FKre

ASIAN DEVELOPMENT BANK RRP:UZB 35496

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

TO THE

REPUBLIC OF UZBEKISTAN

FOR THE

WESTERN UZBEKISTAN RURAL WATER SUPPLY PROJECT

April 2002

CURRENCY EQUIVALENTS (as of 14 March 2002)

Currency Unit – Sum (SUM) SUM1.00 = $0.00144

$1.00 = SUM693

ABBREVIATIONS

ADB – Asian Development Bank CBO – community-based organization EIRR – economic internal rate of return EOCC – economic opportunity cost of capital FIRR – financial internal rate or return JFPR – Japan Fund for Poverty Reduction lcd – liter per capita per day LIBOR – London interbank offered rate MMS – Ministry of Macroeconomics and Statistics NGO – nongovernment organization O&M – operation and maintenance PIU – project implementation unit PMU – project management unit PSC – project steering committee SERF – shadow exchange rate factor TA – technical assistance TCSA – Territorial Communal Services Agency UCSA – Uzbekistan Communal Services Agency UNICEF – United Nations Children’s Fund USAID – United States Agency for International Development WDC – water distribution center

GLOSSARY

Agrovodokanal – rural water and sewerage agency Mahalla – local self-management civil committee Vodokanal – urban water and sewerage agency

NOTES

(i) The fiscal year (FY) of the Government of Uzbekistan ends on 31 December. (ii) In this report, "$" refers to US dollars.

CONTENTS Page LOAN AND PROJECT SUMMARY ii MAP vii l. THE PROPOSAL 1 ll. INTRODUCTION 1 lll. BACKGROUND 1 A. Sector Description 1 B. Government Policies and Plans 7 C. External Assistance to the Sector 8 D. Lessons Learned 9 E. ADB’s Sector Strategy 10 F. Policy Dialogue 10 lV. THE PROPOSED PROJECT 12 A. Rationale 12 B. Objectives and Scope 13 C. Technical Justification 15 D. Cost Estimates 16 E. Financing Plan 17 F. The Executing Agency 18 G. Implementation Arrangements 18 H. Environmental and Social Measures 25 V. PROJECT JUSTIFICATION 26 A. Economic and Financial Analyses 26 B. Environment 28 C. Social Dimensions 29 D. Impact on Poverty 29 E. Risks 30 Vl. ASSURANCES 31 A. Specific Assurances 31 B. Conditions for Loan Effectiveness 33 C. Condition for Disbursement 33 Vll. RECOMMENDATION 33 APPENDIXES 34

LOAN AND PROJECT SUMMARY

Borrower The Republic of Uzbekistan

Project Description The Project will improve potable water supply, provide support to sanitation and encourage improved personal hygiene practices to about 700,000 of the rural population of western Uzbekistan, covering the Republic of Karakalpakstan (Karakalpakstan), adjacent to the Aral Sea, and the province of Khorezm. Over 60 percent of the population are poor. The Project will provide urgently needed assistance in response to the worsening consequences of drought during the past two years. The Project will complement a wide-ranging package of initiatives under the Government’s Aral Sea Drought Relief Program being funded by international development agencies to support the communities in the drought disaster area in western Uzbekistan. The Project will support long-term sustainable water supply management by introducing water conservation measures, educating the public on the value of water, and promoting health awareness campaigns. To better address the needs of Project beneficiaries, a participatory approach will be adopted when formulating and designing subprojects under the Project. Thereafter, the beneficiaries will be involved in implementation.

Classification

Poverty: Core poverty intervention Thematic: Human development

Environmental Assessment

Category B. An initial environmental examination was undertaken, the summary is a core appendix. The Project will not have any adverse impact on the environment, but will have a positive impact by improving the quantity and quality of potable water and sanitation facilities.

Rationale

Karakalpakstan and Khorezm are located in the driest part of Uzbekistan with annual rainfall ranging from 70 to 110 millimeters. Over the last three decades, the drying up of the Aral Sea has aggravated the water shortage problem. Since mid-2000, Karakalpakstan and Khorezm have been suffering from the worst drought in 100 years. About 90 percent of the rice crop and 75 percent of the cotton crop were lost in 2000 and 2001. Many families in rural communities have lost direct access to safe drinking water and their main source of income from agriculture. Women and children are often required to fetch water from distant alternative sources. Drinking water, where available, is often contaminated and of poor quality, exposing the population to high risks of waterborne diseases and carcinogenic and immunological problems. The water shortage situation needs to be addressed urgently as the condition has deteriorated rapidly since the onset of the current drought. The Government has embarked on a

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program for short-term humanitarian relief and medium- to long-term water resource management supported by various multilateral and bilateral aid agencies. The Project will provide a reliable supply of potable water, alleviate human suffering from the drought, and strengthen the institutional capacity to manage scarce water resources in a sustainable manner. The Project will allow the Asian Development Bank (ADB) to play a key role in the joint effort by international aid agencies to assist the Government in combating the water shortage and drought problems in the poorest part of the country. Subregional water resource management is being addressed in parallel supported by international development agencies, including ADB, through assistance to encourage greater cooperation in transboundary water use, more effective and sustainable subregional water resource management, and encouraging changes in agricultural practices.

Objective and Scope

The main objective of the Project is to improve the living and health conditions in the rural communities in Karakalpalstan and Khorezm. The Project will provide safe and easily accessible water supply, minimize water wastage, and improve health conditions by supporting the provision of sanitation facilities and encouraging better hygiene practices. The Project will mitigate the ongoing effects of the drought and will strengthen institutional capacity for potable water resource management to ensure the Government’s water supply program in western Uzbekistan is sustainable. The Project comprises three parts: (i) potable water supply, (ii) water conservation and health improvement, and (iii) capacity building. Potable water supply includes the development of new systems, and rehabilitation and upgrading of existing facilities. The aim is to expand the coverage of potable water supply to households in rural districts from a minimum of 12 percent to 85 percent, reduce unaccounted for water losses from over 50 percent to 30 percent, increase supply efficiency of bulk water and service delivery, and lower unit costs of production. Water conservation and health improvement include introducing water conservation measures, improving sanitation facilities in schools and clinics, and promoting water- and sanitation-related health awareness. Capacity building includes support for project management and institutional strengthening on water supply management. The main elements (the bulk water supply components) of the Project are defined in detail. The Project will adopt a flexible approach where community level subprojects will be selected, planned, and implemented during project implementation to ensure assistance is given to areas with the most urgent need and to allow for coordination with other aid agencies. The Project will include social measures to identify and mobilize community

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participation in subproject planning and implementation, monitor demand, and educate on the value of water.

Cost Estimates

The estimated project cost is $65.0 million equivalent, comprising foreign exchange costs of $37.0 million (56.9 percent) and local currency costs equivalent to $28.0 million (43.1 percent).

($ million)Sources of Financing Foreign

ExchangeLocal

Currency

Total

Percent Asian Development Bank 37.0 1.0 38.0 58.5 Government of Uzbekistan 0.0 27.0 27.0 41.5 Total 37.0 28.0 65.0 100.0

Financing Plan

Loan Amount and Terms

A loan of $38.0 million from ADB’s ordinary capital resources will be provided under ADB’s LIBOR-based lending facilities. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.75 percent per annum, a front-end fee of 1.0 percent, and such other terms and conditions set forth in the draft Loan Agreement.

Period of Utilization

Until 31 March 2006

Executing Agency

Ministry of Macroeconomics and Statistics (MMS)

Implementation Arrangements

A central project management unit will be established within MMS. The unit will be responsible for overall planning, organization, and implementation of the Project, including recruitment of project management consultants, procurement and disbursement activities, implementation monitoring and evaluation, and reporting to ADB. Project implementation units will be established in Karakalpakstan and in Khorezm for financial and project management activities at the local level, including selection, design, planning, and implementation of subprojects. A project steering committee chaired by the deputy minister of MMS and comprising representatives from central and local governments has been established to coordinate drought relief and water supply activities funded by international aid agencies, provide policy guidance, and monitor and supervise overall project implementation including the Project.

Procurement

The procurement of goods and services to be financed by the ADB loan will be undertaken in accordance with ADB’s Guidelines for Procurement. International competitive bidding procedures will be applied for supply contracts estimated to cost the equivalent of $500,000 or more, and civil works contracts valued at over $1.0 million. Supply contracts with a value of $500,000 equivalent or

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less will follow international shopping procedures except for supply contracts with a value of $100,000 equivalent or less, which may be procured by direct purchase or local competitive bidding, as applicable. Civil works contracts valued at $1.0 million equivalent or less will be carried out under local competitive bidding.

Consulting Services

The Project will require 254 person-months of consulting services (32 person-months of international and 222 person-months of domestic) for potable water resource management, subproject selection, procurement advice, financial management, detailed engineering design, project management, poverty reduction, community participation, and health awareness development. Consultants will be engaged in accordance with ADB’s Guidelines on the Use of Consultants based on the quality and cost-based selection method and other arrangements satisfactory to ADB for the engagement of domestic consultants.

Estimated Project Completion Date

30 September 2005

Project Benefits and Beneficiaries

The Project will directly benefit about 700,000 of the rural population in Karakalpakstan and Khorezm, who are suffering from the lack of safe drinking water that has been worsened by the current drought. The majority of the beneficiaries are poor. An increased and more reliable supply of potable water and sanitation facilities will improve the health and general welfare of the beneficiaries, in particular the vulnerable groups who are unable to afford coping mechanisms such as bottled water and must rely on unsafe water sources. By reducing leakage and losses in water supply, existing efficiencies and resulting costs can be minimized. The participatory approach to selection of subprojects will enhance ownership among beneficiaries, which in turn will improve sustainability of project facilities and generate support for ongoing operation and maintenance of equipment, and voluntary water conservation measures and health awareness. Stability of supply and improved standards of service will increase the willingness to pay for service and will contribute to the recovery of operation and maintenance costs in a staged manner, affordable to the population. A stepped tariff structure based on volume of consumption is proposed including a lifeline tariff for the low-income group. The proposed tariff charges for average consumption of between 60 and 75 liters per capita per day is about 3 to 5 percent of the household income, in line with ADB’s affordability criteria of 5 percent of household income. Tariff review will be undertaken annually taking into consideration operating costs, design consumption and affordability; the tariff will be adjusted accordingly. Information, education, and communication campaigns will steer public attitude toward more responsible water usage and better sanitation and health practices. The Project will help to avoid involuntary out-migration

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of population from Karakalpakstan and thereby assist in preserving local culture and customs.

The overall economic internal rate of return based on a sample of subprojects is estimated at 19.7 percent, exceeding the economic opportunity cost of capital, which is assumed to be 12 percent. The overall financial internal rate of return is estimated at 4.4 percent, exceeding the weighted average cost of capital, which is about 2.1 percent, and demonstrating that the Project is financially viable.

I. THE PROPOSAL 1. I submit for your approval the following Report and Recommendation on a proposed loan to the Republic of Uzbekistan for the Western Uzbekistan Rural Water Supply Project.

II. INTRODUCTION 2. During President Chino’s visit to Uzbekistan in June 2001, the Government of Uzbekistan requested emergency assistance from the Asian Development Bank (ADB) to mitigate the impacts of a severe drought that has adversely affected the livelihood of rural communities in western Uzbekistan for the last two years. The area is adjacent to the Aral Sea and covers the Republic of Karakalpakstan (Karakalpakstan) and the province of Khorezm. During project processing, ADB recognized that while immediate relief was needed for those suffering from the drought, dialogue with the Government on water resource management issues was equally important to ensure sustainable development of potable water supply in the project area. Accordingly, a small-scale project preparation technical assistance (TA) was approved in January 2002 to help the Government develop the project proposal.1 Close consultation with the communities and detailed analyses were carried out under the TA. A participatory approach, involving the communities and local government agencies, was used to formulate the Project. This report is based on the findings of the Fact-Finding Mission from 4 to 25 February 20022 and earlier ADB missions, and has incorporated feedback from consultations with project beneficiaries; reports prepared by the TA consultants; and discussions with the central and local governments, international assistance agencies, and nongovernment organizations (NGOs). The project framework is in Appendix 1.

III. BACKGROUND A. Sector Description

1. Water Resources in Western Uzbekistan

3. In 1960 the Aral Sea was the fourth largest inland lake in the world. Increasing use of the main contributory rivers of Amudarya and Syrdarya for water intensive agriculture, particularly cotton and rice growing, has resulted in greatly reduced volumes of water entering the Aral Sea. As a result, the sea has shrunk to less than half its original size and only 20 percent of its original volume. The desiccation of the Aral Sea has resulted in the loss of its fishing, tourism, and shipping industries, and the destruction of the ecosystem of the sea and deltas. The salty desert that has now been formed results in up to 100 million tons of windblown salt dust contaminating the surrounding regions in Uzbekistan and Kazakhstan, further inhibiting agricultural production. From the mid-1990s, a decline in snow and glacier melt from the surrounding mountains combined with a reduction in rainfall have significantly reduced the natural resources of water within the two major watersheds. The Amudarya River in particular has been the main source of fluvial and shallow aquifer abstraction for human consumption and

1 TA 3828-UZB: Aral Sea Area Drought Relief Project, for $150,000, approved on 3 January 2002. 2 The Mission comprised A. Leung, Urban Development Specialist and Mission Leader; L. Nazarbekova, Counsel;

M. Perlas, Senior Portfolio Management Specialist, Uzbekistan Resident Mission (URM); R. Abdukayumov, Portfolio Management Officer (URM); J. Leleu, Water Supply Engineer (TA consultant); L. Thorn, Social Development Specialist (TA consultant); and T. Villareal, Economic and Financial Analyst (TA consultant). As all issues were resolved during the Mission, Management approved waiving the appraisal mission under the New Business Processes.

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agricultural use in Karakalpakstan and Khorezm, and the reduced volume of flow has resulted in the present drought conditions. 4. The annual flow of the Amudarya River at Tuyamuyun, a complex of lakes and reservoirs located approximately 400 kilometers (km) upstream of the Aral Sea and where the Amudarya River flows from Turkmenistan into Uzbekistan, was around 40,000 million cubic meters (m3) between 1991 and 1999. In 2000, the flow at Tuyamuyun reduced to an annual average of 20,180 million m3 and this dropped to 14,400 million m3 in 2001. In each of these years, the river has run dry before it reached the Aral Sea. Impounding reservoirs constructed on the Amudarya River at Tuyamuyun enable the diversion of flows into primary irrigation canals from which water is fed by gravity to the entire irrigation network in Karakalpakstan and Khorezm. The raw water supply for Nukus, the capital city, and other towns and villages in Karakalpakstan, and for Urgench, the capital city, and the towns and settlements in Khorezm, are extracted from such canals. The drought conditions have resulted in insufficient water to properly supply these canals, with the consequences of very limited available water or water below the level of gravity supply, thus requiring pumping and incurring associated overhead costs. 5. Another source of water supply is groundwater found in aquifers at varying depths, although the quality of such water varies considerably and is mostly nonpotable due to contamination from leached salts and agricultural chemicals. Deep groundwater is the main alternative and sustainable source. It is located between 400 and 900 meters below ground and is unaffected by surface activities such as pollutant discharges. However, deep groundwater is extremely high in mineral salts and requires desalination prior to human consumption. 6. The formal supply of potable water throughout Karakalpakstan and Khorezm is from a combination of wells, boreholes, and, increasingly, by bulk water transmission from both the Amudarya River and the Tuyamuyon complex. These sources provide water to approximately 71 percent of the population in Karakalpakstan and 64 percent in Khorezm. The bulk water abstraction scheme comprises pumping from the Karapas reservoir in the Tuyamuyon lake complex and from the main stream reservoir of the Amudarya River. The abstracted water, amounting to about 470,000 m3/day, is then treated and transmitted to Karakalpakstan and Khorezm. Water abstracted from the Amudarya River at Tuyamuyun and downstream for potable use represents only 5 percent of the total annual flow, the remainder is used for irrigation. Water distribution centers (WDCs) receive bulk water from the transmission mains. After storage and further disinfection, the water is pumped into the distribution networks. In areas where WDCs are not supplied by trunk mains, water is obtained from boreholes and deep wells, and is desalinated and disinfected before being pumped for distribution. Distribution is mainly by pipe systems but also by tankers where settlement is remote. Other means of supplying water to the rural population are shallow open wells and hand pumps, but in these latter cases, water quality does not meet national or international standards.

2. Impact of the Drought

7. The drought has resulted in severely worsening water resources in the project area. In 2000, water flow to this area was about 40 percent of the long-term annual average. This has worsened in 2001 with estimated water resources (including both potable and nonpotable) in Karakalpakstan at only 70 percent of the 2000 level and 30 percent of the 1999 level. Inefficient water management practices and lack of water conservation awareness exacerbate the already difficult situation. In 2000, about 90 percent of the rice crop and about 75 percent of the cotton crop were lost. Similar losses are anticipated in 2001, including significant losses in the wheat

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harvest. In 2001, due to the continued water shortage, the Government had to reduce the overall cropping area, mainly among the rice-growing areas, because of its water intensive requirements. Initiatives by the United Nations Food and Agriculture Organization are currently ongoing to pilot alternative agricultural cropping that is less water intensive. However, until results are available and farming practices change, the current socioeconomic depression will continue.3 8. The drought and drying up of substantial parts of the Amudarya River and its canal network not only obviates direct availability of water from these sources, but also severely restricts the supply from shallow wells and medium-depth ground lenses that rely on groundwater recharge through seasonal rainfall and seepage from the river and canals. Shallow wells are generally located near the river and irrigation canals, and the reduction or cessation of flow into the canals results in falling groundwater levels and the consequential abandonment or need to deepen wells. This is especially true of the prevailing conditions in Karakalpakstan. While all canals remain operational, the flow has dwindled from 50 m3/second to a mere 2 m3/second. The secondary and tertiary canal systems are even more inefficient and the overall irrigation efficiency reaches only between 20 and 40 percent. Much of the already reduced volume of water for irrigation is therefore lost, and with it access to water for personal, livestock, and agricultural use. Local sources of drinking water, where available, are often contaminated and of poor quality leading to a high incidence of waterborne diseases in the area.

3. Subregional Cooperation on Water Resource Management 9. The drying of the Aral Sea has resulted in severe and wide-ranging impacts on the environment, economy, and human population. In the late 1980s, programs were initiated by the former Soviet Union to deal with the key problems in the Aral Sea region. Since independence in 1991, these efforts were carried out by the five nations in the Aral Sea basin Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan with major help from the international community, primarily the World Bank, the United States, and the European Union. The five nations signed a water-sharing measure in 1991 that included a provision to provide at least 14,000 million m3 of water per year to the Aral Sea. In practice, however, this water has been supplied to gauging points in the deltas of the Amudarya and Syrdarya rivers, and deliveries to the sea have been considerably smaller. In 1998, the World Bank approved a grant under the Global Environmental Facility to assist the Aral Sea Basin Program of the five Central Asian republics to address the root causes of the overuse and degradation of the Aral Sea Basin waters.4 The objectives of this assistance are to help the governments (i) create a common policy, strategy, and action programs for national and regional water and salt management; (ii) change cropping patterns to reduce irrigation; (iii) promote water conservation; (iv) improve transboundary water quantity and quality; and (v) restore a wetland for biodiversity conservation. Implementation of this project is ongoing and is progressing well.

4. Government Institutions for Water Supply

10. Administration of the country’s water resources and potable water supply is shared by various agencies under the overall supervision of the Cabinet of Ministers. Raw water resources from the Amudarya River and at the Tuyamuyon complex are the responsibility of the Ministry of Agriculture and Water Resources. The raw water abstraction facilities and transmission network 3 From a mission of the Food and Agriculture Organization to identify agricultural interventions in drought affected

areas of Uzbekistan, carried out in January, 2002. 4 The Global Environmental Facility $12.2 million grant for the Aral Sea Basin Program/Water and Environmental

Management Project is administered by the World Bank.

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is under the overall responsibility of the Uzbekistan Communal Services Agency (UCSA). Two UCSA departments, one each in Karakalpakstan and Khorezm, are responsible for operating abstraction pumping stations, treatment works, and transmission pipelines in the two regions. 11. In Khorezm, water from the transmission mains is supplied to both the vodokanals (urban water and sewerage agencies) and the agrovodokanals (rural water and sewerage agencies). Both vodokanals and agrovodokanals are under the supervision of the Territorial Communal Services Agency (TCSA), which reports to the provincial governor. The TCSA is also responsible for the province’s sanitation, central heating, and solid waste systems, among other responsibilities relating to public services. However, sanitation service to the rural communities is minimal with only occasional solid waste collection. In Karakalpakstan, water from the transmission mains is supplied to the vodokanals, which report to the TCSA in Karakalpakstan. Water from the transmission mains is also supplied to agrovodokanals, which report directly to the Council of Ministers of the Republic of Karakalpakstan. 12. The agrovodokanals in Karakalpakstan and Khorezm are responsible for the operation and maintenance (O&M) of rural water supply systems, yet a serious deficiency exists in their functional ability to efficiently manage their assets and deliver services to consumers. Financial management is weak and not based on commercial principles. While tariffs are in place, they are low and not able to cover the full cost of service provisions. The problems are due to (i) the agrovodokanals being transferred out from the Ministry of Agriculture and Water Resources without the benefits of adequate technical support or operational equipment; (ii) inability to manage their assets in a structured and efficient manner; (iii) lack of experience in modern water supply practice and techniques; and (iv) lack of experience in working in partnership with consumer groups and NGOs. The institutional capacity of the agrovodokanals and their staff needs to be strengthened through structured training. 13. Water quality standards are monitored by the State Epidemiological Survey, which is part of the Ministry of Health and maintains operational units in each province or region. These units have the responsibility to monitor the quality standards of potable water supply or wastewater discharge, and can levy penalties for noncompliance by the vodokanals or agrovodokanals. 14. At the central level, coordination of the activities of UCSA, the Karakalpakstan Council of Ministers, and the Khorezm provincial government is carried out by the Ministry of Macroeconomics and Statistics (MMS). MMS’s Department for Rural Infrastructure Development is tasked to (i) develop plans for improving rural water and gas supply systems jointly with UCSA, the Karakalpakstan Council of Ministers, and the Khorezm provincial government; (ii) define cost-sharing arrangements between the central and local governments for financing projects jointly with the Ministry of Finance and the above-mentioned three bodies; and (iii) monitor the implementation of the these activities. In addition, MMS coordinates the implementation of an ongoing World Bank water supply, sanitation, and health project,5 as well as other aid-funded projects in Karakalpakstan and Khorezm. Appendix 2 shows the organization structure for potable water supply in Karakalpakstan and Khorezm. 5 The total project cost is $120 million of which the World Bank loan is $75 million with cofinancing from Kuwait Fund

($20 million) and Kreditanstalt für Wiederaufbau of Germany ($10 million).

