Technical Assistance Consultant’s Report

Project Number: 43556 December 2010

Georgia: Developing an Urban Water Supply and Sanitation Sector Strategy and Regulatory Framework for Georgia (Financed by ADB’s Technical Assistance Special Fund)

Final Report Output 1 – Sector Development Plan

Prepared by Egis Bceom International In Association With: GeoHydro Services

For the Asian Development Bank

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Asian Development Bank Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia PATA 7492-GEO

Final Report Output 1 – Sector Development Plan

December 2010 The Stonemason’s Craft Batania Monastery c. 12th c CE

In Association With: GeoHydro Services

Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

Quality Information of the Document

General Information

Author(s) EGIS PATA Team Title of Project Developing an Urban water supply and sanitation Sector Strategy & Regulatory Framework for Georgia Title of Document Output 1 Sector Development Plan Date December 2010 Reference ADB PATA 7492-GEO

Recipients

Sent to : Name Institution Sent on: Vijay Padmanabhan Asian Development Bank

Copy to : Name Institution Sent on: Ministry of Regional Development and Infrastructures United Water Supply Company of Georgia Georgian National Energy and Water Supply Regulatory Commission

History of modifications

Version Date Made by Checked by:

Final Control of Document Date Name Signature

Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

Abbreviations and Acronyms

BWC Batumi Water Company FDI Foreign Direct Investment FIZ Free Industrial Zone FTZ Free Tourism Zone GDP Gross Domestic Product MAFS Ministry of Agriculture and Food Safety MDF Municipal Development Fund MEPNR Ministry of Environmental Protection and Natural Resources MLHSA Ministry of Labor, Health and Social Affairs MRDI Ministry of Regional Development and Infrastructure NSFSVP National Service of Food Safety, Veterinary and Plant Protection SCWSE State Commission on Water Supply and Energy SDP Sector Development Plan STP Sewage Treatment Plant TSA Targeted Social Assistance UWSCG United Water Supply Company of Georgia WSS Urban Water Supply and Sanitation

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

Table of Contents

Output 1 – Sector Development Plan ...... 1 1.1 Strategic Context ...... 1 1.2 Urban WSS Sector Problems and Constraints ...... 4 1.2.1 Technical Sustainability and Environmental Protection ...... 4 1.2.2 Institutional and Financial Sustainability ...... 5 1.2.3 Enabling Legal and Regulatory Framework ...... 9 1.3 Urban WSS Sector Development Plan...... 10 1.3.1 Vision and Objectives ...... 10 1.3.2 Investment Plan ...... 11 1.3.3 Sector Road Map ...... 13 Appendices ...... 19

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

Map of Georgia

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

Output 1 – Sector Development Plan

1.1 Strategic Context

1. Georgia has a population of 4.43 million and serves as an important nodal point for inter-regional trade flows, connecting the South Caucasus and landlocked Central Asia with the Black Sea and Mediterranean basins. The country’s gross domestic product (GDP) was $10.8 billion in 2009 with an annual growth of 5.9% (2004-2009).

2. As a small, open, economy at the cross-roads of Europe and Asia, Georgia’s trade and economic growth heavily depends on developments in neighboring countries and major trade partners. With the global recovery taking hold, Georgia’s GDP grew by at least 6.6% in the first half of 2010 on account of high growth in manufacturing, trade and transportation with the growth forecast revised upward to 5.5% for 2010. The growing demand for, and higher prices of, main export commodities, such as gold and base metals, along with the continued positive outlook for the Russian Federation, still the major source of remittances to Georgia, are now expected to improve Georgia’s trade and current account balances.

3. Foreign Direct Investment (FDI) in Georgia has been the principal driver of economic growth over the last five years and is a major balancing factor for a sizeable trade deficit. According to the National Statistics Office of Georgia, FDI, at its peak in 2007, amounted to nearly 20% of GDP and held on a steady growth path, from single-digit rates prior to 2006 to double-digit rates from 2006 onward relative to GDP — until the onset of the global financial crisis.

4. With the advance of the global financial crisis and a corresponding decline in FDI (to just 5% of GDP in the first half of 2010), the Government had a compelling reason to act in order to offset a significant decline in private demand and investment. As part of its counter-cyclical policy response to the crisis, the Government capitalized on a sizeable fiscal stimulus package in 2009, which was in line with a shift toward domestic expenditure and donor-financed rehabilitation spending. The need for infrastructure improvements was consistent with policies aligned with fiscal expansion. A significant fiscal stimulus in support of large public investment projects would create space and conditions for private demand to take up the slack later on. This was especially justified given the prevailing sectoral profile of traditional FDI into the economy.

5. The service sector accounted consistently for a predominant share of total FDI— over the years of 2007-2010H1, averaging at nearly 60% of the total FDI. As a share of GDP, FDI in the service sector was equal to 10.5% in 2007, while in 2008—amounting to 7.8%—it was well over a half of the total FDI-to-GDP ratio of 12.2%, and the trend continued through 2010. This meant that the service sector-driven basic needs provision through improved municipal services was a key priority, which is highlighted in the context of major urban centers, such as Tbilisi, Rustavi, Kutaisi, Poti and Zugdidi, where larger populations are associated with increased demand for municipal services and greater pressures on service delivery. Urban centers in traditional tourist destinations, such as Kobuleti, Batumi and, most recently, Mestia, serve as important magnets for tourist attraction during holiday seasons, and the development of service infrastructure, such as hotels and resorts, is a priority along with revamping of road and transport infrastructure that links to such key destinations.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

6. Some major investment initiatives are worth highlighting in the context of free industrial zones (FIZs) and free tourism zones (FTZs):

(i) In 2008, RAK Investment Authority of the UAE assumed full ownership of the Poti FIZ, and in April 2009, Fresh Electric Company of Egypt was one of the first major international investors in the second FIZ in Kutaisi, a major city in western Georgia. (ii) Further sizable investments are expected to be channelled into the Poti Seaport and the Kutaisi FIZ in the near future, as anchored by a highly liberal financial regime (with a multi-currency framework in place) and a tax regime that is highly concessional and greatly conducive to doing business in these zones (such as exemption from VAT, customs duties, profit and property taxes for all companies operating in FIZs). (iii) A new “Free Tourism Zone” initiative recently announced by the President bolsters the role of Ajara region as a major site of urban redevelopment and tourism infrastructure and aims to embrace Georgia’s Black Sea coastline with new investments, as businessmen who will immediately commit at least GEL1 million for investment in the construction of the hotel segment will be exempt from profit and property taxes for the next 15 years.

7. With improved prospects for domestic growth and a recovery in the global economy, further increases in GDP are expected to continue to be driven by the service sector, which together with the industrial and manufacturing base will account for a predominant share of new FDI inflows that are expected to significantly raise prevailing capital-output-ratios in the economy. The service sector alone is expected to gain more than 50% of new investments, leading to an increase of its share in the total FDI to 70%, and is expected to operate at an increased margin of demand, thereby placing further pressures on core basic services provision.

8. The Government is also addressing poverty reduction through its Targeted Social Assistance (TSA) Program. The TSA aims at subsidizing living cost of the poorest but has had limited success since vulnerable groups remain slightly below poverty threshold and economic conditions have so far not improved to the extent allowing vulnerable households to transfer to medium social levels of income. The Government is improving the targeting mechanism of the TSA Program but also realizes that creating employment opportunities is the most important solution to poverty reduction.

9. As the cities and large urban centers are predominantly targeted, investments are creating new employment opportunities that condition further rural-to-urban migration and weigh down on city/secondary town infrastructure and urban service provision, such as water and sanitation, with growing impacts on the habitats and concomitant public health implications. This underscores the importance of urban infrastructure projects in terms of shifting accountability and responsibility for municipal service delivery and provision to effectively address pressing service needs at the local level.

10. Investment in Municipal Services. Recognizing that improving core basic services (water supply, sanitation, and waste management) is important for the survival of cities/towns and sustainability of the economy, through the Ministry of Regional Development and Infrastructure (MRDI), the Government has undertaken various initiatives to improve municipal services and infrastructure across the country in urban centers.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

11. In particular, the Government has mobilized significant external financing for developing municipal services and infrastructure with bulk of the financing coming from donors (approximately $450 million has been mobilized from 1997 to date). Funds were channeled through the Municipal Development Fund (MDF)1 with a combination of on- lending and granting to local governments. Investments in the past were spread across all local bodies in the country. Consequently, service efficiency was not improved significantly though sections of ageing or dilapidated infrastructure were rehabilitated or replaced.

12. The Urban Water Supply and Sanitation (WSS) sector has received approximately $285 million of donor financing. However, investment in WSS infrastructure has been insufficient and the sector continues to be plagued by poor service. Until 2009, 66 water companies provided WSS services to local bodies across the country except Tbilisi and the peri-urban cities of Rustavi, Mskheta, and Gardabani, which were served by 4 independent water companies and were privatized in 2008 with the assets sold to the Georgia Water and Power Company. Institutional reforms in 2009 saw the amalgamation of the 66 water companies into 3 companies: East, West and Adjara. Subsequently, in 2010, the Government further consolidated two water companies (East and West water companies) with the Water Supply Regional Development Authority forming the United Water Supply Company of Georgia (UWSCG).2 The Adjara or Batumi Water Company (BWC) continues to serve the Adjara Autonomous Region.

13. Urban WSS services are now provided by three service utilities:

(i) Georgia Water and Power (GWP), which serves Tbilisi and the peri-urban area and covers 31.8% of the country’s population. Being a privatized company, its business plans including service standards and revenue recovery mechanisms are regulated by the Georgia National Energy and Water Supply Regulatory Commission (GNEWSRC). (ii) Batumi Water Company and Adjara local self-governments that serves the Adjara Autonomous Region (8.6% of the country’s population). The development plans for the BWC are governed by the unique development vision of the autonomous region. Further, investments in the region have already been identified and financing tied up through KfW. (iii) UWSCG that serves the rest of the country (58.5% of the country’s population). UWSCG has 3 organizational tiers comprising a Central Office, six regional branches and 56 service centers covering 54 cities and towns.3

14. Table 1 below summarizes WSS services by each of the above-mentioned service provider.

1 MDF is a state owned financial intermediary designed to mobilize financing and support implementation of priority infrastructure projects across the country. MDF is a legal entity under a public law established by a Presidential Decree under the state program for the Municipal Sector Development and currently reports to the MRDI. It mobilizes funds from international finance institutions, donor agencies, as well as national and local governments of Georgia. A Supervisory Board established by a government decree and headed by the Prime Minister is responsible for MDF management. MDF’s projected annual turnover for 2010 is $216 million. 2 UWSCG is a Limited Liability Company created under the “Law of Georgia on Entrepreneurs” with a capitalization of $31.8 million and it reports to the MRDI. 3 The Bakuriani Service Center is under Borjomi town, and the Sartichala Service Center is under Sagaredjo town.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

Table 1: Urban WSS Service by Service Provider

Source: GeoStat, UWSCG, GWP, Batumi Water.

15. This document lays out the Government’s strategic vision and objectives for the urban WSS sector, with a particular emphasis upon problems and constraints from the perspective of UWSCG. This approach is adopted because UWSCG covers 90% of the country’s geographical area and approximately 60% of the population, including economically strategic urban centers discussed above. In this context, this document lays out the Government’s strategic vision and objectives for the sector and an Investment Plan for the towns and cities served by UWSCG.

16. The development and investment plan for GWP and Adjara is outside the purview of this document as they have a separate plan. Moreover, given its different context, problems and constraints, the Government is preparing a separate development plan for the rural sector. However, those institutional, legislative and regulatory features that are common to each aspect of the broader water sector, and therefore the operations of all utilities in the country, are addressed in this document. 1.2 Urban WSS Sector Problems and Constraints

1.2.1 Technical Sustainability and Environmental Protection

17. Access to Services. While 88% of the country’s urban population has access to a piped water supply network, only 70% urban population in the region served by UWSCG has piped water supply. Only 15% of the urban population in the same region has access to a reticulated sewage disposal system. The existing WSS infrastructure is dilapidated and investments in the sector have not improved the situation significantly. Nonrevenue water is high at over 60% and limited information on underground assets (water and sewer network) constrains investment decisions as system improvements with limited information do not provide the desired outcome of better services. The absence of a functional sewer network in cities and towns also negatively impacts public health; there is high dependence on individual sanitation units especially pit latrines that do not provide a safe and hygienic method of sewage disposal.

18. Absence of sewage treatment plants (STPs) and non-functional STPs in certain towns and cities also negatively impact the environment through pollution of rivers and streams.4

4 Appendix 1 summarizes urban WSS services in the towns served by UWSCG.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

19. Household Coping Strategies. A recent socioeconomic survey indicated:5

(i) Almost 64% of customers served by UWSCG experience intermittent service (less than 24hours) and only 25% of the service centers provide continuous water supply; (ii) Only 57.4% of the surveyed households are connected to the water supply network, 32.7% of households have home water supply from alternative sources, and 8.9% of households do not have a water supply at home and obtain water from surface water (ponds, canals, irrigation channels and drainage canals); (iii) Of those having access to pipe water supply, almost half receive water 3-4 days per week and for 2-4 hours per day; (iv) Coping strategies to overcome shortcoming in water supply include purchase of storage tanks with water pumps, and construction of wells or boreholes. Only a small proportion of households (2%) tried to improve the quality of water before using it for drinking and cooking, either in the form of filtering or boiling. Average water related costs are GEL2.5 ($1.4)/month; (v) Over one-third of households (38.2%) are connected to a functional central sewerage system; and, (vi) There is a significant lack of knowledge and information on the importance of WSS services among minorities.

20. Key Issues and Considerations. Clearly, there is an urgent need to increase investments in improving urban WSS infrastructure. The current poor condition of the assets implies that incremental investments in infrastructure improvement will not result in better WSS services unless there is a comprehensive review of the asset condition and infrastructure designed accordingly. Current system operational practices should also be considered while designing the infrastructure replacement or rehabilitation.

1.2.2 Institutional and Financial Sustainability

21. The State Commission on Water Supply and Energy (SCWSE)6 provides policy direction for the WSS sector while MRDI is responsible for infrastructure development, investment guidance, and administration of line agencies.

22. Economic and service standard regulation of the sector is through the GNEWSRC while environmental regulation is through the Ministry of Environmental Protection and Natural Resources (MEPNR). The Ministry of Agriculture and Food Safety (MAFS) is responsible for drinking water quality assessment. Current institutional responsibilities are detailed in Table 2 below.

5 Appendix 2 summarizes the social and gender development strategy for the urban WSS sector developed as a part of Output 2 of the PATA. 6 Established through the Presidential Decree #284 on 30 May 2008, members include: Prime Minister – Chair, Minister of Regional Development and Infrastructure, State Minister for Integration into European and Euro-Atlantic Structures, Minister of Economy and Sustainable Development, Minister of Energy, Minister of Finance, First Deputy Minister of Environment Protection and Natural Resources, First Deputy Minister of Energy, Deputy Minister of Regional Development and Infrastructure, Deputy Minister of Justice, Senior Advisor to Prime Minister, Advisor to Prime Minister, Manager of Georgian State Electro- systems Ltd, Director of Georgia United Water Supply Company Ltd, Executive Director of Municipal Development Fund, Chair of Georgia Energy and Water Regulatory Commission, and General Director of Georgia Oil and Gas Company Ltd.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

Table 2: Institutional Responsibilities7 Institution Policy Planning Implementation Management Regulation SCWSE  MRDI    MEPNR    MAFS   UWSCG     GNEWSRC  Sources: MRDI.

23. Utility Operations. From a service delivery perspective, it is critical to strengthen UWSCG’s staff capacity and management skills. The UWSCG’s current organizational structure comprises 2,910 positions of which 2,632 (90.45%) are filled and 278 (9.55%) are vacant. A large number of the management staff are new to the sector and require significant training in various aspects of utility management. Staff at the regional centers and service centers also require training in long-term capital planning and asset strengthening, procurement, supervision of capital improvement works, operation and maintenance, and financial management.

24. Absence of appropriate capacity building initiatives for UWSCG staff impedes their ability to improve the quality of WSS service and also redress comprehensively customer complaints. In addition to training on technical and system operation and maintenance, key areas of capacity building of UWSCG staff include:

(i) Accounting is based on national accounting standards and the Financial Accounting Division is currently preparing a financial management manual to guide staff in applying national accounting practices. Staff will need training on international accounting standards and on international financial reporting standards to improve operational efficiencies when the transition is made in the medium-term. (ii) Budgeting. Capital planning, tariff review and calculation, and budget preparation and coordination are carried out by the Financial and Economic Division and based on national budgeting guidelines. The staff will need adequate training on preparing business plans that meet commercial operational efficiencies for submissions to the GNEWSRC. Determining tariffs in the short-term to meet revenue requirements and in the long-term to meet long-run marginal costs taking cognizance of socially equitable principles will be a key function the staff will require training on. (iii) Procurement is centrally-managed and the staff is currently conversant with national procurement procedures only. Activities are largely related to procurement of regular maintenance goods and procurement of civil works and goods under donor financed WSS projects is conducted with MDF support. Over the immediate term, UWSCG staff capacity should be developed to handle international competitive bidding for civil works, equipment and machinery, and turnkey projects.

7 Appendix 3 summarizes the institutional arrangements in the urban WSS sector.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

25. Currently, UWSCG has no internal audit department. The GNEWRC, at present, does not require utility companies that it regulates to submit audited financial statements. While the UWSCG is currently not subject to an external audit, it proposes to conduct an audit of its 2010 financial statements by an external auditor. In the medium-term, UWSCG will need to have its internal audit department.

26. Financial Performance. UWSCG’s 2010 approved revenue budget is $19.5 million (see Table 3 below), with non-domestic consumers accounting for 67% of the tariff revenues and domestic consumers accounting for 33% of the tariff revenues. UWSCG’s revenue collection efficiency for the first half of 2010 is 72% (49% domestic and 94% non- domestic), and the poor performance is attributed primarily to non-payment of tariffs by consumers as a result of poor WSS services and inefficient collection systems. For the same period, its revenue is $3.62 million while expenditure is $6.65 million; therefore, requiring a 50% Government subsidy. The expenditure budget for 2010 balances out with the revenue budget, but the expenditure is constrained by the limited funds available to the UWSCG and does not reflect the actual cost required to provide efficient WSS services.

Table 3: UWSCG 2010 Budget ($ million) Item Amount % A. Revenue Customer Charges 8.1 41.2 National Government Subsidy 10.6 54.4 Local Self-Government Transfer 0.9 4.4 Total – Revenue 19.6 100.0 B. Expenditure Operation and Maintenance 15.7 80.5 Co-Financing 0.8 4.2 Interest and Principal Repayment 1.1 6.0 Head Office’s Project Preparation Activities 1.4 7.0 Capital Cost 0.5 2.3 Total – Expenditure 19.5 100.0 Source: UWSCG.

