The number of females in technical and managerial positions should be tracked and documented annually (from Year 1 until the completion of the project) in progress reports. Number of customer and In Year 1, Participating Water Customer and stakeholder engagement stakeholder engagement at mid- Participating Utilities will provide meetings to discuss results of satisfaction meetings conducted in term and Water evidence of customer PCU surveys and Participating Water Utilities' project areas to discuss at project Utilities and stakeholder action plans for service improvements results of satisfaction closing. meetings which can surveys and Participating include minutes, lists of Page 65 of 106 The World Bank Water Services and Institutional Support Project (P162263) Water Utilities' action plans participants and agreed for service improvements. actions plans. The first meetings in project areas will be organized in Year 2 to discuss results of the baseline survey and agree on the actions that need to be taken by Participating Water Utilities to improve services in project areas and raise awareness about the project. Subsequent meetings will discuss results of mid-term and final satisfaction surveys, progress of actions taken by Participating Water Utilities and any adjustments required to the action plans. ME IO Table SPACE Page 66 of 106 The World Bank Water Services and Institutional Support Project (P162263) ANNEX 1: Detailed Project Description COUNTRY: Uzbekistan Water Services and Institutional Support Project 1. The Project Development Objectives are to: (i) improve coverage, quality and efficiency of water supply and sanitation services in selected project areas; and (ii) strengthen the planning and regulatory capacity of the water supply and sewerage sector. 2. To achieve the above objectives the proposed project is structured in four strategically designed and complementary Components as described in detail below. Activities under Components 1 and 4 will promote and accelerate the institutional strengthening and reform agenda. These activities will be complemented through physical infrastructure investments implemented under Components 2 and 3 that will address identified issues in selected regions to improve coverage, quality and efficiency of water supply and sanitation services. Component 1: Sector policy, regulations and institutions (US$7.8 million – IDA PBA US$6.0 million and SECO US$1.8 million) 3. This Component will finance activities (goods and services) at the national level designed to support and enhance implementation of sector reforms. Component 1 is structured around the Government’s sector development strategy and reform roadmap and is informed by previous analytical and advisory services, including: Social Impact Analysis of Water Supply and Sanitation Services60 (financed under Central Asia Water and Energy Program), Uzbekistan Water Sector Reforms Diagnostics and Support Plan (financed under WPP), Technical Support to Water Sector Reforms (financed under GWSP), and Building Climate Resilient Water Services (financed under GFDRR). It is envisioned that this Component will foster the enabling environment in which Suvokovas operate, aligning it with utility-level interventions to sustain performance improvements achieved under project Components 2 and 3. Sub-Component 1.1: Support for water supply and sewerage sector reforms (US$4.8 million – IDA PBA US$3.0 million and SECO US$1.8 million) 4. This sub-component will finance goods and services to support progress against key national-level sector reform actions, including technical assistance and capacity building to MHCS, Kommunkhizmat Agency, and other key stakeholders. The following activities have been identified and prioritized for IDA and SECO financing under this sub-component: A. IDA financing (i) Support to a national water metering program through the supply and installation of water meters in selected areas to advance the Government’s policy of achieving universal metering of water services. Improvement of water accounting, which will ultimately increase resilience to climate change through improving water security, is a key driver for efficient and rational use of water resources and for the 60 Social Impact Analysis of Water Supply and Sanitation Services in Central Asia: The Case of Uzbekistan. World Bank. 2015. Page 67 of 106 The World Bank Water Services and Institutional Support Project (P162263) reduction of NRW. It also supports the application of transparent and equitable consumption-based tariffs and enables evidence-based investment planning. This approach intends to pilot the effect of metering on the participating Suvokovas by increasing metering coverage within identified service areas and measuring changes in operations – in consumption and in collection efficiency – and in the effect on the Suvokovas’ revenues. The metering program, coupled with support for the establishment of new tariff structures, is intended to help to overcome existing barriers and disincentives to increasing water meter coverage. The project IDA funds will finance a slice of the Government’s national water metering program; around US$3 million, for the supply and installation of around 50,000 consumer water meters. The World Bank’s involvement in the national water metering program will help to sustain momentum and provide technical backstopping behind this important area of reform. It will strengthen the design and implementation of the metering program, including targeting strategies and other technical, social and operational sustainability considerations. B. SECO financing (ii) Expert advisory services for sector policy and regulatory capacity development, including associated analytics as required: The grant will finance experts to work with the Government to further develop sector policy and regulatory capacity in support of sustainable water service delivery. Key priority areas include: • Establishment of a national sector-wide monitoring and benchmarking system. The TA will strengthen MHCS as the main regulatory institution with knowledge and tools to monitor sector development based on selected operational and service performance indicators, including the establishment of a benchmarking system. The sector-wide monitoring and benchmarking system will identify performance gaps and be linked to evidence-based decision-making processes - for efficient and effective investment and TA programing (at central and regional levels). Moreover, this activity will support MHCS in its vision to create a more transparent and competitive framework for incentivizing utility performance improvements. This activity will also build the capacity of the Suvokovas in using the benchmarking system and reporting. It will include procurement of the software and hardware for the benchmarking, M&E system. The monitoring and benchmarking system will inform State of the Sector Annual Reports. An annual benchmarking report is expected to be disseminated to stimulate competition by comparison. • Roll-out and enhancement of medium-term planning and tariff setting procedures. This will include technical support to MHCS for effective introduction and roll-out of medium-term planning and tariff setting processes. It will strengthen regulatory capacity within the sector and overall governance arrangements, by transitioning from current annual business planning and semi-annual tariff applications to medium-term (three to five-year) service and result-oriented processes, closely aligned with investment needs and available financing. Technical assistance will be provided to MHCS first to build the capacity at the center, and subsequently to Suvokovas to determine objectives, service improvement plans and required revenues, calculate required tariffs based on a full cost recovery basis, with Government support for vulnerable groups and during the transition period. • National-level communications, citizen engagement and public awareness strategies and tools. The TA will focus on developing strategies and tools, which can be subsequently rolled-out and Page 68 of 106 The World Bank Water Services and Institutional Support Project (P162263) adapted by the regions for improved communications, citizen engagement and public awareness, on issues such as water conservation, tariff adjustments, and mainstreaming operational and emergency plans for demand management during drought periods. • In addition to the above, this part of the SECO-financed TA may also support policy and regulatory enhancements to mainstream integrated water resource management and green growth practices into policies and leverage private sector participation. (iii) Sector professional development and capacity-building activities. This will include a range of topics including NRW reduction, EE, water safety planning, asset management and commercial / business planning, citizen engagement and gender inclusion. Such support will be institutionalized by working through the MHCS’ Training Center. Each training program would conclude with the participating utility having developed a concrete plan or program to act on the specified topic. This activity is closely linked to corporate development support provided under the on-going SECO TA and complements ADB-funded support to the Training Center. Moreover, it is expected that this support will leverage the outcomes of on-going technical assistance activities to improve sustainability of professional development in the sector. (iv) Knowledge exchange and support to MHCS for improved sector coordination, including support for the preparation of State of Sector Annual reports – will promote application of international good practices and knowledge sharing among service providers, covering topics of interest and relevance, with countries that have advanced WSS systems or have addressed similar sector issues. At least two international study tours and at least one regional study tour will be carried out to expose MHCS decision makers and managerial staff of water utilities to trends, innovations and international good practices in the sector. This activity will also help promote national (between regions of Uzbekistan and various relevant ministries) cooperation, peer learning and coordination in the water supply and sanitation sector at decision-making and technical levels. The activity will include an annual water conference for sector stakeholders and utilities / service providers - an opportunity for WSS professionals, utility companies, regulatory agencies, local governments and line ministries to share best practices in providing sustainable WSS services. It will also provide logistical and administrative support to MHCS for hosting regular sector coordination meetings and for establishment of a development partner group to enhance coordination and communication in support of the broader program and as a platform for high-level strategic guidance and to enhance synergies and collaboration and to ensure effective communication, programming and alignment of various activities and approaches. Technical assistance will also support MHCS to prepare State of the Sector Annual Reports for the water supply and sanitation sector. By the end of each calendar year, such reports will document developments within the sector reflecting data from the monitoring and benchmarking system, including, but not limited to, the following: (i) progress towards achievement of United Nations Sustainable Development Goals No.6 related to water and sanitation adopted in 2015 and the Government’s strategic goals in water supply and sanitation; (ii) assessment of sustainability of water and sanitation services in terms of access, quality, and efficiency; (iii) benchmarking of service providers; (iv) analysis of sector financing including cost recovery of water utilities, sources of financing for capital investments and future needs; (v) progress in sector reforms; and (vi) analysis of remaining sector challenges and action plans. Page 69 of 106 The World Bank Water Services and Institutional Support Project (P162263) (v) Capacity building for water utility financial management, accounting and reporting-– this activity involves policy support and technical assistance to promote a transition toward the adoption of International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs) within the sector. Specially, this will include support to MHCS and Suvokovas for improved accounting and financial reporting processes to ultimately align with international good practices. Moving toward IFRS for SMEs is expected to have a significant impact on the financial management of the utilities, improving the credibility of reporting and facilitating the involvement of the private sector or commercial banks in capital investments. As an initial step, this activity will involve a diagnostic review of Suvokovas’ existing accounting policies, financial reporting framework, including rules and regulations (including existing government legislation regarding reporting), processes and flows of information, human and IT resources, as well as evaluation of national corporate and accounting and financial standards. This technical assistance may also support the updating of asset registries and valuation within pilot Suvokovas and training at the central level and across all 14 Suvokovas. This process would be carried out by contracting a qualified consulting firm working in close coordination with the chamber of accounts. Sub-Component 1.2:Project management and preparation of future investments (IDA PBA US$3.0 million) 5. This sub-component will support project management-related activities of the PCU, including M&E of project activities, project and entity audits, training, safeguards and fiduciary management, beneficiary satisfaction surveys, managing a beneficiary feedback mechanism, including a grievance redress mechanism, and all associated project operating costs, and preparation activities, including feasibility studies that specifically incorporate climate change risks and vulnerabilities for identified priority water supply and sewerage infrastructure and institutional investments, and environmental and social impact assessments. 