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5. Socioeconomic Issues in Karakalpakstan and Khorezm

a. Potable Water Supply 15. Lack of access to potable water is a major reason why socioeconomic development in Karakalpakstan and Khorezm lags behind that of Uzbekistan in general. As of 1 January 2001, the potable water supply coverage for the rural population of Uzbekistan was 72.3 percent compared with 41.6 percent for Karakalpakstan and 55.5 percent for Khorezm. However, these latter two figures reflect coverage in terms of water supply facilities, not actual availability of water for the population. The drought and water shortages have rendered part of those facilities nonfunctional.6 Furthermore, the drought, water shortage in the Amudarya River, and rapidly falling water tables have caused many shallow wells and irrigation canals to dry up. Since about 51 percent of all households, comprising close to 100,000 households and about 560,000 individuals, in Karakalpakstan and Khorezm rely on either open wells or shallow boreholes, this restricted or lost access to water is catastrophic. Even before this loss of supply, the water sources contained a salinity level that was nearly double the maximum allowable concentration recommended by the World Health Organization.7 The water shortage has resulted in degradation of the environment and deterioration of the living conditions of the people. Therefore, alternative and sustainable resources for potable supplies are urgently needed.

b. Health, Hygiene, and Sanitation 16. The lack and poor quality of potable water have posed serious health risks to the population of Karakalpakstan and Khorezm over the decades, especially for women and children. These are caused mainly by drinking water contaminated with salt and fecal matter, heavy mineral content, pesticides, and fertilizers. According to the State Epidemiological Survey (para. 13), 34.4 percent of samples taken from all surface waters in Khorezm in 2000 did not meet the state standards for microbiological safety and 15 percent exhibited positive cholera-like vibrios. Rural sanitary facilities comprise largely simple, open pit latrines. Unsanitary and badly maintained pit latrines without the benefit of water for even basic hand washing, a general lack of satisfactory personal hygiene practices, and the severely restricted availability of water renders the population, particularly school children, at serious risk to infections. Hygiene awareness is low or nonexistent in many rural communities. 17. According to a United Nations Children’s Fund (UNICEF) report (footnote 7), the Karakalpakstan and Khorezm areas are characterized by the highest rate of infant mortality (about 52 per 1,000 live births) and maternal mortality (about 100 per 100,000 live births) in Central Asia. Typical health problems in Karakalpakstan are diarrhea, cholera, typhoid, hepatitis A, allergies, and illnesses related to neurological, carcinogenic, immunological, and reproductive functions.8 Liver cancer has increased five-fold in the last decade. Birth defects are five times higher than in Europe, 90 percent of pregnancies have complications, and about 30 percent of pregnant women have kidney diseases. About 30–80 percent of children under 3 years and 50–80 percent of women in the fertile age group suffer from anemia; the tuberculosis incidence at 150–250 per 100,000 population is among the highest in Central Asia. Children suffering from malnutrition and other diseases have problems concentrating and learning. As a result of the

6 For example, in the district of Koshkupir in Khorezm, 27 percent of rural households have access to a piped water

supply, although in practice only 12 percent benefit from a system that is operational. 7 UNICEF. 2001. Chronic Water Shortage Affecting Children in Uzbekistan, Proposed June 2001-May 2002, UNICEF

Area Office for Central Asia Republics and Kazakhstan. Tashkent. 8 In 2000, diarrhea cases rose dramatically with an increase of 36 percent in June alone. An 80 percent increase in

hepatitis A was recorded during the first six months.

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drought, children, especially girls, who normally help with household chores, have the added task of collecting water from more distant sources. These problems have contributed to reduced attendance at school and a higher educational dropout rate, seriously impairing children’s prospects for future learning.

c. Agriculture and Unemployment 18. The main economic activities in Karakalpakstan and Khorezm are agriculture and agroprocessing. Agriculture alone accounts for about 30 percent of Karakalpakstan’s gross domestic product and about 40 percent of Khorezm’s gross domestic product. Crop production in both areas is almost totally irrigation dependent. Sail salinity is medium to high in 28 percent of the irrigated land. About 20 percent of irrigated land has such high salt and mineral content that it requires annual leaching by using high amounts of fresh river water—a practice that leads to increased water consumption for irrigation. Productivity of irrigated land in Karakalpakstan is 4.5 times lower than the national average, and in Khorezm 1.4 times. As a consequence of the water shortage problem, an estimated 15–20 percent of potential agricultural productivity is lost annually. During 2000, losses in agricultural production in Karakalpakstan alone were estimated at about SUM15 billion ($21.6 million equivalent).9 Other effects include increases in food prices and depletion of family food reserves for the winter. Due to the shortage of irrigation water that is exacerbated by the drought, crop seeding was halved in 2001 and an estimated additional 100,000 people (79,000 in Karakalpakstan and 21,000 in Khorezm) became temporarily unemployed.10 The Ministry of Labor and Social Protection reported that the registered unemployed rose by about 13 percent in Karakalpakstan and 41 percent in Khorezm, between the first quarters of 2000 and 2001. According to MMS, unemployment in Karakalpakstan was 82.2 percent and in Khorezm 66.8 percent in 2001. The majority of the unemployed were in the agriculture sector.

d. Poverty

19. The Government does not have a generally agreed or reliable measure of poverty or an official poverty line. The poor are classified based on the prevailing minimum wage adjusted for inflation, and instead of the term “poverty,” living standards are used in official documents.11 ADB is currently implementing TA to help the Government develop a medium-term strategy for improving living standards.12 Recent work by the World Bank, the European Union’s Technical Assistance to the Commonwealth of Independent States, and the Deutsche Gesellschaft für Technische Zusammenarbeit (German Agency for Technical Cooperation) using the minimum wage criteria showed that urban poverty in Karakalpakstan was about 50 percent compared with 10 percent in Tashkent (national capital) and 28 percent in Ferghana province. Due to the higher percentage of rural population and the impact of agricultural losses, rural poverty is higher. The poor comprise mostly the unemployed, the marginally self-employed, and those employed in agriculture and low-paid public sector jobs. The drought conditions in Karakalpakstan and Khorezm have inevitably increased the number of those living below subsistence levels in the two areas.

9 Mitigation of Drought Consequences in the Aral Sea Area, a proposal submitted in mid-2000 by the MMS to the

international community in Tashkent. 10 Report by the United Nations Office for Coordination of Humanitarian Affairs, United Nations Development

Programme, and WHO, July 2001. 11 The official minimum wage in August 2001 was set at SUM3,430 (about $5) per month. 12 TA 3781-UZB: Comprehensive Medium-Term Strategy for Improving the Living Standards of the People of

Uzbekistan, for $800,000, approved on 28 November 2001.

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6. Community-Based and Nongovernment Organizations 20. NGOs are more active in Karakalpakstan than in Khorezm. Approximately 160 NGOs are registered in Karakalpakstan with activities focusing on water and ecological issues, and on public health awareness. Only about 40 are registered in Khorezm. Community-based organizations (CBOs) are also well developed and comprise local rural assemblies. These rural assemblies are legal entities headed by respected local elders, most of whom are male. Each rural assembly is in charge of a number of mahallas, which is a traditional cultural form of government in Uzbekistan for administering social assistance on behalf of the state. The rural assemblies are responsible for community affairs including enforcing laws, implementing local legislation, ensuring timely payment of taxes and charges for communal services, and allocating social benefits. Women’s committees exist in both Karakalpakstan and Khorezm. These government-recognized groups are responsible for women’s affairs in the community and have the potential to assist with community projects. B. Government Policies and Plans 21. Since independence, the Government has adopted a policy of developing stable and flexible water supply, strengthening the water supply agencies involved, and developing and implementing water conservation programs. Special emphasis has been given to rural water supply that historically was lagging behind the pace of development of urban water supply. The Government passed two resolutions, one in 1996 and the other in 1998, mandating programs to construct 9,500 km of piped networks in rural areas and 750 km in urban areas during 1996–2000. Included were 2,030 km of rural piped networks and 80 km of urban piped networks for Karakalpakstan, and 960 km and 75 km, respectively, for Khorezm.13 The completion of this work, which was funded domestically, achieved coverage of about 80 percent of the urban population and 46.1 percent of the rural population in Karakalpakstan. The corresponding figures for Khorezm were 91 percent and 55.5 percent. However, as mentioned in para. 15, actual availability of water for the rural population remains a serious problem. 22. Another Government resolution in June 1999 mandates the scope of development of the country’s rural water supply until 2010.14 In preparing the resolution, a detailed inventory was made of all rural settlements in the country and identified unserved settlements. For Karakalpakstan, the target is to provide water to 784 additional rural settlements, thereby reaching coverage of 94.1 percent of the population by 2010. For Khorezm, the target is to provide 144 additional rural settlements with water supply to reach a coverage level of 94.4 percent of the population by 2010. The Government recognizes that the drought and water management problems need to be addressed through a practical and sustainable strategy that comprises short-, medium-, and long-term measures. The 10-year Aral Sea Drought Relief Program for Karakalpakstan and Khorezm was formulated in 2000. Besides improving the quantity and quality of potable water supply, the program includes health care, microcredit-based employment generation, social protection of vulnerable families especially in the fall-winter season, and irrigation and drainage. Long-term measures include incentives for water conservation and changes in crop patterns, improvement of the financial and technical capacity of the water utilities to operate and manage the facilities, introduction of cost-based tariffs, and development of small and medium enterprises to reduce reliance on agriculture. MMS oversees

13 Cabinet of Ministers, Resolution No. 182, On the Program for Development of Rural Social Infrastructure in the

Republic of Uzbekistan until 2000, passed on 26 May 1996; and Resolution No. 117, On the Program for Supply of Potable Water and Natural Gas to the Rural Population for 1998-2000, passed on 17 March 1998.

14 Cabinet of Ministers, Resolution No. 278, On Measures for Further Improving Supply of Potable Water and Natural Gas to the Rural Settlements, passed on 1 June 1999.

8

the program, which has a fairly complex, multicomponent approach. Implementation of the program involves various ministries such as health, and agriculture, and water resources. The program is estimated at about $550 million and external assistance is required to meet the funding requirement. 23. The Government’s short-term program for potable water supply to provide immediate relief to the drought-affected population in Karakalpakstan and Khorezm include (i) focus on rural areas where piped or subsurface water is unavailable; (ii) access to drinking water for children and sick people through services to schools and hospitals; (iii) installation of hand pumps in areas where there is no piped water supply and where groundwater can be extracted by hand pumps; (iv) rehabilitation or replacement of water treatment plants; and (v) use of tanker trucks to transport water to population groups that do not have any of the above-mentioned water sources. The Government issued a decree in June 2001 to implement the program.15 The decree included social measures to address the deteriorating situation as a result of the drought. These include assistance to vulnerable groups, exemption of certain taxes, and provision of credits for cattle. The Government has also agreed to write off debts of farmers in Karakalpakstan and Khorezm to the total value of SUM12.9 billion ($18.6 million equivalent). C. External Assistance to the Sector 24. External assistance to the water supply sector in Uzbekistan is increasing although largely focused in urban areas. This includes an ongoing World Bank water supply, sanitation, and health project in the cities of Nukus and Urgench in Karakalpakstan and Khorezm, and a project recently approved by the World Bank for water supply in the cities of Bukhara and Samarkand. Bilateral assistance includes a number of projects under preparation. The French government is proposing assistance for water supply and sanitation in the cities of Namangan and Samarkand, and has expressed strong interest in providing financial support for the proposed Project. The Spanish government is considering assistance for water supply in Bukhara. Assistance to cross-border cooperation on water and energy issues is being provided by the World Bank (para. 9) and by the United States Agency for International Development (USAID) under its Environmental Policies and Institutions for Central Asia initiative. Phase II of this initiative addressed institutional development of Aral Sea Basin water management and the forthcoming Phase III will improve water and energy management. 25. ADB recently approved a loan to finance an urban water supply project for three provincial cities16 and a grant from the Japan Fund for Poverty Reduction (JFPR) to support innovative poverty reduction initiatives in Karakalpakstan.17 A loan and two TAs are included in the 2002–2004 country program to assist the Government with water resource management for agriculture and capacity building of water supply agencies.18 On subregional water resource management, ADB is currently implementing a TA on regional cooperation on shared water resources that includes the Central Asian republics19 and is working on a water energy nexus

15 Government Resolution No. 249, On Additional Measures for Social Protection of the Population and Mitigation of

Consequences of Water Shortage in the Republic of Karakalpakstan and Khorezm Province, passed on 8 June 2001.

16 Loan 1842-UZB: Urban Water Supply Project, for $36.0 million, approved on 27 September 2001. 17 JPFR 9010-UZB: Supporting Innovative Poverty Reduction in Karakalpalstan, for $2.54 million, approved on 25

October 2001. The project includes the provision of hand pumps to villages. 18 Loan: Water Resources Management for Agriculture to be processed in 2003; project preparatory TA: Improvement

of Water Resources Management for Agriculture ($600,000) and advisory TA: Capacity Building for Water Supply Agencies ($600,000) to be processed in 2002.

19 TA 6001-REG: Regional Consultation for the Third World Water Forum, for $1,000,000, approved on 9 October 2001.

9

study jointly with USAID to develop a strategy for supporting transboundary water resource management. A study to explore hydropower development in Central Asia is ongoing. Based on the findings of these studies, ADB will formulate a medium-term strategy on regional water issues, in connection with support to the energy sector. 26. In recent years, multilateral and bilateral aid agencies have been actively assisting the Government with its social programs to address the urgent needs of the affected population in western Uzbekistan and to manage the ecological and socioeconomic catastrophe. The World Bank through its ongoing project in Karakalpakstan and Khorezm; the Kuwait Fund for Economic Development; Kreditanstalt für Wiederaufbau of Germany; the United Nations Development Programme; and the governments of France, Japan, Republic of Korea, Switzerland, and the United States are among those providing significant assistance. The Government is currently negotiating with USAID to support a water supply project in a district in north Karakalpakstan. Appendix 3 provides a summary of the initiatives by multilateral and bilateral funding agencies to assist the Government’s water supply program in response to the drought. 27. The proposed Project is designed to support the initiatives under the JFPR grant (footnote 17) and was prepared in close coordination with major international aid agencies. Coordination has led to joint approaches on strategies to assist the Government in developing and implementing long-term sustainable potable water resource management on the one hand and mitigating the effect of the ongoing drought on the other. The Project will allow ADB to play a key role in the international effort to provide relief to the drought-affected population and to contribute to longer-term solutions to potable water supply in the project area. The Project will focus on rural potable water supply and improvement to public sanitation and health awareness, all of which are urgently needed but where funding is very limited. D. Lessons Learned 28. As implementation of ADB’s urban water supply project in Uzbekistan (footnote 16) has not yet begun, experience from implementing water supply projects financed by other external funding agencies and ADB’s portfolio in other social sectors were considered when designing the Project. Several lessons have been learned. On the preparation of projects, overall processing has been protracted because of difficulties encountered during policy dialogue with the Government. The project development process is often delayed due to a prolonged process for releasing information. Stakeholder consultation and participation is required when preparing projects in accordance with the needs of the Government and beneficiaries to ensure ownership and commitment. The Government recognizes the need to focus on sustainability of operations and increasing ownership by beneficiaries. 29. The lessons from ADB water supply sector projects in other countries, in particular those in Central Asia, have also been studied. In general, the implementing agencies’ limited experience with project implementation has led to delays and slow disbursement. Another problem is the weak institutional capacity of local governments, thus requiring substantial technical and financial assistance. These issues were discussed with the Government during project formulation and appropriate measures including project management support and training programs on implementation procedures have been comprehensively incorporated in the project design. 30. Taking into account these experiences, the Project has incorporated the following features in its design: (i) a flexible menu of subprojects will be adopted that include both

10

strategic and locally focused works that can be completed within the required time frame and within the capability of the local agencies to construct, operate, and maintain; (ii) stakeholders such as rural assemblies, women’s committees, or similar community organizations will be involved in developing subprojects, and may, where appropriate, be responsible for O&M of the facilities; (iii) information, education, and communication campaigns will be carried out; (iv) project activities will be coordinated with the central and local governments and international funding agencies; and (v) training will be provided to strengthen the necessary institutional procedures and to ensure efficient and expeditious procurement. E. ADB's Sector Strategy 31. The central goal of ADB’s strategy in Uzbekistan is to help manage the transition to a market-based economy, and support sustainable poverty reduction and improved standards of living. In support of this goal, ADB’s operational objectives focus on (i) managing the transition, including supporting basic reforms and minimizing the social costs of transition; and (ii) enhancing the potential for growth through regional cooperation, investment in the rural sector, and direct support to the private sector. Within this framework, ADB’s operational strategies reinforce the thrust of ADB’s poverty reduction strategy and the Government’s commitment to improving the living standards of the vulnerable, low-income, and socially excluded segments of its society. The 2001 country strategy and program update emphasizes ADB’s assistance in agriculture and rural development as most of the country’s poor reside in rural areas. As mentioned earlier, ADB has provided grant assistance for supporting poverty reduction in Karakalpakstan (footnote 17) and is assisting the Government to prepare a strategy to improve the living standards in the country (footnote 12). 32. The proposed Project is designed to support ADB’s poverty reduction strategy by addressing the worsening conditions to which the populations of Karakalpalstan and Khorezm are subjected. The target groups to be served by the Project are largely poor households in rural and remote areas where primary basic needs, such as potable water supply, are lacking. F. Policy Dialogue

1. Sustainable Water Resource Management 33. The challenges of water resource management in the Aral Sea area are a legacy of the former Soviet Union. The main cause of the water scarcity in the area is the prolonged inequitable and inefficient management of water resources in the transboundary Amudarya River Basin, both within Uzbekistan, and between the riparian countries. The Government is now faced with a dilemma on how to strike a balance between adopting stringent measures to arrest the worsening environmental degradation, and protecting the livelihood and socioeconomic welfare of a population that is heavily dependent on agriculture. The Government has actively participated in the subregional cooperation on water resource management and in the development of national and regional sustainable water management policies and strategies (para. 9 and footnote 4). Through policy dialogue, the Government recognizes the need for a sustainable approach to water resource management in western Uzbekistan and the necessity to complete the development of its long-term strategy for socioeconomic development in the area. The latter is also supported by other multilateral and bilateral assistance agencies, and a roundtable meeting was held in October 2001 to discuss

11

how the international community can assist.20 In line with the framework discussed at the October meeting, the Government agreed that the proposed Project should achieve two complementary objectives. The first is to assist the Government in developing its potable water resource management strategy through institutional strengthening and training of concerned staff. The second is to mitigate the ongoing effects of the drought in western Uzbekistan by improving potable water supply. ADB has committed further assistance to the Government in transboundary water management, water resource management for agriculture, and capacity building for water supply agencies (para. 25, footnotes 18 and 19).

2. Investment Priorities and Poverty Focus 34. While the Government does not currently have an explicit poverty reduction strategy (para. 19), it has invested major efforts to maintain the provision of social services such as health, education, and basic communal services and social protection for vulnerable groups as integral components of its reform process to a market economy. Basic infrastructure investments have traditionally been planned and financed by the central Government and large projects tend to be focused in the urban areas. The Government realizes that the need to improve basic water supply is urgent, and thus improve the health and living conditions of the rural residents in western Uzbekistan who have long been suffering from water shortage problems intensified by the current drought. The Government agreed that the Project should rehabilitate and expand existing water supply facilities, develop new water supply, and introduce water conservation and health improvement measures to selected poor rural areas. While minimizing costs, the emphasis will be on rehabilitating and upgrading existing facilities, and using simple technology and low-cost methods. The poverty focus is reflected in the selection of subprojects where priority will be given to poor communities that have a majority of their population living below the minimum wage criteria and with high incidences of malnutrition and waterborne diseases. Over 60 percent of the households in the targeted project communities are earning less than the minimum wage, and limited access to potable water supply and sanitation is a major issue contributing to poverty.

3. Decentralization of Implementation and Stakeholder Participation 35. Current Government policies, decrees, and resolutions reflect significant commitment to implementing institutional and financial reforms in the water supply sector. However, top-down approaches are still embedded at all administrative levels of government. In particular, participation of local communities is limited. The Project addresses decentralization and governance issues by strengthening the institutional capacity of local governments to carry out the decentralized functions of providing and maintaining local water supply services. As a result of ADB policy dialogue with the central and local governments, the Project will be implemented by local governments and managed by the central Government in support of the Government’s decentralization policy. Experience indicates that beneficiary participation, good governance, and project sustainability are interrelated factors that contribute to project success, and need to be factored into project design and implementation arrangements. The Project is structured to increase local responsibility for water supply services by decentralizing implementation and O&M, and actively involving both government and community-based stakeholders. Through the participatory process supported by information and education campaigns, consumers will be educated on the need to conserve and price water as an economic resource. The Government also supports the need for capacity building measures, including training of local staff and 20 The roundtable was held on 3 October 2001 in Nukus, capital of Karakalpakstan. Participants included

representatives from, among others, ADB, the World Bank, United Nation Development Programme, UNICEF, USAID, and various embassies including Japan, Germany, and the United States.

12

support for the NGO and CBO implementation role in communities to achieve sustainable delivery of services that meet the needs of the population.

4. Cost Recovery 36. Under the reform policy, the Government seeks to establish self-financing principles for the provision of urban and rural infrastructure services. Resolution No. 243 requires full recovery of O&M costs and permits charging a higher tariff to cover part of the capital cost.21 The Government considers that the pricing of basic infrastructure services should balance four main objectives: (i) cost recovery to ensure financial viability and sustainability; (ii) affordability, particularly for lower income customers; (iii) demand management through metered charging; and (iv) economic efficiency. This policy will be implemented over a number of years. However, the Government recognizes that it will be difficult to achieve full cost recovery for services to rural communities suffering from economic hardship as a consequence of the drought. Currently, the agrovodokanals in Karakalpakstan and Khorezm receive Government subsidies for both capital and operating requirements. After careful analysis of the economic situation in the project area, the Government agrees to (i) target full O&M cost recovery in the long term; (ii) continue subsidies in the short term if affordability criteria cannot be met; (iii) use stepped tariffs for water, with a lifeline tariff for the lowest income group as a way forward; and (iv) review tariffs annually and adjust them accordingly taking into account collection efficiency rates, expenditure, and future investment plans. The Government also confirms that it will continue the policy of subsidizing rural water supply in Karakalpakstan and Khorezm to ensure sustainable service provision to the rural population.