27. Price Setting and Revenue Recovery. The average residential WSS tariff approved by the GNEWSRC in August 2010 was $0.20/m3 while UWSCG’s tariff estimates, based on revenue recovery, showed $0.30/m3.8

Table 4: Regulated UWSCG WSS Tariffs Budgetary (Government) Population (Residential) and Non-budgetary Item (Commercial/Industrial) $/m3 $/person/month $/m3 Water Supply 0.20 1.77 3.40 Sanitation 0.07 0.63 0.90 Total 0.27 2.40 4.30 Source: UWSCG.

8 Revenue estimated to recover operation and maintenance, taxes, depreciation of assets and return on capital.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

28. Clubbed with poor collection efficiency, the gap is expected to widen over time, if adequate revenue enhancement and prudent financial management measures are not implemented expeditiously. Tariff recovery is a key issue across the sector and shortfalls in recovery immediately affect the quality of service provided.

29. The price setting process should, in the longer term, be based on complying with a revenue requirement that is sufficient to meet the service provider’s level of service obligations as set out in statutory standards, or in compliance with levels specified as interim targets in any derogations to meeting such statutory standards.

30. The levels of service in Georgia currently do not meet the required overall standard of supplying potable water to all customers in the defined service areas on a continuous basis at above a minimum prescribed pressure, and it may be many years before such a standard is attained throughout the service providers’ areas of supply. For the foreseeable future, ‘standards’ should be set aside through derogations and replaced with ‘interim targets’ on an area-by-area basis with a view to achieving a longer-term aim of fully satisfying statutory standards.

31. The price setting process should be developed in two phases:9

(i) A transitional phase until the end of 2013, where prices are set to meet immediate budgetary cash flow requirements on an annual basis; and, (ii) A multi-year regulatory framework, whereby prices are set on the basis of financing the activities (operational and investment) that are designed to meet the level of service targets required within the regulatory cycle.

32. Prior to the adoption of a multi-year pricing cycle, prices will still need to be adjusted on an annual basis to meet the cash flow requirements of the service providers. The current high level of subsidy (and the Government’s intention to phase it out as soon as possible) and the costs of financing a significant investment plan in the future will undoubtedly impose significant upward pressures on prices. It is recommended that the short-term price adjustment proposals be used as an opportunity to send market signals and for prices to be allowed to rise accordingly. The additional revenues will be employed to improve levels of service and bolster the financial standing of the UWSCG. Social consequences and impact on the poor should be examined carefully before any price increases are affected.

33. Key Issues and Considerations. The UWSCG will need capacity building in the development of short-term levels of service targets and expectations, preparation of appropriate corporate and business plans10 and tariff submissions in accordance with the regulatory business planning framework and pricing policies/models, assistance in the implementation of regulatory/policy requirements (e.g., new pricing structures), technical assistance in the development of improved operational and commercial practices in order to meet the efficiency improvement expectations as set out in the business planning targets, capital investment (over and above the investment for infrastructure development) for the development of appropriate water quality and wastewater discharge quality monitoring and control systems (laboratories etc.), and the training and development of the staff employed to operate such systems (chemists, laboratory technicians etc.).

9 Appendix 4 summarizes the urban WSS sector tariffs developed as a part of Output 3 of the PATA. 10 The business plan framework will comprise an asset management plan, operational plan, commercial plan, and financing plan.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

1.2.3 Enabling Legal and Regulatory Framework

34. Legislation Associated with the Sector. The Water Law is the principal legal instrument for the wider environmental and water resources regulation. Law 816 on Electrical Energy and Natural Gas is the foundation of GNEWSRC’s powers of economic regulation and responsibilities, but requires amendment to include the specific requirements of the water sector. Additionally, GNEWSRC Decree 18 provides guidance on water supply tariff setting methodology, and GNEWSRC Decree 32 provides drinking water consumption rules that are associated with sector regulation. Regulatory functions of other institutions involved in sector regulation are governed by specific legal instruments.

35. Sector Regulation. Various agencies and their responsibilities for sector regulation include:

(i) Health – Ministry of Labor, Health and Social Affairs (MLHSA) for setting drinking water quality standards and MAFS for ensuring compliance with standards; (ii) Environmental – Raw water abstraction and water resources management: Ministry of Economic Development for issuing licenses and permits for abstraction, riparian rights, and MEPNR for ensuring compliance; MEPNR for setting and monitoring wastewater discharge standards, and for setting and monitoring sludge disposal standards; (iii) Service Standards – GNEWSRC for setting water supply and wastewater standards of service (service coverage, pressure, reliability and customer services) and targets for the achievement of compliance, and monitoring and enforcement of compliance against pre-determined targets / obligations; and, (iv) Economic – GNEWSRC for approving prices/tariffs and monitoring of financial performance (non-financial performance monitoring included in ‘service standards’).

36. Overlap of institutional functions and a weak legislative framework characterize sector regulation. Prevailing legal instruments associated with the institutions do not clearly define responsibilities in the sector, especially with respect to regulation where the assignment of responsibilities is weak; in particular, the setting of (and ensuring compliance with) quality and service standards.

37. The main sector regulator – GNEWSRC – has, generally, insufficient information to challenge price proposals and enforce compliance with level of service targets, and there are no criteria against which price setting and performance can be evaluated. The principal role of the GNEWSRC is an economic regulator, and ideally, it needs to be satisfied that the information presented in the tariff submissions by the service providers is based on the rationale of meeting specific levels of service obligations, which require the development of comprehensive business plans with detailed expenditure and sales projections designed to meet such obligations as set out in Government policy guidance.

38. The challenge facing the GNEWSRC is that, without such guidance, it is difficult to scrutinize plans to ensure that they meet requirements. What is not set out in the law and regulations is the role of GNEWSRC in monitoring and enforcing compliance with standards. It should be the role to the GNEWSRC to monitor progress and performance against the service providers’ business plans, and take action if they are not performing as planned.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

39. Key Issues and Considerations. The institutional capacity of the GNEWSRC is potentially very strong; but despite highly qualified staff, GNEWSRC has capacity limitations, and in the water sector, a lack of experience of WSS services regulation. They presently depend heavily upon lessons learned from the energy sector, which has different requirements. The relationships with other regulatory bodies (e.g., environment and health) are not defined, and therefore, a coordinated regulatory approach is difficult to achieve. Strengthening the GNEWSRC’s capacity in terms of evaluating price proposals, monitoring service utility performance, and determining the coordination role with other ministries is critical to ensure that service utilities maintain performance standards. The GNEWSRC’s functions require strengthening to review business plans, approve tariff proposals, monitor UWSCG operations and performance with regards service standards, and use regulatory tools. Various legislations will need amendment based on the sector regulatory roles and responsibilities identified for each institution.11 Additionally, support will be required for:

(i) The MEPNR – for the development of improved environmental regulatory requirements including, enhanced water resources abstraction licensing framework, effective water resources abstraction reporting and monitoring system, wastewater discharge and sludge disposal licensing framework, effective wastewater discharge quality and sludge disposal monitoring system; and, (ii) The National Service of Food Safety, Veterinary and Plant Protection (NSFSVP) within MAFS – in the development of a water quality regulatory framework founded on the concepts of risk-based audits, the establishment of an effective audit mechanism, the development of reporting systems, and the application of necessary enforcement measures. 1.3 Urban WSS Sector Development Plan

1.3.1 Vision and Objectives

40. To address the problems and constraints prevalent in the urban WSS sector – associated with technical sustainability and environmental protection, institutional and financial sustainability, and enabling legal and regulatory framework – MRDI has developed this urban WSS Sector Development Plan (SDP) with a vision to ensure continuous and reliable water supply and safe sanitation services to all of Georgia’s urban population by 2020.

41. The SDP’s objectives include:

(i) Technical Sustainability and Environmental Protection:  Providing WSS infrastructure to progressively achieve full water supply and sanitation service coverage of all urban households;  Ensuring implementation of asset management and strengthening programs for better operation and maintenance of WSS infrastructure, leading to efficient service delivery; and,  Introducing appropriate mechanisms for environmental protection, by maintaining drinking water quality standards, ensuring treatment and discharge of domestic and industrial effluents, and ensuring water resource protection from abstraction and pollution.

11 Appendix 5 summarizes the urban WSS regulatory framework developed as a part of Output 4 of the PATA.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

(ii) Institutional and Financial Sustainability:  Improving the institutional effectiveness of service utilities, by implementing an enterprise resource management plan, infusing public- private partnerships, and undertaking a customer outreach program, leading to a healthy fiscal status of the service utilities and improved hygiene and sanitation condition of urban households; and,  Improving sector governance through efficient financial management, operational and commercial efficiency of service utilities. (iii) Enabling Legislative and Regulatory Framework: Providing an enabling legal and regulatory (economic, service standard, environmental and health) framework for WSS services, and strengthening the capacity of the GNEWSRC to effectively regulate service standards and approve tariffs, the MEPNR for environmental monitoring, and the MAFS for drinking water quality monitoring.

1.3.2 Investment Plan

42. To meet the vision and objectives laid out in the SDP, the Government’s Investment Plan for urban WSS focuses on physical and non-physical interventions. Physical interventions will address the technical sustainability and environmental protection objectives, while non-physical interventions will address the institutional and financial sustainability, and enabling legislative and regulatory framework objectives. By providing fiscal space for these interventions, the Government will ensure that WSS services are improved and there is adequate regulation of the services to ensure delivery standards are met. These interventions address medium-term (2011-15) and long-term (2016-20) needs.

a) Physical Interventions

43. By providing physical interventions, the Investment Plan will help address the shortfall in infrastructure financing for the sector. This will include: (i) water supply intake, pumping, treatment, transmission, storage and distribution systems; (ii) sewerage network, pumping and treatment plants, and septic tanks for low-density areas; and, (iii) WSS system maintenance equipment and machinery. Physical infrastructure is estimated to cost $1.57 billion and comprises $819 million (approximately 52%) in water supply, $728 million (46.5%) in sanitation, and $23 million (1.5%) in maintenance vehicles and equipment (see Table 5).12

Table 5: Physical Interventions ($ million) Item 2011-15 2016-20 Amount Share Water Supply Augmentation 2.50 0.50 3.00 0.19% Treatment 66.00 14.00 80.00 5.10% Pumping 5.00 1.00 6.00 0.38% Storage 9.00 2.00 11.00 0.70% Transmission 236.50 53.50 290.00 18.47% Distribution 311.00 75.00 386.00 24.59% Meters 35.00 8.00 43.00 2.74% Total - Water Supply 665.00 154.00 819.00 52.17%

12 See Appendix 6 for Detailed Investment Plan.

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Sector Development Plan

Item 2011-15 2016-20 Amount Share Sanitation Sewage Treatment 135.00 39.00 174.00 11.08% Sewers 414.50 69.50 484.00 30.83% Septic Tanks 56.50 13.50 70.00 4.46% Total - Sanitation 606.00 122.00 728.00 46.37% Vehicles and Equipment 14.00 9.00 23.00 1.46% Total 1,285.00 285.00 1,570.00 100.00% Source: UWSCG estimates.

b) Non-Physical Interventions

44. Non-physical interventions will include: (i) capacity development and institutional support to the UWSCG and the GNEWSRC; and, (ii) design engineering and construction supervision support to the UWSCG. By providing capacity development to UWSCG and GNEWSRC, the Investment Plan will pave the way for long-term efficiency improvements in the WSS sector.

45. The support to UWSCG may include (but not necessarily limited to) experts to help improve water supply and sanitation business planning, asset management planning, commercial planning and implementation, accounting and financial reporting, financial analysis and modeling, capital projects implementation and procurement, and communications. These resources are anticipated to be employed on a nearly full-time basis for the lead-up to the first multi-year price submission, but thereafter, periodic and intermittent inputs will be required to assist the UWSCG with the post-submission activities, including regulatory reporting and assistance in improving operational efficiency as per the requirements of the business plan.

46. Non-physical interventions are estimated to cost $70 million, and will include capacity building and public relations improvement for the UWSCG and project management support in terms of infrastructure design engineering and construction supervision. Institutional support and effective financial management will ensure that funds are available for system operation and maintenance. In the medium-term, the Government will provide for viability gap funding and ensure steady stream of cash flows to the UWSCG so that system maintenance is not compromised.

47. The Investment Plan is estimated at $1.645 billion (Table 6) and the current financing plan aims to mobilize about 50% from donors (Table 7).

Table 6: Urban WSS Investment Plan Estimates ($ million) Share of Item 2011 - 2015 2016 - 2020 Total Total (%) Infrastructure 1,285.00 285.00 1,570.00 95.44 Improvement Institutional 15.00 5.00 20.00 1.22 Effectiveness Project Management 45.00 10.00 55.00 3.34 Total 1,345.00 300.00 1,645.00 100.00 Source: UWSCG and MRDI Estimates.

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Table 7: Financing Plan Amount Share of Total Source ($ million) (%) Proposed ADB Financing 500.00 30.40 Cofinanciersa 300.00 18.24 Government 845.00 51.36 Total 1,645.00 100.00 a Under discussion. Source: UWSCG and MRDI estimates.

1.3.3 Sector Road Map

48. To achieve the SDP vision and implement the Investment Plan, the Government has formulated a sector road map that clearly defines the actions to meet SDP objectives, the institutions responsible, and the targets or indicators that will help the Government measure its performance. A defined time frame or milestone will help the Government program and plan its actions (Table 8).

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Table 8: Urban Water Supply and Sanitation Sector Road Map Sector Policy and Institutional Target/Indicator Actions and Description Development Objectives Responsibility and Timeframe A. Technical Sustainability and Environmental Protection 1. Asset Creation. Provide a. Classify towns based on current levels of service and MRDI and – Preliminary Investment WSS infrastructure to identify comprehensive infrastructure improvement UWSCG Plan based on normative progressively achieve full requirement to address city development strategies before standards developed by service coverage with a expanding services across all 56 towns and cities. Jun 2011. continuous and reliable b. Prepare a capital investment plan for short (2013), medium – Final Investment Plan water supply and safe (2017) and long-term (2020) for urban WSS sector that will based on detailed sanitation services. address current back-log and future demand. engineering designs progressively completed between 2011 and by 2017. 2. Asset Management. a. Create a geospatial WSS utility management system that UWSCG – Geospatial WSS utility Ensure better operation and will capture WSS asset information and condition in all management system maintenance of WSS towns. completed for Kutaisi, infrastructure to provide b. Ensure asset management and strengthening to: (i) provide Poti, Marneuli, Mestia, efficient services. water supply of suitable quality, frequency, and pressure; Zugdidi and Anaklia by and, (ii) provide adequate sanitation service coverage, and Jun 2011. safe treatment and disposal of domestic sewage and – Geospatial WSS utility industrial effluent. management system for c. Introduce public-private partnerships in system operation remaining 50 centers and maintenance (e.g., commence with high-skilled completed by 2016. requirement like sewage treatment plants). – PPP intervention with UWSCG concluded by 2013. 3. Environmental Protection. a. Program adequate investments in water treatment and MRDI, MESD, – Relevant national Maintain drinking water water quality testing equipment and laboratories, and UWSCG, legislations and Water quality standards, and amend national legislations to provide the MEPNR GNEWSRC, Law amended by 2013. ensure water resource adequate policing and enforcement powers. MEPNR, and protection from abstraction b. Ensure enforcement of existing licensing system for both MAFS and pollution ground and surface water abstraction.

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Sector Policy and Institutional Target/Indicator Actions and Description Development Objectives Responsibility and Timeframe c. Program adequate investments in wastewater treatment to ensure treated effluent quality meets national standards and water resources are protected from pollution threats; the MEPNR shall introduce a statutory and price mechanism to ensure that the “polluter pays” concept is effective. B. Institutional and Financial Sustainability 1. Institutional a. Design and establish improved organizational structures MRDI and – UWSCG Business Plan Effectiveness. Implement and practices, including delegation of responsibilities (and UWSCG for 2013 to include human an enterprise resource budgets) to regional offices. resource management management plan in utilities b. Enhance utility staff capacity at the managerial-level plan. and customer outreach through public-private partnerships and twinning programs – First Water Management program to improve with service utilities outside Georgia, and enhance technical Program with GTU institutional effectiveness of staff capacity through a Water Management Program in commenced in 2012. utilities. collaboration with educational institutions in Georgia. – GNEWSRC staff trained c. Conduct consumer outreach programs on water, hygiene in using tools and and sanitation practices, tariff payments, and infrastructure systems by 2013. improvement plans through customer care units at Utility – Consumer outreach service centers. program commenced in d. Institute a grievance redress mechanism to address 2011. technical and (environmental and social) safeguard issues associated with Utility operations. d. Ensure capacity building of GNEWSRC to effectively review business plans, tariff proposals, monitor UWSCG operations and performance with regards service standards, and use regulatory tools. 2. Improved Governance. a. Prepare a 3-year Business Plan with annual operations MRDI, UWSCG, – UWSCG’s first 3-year Ensure improved financial plan focusing on measures to reduce non-revenue water, and GNEWSRC Business Plan developed management, operational optimize energy usage, improve human resource by 2013. and commercial efficiency management, and enhance revenues through improved of utilities. billing and collection.

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Sector Policy and Institutional Target/Indicator Actions and Description Development Objectives Responsibility and Timeframe b. Establish an improved financial accounting and reporting – Improved accounting, system, internal audit and controls systems, and auditing, and procurement and inventory management system. procurement systems c. Plan full metering of domestic and non-domestic established by 2013. consumers by 2020 on a progressive basis by addressing – Full metering in all 56 non-domestic and houses with gardens, and areas service centers by 2016. receiving 24-hour service first, and expanding further based Short-term tariffs on the financial viability established by the GNEWSRC and established in 2010, UWSCG. medium-term tariff d. Review potentials of setting WSS tariffs to meet revenue established in 2014, and requirements in the medium-term (till 2017) and in the long- long-term tariffs by term based on long-run cost analysis to include revenue to established by 2020. recover operation and maintenance, taxes, depreciation of assets and return on capital based on socially equitable principles. e. Review the practicality and sustainability of continuing subsidies to the Utility to maintain current levels of service and subject to improved financial performance of the UWSCG. C. Enabling Legal and Regulatory Framework 1. Oversight of economic and a. Conduct a multi-year regulation (3-year cycles) with the first GNEWSRC in – Multi-year regulatory service standard regulation regulatory cycle to commence in 2014, and develop coordination with directives, accounting and UWSCG operations. directives on regulatory cycle and process, and regulatory MRDI, MEPNR guidelines, reporting reporting and control. and MAFS tools and control b. Develop improved regulatory tools and systems that include systems established by a business planning framework, regulatory accounting 2013 (technical guidelines, tariff design and
modelling, performance assistance financed monitoring and control, legal procedures, etc. using donor funds).