6. The IDA credit will finance core operational and management activities under this sub-component. Project management will be further reinforced through the EU IFCA Technical Assistance Grant, which will be directed primarily towards strengthening institutional implementation arrangements, through the engagement of a qualified Project Management Consultancy firm. Component 2: Energy efficiency financing facility (US$13 million – IDA PBA US$10 million and SECO US$3 million) 7. Water supply and wastewater management services in Uzbekistan are energy intensive. In 2017, the Suvokova’ consumed around 640 million kWh of electricity, which represents around 1.2 percent of countries total electricity consumption. The total energy costs for the Suvokova at 2017 prices were around US$19.5 million, comprising 20 to 50 percent of the utilities’ total operating costs. Furthermore, such costs will increase substantially as the currently suppressed energy tariffs are liberated and expected to rise over the coming years. 8. Energy use in Suvokovas is sub-optimal due to (i) the use of inefficient and/or aged pumping equipment; (ii) inadequate equipment maintenance due to limited availability of funds; (iii) limited knowledge and expertise of Suvokova staff with respect to efficient equipment and operating practices; (iv) relatively high NRW that requires excess energy for pumping and distribution; (v) lack of institutional and technical capacity for implementing EE projects; and (vi) lack of motivation and incentives for the Suvokova staff to devote efforts to improve EE and reduce energy costs. 9. Improved efficiency can help the Suvokovas substantially reduce operational costs and achieve better financial results. Based on international experience, it is estimated that annual cost savings of US$6 to US$10 Page 70 of 106 The World Bank Water Services and Institutional Support Project (P162263) million could be achieved through increased EE at recent energy prices and these savings will increase significantly as energy costs escalate. However, the implementation of EE in Suvokovas is hindered by several barriers, the most important ones being the limited technical capacity and lack of availability of financing to implement EE measures. 10. The principal objectives of this Component are to: (i) develop and implement a financing facility for sustainable financing of cost-effective investments in EE in the Suvokovas; and (ii) provide technical assistance to develop the capacity of the Suvokovas, PCU and MHCS to assure sustainability of the financing mechanism. 11. Sub-objectives include: (i) providing financing independent of central government sector investments, thereby allowing acceleration of progress towards sector development objectives; (ii) contributing to the accomplishment of the utility medium-term performance improvement plans; (iii) improving financial management and accountability of the Suvokovas and building their capacity to identify and implement additional EE improvement projects. The Component will support investments that yield net EE gains and enhance the client’s ability to mitigate climate change while also building resilience, including climate change mitigation (greenhouse gas reductions, for example) and adaptation activities (such as drought resilience, water savings, renewable energy utilization). Component 2 activities are further described below grouped under two sub- components. Sub-Component 2.1: Financing facility (IDA PBA US$10 million) Overview of Facility Structure 12. The PCU will implement the initial investments under this Component covered by the IDA financing (US$10 million) following the Bank’s regular procedures for IPF, mostly as small good and works contracts. The energy and cost savings from these investments will be measured, verified and documented throughout the lifetime of the project. 13. A new account, called an Energy Savings and Capture Account (ESCA), will be establish where cost savings from the EE projects will be deposited each year for a specified period. The accumulated funds in ESCA will then be utilized for additional investments within the sector and for future EE activities, creating a revolving fund mechanism. 14. The PCU will select an EE Consultant with technical assessment, financial transactions, and professional management capabilities. This EE Consultant will have responsibilities for identifying, assessing and designing the EE options and managing the implementation of these options and for verifying the cost savings. The EE Consultant will also be responsible for technical assistance for capacity building of the Suvokovas and the MHCS to ensure institutional sustainability. 15. The facility will be open to all Suvokovas (currently 14); applications will be reviewed by PCU with the assistance of the EE Consultant, based on defined eligibility criteria and assessment of financial returns. PCU will develop, with the assistance of the EE Consultant, the procedures for project approval and disbursement of the funds for implementation of the EE activities, and for the measurement and verification if the cost savings resulting from the projects. These procedures will be reviewed by the World Bank team to assure they are adequate to monitor the investments and verify the results. PCU will be responsible for ensuring that investments for the projects meet all national and World Bank requirements. Page 71 of 106 The World Bank Water Services and Institutional Support Project (P162263) Eligibility Criteria 150. All 14 Suvokovas will be eligible for the investment projects. The eligible investment projects will include EE options such as (i) replacement of inefficient pumps with efficient pumps; (ii) leak reduction; (iii) load management by shifting pumping loads from peak to off-peak electricity tariff periods; (iv) improved metering and monitoring; (v) optimizing the operation of multiple pumps; (vi) reducing and leveling pressures in the distribution network; (vii) installation of variable speed drives on pumps; (viii) use of renewable energy (such as solar power and biogas from sludge) for pumping or for energy generation to reduce purchased energy costs; and (ix) other EE and cost reduction measures approved by the World Bank. These activities will also contribute to increased water security through more efficient delivery, and thus increased resilience to climate change. 16. To be eligible for investments under the Financing Facility, each proposed investment project must: • Provide a minimum of 10 percent savings in energy consumption. • Have a simple payback period of less than ten years. • Be limited to a maximum amount of US$3.0 million. • Be supported by a detailed energy audit conducted by an experienced technical team (funded by the TA under the supervision of EE Consultant). Institutional and Implementation Arrangements 17. The Kommunkhizmat Agency and its PCU will be responsible for implementation of this Component. MHCS will provide guidance, oversight and help with coordination to ensure the EE financing facility is successfully established and operational. PCU will be strengthened with additional resources and supported by the EE Consultant, to increase capacity for implementing this innovative component of the project. PCU will develop and implement monitoring and reporting procedures for each investment project. PCU will also be responsible for the Technical Assistance sub-component. PCU will be assisted by the EE Consultant, which will be selected through competitive bidding, to provide technical and consulting support to PCU with respect to energy auditing, identification of EE measures, selection of equipment and service providers, supervision of the project implementation and measurement and verification (M&V) of the energy and cost savings. The energy audits will be partially or fully funded using the technical assistance funds. 18. The “Baseline Energy Consumption and Energy Cost” for the Suvokova will be established by the EE Consultant, as part of the energy audit and will be agreed upon by the Suvokova and PCU. After the implementation of the investment project, the energy and cost savings will be identified and verified. MHCS will need to put measures in place to ensure Suvokova allocate enough funds, for payment of the lower energy bill and to pay the difference between the baseline amount and the lower energy bill (the verified energy cost savings) into ESCA. If the energy costs escalate in subsequent years, appropriate adjustments will be made to the baseline and the cost savings. The Figures below illustrate the ESCA concept and institutional and implementation arrangements for the financing facility. Page 72 of 106 The World Bank Water Services and Institutional Support Project (P162263) EE Investment Placed in the Energy “Energy Savings Energy Costs Baseline Capture Account Cost energy (ESCA)” Savings costs Reduced Funds in ESCA energy utilized for cost investment in new EE projects Energy Cost Baseline After Retrofit Savings Capture Figure A1.1: ESCA concept Funding Energy Cost Savings World Bank MoF / Kommunkhizmat Account Agency Future EE Investment Energy Cost Savings PCU Suvokova TA Implementation Contract services & payments TA Energy Efficiency Equipment & MHCS Capacity Consultant Supervision Service Providers Building Figure A1.2: Institutional implementation arrangements for Component 2 19. The responsibilities of the EE Consultant will include supporting PCU in the following areas: • Identify EE opportunities • Select audit team and supervise detailed energy audit • Develop technical solutions • Verify project eligibility • Identify equipment and service providers for implementation • Supervise implementation • Conduct measurement and verification of savings Page 73 of 106 The World Bank Water Services and Institutional Support Project (P162263) 20. The EE Consultant will also have the responsibility for building the capacity of PCU, Suvokovas and MHCS to ensure sustainable implementation of the facility beyond the lifetime of the project. Sub-Component 2.2: Technical assistance for energy efficiency management (SECO US$3 million) 21. The Technical Assistance (TA) sub-component will finance support services, primarily the EE Consultant contract and others as necessary, with an overall aim to ensure successful implementation of the EE financing facility including strengthening institutional capacity to support its sustainable usage. It will include: • TA to MHCS to assist the development of an EE strategy for Suvokovas to reduce their operational costs and improve their financial viability • TA to PCU to build the capacity of PCU for project design and monitoring and for coordinating the TA to the Suvokovas • TA to the Suvokovas to improve their knowledge and understanding of EE and load management technologies and options, for assessment of the financial and implementation issues, and for preparing project proposals for investment • TA to the MHCS to provide an understanding of EE and load management technologies and options for Suvokovas, procedures for auditing and identifying EE options, and measurement and verification (M&V) of the results of EE projects • TA to equipment and service providers who may be providing services to the Suvokovas for detailed energy audits, assessment of the financial aspects of EE measures, implementation and commissioning, and M&V 22. The TA may also include partial or full funding of detailed energy audits for Suvokova investment projects to ensure readiness of the first series of investments. 23. The TA will also include: • Support for communications, such as technical briefs, brochures, case studies of successful projects, etc. • Annual national conferences on EE in the Suvokovas. • Structured workshops. • Formal training on topics such as pumping technologies, energy auditing (including instrumentation and metering), and load management, EE financial analysis, and M&V. • Hands-on training with experts conducting detailed energy audits, etc. Page 74 of 106 The World Bank Water Services and Institutional Support Project (P162263) Component 3: Regional infrastructure investments (IDA US$220 million – IDA PBA US$30 million and IDA SUF US$190 million) 151. This Component will support infrastructure investments designed to expand access and improve the efficiency and quality of water services in selected subproject areas. The Component will finance goods, works and services (including engineering design and construction supervision) and will include civil and electrical/mechanical installations for water supply production (boreholes, well-fields, intakes, etc., as well as disinfection and pumping as required), and transmission and distribution (networks, storage, meters, etc.) to households in the project areas, along with sewerage collection, conveyance, treatment and disposal / re-use facilities. These installations will help the country to adapt to the anticipated impacts from climate change, namely preventing groundwater contamination to increase water security, reducing the impacts of flooding, and improving water supply reliability to communities facing increasing climate risks. 24. Each subproject eligible for financing has been defined below under a separate sub-component, to be implemented by the Kommunkhizmat Agency in close coordination with the respective regional SUE Suvokova. The subprojects are included in the Government’s broader regional socio-economic development programs, each of which is designed to stimulate economic growth, quality of life and accelerate poverty reduction. 25. The Component will comprise the following four sub-components as described further below. Each sub- component also includes the costs of consultancy services for detailed engineering design and construction supervision to support PCU, Kommunkhizmat Agency, and participating water utilities in preparation and oversight of infrastructure works in project areas. 26. Complementary institutional support activities for the SUE Suvokovas are defined under Component 4. These activities, together with the infrastructure investments, will support sustainable service delivery in the target areas. Sub-Component 3.1: Reconstruction and expansion of sewerage systems in selected subproject areas within Nukus, Takhiatash and Khodjeyli of Karakalpakstan (IDA PBA US$10 million and IDA SUF US$68 million) 27. This sub-component will finance rehabilitation/reconstruction of wastewater treatment plants, pumping stations, and sewerage networks in three urban centers of Karakalpakstan. The cities and towns of Nukus (306,000 inhabitants), Takhiatash (66,000 inhabitants) and Khodjeyli (106,000 inhabitants) are in the north-west of Uzbekistan in the Republic of Karakalpakstan, which is characterized by an extreme continental climate with very low precipitation rates and a desert-like environment. All settlements are located close to each other at Amudarya River (see Annex 4). 