IV. THE PROPOSED PROJECT A. Rationale 37. Western Uzbekistan, comprising Karakalpakstan and Khorezm, has been suffering from water shortage for the past three decades. The situation has deteriorated rapidly since the onset of the worst drought and water shortage in 100 years that started in the mid-1990s. Due to the shortage of irrigation water from the Amudarya River, most of the rice, cotton, and wheat crops were lost in 2000 and 2001. Similar outcomes are expected in 2002. Because irrigation canals, which used to be a main source of raw water for household use, are now either dried up or drying up, many rural households have lost direct access to safe drinking water, as well as means of employment, income, and food from agriculture. Families, particularly the women and children, are now fetching water from distant alternative sources. Drinking water, where available, is often contaminated or of poor quality, containing excessive quantities of mineral salts and bacterial organisms. Consequently, the population in the drought-affected areas is exposed to high risks of waterborne diseases and longer-term consequences of consuming high levels of waterborne minerals that lead to carcinogenic and immunological conditions. In recognition of the urgency of the problem, the Government has embarked on a program for immediate relief that is receiving extensive support from the international community. Through aid coordination, the Project will focus on improving water supply and related health gains to the rural population in Karakalpakstan and Khorezm where over 60 percent of the people are poor. 38. The Government also recognizes the need to better manage the use of water from the Amudarya River, including sustainable abstraction for agricultural purposes together with the establishment of suitable cropping strategies while meeting the needs of the people of 21 Resolution 243, On Measures for Implementing the Rural Water Supply Project in Karakalpakstan and Khorezm,

approved by the Cabinet of Ministers on 8 June 1998.

13

Karakalpakstan and Khorezm.22 These initiatives must be supported by strengthening institutional capacity for rural water supply to ensure sustainable delivery of services. The Project will provide capacity building for local water supply management, and for community development and implementation of viable water conservation measures. In particular, the Project will strengthen the sustainability of potable water supplies to ensure secure and regular availability, largely independent of seasonal variations in raw water resources. By focusing on rural communities, the Project will improve the quality of life of a large proportion of poor people. The Project is in line with the Government’s policy to improve the livelihood of the people in Karakalpakstan and Khorezm, and ADB’s human development and poverty reduction objectives. It supports ADB’s ongoing and planned activities (footnotes 16, 17, 18, and 19) to improve the country’s water sector. The Project will allow ADB to play a key role in the joint effort by international financing agencies to assist the Government in combating the water shortage and drought problems in the poorest part of the country. B. Objectives and Scope 39. The main objective of the Project is to improve the living and health conditions in the rural communities in Karakalpalstan and Khorezm. The Project will mitigate the ongoing effects of the drought by (i) providing safe and easily accessible water supply by reinforcing existing, and developing new, sustainable water supply facilities, particularly to improve the service coverage in rural areas; (ii) supporting water conservation measures, including improvements in O&M practices and public awareness, to minimize water wastage; and (iii) improving the health conditions of the population by providing sanitation facilities and services related to better hygiene practices. About 450,000 people in Karakalpakstan and about 250,000 in Khorezm, of whom the majority are poor, will benefit from the Project.23 40. The World Bank and ADB have coordinated closely during project preparation to ensure that the Project and World Bank’s ongoing project in Karakalpakstan and Khorezm complement each other and support the Government’s drought relief program.24 As a result, the Project emphasizes securing water supply to the rural communities. The Project comprises three parts: potable water supply, water conservation and health improvement, and capacity building. Potable water supply includes the development of bulk pumping and trunk mains, while local supply includes the introduction of new facilities where none currently exists and rehabilitation of nonfunctional supply and distribution systems. The aim is to expand the coverage of potable water supply in rural districts from 12 percent minimum25 to 85 percent, reduce unaccounted for water losses from in excess of 50 percent to 30 percent of supply, increase supply efficiency, and lower unit costs. Water conservation includes the introduction of measures such as metering and encouragement of reduced wastage. Health improvement includes upgrading the sanitation facilities of public institutions such as schools and clinics, and promoting water- and sanitation-related health awareness. Capacity building includes support for community interactive project management and institutional strengthening for potable water resource management. The objective and overall scope of the Project are in accordance with the objectives of ADB’s water sector policy,26 which are to improve and expand the delivery of 22 In support of this, ADB will provide further assistance in water resource management for agriculture (footnote 19)

and will continue policy dialogue on water resource management at a subregional level. 23 Covers about 25 percent of the population in Karakalpakstan and Khorezm. 24 The World Bank project was originally designed for urban water supply in the provincial capital cities of Nukus and

Urgench and their vicinity. Due to the drought, some of the loan funds have been reallocated for improving rural water supply. The work, involving mainly rehabilitation of existing hand pumps, desalination plants, and small treatment plants, will cover about 15–20 percent of the need in the drought-affected areas.

25 Some districts have a population coverage with access to potable water supply as low as 12 percent. 26 ADB. 2000. Water for All: Water Policy of the Asian Development Bank. Manila.

14

services, foster the conservation of water, increase system efficiencies, and improve governance through capacity building of all stakeholders.

1. Part A: Potable Water Supply

41. Bulk Water Supply. This component will strengthen bulk water pumping and transmission into the districts in Karakalpakstan and Khorezm. It will achieve improved security of water supply for most of the population already connected to bulk supplies and provide good quality water to new areas that will be served by distribution networks developed under the Project. New pumping and the strengthening and extension of trunk mains will transmit water to areas without existing access to clean water. 42. Deep Boreholes and Treatment Plants. This component will only cover districts in Karakalpakstan as Khorezm has no deep aquifer resources. The subprojects will involve providing new deep boreholes and associated pumping equipment, reservoir storage, and desalination equipment. This water will then be chlorinated and pumped or delivered by water tankers to distribution points that currently have no access to clean water. 43. Water Distribution Centers. The Project will rehabilitate existing, and construct new, WDCs in various districts in Karakalpakstan and Khorezm. The selection of the districts and settlements will be undertaken at the start of the Project following subproject selection and prioritization procedures. The emphasis will be on securing the existing distribution of good quality water, and expanding or adding new supplies where appropriate. The subprojects will include the rehabilitation of approximately 20 existing WDCs and the provision of about 26 new ones. Each WDC will comprise service reservoir storage, disinfection, metering, pumping, and distribution network. The existing distribution network will be reviewed for efficiency of operation, and be upgraded where necessary. 44. Operational Equipment and Materials. This component will include modernizing the facilities for the agrovodokanals in Karakalpakstan and Khorezm. Laboratory sampling and testing equipment will assist in water quality control; trench excavators, mobile compressors, and welding equipment will facilitate the repairing or laying of trunk mains; small tools and hand equipment will enable good maintenance to be carried out; and leakage detection equipment will assist in minimizing network losses. The provision of necessary repair and maintenance facilities at the agrovodokanals will also be covered under this component.

2. Part B: Water Conservation and Health Improvement

45. Water Conservation and Demand Management. According to a study by MMS in 2000 on demand management and loss reduction in the urban areas of Nukus and Urgench, appropriate repairs to distribution mains can readily achieve a 20 percent reduction in loss. Leakage control by replacing fragile and defective mains is therefore an important aspect of the Project. Use of water meters is another effective means to control the use of water. The Project will assist with meter provision where local consumers agree. Other settlements and districts will be provided with a minimum of bulk metering under the Project but with the intention that the benefits from metered consumption will encourage many other users to have meters fitted as soon as they can be afforded. 46. Sanitation and Health Awareness. The sanitation subprojects will focus on providing support to rural communities that rely on public and private pit latrines. Upgrading of latrines at premises of institutions such as kindergartens, schools, and clinics by introducing ventilated

15

improved pit latrine principles and of associated access to a water supply will bring both practical benefits and will raise the awareness and understanding of good hygiene practice. At selected village centers, individual ventilated improved pit latrines will be constructed, through consultation with rural assemblies and women’s committees, as demonstration units to enable the people to understand both how to construct such latrines and the benefits accruing. The linkage between good hygiene practice and health will be explained in printed and broadcast material.

3. Part C: Capacity Building 47. Institutional Development Program. To strengthen existing institutional capacity and to improve service delivery, a training program, social development measures, and consulting services for institutional development and project management support will be provided. The training program will improve the skills of staff of local governments, agrovodokanals, and rural assemblies to efficiently implement, operate, and maintain the systems. Training and other capacity building will include specific initiatives to (i) upgrade the computerized accounting system for financial management of the total operation by introducing new software; (ii) provide training on water supply management; (iii) provide training on operational management, particularly aimed at asset management; and (iv) initiate a public awareness campaign to encourage willingness to pay. 48. Social development measures to improve the distribution and penetration of benefits will be provided in the form of education and awareness initiatives to support the overall goals and objectives of provision. These will include (i) provision of demonstration ventilated improved pit latrines at local centers; (ii) public health awareness campaigns run by women and NGOs to enable the full benefits of improved drinking water supply and good hygiene facilities to be realized; and (iii) community participation and consumer rights awareness programs to improve the capacity of consumers to participate in project implementation, monitoring, and management. These will be implemented with the support of CBOs and NGOs, and will include the rural assemblies in project design and implementation. 49. Project Management. Project management consulting services will assist in implementing the Project by providing project management support to local governments and agrovodokanals. The consulting services will also involve socioeconomic surveys, community consultations, and participation in project implementation with the support of CBOs and NGOs. The services will cover subproject development, procurement activities, financial management and monitoring, implementation of the training program, support to social development measures, supervision of implementation, and quality control of construction of the physical components of the Project. C. Technical Justification 50. Drought in the regions of Karakalpakstan and Khorezm has highlighted an already disastrous situation whereby insufficient raw water exists to support the needs of both agriculture use and human consumption. Water shortage in Karakalpakstan and Khorezm has been largely a result of excessive use of water for agriculture, which accounts for about 95 percent of the water produced (paras. 6, 7, 33 and 38). This issue, which requires interregional cooperation, is being undertaken at the Government level and supported by international development agencies including ADB through assistance in regional water resource management and changes in agricultural practices (paras. 9, 24, and 25). The focus of this Project is to contribute to longer-term potable water supply and to strengthen the institutional

16

capacity for water supply management. The drying of the Amudarya River has resulted in a large proportion of the population having to resort to alternative and unsafe sources. Short-term assistance with the provision of hand pumps and boreholes cannot be relied upon in the future as nonreplenished resources are exhausted. The Project seeks to develop alternative potable water resources and introduce demand management, which will solve the long-term needs of the population while supporting the short- and medium-term programs of the Government. The proposed technology is the most cost-effective and will benefit the rural population with the provision of a secure and wholesome supply of water. The project cost estimate of less than $100/capita is within the normal bounds of rural water supply projects funded by ADB. In parallel with water supply will be the improvement of sanitary hygiene facilities at public centers where children in particular will understand the advantages and benefits of clean toilets and good hygiene practice. The high incidence of water-related health problems in the regions will be diminished and with it the direct costs of treatment and the indirect loss of opportunity costs. The introduction and application of modern techniques for the efficient management and O&M of water resources and potable water supply systems will be provided under the Project to assist in functional sustainability. D. Cost Estimates 51. The total project cost is estimated at $65.0 million equivalent (at February 2002 prices), of which $37.0 million or 56.9 percent is the foreign exchange cost and $28.0 million equivalent or 43.1 percent the local currency cost. A summary of the cost estimates is provided in Table 1 and detailed cost estimates are given in Appendix 4.

Table 1: Cost Estimates

($ million)

Foreign Local Total Component Exchange Currency Cost A. Water Supply 1. Bulk Water Supply to Districts 11.9 4.4 16.3 2. Water Supply within Districts 7.5 16.2 23.7 3. Operational Equipment and Materials 3.6 0.0 3.6 4. Design and Appraisal 0.3 2.2 2.5 Subtotal (A) 23.3 22.8 46.1 B. Water Conservation and Health Improvement 1. Water Conservation and Demand Management 0.3 0.0 0.3 2. Sanitation 0.0 0.2 0.2 3. Design and Appraisal 0.0 0.1 0.1 Subtotal (B) 0.3 0.3 0.6 C. Capacity Building and Project Management 1. Project Management and Supervision 0.9 0.6 1.5 2. Institutional Strengthening 0.7 0.2 0.9 3. Public Awareness Campaigns 0.2 0.2 0.4 Subtotal (C) 1.8 1.0 2.8 D. Contingenciesa

Physical 2.5 2.4 4.9 Price 1.5 1.5 3.0

Subtotal (D) 4.0 3.9 7.9 E. Interest and Other Charges During Construction 7.6 0.0 7.6

Total 37.0 28.0 65.0 a Physical contingencies are included at 10 percent on all items. Price contingencies are calculated at purchasing

power parity using escalation rates of 2.4 percent per annum for foreign costs and 20 percent for local costs. Source: Asian Development Bank estimates.

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E. Financing Plan 52. The Government of Uzbekistan will provide $27.0 million equivalent counterpart funding to the Project and has requested a loan of $38.0 million from ADB’s ordinary capital resources to help finance the Project.27 The ADB loan will finance the entire foreign exchange cost and 3.6 percent of the local currency cost. The local currency financing is required to fund the entire capacity building and project management component to ensure that the institutional strengthening objective will be achieved. The loan represents 58.5 percent of the total cost. The ADB cost-sharing limit under the Graduation Policy for Uzbekistan for 2002 is 40 percent. However, crop failure and the drop in the price of cotton, the country’s main export earnings, in the last few years, has resulted in a decline in economic performance. Gross domestic product growth decreased from 4.3 percent in 1998 to 3.8 percent in 2001; gross national income dropped from $870 in 1998 to $540 in 2001; and debt/export ratio of goods and services increased from 94 percent in 1998 to 140 percent in 2001.28 Sixty percent counterpart funding represents an extraordinarily high financial burden for the Government whose revenues, particularly foreign exchange, have suffered significant erosion due to the impact of transition and the drought in the last two years. The fiscal constraint is expected to continue in the next few years. Increasing ADB’s cost-sharing from 40 to 58.5 percent is required to ensure timely implementation of the Project, which is essential to provide basic potable water supply to the rural population that are suffering from the drought.29 The Borrower will be the Republic of Uzbekistan. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.75 percent per annum, and a front-end fee of 1 percent, and such other terms and conditions set forth in the draft Loan Agreement. The Government has provided ADB with (i) the reasons for its decision to borrow under the LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. The proposed financing plan is summarized in Table 2 and details are in Appendix 4.

Table 2: Financing Plan

($ million)

Source

Foreign Exchange

Local Currency

Total Cost

Percent (%)

Asian Development Bank 37.0 1.0 38.0 58.5 Government of Uzbekistana 0.0 27.0 27.0 41.5 Total 37.0 28.0 65.0 100.0

a Includes national Government budget allocations and exemption from taxes and duties. Source: Asian Development Bank estimates.

27 The French Government has in principle agreed to provide parallel financing for the installation of new desalination

plants under the Project. The exact amount is being determined by the Ministry of Finance in Paris. The indicative amount for 2002 is about $2.0 million. Upon confirmation from the French Government, the ADB loan amount may be reduced accordingly.

28 Sources: World Bank and Government of Uzbekistan estimates. 29 The financing arrangement for the parallel World Bank project in Karakapakstan and Khorezm is 64 percent from

World Bank, 25.1 percent from the Kuwait Fund and Kreditanstalt für Wiederaufbau of Germany, and 10.9 percent from the Government of Uzbekistan. The financing arrangement for a recently approved urban water supply project in Samarkand and Bukhara, which are richer cities and better able to guarantee counterpart funding, is 64.5 percent from the World Bank (of which half is from the International Development Association), 14.5 percent from the Government of Switzerland, and 21 percent from the Government. The approved World Bank country assistance strategy for 2002–2004 anticipates 50 percent of funding from the International Development Association.

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F. The Executing Agency 53. MMS will be the Executing Agency and have overall responsibility for project coordination and implementation, and liaison with ADB and with other government ministries and departments. MMS is one of the most senior ministries within the Government of Uzbekistan and is responsible for a range of departmental functions. Within MMS is a department for rural infrastructure development, the major function of which is directed to improving water supply in Karakalpakstan and Khorezm. MMS is the coordinator for the Government’s Aral Sea Program and is the executing agency for, among others, the World Bank project in Karakalpakstan and Khorezm. It has in-house technical capacity together with considerable experience in dealing with rehabilitating and upgrading water supply networks. MMS is also well positioned to coordinate the activities of the proposed Project with other externally financed projects in the sector. G. Implementation Arrangements

1. Execution and Coordination 54. To ensure close coordination of the Project with the ongoing World Bank project and other externally financed activities in Karakalpakstan and Khorezm, the existing interministerial project steering committee (PSC) for the World Bank project will also be responsible for project coordination and policy guidance for the proposed Project. The deputy minister of MMS chairs the PSC and members include representatives from the Department of Foreign Economic Relations and Investment, Ministry of Finance, UCSA, and the governments of Karakalpakstan and Khorezm. The PSC is responsible for (i) setting policy guidelines for improving project implementation, (ii) coordinating at the policy level with other ministries, agencies and other donors in the project area, (iii) reviewing and approving annual implementation plans, (iv) monitoring the progress of project implementation, and (v) coordinating procurement activities and awarding of contacts. The project implementation structure is in Appendix 5. 55. A project management unit (PMU) within MMS and project implementation units (PIUs) in Karakalpakstan and Khorezm will be established prior to loan effectiveness.30 The PIUs will be set under each of the local governments to manage the subprojects and the various agencies involved at the local level. The PMU will include a full-time manager and two full-time staff to manage and coordinate the work of the two PIUs, provide technical support to PSC, as well as coordinate with the World Bank project implementation unit in MMS. The PIUs will be responsible for coordinating detailed implementation activities among the various agencies involved at the local level (e.g. UCSA branches, TCSAs, agrovodokanals, local governments, and the World Bank project implementation units at the local level) and will report to the PMU. Responsibilities of the PIUs include financial management of project and subproject accounts, procurement activities, and local community liaison. Each of the PIUs will have a full-time manager and four to five full-time staff. The trunk main agencies and agrovodokanals will be responsible for the day-to-day project implementation activities and will report, through the PIUs, to the PMU. The agencies and agrovodokanals will be responsible for activities such as construction supervision, O&M of assets, and collection of tariffs. The implementation structure and specific roles and responsibilities are summarized in Appendix 5. 30 The remuneration of key PMU and PIU staff who will be recruited as term employees will be included under the

Project. Identification, selection, and remuneration levels of these key staff will be subjected to ADB approval.

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2. Subproject Formulation and Approval 56. The Project will cover rural communities that lack basic potable water supply services. Subprojects under Part A, Potable Water Supply, will be identified, appraised, prioritized, designed, and implemented in accordance with the selection criteria in Appendix 6. The Government will ensure that the settlements and districts suffering the greatest hardship from the effects of the drought will be given the highest priority. Subprojects with a total cost exceeding $200,000 and those having social and environmental issues will require ADB approval. The Government will include detailed information on the scope, coverage, and beneficiaries of these subprojects in the progress reports that will be submitted to ADB. Subprojects under Part B, Water Conservation and Health Improvement, will also be selected and appraised in accordance with the criteria in Appendix 6. The Government will ensure that adequate local budget exists for the proper maintenance of the facilities provided, and that wherever a piped water supply is provided under the Project, improvements to sanitation facilities at all kindergartens, schools, and clinics will be provided. Since each of these sanitation subprojects is unlikely to cost more than $200,000, no prior approval by the ADB is required. 57. Each subproject feasibility study will include a financing plan showing the percentage of the estimated subproject cost to be financed by the loan and counterpart funds from the Government. The feasibility study should also include social and environmental impact assessments. If any subproject involves resettlement, the PMU in coordination with the PIUs will prepare a resettlement action plan in accordance with ADB’s Handbook on Resettlement and relevant local guidelines. The plan will include assurances that land acquisition and resettlement will be undertaken and affected people will be compensated following this plan. The Government will provide a copy of the plan to ADB before approval of the relevant subproject. As part of each subproject appraisal, the PMU in coordination with the PIUs will carry out an environmental screening. Where appropriate, an initial environmental examination and, if required, an environmental impact assessment, will be carried out in accordance with ADB’s Environmental Assessment Requirement and relevant local procedures.

3. Budgetary Support and Channeling of Funds 58. The PMU, under the supervision of the PSC, will undertake central procurement, including the capacity building component and the packages for materials and equipment. The PIU will undertake procurement of all other goods and services, and transfer the physical assets to the agrovodokanals. Counterpart funds will be channeled to the implementing agencies through regular budgetary allocations. Exemptions from taxes and duties will also be recognized. The ADB loan funds will be disbursed either through reimbursement to the PMU and PIUs, or through direct payment to the contractors, suppliers, and consultants. The agrovodokanals will receive revenue from tariffs and charges to consumers, as well as subsidies from the Government for O&M. 59. At the start of the Project, the PMU will help the Karakalpakstan and Khorezm administrations formulate the draft project expenditures for all activities, with estimates for each year of project implementation. These budgets will be reviewed and updated every six months and approved by the PMU before implementation. Expenditures will be recorded at source by the implementing agencies, PIUs, and PMU. The PMU will approve and supervise all drawdown arrangements. The PMU will be responsible for compiling project expenditures based on its own expenditures and the reports of expenditures submitted by the PIUs. It will report project expenditures to MMS and the PSC, with copies to ADB, on a monthly basis, with quarterly and annual summaries.

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4. Anticorruption 60. During project processing, ADB’s anticorruption policy was explained to central and local government officials. Attention was drawn to the sections on fraud and corruption in ADB’s Guidelines for Procurement, particularly the need for bidders, suppliers, and contractors to observe the highest standards of ethics for the procurement and execution of ADB-financed contracts, and the sanctions if fraud and corruption are discovered. The anticorruption provisions in ADB’s Guidelines on the Use of Consultants were discussed. The project management consulting services include assistance to strengthen the implementation arrangements, including internal auditing procedures. The international project management consultants will assist in strengthening the procedures for selecting and engaging domestic consultants, increasing transparency, and providing for equal opportunity competition. The consultants will help to (i) strengthen the financial management system of the local governments and concerned agencies, (ii) conduct training to promote full and consistent adherence to international accounting standards and auditing procedures, and (iii) draft procurement and bidding documents to strengthen the ability to detect fraud and corruption. The Government is increasingly concerned with governance issues and has committed to (i) create a strong mechanism of checks and balances, (ii) strengthen nongovernment and public associations, (iii) reinforce the legal basis for reforms, (iv) support the gradual transfer of government powers of state bodies to citizens’ bodies for self-government and other nongovernment agencies, (v) encourage decentralization, and (vi) ensure the independence of the judiciary.31

5. Implementation Schedule 61. The Project will be implemented over three years and is expected to commence in the beginning of October 2002 and be completed by the end of September 2005. To ensure rapid progress, the Government has agreed to a time-bound implementation schedule with critical milestones. The project implementation schedule is in Appendix 7. With the preparatory work in progress, and design for major structures already completed, the implementation schedule is considered to be realistic.

6. Procurement 62. Procurement of goods and services financed by the ADB loan will be undertaken in accordance with ADB’s Guidelines for Procurement. Civil works contracts valued at over $1.0 million and contracts for goods and related services above $500,000 will be undertaken through international competitive bidding procedures. Civil works contracts valued at $1.0 million or less will be carried out under local competitive bidding procedures acceptable to ADB. Contracts for goods and services valued at or under $500,000 will be procured following international shopping procedures except for supply contracts with a value of less than $100,000 equivalent, which may be procured by direct purchase. The proposed procurement packages and their estimated costs are provided in Appendix 8.