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Sector Policy and Institutional Target/Indicator Actions and Description Development Objectives Responsibility and Timeframe 2. Environmental and Health a. Develop for MEPNR improved environmental regulatory MEPNR and MAFS – Environmental Regulation requirements including, water resources abstraction regulatory and licensing licensing framework, effective water resources abstraction framework, reporting reporting and monitoring system, and effective wastewater and monitoring systems discharge quality and sludge disposal monitoring system developed for MEPNR b. Based on World Health Organization standards for drinking by 2013. water, develop for NSFSVPP within MAFS a water quality – Water quality regulatory regulatory framework founded on the concepts of risk framework, reporting based audits, establish an effective audit mechanism, and monitoring systems develop reporting systems and necessary enforcement developed for MAFS by measures. 2013. 3. Legislative Framework a. Amendments to Law 816 on Electrical Energy and Gas to UWSCG, – Law 816 on Electrical (i) adopt a multi-year regulatory cycle; and (ii), redefine GNEWSRC, Energy and Gas return on assets to return on capital invested. MEPNR and MAFS amended by 2013. b. Introduce a new legal instrument to temporarily exempt – Presidential decree UWSCG from the provisions of GNEWSRC Decree 18 on exempting UWSCG price setting methodology until the new multi-year from provisions of framework is established. GNEWSRC Decree 18 c. Amendments to the Law on Public Health and MAFS order on price setting 44 to (i) grant greater powers to NSFSVPP with respect to methodology till 2013 water quality regulation; (ii) to grant authority to GNEWSRC issued in 2011. to exempt service providers from compliance with water – Law on Public Health quality standards until the infrastructure is in place to and MAFS order 44 ensure such compliance. amended by 2013. – Water Law amended by 2013. GNEWSRC = Georgia National Energy and Water Supply Regulatory Commission GTU = Georgia Technical University MAFS = Ministry of Agriculture and Food Safety MEPNR = Ministry of Environmental Protection and Natural Resources MESD = Ministry of Economic and Sustainable Development MRDI = Ministry of Regional Development and Infrastructure NSFSVP = National Service of Food Safety, Veterinary and Plant Protection SCWSE = State Commission on Water Supply and Energy UWSCG = United Water Supply Company of Georgia LLC

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Appendices

Appendix 1: Urban WSS Services in UWSCG Towns Appendix 2: Social and Gender Development Strategy (Summary) Appendix 3: Institutional Arrangements Appendix 4: Urban WSS Tariffs (Summary) Appendix 5: Urban WSS Regulatory Framework (Summary) Appendix 6: Detailed Investment Plan Appendix 7: City Database Appendix 8: Service Center Database and RIA Results

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Appendix 1: Urban WSS Services in UWSCG Towns

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Notes: No available data for unaccounted for water towns covered by GWP, Sachkhere, Batumi Water, and other towns within Adjara Autonomous Region. No data on daily water supply for towns in Adjara region and Sachkhere Sources: Population estimate based on GeoStat data, UWSCG, and PATA-RIA

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Appendix 2: Social and Gender Development Strategy (Summary)

A. General Situation of Poverty and Gender in Georgia

1. Country-Level

1. Widespread poverty has been a major unresolved problem for the Georgian population since independence in 1991. According to official statistics (2009), over one- fifth of the Georgian population (22.1%) lives in poverty, and a tenth (9.4%) lives in extreme poverty. The current official Geostat threshold of poverty is set at GEL89.7 ($51.25) per person per month – 60% of median consumption in 2009, and the threshold for extreme poverty is set at GEL61.1 ($34.91) – 40% of median consumption in 2009.

2. The Government adopted the Millennium Development Goals (MDGs) and has declared the reduction of extreme poverty to less than 4% by 2015 as a national objective. Georgian State policy for poverty reduction is based on macroeconomic stability, economic development, especially related to services, agro industry and tourism, as stated in the ‘United Georgia Without Poverty’ document. In 2007, the Government introduced Basic Data Directions (BDD) document linked to annual progress reports and the MDGs’ targets, which enabled the link between macroeconomic development indicators and social welfare.

3. Recent economic growth has occurred, but it has no impact yet on unemployment and poverty rates. Urban unemployment is estimated to be five times higher than in rural areas; nevertheless, urban incomes are higher than rural.

4. Gender gaps persist in employment and pay. The rapid rise in unemployment since the armed conflict with Russia has increased competition for jobs and resulted in increasing financial insecurity for women. Being married and having children is considered by potential employers to be a disadvantage, and maternity benefits are not always provided despite the legal requirement to do so. Therefore, women are less likely to be employed in the private sector, while public sector jobs are being reduced as part of Government’s macroeconomic policy. Women’s economic activity rate (54.3%) is much lower than men’s (74.6%). Occupations, in which women work (in education, healthcare and social assistance, hotels and restaurants), have low average incomes. According to 2005 data of the Department of Statistics, women in the public sector earned an average of GEL89.3 ($51.02) monthly while men earned an average of GEL184.1 ($105.2) monthly.

5. In the urban water supply and sanitation (WSS) sector, the participation of women still needs to be increased. According to the Human Resource Department of the United Water Supply Company of Georgia (UWSCG), around 35% of employees are women, with a large proportion in administrative tasks. In top management, 4 out of 14 department heads (30%) are women. A career development plan for UWSCG is not yet in place and there are current plans to create a computerized database of UWSCG employees, which would allow sex-disaggregated analysis of human resource management. At the policy level, the representation of women in the State Commission on Water Supply and Energy is low, with only 2 women among the 19 members.

6. There are a very large proportion of female-headed households in Georgia (i.e., 36% in 2007). Some have husbands working outside Georgia, leaving their women to take over all household’s responsibilities.

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7. In 2007, the World Bank Poverty Assessment reported that the incidence of poverty among female-headed households (25%) was higher than among male-headed households (23.1%), and significantly greater in terms of incidence of extreme poverty. 8. There are, 130 000 Internally Displaced Persons (IDPs) in Georgia, of which 61% live in private house and 39% in collective centers1. The housing conditions of IDPs in collective settlements are extremely poor. In some cases, there are entire floors with several families sharing one toilet. IDPs have fragmented families, and find it more difficult to get bank credit because they seldom own property. 9. Two main groups of ethnic minorities live in Georgia: Azeri’s comprise 6.5% of total population; and, Armenians 5.7%. Women (and men) from ethnic minorities, aged 20 and above, are unable to speak or write in Georgian. The communication between ethnic groups is reduced since the official Government language changed from Russian to Georgian after the Rose revolution. Minority school children are now learning Georgian language, but the economically active age group are unable to do so, which puts them at a disadvantage when seeking work or understanding laws and regulations. 10. Azeri girls do not always complete their state education due to cultural norms of early marriage, which puts them at further disadvantage. Low levels of education of women in households are correlated to higher poverty rates in households, where no women over 15 years old have education at secondary level. Armenian cultural norms discourage women’s participation in decision-making. 2. Institutional Framework

11. Government’s social responsibility is predominantly under the regional departments and municipal services of the Ministry of Labor Health and Social Affairs (MLHSA). The Social Service Agency (SSA) was created in 2006, under the MLHSA, to administer social benefits, including scholarship grants, pensions, targeted social assistance and health insurance. SSA regional and district branches are in-charge of identifying social beneficiaries, delivering benefits and monitoring the distribution. The SSA has specific social programs: categorical benefits for specific disadvantaged or “deserving” groups, including IDPs, orphans, disabled people, World War II veterans, and victims of political repressions; maternity and childcare; and, household allowance and social allowance for families under the poverty line, otherwise called Targeted Social Assistance (TSA). Regarding minority issues, an Ombudsman works independent of the Government to address grievances of the general public. 12. A key element for poverty reduction is the program of TSA that aims at subsidizing living cost of the poorest. However, TSA has had limited success since vulnerable groups remain slightly below poverty threshold, and economic conditions have so far not improved to the extent that vulnerable households have not transferred to medium social levels of income. 13. About one-third of officially poor households and 40% of extremely poor households receive no social assistance at all.2 Free health insurance for vulnerable families is concentrated in the poorest quintile of households; however, even in this group, only about 21.3% are covered.

1 Source: Ministry of Internally Displaced Persons from the Occupied Territories, Accommodation and Refugees of Georgia. 2 Source: UNICEF 2009.

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14. Even if Georgia can be considered more advanced in gender equity than several Eastern European and CIS countries, still much remains to be done. The Government has recently made some progress in addressing gender inequities. Georgia has adopted the MDG aiming to achieve gender equality and women’s empowerment. Apart from international commitments, gender equality measures were promoted in the recent creation (in 2010) of a Council on Gender Equality, which has acquired a permanent mandate.

3. Regulatory Framework

15. Provision of pensions and social allowance is handled by the SSA. The roles and responsibilities are outlined in the Decree, issued in February 2006 by the Minister of MLHSA, on "Granting and Payout of State Pension, State Compensation and State Academic Scholarship"; the objective of which was to establish an effective system for providing social protection to the Georgian population. In February 2009, the Government’s Decree on Determination of Terms of Vouchers for Health Insurance, to be distributed to the citizens in 2009 in the Framework of the "State Health Insurance Program of the Population Living Under Poverty Line", was introduced.

16. A Gender Equality Law was passed in 2010 by the Parliament, but has not yet been widely promulgated. Such Law ensures that gender equality is addressed in all development projects in the country. A Draft National Gender Action Plan (NGAP) was produced in July 2010 and will be discussed at the Parliament in the first half of 2011.

B. Socio-Economic Situation in Secondary Towns

17. The survey conducted in August 2010 by the Policy and Advisory Technical Assistance (PATA) Team covered different regions in Georgia, and 1,600 face-to-face interviews were conducted, which represent 4% of the urban population of 6 secondary towns of the UWSCG area. These secondary towns were selected based on socio- economic parameters and geographic representation: Zugdidi and Anaklia, as medium- sized cities in the western part of the country, with a large number of IDPs; Marneuli in the central region, with a high proportion of Azeri population; Akhalkalaki in the southern region and a large proportion of Armenian population; Telavi, an eastern city in an economic growth area; and, Mestia, a small northern city favorable for tourism development. The PATA survey was thereafter strengthened by information acquired from several focus group discussions (FGDs) and poverty mapping consultations.

18. The household survey of secondary towns shows that poverty ratio is more significant in secondary towns than at national level. In the areas surveyed by the PATA Team, 39.7% of households live below the minimum subsistence level of GEL220 ($125.71)/household/month (equivalent to GEL61 ($34.85)/person, for an average household of 3.5 persons). Proportionally, more Georgians (40.7%) live below the minimum subsistence level than Azeris and Armenians (34% live below GEL220 ($125.71)/household/month) – this is likely due to remittances sent by Azeris and Armenians working abroad.

19. Poverty mapping conducted by the PATA team shows that there are usually no specific poverty areas in the secondary towns, and therefore, the monitoring of access to water service of poor and extremely poor must be done by social services on an individual basis.

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1. Water Supply

20. The PATA survey indicates that 57.4% of households are directly supplied with water by the UWSCG, and 32.7% of households use ground water (boreholes and wells) or water tankers.

21. About 8.9% of households do not have water supply at home and obtain water from surface water (ponds, canals, irrigation channels and drainage canals). These figures reflect varying situations between secondary towns that are fully equipped with piped water (such as Poti) and others that are with non-operating systems (such as Zugdidi or Anaklia, where all families use alternative sources, because the piped water system has been non-operational since the 1993 war).

22. Over half of households (56.8%) report satisfaction regarding their water supply source. A higher level of satisfaction (78.8%) is expressed among households not connected to the UWSCG, who therefore depend on their own sources of water. Only 61.1% of households supplied by the UWSCG are satisfied; and the reasons for dissatisfaction being the bad quality of water and the irregularity of supply (i.e., almost half of them have water supply for only 3-4 days per week, mostly during 2 to 4 hours per day). There is no difference in satisfaction levels between male and female despite women’s gender roles being more closely affected by water service provision.

23. There is a positive correlation between the level of household income and access to piped water supply from UWSCG: 45.6% of households with income of less than GEL100 ($57.14) a month have access to central water supply, and up to 63.7% for households with income exceeding GEL601 ($343.42).

24. The majority of households (67.2%) with no water supply inside their homes live below the minimum subsistence level.

2. Sanitation

25. Over one-third of households (38.2%) are connected to a central sewerage system with pipes working properly; 9.6% of households have problematic sewage pipes; 6.3% are not connected due to affordability reasons (despite the presence of a sewerage pipe); and, the remaining 45.9% of households have no sewerage system available for their dwelling and rely on individual waste water disposal, such as a soakage pit, septic tank, and pit latrines.

26. Majority of households (92.4%) do not pay for monthly sewerage services provided by the UWSCG. Only 1.9% of all households pay regular sanitation bills, majority of which pay GEL2 ($1.14) per month.

27. Although there are sewerage pipes in most secondary cities, none of the Investment Program towns is equipped with an operating wastewater treatment facility.

28. 49.5% of dwellings have flush toilets, 48% have dry pit latrines, 1.8% have both, and 0.7% do not have any. Both genders’ support for public amenities, such as public toilets in town centers, is very high (96.8%), with an estimated acceptable tariff of between GEL0.10 to GEL0.20 per visit ($0.05 to $0.11).

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29. The water supply and sanitation conditions are especially difficult for the IDPs living in non-purposely built accommodations, such as hospitals and old factory buildings. Several families have to share toilets and water supply source in the corridor or yard, and the water supply is usually restricted. Most of the time, IDPs cannot afford coping mechanisms to improve their existing WSS situation.

3. Coping Costs

30. In order to overcome the deficiencies of the existing service (i.e., to cover the period when water supply is cut), households purchase storage tanks with water pumps. 7% of households purchase bottled water (some of them purchase regularly). Households without an access to pipe water supply develop strategies of building wells (or boreholes) and pumping water to a range of storage containers. Only a small proportion of households (2%) tries to improve the quality of water before using it for drinking and cooking.

31. In terms of sanitation, 13.4% of households have incurred costs to empty septic tank or pit latrine with an average amount of GEL5.4 ($3.08) per month per household. Cost incurred for medical treatment of water-borne- and sanitation-related diseases is limited since only 2.5% of adult respondents report having suffered from such diseases.

32. The water and sanitation awareness is relatively high, with nearly 99% of interviewed people aware of good hygiene practices and 90% aware of the general risk of water-related diseases. A lower awareness level is noticeable among the ethnic minorities, with only 70% of correct responses regarding water-related diseases.

33. Economic water costs (costs that cannot be measured financially), include the number of days lost at work due to sickness, time spent collecting water, domestic disturbances due to irregular water supply, and the lost occupation opportunities. Domestic disturbances due to irregular water supply are quite important: 27.3% of women have to wait in the house to collect water, 20.8% are hindered from carrying out their family duties, and 12.8% are prevented to do their cooking according to their wishes. In households with no home water supply (8.9% of all households), the burden of collecting water is usually shared by men and women, and the actual time spent on one round trip to fetch water mostly varies from 10 minutes to 20 minutes.

34. Table 1 shows that water supply expenses, either from the UWSCG or another source,: depicts the cost incurred on various coping strategies3 (depreciation of water equipment, maintenance, electricity for water pump, health expenditure, and sanitation expense); provides the proportion of monthly income being spent on water and sanitation; and, compares the present proportion with the similar proportion if the UWSCG 2010 tariffs4 were fully applied (most urban areas currently do not pay the USWCG 2010 tariff). It shows that in this case, expenditure on WSS would slightly increase for most income categories and would remain above 3% of the income of the households living below the minimum subsistence level (GEL220 or $125.71). However, this does not take in account the benefits gained from an improved WSS system in terms of saving economic costs.

3 The coping costs used in Table 1 are based on FGDs, and are calculated as an average cost for all households in the income category. 4 The calculation of the water expenses is based on the average number of persons per household in the income category multiplied by the UWSCG 2010 flat-rate tariff (GEL 2.4/person).

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4. Willingness-to-Pay

35. From results of FGDs held in secondary towns, the willingness-to-pay for improved water supply and sanitation is, in general, high5, especially when people realize how much is spent on coping mechanisms. 36. The regulated flat–rate tariff of GEL2.4 ($1.37)/person/month is not considered too high by the majority, but metering is more preferred (GEL0.23 ($0.13)/m3). Willingness to pay more for improved water services is equally high for both men and women.

C. Poverty Alleviation Strategy

1. Investment (Physical)

37. The goal of the Investment Program’s social and poverty reduction strategy is to alleviate poverty, through equal access to WSS. The improvement of WSS services, combined with generating awareness on the importance of clean water and hygiene, will improve the general health and hygiene status of the concerned population, especially the poor, the IDPs and female-headed households. In IDP communities, the improved water quality, combined with the provision of public toilets and washing facilities, will reduce water-borne- and sanitation-related diseases and will decrease significantly coping costs incurred to compensate for inadequate water supply and low water pressure. Quality of life will also be enhanced by the environmental improvements that will accompany the introduction of proper sewerage and wastewater treatment in towns with currently decaying infrastructure and pit latrines. Necessary construction work for physical investments under the Investment Program will also create temporary employment opportunities and will require labor for system operation and maintenance in the long- term.

2. Institutional Effectiveness (Non-Physical)

38. The population will be educated on their customer rights, complaint and feedback, in order to facilitate a reliable grievance mechanism. Monitoring the efficiency of WSS services for the poor will be based on consumer groups’ feedback, census information, disconnection rate, complaint statistics, and information collected by local nongovernmental organizations (NGOs). The Investment Program will benefit from the Regional Technical Assistance (RETA) 7563: Gender Inclusive Growth in Central and West Asia Developing Member Countries. Through the RETA, a pilot project on consumer education and awareness generation will be implemented in Mestia and Marneuli by an Apex NGO. The Apex NGO will conduct a comprehensive household survey on water and wastewater management at the household level before and after an information, education and communication (IEC) campaign, which will especially target women as household managers. The results of the pilot project will inform the public relations campaign of the UWSCG, the Investment Program’s Implementing Agency. The public relations campaign will then be rolled out in parallel in all 6 secondary towns to create awareness and ownership of the Investment Program. Sex-disaggregated data on poor households’ access and affordability will guide long-term WSS services to the poor.

5 The only exception is Mestia, where the population currently do not pay for water or sanitation due to the availability of numerous spring waters.

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D. Gender Action Plan for Water Supply and Sanitation

39. The Gender Action Plan (GAP) is targeted at all levels of Government and future private sector WSS providers to achieve effective gender balance. The main goal of the proposed GAP for urban WSS is to reduce the gender gap in the urban WSS sector in the context of the Gender Equality Law passed in 2010.

40. Specific objectives related to urban water supply and sanitation can be expressed in:

(i) Equitable access to WSS services; (ii) Reduction of water-related time and efforts; (iii) Health and hygiene improvement; (iv) Gender-sensitive improved governance in the WSS sector; (v) Improved participation, transparency and accountability of women; and, (vi) Collect and publish sex-disaggregated data on consumer behavior.

41. Proposed targets for the sector will relate to the improvement of access to affordable WSS services, reduction of water-related time poverty of women, health and hygiene improvement, increased representation and employment of women in the urban WSS sector and established customer care centers, as well as complaint and grievance mechanisms.