28. The water demand for irrigation purposes from Amudarya River is high and in competition to drinking water abstraction for regional trunk mains from Tuyamuyun reservoir and treatment plants in Nukus city and Takhiatash town. Improvement of the water supply systems in Karakalpakstan is financed by ADB. The existing sewerage services in the four project cities/towns are basic as only a very small share of the population has access to the centralized sewerage system. All other residents depend on on-site sanitation facilities (i.e. pit latrines and septic tanks). The existing sewerage infrastructure, built in the 1960s and 1970s, is in poor condition and needs urgent rehabilitation or replacement. Wastewater treatment plants (WWTPs) in Nukus and Takhiatash are highly degraded and the situation is particularly dire in Khodjeyli, where there is no WWTP, and therefore untreated wastewater is discharging into disposal fields, which increases the risk of the community’s exposure to contaminated groundwater. Page 75 of 106 The World Bank Water Services and Institutional Support Project (P162263) 29. Nukus city, administrative center of Karakalpakstan with a population of about 306,000 people, is supplied with water from the Tuyamuyun Water Treatment Plan (WTP)/Reservoir, which feeds the 234 km Tuyamuyun- Nukus-Taktakupir transmission main system and Takhiatash WTP, which also supplies Takhiatash and Khodjeyli cities through a regional transmission main. Both WTPs will be upgraded in the near future (ADB-financed project). Currently about 96 percent of the population in Nukus city are connected to a centralized water supply system. 30. At present, only about 3 percent of the population is connected to the sewerage system, while the remaining share of the population relies on on-site sanitation facilities. Further, there are many apartment buildings under construction, which should be connected to the sewerage network. The existing sewerage system includes 141 kilometers of sewer network, 20 pumping stations and one WWTP. Wastewater is pumped from the main sewerage pumping station, through a pressure sewer to the WWTP which is located about 15 kilometers from the main pumping station. The WWTP was put into operation in 1984 with a design capacity of 65,000 cubic meters / day and consists of bio-ponds with several treatment stages. Currently, due to the deterioration of the inlet and distribution structures and due to poor maintenance, wastewater is not treated adequately and just infiltrate into the soil. The main deficiencies are: (i) the highly degraded sewer network; (ii) worn out pumping stations; (iii) the pressure collector from the main pumping station to the WWTP, which is partly in poor condition and should be rehabilitated; (iv) inadequate functioning of the WWTP; and (v) the location of the WWTP far outside of the city, which causes high O&M costs. 31. The subproject aims at increasing the sewerage connection rate to about 52 percent. The proposed measures include: (i) rehabilitation and extension of sewer networks; (ii) support for household connections; (iii) rehabilitation of pumping stations and construction of new pumping stations; (iv) rehabilitation of the sewer pressure mains from the main wastewater pumping station to the WWTP (length depending on the new location of the WWTP); and (v) reconstruction of the WWTP. 32. Takhiatash town is located 12 kilometers south of Nukus, on the left bank of the Amudarya River, in the Khodjeyli district of Karakalpakstan. The town is characterized by abandoned industrial buildings, low population density and a relatively small area with apartment buildings. The town is supplied with water from Takhiatash WTP and additionally receives water from the Tuyamuyun-Nukus-Taktakupir transmission main. Currently, about 86 percent of the population is connected to the centralized water supply system and receives intermittent water supply for six hours per day. 33. The sewerage system covers only 16 percent of the total population, mainly living in multi-story buildings, of 49,000 people. There are no large industries connected to the sewerage network. The total length of the sewerage networks is 13.5 kilometers and there are five sewerage pumping stations. The existing WWTP, with a capacity of 7,600 cubic meters / day, built in 1989, is not functioning and does not receive wastewater from the sewerage network. Therefore, untreated wastewater is discharging to the nearby irrigation drainage collector outside of the town. The main deficiencies are: (i) the highly-degraded sewer network; (ii) worn out pumping stations; and (iii) the non-functioning WWTP (a new WWTP at an appropriate location has to be constructed). 34. The subproject aims at increasing the sewerage connection rate to about 50 percent. The proposed measures include: (i) rehabilitation and extension of sewerage networks; (ii) support for household connections; (iii) rehabilitation and construction of new pumping stations; and (iv) reconstruction of a WWTP with a capacity of about 6,000 cubic meters / day. Further, on-site sanitation facilities (septic tanks and improved pit latrines) should be promoted for the remaining part of the population not connected to the centralized sewerage system. Page 76 of 106 The World Bank Water Services and Institutional Support Project (P162263) 35. Khodjeyli town. Located 10 kilometers west of Nukus, Khodjeyli, administrative center of Khodjeyli district, has a total population of approximately 77,000 people and no industries. The town is supplied with water from the Tuyamuyun-Nukus-Taktakupir transmission main. Currently, about 75 percent of the population is connected to the centralized water supply system and receives intermittent water supply for six hours per day. 36. Commissioned in 1970, the sewerage system is extremely small with a total length of 3 kilometers and 2 small wastewater pumping stations in operation. Only five percent of the population – about 1,200 households and about 10 private commercial entities – are connected to the sewerage network. There is no WWTP, and the collected sewage is discharged into irrigation drainage channels and disposal fields outside of the town. The main deficiencies are: (i) the highly-degraded sewer network; (ii) worn out pumping stations; and (iii) the absence of a WWTP. 37. The subproject aims at remediation of the most urgent deficiencies (e.g. public health risk due to leaking collectors or networks and uncontrolled discharge of wastewater in the town). The proposed measures include: (i) rehabilitation of sewerage network; (ii) rehabilitation of pumping stations; (iii) reconstruction of a new WWTP stage 1 with a capacity of about 10,000 cubic meters / day; (iv) extension of the sewerage networks; (v) house connections; (vi) and construction of new pumping stations. Sub-Component 3.2: Improving water supply and sewerage systems in selected subproject areas within Syrdarya region (IDA PBA US$10 million and IDA SUF US$66 million) 38. This sub-component will finance rehabilitation/reconstruction of water supply and sewerage systems covering underserved district towns and rural villages across the region. Administratively, Syrdarya is structured into eight districts and three cities of regional importance: Gulistan, Yangiyer, and Shirin. The region is in the central part of Uzbekistan on the left bank of the Syrdarya River. 39. Water supply system description: About 68 percent of the total population of 790,000 in the Syrdarya region currently have access to improved water supply systems. The Syrdarya Water Supply Project (P111760), which closed on June 30, 2019, rehabilitated water supply infrastructure in five districts: Akaltyn, Bayaut, Mirzaobad, Sardoba, and Khavast. 40. About 15 villages in the central part of Syrdarya region are supplied by recently rehabilitated “Beshbulak” Water Intake, which feeds the transmission main from “Beshbulak” Water Intake to Gulistan city (North Pumping Station). The villages connected to this transmission main have degraded local water supply networks, and supply interruptions due to pipe bursts. The villages in northern and southern parts of the region are supplied from individual wells. 41. This subproject aims to address identified deficiencies and improve water supply service for around 242,500 residents in three remaining districts of the region (Syrdarya, Gulistan, and Saykhunabad districts) and Yangiyer town, as described further below. 42. Syrdarya district, with a total population of 126,200 people, is in the northern part of the Syrdarya region and includes two towns - Baht and Syrdarya - and 43 villages. Currently 96 percent of the population in the district has access to improved water supply systems, but only 48 percent of houses have house connections. 69 percent are customers of the Suvokova, 19 percent use other sources of water (wells) and 12 percent are supplied by water vendors. There are five larger water intake facilities with a total capacity of 31,800 cubic meters /day and 111 stand-alone wells (25,100 cubic meters per day) in operation, of which 30 require reconstruction. Further, the total length of water supply networks is 329 kilometers, of which 89 kilometers are degraded and more than Page 77 of 106 The World Bank Water Services and Institutional Support Project (P162263) half of the 87 existing water towers are out of operation. 43. The main deficiencies are: (i) more than one third of the existing wells are worn out due to degraded casings of boreholes and old and inefficient pumps causing high electricity costs; and (ii) about 27 percent of the water supply network is degraded causing high leakages and low supply continuity of four-six hours/day. The proposed measures include: (i) rehabilitation and construction of wells; (ii) rehabilitation and construction of distribution network; and (iii) procurement and installation of bulk and customer water meters. 44. Gulistan district, with a total population of 70,900 people, is in the south of Syrdarya district and consists of 39 villages (Dekhkanabad as the district center) of which 11 are supplied from the transmission main “Beshbulak – Gulistan City”. For the remaining 28 villages, the main sources of drinking water are 57 local wells, of which 15 wells are to be reconstructed. Further, the total length of water supply networks is 316 kilometers, of which 81 kilometers are degraded. Currently 74 percent of the population in the district has access to improved water supply systems. 45. The main deficiencies are: (i) more than 25 percent of the existing wells are worn out due to degraded casings of boreholes and old and inefficient pumps causing high electricity costs; and (ii) about 25 percent of the water supply network is degraded causing high leakages and low supply continuity of four-six hours/day. The proposed measures include: (i) rehabilitation and construction of wells; (ii) rehabilitation and construction of distribution network; and (iii) procurement and installation of bulk and customer water meters. 46. Saykhunabad district, with a total population of 76,000 people, is in the south-western part of the Syrdarya region and includes 39 villages. Currently 54 percent of the population in the district has access to improved water supply systems. In total 50 percent are customers of Suvokova, 17 percent use other sources of water (wells) and 33 percent are supplied by water vendors. The sources of drinking water are 93 wells of which 34 wells are to be reconstructed. The total length of water supply network is 291 kilometers, of which 124 kilometers are degraded. 47. The main deficiencies are: (i) more than one third of the existing wells are worn out due to degraded casings of boreholes and old and inefficient pumps causing high electricity costs; and (ii) about 43 percent of the water supply network is degraded causing high leakages and low supply continuity of four-six hours/day. The proposed measures include: (i) rehabilitation and construction of wells; (ii) rehabilitation and construction of distribution network; and (iii) procurement and installation of bulk and customer water meters. 48. Yangiyer town, with a total population of 42,700 people, borders Khavast and Bayaut districts about 33 kilometers south of Gulistan city. The population currently uses local wells for drinking water purposes. The subproject aims at increasing the water supply connection rate and at increasing the supply continuity to 24/7 by connecting the town to the existing transmission main from Gulistan city (Pumping Station North) to Yangiyer town. Currently only about two thirds of the total length of the 33- kilometer transmission main is in effective operational condition. 49. Identified water supply investments under this sub-component include: (i) reconstruction of Pumping Station North with replacement of pumps pumping to Yangiyer Trunk main; (ii) reconstruction of about 30 kilometers of transmission mains; (iii) installation of bulk and customer water meters. 50. Sewerage system description: Sewerage systems exist in three (Gulistan, Shirin, Yangiyer) cities and two district centers (Khavast and Akaltyn). Rehabilitation of sewerage systems of Gulistan, Shirin and Yangiyer cities is Page 78 of 106 The World Bank Water Services and Institutional Support Project (P162263) carried out through the project financed by the Islamic Development Bank. A very small share of the population (26 percent and 29 percent respectively) has access to the centralized sewerage system. All other residents depend on on-site sanitation facilities (i.e. pit latrines and septic tanks). The existing sewerage infrastructure, built in the 1970s, is in poor condition and needs urgent rehabilitation or replacement. There are no WWTPs in Khavast and Akaltyn district centers, and therefore untreated wastewater is discharged into disposal fields, which increases the risk of the community’s exposure to contaminated groundwater. In most settlements the drains and connection manholes are still in place but not operable. The sewer pipes are inoperable and full of sediment. The pumping stations are not in operation and the equipment has been removed. 