7. Consulting Services 63. The Project will require consulting services in the fields of potable water resource management, project management, water supply and sanitation, procurement, health and public awareness education, financial and accounting advice, poverty reduction and community participation, and community-based water resource management. Consulting services will assist

31 Resolution No. 296 of the Cabinet of Ministers, 10 June 1999.

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in (i) developing and supporting the institutional development program on potable water resource management, information campaigns to promote water conservation, and willingness to pay for water usage; (ii) selecting subprojects; (iii) preparing detailed feasibility and engineering design studies, including socioeconomic, technical, and environmental surveys; (iv) preparing contract packages and documents and procurement activities; (v) evaluating project activities; (vi) supervising, monitoring, and evaluating project activities; (vii) supporting the management and activities of the PMU and PIUs; (viii) helping staff prepare loan withdrawal applications and supporting documents; (ix) mobilizing community participation in the development and ownership of subprojects; (x) introducing the public to the concepts and importance of minimizing water losses/wastage and of water use in personal hygiene with linkages to improved health; and (xi) maintaining accurate and sufficient project accounting records in accordance with international accounting standards. A total of 254 person-months (32 person-months international and 222 person-months domestic) of consulting services are required. The international consultants will be engaged by MMS in accordance with ADB’s Guidelines on the Use of Consultants based on the quality and cost-based selection method, and other arrangements acceptable to ADB for the engagement of domestic consultants. The international consultants will contract with suitable NGOs and CBOs for the design and implementation of subprojects. The terms of reference for the consultants are in Appendix 9. 64. The institutional development program will include training of existing and new government and concerned agencies’ staff on water supply management and O&M of water supply schemes. The program will focus on introducing the agrovodokanals to water demand management techniques and the consumer-response management of supplying water such that public confidence and willingness of the population to pay an economic charge for water is increased. The program involves (i) providing project information to customers; (ii) providing good quality water as agreed; (iii) developing capabilities, including planning, engineering, financial, accounting, billing, tariff setting and collection, and operations; (iv) effectively responding to problems and complaints; (v) establishing and ensuring continued attention to preventive maintenance programs; and (vi) carefully monitoring system performance. 65. The PMU and PIUs, in coordination with the health departments in Karakalpakstan and Khorezm and with assistance from the consultants, will work with NGOs to develop hygiene and health awareness programs for the health departments and CBOs, such as the rural assemblies. The programs will include (i) communication campaigns to educate the population on the causes, effects, and prevention of waterborne and related diseases; (ii) specification and standard setting for health awareness campaigns in areas such as maintenance of sanitation facilities, food storage and preparation, and personal hygiene in houses and small businesses; and (iii) communication and training programs for local NGO staff and volunteers, including women’s and youth groups to implement the programs with the community in the project communities.

8. Disbursements 66. The PMU and PIUs will be responsible for preparing disbursement projections, requesting budgetary allocations for the counterpart funds, collecting supporting documents, preparing withdrawal applications, and sending them to ADB in accordance with the ADB Loan Disbursement Handbook. To facilitate implementation of the Project, an imprest account in dollars will be established at the PMU level at a bank acceptable to ADB. The PMU will be responsible for timely release of imprest funds to the PIUs as needed. The imprest account will be established only after the project-financed financial management adviser is fielded and ADB confirms the establishment of sufficient financial management and accounting systems at the

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PMU and the PIUs. The initial ceiling of the imprest account will be $250,000. The imprest account will be established, managed, replenished, and liquidated in accordance with ADB’s Loan Disbursement Handbook and with detailed arrangements agreed to by the Government and ADB. ADB’s statement of expenditures procedure will be used to liquidate advances from the imprest account.

9. Accounts, Audits, and Reports 67. The Government will ensure records and accounts adequate to identify the goods and services financed from the loan proceeds will be maintained. The PIUs will maintain separate project accounts, in coordination with the PMU, which will prepare the project accounts and related financial statements, including for the imprest account and records of the statement of expenditures. Project accounts and financial statements will be audited annually in accordance with sound auditing standards by independent auditors acceptable to ADB. Certified copies of such audited accounts and financial statements will be submitted to ADB within nine months after the close of each fiscal year. All such reports and statements will be submitted in English. The Government has agreed to finance the costs related to the annual auditing from the loan proceeds. MMS and the PIUs were informed of ADB’s new policy on submission of audited financial statements and the strict penalties for noncompliance. The PMU and ADB may review and audit these records on a random basis. 68. The PIUs, in coordination with the PMU, will prepare quarterly reports on the implementation of project-funded activities. The reports will be in a format acceptable to ADB and will indicate, among other things, progress made against established targets, problems encountered during the quarter, steps taken and steps proposed to resolve the problems, compliance with loan covenants, and project activities to be undertaken during the next quarter. A project completion report will be prepared within three months of project completion. All reports will be submitted in English.

10. Project Performance Monitoring and Evaluation

a. Annual Operation Plans and Financial Review 69. To facilitate project implementation, MMS will prepare by 30 September 2002, and thereafter by 30 September of each year, an operation plan for the next fiscal year. The plan will include (i) proposed budgetary allocations for subproject works, and specifically, the allocation of sufficient counterpart funds from the central Government and other sources for timely project implementation; (ii) status of policy actions; and (iii) financing plan for the project activities for the succeeding year. The plan will confirm that the Government has allocated an adequate budget for financing project implementation and recurrent costs.

b. Project Performance Monitoring System 70. The PIUs will implement a project performance monitoring system to evaluate the delivery of the planned facilities and the project benefits accrued. The PMU, with the assistance of the consultants, will develop comprehensive performance monitoring procedures and plans in accordance with ADB’s handbook within three months after loan effectiveness. The PIUs, with guidance from the Uzbekistan Resident Mission, will carry out project performance monitoring activities, including establishing benchmarks, collecting information, monitoring benefits, and evaluating social and environmental impacts. Data collection will be carried out prior to the start of the physical implementation of the Project and in conjunction with community participation. It

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will then continue on a regular basis during project implementation until three months after project completion. The results will be incorporated in the project progress and completion reports.

c. Annual and Midterm Review 71. ADB and the Government will jointly undertake annual project reviews to assess progress, identify constraints, and agree on strategies for resolving such constraints. More than one review per year is expected for the first year. In addition, ADB and the Government will carry out a comprehensive midterm review in the second year of project implementation (2003/04). The Government will ensure that the midterm review is informed of any policy or implementation changes affecting the local governments and the water supply sector, and if necessary, recommend changes in design and implementation. The midterm review will (i) review the scope, design, and implementation arrangements of the Project; (ii) identify changes needed since the time of project appraisal; (iii) assess implementation performance against project indicators; (iv) review and establish compliance with loan covenants; and (v) identify problems and constraints and, if necessary, recommend changes in the design or implementation arrangements.

11. Advance Action and Retroactive Financing 72. Due to the urgency of the situation prevailing in Karakalpakstan and Khorezm, the Government has asked ADB to approve advance action for the establishment of the PMU and the two PIUs, as well as for consultant recruitment. The Government has been informed that approval of advance action does not commit ADB to finance the whole or any part of the Project. In the event the Project is approved, ADB will finance up to $1,000,000 on a retroactive basis for all expenditures incurred after 4 February 2002 for these project activities.

12. Community Participation 73. A participatory approach will be adopted to select and formulate the subprojects during implementation. A particular focus of the participatory program will be on meeting and prioritizing the needs of the poor. The capacity building component will provide training for local NGOs and CBOs to participate in managing and maintaining the subproject facilities in the long term. 74. The main selection criteria for NGO participation in the Project will be (i) a well-established track record of activities and social networks in Karakalpakstan and Khorezm, (ii) experience in public health, (iii) experience in mounting publicity campaigns, (iv) evidence of involvement of women and people of all ethnic origins in the project area, (v) experience in keeping accounts and making progress reports, (vi) willingness to receive specialist training from national or international NGOs, and (vii) ability to commit the needed staff resources full-time for the required duration of the Project.

13. Private Sector Participation 75. Infrastructure development requires supply of equipment, materials, and contracting services. A strong support industry is an essential element for good utility performance. A private support industry for the water supply sector, especially rural water supply, is evolving only slowly in Uzbekistan. Most services are delivered through state agencies, publicly owned self-financing organizations, or recently privatized companies that provide similar services as

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were offered by the former state-owned enterprises, institutes, and ministries. Greater private sector participation will result in competition that allows utilities and consumers to choose the best contract in terms of quality and cost. The Project will provide opportunities for the development of (i) a diversified private consulting capacity by contracting research and design institutes that are privatized or operate on market principles; (ii) a responsive and efficient domestic industry to supply quality equipment and materials by procuring from privatized state equipment manufacturers and material suppliers; (iii) civil works contractors that are capable of providing quality services by contracting the privatized state civil works contractors; (iv) small-scale enterprises that can offer construction and O&M services; (v) NGOs that can help communities maintain the infrastructure facilities; and (vi) local consulting businesses, survey companies, and individuals.

14. Operation and Maintenance 76. The intention of the Project is that all investment should be owned and managed by the local operating organizations. The Project will strengthen the technical capabilities and operational practices of the agrovodokanals, and will provide technical training and essential plant and equipment for these purposes. Maintenance practices will be established to ensure sustainability of the capital assets and maximize efficiency of operation. System performance will be monitored and procedures for corrective action will be set up. The beneficiary communities will participate in the decision process to the degree to which they are required or prepared to support local distribution and assume responsibility for their local supply network, which will include metering, either bulk or individual. This mobilization of local community organizations to nominate their particular water delivery requirements and thus accept a degree of ownership and responsibility for the operation and performance of the same will support sustainability of the project facilities and services.

15. Cost Recovery 77. The Government agreed that the agrovodokanals should prioritize O&M expenditure to ensure that existing and future service delivery is sustainable. Based on the financial data of agrovodokanals, current tariff levels and overall revenues are low, and revenue is insufficient to carry out repair and maintenance of the existing network or extend services to more remote villages. Existing tariffs cover only about 30 to 40 percent of O&M cost. Tariff collection is about 30 percent of the billed amounts and unaccounted for water is over 50 percent of supply. To enable the agrovodokanals to raise and collect tariffs that will sufficiently cover their O&M expenditures, the existing service levels will have to be improved to a satisfactory level, both in quantity and quality of water provided to the rural communities. Given the economic difficulties facing the rural population in the project area, tariffs cannot be increased in the short term to achieve full cost recovery of O&M and capital investment for the Project. The proposed stepped tariff, with a lifeline tariff for the lowest income population, will likely initially achieve only partial recovery of O&M cost. Full cost recovery of O&M cost and partial recovery of the project capital cost are targeted within 10 years of project completion. To ensure sustainability of the project facilities, the Government has assured that the tariff revenue will be prioritized for O&M. The capacity building component of the Project will provide training on financial management of the agrovodokanals. Through improved service delivery and customer willingness to pay, the financial viability of the agrovodokanals is expected to slowly improve.

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H. Environmental and Social Measures

1. Environmental Impacts 78. The Project is intended to implement a series of urgent schemes to improve availability of potable water supplies, assist in good management practices, and support rural sanitation. The overall impact will be a substantial improvement in public health and quality of life, while maintaining or improving the quality of water resources. Being a category B project, an initial environmental examination was undertaken using criteria specified in ADB’s Environmental Guidelines for Selected Infrastructure Projects (Appendix 10). None of the components will cause significant adverse environmental impacts based on the screening of possible environmental consequences using ADB checklists. 79. The project physical activities involve rehabilitating or constructing new pumping stations and trunk mains, drilling new deep boreholes and introducing desalination equipment, rehabilitating existing and providing new WDCs, strengthening distribution networks to rural communities, and improving sanitation facilities in education and medical establishments. These activities will be undertaken largely in rural areas, away from any densely populated localities. The major permanent works will be either underground, i.e., pipelines, or in existing compounds dedicated for water supply facilities, i.e., water treatment and distribution centers. The new land required for WDCs will not involve resettlement of the population and no loss of crop production will result from the Project, since surplus, uncultivated land is not in short supply. 80. Some sites of historic and cultural interest are located in the area, although none of known ecological importance. The design of each subproject will take account of the known sites, if any, and will ensure that they remain protected and free from any deleterious effect of the project work. The impact of construction activities will be limited in duration and extent, traffic flow and problems of noise and dust from construction activities will be temporary, and suitable mitigation measures will be taken to minimize these impacts. All major or minor pipe routes will be away from habitation and will follow the alignment of existing infrastructure services such as roads, gas, electricity, and telecommunications. Appropriate arrangements will be put in place for the safe disposal of sewage sludge from latrine blocks. Overall, adverse environmental impacts of the Project are insignificant as compared with the benefits accruing.

2. Social Measures 81. A social analysis following ADB’s Guidelines for Incorporation of Social Dimensions and Handbook for Incorporation of Social Dimensions in Projects was undertaken to evaluate the status of water supply and the demands of the rural population living in Karakalpakstan and Khorezm. Views of the community concerned were obtained regarding their potable water needs and willingness to pay fees for the services. The results of the social analysis are incorporated in project formulation as outlined in Appendix 11. The social analysis indicates that the potential beneficiaries show a high level of interest and support for the Project. To ensure that the Project benefits will be affordable to the target population, tariff increases will be implemented in a staged manner with regular reviews taking into consideration the income level of the rural population. Project implementation does not require any resettlement. 82. A random survey of the target population was conducted to yield information pertinent to designing aspects of the Project that would address the needs of the poor. The findings of the survey provide a socioeconomic profile (Appendix 11), which provides the basis for including specific social measures. Such elements are mechanisms to ensure that all users, particularly

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the poor and women, will be able to participate in project implementation, receive the benefits of improved water supply, and are willing and can afford to pay for the water services. The involvement of rural assemblies and related support for their activities is consistent with the cultural tradition of community participation, embodied in the local committee system. Women’s involvement will be facilitated through the existing rural assembly system where women committees are represented. These features are expected to serve as the keystone for (i) interaction between service providers with consumers; (ii) coordination of line ministries responsible for promoting water conservation awareness, drinking water, and health standards; and (iii) provision of a voice for the target population to alert the responsible authorities to their particular needs or problems. In short, these built-in features are socially sound and will encourage stakeholder ownership and accountability for project implementation.

V. PROJECT JUSTIFICATION A. Economic and Financial Analyses

1. Economic Analysis 83. The Project will improve potable water supplies to rural communities in Karakalpakstan and Khorezm that are currently deprived of basic water needs as a result of water shortage in the region that has been exacerbated by the drought. The Project will (i) increase rural water supply service coverage; (ii) generate efficiency gains, reducing distribution leakage, and water and electricity costs; (iii) improve cost recovery through better service delivery and customer service; (iv) reduce natural resource depletion; and (v) improve public health by reducing the incidence of waterborne diseases. 84. The economic benefits identified were based on two sample subprojects, one in Bozatau district in Karakalpakstan and the other in Koshkupir district in Khorezm. The benefits reflect significant poverty reduction and improvement in living conditions, in particular, health and hygiene of the rural population of whom over 60 percent is poor. Nonincremental benefits include (i) resource cost savings from customers obtaining water from other sources, (ii) availability of unaccounted for water to users after improvement of facilities under the Project, and (iii) health benefits. Incremental benefits include additional water sales to meet suppressed or increased demand of existing customers and additional sales to new customers who will be connected to the piped network, based on customers’ willingness to pay. 85. Resource cost savings or time savings to collect water is a major economic benefit of the Project. According to the socioeconomic survey, 60 percent of the households indicated that due to the water shortage in the region, which has been further intensified by the drought, they have to walk to faraway wells to find water.32 At least 2.5 hours are spent each day in the summer and at least 1.5 hours in the winter to collect water. Unaccounted for water is currently at over 50 percent of the total water produced. Improvement to the water supply facilities and better leakage control under the Project is expected to reduce the unaccounted for water to 30 percent. Water resource conservation benefits will be achieved through water demand management impacts of users paying cost-based tariffs and reduced water wastage. The

32 Official data from the agrovodokanals indicate that about 73 percent of rural households in the sample subproject

district of Koshkupir and about 46 percent in the sample district of Bozatau do not have water connections and have to obtain and carry water from other sources. Of those households with piped water connections, supply is scheduled with the majority receiving water for only 2–3 hours per day. The consumption level is therefore low at about 45 liters per day per household or less than 10 liters per capita per day. The suppressed demand is very high.

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Project will also bring significant health benefits from improved quantity and quality of water, improved sanitation facilities, and better hygiene practices, thereby reducing the morbidity rate and costs of treatment of waterborne diseases of the rural population. 86. The incremental benefits of increased sales are based on the difference between the current level of usage at less than 10 liters per capita per day (lcd) and the estimated increased consumption to a minimum of 60 lcd as a result of the Project. This benefit is estimated using the consumer’s willingness to pay survey results. 87. The Project will also provide indirect economic benefits by training concerned agencies’ staff in technical and financial management, institutional development, and local community governance. Other benefits cannot be quantified but will accrue in general terms to economic development of the project area as a result of improved water supply and sanitation. These include increased economic activities and output of commerce and industry, and improved operations of institutions such as schools and hospitals that require secure and safe water supply. 88. The economic internal rate of return (EIRR) calculation was undertaken in constant 2002 prices using the domestic price numeraire, since the outputs are nontradable in nature. Economic costs, excluding taxes and financial prices, are converted using factors of (i) 1.4 for the shadow exchange rate factor (SERF),33 and (ii) 0.8 for labor. The EIRRs for the sample subprojects in Bozatau district and Khoskupir district are 18.0 and 19.9 percent, exceeding the economic opportunity cost of capital, which is assumed to be 12 percent. Switching values and sensitivity indicators were tested using the SERF at 2.1 and increase in capital and O&M cost by 40 percent. The subprojects were found to be economically viable under adverse cost-benefit scenarios. A summary of the economic analysis is in Appendix 12.

2. Financial Analysis 89. A financial appraisal was undertaken for each sample subproject, comparing the financial internal rate of return (FIRR) with the weighted average cost of capital; and the average incremental cost with the average incremental revenue. Costs include capital costs in line with the implementation schedule, operational costs, and replacement costs. Estimates of O&M costs consider improvements in efficiency, particularly in the use of electricity, volume of water produced, and specific maintenance requirements for the facilities created under the Project. Only additional costs resulting from the Project were included in the FIRR calculation. Revenue from direct user charges is at an assumed collection rate of 65 percent. This is a considerable improvement on the current collection rate, which is about 30 to 40 percent. 90. The FIRRs for the sample subprojects in Bozatau and Koshkupir are 3.9 and 4.8 percent. Both exceed the weighted average cost of capital, which is about 2.1 percent, demonstrating that at proposed tariff levels the Project is financially viable. Switching values and sensitivity indicators were tested, and the subprojects were found to be financially viable under adverse cost and revenue scenarios. 91. Financial projections were prepared for the agrovodokanals for 2002 to 2025, the project period. Existing cash flow difficulties are expected to continue during project implementation since poor service delivery is one of the main reasons for low tariff collection. This should not affect project implementation since all counterpart funds are financed by the central 33 The SERF is calculated based on the official exchange rate of SUM693 and the commercial rate of SUM990 (as of

February 2002). Sensitivity analysis has assumed the SERF at 2.1 based on the market rate of SUM1,480.

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Government through state budget allocations and project assets will be transferred to the agrovodokanals. Currently, the Government is subsidizing about 50 percent of the O&M expenses of the agrovodokanals. In view of the worsening economic situation in the project area, the Government recognizes that the necessity of continuing to subsidize operation of the agrovodokanals to ensure sustainable service delivery. Once service delivery improves and new charging arrangements and tariff increases are in place in 2006, the financial performance of the agrovodokanals will improve and key ratios will satisfy requirements. The operating expenditure to income ratio will be below 1.0 and the current asset to current liability ratio will be higher than 1.0. A summary of the financial analysis is in Appendix 13.

3. Affordability Analysis and Project Sustainability 92. Due to the economic difficulties in the project area, only partial recovery of O&M cost will be achieved in the early years after completion of the project facilities (para. 77). Full cost recovery of O&M cost is targeted within 10 years after completion of the project facilities. User charges will need to be increased to ensure sustainability of project facilities and operation of the utility agencies. However, the charges need to be increased in stages taking into consideration affordability for the beneficiaries; in particular the poor must be protected from charge increases. The current tariff is based on a flat per capita charge irrespective of the volume of water consumed. A stepped tariff structure is proposed. A lifeline tariff for low consumption at a rate affordable to the lowest income users will be applied. Consumption in excess of the lifeline block of 10 m3 per person per month will be charged at a higher rate. The proposed tariff structure assumes an estimated average household of 5.6 members and consumption of about 75 lcd for average income households with connections and 60 lcd, or about 10m3 per month consumption, for low income households. An affordability analysis was undertaken to assess whether the proposed tariff is affordable to residential consumers, based on estimated tariffs and household income data from the social survey. 93. The household charges were compared with willingness to pay. Results from the socioeconomic survey showed that households were willing to pay an average of SUM300 per month for water. Proposed charges for average water consumption ranging from SUM260 to SUM310 per household are in line with the average willingness to pay. Proposed average household charges were also compared with average household income. Water charges of less than 5 percent of income are considered to be affordable, in line with ADB affordability criteria. Proposed charges are about 3 to 5 percent of average household income. For very low-income residents, proposed charges for 60 lcd were compared with the income of the poorest 10 percent of households. Proposed charges are lower than 5 percent of household income in the sample subproject districts. The detailed affordability analysis is in Appendix 14. B. Environment 94. The Project’s physical components will have no adverse impact on the environment. Most of the physical work, including rehabilitation of existing infrastructure and new construction such as WDCs and additions to the distribution networks, will be on land already designated for public services. These works will not encroach on sensitive ecological, cultural, or historical sites. Replaced pipes will be disposed of through metal recycling, and other wastes from excavations and from demolition work will be disposed of in designated municipal landfills. The Project is expected to have a positive impact on the environment by improving the quantity and quality of delivered water to rural communities and providing simple sanitation facilities to schools and clinics. The abstraction and production of water will more closely match consumer demand by reducing inefficiencies and losses. The use of metering and consumption-based

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billing will encourage conservation by users. Continuous environmental monitoring will be undertaken as part of the project performance monitoring system to ensure construction quality and environmental management meets national standards. C. Social Dimensions

1. Social and Health Impact 95. Supported by the public health awareness component, the supply of potable water will have a marked positive impact on the health of the population. Water consumers will achieve a significant reduction in their medical expenses thereby freeing up income for the purchase of more food. An indirect positive impact will be the improvement in nutrition and reduction of the incidence of anemia. Adults will become more productive and able to participate in income-generating activities. School absenteeism will decrease as children will become healthier and will not be required to spend time collecting water. The extension of rural assemblies to local water management will provide the basis for involving future development projects. The Project will also help to decrease the out-migration of population from Karakalpakstan and thereby assist in preserving local culture and customs. 96. Waterborne infectious diseases such as diarrhea, typhoid, and hepatitis A are common in the project area. Project beneficiaries will experience a rapid reduction in these infections when their household sanitation practices are improved, together with those at schools and hospitals. The provision of water will reduce exposure of the community to high levels of toxic salts, which exist in groundwater that they currently drink. In the medium to longer term, the incidence of chronic diseases of the liver (hepatitis), gastrointestinal tract, and kidneys, and some cancers, which are associated with decreased immunity linked to toxic salt levels, are expected to decrease. The public health awareness program and improvement in sanitation facilities at schools and hospitals will have a positive impact on rates of waterborne infections. The provision of potable water in clinics will substantially improve their ability to wash patients and equipment with clean water. This benefit will be most felt by clinics that have no gas supply to boil water.