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Table 1: Household Coping Costs (in GEL) and Affordability

Payment Water Income Water for Water Water New Payment Electricity Total Total Average Expenditure Categories Supply Taken Depreciation Cost for Health Sanitation Expense Proportion to for Water Coping Expenditure Household as a Variance from from of Equipmenta Maintenanceb Expenditure Expense with of HH UWSCG Pump Costs on Water Income Proportion of UWSCG? Other Full Tariff Income HH Income Source

Less Than Yes 1.2 0.5 0.4 1.1 2.1 - 0.5 4.6 5.7 85.4 6.7% 5.7 6.7% 0.0% GEL100 (45.4%) No 0.0 0.2 0.7 2.9 0.1 0.3 4.1 4.1 82.4 4.9% 6.5 7.9% +3.0% (54.6%) GEL101 to Yes 1.0 1.0 0.2 0.7 2.6 0.1 0.7 5.4 6.4 174.0 3.7% 7.4 4.2% +0.5% 220 (53.7%) No - 0.2 0.5 2.8 0.1 0.2 3.7 3.7 168.8 2.2% 7.9 4.7% +2.5% (44.3%) GEL221 Yes 1.6 0.9 0.6 1.8 3.6 0.4 1.3 8.5 10.1 406.2 2.5% 9.9 2.4% -0.1% to 600 (61.9%) No 0.2 0.8 2.2 2.9 - 0.3 6.4 6.4 387.3 1.6% 9.4 2.4% +0.8% (36.4%) GEL601 Yes 2.0 3.2 1.4 4.1 2.4 1.2 1.8 14.0 16.1 1071.3 1.5% 10.8 1.0% 0.5% and More (63.7%) No 0.0 1.0 2.9 4.2 - 1.0 9.1 9.1 1085.2 0.8% 11.1 1.0% +0.2% (35.2%) Total Yes 1.5 1.3 0.6 1.8 2.7 0.4 1.1 8.0 9.5 435.8 2.2% 8.8 2.0% -0.2% (57.1%) No 0.1 0.5 1.5 3.2 0.0 0.3 5.7 5.7 356.2 1.6% 8.5 2.4% +0.8%

(41.6%) a Straight-line depreciation is used over 12 years. b It is assumed that 2% of the capital investment is needed for maintenance.

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Appendix 3: Institutional Arrangements

Figure 1: Institutions Involved in Urban WSS Sector* 1. Ministry of Economy and Sustainable Development (MESD) - Department of Economic Analysis and Policy (DEAP) * Economic Policy (EP), Entrepreneurship Analysis and Policy (EAP) and Regional Economic Policy Divisions (REPD). - Department of Urbanisation and Construction (DUC) - Legal Department (LD) - Department of State Property Management Policy (DSPM) has two divisions: State Property Management and State Property Registration. - General Inspection (GI) - Sub-divisions: Department of Tourism and Resorts (DTR) and Agency for Free Trade and Competition (AFRC) - Ministry’s Public Law Entity (MPLE)s: Georgian National Investment Agency (GNIA), Restructuring centre of privatized enterprises (CERMA), State Enterprise Management Agency (SEMA), Georgian National Agency for Standards, Technical Regulations and Metrology, Georgian State Inspection for Technical Supervision, Restoration and Development Fund of Borjomi Central (historic) Park, National Accreditation Center – Accreditation Center (GAC), Georgian State Procurement Agency and Chamber of Commerce and Industry of Georgia 2. Ministry of Regional Development and Infrastructure (MRDI) - Department for Regional Development under MRDI 3. Ministry of Environmental Protection and Natural Resources (MEPNR) - Department of Environmental Policy and International Relations (DEPIR) - Service of Licenses and Permits (SLP) - Inspection of Environmental Protection (IEP) - MPLEs: National Environmental Agency (NEP), Sustainable Development Projects Implementation Agency (SDPI), State Division of Geology (SDG), State - Department of Hydrometeorology (SDH), State Inspectorate for Technical Supervision (SITS) 4. Ministry of Labour, Health and Social Affairs (MLHSA) 5. Ministry of Agriculture (MA) - National Service of Food Safety, Veterinary and Plant Protection (NSFSVPP) 6. Ministry of Finance (MF) - Municipal Development Fund of Georgia (MDFG) 7. Ministry of Justice (MJ) - Department of Systematization of Statutory Acts and Relations with Local Bodies (DSSARLB) * Division of Relations with Local Bodies (DRLB) 8. State Commission on Water Supply and Energy (SCWSE) 9. Georgian National Energy and Water Regulatory Commission (GNEWRC) 10. State Representatives (State Attorney–Governors) 11. Body of Local Self-Governing Units or Local Self-Governing Body (LSGB) 12. United Water Supply Company of Georgia (UWSCG)

* The key institutional players in the Urban WSS Sector can be categorised into five major groups: (i) Planners; (ii) Policy Makers; (iii) Regulators; (iv) Service Providers; and, (v) Other Groups consisting of funding agencies, land registration authority, among others. The institutional planners in Georgia come from the different Ministries with varied interests in urban WSS Sector, including then-MED, (now MESD), MRDI, UWSCG and planning units of other WSS providers. The group of institutional policy makers consists of SCWSE, MRDI for regional development and infrastructure policy issues, MESD for economic policy including policy on asset registration and management issues, MESD-DUC for urban policy issues, and MENR- DIER/DWRM for environmental management/water resources management policy issues. Page 1

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Table 1: Institutional Functions, Responsibilities and Legal Basis Functions Institutions Legal Basis/Responsibilities Ministry of Regional Law No. 10 30/01/09 Development and for regional development and infrastructure planning supporting Planning Infrastructure (MRDI) municipal/local planning Local Self-Government Law on Local Self Government 2005, 16/12/2005, Article 16(2)f (LSG) for local territorial planning GD Charter WSRDA May 2009 established for the purpose of State Commission on improving the WSS sector, promoting regulation in the energy Water Supply and sector, coordinating the work of Departments involved in this Energy (SCWSE) Policy Decision sector Commission for Georgian Government issued Enactment No. 172 on 25/6/2010 Regional Development Line of authority, powers, functions and competency will be (CRD) formulated 3 months from enactment effectivity Law of Georgia on the Structure, Powers and Order of Activity of Ministry of Economic the Government of Georgia 11/2/ 2004 created MED and Law No. and Sustainable 77 10/3/04 for economic policy including policy on state-owned Development (MESD) asset registration and management issues GD Charter No 10, 30/4l 2009: i) Analysis of the county’s macro- MESD-Department of economic policy; ii) Participation with in elaboration and Economic Analysis and implementation of sectoral economic policy/ strategies together Policy (DEAP) with different official agencies; iii) Participation in elaboration of the country’s social and migration policy, & labor market regulations GD Charter No 10, 30/4l 2009 MESD-Department of Development, coordination and management of policies: urban Urbanization and development, territorial development and architectural-urban Construction (DUC) planning, construction activities, housing and communal infrastructure. Policy Formulation MEPNR-Department of Water Law (2007) Integrated Environmental For environmental management/water resources management Management (DIER) policy issues and Division of Water Resource Management (DWRM) Prepares state and international environmental programs; determines the priority directions of relationship with international MEPNR- Department of organizations and countries in environmental field; coordinates Environmental Policy and monitors implementation of international commitments; and International coordinates activities of focal points of environmental conventions Relations (DEPIR) having international and regional importance; participates in organizing activities of joining environmental convention having international and regional importance. Ministry of Regional Law No. 10 30/01/09 Policy Development and for regional development and infrastructure policy issues, being a Recommendation Infrastructure (MRDI) member of the SCWSE Law 816 on Electrical Energy and Natural Gas, 27/6/97; amendments and Constitutional Court No. 1/2/411 of 19/22/2008 Decree No. 18 of GNEWRC, 29/08/2008 provides for developing Georgian National the methodology for water supply tariffs, termination of contents of Energy and Water Economic service fees, rules for normative losses, and procedures for setting Regulatory Regulation tariff. Commission (GNEWRC) Decree No. 24 of GNEWRC, 1809,2008 sets the general rules on calculation of regulatory fees in power, gas and water supply; Water Utilities shall pay regulatory fee calculated as income multiplied by 0.00 min. GEL 500 per annum.

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Functions Institutions Legal Basis/Responsibilities Law No. 1666 on Independent National Regulatory Authorities provides the legal guarantees for the independence of Commissioners of Regulators.. Due to absence of detailed WSS policy, GNEWRC depends heavily on the ad hoc decisions of the government, In addition the biggest water utility UWSCG is owned by 100% state, and it does not have management autonomy on

important decisions and therefore GNEWRC cannot impose any sanctions and prescriptions because it means to act against government’s policy. The establishment of public defender of consumers' interests within regulator is deemed to be an effective mechanism for defending consumer rights. In addition there is no fee for launching a claim with defender. Law on Local Self Government 2005, Article 16(2)h, 16/12/2005 and amendment 6/2010 maintains competence on sewerage service provision. Law No. 1506 on Fundamentals of Spatial Structure and Local Self-Government Urbanization dated 2/6/2005 (LSG) Ministry of Urbanization and Construction Order No. 3126, 5/2/2001 Law No. 2911 on Control of Technical Danger 08 (April 2010) provides that TCI Construction supervision authorities of the local municipalities. Law on Public Health 5069 and amendments, 27/6/ 2007 MLHSP Order No. 15 dated 22/1/2004 provides for sanitary rules for water sample testing; terms of taking water samples; Technical Ministry of Labor, requirements for sample processing; MLHSP Order No. 306, Regulation Health and Social 11/7/2007 sets water quality standards, hygienic specifications Protection (MLHSP) and requirements for bottled drinking and mineral water. MLSHSP Order 349, 17/12/2007 provides that State controls quality of drinking water and that it meets WHO and EU directives. Law of Georgia on the Structure, Powers and Order of Activity of the Government of Georgia 11/2/2004 created MAFS Ministry of Agriculture Technical Regulation on Drinking Water Decree No. 349 controls and Food Safety- compliance with the defined safety parameters for the drinking National Service of water and performs the selective laboratory control of drinking Food Safety, Veterinary water in accordance with the safety parameters and Plant Protection MAFS Order No.2-44, 14/3/2006 as amended by Order 44, (NSFSVP) 13/4/2007 NSFSVPP monitors quality of drinking water/bottled drinking water Law of Georgia on the Structure, Powers and Order of Activity of the Government of Georgia 11/2/ 2004 created MENR (now MEPNR- Service of MEPNR) Licenses and Permits Water Law 1997 and amendments (SLP) MEPNR Order No. 8 on the approval of the regulations for the Environmental Impact Assessment MEPNR Order No. 139 11/8/96 Environmental Law on Environmental Protection No. 519, 10/12/1996 for MEPNR-Inspection of Regulation provision on competence of state authorities on environmental Environmental protection and norms of EP, qualitative norms, norms for pollution Protection (IEP) of environmental with hazardous substances and microorganisms, norms of use of chemical substances in environment, etc. Issuing permit for use of entrails, Ordinance of the Government of Georgia No. 136, 11/8/2005 MESD Law on Entrails No 242 dated 7/5/2006 defines that ground waters are entrails.

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Functions Institutions Legal Basis/Responsibilities Law on Private Enterprises No. 557, 1997 and Charter of UWSCG; United Water Supply Law on Local Self-Government on 20/11/ 2007, LSGUs were Company of Georgia deprived of exclusive competence in providing water supply (UWSCG) services Execution/ Georgian Water and Law on Private Enterprises No. 557, 1997 and Charter of GWP Implementation Power LLC (Service Batumi Tskali Law on Private Enterprises No. 557, 1997 and Charter of Batumi Delivery) LLC/Batumi Water Tskali Sachkhere Law on Local Self Government 2005, Article 16(2)h, 16/12/2005 Municipality and other and amendment 06/2010 provides the basis for the competence of municipal service the Local Self-Government to operate WSS services within its providers jurisdiction. Law of Georgia on the Structure, Powers and Order of Activity of the Government of Georgia 11/2/ 2004 created MF; Budget Code of Ministry of Finance Georgia No. 2440, December 18, 2009 mandates MF to coordinate (MF) the process of preparation and submission of the draft state budget and MF Order 31, 21/1/2005 approves forms for calculation of fees Financing for use of natural resources GD Charter of MRDI No. 77, 10/09/2004 Municipal oversees the financing related responsibilities of the State Program Development Fund of for the Municipal Sector Development; and is responsible for Georgia (MDFG) allocation of funds raised from international donors and financing institutions to implement municipal development projects. Ministry of Justice Law on Local Self Government 2005, Article 13(1-2)a-d, 16/12/2005 Registration of (MJ)-Department of the authority for registration of LSG and defined their geographical LSG and their Systematization of borders is vested with MJ. Territorial Statutory Acts and Jurisdiction Relations with Local Bodies (DSSARLB) GD Charter No 10, 30/4/2009 MESD-State Law on Entrepreneurs Art 44-50 Limited Liability Companies 2009 – Enterprise SEMA had authority over UWSCG and appoints its Director Asset Management Agency Law No. 5274 on Declaring Ownership Right on the Land Management (SEMA) Possessed by Individual and Private Legal Entities MRDI Presidential Decree No.978 11/10/2010 SEMA transferred management tools to MRDI. Consumer Law 151 on Consumer Protection, 20/03/1996 Protection/ Civil society provides for fundamentals of consumer protection, consumer rights Relations associations on quality of goods and manufacturer; and water provision rules of GNEWRC

 For service delivery in the 68 cities and towns, the United Water Supply Company of Georgia (UWSCG) is the service provider for the 56 municipal water service areas in Georgia, excluding those served by the Georgian Water and Electric Company and Batumi Water Company, Sachkhere Municipality, other service areas in Adjara region and the 3 newly created LSGs which are uncontrolled areas (Eredvi, Tighvi and Kurta).

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Table 2: Extent of Authority of Institutions Involved in Urban WSS Sector Strength of Policy- Service Relationship Institutions Planning Regulation Financing Interests/Stakes and Capacity Related Providers with UWSCG (Scale 1-5) Limited to policy recommendation, broad direction for regional development and infrastructure; coordination with service providers; Implied planning function but no planning unit; No governing authority over UWSCG but MRDI x x x 4 simply coordinates with UWSCG on concerns related to WSS sector; Effective in 2009, MRDI also deals with administering international donor funded infrastructure projects including projects in WSS sector which is coursed through the MDFG.1 an informal consultative ad hoc body comprised of 15 members chaired by the Prime Minister SCWSE x 4 which is responsible for water and power policy decision (political) Has direct authority over UWSCG its assets being a state- MESD x 5 owned entity that provides goods or services for profit.;2 and ground water licensing Economic analysis and policy MESD-DEAP x 3 formulation Limited capacity to formulate MESD-DUC x 2 national urban policy and development framework Authorized to formulate policies MESD-SEMA x x 5 on and manage state assets Economic regulator for WSS and GNEWRC x 4 power

1 MDFG was under the MF until 2009; thereafter its activities were coordinated by the MRDI which has become the governing authority and controller of public entity MDFG. 2 This can be traced from the previous set up where the WSS sector was previously managed as an urban service at municipal level by three LLC created under the Law of Entrepreneurs No. 557 (1997). Articles 44- 50 of this Law describe the responsibilities and authorities of the Limited Liability Company (LLC) whose Partner(s) have a liability to any creditors. At least one person is needed to form a Limited Liability Company. Capital is held in shares and rights and obligations are set out in the founding Charter of the LLC and agreed by the Partners. LLCs are not proscribed from forming Supervisory Boards to oversee their business but these must be within the conditions of the Charter set up by Members.

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Strength of Policy- Service Relationship Institutions Planning Regulation Financing Interests/Stakes and Capacity Related Providers with UWSCG (Scale 1-5) Limited capacity for urban planning, construction monitoring and regulations enforcement and urban governance capacity; generally rely on the capacity of the local Local Self- architects/ infrastructure Governments x 1 coordinator and private (LSGs) consultants to prepare site development plans and architectural rendering; provides local WSS services to areas not covered by UWSCG coverage and communal providers Limited to health regulatory MLHSP x 2 issues and setting of water quality standards Limited capacity and resources to monitor water quality MAFS- throughout Georgia; brings x 2 NSFSVP limited samples to MESD- accredited private laboratories for analysis. MEPNR- Has not yet finalized documents DIEM and x x 2 stipulating IWRM and River DWRM Basin strategy Has not finalized documents MEPNR- x 2 stipulating international DEPIR environmental policies MEPNR- SLP x 2 Limited power to regulate environmental compliance and enforce accountability from MEPNR-IEP x 2 project proponents and violators of environmental laws Formulation of national financing MF x x 3 policies and financing GoG operations

3 Authorized to provide funding for MDFG x 2 municipal infrastructure projects. Provides WSS services to 55 UWSCG x x x service areas; limited corporate planning capacity Georgian Provides WSS services to Tbilisi, Water and x x 1 Rustavi, Gardabani & Mtskheta Power LLC Batumi Tskali Provides WSS services to x x 1 LLC Batumi and periphery

3 MDFG is a legal entity attached to the Ministry of Economic and Sustainable Development established under a public law pursuant to Presidential Decree No. 294 dated 7/6/1997.

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Strength of Policy- Service Relationship Institutions Planning Regulation Financing Interests/Stakes and Capacity Related Providers with UWSCG (Scale 1-5) Refers to LSGs such as the Other Sachere Municipality in Imereti Municipal and communal operators which x x 1 Service provide WSS services to other Providers areas not covered by the other 3 service providers MJ- Registration of LSG and their x 1 DSSARLB Territorial Jurisdiction No active civil society organization which participates in the discussion of issues or Civil Society x x 1 planning for UWSS sector; Associations Ideally should also be organized and involved in planning and participatory policy formulation

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Appendix 4: Urban WSS Tariffs (Summary)

A. Present Situation

1. UWSCG Financial Situation

1. Water Supply and Sanitation (WSS) services in the urban areas of Georgia are currently provided by: (i) Georgia Water and Power (GWP) for Tbilisi, Rustavi, Gardabani, and a portion of Mtskheta; (ii) United Water Supply Company of Georgia (UWSCG) for 56 service areas located in 54 municipalities nationwide; (iii) Batumi Water Company (BWC) for Batumi; and, (iv) Municipal governments for Sachkhere and the rest of the municipalities of the Autonomous Region of Adjara consisting of Khelvachauri, Kobuleti, Keda, Shuakhevi and Khulo.

2. UWSCG was established in January 2010 and now operates 56 service centers (SCs) through six regional branches. UWSCG was created under the “Law of Georgia on Entrepreneurs”, with a capitalization of GEL57.9 million ($33.1 million). The State owns the company through the MRDI, which owns 100% of shares.

3. The assets of the UWSCG are aging and severely deteriorated due to lack of funding for capital maintenance accumulated over many decades. Urban WSS services do not meet the needs of many of the urban populations in terms of coverage (unmet needs) and service levels (intermittent supplies). Under these circumstances, increasing tariffs to enhance revenues, but without the corresponding increase in service levels, may be resisted by the users.