51. This sub-component will support the development of small-scale decentralized sewerage systems and promote on-site sanitation solutions to improve the quality and coverage of sanitation services for district towns of Syrdarya region: 52. Bayaut town of Bayaut district (18,200 people / 4,038 households). Bayaut is the administrative center of Bayaut district. There is a water supply network with household connections and public standpipes in the central area of the town, but a sewer system has never existed in Bayaut. The project aims to improve access to improved sanitation to around 10,300 people (57 percent) 53. Dekhkanabad town of Gulistan district (12,000 people / 2,677 households). Dekhkanabad is the administrative center of Gulistan district and has a function water supply network. There is currently no existing sewerage system in the district and the population is relying on pit-latrines which causes pollution of the aquifer. The project aims to improve the quality and coverage of sewerage services for around 8,500 beneficiaries (70 percent). 54. Syrdarya town of Syrdarya district (32,500 / 7,215 households). Syrdarya town is the administrative center of Syrdarya district with a total population of approximately 32,500 people. The town is supplied with water from three wellfields and currently 100 percent of the population is connected to the centralized water supply system. A sewer system has never existed in the town. The project investments aim to reach around 21,000 beneficiaries residing in the Syrdarya town (about 65 percent) 55. Pakhtaabad town of Sardoba district center (17,160 people / 4038 households). Pakhtaabad town is the administrative center of Sardoba district. The town is supplied with water from supplies water from Turttom system and currently, about 90 percent of the population is connected to the centralized water supply system. In past Pakhtaabad had a sewer system and a treatment plant servicing mostly the multi-story apartment buildings, where individual houses generally had pit latrines. The sewer system and WWTP deteriorated at the end of the 1980s and is no longer in use. The project aims to improve the quality of sewerage services and improved sanitation for around 13,700 beneficiaries in Pakhtaabad (80 percent). 56. Sardoba town of Akaltyn district (13,730 people / 3,052 households). The town has an existing sewerage system in central part of the town covering about 29 percent of its population or 4,000 people mostly living in apartment buildings. Existing sewerage networks are however worn out and in need for rehabilitation. There is no wastewater treatment plant, and the collected sewage is discharged into irrigation drainage channels and disposal fields outside of the town. The project investments aim to benefit around 10,000 people residing in the Sardoba town (73 percent). 57. Identified sewerage investments under this sub-component include: (i) reconstruction/rehabilitation of wastewater treatment plants and pumping stations, (ii) rehabilitation and construction of estimated 105 Page 79 of 106 The World Bank Water Services and Institutional Support Project (P162263) kilometers of sewer networks (at least part of which will be zero-energy gravity-based sewers), and (iii) house connections in the five towns of Syrdarya region. The sewerage investments will provide improved services for around 63,700 people (including 59,700 through new connections) in the project areas. On-site sanitation facilities (septic tanks and improved pit latrines) will be promoted for the remaining part of the population not connected to the centralized sewerage system. Sub-Component 3.3: Reconstruction of water supply and sewerage systems in Kattakurgan town in the Samarkand region (IDA PBA US$10 million and IDA SUF US$56 million) 58. This sub-component will finance rehabilitation/reconstruction of water supply and sewerage systems covering Kattakurgan town in the Samarkand region. The town, with population of about 87,000 people, is the second biggest in the region, located 78 kilometers from Samarkand city, downstream of the Karadarya River in the Zarafshan valley. There are about 210 multi-story buildings with 7,500 households and 22,000 households in individual private houses. Industries within the town are being revitalized with a focus on agro-industry and processing. 59. Water supply system description: The centralized water supply system, commissioned between 1958 and 1973, with a capacity of 44,600 cubic meters / day serves an estimated 79 percent of the population. The main source of water is groundwater from the Zarafshan River Valley. Water is supplied from the (i) “Murtak” water intake, located six kilometers from the town, (ii) the “Kurpa” water intake, located 1.5 kilometers from the town, and (iii) three small water intakes located in the town. “Murtak” is the main water intake with in total 15 wells and a total capacity of 22,000 cubic meters /day, of which only 7 wells are operational. Currently, the well-field is not protected (no fence and intensive agricultural activities nearby) as the land is currently not owned by the Suvokova. The yield of the well-field is high (no quantitative constraints) and water quality is satisfying. However, there is a pollution risk (i.e. pesticides) of the aquifer due to agricultural activities (i.e. cotton) in the vicinity of the well-field, which should be thoroughly assessed to design adequate mitigation measures. From the “Murtak” water intake, water is pumped through a second lift pumping station (1,200 cubic meters / hour) and a transmission main with a length of six kilometers (DE 630 mm) to the water intake "Kurpa" into two reservoirs with the volume of 3,000 cubic meters. At “Kurpa” water intake there are two wells in operation, which discharge to the same reservoirs. From these reservoirs, water is pumped to the town network by a third-lift pumping station (capacity of 6,300 cubic meters / hour) and three water mains (DE 400 – 600 mm). The water network has a total length of 345 kilometers out of which 66 kilometers of water mains and 279 kilometers of distribution network. The network was built in the 1970s and hence reached the end of its life age after more than 40 years in operation. 60. The main deficiencies in the water sector are: (i) lack of sanitary protection zone at water intake “Murtak”; (ii) more than half of the existing wells are out of operation; (iii) overall hydraulic concept is inefficient as the number of pumping stations to lift water from “Murtak” water intake to the network in the town is unnecessary high and water is pumped directly from the third lift-pumping station at “Kurpa” to the distribution network in the town without any reservoir; (iv) no disinfection of water is carried out due to lack of equipment; and (v) the majority of the water supply network is degraded causing high leakages and low supply continuity of 6-10 hours / day. 61. Sewerage system description: At present, about 53 percent of the population is connected to the sewerage system, while the remaining share of the population relies on on-site sanitation facilities. The sewerage system, which has been in operation since 1971, includes 10.6 kilometers of main collectors, 20.6 kilometers of sewer network and a WWTP. Most collectors and sewerage networks of the town were built more than 40 years Page 80 of 106 The World Bank Water Services and Institutional Support Project (P162263) ago and are in poor condition. About 13 kilometers of the total network is deteriorated and needs replacement. The sewerage from the town network discharges by gravity to a main collector with a length of about 10 kilometers (reinforced concrete and partly steel) to the WWTP. The main collector has been deteriorated at some places and therefore most of the sewerage is discharging to the fields where it is used for irrigation. The WWTP has a capacity of 20,000 cubic meters / day and was built in 1988 but has been out of operation since 2003 due to flooding in the 1990s and problems with electricity supply. All treatment facilities are in very poor condition and the technical equipment has been dismantled. Therefore, the WWTP cannot be rehabilitated and should be abandoned. 62. The main deficiencies are: (i) the degraded sewer network; (ii) the gravity main collector from the town network to the WWTP is in very poor condition and has to be replaced; (iii) the WWTP has been abandoned for more than 15 years; and (iv) the location of the WWTP is unnecessarily far outside of the town, which causes high O&M costs. The subproject aims at increasing the sewer connection rate to about 93 percent and at ensuring adequate treatment of wastewater. 63. To address the towns water supply and sewerage deficiencies this subcomponent will finance: (i) rehabilitation of water intake facilities; (ii) rehabilitation and reconstruction of pumping stations, (ii) rehabilitation of about 22 kilometers of transmission mains and reservoirs, (iv) the rehabilitation and extension of an estimated 180 kilometers of distribution network including water meters; (v) reconstruction of the WWTP and pumping stations; and (vi) rehabilitation and extension of about 57 kilometers of sewerage networks; (vi) construction of a new sewage pumping stations; (viii) reconstruction of a WWTP with a capacity of about 25,000 cubic meters / day; and (v) procurement of O&M and laboratory equipment (ix) procurement and installation of bulk and customer water meters; and (v) procurement of O&M and laboratory equipment 64. This subproject will directly benefit around 91,800 people (including 23,300 people through new connections) residing in and around Kattakurgan town, 90 percent of which (around 85,000 people) will have access to sewerage services. Component 4: Professionalization of participating water utilities (US$6 million – IDA PBA US$3 million, SECO US$3 million) 65. Component 4 will finance specific activities (goods and services) designed to support and strengthen the capacity of participating water utilities – SUE Department for Operation of Interregional Trunk Main Tuyamuyun- Nukus (Karakalpakstan), Syrdarya and Samarkand Regional SUE Suvokovas, engaged under Component 3 of the project. This Component will be flexible and allow for emerging needs of utilities to be considered and support throughout the lifetime of the project. It will build upon the results of other on-going institutional strengthening and corporate development activities and help to advance lagging actions introduced under recent reforms, including those defined under Cabinet of Ministers’ Resolution #306, consolidating the aggregated service delivery model (which involved the restructuring and consolidating 131 water supply and sanitation utilities into 14 SUE Suvokova). 66. Activities under this Component will focus on enabling and equipping the Suvokovas with the knowledge and tools necessary to improve operational efficiency, financial and investment planning capacity, quality of service delivery, and sustainability more generally. Based on institutional assessments carried out to date, it is anticipated that the following activities may be included: support for (1) introduction of medium-term service improvement planning tools; (2) development of tariff structures (and associated communications campaigns) that incentivize Suvokova performance, encourage rational use of water resources, improve consumer equity, and Page 81 of 106 The World Bank Water Services and Institutional Support Project (P162263) support sustainable cost recovery; (3) NRW reduction management plans – equipment, training and creation of District Metering Areas; (4) support to enhance internal Suvokova governance arrangements to improve performance incentives for managers and staff (with specific consideration of gender-related issues) and employment opportunities for women by developing Gender Enhancement Plans. The project will also make sure that capacity-building activities will be equally accessible to women and men and will offer gender-awareness trainings and targeted leadership and communication trainings for women. Other supporting activities which may be financed, as needed, include pilots for online monitoring of wastewater discharges from industrial areas, introduction of modern billing and collection and accounting systems, automated water balance and asset management systems, hydraulic modeling / GIS / MIS, and consumer information and complaints management systems, etc. 67. This Component will also support diagnostics of Suvokova performance, operational maturity and investment plans, based on which low-cost / high-impact measures will be identified for implementation at initial stages. Other associated activities may include: (i) development of standard operating procedures, systems, reporting tools, etc. for compliance with new regulatory procedures, etc.; (ii) determination of baseline and target operational and financial performance indicators; and (iii) identification and development of potential PPP arrangements to support accelerated professional development and service improvements. 68. The IDA funds allocated under this Component (US$3 million) will be primary allocated for the purchase of necessary goods and equipment (approximately US$1 million per utility), while the SECO funds (US$3 million) will be used to engage consultants to support the above professionalization and capacity building activities at the utility level. These activities, combined with the infrastructure investments under Component 3, will lead to concrete results – advancing progress towards universal access to better-quality and more resilient water services in the respective regions. Assessment of GHG emissions 69. The project will mitigate impacts of climate change through the reduction in NRW, improvement in energy efficiency and improvement of collection and treatment of wastewater. Table A1.1 summarizes values and results from each of the participating Suvokovas. In addition, Table A1.2 summarizes the reduction in greenhouse emissions. The project has the potential to save around 3.35 million cubic meters of water per year (at production level of 15.60 million cubic meters per year), leading to net GHG emission reductions of 3,947 tons/year of CO2eq (assuming 0.506 kg of CO2/kWh of electricity61) due to energy efficiency gains. In addition, and the wastewater collection and treatment activities will also reduce net GHG emissions by 2,182 tons/year of CO2eq. A detailed description of IDA- and SECO-financed activities under each Component of the project is presented below. 