2. Gender and Development 97. Women are target beneficiaries of this Project since they are traditionally responsible for collecting and managing drinking water, and health and hygiene in the home. Many of them are in poor health due to anemia and water-related diseases.34 The Project will relieve women of the burden of walking long distances and queuing for water collection, and thus free their time for rest and other activities. The women will benefit from education provided by the Project, enabling them to realize their desire to improve the protection of their children from disease. Women will also be involved in various aspects of project implementation, i.e., water conservation, and public health awareness. This experience will strengthen their capacity to take up future self-help projects as and when opportunities arise. D. Impact on Poverty 98. Based on the socioeconomic survey and using the minimum wage criteria (para. 19 and footnote 11), over 60 percent of the beneficiaries in the two districts are poor. The proportion of poor households is 80 percent in the sample district of Bozatau (Karakalpakstan) and 55 34 Official data show that 98 percent of women of reproductive age in Khorezm and 81.2 percent in Karakalpakstan

are anemic.

30

percent in Koshkupir (Khorezm). Water-related morbidity rates are high, and people often have to spend a large portion of their income or sell their assets to pay for medical treatment. The Project will improve water supply service to these poor rural communities. Increased access to water services will result in improved living conditions and hygiene practices among the rural poor, thereby reducing the incidence of waterborne diseases and related medical expenses. In most cases, significant cost savings from the use of alternative and distant water sources can be used for income-generating activities. 99. The Project will benefit poor households by introducing a tariff structure that charges by volume of water used and a lifeline tariff for low consumption households. This will guarantee access to water services that are affordable to the rural poor. Beyond the lifeline consumption of 10 m3 per month, a higher tariff will be charged to ensure water demand management and conservation by higher income users. 100. The Project will improve the quality of life of the beneficiaries through (i) access to safe drinking water and better sanitation facilities; (ii) access to washing facilities; (iii) lower morbidity level from exposure to waterborne diseases; and (iv) less time spent on water collection, i.e., loss of productive time. Since lower income households are more vulnerable to service deficiencies as coping mechanisms are unaffordable, they are more vulnerable to sickness. This can lead to comparatively low school attendance and decreased ability to learn or to be involved in productive work. The Project will also create construction-related job opportunities for the unemployed skilled and unskilled laborers during the implementation stage. About 600 person-months of skilled employment and about 1,000 person-months of unskilled employment will be created by the Project. The results of the poverty impact assessment are in Appendix 15. E. Risks 101. Six possible risks have been identified: (i) control of the flow in Amudarya River by riparian countries upstream of Uzbekistan; (ii) failure of raw water pumping and transmission systems to deliver the necessary water to the distribution centers; (iii) lack of institutional capacity, particularly at the local level, and experience in subproject selection and appraisal; (iv) lack of experience by the operating agencies, principally the agrovodokanals, to collect payment from individual consumers and by the individuals to recognize the need for and manage such payments; (v) lower than expected realization of subsidy or cost recovery jeopardizing service sustainability; and (vi) delay in project implementation due to unfamiliarity with ADB procedures. The Government recognizes that agricultural projects in other regions must be sustainable and is developing facilities to support this policy.35 The Government is also working closely with neighboring countries to develop a coherent policy on water resource management that is endorsed by the subregional governments. International development agencies are supporting this initiative. A subproject component will strengthen the capacity of delivery facilities to the Tuyamuyon-Nukus system thus significantly improving the security of raw water supply. The risk of pump failure will be minimized by establishing good maintenance procedures and ensuring power supply from alternative sources. The issue of institutional capability in subproject selection and appraisal has been dealt with by including the capacity building program, which includes project management support to assist in project implementation. Through O&M training, the agrovodokanals will be trained to ensure their effectiveness in project implementation and O&M. The Government is committed under its current policy to subsidize the agrovodokanals, in particular those in the project area, to ensure sustainable service delivery to the rural population. The capacity building component will comprise training in (i) 35 The Karshi Cascade Project in Kashkadarya province funded by the World Bank is an example. ADB will also be

providing assistance to the agriculture sector (footnote 18).

31

tariff setting; (ii) tariff reviews; (iii) customer service training; and (iv) regular monitoring of customer satisfaction to improve service delivery, consumers’ willingness to pay, and tariff collection. Measures to reduce possible delays have been discussed with the Government. Agency responsibilities and appropriate mechanisms for coordination have been identified to avoid the risk of delay in implementation.

VI. ASSURANCES A. Specific Assurances 102. In addition to the standard assurances, the Government has given the following assurances, which are incorporated in the legal documents:

(i) Counterpart funding. The Government will ensure that during each year of project implementation adequate funding, including budgetary allocations, of counterpart funds will be made, and such funds will be released by the relevant authorities on a timely and regular basis to facilitate project implementation by preparing and adopting, by 30 September of each year, an operation plan for the next year.

(ii) PMU and PIU staff. The Government will ensure that the PMU and PIUs are

always adequately staffed with competent technical, accounting, and support staff.

(iii) Subproject selection and review. The Government will follow the selection

criteria for subproject selection, and will seek ADB’s approval for each of the first two subprojects from Karakalpakstan and Khorezm, all subprojects that cost over $200,000, and those having social and environmental issues prior to any contract award for that subproject. The Government will submit completion reports for the first 10 subprojects for ADB’s review and comments. Selection of subprojects involving the Kaparas Reservoir facilities in Tuyamuyun complex requires a letter of no-objection from the Government of the Republic of Turkmenistan and approval from ADB.

(iv) Sanitary facilities and health awareness. The Government will ensure that

wherever a piped water supply is provided under the Project, improvements to sanitation facilities and provision of hand-washing facilities at all kindergartens, schools and clinics, as well as health awareness programs will also be provided.

(v) Maintenance of project facilities. The Government will ensure that project

facilities are properly managed by the concerned local governments, agrovodokanals, and rural assemblies through the collection of user charges and other local taxes; and provide subsidies when required.

(vi) Cost recovery. The Government will ensure that (a) revenues from water tariffs

cover O&M project cost as a first priority; and (b) full cost recovery of O&M and partial recovery of capital cost is achieved in a staged manner within a 10-year period after completion of the project facilities.

(vii) Nonrevenue water. The Government will establish appropriate monitoring

systems for nonrevenue water by 2003 to ensure the reduction of nonrevenue

32

water in the subproject districts so that by 2005 nonrevenue water will not exceed 30 percent of the total water generated by each agrovodokanal in the subproject districts.

(viii) Environment. The Government will ensure that (a) project implementation is

carried out in accordance with existing environmental laws, regulations, standards, and international agreements signed by Uzbekistan, and ADB’s guidelines, in particular, Environmental Assessment Requirements and Procedures of ADB; (b) all monitoring and mitigation measures indicated in the initial environmental examination are undertaken for the Project; (c) project implementation will include consultation with local communities on environmental issues, and the public will have access to environmental information pertaining to the Project; (d) the existing capacity for carrying out monitoring of water and air emission will be maintained during the Project’s life; (e) initial environmental examinations and environmental impact assessments, where applicable, will be carried out for the subprojects and submitted to ADB for review; and (f) any negative environmental impact that may occur as a result of the implementation of any subproject will be mitigated.

(ix) CBOs and NGOs. The Government will (a) facilitate involvement of CBOs and

NGOs concerned in the planning, design, construction, and O&M of the subprojects; (b) actively assist with capacity building, such as in the health and hygiene components of the Project; and (c) ensure participation of women in community groups in project implementation, availability of adequate employment opportunities for women by agrovodokanals in project activities, and compliance with ADB’s Policy on Gender Development during project implementation.

(x) Accounting standards. The Government will ensure that all necessary

measures are taken within one year from project commencement to allow the PMU and PIUs to apply international accounting standards (of the International Accounting Standards Committee or other internationally accepted standards) for the purpose of this Project.

(xi) Audit. The Government will ensure that the project account and financial

statements are audited by an independent auditor in accordance with sound audit standards acceptable to ADB, and ensure that the auditor will be selected and engaged in accordance with competitive selection procedures acceptable to ADB. Loan funds may be used to finance expenditure for private sector auditors and translation of auditor’s reports into English.

(xii) Project Performance Monitoring System. The PMU and the two PIUs will put

in place project performance and management monitoring and evaluation indicators, including baseline data and indicators of social, economic, and environmental impacts of the Project upon the beneficiaries, within three months of loan effectiveness, and will submit project performance monitoring system reports to be incorporated in the quarterly progress reports and project completion report to ADB.

33

B. Conditions for Loan Effectiveness 103. Prior to loan effectiveness:

(i) the Government will have issued a decree specifying the project implementation arrangements satisfactory to ADB, namely (a) the respective roles and responsibilities of the Ministry of Finance, MMS, the governments of Karakalpakstan and Khorezm, and other relevant agencies in implementing the Project; and (b) flow of funds between such parties; and

(ii) the PMU and PIUs will be established.

C. Condition for Disbursement 104. Except for mobilization payments for project consultants, loan disbursement will not take place until the Government has fielded the project management consultants provided under the Project.

VII. RECOMMENDATION 105. I am satisfied that the proposed loan would comply with the Articles of Agreement of ADB and recommend that the Board approve the loan of $38,000,000 to the Republic of Uzbekistan for the Western Uzbekistan Rural Water Supply Project from ADB’s ordinary capital resources with interest to be determined in accordance with ADB’s LIBOR-based lending facility; an amortization period of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board. TADAO CHINO

President April 2002

34

APPENDIXES

Number Title Page Cited on (page, para.)

1 Project Framework 35 1, 2 2 Institutional Structure 38 4, 14 3 External Assistance to the Water Sector in the Drought

Areas of Uzbekistan 40 9, 26

4 Cost Estimates and Financing Plan 43 16, 51 5 Project Implementation Structure 44 18, 54 6 Subproject Selection Criteria and Process 46 19, 56 7 Implementation Schedule 50 20, 61 8 Tentative Procurement Packages and Procurement Modes 51 20, 62 9 Terms of Reference for Consulting Services for Project

Management Support 52 21, 63

10 Summary Initial Environmental Examination 55 25, 78 11 Social Analysis 58 25, 81 12 Economic Analysis 61 27, 88 13 Financial Analysis 64 28, 91 14 Affordability Analysis 68 28, 93 15 Poverty Impact Assessment 70 30, 100

SUPPLEMENTARY APPENDIXES

(available on request)

A Background on the Aral Sea Environmental Problems B Existing Potable Water Supply in Karakalpakstan and Khorezm C Subproject Design Criteria D Summary Description of Sample Subprojects E Initial Environmental Examination F Detailed Economic Analysis G Detailed Financial Analysis H Project Performance Monitoring System I Social Analysis

Appendix 1, page 1 35

PROJECT FRAMEWORK

Design Summary Project Targets and Measurable Indicators

Monitoring Mechanism

Risks and Assumptions

Goals � Improve the living

and health conditions of the people, particularly the poor, living in rural communities in Karakalpakstan and Khorezm.

� Sustain access to safe and

adequate water supply for 700,000 people, of which over 60 percent are classified as poor.

� Reduce the incidence of waterborne diseases: typhoid (from 90 percent), diarrhea (85 percent), and hepatitis A (80 percent).

� Conduct

surveys at midterm and at project completion.

� Public sector

agencies provide effective support.

Purpose/Objectives � Mitigate the

effects of the ongoing drought by providing safe and easily accessible water supply, minimizing water wastage, and improving the health conditions through better hygiene practices.

� Strengthen sustainable potable water supply management.

� Provide safe and

sustainable water supply to at least 150 rural settlements by 2005.

� Improve water supply coverage in districts from about 12 percent minimum to 85 percent by 2005.

� Unaccounted for water will be reduced from over 50 to 30 percent by 2005.

� Implement water conservation measures in at least 150 settlements.

� Improve sanitation facilities in schools and clinics in about 50 settlements.

� Improve health awareness to at least 150 settlements.

� Surveys at

midterm and project completion

� Project performance report

� Quarterly progress reports

� Infrastructure is

properly managed, operated, and maintained.

� Communities participate effectively in project design and implementation.

� Maintenance of the infrastructure facilities is sustainable.

� Tariffs are set at appropriate levels and are collected.

� Communities are willing to pay.

Outputs Part A: Water Supply � Provide safe

drinking water. � Improve bulk

water supply. � Improve local

distribution network system.

� Upgrade operational and maintenance facilities of agrovodokanals (rural water and sewarage agencies)

� Reinforcement of

sustainable raw water supplies

� Extension of transmission mains into areas not currently served

� Rehabilitation and construction of water supply systems in at least 150 settlements

� Provision of essential operational and maintenance equipment to the agrovodokanals in Karakalpakstan and Khorezm.

� Progress

reports and Asian Development Bank (ADB) review missions

� Project performance management system (PPMS)

� Funding from the

central Government budget is adequate.

� Design institutes provide reliable inputs.

� Infrastructure facilities are effectively operated and maintained.

� Nongovernment organizations (NGOs) and community-based organizations (CBOs) participate.

Appendix 1, page 2 36

Design Summary Project Targets and Measurable Indicators

Monitoring Mechanism

Risks and Assumptions

Part B: Water Conservation and Health Improvement � Introduce water

conservation measures.

� Provide sanitation facilities.

� Establish water conservation and health education programs.

� Replacement of fragile and

defective pipes to reduce water leakage

� Provision of about 40-50 bulk meters

� Provision of ventilated improved pit latrines to schools and clinics in about 50 settlements

� Education and community awareness programs implemented in at least 150 settlements

� Progress

reports and ADB review missions

� PPMS

� Counterpart

funding from government is adequate.

� Community participation is effective.

� Implementation and management arrangements are effective.

� Cooperation among agencies is effective.

Part C: Capacity Building � Establish training

programs on project management, institutional development, financial management, and community participation.

� Establish an effective project management system.

� Provide consulting services for project management support.

� Training programs

implemented for about 300 community leaders, local governments, members and staff of agrovodokanals

� Project implementation on schedule

� Project status reports and contracts submitted on a timely basis

� Progress

reports and ADB review missions

� PPMS

� Counterpart

funding from government is adequate.

� International and domestic consultants provide effective support to the project management and implementation units.

� Implementation and management arrangements can deal effectively with interference from influential parties.

� Cooperation among agencies is effective.

Activities Part A: Water Supply � Community

consultations � Physical

infrastructure surveys, investigation, and designs

� Construction and rehabilitation of water supply facilities

� At least two NGOs and

the existing rural assembly (CBO) for each selected settlement to be consulted

� Detailed survey of existing infrastructure facilities and detailed engineering. design of the proposed project

� Construction or rehabilitation of water supply systems in at least 150 settlements

� Progress

reports and ADB review missions

� PPMS

� Knowledge of and

experience with ADB procurement procedures is improved through training.

� Construction companies are competent.

� Communities, NGOs, and CBOs fully cooperate

Appendix 1, page 3 37

Design Summary Project Targets and Measurable Indicators

Monitoring Mechanism

Risks and Assumptions

� Improved management systems in the agravodokanals in Karakalpakstan and Khorezm

� Delivery and clearance of imported materials and equipment is timely.

Part B: Water Conservation and Health Improvement � Conduct

community consultations.

� Organize water conservation and health awareness programs.

� Construct simple sanitation facilities.

� At least two NGOs and the

existing rural assembly consulted in the selected settlement

� Water conservation and health awareness programs implemented in at least 150 settlements

� Improved sanitation facilities in education and medical institutions in about 50 settlements.

� Implementation of water conservation and public health awareness campaigns with the support of CBOs and NGOs

� Progress

reports and ADB review missions

� PPMS

� Communities,

NGOs and CBOs fully cooperate

� Competent counterpart staff are available.

� Imported equipment is delivered on a timely basis.

Part C: Capacity Building � Appoint

consultants and identify NGOs and CBOs.

� Provide training

courses for management staff.

� Appoint

management staff. � Help implement

institutional reform in water supply.

� Engagement of 16

international and domestic consultants under the Project

� Identification of NGOs and rural assemblies to be involved in project implementation

� Training of 300 staff from agravodokanals, local governments, rural assemblies, and NGOs

� Project steering committee and project management unit established

� Project implementation units established

� Training of rural assemblies

� Progress

reports and ADB review missions

� PPMS

� Funding for project

management consultants is adequate.

� Competent counterpart staff are available.

INSTITUTIONAL STRUCTURE

Cabinet of Ministers of Republic of Uzbekistan

UCSA MH MMS MAWR MF

Office of Mayor of Khorezm

TCSA

Vodokanal Agrovodokanal

Trunkmain Agency

Khorezm

SES Khorezm

Trunkmain Agency

Karakalpakstan

SES Karakalpakstan

Council of Ministers of Karakalspaktan

Karakalspaktan CSA

Vodokanal Agrovodokanal

Urban and rural population

CSA = Communal Services Agency, KKP = Karakalpakstan, MAWR = Ministry of Agriculture and Water Resources, MF = Ministry of Finance, MH = Ministry of Healthcare, MMS = Ministry of Macroeconomic and Statistics, SES = Sanitary Epidemiological Survey, TCSA = Territorial Communal Services Agency, UCSA = Uzbek Communal Services Agency

Appendix 2, page 2 39

Institutional Responsibilities

Cabinet of Ministers (CM) The Government of Uzbekistan. Controls the activity of all ministries, agencies, and government organizations

Ministry of Macroeconomic and Statistics (MMS)

Responsible for carrying out the implementation of government socioeconomic and statistical policy; also water to Karakalpakstan and Khorezm

Uzbek Communal Services Agency (UCSA)

Responsible for operation of trunkmain agencies in Karakalpakstan and Khorezm

Ministry of Agriculture and Water Resources (MAWR)

Responsible agency for all surface water in the Uzbekistan

Ministry of Finance (MF) Responsible for regulating the external debt; coordinates the using of attracted loans

Ministry of Healthcare Responsible for implementing health policies, develops and approves the sanitation norms, controls the activity of SES.

Sanitary Epidemiological Survey (SES)

Responsible for controlling the quality of portable water provided by water utility agencies

Trunkmain Agencies Responsible for bulk water supply in Karakalpakstan and Khorezm, their activity is controlled by UCSA

Mayor office of Khorezm Province (MOK)

Responsible for coordinating all activities in Khorezm, controls the activity of Territorial Communal Services Agency

Territorial Communal Services Agency (TCSA)

Under the supervision of local government, controls the activity of agrovodokanal and vodokanal

Agrovodokanal Responsible for providing potable water to the rural population

Vodokanal Responsible for providing potable water to urban population

Council of Ministers of Karakalpakstan

Government of Karakalpakstan, responsible for coordinating all activities in the province; controls the activity of TCSA

Karakalpakstan Communal Services Agency

Under the supervision of the Karakalpakstan Council of Ministers, responsible for communal services

EXTERNAL ASSISTANCE TO THE WATER SECTOR IN THE DROUGHT AREAS OF UZBEKISTAN

Aid Provider

Project Title

Type of

Assistance

Project Description

Project Costs

Project Status

Recipient

Information

Water Supply Sanitation and Health Project

Loan Drinking water supply infrastructure development (sanitation and health improvement), procurement of water carriers and containers, etc.

Ph. I: $6.8 million Ph. II: $6.8 million (from the ongoing project loan)

Ongoing Karakalpakstan and Khorezm province

World Bank

Cotton Subsector Improvement Project

Loan Procurement of irrigation and construction machinery, equipment for pumping stations

$6.88 million from the project's unutilized balance

Ongoing Water utilities in Karakalpakstan and Khorezm province

Supporting Innovative Poverty Reduction in Karakalpakstan (JFPR) Grant

Grant aid Microfinance schemes, drinking water supply, equipment leasing

$2.5 million (JFPR grant channeled through ADB)

Approved by Government of Japan

Karakalpakstan ADB

(Western Uzbekistan Rural Water Supply Project)

Loan Support Government's actions to mitigate the consequences of the drought in Karakalpakstan and Khorezm

$38 million Preparation Karakalpakstan and Khorezm

Kreditanstalt für Wiederaufbau (KfW) of Germany

Rural Water Supply Project

Loan Improvement of rural water supply in farm areas

$10.0 million Ongoing Khorezm

Emergency Actions to Mitigate the Consequences of the Drought (Phase I)

Technical assistance

Capacity building of the Government in coordinating multi-disciplinary drought relief and mitigation actions; procurement and installation of 300 water hand pumps

$150,000 Ongoing (hand-pump component completed)

Takhtakupir, Karauziak, and Bozatau districts of Karakalpakstan (for the handpump component)

UNDP

Emergency Actions to Mitigate the Consequences of the Drought (Phase II)

Technical assistance

Deployment of an international drought prevention and mitigation adviser, development of a national drought preparedness and mitigation strategy, labor intensive public works program

$200,000 ($30,000 committed for public works component)

Planned (project to be elaborated by Nov 2001)

Bozatau district of Karakalpakstan (for the public works component)

Aid Provider

Project Title

Type of

Assistance

Project Description

Project Costs

Project Status

Recipient

Information

Government of the Republic of Korea

(Emergency Drought Relief Grant, 2001)

Grant aid Procurement of 25 tanks for water storage and transportation

$20,000

Water tanks received

Karakalpakstan (15 water tanks) and Khorezm (10 water tanks)

(Procurement of pumps for water wells)

Grant aid Procurement of 90 submersible pumps for water wells

$39,900 Ongoing Karakalpakstan Agriculture and Irrigation Construction Agency

Government of Japan

(Rehabilitation of drilling equipment)

Grant aid Procurement of spare parts for the rehabilitation of drilling equipment

$40,000 Grant applications under consideration

Priaral'skaya Hydrogeological Expedition

Government of United States (US) - United States Agency for International Development (USAID)

Cash Grant to Drill Wells in Muynak district

Grant aid Well drilling and 35 hand pumps installed in several villages in Muynak district; grant given to the US nongovernment organization - Joint Development Associates, Inc.

$25,000 Completed in Dec 2000

Muynak district of Karakalpakstan

Government of USA - USAID

Cash Grant to Drill Wells in Khalkabad district centre

Grant aid Well drilling in Khalkabad district centre (anticipated 50 wells); grant given to the local NGO: Atamakan Charitable Foundation).