4. There are an estimated 267,000 customers served by UWSCG as of July 2010. About 259,000 are residential customers, but only 10,000 (4%) are metered while all 8,000 non-residential customers are metered as of October 2010. To minimize water wastage1, metering is encouraged by UWSCG, which has designed the tariffs so that monthly bills for un-metered residential customers are higher than for metered customers.

5. Hours of water supply service per day vary among SCs (summarized in Table 1 below). The major reasons for the low levels of service in some SCs are: (i) inadequate supplies to cover demand caused by water wastage in the large majority of households that are un-metered; (ii) managers reducing operating hours to match available budgets; and, (iii) not enough water resources in the systems to serve existing demands.

Table 1: Hours of Supply as of July 2010 Hours/Day 20-24 11-19 1-10 Total

Number of SCs 13 4 29 46 (No Data in 9 SCs)

% of SCs 28.3% 8.7% 63.0% 100%

6. The collection efficiency among non-residential consumers is high (94%), whereas the collection efficiency from households is low due to: (i) the low service level that deters customers from paying their bills; (ii) the widely held perception that water is ‘free’ with users unaccustomed to paying their bills, and, (ii) the deficient bill collection systems in SCs.

1 Non-revenue water is as high as 80% in some service centers.

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7. The 2010 UWSCG budgeted revenue – $19.5 million – is composed of tariff revenues (41%), national subsidies (54%), and local government transfers (4%). Households consume 83% of water, but contribute only 33% in tariff revenues, whereas non- residential consumers contribute to 67% of the tariff revenues. Income from the 10 largest water non-residential consumers of UWSCG is about $3.4 million/year or 42% of tariff revenues. Considering the difference between non-residential and residential tariff, these consumers may develop their own source of water, thus rendering to risk the economy of the UWSCG, which should examine the actual costs of supply of these customers and compare it with the cost of water from an alternative source available to them.

8. The 2010 USWCG budget expenditures are constrained by the limited available funds and do not reflect the actual costs required to provide a level of service based on a 24/7 water supply. Managers in SCs are therefore sometimes obliged to maintain lower- than-necessary service levels based on the limited funds made available to them.

2. Tariff Regulatory Framework

9. The present tariffs, approved by Georgian National Energy and Water Supply Regulatory Commission (GNEWSRC) are based on historic costs (as per Decree No. 18) provided by the GNEWSRC: ‘Tariff (GEL/m3) = O&M2 + Depreciation + 15% of Net Historic Book Value + Non-Recoverable Taxes)/Water Sold’. The following Table gives the USWCG tariffs accepted in August 2010 by the GNEWSRC, differentiated for residential (metered and unmetered) and non-residential customers, alongside those of the other water companies operating in Georgia, Batumi Water Supply and Georgia Water and Power (Tbilisi).

Table 2: Existing WSS Tariffs of UWSCG, GWP and BWC (2010) Category Unit UWSCG GWP BWC Water Supply Residential (Metered) GEL/m3 0.20 0.191 0.33 Residential (Un-Metered) GEL/person/month 1.77 2.259 1.20 Non-Residential Government GEL/m3 3.40 2.966 2.00 Commercial/Industrial 2.50 Sanitation Residential (Metered) GEL/m3 0.07 0.034 0.18 Residential (Un-Metered) GEL/person/month 0.63 0.408 0.65 Non-Residential GEL/m3 0.90 0.763 Government 1.50 Commercial/Industrial 1.50 Total Residential (Metered) GEL/m3 0.27 0.225 0.51 Residential (Un-Metered) GEL/person /month 2.4 2.667 1.85 Non-Residential GEL/m3 4.30 3.729 Government 3.50 Commercial/Industrial 4.00

2 O&M cost of all service centers, regional branches and head office.

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10. The major weaknesses of the present tariff calculation methodology (Decree No. 18) are as follows: (i) the depreciation account is intended to provide dedicated funds for the capital maintenance of assets, but there is no distinction made as to what form of depreciation is to be applied (historic cost or current cost), and therefore, the allowance is based on historic costs, which are substantially less than necessary for effective capital maintenance to ensure continuation or improvement of the same level of service; (ii) the methodology infers immediate full cost recovery as an objective, but it is impossible to determine this without specifying the standards and levels of service expected from the service provider; and, (iii) the term ‘reasonable’ return on equity capital, as mentioned in the Decree, is open to different interpretations, the regulatory capital value (RCV) upon which a return can be earned is not defined, and the use of historic net book value may be too high or too low according to differing situations.

B. Proposed Tariff Strategy

1. Tariff Setting Principle

11. On behalf of the Government, the role of the GNEWSRC is to ensure that Government’s social and welfare policy in the sector is carried out and maintained. The relationship of the GNEWSRC with the water service providers is mainly one of price determination, providing direction, and monitoring behavior. The water service providers have to meet Government targets for levels of service and demonstrate to the GNEWSRC that the tariffs they need to charge are appropriate, and that the services are being managed efficiently.3

12. The basic objectives of tariff design are to: (i) allow sufficient revenues to be collected to ensure cost recovery and financial sustainability of the utility; (ii) be affordable to the poor; (iii) encourage and provide economic incentives for the efficient allocation of water resource use between the different sectors; (iv) encourage environmental sustainability; and, (v) be administratively consistent and acceptable to the users. All these aspects of tariff design are in practice difficult to achieve, because they comprise contradictory objectives, and any tariff structure must therefore comprise a trade-off between different objectives.

2. Multi-Year Regulatory Cycle

13. With regard to tariff setting, the Policy Advisory Technical Assistance (PATA) recommends the establishment of a multi-year pricing cycle, whereby prices are determined at these periods with allowable automatic annual adjustments to cater for inflation, investment demands, expected efficiency improvements and other factors.

14. The following aspects will need to be addressed within the framework of developing the multi-year pricing approach:

(i) Determination of levels of service expectations, upon which a business plan can be developed with the aim of such expectations, and the necessary revenue requirement, upon which prices can be determined and form the basis of a pricing submission; (ii) Government policy guidance with respect to pricing; (iii) Development of a pricing model and regulatory accounting guidelines (RAGs);

3 Output No. 4: Urban WSS Regulatory Framework.

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(iv) Determination of an RCV, upon which a return can be earned. This opening RCV is quite distinct from accounting asset values (historic or otherwise determined); it is rather a reflection of the value of the business as a going concern and its future profitability; (v) The subsequent adjustments to the RCV (investments, disposals, depreciation and working capital) would need to be determined through a set of RAGs (as distinct from international accounting rules); (vi) The determination of an appropriate rate of return on RCV based on the capital asset pricing model (CAPM) or some other selected methodology; and, (vii) Mechanisms for determining the allowance for capital maintenance to be included in the pricing framework, employing concepts such as current cost accounting and infrastructure renewals accounting.

15. The pricing model to be adopted, in accordance with good regulatory practice, is based upon the concept of determining a revenue requirement made up of:

(i) Direct operating costs; (ii) Capital maintenance, comprising: (a) Infrastructure renewals charges; and, (b) Current cost depreciation (iii) Return on RCV.

16. This revenue requirement is then satisfied by income received from user charges. In a multi-year cycle, the prices are determined on an annual basis for the period of the cycle and converted to a certain factor (e.g., RPI + X type formula) commonly applied to multi-year pricing structures.

17. Main actions required for the implementation of the multi-year pricing framework by January 2014 are as follows are as follows:

Table 3: Timetable of Actions Required to Put in Place the Multi-Year Pricing Framework Institution Responsible and Activities Year GNEWSRC Adapt Regulations 2011 – 2012 Develop Business Planning Framework 2013 Develop Detailed Pricing Policy 2013 Develop Pricing Model 2013 Approval of Price Proposals 2013 UWSCG or Service Provider Develop Business Plan and Price Submission 2013 Implementation of New Prices in January 2014 2014

C. UWSCG Tariff Strategy

1. Customer Categories

18. At present, UWSCG has three customer categories for which a tariff system may be designed. Customers can be grouped into categories with similar consumption and demand characteristics.

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19. Commercial and industrial customers can be grouped into minor and major water users based on a cut-off threshold4. High volume consumers above this threshold could be charged lower than the normal rate to encourage these consumers to continue using UWSCG water supply service.

2. Immediate Tariff Setting

20. The UWSCG has already implemented the new tariff in the SCs, with the exception of Poti SC. For metered residential customers, the maximum regulated rates for WSS are applied and are uniform for all SCs. For un-metered residential customers, in general, the new tariffs in each SC are linked to the level of service and the economic development of the service center. The SCs were grouped according to the existing level of service (hours of water supply per day) and were given a corresponding code: “red” for SCs with water supply from 1 to 10 hours per day; “amber” for SCs with water supply from 11 to 19 hours per day; and, “green” for SCs with water supply from 20 to 24 hours per day.

21. The immediate proposal is for code “red” SCs to charge a minimum of GEL0.60 ($0.34) per capita per month; for code “amber” SCs to charge a minimum of GEL0.80 ($0.45) per person per month; and, for code “green” SCs to charge a minimum of GEL1.00 ($0.57) per person per month.

3. Medium- and Long-Term Tariff Strategy

22. In the short-term (2011-2013), emphasis is placed on covering all cash requirements, improving financial stability and sustainability of the UWSCG, considering that opportunities for enhancing revenues and reducing costs do exist within the UWSCG. The present subsidies will be decreased and user charges increased progressively. This period will be used to prepare the setting up of a multi-year tariff strategy.

23. In the medium-term, the multi-year tariff setting methodology will be applied with two first cycles of 3 years (2014-2016 and 2017-2019). Tariffs will encompass O&M, capital maintenance (depreciation costs and infrastructure renewal charge) and return on capital based on RCV. Tariffs submission will be set according to the RAGs adopted by the GNEWSRC, and based on service expectations set by the Government. Operation subsidies will be removed gradually and the level of cross subsidies between residential and non-residential customers will be decreased.

24. In the longer-term, tariffs will be based on longer term analysis (3 to 5 years), set for the period of the cycle. Operation subsidies will no longer be in place and cross subsidies between residential and non-residential customers will be reduced to a factor of maximum 3.

4. Affordability of Proposed Tariffs

25. The affordability of WSS services is usually estimated based on disposable household income or household expenditures, and the amount spent on the services. Generally, a figure of 3% of monthly household income spent on WSS services is considered „affordable‟ to poor households, but this is a highly tentative figure as surveys show that poor people with no piped water supplies often spend several times higher than this amount for water from alternative sources.

4 A 55-m3 cut-off threshold between small and big commercial/industrial customers is proposed considering a tariff simulation prepared by the PATA. Based on this simulation, 55 m3 is the monthly water consumption where the AIC per m3 of water from a borehole, starts to decline relative to the current cost of water for non-residential customers of UWSCG.

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26. Based on the PATA survey, which was conducted in seven secondary towns, the average household income is about GEL391 ($223.42) per month while the average household expenditure is GEL386 ($221) per month. A significant portion of households (39.7%) have recorded income of less than GEL220 ($125.71) per month, which is the official minimum subsistence income level determined by the National Statistics Office of Georgia.

27. Based on the same PATA survey, households living below the poverty line (GEL220/month, $125.71) are, on the average, already paying more than 3%, and would pay even more when the present UWSCG tariffs are fully applied. The PATA survey has calculated that, considering their income, about 39.2% of households will spend more than 3% of their monthly income in UWSCG bills when the current tariff of GEL2.4 ($1.37) per capita per month (GEL2.4 x 4 = GEL9.6 ($5.49)/month/household) is fully applied. Special measures are needed to ensure that the households who do not receive any social benefits are assisted to cover their water charges, especially considering the tariff increases due to upcoming investments.

28. Considering that metering is recommended to reduce water wastage and monthly expenditure of households on WSS, special attention should be made to ensure that connection fees are not a hindrance for the poorest to getting connected to the system. The connection fee could be spread in several months (e.g., 12 months) to reduce the initial cash payment, and the monthly bill for the connection cost could be included in the monthly water bill of the poor customers.

29. After the implementation of the new tariffs, the level of monthly revenue collection should be monitored to evaluate the net effect of the new water tariff on the population. A negative effect in terms of access to water and sanitation would mean that an adaptation of tariffs will be required.

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Appendix 5: Urban WSS Regulatory Framework (Summary)

A. Introduction

1. The regulation of the water supply and sanitation sector in Georgia is presently facing several constraints, including: (i) weak, incomplete and, in some cases, contradictory legal instruments; (ii) limited policy guidance from the Government; (iii) overlapping regulatory responsibilities; and, (iv) regulatory functions not properly defined. In order to effectively reform the regulatory framework, the Government needs to undertake a set of decisions, of which the most important are the: (i) adoption of a sector policy and development of a strategy to satisfy immediate and long-term requirements; (ii) establishment of a Policy Advisory Group within the Ministry of Regional Development and Infrastructure (MRDI) to assist in the implementation and adaptation of the policy and strategy; (iii) creation of an improved multi- year price review regulatory framework; and, (iv) development of various legal instruments to meet the policy objectives.

B. Policy, Strategy and Short-Term Guidance

2. The Policy and Advisory Technical Assistance (PATA) prepared a sector policy and a road map based on the Government’s desired objectives and directions for the sector. The principal policy directions linked to water supply and sanitation (WSS) include:

(i) Technical Sustainability and Environmental Protection:  Providing WSS infrastructure to progressively achieve full water supply and sanitation service coverage of all urban households;  Ensuring implementation of asset management and strengthening programs for better operation and maintenance of WSS infrastructure leading to efficient service delivery; and,  Introducing appropriate mechanisms for environmental protection by maintaining drinking water quality standards, ensuring treatment and discharge of domestic and industrial effluents, and ensuring water resource protection from abstraction and pollution.

(ii) Institutional and Financial Sustainability:  Improving the institutional effectiveness of service utilities by implementing an enterprise resource management plan, infusing public-private partnerships, and undertaking a customer outreach program leading to a healthy fiscal status of the service utilities and improved hygiene and sanitation condition of urban households; and,  Improving sector governance through efficient financial management, operational and commercial efficiency of service utilities.

(iii) Enabling Legislative and Regulatory Framework: Providing an enabling legal and regulatory (economic, service standard, environmental and health) framework for WSS services, and strengthening the capacity of Georgian National Energy & Water Supply Regulatory Commission (GNEWSRC) to effectively regulate service standards and approve tariffs, Ministry of Environmental Protection and Natural Resources for environmental monitoring, and Ministry of Agriculture and Food Safety (MAFS) for drinking water quality monitoring.

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C. Legal Instruments to be Amended

3. The principal legal changes necessary to meet the policy objectives include: (i) amendments to “Georgian Law on Electricity and Natural Gas” (Law No. 816, 27.06.1997) to adopt a multi-year regulatory cycle, licensing of service providers, and other amendments; and, (ii) recommendations for changes to the Georgian Law on Water (Law No. 936, 16.10.1997) to grant service providers exemption from environmental liabilities, licensing of water abstraction and wastewater discharge permits.

D. Licensing Requirements

4. The improvement of water resources protection requires the re-introduction of licenses for specific activities that have impact on the environment and/or have adverse impact on the ability of the service providers to meet their water quality obligations, setting out the license holder’s rights and obligations. These include surface water abstraction licenses, wastewater discharge permits and sludge disposal permits.

5. It is recommended that service providers be licensed to carry out their activities. The conditions of the license would set out their service and regulatory compliance obligations. Rather than use alternative instruments, such as a public service agreement to enforce conditions upon service providers, licenses are preferred for utilities as they can be changed unilaterally by the license issuer (when needs arise and circumstances dictate) whereas contracts require mutual agreement for any changes.

E. Water Quality Regulation

6. The National Service of Food Safety, Veterinary and Plant Protection within the MAFS is responsible for water quality regulation. There is a need to redefine its role to that of a water quality audit agency (or transfer water quality function to another agency) to ensure that testing is undertaken by the service provider in accordance with good practice and that the quality of water is in compliance with specified standards.

7. The water quality regulatory framework should be based on risk assessments and control including: risk assessment of each system, identification of potential hazards, design of control and/or risk mitigation measures, proper reporting, and enforcement notifications. It is however noted that these may require an improvement of water quality testing infrastructure (laboratories and professional staff) under the management of the service providers.

F. Intermediate Regulatory Price Setting Process

8. Prior to the adoption of a multi-year pricing cycle, prices will need to be adjusted on an annual basis to meet the cash flow requirements of the service providers. The willingness of the Government to phase out the current high subsidies and the upcoming water supply and sanitation investments will impose significant upward pressures on prices, and it is therefore recommended that any short-term price adjustment proposals be used as an opportunity to send market signals and for prices to rise gradually.

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G. Multi-Year Regulatory Price Setting Framework

9. The United Water Supply Company of Georgia (UWSCG) and other service providers will develop their corporate and business plans based on the Government’s level of service expectations. The format of such plans should however be specified by GNEWSRC and be in harmony with the pricing model. The business plan framework should comprise an asset management plan (capital maintenance and enhancement), an operational plan, a commercial plan and a financing plan. The business plan should relate to the achievement of the level of service targets and presented in monetary terms (costs and benefits), and be driven by objectives other than level of service compliance, e.g. profit incentives.

10. The Government is expected to provide policy guidance to GNEWSRC with respect to pricing from which the GNEWSRC can formulate a more detailed pricing policy and a pricing model. The regulatory pricing model to be adopted should be based on the concept of determining a revenue requirement made up of:

(i) Direct operating costs; (ii) Capital maintenance made up of: (a) infrastructure renewals charges; and (b) current cost depreciation; and, (iii) Return on regulatory capital value.

11. This revenue requirement is satisfied by income received from user charges determined on an annual basis for the period of the cycle and converted to an annual automatic inflation adjustment formula commonly applied to multi-year pricing structures (e.g., RPI1 + X). The value of X is determined in the review of business plans and tariffs submitted by service providers as being what is necessary to achieve the investment requirements and also allows for expectations of efficiency improvements. Preliminary calculations suggest that X for water supply services could be as high as 20% for domestic customers in the first regulatory cycle, meaning that prices may have to increase annually by some 20% per year in real terms for the first three years.

H. Regulatory Scrutiny and Negotiations

12. To guard against the service providers underplaying performance expectations to secure higher prices, the role of GNEWSRC is to scrutinize and challenge business plan and proposals submitted by service providers. The GNEWSRC needs to employ external resources (technical and financial) to properly scrutinize the submissions and make their recommendations. The service providers will be charged a levy to cover the regulatory costs. To avoid unacceptable price shocks, it may be necessary for GNEWSRC to propose a re- assessment of the targets, identifying those that may need to be sacrificed or adjusted.

13. On the conclusion of the negotiations between the GNEWSRC and the service providers, the final business plan and price submission should be prepared as the basis for the prices to be charged over the three years of the review period and the results published accordingly. This effectively creates an implicit contract between the service providers and the GNEWSRC (and the customers) on the basis of agreed prices in exchange for a commitment to meet levels of service targets. Where targets are not met, adjustments to the revenue requirement in subsequent reviews may be required, giving the customers their money back.

1 Retail Price Index

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I. Monitoring and Regulatory Action

14. Regulatory monitoring is a principal function of the GNEWSRC; in particular, the monitoring of performance against the business plan targets, and includes: financial (regulatory accounting), non-financial (performance reporting), and audit/verification of reported information.