61Specific emission estimates for Uzbekistan grid power is 0.506 kg of CO2/kWh as provided from the World Bank Toolbox for the calculation of GHG emissions. The estimate is based on the fact that the majority of power plants in Uzbekistan burns natural gas as primary source of energy for electricity generation. Page 82 of 106 The World Bank Water Services and Institutional Support Project (P162263) Table A1.1: Water and Energy Savings based on Improvement Targets Energy Physical Reduction Energy Savings Water in CO2 Consumption Leakage NRW due to Savings Emissions Water Water (kWh/m3 (%) (%) Supply Supply NRW and from Leak (tons Supplied) Energy Reduction CO2eq/ye Region / (million (million Suvokova m3/year) m3/year) Manage- (million ar) With Without ment m3/year) Current Current Current Target Target Target Project Project (GWh/year ) Syrdarya 11.500 13.969 1.159 0.927 32.0% 17.4% 45.4% 26.1% 5.527 2.469 2,796 Kattakurgan 4.100 4.981 1.336 1.069 33.0% 18.6% 44.8% 26.7% 2.273 0.881 1,150 Total 15.600 18.950 7.800 3.350 3,947 Note: Physical water savings are calculated assuming the same quantity of actual water demand. For instance, in Syrdarya, the actual demand will be 9.499 million m3/year, but because of the current leakage water rate of 32.00%, the water supplied must be 13.969 million m3/year. Based on the planned leakage reduction under the project (i.e. from 32.00% to 17.40%), the required water production will drop from 13.969 million m3/year to11.500 million m3/year. Hence, leakage (physical loss) will drop from 4.470 million m3/year to 2.001 million m3/year and the physical water savings will be 2.469 million m3/year. In addition, the water quantity sold will increase by 0.871 million m3/year. Table A1.2: Summary of GHG emissions and savings from both water and wastewater services improvement Totals by Category Total CO2 Equivalent Total CO2 Equivalent Total CO2 Total CO2 Gross Emissions in Baseline Emissions Equivalent Equivalent 25 yrs in 25 yrs Net Emissions Net Average With Project Without Project Saving in Annual Emissions (tons CO2eq) (tons CO2eq) 25 yrs Saving (tons CO2eq) (tons CO2eq/year) Emissions for Water Utilities Syrdarya 134,884 204,806 69,922 2,796 Kattakurgan 55,433 84,184 28,751 1,150 Total Emissions for Water Utilities 190,318 288,990 98,673 3,947 Emissions for Wastewater Utilities Syrdarya 46,310 65,545 15,235 609 Kattakurgan 44,300 72,063 27,762 1,110 Karakalpakstan 350,321 361,869 11,549 462 Total Emissions for Wastewater Utilities 440,931 495,477 54,546 2,182 Project Total Emissions 631,249 784,467 153,219 6,129 Page 83 of 106 The World Bank Water Services and Institutional Support Project (P162263) ANNEX 2: Implementation Arrangements and Support Plan COUNTRY: Uzbekistan Water Services and Institutional Support Project Project institutional and implementation arrangements 1. The project institutional and implementation arrangements have been informed by IDA’s experience in the WSS sector in Uzbekistan. The key institutions involved in the implementation of the proposed project are the Ministry of Housing and Communal Services, the Ministry of Finance, the Ministry of Investments and Foreign Trade, the Kommunkhizmat Agency under MHCS at the national level, and regional State Unitary Enterprises (SUE) Suvokovas at the local level. Provincial governments (Khokimiyats and Council of Ministers of Karakalpakstan) will facilitate project implementation at local level and will be indirect beneficiaries of the project. Overall institutional and implementation arrangements are illustrated in Figure A2.1. below. Figure A2.1 : Institutional implementation arrangements Note: *Project Management Consultant financed through EU IFCA grant. 2. Ministry of Finance (MoF). As the Recipient’s representative, MoF commits to the project development objectives and will cause the project to be carried out in accordance with the financing agreements. MoF will be Page 84 of 106 The World Bank Water Services and Institutional Support Project (P162263) responsible for timely provision of co-financing and transfer of credit proceeds in accordance with subsidiary agreements. In addition, MoF will be involved in implementation of national-level activities under Component 1 related to the water and wastewater tariff policy and financial reporting of water utilities (Suvokovas). 3. Ministry of Investments and Foreign Trade (MIFT). MIFT was established on January 28, 2019 by merger of the Ministry of Foreign Trade and State Investment Committee. MIFT is a government agency responsible for coordinating the preparation and implementation of a unified state investment policy and attracting foreign investments in Uzbekistan and cooperation with IFIs. MIFT will therefore play a key role as a Government and donor liaison and will ensure that the project is well coordinated with the Government programs and projects and donor investments. MIFT will support any necessary legal and financial decisions in relation to the program, facilitate obtaining internal Government clearances, and provide oversight on the program reporting, related to progress and utilization of funds to the Bank and may bring any major issues to the attention of the higher-level management of the Bank. 4. Ministry of Housing and Communal Services (MHCS). Established in April 201762, MHCS is the government agency mandated for the development of the water and sanitation services sector in country. MHCS will provide policy guidance, strategic inputs and have an oversight role for the program. They are the key stakeholder and beneficiary of national-level activities under Component 1. MHCS will coordinate with the relevant ministries and government agencies to facilitate implementation of Component 1 and other key areas of the program as necessary. 5. Kommunkhizmat Agency under MHCS. The Kommunkhizmat Agency and their PCU will be responsible for project implementation, and accordingly will enter into a project agreement with the World Bank and Subsidiary Agreement with MoF, which will govern its roles and responsibilities. The Kommunkhizmat Agency will oversee all PCU activities and will be directly involved in contract management under Component 3. The Kommunkhizmat Agency will act as the Employer under the contracts and hand over rehabilitated/installed assets to the Suvokovas upon satisfactory completion. Responsibilities for promoting household connections and communication/engagement with consumers will rest with the Suvokovas, who will also coordinate with local authorities and other stakeholders and ensure land is properly allocated for the project purposes and in compliance with the Bank’s safeguards policies. 6. PCU. The existing PCU, established under the Kommunkhizmat Agency, implements two on-going and one recently closed water supply and sanitation projects in Uzbekistan (Bukhara and Samarkand Sewerage Project, and Alat and Karakul Water Supply Project, Syrdarya Water Supply Project closed on June 30, 2019). PCU will be responsible for day-to-day project management including procurement, financial management, management of designated accounts, disbursements, monitoring and evaluation, safeguards management, audit management, quality and compliance oversight, and progress reporting. PCU will monitor and coordinate project activities of implementing entities and coordinate communications with the Bank and government agencies. Figure A2.2 below illustrates agreed organizational structure of PCU. 7. PCU will be supported by PMC, EE Consultant and DDCS Consultant. The consultants will be contracted by PCU and will have specific responsibilities to be described in their terms of reference. PMC will be an international firm, staffed with a team of international specialists who will work side-by-side with PCU on daily basis to support overall management of the project. PMC will assist PCU in project implementation and activities at national level under Component 1 and at local level under Component 4. PMC will also be tasked with training and professional development activities to ensure strengthening of the Kommunkhizmat Agencies institutional capacity for 62 Presidential Decree #UP-5017 of April 18, 2017. Page 85 of 106 The World Bank Water Services and Institutional Support Project (P162263) investment planning, design and implementation. The PMC contract will be financed through EU IFCA grant- financing. 8. The EE Consultant will facilitate implementation of Component 2 and provide technical and consultant support to PCU. The EE Consultant will be responsible for energy auditing, identification of EE measures, selection of equipment and service providers, development of technical solutions, supervision of the project implementation and measurement and verification of the energy and cost savings. The EE Consultant will also build the capacity of PCU, MHCS, Suvokovas and MHCS in development of EE strategy, EE technologies and options for Suvokovas, detailed energy audits, EE financial analysis, measurement and verification of the results of EE investments. The EE Consultant will be selected through competitive bidding. The EE Consultant will coordinate its work with the Component 2 Coordinator of PCU and will work closely with the MHCS and Suvokovas. The EE Consultant contract will be financed through SECO grant co-financing. PCU Coordinator CENTRAL LEVEL Engineering / Technical Financial Management Institutional & Energy Efficiency 1 Water Supply Specialist/Engineer 1 Financial Management Specialist Component 1 Coordinator 1 Sewerage Specialist/Engineer 1 Disbursement Specialist Component 2 Coordinator Procurement M&E and Administrative Staff Safeguards Management 1 Senior Procurement Specialist 1 M&E Specialist, 1 Accountant 1 Environmental Safeguards Specialist 1 Procurement Specialist 1 Office Manager / Translator; 1 Driver 1 Social Safeguards Specialist LOCAL LEVEL Regional Branch Regional Branch Regional Branch in Karakalpakstan in Syrdarya Region in Samarkand Region 1 PCU Regional Coordinator 1 PCU Regional Coordinator 1 PCU Regional Coordinator 1 Engineer (Sewerage) 2 Engineers (Water Supply & Sewerage) 2 Engineers (Water Supply & Sewerage) 1 Environmental Safeguards Specialist 1 Environmental Safeguards Specialist 1 Environmental Safeguards Specialist 1 Social Safeguards Specialist 1 Social Safeguards Specialist 1 Social Safeguards Specialist Figure A2.2: PCU Organizational Structure 9. The DDCS Consultant will provide support to PCU and Kommunkhizmat Agency in advancing the designs and implementation of the infrastructure subprojects under Component 3. The consultant will carry out the remaining detailed engineering designs, prepare technical specifications, cost estimates, procurement documentation, and other associated support to enable timely tendering and contract award. During construction, the Consultant will act as the Engineer (employers’ representative) under FIDIC-based contracts and carry out supervision and contract administration procedures with reference to quality, cost and time controls to support implementation of the infrastructure activities. The Consultant will also be tasked certain activities to Page 86 of 106 The World Bank Water Services and Institutional Support Project (P162263) support management of environmental and social safeguards procedures to help ensuring compliance with the World Bank’s policies and procedures. The DDCS Consultant will work closely with technical-engineering staff of PCU, Kommunkhizmat Agency and Suvokovas. 10. PCU branches will be established in regional centers of selected project areas and will be located within the premises of the water utilities. Regional branches led by a local coordinator shall employ engineering, institutional, safeguards and administrative staff. Regional branches will be responsible for coordination of local- level activities under Components 3 and 4. 11. Samarkand and Syrdarya Regional State Unitary Enterprises (SUE) Suvokovas and Department for Operation of Interregional Trunk Main Tuyamuyun-Nukus (Karakalpakstan) will be institutional beneficiaries of Components 3 and 4 of the projects. Each of these three Suvokovas have experience with implementation of IDA- funded projects. Moreover, Samarkand and Syrdarya Suvokovas are benefitting from institutional support TA under the on-going Bukhara and Samarkand Sewerage Project and Syrdarya Water Supply Project and their capacity will be further reinforced through a corporate development program under the SECO Technical Assistance. The Suvokovas will be responsible for regional-level institutional strengthening activities under Component 4. 12. Provincial governments. Participating water utilities are subordinated to MHCS and Khokimiyats and Council of Ministers of Karakalpakstan. Khokimiyats and Council of Ministers of Karakalpakstan will facilitate project implementation by timely land allocation for infrastructure facilities and supporting Suvokovas in communication with the population. The MoF intends to sign the respective Subsidiary Agreements with each of the participating water utilities and Khokimiyats/Council of Ministers of Karakalpakstan respectively for purposes of reimbursement of the cost/value of the assets, as well as the transfer of the respective assets. 13. Training Center under MHCS. State Unitary Enterprise “Training-methodical Center” KOMMUNALO” QUV” was founded on July 18, 2017 under MHCS. The main tasks are training, professional development, knowledge and skills enhancement of public utilities staff through training seminars, courses and other teaching methods, development of draft regulatory documents, programs, guidelines and other documents and materials. The company can provide consulting services for training, development of regulatory documents and research material. Capacity building under Component 1 will involve the Training Center under MHCS and complement other on-going ADB-supported activities. Financial management, disbursements, and procurement Financial management and disbursements 14. FM responsibilities and capacity. PCU will be responsible for FM of all project components including submission of quarterly unaudited IFRs and audited annual project financial statements to the World Bank. PCU has FM specialist and a project accountant. The existing FM staff has knowledge and experience in implementing Bank financed Projects. Considering expected heavy work-load during the implementation of this proposed Project, the PCU will hire an additional dedicated disbursement specialist during implementation of this Project. 