$25,000 Ongoing Khalkabad town, Karakalpakstan

International Federation of Red Cross and Red Crescent Societies (IFRC)

Food aid and medical supplies

Grant aid Supply of 30 water purification filters for 30 medical aid points

SFr1,006,000 in total ($602,400 equivalent)

Expected to be raised in response to the IFRC international appeal

Karakalpakstan

Aid Provider

Project Title

Type of

Assistance

Project Description

Project Costs

Project Status

Recipient

Information

Development of a project for funding under a soft loan from the Government of Germany

DM70,000 ($32,500 equivalent)

Project feasibility study commenced in Sept. 2001

Recipients to be defined by the feasibility study

(Technical Assistance for the Improvement of Water Supply)

Technical assistance

Supply of spare parts, pumps, and pipes

DM250,000 ($116,000 equivalent)

Under consideration

Water utilities in Karakalpakstan and Khorezm

Government of Bavaria (Germany)

(Improvement of Water Supply to the Orphanage in Khiva)

Grant aid Well-drilling and installation of electric pump; repair of the water supply and heating systems

UZS3.09 m ($7,000 equivalent)

Completed Khiva city orphanage

Flygt International (a private sector company)

Equipment for Pumping Station #25 in Nukus

Grant aid Supply of electrical and mechanical equipment for Pumping Station #25 in Nukus

$15,000 Not available Sewage pumping station #25, Nukus, Karakalpakstan

Joint Development Associates (JDA) Intl.

Well Drilling - Phase II (Phase I funded by the US - USAID)

Grant aid/ technical assistance

Drilling 300 shallow wells, installing hand pumps, training on maintenance and sanitary norms

Not available Ongoing Villages in Muynak, Bozatau, and Sumanay districts

The information presented in the matrix derived partly from the aid response to United Nations Development Programme (UNDP) request (letter of 23 July 2001) to share the project-related information as per the established data template. Part of the information was made available by the Ministry of Macroeconomics and Statistics. UNDP will continue monitoring the aid flows and update the matrix, as appropriate.

Total Aid Approved In Response To The Drought In 2001: Loans: $22,430,000 Free-standing aid: $1,366,500a

Total Aid Planned (Remainder Of 2002 To 2005): Loans: $58,000,000 Free-standing aid: $7,000,000a

a includes only those funding agencies that supplied financial information Source: UNDP and Ministry of Macroeconomics and Statistics

Appendix 4 43

COST ESTIMATES AND FINANCING PLAN

Table A4.1: Cost Estimates ($ million)

Foreign Local Total Component Exchange Currency Cost A. Water Supply 1. Bulk Water Supply to Rayons 11.9 4.4 16.3 a. Civil Works 0.9 4.2 5.1 b. Equipment 11.0 0.2 11.2 2. Water Supply within Rayons 7.5 16.2 23.7 a. Civil works 3.3 8.9 12.2 b. Equipment 4.2 7.3 11.5 3. Operational Equipment and Materials 3.6 0.0 3.6 4. Design and Construction Supervision 0.3 2.2 2.5 Subtotal (A) 23.3 22.8 46.1 B. Water Conservation and Sanitation 1. Water Conservation Measures 0.3 0.0 0.3 a. Civil Works 0.0 0.0 0.0 b. Equipment 0.3 0.0 0.3 2. Sanitation 0.0 0.2 0.2 a. Civil Works 0.0 0.2 0.2 3. Design and Appraisal 0.0 0.1 0.1 Subtotal (B) 0.3 0.3 0.6

C. Capacity Building 1. Project Management and Supervision 0.9 0.6 1.5 2. Institutional Strengthening 0.7 0.2 0.9 3. Public Awareness Campaigns 0.2 0.2 0.4 Subtotal (C) 1.8 1.0 2.8

D. Contingencies 1. Physical 2.5 2.4 4.9 2. Price 1.5 1.5 3.0 Subtotal (D) 4.0 3.9 7.9 E. Interest and Other Charges During Construction 7.6 0.0 7.6 Subtotal (E) 7.6 0.0 7.6 TOTAL 37.0 28.0 65.0

a Physical contingencies are included at 10 percent on all items. Price contingencies are calculated at purchasing power parity using escalation rates of 2.4 percent per annum for foreign costs and 20 percent for local costs.

Source: Asian Development Bank estimates.

Table A4.2: Financing Plan ($ million)

Source

Foreign Exchange

Local Currency

Total Cost

Percent (%)

A. External Source Asian Development Bank 37.0 1.0 38.0 58.5 Subtotal (A) 37.0 1.0 38.0 58.5 B. Domestic Source Government of Uzbekistan Exemptions from taxes and duties 0.0 9.0 9.0 13.8 Budget allocations and other sources 0.0 18.0 18.0 27.7 Subtotal (B) 0.0 27.0 27.0 41.5 Total 37.0 28.0 65.0 100.0

Source: Asian Development Bank estimates.

Appendix 5, page 1 44

PROJECT IMPLEMENTATION STRUCTURE

Table A5.1: Summary Of Proposed Implementation Arrangements Project Organization Proposed Organization/

Representation Roles and Responsibilities Staffing

Government Steering Committee for the

Project

Representatives of • Cabinet of Ministers of

the Uzbekistan • Ministry of

Macroeconomic and Statistics (MMS)

• Ministry of Finance (MF) • Uzbek Communal

Services Agency (UCSA)

• Council of Ministers of Republic of Karakalpakstan • Mayor office of Khorezm

• Coordinate project implementation • Provide policy guidance for the Project

Management Unit (PMU) and MMS • Coordinate with MMS, PMU, and

different organizations involved in project implementation

• Coordinate PMU activity • Evaluate bids and award consulting and

major implementation contracts, e.g., equipment

• Coordinate other donor activities in the project area

Existing senior government staff members to be appointed by the Cabinet of Ministers

Executing Agency MMS • Project coordination and implementation

• Liaise with Asian Development Bank (ADB)

• Liaise with Government • Report to project steering committee

(PSC) • Establish and chair the PMU

Existing staff secondments using organizational budget

Some institutional capacity building may be required from project budget

Project Management Unit Representatives of • Design Institute of

UCSA • MMS/international

consultants

• Coordinate project implementation including technical support to PSC

• Allocate loan funds and other project budget resources

• Report to MMS and PSC • Identify, appraise, and select

subprojects • Manage and coordinate the activities of

the project implementation units • Coordinate preparation of subproject

feasibility studies and central procurement activities

Existing senior staff time allocations to committees using organizational budget Full time PMU manager and staff (3 posts). Paid for from loan consultancy budget

Project Implementation Unit

(one for Karakalpakstan and one for Khorezm)

Representatives of • Provincial Mayor's Office

(Council of Ministers of Karakalpakstan)

• Provincial Finance Department (Ministry of Finance of Karakalpakstan)

• Territorial Communal Service Agency

• Agrovodocanal • Local design institute

representatives

Responsible for initiating and coordinating detailed subproject implementation including • Prepare subproject feasibility studies,

including necessary social and environmental impact assessments

• Supervise construction design • Prepare tender and bid documents • Evaluate bids and award local

implementation contracts e.g., civil works

• Undertake procurement • Supervise construction • Provide monitoring and quality control • Maintain project accounts and financial

reporting for the PMU and MMS • Coordinate community consultation

Existing senior staff time allocations to committees using organizational budget Full-time PIU manager and staff (5 posts for each PIU). Paid for from loan consultancy budget

Implementation Agencies

For Bulk Water Transmission: � Tuyamuyun-Nukus and

Tuyamuyun-Urgench trunk main agencies

For Rural Supplies: � Agrovodokanals of

Karakalpakstan and Khorezm

Responsible for "on the ground" subproject construction, operation and management, and collection of tariffs including: • Liaise with the Project Implementation

Units (PIUs) • Provide brief on construction design

and coordinate with designers • Commission assets • Operate and maintain assets • Collect tariffs • Maintain operating and investment

accounts (for all assets) and public financial reporting (inc. to PIU/PMU/MMS)

Existing staff secondments to projects using organizational and project budget

Support from design institutes, other contractors -paid for from project budget

Strong institutional capacity building is required from project budget

Appendix 5, page 2 45

Table A5.2: Implementation Arrangements for the Project

Government Project Steering Committee

Project Management Unit

Project Implementation Unit

Karakalpakstan

Project Implementation Unit

Khorezm Province

Implementation Agency

Agrovodokanals in Karakalpakstan

Implementation Agency

Agrovodokanals in Khorezm Province

Executing Agency Ministry of Macroeconomic

and Statistics

Implementation Agency

Trunkmain Agency in Khorezm Province

Implementation Agency

Trunkmain Agency in Karakalpakstan

Appendix 6, page 1

46

SUBPROJECT SELECTION CRITERIA AND PROCESS 1. These general criteria will apply to all subprojects to be implemented under the Project.

(i) The subproject will directly address the basic needs of people affected by the drought conditions in Karakalpakstan and Khorezm.

(ii) The subproject reflects the water supply strategy set down by the Government of

Uzbekistan and is not in conflict with project strategies under other internationally funded works.

(iii) The proposed subprojects must be and remain sustainable through proper

maintenance of the project facilities. (iv) The subproject must be technically feasible and the least-cost solution

alternative. (v) Communities affected by the subproject must have participated in its selection

and design. (vi) The subproject should promote to the extent possible equity of access to water

supply and place particular emphasis on low-income and vulnerable groups and women.

(vii) The subproject is in conformity with the environmental requirements of both the

Government and ADB. (viii) The facilities to be provided under the subproject will be of a size or capacity

adequate for their intended use, making reasonable provision for future increases.

(ix) The subproject will be able to be completed within the project implementation

period.

Table A6: Subproject Identification and Selection Process Stage Step Activity Output 1. Data Preparation: By considerating each district in Karakalpakstan (15) and Khorezm (11) 1.1 Determine present and predicted rural

population. Rural population per district

1.2 Assess average income for rural population.

Average in Sum per month

1.3 Calculate water demand by rural population based on regional norms.

Present and future water demand per district (m3/day)

1.4 Define existing available potable water resources in terms of quantity, reliability, and quality.

m3 /day Reliability/dependency Quality versus standards

1.5 Compare available resources against demand.

Prioritized list of districts with greatest deficits

Appendix 6, page 2

47

Stage Step Activity Output 2. Options for Potable Water Supply: By considering each district in Karakalpakstan (15) and Khorezm (11) 2.1 Review technically feasible and

sustainable options for provision of potable water.

Identify options

2.2 Compare with strategies and activities of other investors in project area.

Assess compatibility of strategy and outputs; adjust as necessary

2.3 Generate cost estimates for options. Select least-cost 2.4 Identify and quantify maintenance needs. List and cost 2.5 Calculate least cost per capita $ per capita 3. Prioritization of Districts For options identified and prioritised 3.1 Compare option with government strategy. Confirm fit 3.2 Assess if option can be realized within

project period If not, revisit alternative options if available

3.3 Willingness of municipality and rural assemblies to share responsibility for the Project, (including metering and participation in some cost recovery mechanism)

Adjust priority of district as necessary

3.4 Compare districts with percentage poor and prioritise

Greater percentage of poor then higher priority

3.5 Compare priority districts with percentage households having gas supply1

Greater percentage with gas then lower priority

4. Extent of Subproject Works: Penetration of investment into selected priority districts 4.1 Aim: equitable distribution of subproject benefits across district as far as

financial resources will permit 4.2 Evaluate if basic minimum needs2 can be

met for whole district If yes proceed with subproject definition; if no reassess options in accordance with 4.3 and 4.4

4.3 Undertake review of spatial poverty across district

Distribution of poverty

1 Households with gas supply are able to boil water and reduce risk of waterborne disease. 2 Defined here as reliable access to safe water.

Appendix 6, page 3

48

Stage Step Activity Output 4.4 Survey/review significant spatial

distribution of poor households (a) if uniform proceed with

subprojects identification to the limit of available funding under the Project and consistent with full cost recovery for operation and maintenance (O&M) within 5 years of project completion

(b) If spatial variation then prioritise according to 4.5

4.5 Based on prioritising poorest settlement areas where spatial bias exists, assess projected cost recovery for degree of coverage of district by subproject

If the projected cost recovery by full prioritisation of poorest settlements will not cover O&M costs within 5 years of completion of subproject, adjust settlement priority by iteration until this is achieved.

5. Subproject definition 5.1 Identify subproject components by type of

resource for supply and necessary treatment

Subproject scope and cost per capita

5.2 Identify subproject components for means of local distribution (pipes/tanker/community collection).

Subproject scope and cost per capita.

5.3 Confirm the subproject is in conformity with environmental and social (including resettlement and minority group involvement) requirements, of both ADB and the Government.

Readjust subproject design if necessary.

5.4 Define metering and loss reduction measures necessary.

Scope and cost benefit (Sum/m3)

5.5 Define total cost of subproject within district and the projected minimum cost recovery within 5 years.

Confirm subproject affordable within terms of Project.

Figure A6: Subproject Selection Process

STAGE 1 STAGE 2 STAGE 3

Demographic data and water demand

calculations for each rayon

Generate list of rayons and settlements

priorirtized with least existing access to wholesome water

supply

Compare with other investment

programs – is there a conflict or duplication?

Comparative review of technical feasible options for

water supply by rayon

River abstraction

Hand pumps Deep boreholes

Canal abstraction

Shallow wells

Treatment where necessary/piped supplies/tanker delivery/ local collection points

Cost estimates for feasible/sustainable

options to supply rural areas

Cost per capita

Based on best resource option, apply subproject selection criteria

for supply to settlements

Good stakeholder commitment

Targets poor and

underprivileged

Accords with government

strategy

Least cost

Maximum health benefits

Prioritized list of subprojects

Project Implementation

Project Setup1. Preselection of Consultants2. Establish PMU and PIUs

Karakalpakstan1. Investigations2. Options/Subproject Selection3. Detailed Designs4. Tendering and Evaluation5. Construction and Commissioning

Khoresm1. Investigations2. Options/Subproject Selection3. Detailed Designs4. Tendering and Evaluation5. Construction and Commissioning

Capacity Building and ProjectManagement Support1. Community Participation2. Project Management Support

PIU = Project Implementation Unit, PMU = Project Management Unit.

IMPLEMENTATION SCHEDULE

Activity1 2 3 41 143 2 3 41 2 3 4 2 3 4

2002 20052003 2004

50 Appendix 7

Appendix 8 51

TENTATIVE CONTRACT PACKAGES AND PROCUREMENT MODES ($ million)

Contract

Possible Packaging

Cost Estimate

Procurement Method

A. Water Supply 1. Bulk supply: Civil works,

infrastructure (incl. pipework and specials)

Two contract packages in each oblast.

6.78

ICB

2. Bulk supply: Pumping

equipment, switchgear and controls, materials

Four contracts: two per oblast. 18.45

ICB

3. Water Distribution Centers and associated distribution network - Civil works.

Total fifteen contracts1 14.24

LCB

4. Water Distribution Centers and associated distribution network - Equipment

Total seven2 contracts 13.58

ICB

5. Operation and Maintenance Equipment: supply of general and specialist equipment to Agrovodokanals

Six to ten contracts per oblast

4.02

IS/DP

B. Water Conservation and Sanitation 6. Water conservation measures One contract per oblast

0.05

IS/DP 7. Supply/refurbishment

institutional sanitation One contract per rayon

0.2

LCB/DP 8. Public awareness / education

program One contract per oblast

0.5

LCB ICB = international competitive bidding; IS = international shopping; LCB = local competitive bidding DP = direct purchase (value not greater than $100 000)

1 Numerous small packages for government funding in Soum. Each package under $1 million equivalent. 2 Contracts for i) pumping equipment, bulk metering and controls x 3; ii) associated electricity power supply x 2; iii)

chlorination; and iv) desalination plant.

Appendix 9, page 1

52

TERMS OF REFERENCE FOR CONSULTING SERVICES FOR PROJECT MANAGEMENT SUPPORT

1. As part of capacity building, resources will be allocated for consulting services support to the project management unit (PMU) and the two project implementation units (PIUs). The consultants will provide overall project management and support in areas such as financial management, both of the Project and of the implementing agencies; technical support in the detailed design of project components, evaluation and procurement, project monitoring and reporting, quality control, community participation, and development of public awareness of water conservation and personal hygiene and the linkages with health. Consulting services will be procured through a consulting firm by the PMU on behalf of the Government, using open tendering procurement procedures to be approved by ADB in accordance with ADB’s Guidelines on the Use of Consultants based on the quality and cost-based selection method. 2. Consulting services will comprise both international and domestic consultants. The international consulting inputs will be focused in the first six months of project preparation and mobilization enabling the transfer of project management and implementation techniques to domestic consultants and counterpart staff who will be responsible for long-term project implementation. A. International Consultants 3. Six international consultants will be employed for a total of 32 person-months concentrated in the first six months to mobilize the Project and to establish operating systems and procedures needed for the sound management of the Project and its activities. The international consultants will then return intermittently during the remainder of the Project to ensure that these standards are maintained, and assist in monitoring and adapting the Project as necessary. The terms of reference for consultants are as follows. 4. Project Management and Team Leader for the PMU (12.0 person-months). The specialist will serve as the team leader of the PMU in its initial stage and will coordinate the activities of the consultants. The specialist will establish the PMU working arrangements, provide ongoing support to the PMU, train domestic consultants on procurement and project management activities, and monitor project implementation. He/she will work for six months of the first year of the Project and then make subsequent visits totaling six months, the timing being as agreed to suit the requirements of the Project. The specialist will assist the PMU in communications with ADB to ensure smooth project implementation.

5. Senior Design Engineer and Procurement Specialist (4.0 person-months). The specialist will work closely with the project management specialist, the local senior design engineer, design engineers, and local engineers, in each PIU. He/she will identify basic information requirements for preliminary project evaluation, so as to develop a rapid appraisal system for engineering requirements. The engineer will identify quantities of equipment, materials, and services to be purchased through international procurement procedures of the Asian Development Bank (ADB) and assist the Ministry of Macroeconomic and Statistics (MMS) to prequalify the international and local contractors that could supply the equipment and materials and services required. He/she will prepare guidelines for construction supervision to be undertaken by domestic consultants. The engineer will start work in month two after commencement of the Project.

Appendix 9, page 2

53

6. Financial Specialist for the PMU (6.0 person-months). The specialist has two main tasks. The first is keeping accounts for the Project, including financial monitoring of the Project, participating in preparing the annual work plan, and reviewing utility agency budget capacities and expenditures. The second is developing improved financial management of the implementing agencies. He/she will work closely with the local accountants in the PIUs and the local governments to review local budget capacities and revenue and expenditure flows, and carry out tariff reviews. The financial specialist will start in month two of the contract for three months and will make three further monitoring inputs of one month, the timing to be as agreed to suit the requirements of the Project.

7. Water Supply Design Engineer for the PIUs (4.0 person-months). The water supply design engineer will work in the PIU to ensure that the water supply systems developed for preselection, contract documents, and procurement are fully understood and observed by the PIUs and the local governments. The design engineer will also assist in preparing a detailed implementation plan, and procurement and contracting arrangements; supervise detailed engineering designs (where applicable); and assist in setting up construction supervision schedules and procedures. The design engineer will start from month three of the contract and work for two and a half months followed by two visits of three weeks each during the remainder of the contract, the timing of the visits to suit the requirements of the Project. 8. Community Development and Poverty Reduction Specialist for the PIUs (4.0 person-month). The specialist will supervise and prepare the work of the domestic consultants in each PIU at the commencement of the Project. He/she will identify competent nongovernment organizations (NGOs) that could be used to assist local communities strengthen their capacity to participate in the development and management of infrastructure programs. He/she will assist in involving the rural assemblies in project implementation and in training them on the principles and techniques of community participation in the level of service, costs, and tariffs. The specialist will assist the PMU, PIUs, and the community in ensuring that the subprojects are aimed at poverty reduction. This input would be made during the first three months of the Project and one month in year two. 9. Hygiene Specialist (2.0 person-months). The hygiene specialist will prepare material and supervise the initial public awareness campaign aimed at improving water conservation generally and water use for personal hygiene. The specialist will link with NGOs and community based organizations identified, and provide necessary training to them for onward community involvement. The input will be during months three and four of the project such that there is an overlap with the community development specialist. B. Domestic Consultants and Personnel 10. Nine domestic consultants will be needed for project implementation for a total of 222 person-months. The specific terms of reference are as follows. 11. Assistant Team Leader for the PMU (36 person-months). The domestic assistant team leader will work closely with the team leader and be responsible for ensuring that the overall work program is completed efficiently and effectively within the time concerned. He/she will report to the project manager and MMS. The assistant team leader will work for virtually the full period of the Project and be responsible for assisting in procurement and project management activities. He/she will prepare project progress reports as required by ADB, and develop annual work plans and budgets.

Appendix 9, page 3

54

12. Senior Rural Water Engineer for the PMU (36 person-months). The senior design engineer will work closely with the international specialist in setting up the technical program for the Project. He/she will work for 24 months from the start of the Project. The engineer’s responsibilities include applying standards for detailed engineering designs and specifications, assisting in the identification of subprojects, preparing a detailed subproject implementation schedule, assisting in preparing procedures for selection of consulting design support services and procurement for the Project, evaluating bids, and preparing and supervising detailed engineering designs.

13. Financial Specialist for the PMU (36 person-months). The financial specialist will work closely with the international financial adviser and the accountants in the PIUs. He/she will be responsible for compiling and preparing the project financial statements as required by ADB, preparing the first annual work plans and budgets, and monitoring project expenditure.

14. Water Supply Engineers and Program Managers for the PIUs (2 positions for a total of 54 person-months). The water design engineers and program managers are to act as team leaders of the PIUs and perform the duties of design engineer for all project activities in their respective cities. With the assistance of the PMU, they will prepare the implementation program for the Project; assist in the selection of subconsultants for preparing feasibility studies and engineering designs; assist in and monitor the work of the subconsultants; carry out activities in inviting potential bidders, evaluation, and awarding in accordance with ADB’s Guidelines for Procurement; set up construction supervision procedures and assist in supervision work; and prepare monthly and quarterly progress reports for the PIU and PMU.

15. Accountants for the PIUs (2 positions for a total of 24 person-months). The accountants for the two PIUs will start work with the Project at its commencement and continue for the first six months and intermittently thereafter. The accountants will work closely with the senior financial adviser in preparing all financial reports, ensuring they are prepared accurately and promptly, that all transactions are recorded properly, and a clear audit trail is maintained. More specifically the accountants will assist in reviewing the work plan and budget; and monitor project expenditure in the PIU. 16. Community Development Specialist for the PIUs (2 positions for a total of 36 person-months). The community development specialists in each provincial PIU will start work with the Project at its commencement and work for an initial period of nine months followed by three months during the second year, the timing determined by the needs of the Project. They will identify and work with competent NGOs that could be involved in the Project to assist local communities strengthen their capacity to participate in developing and managing infrastructure programs; support community mobilization through the consumer committees; review performance of the Project to ensure that women and the poor are fully involved; prepare monitoring reports on these aspects for submission to the PMU; and participate in training for design contractors on the principles and techniques of community participation in the level of service, costs and tariffs. 17. Support Staff. Administrative support staff will comprise a bilingual secretary/administrative assistant in each PMU and PIU office for the duration of the particular office. An interpreter/translator will be based in the PMU and employed full-time for the first six months of the Project. Each PIU and PMU office will have a full-time driver and one vehicle will be hired per office for the period of the activities of the office in the Project.