15. For the financial reporting aspect, it is necessary to introduce regulatory accounting guidelines (RAG), to record actual financial transactions in a manner that is compatible with the assumptions as set out in the model to allow for monitoring of performance against the expectations as set out in the price review. RAG also has the purposes of defining the information requirements necessary for inclusion in financial models, the evaluation of the financial capacity of utilities, scenario testing, benchmarking etc. where appropriate. RAG differs from conventional accounting through:

(i) The separation of core (regulated) income and expenditure from non-core (unregulated) income and expenditure; (ii) The recording of costs by activity (e.g., production and distribution for water); (iii) The determination of regulatory capital values (quite different to book values); (iv) Infrastructure renewals accounting for underground assets and depreciation (calculated on a current cost) for above ground assets; (v) Current cost accounting to capture the impacts of inflation; and, (vi) Financing of investments.

16. Regulatory accounting must be accompanied by reporting on non-financial performance, e.g., production, sales, customer numbers, etc. Caution is advised with respect to the reporting of losses, and GNEWSRC should evaluate performance relative to net economic benefits, for example, regarding the level of leakage. These non-financial parameters, when combined with the regulatory accounting information, can form the basis of performance measurement and benchmarking.

17. Audit and verification of information submitted by the service providers will be best undertaken by external independent bodies, including the employment of the services of external financial auditors and professional consulting engineers for the non-financial aspects.

18. For future reviews, a detailed reconciliation of actual expenditure against planned expenditure will be required.

19. The GNEWSRC needs to apply a high degree of discretion with respect to enforcing compliance with standards and the actions that the GNEWSRC can take are generally limited to that which can be considered fair and reasonable. The proposed licensing of service providers is intended to enhance the enforcement powers of the GNEWSRC.

20. Other measures the GNEWSRC may take with respect to enforcing compliance with obligations include the use of the regulatory accounting structure to reward early investment but penalizes delayed investment, claw backs of unspent funds that were earmarked for investment and regular public publication of annual performance reports.

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J. Other Regulatory Functions

21. The role of GNEWSRC with respect to consumer issues is well-defined, and GNEWSRC operates a well-functioning dispute resolution service, which is deemed to be successful. The institution of an independently appointed Public Defender within GNEWSRC provides consumers with additional legal support and has proved to be successful; the weakness, however, in these arrangements is that the roles of GNEWSRC and the Public Defender are not well known to the general public, and efforts should be made to redress this in GNEWSRC’s communications strategy.

22. Furthermore, guidance should be provided for customers to resolve disputes with the service provider at local level and only approach the GNEWSRC if the dispute is not resolved; the establishment of local consumers groups, assisted by the GNEWSRC, shall be encouraged to serve as a direct communication tool between service providers and consumers.

23. The GNEWSRC undertakes its communications strategy seriously although most of its material is related to the energy sector. The communications strategy regarding water supply should be bound into the multi-year pricing approach with regular publication of policies, targets, procedures, progress and outcomes. Furthermore, such publication should be prepared in layman’s terms, easily understood by the wider population rather than confined to professionals in the sector. The communications strategy should include regular (annual) performance reporting, and consumer information, e.g., how to submit complaints to GNEWSRC and/or the Public Defender.

K. Support Requirements

24. There is a need to provide support and capacity building to the three following principal organizations involved in the sector:

(i) To the Government (through the MRDI), in the implementation of the policy and strategy, development of new legal instruments, long-term strategic plans, short term levels of service expectations and policy guidance for the forthcoming multi-year price review;

(ii) To the GNEWSRC, in the analysis of short-term pricing proposals based on short-term budget requirements, the development of the regulatory tools for the multi-year price review framework, and enhancing communications activities; and,

(iii) To the UWSCG (and possibly other water service providers), in the development of short-term levels of service targets and expectations, the preparation of appropriate corporate and business plans and tariff submissions, the implementation of regulatory and policy requirements, the development of improved operational and commercial practices and planning targets, and the development of capital investment plans for appropriate water quality and wastewater discharge quality monitoring and control systems (laboratories, etc.).

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Appendix 6: Detailed Investment Plan

Table 1: Assumptions and Unit Costs Description Value Unit Average Annual Growth Rate (2002-2009); Assumed Long-Term 0.22 % Growth Rate of Municipality, if Growth Rate is 0 or Negative Water Demand (Net Demand + 20% Losses) 250 LPCD Commercial & Other Bulk Water Demand 50% % of Domestic Demand Tourism Water Demand in Tourism Potential Towns 40% % of Domestic Demand Daily Pumping Hours 22 hours

Average Pumping Hear (T&D) m 50 Storage Requirement 50% of Daily Supply Transmission & Distribution Network 1 m per capita Sewage Generation (80 % of Net Water Supply) 64% % of Gross Water Supply Sewer Network 1 m per capita Sewer Mains 10% of Laterals/Network HH Connected to Sewer (Towns > 50,000 Population) 90% HH Connected to Sewer (Towns < 50,000 Population) 80% Remaining Households 10-20% Individual Septic Tanks

Unit Costs Water Intake Works 34.00 $/m3 Minimum Intake Work Cost 100,000 $ Treatment (Chlorinator) 50,000 $ - Lump Sum Treatment (Sedimentation, Filtration) 382 $/m3 Minimum Wtp Cost 500,000 $/unit Pumping (Avg. 50 M Head) 2,750 $/KW Storage (Rehabilitation) 30.00 $/m3 Storage (New) 89.00 $/m3 Transmission Lines (Steel/DI of Average Dia 500 mm), 284,460 $/km Rehabilitation Distribution Lines (Rehabilitation) 147,003 $/km Distribution Lines (HDPE of Average Dia 225 mm) 294,006 $/km Domestic Meters & Service Connections, Average 15 mm Size 113 $/unit Non-Domestic Meters & Service Connection, Average 25 mm Size 199 $/unit

Sewage Treatment Plant 625 $/m3 Minimum STP Capacity 2,000 m3 Sewer Network (Combined Trunk, Mains, Laterals, Manholes, 350,000 $/km Pumping) Septic Tank (Household) 1,259 $/Unit

Towns Less Than 25,000 Population 300,000 $/Town Towns More Than 25,000 Population 500,000 $/Town

Contingency 25% of Base Cost Incremental Administration 5% of Base Cost

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Table 2: Worksheet

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Table 3: Investment Plan

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Appendix 7: City Database

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Appendix 8: Service Center Database and RIA Results

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Asian Development Bank

Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia PATA 7492-GEO

Final Report - Annexes Output 1 – Urban Water & Sanitation Sector Strategy

December 2010 Fresco, Davit Gareja Monastery c.14th c CE

In Association With: GeoHydro Georgia

Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Urban Water & Sanitation Sector Strategy

Annexes

Annex 1-1: Urban-Rural Dynamics Annex 1-2: Overview of Contemporary Urban Development Issues in Georgia Annex 1-3: Demography Annex 1-4: Regional Resource Base and Economic Indicators Annex 1-5: Examination of Social Dimensions, Environmental Considerations, Safeguards and Governance Issues in WSS Sector Management Annex 1-6: UWSS Profile Annex 1-7: Urban Households 2010 and Current Levels of Urban WSS Services Annex 1-8: Population Projection and Future UWSS Demand Annex 1-9: Multi-Criteria Analysis Annex 1-10: Inventory of Laws and Policies Annex 1-11: UWSCG Staff Annex 1-12: Urban WSS Infrastructure Needs Annex 1-13: Unit Cost and Assumptions for Urban WSSS Annex 1-14: Investment Cost

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Annex 1-1: Urban-Rural Dynamics

Urban-Rural Models of Georgia’s Municipalities

There are many types of urban-rural models in Georgia’s municipalities, namely:

 a city (urban area) which comprises the whole municipality;  a city (urban area) within a municipality with rural portions;  a paralegal entity (sub-urban) within a municipality with rural portions;  a combination of a city and a paralegal area/s (sub-urban area/s) within a municipality with rural portions; and,  a combination of paralegal area/s (sub-urban area/s) within a municipality with rural portions.

Table 1 shows the urban and rural population and the urban and rural households by region throughout Georgia. Lower Kartli has the biggest urban population, followed by Imereti region and Samgrelo Zemo-Svaneti region.

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Provincial Urban Population Rural Population Total Urban Household Rural Household Total Capital/ Region Population Household Regional Figures Figures Centre Figures % Figures % Figures % Figures % Imereti Kutaisi 321,041 46.17 374,373 53.83 695,414 95,885 46 110,604 53.56 206,489 Samegrelo-Zemo Svaneti Zugdidi 181,316 39.10 282,437 60.90 463,753 48,868 39 77,939 61.46 126,807 Ajara Batumi 165,682 44.23 208,881 55.77 374,563 44,915 49 46,971 51.12 91,886 Guria Ozurgeti 37,460 26.16 105,748 73.84 143,208 10,464 26 29,981 74.13 40,445 Racha-Lechkhumi Ambrolauri 9,527 18.72 41,354 81.28 50,881 2,967 17 14,998 83.48 17,965 Mtskheta-Mtianeti Mtskheta 31,879 25.62 92,553 74.38 124,432 9,403 25 28,350 75.09 37,753 Samstskhee-Javakheti Akhaltsikhe 64,616 31.29 141,873 68.71 206,489 18,258 32 38,421 67.79 56,679 Kakheti Telavi 83,473 20.58 322,093 79.42 405,566 18,258 15 100,942 84.68 119,200 Inner (Shida) Kartli Gori 113,235 36.16 199,880 63.84 313,115 18,258 23 59,827 76.62 78,085 Other cities 183,170 37.16 309,741 62.84 492,911 18,258 18 80,827 81.57 99,085 Lower (Kverno) Kartli Kodori Ravine - - 1,956 100.00 1,956 18,258 97 519 2.76 18,777 Tbilisi 1,073,034 99.99 147 0.01 1,073,181 313,857 100 43 0.01 313,900 Total 2,264,433 52.11 2,081,036 47.89 4,345,469 617,649 51 589,422 48.83 1,207,071

Provincial Urban Population Rural Population Total Urban Household Rural Household Total Region Capital/ Population Household Regional Figures % Figures % Figures Figures % Figures % Figures Lower (Kverno) Kartli TbilisiCentre 1,073,034 99.99 147 0.01 1,073,181 313,857 100 43 0.01 313,900 Imereti Kutaisi 183,691 100.00 - - 183,691 54,807 33 110,604 66.87 165,411 Ajara Batumi 121,221 100.00 - - 121,221 33,425 42 46,971 58.42 80,396 Samegrelo-Zemo Svaneti Zugdidi 181,316 39.10 282,437 60.90 463,753 48,868 39 77,939 61.46 126,807 Imereti Other cities 137,350 29.96 321,041 70.04 458,391 266,234 55.85 210,437 44.15 476,671 Ajara Other cities 44,461 21.16 165,682 78.84 210,143 132,257 52.70 118,711 47.30 250,968 Guria Ozurgeti 37,460 26.16 105,748 73.84 143,208 10,464 26 29,981 74.13 40,445 Racha-Lechkhumi Ambrolauri 9,527 18.72 41,354 81.28 50,881 2,967 17 14,998 83.48 17,965 Mtskheta-Mtianeti Mtskheta 31,879 25.62 92,553 74.38 124,432 9,403 25 28,350 75.09 37,753 Samstskhee-Javakheti Akhaltsikhe 64,616 31.29 141,873 68.71 206,489 18,258 32 38,421 67.79 56,679 Kakheti Telavi 83,473 20.58 322,093 79.42 405,566 18,258 15 100,942 84.68 119,200 Inner (Shida) Kartli Gori 113,235 36.16 199,880 63.84 313,115 18,258 23 59,827 76.62 78,085 Other cities 183,170 37.16 309,741 62.84 492,911 18,258 18 80,827 81.57 99,085 Lower (Kverno) Kartli Kodori Ravine - - 1,956 100.00 1,956 18,258 97 519 2.76 18,777 Total 2,264,433 53.29 1,984,505 46.71 4,248,938 963,572 51 918,570 48.80 1,882,142

Source: Georgia Statistics Office, 2002.

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Annex 1-2: Overview of Contemporary Urban Development Issues in Georgia

Urban Development in Georgia – A Brief History

The development of the three key urban areas in Georgia can be traced back from the early kingdoms which developed their capital in the different parts of the country represented by the present regions. The present capital city traces its roots from the emirate set up by the Arabs at Tbilisi which eventually grew by almost 10 times the size of any other city in the country. The ancient city of Kutaisi was one of the main cities of ancient Colchis and a settlement that existed for about 4,000 years and turned into the second most important industrial city during the Russian regime but shrank with the dwindling of its industries after Georgian independence.

Batumi is the capital of the Adjara region which has been part of Colchis and Caucasian Iberia since the ancient times but was colonized by the Greeks in the 5th century BC, fell under Rome in the 2nd century BC and became part of the Egrisi region before being incorporated into the unified Georgian Kingdom in the 9th century AD. As the Ottomans conquered Adjara in 1614, the people were converted to Islam. The Ottomans were forced to cede Adjara to the expanding Russian Empire in 1878. Adjara‟s autonomy even after the post-Socialist transition is attributed to its historic distinction of having association with Muslim neighbouring country-Turkey. In July 2007, the seat of the Georgian Constitutional Court was moved from Tbilisi to Batumi.

The process of urbanization which started in the mid-19th century along with the process of industrialization which happened gradually. At the beginning of 20th century, people from rural areas mostly in the highlands moved down to the nearby cities and towns for better economic opportunities. The second significant outflow of younger members of households to larger cities was also recorded. Since 1950 this process became more intensive mainly due to the development of transportation networks. During the Soviet period, the settlement system had more or less a balanced character where Highland Racha was perceived to be the only problematic region suffering from depopulation as a result of industrial development in Tbilisi, Kutaisi, Batumi, Gori and others. Being then a part of the USSR, the “microrayon” concept of development was seen as a major contribution in organizing life within the cities since it focused on communal rather than individual.

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The implementation of microrayon development had shortcomings as the completion of public services lagged behind housing because buildings for services entail more technological input which remained as secondary theme after housing.1

Consequences of the Transition

Internal conflicts, widespread stagnation and high rate of unemployment followed the collapse of the Soviet Union. Statistics show that the Internally Displaced Persons and refugees account for a large percentage of the Georgian population and that urban unemployment rate (28.0%) is five times bigger than rural unemployment (5.7%). Similar to the experience of other post-socialist cities/towns in Eastern and Central Europe, suburbanisation and gentrification has transpired in Georgian key urban areas with population leaving the then-industrial areas and moving to urban areas which the Government includes in the priority municipalities for economic development such as for industrial, tourism and port-led activities. This is reflected in the population dwindling in central Tbilisi, Gardabani, Mtskheta, Ambrolauri, Oni and Tsageri and increasing in population of Chokhatauri, Poti, Kharagauli, Terjola, Marneuli and Bagdati.

Privatisation Process and Land Use Dynamics

Bereft of important urban planning consideration, zoning, cultural heritage preservation and cadastral mapping, the privatisation process which began in the early 90s had a number of omissions that resulted in negative consequences. The problem of irreversibility is manifested in the historical parts of cities where the process of massive privatisation transpired but resulted in construction bubble leaving parcels of land idle and massive unfinished structures. Illegal construction and encroachment on government properties became visible which distorts the city image and causes degradation of unique and highly valuable urban environment. Dilapidated streetscapes are also noticeable in a number of urban areas due to absence of urban renewal program which is also seen to result in loss of city image, and depreciation of properties. Likewise, narrow and dilapidated urban roads, inadequate urban service as well as deteriorated urban WSS infrastructure due to absence of an urban renewal program causes time lost for users of congested roads and recipients of water supply and poses environmental degradation. The former Ministry of Urbanisation and Construction (MUC) and the Municipality of Tbilisi issued rules for land use and building regulations for the city of Tbilisi as an attempt to restrict outrageous and unplanned constructions that took place in the capital but the Ministry was dissolved later.

1 DiMaio, Jr. A.J. (1974) Soviet Urban Housing : Problems and Politics. London: Praeger Publishers, Inc.

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Emphasis on Construction as an Economic Driver

The government that came into power after the Rose Revolution successfully advanced construction activities by creating favourable conditions for foreign investments in the construction sector. Large scale construction projects which vividly lack integrated urban planning appreciation mushroomed in the periphery of the city center. Active private sector initiatives in the construction of housing and business facilities, matched by public participation in the building and reconstruction of state-owned health, education, and other facilities were noted reducing dependence of the construction sector on single projects and introducing a higher degree of sustainability. The 14% economic growth recorded in 2007 was attributed to the construction of buildings.2 The integrity, however, of many local private building companies operating as developers on the real estate market was questioned due to negligence and failure to observe construction and sanitary norms. The absence of sanctions attached to zoning regulations did not provide a definitive legal guidance for determining the areas for new development and regulation in the city center as the current practise relies on the commonly accepted principle that urban land problems would be settled by the market economy.

One neglected aspect in the urban sector inherited from the Soviet time is the critical condition of housing where almost half of the 1,119 residential units amortized in Tbilisi need emergency repair. The existing system of communal infrastructure is in a desperate state due to absence of proper maintenance measures since 1991. The high cost of repair and maintaining communal infrastructure led the private owners to be lukewarm in addressing it and the construction companies to evade the responsibility to provide the basic WSS infrastructure which resulted in poor water supply service delivery and deterioration of the urban environment.3 The big increase in stock of privately developed housing projects caused by market obsessed and investment eager economy led to high housing market speculation which created a construction bubble (unfinished construction and increased unemployment in the construction sector).

Neglect of Effective Spatial Planning

As in most of the post-Socialist states, the main focus of public attention in Georgia during the transition period related to political and economic concerns which were considered as the core for advancing social reforms and little attention have been given to the spatial aspects, and that changing the urban form and structure of cities entail a considerable amount of time. Only the country‟s capital where the peri-urban areas have experienced a visible physical transformation giving birth to new forms or architecture such as the development of single-detached and modern high-rise residential units and a big supermart outside the old city center towards the outskirt district or village such as Dighomi District on the northside, Tskneti on the west side, and Krtsanisi on the east side of Tbilisi.

2 Report No. 4440-GE Georgia Poverty Assessment (June 2008). Human Development Sector Unit. South Caucasus Country Unit, Europe and Central Asia Region, Document of the World Bank, p. 17. 3 Nino Gerkeuli, Report on National Urban Policy In Georgia, (no date).