15. PCU has procedures in place to meet minimum requirements in respect of planning, budgeting and accounting, however the Project Operational Manual (POM) shall reflect the proposed project related; project description, PDOs, internal controls, budgeting, external auditing, financial reporting, and accounting policies and procedures and this is condition of effectiveness. The PCU will manage project payments and maintain project accounting records, which would be segregated for this project. The existing accounting software, 1-C, needs to be customized for accounting and financial reporting purposes of the proposed project within 30 days after project effectiveness. The annual audited financial statements together with the auditor’s opinion and the Management Letter will be provided to the World Bank within six months after the end of each fiscal year and at the closing of Page 87 of 106 The World Bank Water Services and Institutional Support Project (P162263) the project. The PCU will be responsible for selection and appointment of the project auditor, according to Terms of Reference acceptable to the Bank, and the financial audit will be financed from the credit proceeds. 16. Agreed actions: Table A2.1: Agreed FM Action Plan Action Responsible Completion Update the Financial Management Manual within Project Operational PCU By effectiveness Manual to reflect the project related internal control, budgeting, external auditing, financial reporting and accounting policies and procedures Customize the existing accounting software that will be able to PCU Within 30 days after project generate reports automatically specifically tailored to the proposed effectiveness Project needs 152. FM risk assessment. Financial Management Risk Assessment. The appraisal stage assessments determined that the FM related fiduciary risks are High, based on historical performance and observed weaknesses with regards to internal controls, flow of funds, budgeting, accounting, reporting and auditing. Key FM related risks include: (i) late documentation of advances, (ii) late submission of both projects and entities audit reports, and (iii) late submission of un-audited interim financial statements. Moreover, recent auditor’s management letters for the PCU also signaled some internal control issues, including contract monitoring procedures, internal verifications and approvals, accounting and reporting aspects. 153. For successful implementation this project, efforts are required to strengthen and promote FM capacity of the PCU. Risk mitigation measures integrated into the project design include: (i) customizing the “1C” automated accounting system to better support project accounting and reporting; (ii) ensuring strict adherence to policies and procedures in POM to be developed for the proposed project; and (iii) increasing the capacity of the FM staff, by adding an additional position within the PCU and providing support through the PMC. 17. Planning and budgeting. PCU has, in general, acceptable budgeting and planning capacity under the on- going Bank financed Projects. The annual budget of the proposed Project will be based on the final procurement plan that is to be discussed and agreed with the PCU Director and approved by the World Bank. All changes to the procurement plan will be reviewed by the PCU Director and approved by the World Bank. The Director, the FM specialist, and the procurement specialists will be involved in the preparation of the annual budget. These budgets will form the basis for allocating funds to project activities. The annual budget will be prepared in accordance with the Interim Financial Report (IFRs) format (disbursement categories, components and activities, and broken down by quarter) 18. Accounting. PCU has 1C accounting system. Accounting of all on-going projects is maintained on an accrual basis accounting in accordance with National Accounting Standards of Uzbekistan; however, cash basis accounting of the International Public Sector Accounting Standards will be used for the project reporting purposes. PCU adopted 1C accounting system that suits the needs of the projects, and the system is fully operational in PCU. The accounting system is multi-user and has dual currency (US$ and UZS) functionality and is fully capable of generating interim financial reports (IFRs), Statements of Expenditures and Withdrawal of Applications automatically, however due to system glitches IFRs, Statement of Expenditures and Withdrawal of Applications are prepared manually. The system will need to be upgraded within 30 days after project effectiveness and software developer will need to be involved on a regular basis to fix any system glitches. Page 88 of 106 The World Bank Water Services and Institutional Support Project (P162263) 19. Financial reporting. PCU will be responsible for preparation of Interim unaudited IFRs under the project on a quarterly basis. IFRs will be submitted to the Bank within 45 calendar days after the end of each calendar quarter. The format and content of the IFRs have been agreed with PCU. 20. Internal controls. The PCU’s internal control system needs to be improved. Expenditures will be authorized by the PCU Coordinator and verified by the FM specialist. The FM chapter in POM will describe in detail the internal control procedures including approval of payments, authorization of expenditures, bank reconciliations, verification of expenditure eligibility and accuracy, flow of financial documents. 21. Staffing. Currently financial management staffing is adequate in the PCU in terms of skills, experience and number of persons. From Financial Management perspective PCU has Financial Management Specialist and one project accountant who are currently managing implementation of the Bank financed Projects. However, considering expected heavy work-load during implementation of this Project, PCU will also hire a dedicated disbursement specialist for the project. 22. Flow of funds. Credit funds will flow to the project via disbursements to one DA, which will be maintained by PCU. The ceiling of DA will be stated in the Disbursement Letter. 23. Internal controls. PCU will establish an internal control system capable of providing reliable and adequate controls over funds flows, transactions flow, FM, and disbursement processes and procedures. These include controls for safeguard of assets, segregation of duties, authorization of transactions, review and approval of invoices, and contract management, among others. The internal control system to be used by PCU, and additional reporting and auditing requirements, will be specified in detail in existing POM. Existing POM will be updated by PCU in the form and substance acceptable to the World Bank before project effectiveness. 24. External audit. No entity audits are required under this Projects. PCU will be responsible for arranging the annual audit of project financial statements. The project financial statements audit will be conducted (a) by an independent private auditor firm acceptable to the World Bank, on terms of reference acceptable to the World Bank and (b) according to the International Standards on Auditing issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. The project audit will include: (a) audit of financial statements, and (b) review of the internal controls of PCU with special attention to the compliance with requirements established in the Financing Agreement and World Bank guidelines and procedures and also the local legislation requirements. No entity audit will be required. Table below summarizes the audit requirements for this project. Table A2.3: Project Audit Requirements Audit Report Due Date Project financial statements Within six months of the end of each fiscal year The project financial statements include project balance sheet, sources and uses and at the closing of the project of funds, uses of funds by project activities, statement of expenditures, withdrawal schedule, DA statement, notes to the financial statements, and reconciliation statements. 25. The audited project financial statements will be disclosed to the public in a manner acceptable to the World Bank. Following the World Bank’s formal receipt of these statements from the borrower, the World Bank will make them available to the public in accordance with the World Bank Policy on Access to Information. Audit of annual project financial statements will be financed from credit proceeds. Page 89 of 106 The World Bank Water Services and Institutional Support Project (P162263) 26. Disbursements. PCU would oversee planning and managing project disbursements, as well as preparation and submission of withdrawal applications to the World Bank. For this purpose, PCU shall have access to the World Bank’s Client Connection platform. The project would use standard disbursement methods, including advances (DA), direct payments, reimbursements, and special commitments. One DA would be opened and maintained in the commercial bank/financial institution acceptable to the World Bank for project-related funds flows and payments of eligible expenditures. The details, such as the ceiling for the DA, would be provided in the Disbursement and Financial Information Letter. Eligible project expenditures, consisting of regular goods, consulting services, non-consulting services, and training and operating costs, would be documented to the World Bank using statements of expenditure and full documentation, as prescribed in the Disbursement and Financial Information Letter. Procurement 27. Applicable Procurement Framework: The activities under the project will be subject to the “Procurement Regulations”. All procurement of contracts will be conducted through the procedures as specified in the World Bank’s Procurement Regulations for IPF Recipients - Procurement in Investment Project Financing Goods, Works, Non-Consulting and Consulting Services, dated July 2016, revised November 2017 and August 2018 (the Regulations). The procurement and contract management processes will be tracked through the STEP system. 28. Procurement Risks Assessment: Procurement capacity assessment was performed by the Bank using the Procurement Risk Assessment and Management System (P-RAMS). The key risks concerning procurement for implementation of the project include systemic weaknesses in the areas of: (i) weak implementation capacity in project implementation units and inefficient procurement processes; (ii) delays in procurement processes resulting from the complex and time-consuming Government internal approval of procurement decisions; (iii) poor capacity, practice and tools for efficient contract management and monitoring; and (iv) procurement malpractices and weak integrity safeguards particularly in the water sector. 29. Risk mitigation measures include: (i) strengthen and promote consolidation of overall procurement capacity of the implementing entities and particularly for technical specifications preparation and efficiency of managing procurement processes; (ii) engagement of international specialists to support procurement processes for large and high value contracts for Works and Design, Supply &Installation contracts; (iii) clear definition of decision-making processes, accountability and integrity safeguards for procurement decisions (as set out in the POM); (iv) put in place an efficient contract management mechanism, including the tracking of key performance indicators. The procurement related fiduciary risk is assessed as Substantial. 30. PPSD and Procurement Plan: The PPSD and resulting Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity. 31. Use of National Procurement Procedures: All contracts for goods, works and consultancy services following national market approach shall use the procedures set out in the PPL dated April 2018. The provisions of the PPL are consistent with the World Bank Procurement Regulations Section V – Para 5.4 National Procurement Procedures subject to a few conditions specified in the PPSD. Further improvement of the 2018 legal and regulatory framework is being carried out by the Government. The on-going reform activities include the development of a new PPL and its implementation regulations as well as a full-fledged e-procurement system. The World Bank is being providing support and advice to GOU on the development of this new framework and will update the assessment of the National Procurement Procedures that will be adopted for the national competition procurement approach under the project. Moreover, the Bank procurement team has recently undertaken a rapid market analysis of the Uzbekistan local construction industry with the main objective to Page 90 of 106 The World Bank Water Services and Institutional Support Project (P162263) develop an appropriate and updated knowledge and understanding of the national construction sector in Uzbekistan and the actual capacity of the local contractors in participating and implementing construction contracts in the country under Government, IFIs, or private sector funded investment projects. The findings will allow the agencies involved in the procurement of civil works to develop procurement approaches that would encourage increased participation of national contractors in bidding processes. It will also help the Bank to update the selection of procurement approaches and update methods’ thresholds for civil works in Uzbekistan and consequently promote an increased use of the National Open Competition approach. Approach to implementation support 32. The Implementation Support Plan (ISP) provides the framework for the Bank’s operational approach to supporting MHCS’ implementation of the project and monitoring implementation progress. The ISP has been developed taking into consideration: (a) the risks identified for the project; (b) importance of large civil works contracts in overall implementation and in the achievement of PDO; (c) the importance of environmental and social safeguards. The ISP reflects these key considerations. 