Appendix 10, page 1

55

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION A. Introduction 1. The project physical components for water supply in the two provinces of Karakalpakstan and Khorezm were examined against the criteria specified in ADB’s Environmental Guidelines for Selected Infrastructure Projects. The checklist of water project actions known to affect environmental resources and values was applied. 2. The project implementation units (PIUs) to be set up under the Project and the utility agencies concerned will also conduct environmental screening during appraisal of the water supply subprojects according to the laws of Uzbekistan. The law requires that an environmental impact statement will be prepared starting at the time of the selection of the construction site, and with tasks continuing through the preparation of feasibility studies, implementation, and construction. Where appropriate, an initial environmental examination and, if required, an environmental impact assessment, will be carried out in accordance with ADB’s Environmental Assessment Requirement and relevant local laws and procedures. B. Description of the Project 3. The project physical components comprise works as identified generally in Table A10.

Table A10: Physical Components

Water Supply Component Karakalpakstan Khorezm Bulk water pumping station 1 1 Transmission mains 56 km 16 km Trunk main – rehabilitation and new 34 km 50 km New borehole 8 0 Storage reservoir 24 20 Chlorine dosing facility 24 20 Desalination units 8 0 Local booster pumping (stations) 24 20 Replace fragile/defective mains 100 km 140 km Construction of new distribution mains 160 km 100 km Supply, district, consumer metering TBA TBA Operational plant and equipment 1 1 Asset management facilities 2 2 Laboratory testing 1 1

C. Description of the Environment 4. Physical. Most of the project works will occur within the rural environment where low densities of population and lack of formal infrastructure applies. The terrain is flat and, particularly in Karakalpakstan, is predominantly desert. Agriculture is wholly dependent on irrigation. The climate is hot and dry in summer, causing a significant increase in water use. 5. The quality of abstracted raw water varies considerably according to the source and is treated accordingly. Treated water is transmitted in buried pipelines, stored in closed reservoirs, then further chlorinated and either pumped into the below-ground distribution network or transported by road tanker to delivery points.

Appendix 10, page 2

56

6. Ecological. Years of intensive agricultural production, primarily cotton growing, has caused serious, long-term ecological problems in Uzbekistan. Rivers are badly polluted by cattle breeding, industrial effluent, and sewage, in addition to receiving surface runoff and leachate loaded with agrochemicals. These river waters require treatment prior to use for potable supply. Shallow groundwater sources are also liable to contamination from surface activities and are not favored as a potential source of water. Deep ground waters are generally free from pollution although heavily laden with mineral salts. 7. Socioeconomic. The poor level of water availability and quality in the rural regions of the Aral Sea area have social and health impacts. Water-borne diseases are prevalent throughout Karakalpakstan and Khorezm, and unemployment exceeds 50 percent of the qualifying population. As a result, a large majority of the population are poor and unable to afford medical treatment or, in many cases, nutritious foods. D. Screening of Potential Environmental Impacts and Mitigation Measures

1. Project Location 8. The proposed work is in low-density rural areas without well-developed formal infrastructure. The work comprises rehabilitation of existing and introduction of new water supply and distribution facilities. None of the water supply components will adversely affect natural or cultural resources nor sensitive ecological zones, and no resettlement of residents is required by any of the activities.

2. Design Aspects

9. The overall effect of the proposed works will be to improve the availability, quality, and efficiency of water service. Water resource options will include the review of available and sustainable sources. Where applicable, boreholes will be drilled to deep aquifers that are proven to provide sufficient yield and of a quality that can be readily desalinated. The use of metering and consumption-based billing will encourage conservation by users. Water quality will improve as a result of improved filtering and chlorination, and by replacing leaky distribution networks to reduce infiltration by groundwater. Improvement of testing laboratories in the agrovodokanals (rural water supply agencies) will improve their capacity to monitor the quality of raw water and water supplied to the distribution network. 10. Chlorine-dosing facilities will be designed and constructed to comply with state planning and construction standards.

3. Construction

11. The construction of pipe networks is likely to cause minor, temporary impacts such as traffic disruption, and potential for erosion (silt runoff) at excavation and trenching sites. However these are routine problems that can be mitigated by construction management.

4. Operations Stage

12. Improved efficiencies in all phases of service provision, combined with tariff reforms, will improve the willingness to pay and, in the longer term, enable the generation of revenues to sustain the service at the improved levels. Where new equipment is installed, training on operation and maintenance will be provided.

Appendix 10, page 3

57

5. Environmental Monitoring and Institutional Requirements 13. Each of the utility agencies concerned will be required to assess environmental impacts of the project physical work, and to prepare the statements of environmental impacts and consequences required by law in Uzbekistan. The works proposed are similar to other works conducted by the respective utility agencies although training will be needed (and will be provided under the Project), for them to prepare the required environmental impact assessments. 14. Once the components are operational, the utility agencies will need to monitor water quality according to existing laws and regulations. A monitoring plan will be set up at the commencement of the Project and will specify the frequency, methods, quality standards, and procedures and actions to be followed as a result of noncompliance. This monitoring is currently undertaken by the Sanitary Epidemeological Survey, part of the Ministry of Health on their behalf, but this arrangement should prove unnecessary after completion of the Project. Operational safety will be improved under the Project and a designated safety officer will be included in training provided to operators of equipment under the Project. The safety officer will monitor and arrange the necessary mitigation of hazardous working conditions.

6. Findings and Recommendations

15. None of the Project’s physical components will cause significant environmental impacts based on the screening of possible environmental consequences using ADB checklists. The water supply project components will improve the access to safe water, but will not cause any significant depletion of resource in the process. Improved supply networks will reduce losses and waste. Improvements to sanitation and hygiene will reduce the incidence and socioeconomic costs of illness. 16. The PIUs should each designate one staff member as responsible for (i) assuring that tender and contract documents contain binding provisions to prevent and mitigate adverse environmental impacts; (ii) assuring that the implementing utility agencies comply with Government environmental impact regulations and standards; and (iii) monitoring and reporting on impacts and compliance with the adopted environmental protection measures. E. Conclusion 17. The Project will have no significant adverse environmental impact, but will result in numerous environmental improvements. A full environmental impact assessment is not considered necessary.

Appendix 11, page1

58

SOCIAL ANALYSIS A. Report Outline 1. This report provides a profile of the key characteristics of residents in the sample subproject districts, including their perceived needs, and evaluates the likely impact of the Project on them including their ability to access project benefits. The report is based on research consisting of a random statistical survey of 200 households in each of two subproject districts (Bozatau in Karakalpakstan and Koshkupir in Khorezm) and focus groups, separately for women and men, convened in each district.1 The participants represented low-income people living in rural settlements within these districts. Meetings were also held with local government officials and nongovernment organizations (NGOs) active within the districts B. Background 2. The project districts are located within Karakalpakstan and Khorezm, which have been facing water shortage problems further intensified by the ongoing drought. The traditional sources of income from agriculture and fishing have all but ceased, and the majority of households rely on social assistance. The basic human need for safe drinking water is not being met. Water availability from wells is inadequate and of poor quality, polluted with fecal bacteria and high salt levels. Consequently the level of morbidity is high, and women and children are forced to travel long distances to fetch water. C. Profile of Project Beneficiaries 3. The household monthly income in Bozatau ranges from SUM6,900 to SUM15,900. Corresponding figures for Koshkupir are SUM7,600 and SUM18,900. The majority of households have between 3 and 8 members. Monthly per capita income was lowest in households above 9 members (e.g., less than SUM2,000 in Bozatau for households with 9–12 persons). Large households of 12 persons or more comprise 10 percent of the total. Mean monthly household expenditure on health is a major expense and comprises about SUM6,000 in Bozatau and SUM9,000 in Koshkupir. Per capita daily food consumption is extremely low: in Bozatau the mean calorie intake is 1,996 and 2,335 in Koshkupir. D. Role of Women 4. Women in the project area are traditionally responsible for collecting water used for drinking, cooking, childcare, and cleaning. The traditional male occupations of crop cultivation and livestock rearing have significantly declined due to the prevailing ecological conditions. In many households women are now the main wage earners, working in low paid service jobs such as cleaning. E. Water Sources and Availability 5. In some rural areas (27 percent in Koshkupir and 54 percent of Bozatau) households are supplied by the agrovodokanals (rural water supply agencies); while the service is very often

1 The socioeconomic survey and focus group discussions were carried out during February 2002 under TA 3828-

UZB: Aral Sea Area Drought Relief Project, for $150,000, approved on 3 January 2002. The two districts are typical for rural Karakalpakstan and Khorezm.

Appendix 11, page2

59

scheduled,2 in some cases the connection has completely failed. The majority of the rural population rely on water from shallow wells (70 percent of Bozatau and 92 percent of Koshkupir), which is limited, seasonally irregular, and of extreme poor quality. 6. In Koshkupir, people with water pipes and intermittent supplies are able to grow fruit and vegetables in their garden plots. However poor water quality affects production. When water is not available nearby, or when the quality is very poor, people travel longer distances, often more than 2 kilometers to find water. A few households have paid for private boreholes and supply water to neighbors. People in Koshkupir are sometimes able to obtain water from irrigation channels and cooling water from the electricity plant. Like well water, the irrigation water needs to be boiled and the industrial water contains toxic chemicals. Sometimes households have no water for days. Coping mechanisms include borrowing water from neighbors. Since the onset of the drought, people have to pay for such water. In some cases, people have to sell milk (normally for personal consumption) from the cow to buy water. In Bozatau, since they have no cash, they borrow and repay neighbors in water. F. Sanitation and Health 7. Community awareness, motivation, and standards on sanitary practices are very low and modes of transmission of waterborne diseases are little known. Latrines, where available, are inadequately constructed. Many schools, especially in Bozatau, are without water pipes or wells, and are unable to provide hand-washing facilities for pupils. In Bozatau, people have little surplus water left for cleaning. Expenditure on sanitation takes low priority. The exception is among women in Koshkupir who want to improve their latrines. Teachers interviewed in the subproject districts are aware of the health risks but have no budget to improve facilities. Some provide their own labor to dig new school latrines. Drinking water is boiled in the schools but it is salty and the availability is often inadequate. 8. People associate the high salt levels in their water with kidney disease but do not associate infectious diseases with unboiled water. Expenditure on medical treatment is extremely high and is the predominant reason for having to relinquish assets. When people have no money to pay for treatment they attempt to borrow from family or from neighbors. When this is not possible they sell their assets such as the cow. The household cow is often the main asset and cow milk is a more important income source than crops. Watering the cow takes priority over washing. People become extremely vulnerable if they have no cow and are then unable to obtain medical treatment. This may partly explain the low levels of disease recorded in official statistics. G. Perceived Needs and Demands 9. The research reveals differing socioeconomic conditions across the study areas. In Koshkupir, salty water is usually available from the wells and hand pumps. Men’s concern is therefore to maintain their ability to irrigate and to desalinate the water to increase crop yield. The women are mainly concerned about water quality. At the other extreme, in Bozatau, water of any quality is very scarce so people are concerned about supply as well as quality. Feeding the cow takes equal priority since it provides income to buy food. 2 Scheduled supplies are often restricted to one hour in morning and one hour in afternoon.

Appendix 11, page3

60

H. Willingness to Pay 10. Willingness to pay for drinking water in the sample districts is linked to perceptions about the future viability of crop production and whether water supply is available through pipes nearby. Men’s willingness to pay is particularly sensitive to these conditions since in Koshkupir they are responsible for crop production to generate income, as well as for household consumption. Shallow wells in Koshkupir still have adequate water although its quality is very poor. Households with pipes do not support metering since they are concerned that water for irrigation will also be charged. However other households support metering. All the focus groups are against shared metering because they feel that there will be an abuse of water use. Respondents are initially skeptical about paying for water because they are concerned about affordability. However, when savings on health care and project financing are explained, most agree that they should pay a token amount related to consumption level. I. Affordability 11. Affordability is relatively low and the conventional measure of 5 percent of household income is too high since other basic human needs are not currently being met. People subsist on milky tea, bread, and pasta. Many cannot afford medical treatment and often cannot afford soap. Focus groups report children missing school due to inadequate winter clothing. Cash income is low since utility bills are being deducted at source from allowances and pensions. The proposed tariff takes this into consideration to establish charges based on level of consumption, including a lifeline tariff for the lowest income group. Overall people will be charged about 3 percent of household income. It is also proposed that community based organizations (CBOs) allocate water credits and coupons to subsidize poor consumers. J. Community Structure and Absorptive Capacity 12. Rural communities in the sample subproject districts have well-organized CBOs. These take the form of formal rural assemblies and their constituent neighborhood organizations. The district governments maintain good contact with them and also retain women’s committees. NGOs are active in Karakalpakstan with over 160 NGOs of which at least 70 are active. In Khorezm, 43 are registered. The strong social support structure in rural areas is likely to ensure that all households will receive equitable amounts of drinking water provided sufficient infrastructure is available for water delivery within reasonable distances. Settlement patterns are scattered and a piped supply will not always be cost effective. CBOs will be consulted on water delivery to areas that may not have pipes. Consumers are prepared to assist in laying pipe and in transporting water to distribution points. K. Social Impact of the Project 13. The mitigation of the Aral Sea environmental problems will not be achieved quickly, and the rapidly deteriorating socioeconomic and health situation requires emergency aid. The drinking water project and associated health awareness component will partially reduce poverty in that people will have reduced exposure to disease and will therefore spend less on medical treatment. This will release their meager resources to buy more nutritious food and help to reduce the very high levels of anemia among women in reproductive age groups and improve perinatal health. School-age children will become healthier and have increased learning capacity. The proposed Project will bring significant positive social impact to the target beneficiaries.

Appendix 12, page 1

61

ECONOMIC ANALYSIS

A. Methodology and Approach 1. The economic analysis is undertaken in accordance with Asian Development Bank (ADB) guidelines, including Guidelines for the Economic Analysis of Projects, and Handbook for the Economic Analysis of Water Supply Projects. The analysis describes the economic rationale and target beneficiaries, sets out the without-project situation, and undertakes an analysis of alternatives. The analysis compares the calculated economic internal rate of return (EIRR) for the sample subprojects1 with the economic opportunity cost of capital (EOCC), which is assumed to be 12 percent.2 Standard and project-specific sensitivity tests are undertaken to assess the robustness of the EIRR calculation. The analysis uses the domestic price numeraire, as benefits are nontradable in nature. The analysis is undertaken in constant 2002 prices. B. Economic Rationale and Without-Project Situation 2. The water supply components will (i) generate major efficiency gains, reducing network leakage and pumping energy costs by over 20 percent; (ii) improve cost recovery through better user satisfaction with service delivery; (iii) improve access to safe water for the nonconnected households; (iv) reduce natural resource depletion; (iv) improve public health by reducing the incidence of waterborne disease; and (v) support economic recovery. Unaccounted for water will be reduced from in excess of 50 percent, to a target of 30 percent over the Project’s life. 3. Rural water supply services in the project districts are inadequate.3 Assets have deteriorated and lack of proper maintenance is such that water supply in the two subproject districts is severely compromised. Without urgent major investment in production and the distribution network, the agrovodokanals’ (rural water supply agency) water supply systems will continue to deteriorate rapidly, with serious economic and environmental consequences. Water shortages and pressure problems limit the actual supply to between 30 and 60 percent of those connected in Bozatau and Koshkupir respectively, and without urgent investment the systems are expected to fail completely within 10 years. The Project is considered high priority by the Government, is timely, and is well integrated with other investment activities in these two regions to pursue the long-term objective of providing sufficient and secure water supply to the rural population. Improved efforts on cost recovery and operation and maintenance (O&M) will have a positive impact on willingness-to-pay, sustainability of services, and potable water resource management. C. Project Description and Beneficiaries 4. The Project focuses on the secure and sustainable supply of good quality potable water to rural communities within the districts of the two provinces. The physical works will generally comprise trunk mains, pumping stations, boreholes and desalination plants, reservoirs with chlorination equipment, and local distribution networks that will include metering. The Project will also provide technical assistance and capacity building to agrovodokanals,4 health awareness education to the population, and improvements to sanitation at schools and clinics. The Project will benefit about 700,000 customers, as well as small businesses, and educational 1 The sample subproject districts are Bozatau in Karakalpakstan and Koshkupir in Khorezm. 2 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila. 3 Service coverage levels are low, 27 percent and 54 percent of rural population in Koshkupir and Bozatau,

respectively, and service levels are low with two to four hours intermittent supply. The rest of the population obtain water from hand pumps, boreholes, and canals, which are distant, saline, and contaminated in most cases.

4 The World Bank-funded Water Supply and Sanitation Project has initiated institutional reforms among vodokanals (urban water supply agencies). These include tariff restructuring measures in pilot districts where water metering has been installed.

Appendix 12, page 2

62

and medical institutions. Access to a clean, safe, and reliable water supply system will be of particular benefit to the rural poor. Community-based consumer committees will also be set up in each district to help the agrovodokanal develop a more customer-oriented service and improve customer satisfaction. Specific service delivery targets for water supply and water quality have been agreed with the Government. D. Analysis of Alternatives 5. An analysis of technical alternatives was undertaken based on items that were considered essential for establishing a sustainable water supply system. In Koshkupir, no groundwater sources are suitable, and hence potable water should be from the Tuyamuyun trunk main system only. In Bozatau, a number of potential options are available, including shallow groundwater lenses, deep aquifers, and where practical, connection to the Tuyamuyun supply. However, shallow lenses are not necessarily reliable and deep aquifer resources depend upon desalination before the water is of a potable standard. The choice of single option or a combination of options will therefore depend on (i) physical feasibility, (ii) unit cost of supply based on incremental investment and O&M costs, and (iii) sustainability of resource. The consideration of alternative sources was strengthened by the choice of the most cost-effective rehabilitation of the distribution system and construction of new water distribution centers. E. Economic Costs 6. Economic costs exclude taxes, and financial prices are converted to economic prices using conversion factors. The shadow exchange rate factor (SERF) was assumed to be 1.4 based on the existing relationship between the commercial rate and the official rate.5 Since the SERF is a key input into the analysis, tests were undertaken to assess the sensitivity of the Project to changes in the SERF. The conversion factor for labor was assumed to be 0.8, since there is excess employment in communal services for both skilled and unskilled staff. Considerable savings are made in operational costs under the Project, due to efficiency gains, but these savings are reduced due to projected increases in O&M expenditure due to increased production and distribution capacity. The incremental economic costs are phased over the Project’s planning period, assumed to be 20 years, after completion. F. Economic Benefits 7. For water supply components, the major economic benefits comprise (i) cost savings on the nonincremental supply to connected and nonconnected households; and (ii) willingness-to-pay based on average demand price for incremental water supplies. For connected and nonconnected households, the nonincremental benefits are quantified using the resource cost savings approach for (i) use of alternative water sources; (ii) time savings for water collection; (iii) nontechnical losses;6 and (iv) savings in health expenditure.7 Incremental benefits are valued using (i) willingness to pay. Values for potable water consumption are based on the cost of potable water for a minimum drinking requirement but only for the highest 10 percent income group among the nonconnected households.8 Time savings for water collection and willingness to pay are based on the social survey. Health benefits are calculated based on the avoided

5 The SERF was estimated at 1.4 based on the prevailing official rate and the commercial rate as of February 2002.

Sensitivity analysis assumed the SERF to be 2.1 based on the market rate. 6 Nontechnical losses add to the welfare of population served and estimated to be 20 liters per capita per day for

Bozatau and 10 in Koshkupir. (ADB. 1999. Handbook for Economic Analysis of Water Supply Projects. Manila. p. 65).

7 Incidence of waterborne diseases is caused by (1) high salinity levels of water from boreholes and river canals particularly in Karakalpakstan, and (2) water contamination due to corroded conditions of pipes and lack of proper structure for existing hand pumps and boreholes.

8 Potable water is purchased from other districts by households on regular scheduled bus trips.

Appendix 12, page 3

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treatment costs, using official health statistics on the impact of water supply improvements on the incidence of the three most common waterborne diseases and the cost of medical treatment, including supplies from local hospitals. G. Results 8. In the two sample subproject districts, the EIRRs exceed the EOCC, which is assumed to be 12 percent. Sensitivity analysis, conducted for a 10 percent increase in capital and operating costs, and 10 percent reduction in subproject benefits, is summarized in Table A12. Another standard sensitivity scenario assumes a one-year delay in benefits. Even at the worst case scenario, which combines a 10 percent decrease in benefits and 10 percent increase in costs, the subprojects are still feasible with EIRRs above 12 percent. The resulting EIRRs are robust and subprojects are economically viable even in the combined worst case scenario. Switching values and sensitivity indicators are also calculated. The results indicate that the EIRRs of subprojects are most sensitive to a decline in project benefits. 9. Two additional project-specific sensitivity tests were undertaken: (i) increases in the value of the SERF to reflect the difference between the current market exchange rate and the official rate; and (ii) capital and O&M costs increase by 40 percent. The EIRRs in both districts exceed the EOCC of 12 percent. The results show that the SERF will have to increase by about 30 percent for the EIRR to fall below the EOCC. The second sensitivity test assumes that the capital and incremental O&M costs will increase by 40 percent considering the possible construction delays and relatively lower operational efficiencies. Again, the EIRRs remain above the EOCC. Table A12.1 summarizes the results.

Table A12: Economic Internal Rate of Return Analysis and Sensitivity Tests Item Bozatau

Koshkupir

Overall

Base case 18.0% 19.9% 19.7% Costs increase by 10 percent 16.3% 18.2% 18.0% Benefits decrease by 10 percent 16.2% 18.0% 17.8% Costs increase by 10 percent, benefits

decrease by 10 percent 14.6% 16.4% 16.2%

Benefits delayed by one year 15.3% 16.9% 17.0% Shadow exchange rate factor at 2.1 16.1% 13.8% 14.1% Operation and maintenance (O&M)

costs increase by 40 percent 12.7% 14.2% 14.0%

Switching value—cost increase 45% 61% 60% Switching value—benefit decrease Switching value—capital and O&M

costs increase by 40 percent Sensitivity indicator—cost increase Sensitivity indicator—benefit decrease

78%

47% 2.2 1.3

38%

62.8% 1.6 2.6

83%

60% 1.7 1.2

Sensitivity indicator—capital and O&M increase by 40 percent

2.1 1.6 1.7

Source: Asian Development Bank estimates. H. Conclusion 10. The project components are economically viable and are robust to adverse cost and benefit scenarios. The calculated EIRRs are expected to be lower than the true EIRR since the economic, social, and environmental implications of not undertaking the Project are severe and worsen rural poverty in the project area.