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Inner city development of modern high-rise structure and redevelopment of old structures are seen in the southern portion of the old city center of Tbilisi, Kutaisi and Zugdidi. The mono-centric model of urban patterns in the key cities are expected to remain until a major boost in the economic sector takes place where people will opt to build or purchase properties outside the built up-area congested with the multi-level residential structures built during the Soviet time. Derelict industrial areas are visible in Kutaisi, Zugdidi, Gori, Tkibuli and other cities which used to host the Soviet-built factories creating an image of neglect and abandonment in the physical form. Diversification of mono-functional areas, strip development are observed along major highways and new roads which may result in sub-urban sprawl in absence of planning and lack of institutional coordination persist. Patches of illegal structures or encroachment and redevelopment brownfield sites for internally displaced communities are noted along the major highway outside the city center. Painting the old gray-toned structures all over the country brought colour to the streetscapes of the key cities. Proliferation of multi-level business establishments started to sprawl in the inner cities of Tbilisi, Kutaisi and Zugdidi. Revitalisation of urban districts and old cities identified as tourist destinations through refurbishing of structures‟ facade such as those located old inner core of Tbilisi, Mestia and Bakhmaro. Redevelopment plans for tourism oriented activities in the western region is seen to result in depopulation of city centers attracting people to migrate to seek for better opportunities that come together with this new economic development in the countryside.

However, the urban areas in the rest of the regions have remained stagnant being the administrative centers of the province hosting the trading centers for agricultural products of the rural villages.

Need for Effective Regional and Urban Development Approaches

Urban development is a local manifestation of regional development as urban centers are in fact the spatial aspect of a regional economy. However, there is no general theory for regional economic imbalance that can be applied universally to explain the reasons why the regional problem exists and remedies that work in one place may not work in another. Different regional theories are useful, however, in gaining better insights into regional inequalities and assist planners decide on „what is to be done‟ at national and regional levels. This requires an open and pragmatic approach. Most theories assume that a macro-level economic and institutional analysis is necessary with regard to the „regions‟ and that most are outcomes of broader theorising about the national economy and its relationship to the wider economic world. These dimensions are not fully considered in most of the regional development thinking in Georgia. „Economic growth pole‟ and urban location theory attempts to „second-guess‟ the factors that make present successful regions successful and tries to push and pull growth industries into a „growth pole‟ in a poorer region as a means of catching up with the others. This is a popular approach allows infrastructure and other incentives to be planned and implemented, but in practice has limited impact. The most significant

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Urban Water & Sanitation Sector Strategy - Annexes Annex 1-2 interventions in regional development are macro-economic with respect to monetary and fiscal policy, and trade policy; coordinate linkages within the country and with other countries; and micro-economic with respect to labor mobility, local economic development initiatives, and local incentives. Because regional and urban development interventions require public monies they must be carefully appraised, monitored and evaluated to check on their performance with respect to the national and regional economies and their impact on regional societies. A series of questions need to be addressed: what is regional and urban development policy expected to achieve; how are the impacts to be measured; which policy instrument is likely to be the most effective and how should they be packaged together; and what is the evidence of past experience of regional and urban interventions in Georgia. This requires the formulation of a National Development Plan comprising government‟s decisions on national direction and developmental strategy. On the other hand, regional economic development policies are secondary to national development policy. The „region‟ in national economic development is the spatial interpretation of national economic policies and regional development should be formulated and prioritized within the context of national and sector planning. ‘Integrated’ regional development means an integration horizontally with other regions in a spatial sense, and vertically through the sector ministries in an economic sense.

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Annex 1-3: Demography

City Population

1 Georgia‟s population records show a trend in decreasing population from 1990 to 2004 and from 2006 to 2008. The trend within the cities and towns is mainly attributed to the impact of the changing political situation during the post-Socialist period before the 2004 Rose Revolution, and to the 2008 military conflict with Russia when a significant number of people moved within and outside the country. A slightly increase in population was noted between 2008 and 2009.2

As given in the GSO 2002 data, the urban population of Georgia (2,264,286) represents 52.10% of the total population (4,345,686). Of the total urban population, about 1,072,887 (47.38%) come from Tbilisi, 183,691 (8.11%) from Kutaisi, 121,221 (7.32%) from Batumi,

114,331 (5.49%) from Rustavi3, and the rest of the urban population (33.66%) comes from other cities and municipalities. Combining the total population of Tbilisi, Kutaisi, Batumi and Rustavi already comprises 36.76% of the country‟s total population. Imereti (374,737 or 18% of the total rural population) and Kakheti (322,093 or 15.47% of the total rural population) have the highest rural population among the regions.3 This implies that urbanisation only takes place at the center (Tbilisi and 3 other urban areas) due to the highly concentric spatial growth in Georgia characterized by the outward expansion of urban development from the center of the capital city induced by the construction of the circumferential or radial roads5, while the other portion of the country‟s population are spread in the rural areas where agri-based economic opportunities are available. In terms of population density, Kutaisi (2,694 p/km2) Tbilisi (2,196 p/km2) and Rustavi (1,957 p/km2) have the highest population density; Marneuli (526 p/km2), Zugdidi (252 p/km2), Samtredia (245 p/km2), Terjola (235 p/km2) and Khelvachauri‟s population density range from 200- 999 p/km2; Chiatura, Tskaltubo, Khaskuri, Chokhatauri, Khoni, Kobuleti, Kharagauli and Zestaponi have a population density ranging from 100-199 p/km2; the rest of the cities and towns have a population density below 100 p/km2 (Table 2). This big population concentration in a few key urban areas in the country reflects a growth center policy which hinders balanced regional development.

1 From 5.42 million in 1990 to 4.31 million in 2004 (GSO records 1990-2004). 2 GSO records show an increasing birth rate trend from 11.0 per 1,000 population in 2000 to 12.9 per 1,000 population in 2008 and a decreasing mortality rate from 10.7 per 1,000 population in 2000 to 9.8 per 1,000 population in 2008. The birth and mortality rates, however, showed a positive change in 2009 recorded at 14.4 per 1,000 population and 10.6 per 1,000 population, that is, a positive population change, excluding migration. 3 The difference of urban and rural population in Imereti is not much at 46.14% and 53.86%, respectively. Kakheti consisting of Akhmeta, Gurjaani, Dedoplistskaro, Telavi, Lagodekhi, Sagarejo, Signaghi and Kvareli is the least urbanised region in Georgia with only 20.58% of the population living in towns and settlements. The rest of the cities and municipalities in the 10 regions were generally rural in character and only the administrative centers have an urbanised image. The total rural population of the country is 2,081,400 (47.41%) as per GSO 2002 record.

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Table 1: Municipal Area, Population, Population Change and Population Density

Notes: Highlighted in blue are not covered by UWSCG.

Source: Georgia Statistics Office.

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Notes: Highlighted in blue are not covered by UWSCG.

Estimates of 2010 and Projection of 2020 and 2040 are based on Georgia Statistics Office data.

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Annex 1-4: Regional Resource Base and Economic Indicators

Economic Potential of Regions, Cities and Towns

The dominance of Tbilisi as being the country‟s capital is manifested in the number of business entities recorded at 136,211 or 46.3% of the country‟s total business entities1, followed by Imereti (35,155 or 5.4%) and Samagrelo-Zemo Svaneti (24,573 or 8.3%) where Kutaisi and Zugdidi are located, respectively. Employment statistics of 2008, however, shows that Samegrelo-Zemo-Svaneti Region2 have the highest employment rate at 75.1% and 71.3%, respectively. The regions with the highest unemployment rate in 2008 were Adjara (25.6%), Mtskheta-Mtianeti (17.7%) and Inner Kartli (16.3%) which can be attributed to the abandonment of communal farming and animal raising and industries after the Soviet regime. The regions with the highest industrial employment rate in 2008 were Kvemo Kartli (15.5%) and Imereti (15.2%) where Tbilisi and Kutaisi are located. GSO statistics show a low employment rate for Tbilisi recorded at 37.0% in 2006, 39.8% in 2007, 36.8% in 2008 and 37.5% in 2009. The cities and towns located in Kakheti, Samegrelo-Zemo-Svaneti, Samtskhe-Javakheti, Mtskheta-mtianeti have the highest economic activity rates in 2009 ranging from 68.5% to 73% as compared to Tbilisi‟s 37.5%.

Shida Kartli comprised of Gori, Kaspi, Kareli and Khashuri which needs to be promoted for development of agriculture infrastructure and industrial economic activities. Gori used to be the site of the Russian economic properties. Kaspi economy relies on agriculture with a few industries producing building materials and wine/spirits. There are a number of historical and architectural sites in Kaspi which include Rkoni Monastery, Samtavisi and Kvatakhevi churches and which may be developed for tourism.

From 2003 to 2008, agriculture, hunting and forestry, fishing were the highest contributory sectors to the Kakheti province’s gross value added. In 2008, the province‟s public administration sector had an increase in the GVA which made the sector second highest contributor to the total GVA. Kakheti which has the highest ratio of fertile agricultural lands to the entire land resources and area per population in Georgia heavily depends on agriculture. The region‟s agriculture and processing is concentrated on vineyard and wine sector. Other sectors of the economy consisting of construction, product processing by households, education, health and social work are less visible in Akhmeta, Gurjaani, Dedoplistskaro, Telavi, Lagodekhi, Sagarejo, Signaghi and Kvareli. Kakheti region boasts of the oldest historic monuments and a significant area of State forest and reserves known for unique flora and fauna. Further development of trade is anticipated with the restoration of Tbilisi-Telavi road through the Gombori Pass.

1 As of 1/1/2010. 2 It consists of Abasha, Zugdidi, Matrvili, Mestia, Seaki, Chkhorotsku, Tsalenjikha, Khobi and Poti and Samstskhee-Javakheti Region comprised of Adigeni, Aspindza, Alkhaltsikhe, Akhalkalaki, Borjomi and Ninotsminda.

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Imereti Region’s economic strength relied on its major city Kutaisi (the second largest city in Georgia); other urban industrial centers such as Samtredia3 (food and wine industry), Chiatura (manganese production center) which has a rail linked to Zestaponi (known for metal production, large ferro-alloy plant processing manganese and wine production4), Tkibuli (coal mining center5 and tea production), Khoni, (tea production) and Sachkhere. Imereti was traditionally an agricultural region known for its mulberries and grapes. The region‟s priorities are now geared towards rehabilitating the tourist and resort industry, particularly the rehabilitation of resort grottos in Sataplia and Khumis Tavu, historic palace of Gordi, forest-park, the Vani archaeological complex, and Bagrati church restoration. Tkibuli also boasts of its Medieval architecture (Monastery Complex (XI-XII centuries), Motsameta Monastery Complex (VIII-XI centuries, picturesque villages, rich folklore, agri- tourist farms (tea production), forest, caves, mountains, woods, waterfalls, wild rivers, home-made vine and food. Based on GeoStat 2008 estimates, economic activity rate in the region is 66.4%‟ employment rate is 58.6%; and unemployment rate is 11.8%.

Mtskheta-Mtinaneti Region consisting of Dusheti, Tianeti, Mtskheta and Kazbegi has a rich deposit of minerals which are mostly used for construction such as marble stones, limestone, inert materials, diabase, shale stones and andesites. The Devdorak copper deposit is located in the vicinity of the village of Gveleti, Kazbegi district (close to Devdorak Glacier). The region is also rich in mineral water.6 A unique type of industrial clay for pottery is also found in the region. It also has a rich and diverse flora and fauna. The known state reserves Saguramo and Kazbegi state are found in the region. Bestowed with rich natural resources and historic-cultural heritage, tourism potential is also explored in the region. Its natural setting with a beautiful mixture of rocks and spacious fields with a serpentine road leads up to a vast hollow makes it an interesting area for eco-tourism. Dusheti and Kazbegi host the Dariali-Aragvi road (military highway of Georgia) representing one of the main arteries connecting the Caucasus with Russia. Kazbegi has two major tourist attractions: the Sno Fortress and Gergeti Holy Trinity Church which represents an outstanding monument of Georgian Architecture. For Tianeti, the tourist attractions are its rich cultural heritage in the form of Bochorma Fort, Zhaleti Basilica, Archili Monastery, Sakdari Church and Devenaantkhevi Church. These cities or towns such as Mtskheta, Gudauri, Dusheti Kobi and Kasbegi towards the north are groping on how to push economic growth as tourism-led construction and development have slow down since the war transpired leaving a number of unfinished hotels waiting for the next economic boost to come.

Racha-Lechkumi region in northwestern Georgia which includes the historical provinces of

3 Samtredia evolved as a town from a crucial railway junction in the 1880s and acquired a town status in 1921. Under the Soviet rule, it was industrialised for the production of food and wood. http://en.wikipedia.org/wiki/Samtredia retrieved 29 June 2010. 4 The transport, communications, trade-service and agriculture sectors are equally developed in Zestaponi. It has 5,000 hectares of vineyards accounting for 80% of all farmland. The Sakara Viticulture and Winemaking Scientific-Research Station plays an important role in developing viticulture in Zestafoni. Other crops include corn and vegetables, cattle breeding and swine production. JSC Fero contributes highly to the local economy. Source: Zestaponi Municipal Economic Development Plan, September 2007. 5 Only one of the nine coal mines is functional. http://en.wikipedia.org/wiki/Tkibuli retrieved 29June 2010. 6 This region is known for producing known brands such as “Vazha‟s Tskharo”, “Khada”, “Natakhtristskhali”, “Vedza,” “Bagini”, “Lomisa” and “Alnaguda” from Stephantsminda, Kobi and Truso.

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Racha, Lechkhumi and Kvemo Svaneti (i.e., Lower Svaneti) has maintained its rural character covering an area of 4,954 km² and with a population of 50,969 (2002 census). It is the most sparsely populated region in the country. The GoG‟s priority direction for this region with four administrative centers consisting of Ambrolauri7, Lentekhi, Oni and Tsageri is geared towards improving the arrangement of city centers and territorial units with specific orientation on urgently improving the condition of the internal city, roads, parks, and public gardens which lack proper arrangement, clubs and youth centers, village centers which lack street lights further exacerbating its difficult living condition and helping in the process of stabilising migration. Proposed in this region is infrastructure development including internal roads, bridges, water supply systems, electricity energy transmission lines, reinforcement construction along rivers which causes serious problems regarding the economic and social development of the region.

Also included in the GoG‟s priorities is the completion of railway connections across China-Georgia-Europe and the construction of the Karsi-Akhalkalaki railway and connection of the Georgian Railways to Turkey. This land transport-led development is expected to support the goal of establishing 100 new processing plants in the rural areas, creating more than 200 enterprises for processing agricultural products which will generate more than 10,000 employment, and involving about 100,000 persons in spin-off activities in line with the development goals of the agricultural and tourism sector.

Samtskhe-Javakheti region composed of Adigeni, Aspindza, Akhaltsikhe, Akhalkalaki, Borjomi and Ninotsminda is seen to develop as a tourist destination due to the potential of the cultural centers and resort infrastructure in Abastumani, Borjomi and Bakuriani. Coal mining operation, construction of thermal electric power plant, small milk processing enterprises, fruit and vegetable process enterprises, development of dry fruit, seed and bee nursery are among other economic activities included in the priority for development in this region.

7 The region‟s capital Ambrolauri is known serving as one of the residences of the kings of Imereti in the 17th century. Of the royal complex, only the ruins of a church and a tower have survived. In 1769, the Imeretian king Solomon I granted this locale to the prince Zurab Machabeli who erected a "Machabeli tower" there. Ambrolauri was officially granted the status of town in 1966. The 1991 Racha earthquake with a maximum intensity of 9 on the MSK scale centered on the districts of Oni and Ambrolauri on the southern foothills of the Greater Caucasus mountains which killed 270 person, left approximately 60,000 homeless and caused mass destruction, including several Medieval monuments.7 The mainshock was followed by a complex aftershock extended over several months that caused further damage and casualties. Rescue operations in this region became complicated when the internal conflict burst.

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The economy of Guria region relies on sub-tropic farming and tourism. The province is also one of the largest tea growing regions in Georgia. The Black Sea‟s Ureki health resort is rich in magnetic sand and Bakhmaro resort development is included in the priority for economic development in the region. Water is one of the region‟s major resources making it famous for the mineral water of Nageblavi which is similar to Borjomi in its chemical composition. The region‟s unemployment rate in 2008 was 8% of the labour force; economic activity rate, 72.8%; employment rate of about 67 percent.8

Samegrelo-Zemo Svaneti region in western Georgia includes the historical Georgian provinces of Samegrelo (Mingrelia) and Zemo Svaneti (i.e., Upper Svaneti) including the Abasha, Zugdidi9 (capital), Martvili, Mestia, Senaki, Chkhorotsku, Tsalenjikha, Khobi and city of Poti. The region‟s total gross value added (GVA) in 2008 was GEL 1,556.30 million at current prices, of which public administration had the biggest share estimated at GEL285 million, followed by transport and communication at GEL257.7 million; trade:repair of motor vehicles and personal and household goods; agriculture, hunting, forestry and fishing at GEL231.6 million. The GVA is calculated proportionally based on employment. In 2008 the unemployment rate in the region was 11.8 percent of 209,900 thousand persons, economic activity rate was 69.1 percent and employment activity rate was 61 percent of 209,900. The government places high priority on rehabilitating highways and rehabilitation of head construction of water of supply and sewage system, arrangement of landfill, construction of bus stations, bridges, network of street light system, renovation/construction of hotels in Zugdidi including Anakliya and Mestia, restoration of sports club, construction of rest houses and hotels, restoration of historical monuments, conduct of archaeological excavation among other tourism oriented activities. The region is generally being promoted for tourism development, except for Poti with a free industrial zone operation on full-fledged terms and port infrastructure to be enlarged. The towns surrounding Zugdidi are generally agricultural with hazel nuts as leading product.

Adjara region10 is an autonomous republic of Georgia located in the southwestern corner of the country, bordered by Turkey to the south and the eastern end of the Black Sea. Among the economic development priorities in Batumi are port development and Kulevi terminals. Included in the priority for Adjara regional development is road infrastructure improvement, increase in the intensity of the air traffic and the number of the flights, number of the air companies, and number of the passengers approximately commissioning three international airports into operation; turning Georgian Railways into a successful corporation. The strength of this region lies on its being the gateway of Georgia to Turkey.

8 According to another source, emplyment rate in Guria in 2008 is 75.1% and unemployment rate is 3.8%. 9 Historically, Zugdidi was the capital of principality of Mingrelia (Odishi) until 1867, when the principality was abolished by the Russian Empire. 10 Adjara is also referred to as Ajara, Adzhara, Ajaria, Adjaria, Adzharia, or as Achara. It was formerly was known as Acara under Ottoman rule and Adjarian Autonomous Soviet Socialist Republic (Adjar ASSR) under the Soviet Union.