33. The ISP will involve: (a) hands on operational support; (b) close and on-going communications with MHCS and PCU, with respect to procurement and contract implementation issues; (c) appropriate M&E arrangements; and (d) semi-annual implementation support missions involving Bank staff and technical consultants. This approach will provide comprehensive support and oversight for project implementation and enable quick and responsive interactions between project officials and Bank staff. Implementation support plan and resource requirements 34. Technical Implementation Support. During the implementation phase, the task team will continue to engage experienced civil engineers to ensure the technical quality of outputs. During the construction phase, the engineer on the team will provide supervision support to ensure the quality of works and safety. Given the shortcomings in construction supervision observed in WSS projects, attention will be placed to ensure that supervision systems are in place and are being followed closely. Technical implementation missions will be implemented three times a year during the first 18 months of project implementation, followed by bi-annual supervision missions. The engineer will carry out site visits where works are on-going or where service has recently commenced. Technical implementation support will also involve support from an Energy Efficiency Specialist with technical expertise and experience in EE projects or similar activities. During project implementation, the EE Specialist will provide support in providing guidance to PCU and EE Consultant, review and monitor EE investments. 35. Institutional strengthening support. The project has a focus on strengthening the water sector institutions at the local and central level for improved service delivery. The Bank will offer technical support through this process by deploying specialized skill sets relevant to the planned reform activities. This will specifically include an Institutional Specialist, experienced in water sector reforms (planning and implementation), and a Financial Specialist, with extensive experience in utility finances, tariff structuring, investment planning and financial regulation. Institutional strengthening support will be implemented two times a year for the full project period. 36. Financial management implementation support. During project implementation, the task team will supervise the project’s financial management arrangements in the following ways: (i) review the project’s quarterly IFRs as well as the project’s and entity annual financial statements, the auditor’s reports and management letters, and remedial actions recommended in the auditor’s management letters, and (ii) during the Bank Team’s on-site missions, review the following key areas: project accounting and internal control systems; budgeting and financial planning arrangements; disbursement arrangements and financial flows, including Page 91 of 106 The World Bank Water Services and Institutional Support Project (P162263) counterpart funds, as applicable; and any incidences of corrupt practices involving project resources. As required, a World Bank-accredited financial management specialist will participate in the implementation support and supervision process. 37. Environmental and social safeguards implementation support. A Bank Environmental Specialist will review the implementation of the project’s ESMPs and provide guidance to the PCU’s environmental specialist to ensure compliance with the Bank’s environmental safety guidelines. Similarly, a bank Social Development Specialist will review the implementation of the project’s resettlement action plans (if any) and provide guidance to PCU to ensure compliance with the Bank’s social safeguards guidelines. 38. In addition to regular implementation support, the Bank will have to monitor closely the hiring process of the Consultants for project implementation, design review and construction supervision, and EE who will have capacity building and support functions. The Consultants will be required to have strong international experience. This arrangement, including high supervision support from the Bank, will enable the provision of the necessary support throughout the implementation of the project, and build capacity of PCU. Table A2.4: Skills Mix Required for the Duration of Project Implementation Project Audit Requirements Skills Needed Number of Staff Number of Trips Comments Weeks Task team leaders 40 8 Field-based staff Civil engineer 40 16 Consultant Institutional specialist 8 8 Headquarters staff/International consultant Financial specialist 4 2 Headquarters staff/International consultant Energy efficiency specialist 4 2 Headquarters staff/International consultant Environmental specialist 10 8 Field-based staff Social development 10 8 Field-based staff specialist FM specialist 10 2 Field-based staff Procurement specialist 8 2 Field-based staff M&E specialist 2 2 Field-based staff Communication specialist 1 1 Field-based staff Page 92 of 106 The World Bank Water Services and Institutional Support Project (P162263) ANNEX 3: Financial and Economic Analysis COUNTRY: Uzbekistan Water Services and Institutional Support Project Financial Analyses 1. Background. The proposed project includes water and sewerage investments in three separate regional Uzbek water and sanitation providers (Suvokovas). These are the SUE Department for Operation of Interregional Trunk Main Tuyamuyun-Nukus (Karakalpakstan Suvokova); the Syrdarya Regional SUE Suvokova; and the Samarkand Regional SUE Suvokova. As a result, there are three separate financial analyses – one for each Suvokova. 2. For most investment projects in a WSS utility, the financial analysis would include a review of recent financial and operational performance as well as two forward-looking analyses: (i) an analysis of the financial rate of return of the project investments; and (ii) an analysis of the impact of the project on the finances of the utility, including whether the utility is able to repay any debt associated with the project investments. However, issues related to water service providers in Uzbekistan and to these investments point toward a different approach here. These issues are: (i) A legacy of very low customer tariffs, insufficient funds for adequate maintenance of assets, and significant underinvestment, leading to long-term degradation of assets and service over time, poor operational and financial recordkeeping, and the recent creation of the Suvokovas, which merged the larger, regional-capital-based utilities with water providers in the relevant region’s rural districts and small towns. This has resulted in inaccurate asset registries and balance sheets, in turn leading to unreliable financial statements and reports. Technically, analyses of Suvokovas’ operations and finances indicate both adequate service and the ability to meet operating costs. In fact, however, operating expenses are kept artificially low (through intermittent pumping and service; low staff salaries; and postponing of necessary maintenance, for example), to show that revenues cover costs. Given problems with existing data, it is practically impossible to undertake robust analyses of the current financial conditions or to make useful financial projections. (ii) Investments funded under the project are a combination of service extension and rehabilitation of existing assets. While the former will result in new revenues, the latter will only maintain or slightly improve existing revenues, the result being that new revenues generated by the project investments – especially at current tariff levels – will be insufficient to generate a rate of return or to repay associated debt. For that reason and as discussed and agreed with the Government, project funds are considered a grant to each of the Suvokovas, and financial rate- of-return analyses are not being undertaken. 3. Instead existing financial and operational data is used, despite their limitations, combined with estimates of the operational results of the project investments, to calculate changes in tariffs that would be necessary for the Suvokova to meet an operational cost recovery ratio of at least 1.0.63 This approach 63 Throughout this analysis, operational cost coverage ratios are calculated as (i) the relevant tariff billings, divided by (ii) the associated operating costs. Operating cost estimates do not include interest expense (because of challenges in reporting and confirming debt) or provisions for uncollected revenues. Where noted, the operational cost coverage ratio includes estimated Page 93 of 106 The World Bank Water Services and Institutional Support Project (P162263) still has limitations – in most cases, tariffs are calculated based on services across an entire Suvokova, and therefore tariff increases that incorporate new operating costs would be applicable to all customers, including those who do not benefit from improved service. Estimated tariff increases would also not incorporate increases necessary to improve maintenance or service in other service areas, nor would they include inflationary increases. In the absence of the ability to calculate service-area-specific tariffs, however, this approach provides a useful indication of minimum levels of tariff increases. 4. Analysis. The bases for the financial reviews of the beneficiary Suvokovas were the most recent operational and financial data made available by the Suvokovas to MHCS. Data for 2016 and 2017 were reviewed, as well as, where available, initial data for 2018, and with- and without-project projections made. Projections were made at current cost levels and tariffs – that is, in order not to confuse the impact of project investments or changes in the customer base, no inflationary or real increases were assumed as a base case. The following table summarizes initial core data for each of the Suvokova, as well as assumptions going forward. Information provided are 2019 estimates, based on 2018 actual or projected information. depreciation charges in the denominator. Page 94 of 106 The World Bank Water Services and Institutional Support Project (P162263) Table A3.1: Summary of Operational Information and Project Service Extensions Karakalpakstan Suvokova Syrdarya Suvokova Samarkand Suvokova Project-related Project-related Project-related Baseline Baseline service Baseline service service extensions extensions extensions Residential water connections 156,252 n/a 117,050 13,450 323,080 5,170 Residential sewerage connections 24,190 26,860 1,044 13,260 87,990 8,550 Commercial sewerage connections 691 750 0 400 383 385 Metering ratio (water service) 43.5% n/a 5.8% 52% 38% 45% Non-revenue water 32% n/a 53% 44% 57% 55% 425 Household water tariff (UZS/m3) 720 420 (Samarkand districts only) Household wastewater tariff 650 275 365 (UZS/m3) Operational cost coverage ratio (tariff billings / operating costs, not 0.96 0.91 1.16 including depreciation) * Operational cost coverage ratio (tariff billings / operating costs, including 0.67 0.87 1.10 depreciation) * * Operational cost coverage ratios provided here are calculated for the Suvokova as a whole, incorporating both water supply and sewerage services. They are based on reported billings and costs. Page 95 of 106 The World Bank Water Services and Institutional Support Project (P162263) 5. The analyses review the impact of the proposed investments on operating costs, using current operating cost patterns for water, but incorporating any expected changes in NRW and electricity usage. For sewerage, the projections use an annual cost estimate equal to 2.5 percent of capital costs. Using those projections, an estimate of tariff increases for water and for wastewater, respectively, to reach an operational cost coverage ratio of at least 1.0 is calculated and presented here. 6. Karakalpakstan: Karakalpakstan Suvokova is the only utility whose project investments are limited to sewerage infrastructure64. Investments are planned to be made in four urban areas, with the majority of new infrastructure and sewerage extensions to be made in the provincial capital, Nukus. Karakalpakstan’s existing operating costs of sewage collection and treatment are a small part of the Suvokova’s operational costs – approximately 10 percent of Karakalpakstan’s direct operating costs (not including depreciation). Using the assumption that annual operating costs of the new infrastructure of about 2.5 percent of the capital costs, including adequate maintenance, increases direct operating costs of the utility as a whole by about 50 percent. 7. The following summarizes estimates with respect to: (i) without-project real tariff increases necessary to meet an operating cost coverage ratio of 1.0 (not including depreciation); (ii) without-project real tariff increases necessary to meet an operating cost coverage ratio of 1.0 (including depreciation; and (iii) and (iv) – the same real tariff increases necessary with the project. Real tariff increases are based on actual 2019 tariffs. Table A3.2: Estimated Necessary Real Tariff Increases Karakalpakstan Suvokova Water Supply (no project) Sewerage – without project Sewerage – with project Operating Operating Operating Direct Direct Direct costs with costs with costs with operating costs operating costs operating costs depreciation depreciation depreciation Percent increase 10% 70% No increase No increase* 280% 800% Resulting real tariff (household) 792 1,224 650 650 2,470 5,850 (UZS/m3) * Assumption that existing sewerage infrastructure has no useful life remaining and has been fully depreciated. 8. While the necessary tariff increases specific to sewerage appear quite alarming, the Suvokova may, decide to structure tariffs to cross subsidize sewerage service using water supply revenues. For example, increasing all water and sewerage tariffs by 60 percent would result in a 1.04 operating cost coverage ratio, not including depreciation, while increasing all tariffs 160 percent would result in a 1.0 operating cost coverage ratio, including depreciation. While this may not appear fair for customers who do not enjoy piped sewerage, this is not an uncommon way to cover the relatively high costs of sewage collection and treatment as service is expanded. 