Appendix 13, page 1

64

FINANCIAL ANALYSIS A. Introduction, Background, and Scope 1. The financial analysis is undertaken in accordance with Asian Development Bank (ADB) guidelines, including the Handbook for the Economic Analysis of Water Supply Projects. 2. The agrovodokanals (rural water supply agencies) in Karakalpakstan and Khorezm are responsible for rural water supply and sanitation in the provincial districts.1 Government policy for agrovodokanals currently allows provision of subsidy for capital and operating requirements, although it is simultaneously promoting market principles in the provision of communal services.2 However, the current financial situation of the agrovodokanals is poor, mainly due to (i) low tariffs, (ii) unaccounted-for-water of about 50 percent,3 (iii) low revenue collection rates, (iv) rising costs, and (v) cash-flow problems. The Project seeks to reverse the downward spiral of poor service delivery, low efficiency in tariff collection, underfunding, and aging and deteriorating assets to enable agrovodokanals to become self-financing and sustainable in the long term. 3. A financial analysis was undertaken of the two sample subproject districts of Bozatau in Karakalpakstan and Koshkupir in Khorezm. The analysis calculates tariffs required for operation and maintenance (O&M) and capital cost recovery, undertakes a financial appraisal of project components in each district, and provides financial projections for the two agrovodokanals at the district level. However, due to the limited customer base of agrovodokanals and the poor economic conditions, a more realistic approach is for tariff recovery to fund O&M only. The Government will need to continue with its current policy of subsidizing both the capital and some operating requirements of agrovodokanals to sustain the improved levels of service. This subsidy will include the indirect subsidy provided by the discounted rate charged for bulk water supplied from the Tuyamuyun source.4 Nevertheless the agrovodokanals must comply with operating and financial efficiency requirements in the medium term. This will enhance their revenue generating capacity and encourage them to practice better water demand management practices. B. Tariff Setting and Cost Recovery 4. Calculated full cost recovery tariffs are calibrated against the affordability of the rural poor, which dictates the required level of long-term capital and operating subsidies. Tariff estimates are based on the proposals to introduce metered volume charging by 2006.5 Tariffs

1 In Karakalpakstan, the agrovodokanal operations are centralized and cover all 15 districts. In Khorezm, a

decentralized management of rural water supply exists, with each of the 11 districts having staff responsible for providing the district’s water supply requirements.

2 Resolution No. 243 allows for full recovery of operation and maintenance costs as a minimum requirement without excluding the option to charge higher tariff to cover part of the capital cost. This policy will be implemented over a number of years. However, achieving full cost recovery for services to the rural communities that are suffering from economic hardships as a consequence of the drought will be difficult.

3 Unaccounted for water estimate is based on the Demand Management and Loss Reduction Study conducted by the Ministry of Macroeconomic and Statistics in August 2000.

4 Interregional trunk main supplies based on raw water abstraction from the Amudarya River at Tuyamuyun. 5 The Kreditanstalt für Wiederaufbau-financed rural water project indicated that in 2000, a realistic tariff (assuming

the rural water supply systems are functioning well) would be in the range of SUM200 per month per household, plus inflation.

Appendix 13, page 2

65

will cover O&M expenditure in a phased manner, but will not cover interest on the ADB loan.6 O&M cost estimates are based on improvements in efficiency of operation, particularly in the volume of water produced and effective maintenance requirements. Water demand is based on the estimated daily consumption for domestic use only, although in Karakalpakstan, this does include an allowance for cattle. Unaccounted for water is assumed to reduce from a current 50 percent to 30 percent as a result of project works. Resulting from the improved service delivery, the tariff collection rate is assumed to be 60 percent in the early years after project completion, rising to 75 percent by 2010. 5. The proposed average tariffs per cubic meter in 2006 (in constant prices) are SUM30 in Bozatau and SUM40 in Koshkupir (equivalent to about $0.043 and $0.057 at the official exchange rate).7 Since existing tariffs are based on normative consumption, comparing existing and proposed tariffs is difficult. However, comparisons of existing and proposed household charges are shown in the affordability analysis. Required tariff levels are sensitive to changes in production, consumption, losses, tariff collection rates, actual costs, and inflation among other factors, and hence tariff reviews must take place regularly, and appropriate tariffs implemented, both during project construction and beyond 2006. C. Financial Appraisal 6. Project financial appraisal for each district, compares the financial internal rate of return (FIRR)8 with the weighted average cost of capital of 2.1 percent.9 Sensitivity tests are undertaken to assess the impact on the FIRR of cost increases, revenue decreases, and currency depreciation. Switching values and sensitivity indicators are also calculated. The appraisal is undertaken in 2002 prices. Project capital expenditure is estimated based on the implementation schedule and includes physical contingencies of 10 percent for all items. Replacement costs are included for all operating equipment being needed 15 years after project completion. O&M costs include only the incremental costs incurred under the Project. 7. Revenues are estimated based on the required average tariff, predicted water consumption, and a collection rate of 60 percent. Tariffs are assumed to stay constant in real terms after 2006, but revenues increase along with increases in water consumption. The FIRRs are 3.9 percent in Bozatau and 5.1 percent in Koshkupir. These reflect the required Government subsidy for the capital and operating requirements. With Government subsidies plus direct revenues, incomes exceed the weighted average cost of capital of 2.1 percent, demonstrating that at proposed, affordable tariff levels the Project can be financially viable (Table A13.1). The overall FIRR is 4.6 percent. 8. Standard sensitivity tests were undertaken on key assumptions in the analysis. The results indicate the Project is most sensitive to a decline in water sales or tariff collection, and a further test was undertaken for a 15 percent decrease in revenue. Even so, the Project was

6 The ADB loan which covers part of the capital works will be paid by the Government and the agrovodokanals will

not assume any liability related thereto but will be responsible to ensure that the capital assets of the Project are given proper and adequate maintenance.

7 In 2001, the average tariff levels in Bozatau and Koshkupir for domestic users were SUM14.7 and SUM22.7 respectively.

8 The FIRR calculation uses project capital costs and additional O&M costs associated with the Project. 9 The WACC is calculated based on the cost of borrowing from ADB and counterpart funds. The cost of ADB funds

are calculated at 2.5 percent of the foreign cost component and discounted at international inflation of 2.4 percent. The cost of counterpart funds is assumed to be 5 percent over the rate of inflation in line with Government rates for long-term lending.

Appendix 13, page 3

66

found to be financially viable under all the adverse cost and revenue scenarios. Detailed calculations and sensitivity tests on the FIRR are shown in a supplementary appendix.

Table A13.1: Water Supply, Proposed Tariffs, and Summary FIRR Results

Item Bozatau Koshkupir Over-all Average required tariff 30 40 35 WACC 2.1% 2.1% 2.1% FIRR 3.9% 4.8% 4.4% Costs increase by 10 percent 3.1% 3.6% 2.5% Revenues decrease by 10 percent 2.9% 3.2% 3.0% Costs increase and revenues decrease by 10 percent

2.1% 2.5% 2.3%

Revenues decrease by 15 percent 2.1% 2.4% 2.2% Revenues delayed by 1 year 2.4% 3.3% 3.3% Currency depreciation of 30 percent 2.4% 2.8% 2.2% Costs increase by 10 percent—switching value

29% 29% 12%

Revenue decrease by 10 percent—switching value Revenue decrease by 15 percent—switching value

20% 15%

18% 17%

17% 15.4%

Currency depreciation—switching value 38% 44% 30% FIRR = financial internal rate of return, WACC = weighted average cost of capital. Source: Asian Development Bank estimates. C. Financial Projections 9. Detailed financial projections up to 2025 have been prepared for the agrovodokanals10 in Bozatau and Koshkupir. The projected financial statements are in current prices that include inflation in each year.11 For purposes of analysis, project assets are valued using the commercial exchange rate and are assumed to accumulate as work in progress in line with the implementation schedule. The opening balance is based on balance sheets provided by the agrovodakanals for 2001.12 Fixed project assets are depreciated at a rate of 2.5 percent per annum for pipe networks, 10 percent for meters, and 5.0 percent for other assets, on a declining balance. Accounts payable represent 10 percent of operating expenses. Seventy percent of nonoperational revenue is assumed to be zero. 10. The value-added tax is calculated at an average of 20 percent on actual income. The collection rate is assumed to be 60 percent rising to 75 percent after project completion. Revenue for the years up to 2006 is based on actual current income, increasing at an annual rate of about 15 percent. Although tariffs are assumed to increase over the construction period,

10 The financial data for Bozatau and Koshkupir water supply operations have been estimated based on actual 1999-

2001 operational data from Karakalpakstan and Khorezm agrovodokanals. 11 International inflation is assumed to be 2.4 percent per annum. Domestic inflation is assumed to be 24 percent for

2002 to 2005, 20 percent from 2006 to 2010, and 15 percent thereafter. 12 Revaluation of fixed assets was undertaken by agrovodokanals in 2001 as per legislation.

Appendix 13, page 4

67

significant improvement in collection rates are not expected to occur until three years after project implementation when benefits have been experienced. 11. In the years to 2006, because of inadequate actual income, the agrovodokanals are expected to continue to experience cash-flow problems, given inadequate service provision and inability to charge for a service if none is provided. Since revenue is dependent on tariff collection, the actual operating service requirement is critical to the financial sustainability of the agrovodokanal and the Project must, therefore, focus on service delivery. Agrovodokanal expenditure is expected to remain constant in real terms until 2006 but thereafter fixed and variable costs for water are calculated based on production volumes. From 2006, a moderate profit should occur with improved financial ratios. The Government has agreed that O&M costs will receive priority, and only when they have been met will any remaining revenue by released for capital and loan repayments. 12. On the data available and assumptions as described, the agrovodokanals are shown to be able to cover O&M expenses in about 10 years, with income covering realistic and adequate requirements for maintenance and repair. Under these conditions, the agrovodokanals appear to be sustainable in the long term. Summary ratios are shown in Table A13.2. Detailed analysis and financial statements are shown in a supplementary appendix.

Table A13.2: Agrovodokanals, Key Ratios 2006

Item Bozatau Koshkupir Operating ratio 0.95 0.80 Current ratio 1.10 1.35

Source: Asian Development Bank estimates.

Appendix 14, page 1 68

AFFORDABILITY ANALYSIS A. Introduction 1. An affordability analysis was undertaken to assess whether the Project is affordable to lower income rural households, based on estimated tariffs and household income data from the social research.1 In line with Asian Development Bank (ADB) practice, tariffs are considered to be affordable if they fall below 5 percent of monthly household income. Since metered charging will be introduced under the Project, a tariff structure was prepared for each district using a stepped tariff by volume and lifeline tariff for minimum consumption of 10 cubic meters per household per month to increase affordability of the rural poor. B. Tariff Structure and Affordability 2. Proposed average tariffs are calculated using the principle of full cost recovery of operation and maintenance (O&M). However, since affordability of tariffs is a critical issue in the drought-stricken areas in Karakalpakstan and Khorezm, the Government has committed to continue subsidizing rural water supply until the agrovodokanals can fully recover the cost of O&M from users. In addition, once meters are installed under the Project, charging rural customers by volume but stepping tariffs according to actual water consumption is recommended.2 This will encourage demand management and appropriate water use, and reduce wastage. Setting a low tariff for low consumption is termed a “lifeline” tariff as it assists those with low income to have a subsistence consumption of water at affordable price. 3. The tariff structure includes for residential customers: a lifeline tariff set at 60 liters per capita per day (lcd), a tariff for consumption between 61 lcd and 75 lcd, and a higher tariff for consumption over 75 lcd. The objectives of volume tariff structuring are to guarantee access of lower income households to piped water and to encourage efficient water use by higher income consuming households, and thus, ensure reduction of water loss from leaks and wasteful use. 4. A detailed comparison of existing and proposed charges for domestic water consumption levels in the two sample subproject districts of Bozatau in Karakalpakstan and Koshkipur in Khorezm is shown in Table A14. The proportion of these charges to household incomes is also shown. The household charge for average water consumption satisfies ADB criteria since it accounts for a maximum of less than 5 percent of average household income. For those with the lowest incomes, the water charge is lower than 5 percent of income if water consumption is limited to around the lifeline consumption level. The social research showed that about 73 percent of respondents in Bozatau and about 85 percent in Koshkupir were willing to pay for water supply improvements. Of those respondents who were willing to pay, the average was about SUM280 in Bozatau and SUM320 in Koshkupir per household per month. Proposed household charges are in line with these levels. 5. Proposed water tariffs per cubic meter are in the range of SUM20 for Bozatau and SUM25 for Koshkupir. These levels represent a reasonable increase compared with the current tariffs of SUM10 for Bozatau and SUM18 for Koshkupir, since current tariffs have been increased to take account of inflation. The analysis shows keeping tariffs at about 3 percent of household income, this means that required tariff increases remain affordable in Bozatau and Koshkupir. 1 Social research included social surveys, field visits, and focus groups discussions in the sample subproject

districts. 2 The World Bank Water Supply project has been undertaking metering of household consumption in the district

centers. A detailed stepped tariff structure based on size of meters installed has been proposed to the Government. Once metered volumes become available, the demand information will be used to assist in designing an appropriate tariff structures in the project areas.

Domestic Tariffs

Existing Charge per

Capita Soum per Month (SUM per

month)

Existing Charge per Household (SUM per

month)

Example Proposed

Water Charge Per

Capita (SUM per

Month)

Example Proposed

Water Charge Per

H/Hold (SUM per

Month)

Example Proposed

Water Charge as

% of Existing

Water Charge

Lowest Decile HH

Income per Month

Example Proposed

Water Charge % of Lowest Decile HH

Income

Lowest Quintile HH Income per

Month

Water Charge % of Lowest

Quintile HH Income

Average HH Income per Month

Water Charge %

of Average

HH Income

A. Koshkupir

Consumption at 60 lpd 35.8 179 45.0 261.0 146% 7,600 3% 12,400 2% 15,300 2%Consumption at 80 lpd 35.8 179 55.2 320.2 179% 7,600 4% 12,400 3% 15,300 2%Consumption at 100 lpd 35.8 179 66.9 368.9 206% 7,600 5% 12,400 3% 15,300 2%

69

Average consumption at 75 lpd 35.8 179 52.7 305.4 171% 7,600 4% 12,400 2% 15,300 2%Consumption at 110 lpd 35.8 179 66.9 388.0 217% 7,600 5% 12,400 3% 15,300 3%

B. BozatauConsumption at 60 lpd 17.0 100 36.0 223.2 223% 6,900 3% 10,200 2% 13,200 2%Consumption at 80 lpd 17.0 100 43.8 271.6 271% 6,900 4% 10,200 3% 13,200 2%Consumption at 100 lpd 17.0 100 53.1 329.2 328% 6,900 5% 10,200 3% 13,200 2%Average consumption at 75 lpd 17.0 100 41.9 259.5 259% 6,900 4% 10,200 3% 13,200 2%Consumption at 110 lpd 17.0 100 58.5 362.7 362% 6,900 5% 10,200 4% 13,200 3%

HH = household, lcd = liter per capita per day.Source: Asian Development Bank estimates.

Appendix 14, page 2

Daily Per Capita Water Consumption

Independent of consumption

Table A14: Tariff Structure and Affordability

Appendix 15, page 1

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POVERTY IMPACT ASSESSMENT

A. Poverty Measures 1. Uzbekistan has no agreed or reliable measure of poverty and no official poverty line. The average per capita monthly income in 2001 was estimated at SUM9,710.1 The Government uses the concept of “least provided families” to identify those needing support for basic human needs. The main indicator is income per family member, including additional criteria of asset ownership. In Government terms, the poor are classified as a vulnerable and low-income group based on the prevailing official minimum wage, which is adjusted regularly for inflation, and in January 2002 was set at SUM3,430 per month.2 In a recent study by Gesellschaft für Technische Zusammenarbeit, Tacis, and the World Bank, minimum wage was used to assess the poverty level in Tashkent, Ferghana, and Karakalpakstan. Based on the minimum wage criteria, urban poverty in these areas was estimated at 10, 28, and 50 percent, respectively. Rural poverty is expected to be higher. In the same survey, self-ranked poverty (i.e., not having enough money for food and medicines) in these areas ranged from 30 to 70 percent of the population depending on the location. Using the World Bank definition of poverty of $1 per day, even at the official exchange rate, would put the average income in Uzbekistan at approximately two thirds of the $1 a day level. This indicates that the majority of the population in the country is poor. B. Income in the Project Area 2. Income and expenditure data for 2000 and 2001 show that the average per capita annual money income was SUM116,520 and expenditure was SUM102,600, an equivalent of SUM9,710 and SUM8,550 per month. However, the national average hides wide variations between Tashkent City and other provinces, particularly the poorer regions such as Karakalpakstan, where income and expenditure levels are much lower. About 80 percent of the population in Karakalpakstan and 60 percent in Khorezm were unemployed in 2001. The annual per capita income in Karakalpakstan and Khorezm in 2001 was estimated at SUM54,430 and SUM63,770 respectively. Based on the socioeconomic survey undertaken in February 2002, the monthly household income and expenditure in the sample subproject district of Bozatau in Karakalpakstan were SUM15,900 and SUM15,560. The corresponding figures in the sample subproject district of Koshkupir in Khorezm were SUM18,900 and SUM 18,780.3 Average per capita monthly income was SUM3,180 in Bozatau and SUM4,110 in Koshkupir, as compared to the minimum wage of SUM3,430 per capita per month.

Table A15: Income and Consumer Expenditure Location

Per Capita Money Income

(annual)

Consumer Expenditure

(annual)

Per Capita Money Income

(per month)

Consumer Expenditure(per month)

2001 2001 2001 2001 National Average 116,520 102,600 9,710 8,550 Karakalpakstan 54,430 47,880 4,536 3,990 Khorezm 63,770 56,080 5,314 4,674 Bozatau (Karakalpakstan) 38,160 37,800 3,180 3,150 Koshkupir (Khorezm) 49,320 47,760 4,110 3,980

Source: Asian Development Bank estimates.

1 Based on Ministry of Macroeconomics and Statistics preliminary income and expenditure estimates for 2001. 2 Due to high inflation, the real value of the minimum wage is less. 3 Consumer expenditure is used as the comparative measure of wealth.

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C. Approach to Poverty Impact Analysis 3. In the absence of an official poverty line, the minimum wage of SUM3,430 per capita was used to calculate the percentage of poor beneficiaries. This has been the criterion being used by other international funding agencies for assessing poverty in Karakalpakstan. Using income alone provides a relatively narrow definition of poverty, and tend to ignore the economic, cultural, and social situation in the project area, as well as nonmonetary benefits and unregistered income. Given the economic situation in Karakalpakstan and Khorezm, particularly in the rural areas, where a large portion of people’s income from agriculture has been lost due to the drought, the use of the national minimum wage is a conservative measure of the level of poverty in the project area. D. Loan Classification 4. Based on a poverty line of SUM3,430 per capita per month and the social research results,4 over 60 percent of project beneficiaries are poor. This includes 80 percent in Bozatau and 55 percent in Koshkupir district. The loan is therefore classified as a core poverty intervention since the proportion of beneficiaries classified as poor is above 50 percent. E. Poverty Impact Assessment 5. The assessment of poverty impact used for this Project has considered (i) the extent to which the project targets areas where the rural poor are located, (ii) the proportion of project beneficiaries who are poor, (iii) the targeting of the project loan toward the poor, and (iv) the impact on the quality of life of the poor. 6. Identification of the poor within a set of project beneficiaries is possible for this Project considering that the project area is rural where the majority of the population have limited income opportunities due to depressed economic conditions in these two regions. All target beneficiaries will benefit from the improvements to the water supply services. The benefits include access to safe and clean water, better health, time savings from fetching water for more productive uses, and overall improvement to the livelihood of the population. 7. Using a poverty line of SUM 3,430 per capita per month, the proportion of poor households in the two sample project districts is over 60 percent. The majority of the Project’s beneficiaries are poor as they cannot afford to pay for alternatives. This situation will worsen if the Project does not go ahead as the source of water continues to deplete, and the infrastructure facilities continue to deteriorate such that water supply will decease entirely. 8. The loan from the Asian Development Bank (ADB) provides 58.5 percent of the project costs. The funds will be targeted at project beneficiaries, over 60 percent of whom are poor. Based on this, at least $22.8 million of the funds will be targeted to the rural poor. 9. Poverty impact is also measured in terms of quality of life related to a definition of an acceptable rural living standard including access to basic services such as water supply and sanitation facilities, all of which are included in the ADB objective of poverty reduction. For this Project the acceptable rural living standard is assumed to be when the population is able to access clean water to meet their basic needs such as drinking and washing. The poor quality of

4 Research included a socioeconomic survey, field visits, and focus group discussions.

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water and the cost of treating the water for consumption are also taken into account.5 Further, these problems have limited the economic potential of the area, aggravating poverty conditions.6 10. Quality of life measures for households appropriate for the water supply component of this Project include (i) access to safe drinking water, (ii) access to washing facilities, (iii) morbidity level due to exposure to waterborne disease, (iv) cost of making water potable, and (v) proportion of the day spent collecting water (i.e., loss of productive time) and storage. Area targeting of low-income households is achieved under the Project with lower income households provided access to safe drinking water that is affordable. Service standards will be upgraded resulting in improved water quality that will have a positive impact on the health conditions of the rural population. This situation will enable the rural poor to save on medical costs. These will have long-term implications in mitigating poverty where families become less vulnerable to sickness and more involved with productive work. Children’s education will be more secure and improved sanitary conditions in schools will be more conducive for learning. 11. The Project will also provide opportunities for women to use their time more productively since they will not have to spend a large amount of time fetching water. Small- and medium-size businesses are likely to improve productivity with a continuous supply of water. The Project will also create construction job opportunities for both skilled and unskilled labor during the implementation stage. The Project will create about 600 person-months of skilled employment and about 800 person-months of unskilled employment. F. Conclusion 12. Over 60 percent of the project beneficiaries are poor, and at least $22.8 million of the loan will be targeted to them. Providing access to safe water will improve the quality of life of the rural poor, who are more vulnerable to lack of water supply. The Project will reduce both the monetary and nonmonetary effects of acute water shortage, which perpetuate the poverty cycle of the rural poor. The Project will support the Government’s long-term objective, which is to achieve 100 percent piped water service in both rural and urban areas in Karakalpakstan Khorezm, and to improve the livelihood of the people in these two regions that have been suffering from the Aral Sea water problem.

5 The poor and declining surface water quality due to salinity attributable to extensive upstream irrigation in the

Amudarya basin, and wasteful irrigation and poor drainage practices in Karakalpakstan have compounded the problem of the lack of good quality water for domestic use. Other water sources such as shallow wells do not provide a stable water supply as the level of water in these wells is subject to seasonal variations and many have dried up because of the drought. Groundwater when available is often of high mineral content and requires desalination before it becomes potable.

6 The rural poor despite receiving some form of social stipends such as pensions, unemployment support, and support for mothers with infants, need to earn extra cash income from private production of farm products. However, land productivity has declined considerably due to lack of water and little income is derived from land cultivation. Many poor households have to sell their limited assets to buy food, clothing, and other necessities.