9. Syrdarya: Project investments in Syrdarya Suvokova include infrastructure rehabilitation and service extensions for both water supply and sewerage. Information about existing sewerage connections was not readily available, and therefore estimates were used to separately calculate existing cost coverage ratios for water supply and sewerage. Like the case in Karakalpakstan, post-project operating costs for sewage collection and treatment costs in Syrdarya Suvokova are estimated at 2.5 percent of capital expenses. In terms of water supply, post-project operating costs have been estimated based on existing costs but incorporated estimated reductions in NRW and in electricity use. 64 Water supply infrastructure is financed through the ADB-financed Western Uzbekistan Water Supply System Development Project. Page 96 of 106 The World Bank Water Services and Institutional Support Project (P162263) Table A3.3: Estimated Necessary Real Tariff Increases - Syrdarya Suvokova Water supply – without project Water supply – with project Direct operating Operating costs with Direct operating Operating costs with costs depreciation costs depreciation Percent increase No increase No increase No increase 140% Resulting real tariff (household) (UZS/m3) 420 420 420 1010 Sewerage – without project Sewerage – with project Direct Operating costs Direct operating Operating costs operating with depreciation costs with depreciation costs Percent increase 75% 75%* 180%** 500% Resulting real tariff (household) 480 480 1,350 2,900 (UZS/m3) * Assumption that existing sewerage infrastructure has no useful life remaining and has been fully depreciated. ** With-project estimates of necessary tariff increases are in addition to without-project tariff increases. 10. Regarding post-project operating costs for water supply, it is important to note that, despite significant increases in customers served through the project, direct operating costs on a per-meter basis are expected to decrease somewhat due to the replacement of outdated, oversized pumps with appropriately sized, modern pumps. The cost of wastewater collection and treatment, however, will rise significantly from current reported costs. 11. Samarkand Suvokova: Project investments in Samarkand Suvokova include infrastructure rehabilitation and service extensions for both water supply and sewerage. However, unlike in Syrdarya Suvokova, investments will be limited to Kattakurgan town and its environs, rather than in several district towns. It was not possible to isolate existing operational and financial information for Kattakurgan for the analysis (Samarkand Suvokova reports information for Samarkand City separately but combines information for all other service areas.) This results in estimated tariff increases for water being applied across all the districts served by Samarkand Suvokova, despite improvements only being made in Kattakurgan. (This is less applicable for sewerage investments, because far fewer customers have sewage connections.) Regarding projected estimates of resulting operating costs, post- project operating costs for sewage collection and treatment costs are estimated at 2.5 percent of capital expenses. Post-project water supply operating costs have been estimated based on existing costs, with adjustments made for electricity efficiencies from new pumps and for reductions in non-revenue water, both of which are expected results of the project. Table A3.4: Estimated Necessary Real Tariff Increases - Samarkand Suvokova (non-Samarkand City) Water supply – without project Water supply – with project*** Direct operating Operating costs Direct operating Operating costs costs* with depreciation** costs with depreciation No additional Percent increase 40% 50% 40% increases projected Resulting real tariff (household) 600 640 600 890 (UZS/m3) * One-quarter of total Suvokova administrative costs have been applied to direct district operating costs. Page 97 of 106 The World Bank Water Services and Institutional Support Project (P162263) ** Depreciation for existing non-Samarkand City water infrastructure is estimated to be one-fifth of total reported depreciation for Samarkand Suvokova. *** With-project estimates of necessary tariff increases are in addition to without-project tariff increases, if applicable. Sewerage – without project Sewerage – with project** Direct operating Operating costs with Direct operating Operating costs costs depreciation costs with depreciation Percent increase 50% 50%* 340% 620% Resulting real tariff (household) 547 547 2,410 3,940 (UZS/m3) * Assumption that existing sewerage infrastructure has no useful life remaining and has been fully depreciated. ** With-project estimates of necessary tariff increases are in addition to without-project tariff increases, if applicable. 12. Similar to the case in Karakalpakstan, the wastewater tariff necessary to cover operating costs plus relevant depreciation is a noticeable increase from the existing tariff. As in Karakalpakstan, though, the Suvokova may choose to structure tariffs to cross subsidize sewerage service with water supply revenues. In this case, increasing all water and sewerage tariffs by 60 percent in the districts (in addition to the 50 percent increase necessary to bring billings in line with costs prior to the project) would result in full cost coverage of district water and sewage services, including depreciation. Affordability Assessment 13. Project affordability assessments indicate that with such tariff increases, the combined bills for household water supply and sewerage services will remain below affordably thresholds65, even for the poorest households (bottom 20 percent) where adjusted bills are conservatively projected to represent around 5 percent of monthly household incomes. Figure A3.1: Project affordability scenarios with tariff increases (combined water and sewerage) 65 Set at 5 percent of household income. Page 98 of 106 The World Bank Water Services and Institutional Support Project (P162263) 14. The above is based on an estimate of 5 percent of household budgets by quintile together with the amount spent on water and sewerage (for those with non-zero expenditure) by quintile. The expenditure is updated by the percentage increase for water and sewerage in the with/without project scenarios, compared to household consumption updated for inflation. 15. The simulation graph shows: • In gold: the cost for the average (connected) household, for water and sanitation, after increases in the tariff of the magnitudes discussed, without the project • In blue: the cost for the average (connected) household, for water and sanitation, after increases in the tariff of the magnitudes discussed, with the project • In orange: the projected 2019 budget threshold of 5 percent for the (national) bottom quintile of households 16. The result suggests that households would break marginally above a 5 percent threshold of their average budget (for the bottom quintile) in only a few cases in Karakalpakstan and Syrdarya region. Page 99 of 106 The World Bank Water Services and Institutional Support Project (P162263) Economic Analyses 17. Economic analyses have been carried out for the project, incorporating (i) capital investment and estimated operating costs; (ii) time savings to beneficiaries of water-supply investments, resulting from beneficiaries no longer having to access water from relatively distant sources; (iii) reductions in direct costs of treating existing water sources (i.e., boiling); (iv) reduced health costs resulting from reduced incidence of diarrhea and infectious hepatitis, and (v) with respect to sewerage investments, economic benefits of reduced pollution resulting from sewage discharge. Economic internal rates of return (EIRRs) have been calculated based on the streams of costs and benefits over a period of 30 years (combined implementation period and operational period), as well as the investments’ net present values (NPVs), based on a discount rate of six percent. The economic analyses are presented on the basis of the Suvokovas – that is, the results for investments in Karakalpakstan, in Syrdarya, and in Samarkand Suvokovas are presented separately, as well as in aggregate. 18. The economic analysis is based on the estimated capital costs, expensed over a five-year implementation period, annual operating costs associated with the investments, and the following assumptions: Assumptions Sewerage Water Supply (Karakalpakstan, (Syrdarya and Syrdarya, and Samarkand) Samarkand) Beneficiary Households (Direct) 18,620 48,675 Average household size 4.5 4.5 Capital Investment Costs US$76.5 million US$142 million Based on current cost Operating costs structures + energy 2.5% of capex annually efficiencies Average agricultural wage US$0.50/hour US$0.50/hour Pre-project Water Access Percentage households manually fetching water 80% n/a Time spent accessing water 1.5 hours/day Household water treatment 10 l/p/d Electricity usage to boil water 0.09 kWh/liter Cost per kWh USS 0.05 Post-project Water Access Time spent accessing water 0.5 hours/day Pre-project water-borne diseases Incidence of diarrhea 30% Number of days lost per incidence 1 Cost of treatment per incidence USS 3.0 Incidence of infectious hepatitis 0.23% Number of days lost per incidence 10 Cost of treatment per incidence US$150.00 Post-project water-borne diseases Incidence of diarrhea 15% Incidence of infectious hepatitis 0.08% Wastewater Pre-project Wastewater – household costs % of unserved households using septic tanks 60% Annual cost of septic-tank maintenance UZS 600,000 (US$ 70) Annual cost of other sanitation means UZS 85,000 (US$ 10) Pre-project Wastewater Environmental Costs Bio-chemical oxygen demand discharge 60 grams/person/day Chemical oxygen demand discharge 135 grams/person/day Page 100 of 106 The World Bank Water Services and Institutional Support Project (P162263) Assumptions Sewerage Water Supply (Karakalpakstan, (Syrdarya and Syrdarya, and Samarkand) Samarkand) Nitrogen discharge 14 grams/person/day Phosphorus discharge 4 grams/person/day Shadow price – Bio-chemical oxygen demand * € 0. 33 per kg Shadow price – Chemical oxygen demand € 0.098 per kg Shadow price – Nitrogen € 16.35 per kg Shadow price – Phosphorous € 30.94 per kg US$/€ exchange rate 1.12 Discount to reflect environmental sensitivity of 50% discharge areas Post-Project Environmental Benefits Bio-chemical oxygen demand post-project 70% reduction reduction Chemical oxygen demand post-project reduction 75% reduction Nitrogen post-project reduction 70% reduction Phosphorous post-project reduction 80% reduction * “Economic Valuation of Environmental Benefits from Wastewater Treatment Processes, an empirical approach for Spain”, Science of the Total Environment, Volume 408, Issue 4. 19. Results: Karakalpakstan Investments. Applying the above assumptions, the analysis for the proposed investments in Karakalpakstan (all sewerage infrastructure) indicate an economic internal rate of return (EIRR) of 29.0 percent. The NPV, calculated using a discount rate of 6 percent, is calculated to be US$225.5 million. The majority (more than 95 percent) of benefits are related to reductions in pollution resulting from the collection and treatment of previously untreated sewerage). 20. Syrdarya Investments: The combined EIRR for the Syrdarya investments are estimated to be 8.4 percent, with an NPV of US$15.2 million. Two-thirds of the benefits derive from investments in sewerage (with nearly all due to pollution reduction), while one-third is generated from investments in water supply. 21. Samarkand Investments. The combined EIRR for the Samarkand investments are estimated to be 7.0 percent, with an NPV of US$4.8 million. Just under 80 percent of benefits are derived from investments in sewerage (again, with nearly all due to pollution reduction), while 20 percent of benefits are derived from investments in water supply. 22. In aggregate, the project is estimated to generate an EIRR of 17 percent, with an NPV, calculated using a discount rate of 6 percent, of US$255.1 million. Eighty-seven percent of the aggregate benefits are due to the value of the reduction in pollution (i.e., from sewerage investments), while 9 percent accrue to beneficiaries of water supply investments. In addition, nearly 92 percent of benefits come from the investments in Karakalpakstan Suvokova, with much smaller shares from the investments in Syrdarya and Samarkand Suvokovas. The high returns generated by the investments in Karakalpakstan are due both to the relatively high number of beneficiaries compared to the capital costs (relative to the investments in the other Suvokovas), as well as to the fact that investments there are limited to sewerage, which generates significantly higher returns than the reconstruction and rehabilitation investments in water supply. 23. Impacts from greenhouse gas (GHG) emissions: The economic analysis was also undertaken incorporating net greenhouse gas (GHG) emissions resulting from the project. In all cases, the project results in small reductions in GHG emissions. Estimated reductions have been monetized using the shadow price of carbon Page 101 of 106 The World Bank Water Services and Institutional Support Project (P162263) per World Bank’s guidelines with a baseline minimum value of US$40 and a maximum of US$80 per ton CO2eq in baseline year 2020, with an average rate of increase of 2.26 percent per year. 24. The following summarizes the GHG impacts of the project investments. Net Average Annual CO2-equivalent (tons CO2eq) Emissions Karakalpakstan Syrdarya Samarkand Water Supply n/a - 2,798 - 1,150 Sewerage - 462 - 609 - 1,110 Total - 462 - 3,407 - 2,260 Impact on CO2 emissions reductions on Economic Returns Karakalpakstan Syrdarya Samarkand Baseline EIRR 29.0% 8.4% 6.9% EIRR (with low-range value of CO2 reductions) 29.0% 8.8% 7.4% EIRR (with high-range value of CO2 reductions) 29.0% 9.0% 7.6% Page 102 of 106 The World Bank Water Services and Institutional Support Project (P162263) ANNEX 4: Project Maps COUNTRY: Uzbekistan Water Services and Institutional Support Project Page 103 of 106 The World Bank Water Services and Institutional Support Project (P162263) Page 104 of 106 The World Bank Water Services and Institutional Support Project (P162263) Page 105 of 106 The World Bank Water Services and Institutional Support Project (P162263) Page 106 of 106