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Provincial Capital/ Agriculture Industry Regional Investment Employed Unmployed employed employed Region Centre Economic Activity Resource Base Potential (2008) Persons (2008) (2008) (2008) mining, economic free zone, water, forest, metallurgy, coal, Imereti Kutaisi tourism & industrial minerals textile, medical 58.60% 11.80% 60% 15% tourism clays, peet, tea, hazelnut, gold Guria Ozurgeti tourism, agriculture minerals, water mine, medical 75.10% 3.80% 90% 1.80% tourism minerals, forest, agriculture, Samegrelo-Zemo Svaneti Zugdidi tourism, agriculture water hazelnut, tourism 61.00% 11.80% 5.40% tourism, medical Racha-Lechkhumi Ambrolauri tourism, agriculture . tourism, 0.50% food processing, water, minerals, Mtskheta-Mtianeti Mtskheta tourism, agriculture corn, wool, wood, forest 47.00% 17.70% 1.90% tourism food processing, Samstskhee-Javakheti Akhaltsikhe tourism, agriculture water, forest industrial minerals 71.30% 7.50% 2.40% -limestone wine, wood, Kakheti Telavi agriculture, tourism water, forest water, h-power 63.80% 9.30% 80% 5.40% energy Inner (Shida) Kartli Gori agriculture, tourism forest, minerals food processing, 49.80% 16.30% 5.40% mining,tourism water, forest, Lower (Kverno) Kartli Tbilisi tourism & industrial metallurgy, minerals 56.70% 10.70% 15.50% tourism

tourism, transport, food processing, water, forest, Ajara Batumi tourism, free zone citrus, fish, tea, minerals 44.40% 25.60% 5.40% hazelnut, industrial minerals

Employed Employed Employed Employed persons in Employed Provincial persons in persons in persons in hotel & persons in Number of Capital/ industry construction trade restaurant transport Registered Regional (Average (Average (Average (Average (Average Business Region Centre 1999-2008) 1999-2008) 1999-2008) 1999-2008) 1999-2008) 1/1/2010

Imereti Kutaisi 16,156 2,826 12,265 851 4,607 35,155

Guria Ozurgeti 1,550 438 1,526 143 502 7,813

Samegrelo-Zemo Zugdidi 4,053 2,172 5,836 479 5,606 24,573 Svaneti

Racha-Lechkhumi Ambrolauri 823 445 1,007 59 236 1,902

Mtskheta-Mtianeti Mtskheta 1,891 1,005 1,522 607 601 6,910 Samstskhee- Akhaltsikhe 2,137 629 2,609 413 773 1,902 Javakheti Kakheti Telavi 4,332 809 5,303 209 1,065 16,036

Inner (Shida) Kartli Gori 4,596 1,410 3,587 373 1,865 14,483 Lower (Kverno) Tbilisi 13,560 1,647 7,258 475 1,664 23,645 Kartli Ajara Batumi 5,483 2,748 10,261 1,414 6,363 16,820 Notes: Highlighted in yellow shows high statistics while the highlighted in blue reflects low statistics in comparison with the rest.

Source: Georgia Statistics, 2008.

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Annex 1-5: Examination of Social Dimensions, Environmental Considerations, Safeguards and Governance Issues in WSS Sector Management

Social Dimensions

Social safeguard policies are paramount to achieving sustainable community development impact. This diagnostic analysis with social dimension adheres to the policy of avoiding, minimizing or mitigating adverse social costs to third parties or marginalization of vulnerable groups that may result from urban development projects such as rehabilitation or constructing new water supply and sanitation infrastructure, including sewerage systems. The proposed projects are supposed to have positive impact on the society, especially on women, IDPs, ethnic communities and other the marginalised sector of the society. The seventh MDG Goal of Georgia is to ensure environmental sustainability and reduce by half the proportion of people without sustainable access to safe drinking water. The present trend shows that the coverage of water supply and sanitation has gaps, particularly in rural areas. According to one source, 82% of the population was using improved drinking water sources (2005). Almost 10% of the households covered in the “Report on the Georgia Welfare Monitoring Survey” (2009) lack access to water, sanitation and heating1. The likelihood of achieving this goal is unclear.2

Impact on Settlements

Of the 68 cities and towns in Georgia, only a number of cities have big urban areas such as Tbilisi, Rustavi, Batumi and Kutaisi which are the few highly urbanised cities in the country with population density ranging from 1,957-2,694 persons/km.2 Most towns have lesser population density with rural characteristics and agriculture as a major contributor to household economies. Of these 65 cities and towns, UWSCG covers only 56 Service centers including Kutaisi but excluding Tbilisi, Rustavi and Batumi. Most of the potential project affected areas are located in the urban and semi-urban fringes with business and different forms of non-agricultural livelihood. Hence, the issue on involuntary settlements is far from arising. The involuntary settlement issue will only crop up when the selected sites for the infrastructure components will have no other alternative site and could not avoid affecting residents on the identified sites which will only be determined during the

1 “How do Georgian Children and their Families Cope with the Impact of the Financial Crisis?” Report of the Georgia Welfare Monitoring Survey, 2009. UNICEF Georgia, University of York, April 2010. 2 Source: Asian Development Bank (January 2008). Georgia: Interim Operational Strategy 2008–2009

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Urban Water & Sanitation Sector Strategy - Annexes Annex 1-5 feasibility study and detailed engineering design stage.

Impact on Physical Cultural and Historic Resources

Infrastructure and services for water supply and sanitation have positive impact for development of physical cultural and historic resources which are planned to be tourist destinations. Provision of water supply and sewerage systems has been the priority for infrastructure development in support of the Government‟s Tourism Strategy. The potential impact of the proposed urban WSS projects on the physical cultural and historic resources in the identified tourism areas which are included in the first tranche of proposed projects to be funded by the ADB and other project area for other funding will be assessed. Specific assessment and recommendation will be undertaken for those tourism areas which are included in the sample cities for social survey.

Impact on Marginalized Sector

The proposed water supply and sanitation projects will not have a negative impact on the women sector, IDPs, ethnic and low income groups. As per GSO 2002 statistics, 47.16% of the total population consists of men and 52.84% were women; and about 16.25% of the country‟s total population consist of ethnic population. Azeris (6.1%) and Armenians (5.69%) comprise the biggest ethnic groups in Georgia, and the other ethnic groups were Apkhazian, Ossetian, Russian, Greek and Ukrainian.

A total of 539,256 helpless families and 1,761,191 helpless persons were registered in the unified database and receiving subsistence allowance, representing 28.5% of the total households and persons of Georgia, respectively. Of these registered families and persons, 153,434 (28.5%) families and 420,802 (23.9%) persons receive subsistence allowance. Imereti Region (103,206) has the highest number of helpless families and 317,895 persons registered in the unified database and receiving substance allowance, followed by Tbilisi, Kakheti, and Samagrelo-Zemi Svaneti. The assessment includes looking into the percentage of the households and population who belong to the marginalized sector in the 65 cities and towns and the detailed diagnostic for social and gender aspects will look into this marginalized group in the surveyed cities and towns.

Over the past two decades internal conflicts, widespread stagnation and the high rate of unemployment which followed the collapse of the Soviet Union have been become a major socio-economic concern. The Internally Displaced Persons (IDPs)3 and refugees which account for 227,399 (5.15%) of the Georgian population in 2009 and urban unemployment rate (28.8%) which is almost 4 times bigger than rural unemployment (7.8%), are socio-economic issues which have geographical and socio-economic ramifications for developing the urban WSS sector strategy. As in other post-Socialist states, the main concern of government during the transition period has been key economic reforms, and limited attention has been given to the integration of spatial and infrastructure planning into macro-economic planning.

3 Detailed assessment of IDPs is provided in Output 2-Social and Gender Development Strategy.

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The distributional effect of the proposed project will have to consider the impact on the marginalised/urban poor households which lack access to WSS which is estimated at 10% of the 4,848 households across Georgia and poorest region Mtskheta-Mtianeti which has three times higher than the official (37.1%) than the least poor (12.7%).4

Environmental Dimension

The BDD stipulates that for environment protection, the direction for budget allocation is geared towards: i) switching to a new system of water resources management; ii) development of environment protection; and iii) development of environment monitoring and forecast system. However, the revision of Water Law is still on-going. Enforcement of high penalties is problematic in Georgia, especially if natural person is concerned. This is also attributed to the provision of the Administrative Code which provides for approximately 10 times lower penalty at GEL 800 or a maximum of GEL 2,000 for similar offences in water sector. Law 2911 should be amended to repeal the provision of the Administrative Code and the penalty stipulation should be reviewed to make it enforceable. On international and environmental policy, the GoG is working in cooperation with neighbouring countries with respect to riparian rights citing regional discussion about Kura-Araks, that Georgia has a joint monitoring undertaking on River Basin Management together with Armenia and another with Azerbaijan, and sub-river basins within Georgia territory. Georgia will adhere to Helsinki Convention with respect to international obligations for maintaining water quality, if admitted to EU. Georgia is a signatory to the Bucharest Convention for the protection of the Black Sea against pollution.5 However, the Convention and the Protocol are poorly implemented in Georgia due to lack of respective policy guidelines, systematic control over waste water including industrial water, drained into the Black Sea, poor technical condition of wastewater treatment facilities. One big environmental pollutant to Rioni River that drains to the Black Sea is agricultural output and there exists no agricultural policy to address this environmental issue on waste water discharges of the agri-industries and other entities which contributed to the deterioration of the surface water quality because it is not within the competence of the NSFSVPP but the MEPNR. It is unclear which state body is responsible for implementation of the convention at the national level. Concrete policies would have to be formulated and activities would have to be undertaken including prioritizing rehabilitation of waste water systems for resorts/tourism area of the Black Sea and STPs of resorts in the coastal zone to ensure environmental compliance.

4 Survey and analyses by York University entitled “How do Georgian Children and their Families Cope with the Impact of the Crisis: Results of the 2009 Welfare Monitoring. 5 Convention on Black Sea Protection from Pollution dated 21/04/1992.

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The Project Proponent of urban WSS project(s) has to undertake environmental impact assessment to verify the pattern of identified alternatives in accordance with existing regulations and guidelines set by the Inspection of Environmental Protection of Georgia. The purpose of this diagnostic is: i) to assess the environmental dimension in planning for urban WSS projects prior to initiating feasibility studies and detailed planning and development activity such as civil works, other construction and operation works; and ii) to ensure that environmental aspects and impacts are known since the project identification stage to facilitate the proper selection of the alternative with minimal amount of environmental risk or negative impact. This Report will emphasize on the need to look into the environmental problems which may result into irreversible ecological damage, if appropriate water supply and sewerage infrastructure and utilities are not installed, for example, in the Black Sea area where there exists a serious threat of irreversible ecological damage from going beyond the threshold level of pollutant and loss of income from traditional tourism. For water sourcing, among the environmental concerns identified are: i) unregulated ground water sourcing could pose a threat on important surface water sources and WS system of service providers, salination as in the case of towns near the Black Sea, particularly Anakliya, or sink holes in high areas which may lead to soil erosion, unmonitored water quality and extent of mineral intake beyond acceptable parameters through time of the residents relying on their private boreholes which lack treatment of excessive mineral contents; ii) absence of a water management strategy or coordinated or conjunctive water management policies that recognize the interconnection between groundwater and surface water and consider the implication of regulating water resources to ensure sustainable development of Georgia‟s rich water resources; and, iii) absence of policy on the degree of importance of water usage (domestic, industrial, recreational, etc.) which will help in adjudicating issues when conflict arises in the future, for example, water rights among energy providers, irrigation dam proponents/providers/users, WSS proponents, and recreation or tourism development project proponents.

The projects for urban WSS sector may have different components. For a water supply project for instance, the components may be one or more components including water sourcing, treatment, transmission, distribution and service connection. For sanitation projects, this examination will have to look into the sewerage network and treatment plant. This initial environmental examination will have to look into the issues into the potential impact of the output of the STP(s) on the recipient body of water which requires dutiful monitoring during the operation period. Conversely, the surface water intake structure also will have to assess the impact of the activities in the surrounding area to ensure the water quality.

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Assessment of the absence of ecological safeguard from unregulated wood harvesting and solid waste disposal in the rural areas would have to be considered in the EIA Study, for instance, the highest local revenue of Mestia LSG is the share from natural resources, specifically wood. Ironically, Mestia experienced severe flooding and landslides caused by the big extent of water flow during heavy rainy season in 2005 affecting families and wiping out around 15 houses in Lalaidi, 15-20 Laghami and about 50 houses in Kekhtagi and 2 other villages in Mestia district.6

The absence of integrated water resource management in conjunction with watershed management and poor coordination among environmental and infrastructure planners will result in high environmental cost and may even cause damage to life and properties. The absence of an appropriate solid waste management facilities and mechanisms in Mestia led the local people to simply dump off their solid waste in idle lands beside one upstream portion of Enguri river which could have serious implications for water quality considering that it will be the same water source to be tapped near Jvari to serve Zugdidi and Anakliya and other small villages along the river.7

Another environmental dimension which have to be assessed in the planning of urban WSS services is the impact of climate change in the ecosystem affecting the extent of water flow and catch-scale due to glacier growth or shrinkage and melting which may require climate-proofing designs and institutional reforms. It is noted that the existing non- operative sewage treatment plant in Kutaisi experiences flooding every time Rioni river water level rises. If the project or any of its component falls within the category of environmentally critical project or to be located in an environmentally critical area, assessment of the proposed project component or site of the (from planning, pre- construction) such as identification of site for infrastructure which passes through a forested areas or any other environmentally sensitive areas, during construction, operation) will have to be thoroughly studied.

6 Key informant interview from a local resident in Mestia conducted on 13 June 2010. 7 Assessment based on site visits and key informant interview with local residents, Mestia Mayor Gochalidze and Deputy Mayor Vakho Pilpani conducted on 13 June 2010.

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Given that urban WSS is mainly provided by UWSCG, Georgia Water and Power, Batumi Water and other service providers throughout the country, the local self-government (LSG) units may have the tendency to fully delegate environmental responsibilities and ecological accountability to the service provider and MEPNR. Coordination and co- management of environmental responsibilities will have to be shared by the LSGs, service provider and contractors in ensuring that the proposed project will not have an adverse impact on the existing built-up and natural environment. For instance, the absence of agreement and measures to mitigate contractors from leaving the digging of roads to install pipelines left the Kutaisi government bear the environment having unrestored local roads8 despite the assurance of the Deputy Mayor that the LSG‟s infrastructure coordinator regularly coordinates with the Service Center and Regional Branch of UWSCG. This also holds through for coordinating road projects with pipe laying for water supply, sewerage and drainage networks, particularly in the case of infrastructure project in Mestia, Zugdidi and Anakliya corridor.

The existing environmental policies and regulations are found to be inadequate requiring amendments to the existing laws. Since registration of ground water sources falls into the responsibility of MESD and the competence of the Bureau of Geological Science does not respond to control or monitoring, potential lowering of the water table may happen when this unregulated practice all over Georgia is not addressed. Furthermore, the GoG has not yet set concrete policies, regulatory and institutional framework and mechanisms that looks into private led development projects which have environment implications for water resources, such as the identified industrial zones in Kutaisi, Poti and other cities requiring water supply and discharging of industrial waste water.

8 This was observed by the PATA Team during its field visit to Kutaisi on 8 July 2010.

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Annex 1-6: UWSS Profile

Notes: Highlighted in blue are not covered by UWSCG.

Source: ADB Provided information from various sources.

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Source: UWSCG, 2010.

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Annex 1-7: Urban Households 2010 and Current Levels of Urban WSS Services

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Table 2: Urban Households 2010 and Current Levels of Urban WSS Services by Service Center

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Annex 1-8: Population Projection and Future UWSS Demand

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Annex 1-9: Multi-Criteria Analysis

Applying Multi-Criteria Analysis (MCA) in Prioritizing Cities and Towns as a Matter of Strategy

This MCA applies weighted and scored matrices and requires establishment of measurable criteria, both qualitative or quantitative, to identify a single preferred strategic plan to rank or short-list options for more detailed assessment based on overall merit of cities and towns.

For purposes of running the MCA, weight factors are given to the indicators based on the value judgment of the key stakeholders who represent the national and local governments, civil society, academe and consumer users. These stakeholders would have different interests and advocacies which can either be for social, economic values or a combination of socio-economic values.

Prioritisation and sequencing through MCA is employed to cover all LSGs at a specified period of time and assist the GoG in prioritising based on the following parameters: i) Demographic indicators for identifying maximum beneficiaries; ii) Economic indicators for determining the contribution to or implications on the economic standing of cities and towns; iii) Socio-economic indicators for determining the distributional economic benefits to the society and its impact particularly on the marginalised sector; and iv) Geographical and other physical indicators for geographical balancing, equitable regional distribution and integrated water resources/river basin management. MCA emphasises the judgment of the decision-making team in the selection of criteria, estimating and assigning weights and in assessing the contribution of options to each performance criterion.1

First Level of Ranking (Social and Economic Parameters)

 Demographic Indicators (Urbanisation Level) . Urban Population (2002) . Population Density (2002) . Population Growth (2002-2009) . Live Birth Rate by region (2000-2008)

1 A survey form is developed and a workshop is proposed to be conducted to obtain different value judgment from key stakeholders to ensure a participatory approach in policy decision making. MCA results have been forwarded to UWSCG and a stakeholders workshop is proposed to be conducted after the GoG has resolved other policy related issues. The associated subjectivity can be addressed through consultation among key stakeholders may be used to debate and agree these subjective scores and weights. The analysis may also consider grouping of all cities/towns to ensure an equitable distribution of opportunities among the 68 cities and towns of different classes and among the 10 regions.

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 Economic Indicators . Municipal Receipts (Local Income and Central Government Allocation) . Business Establishments (2008) . Employment Rate (2008) . Economic Activity Rate (2008) . Gross Value Added by Sector (2008)  Socio-Economic Indicators . Poor Families (2009) . Poor Population (2009) . Internally Displaced Population (Registered as of 2009) . Ethnic Population (2002)

Second Level of Selection/Categorisation (Physical and Geographical Categorisation)

 Geographic Indicators . Regional distribution by administrative jurisdiction (10 political regions) . Climate Zone (West-Humid, East-Arid, Central-Semi-Arid and South-Continental) . Water Sourcing (surface water, ground water or combination)  WSS Deficiency . Water supply connection . Sewerage network connection . Daily Supply (regularity/pressure) . Adequacy of water production (source/WTP/reservoir capacity vs population served)

For purposes of selecting the representative cities or towns for socio-economic and willingness to pay survey, MCA was employed with equal weights given to most of the indicators, except for population growth rate which is mostly negative in real value and that the real value of the number of persons (maximum beneficiaries) are given prime consideration among the demographic indicators. All cities and towns are ranked based on overall merit. The results of the Consultant‟s technical assessment using MCA (Annex Tables 15-20) was used as basis for selecting Marneuli, Zugdidi (including Anakliya) and Mestia as sample cities for socio-economic and willingness to pay survey. This is further discussed in Annex of Output 2 – Social and Gender Development Strategy.

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Source: Georgia Statistics Office, 2002.

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Source: Georgia Statistics Office, 2002.

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Sources: Ministry of Finance, 2009 and Georgia Statistics Office, 2008.

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Sources: Helpless Families and Households - Social Services Agency, 2009. Population by Ethnicity - Georgia Statistics, 2008.

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Source: Georgia Statistics Office, 2002.

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STRATEGIC VISIONING AND MCA WORKSHOP

Workshop Objectives As per TOR, ADB will develop a multi-tranche financing facility investment program (MFF- IP) which will evolve from the Government of Georgia‟s (GoG) vision for the sector based on its strategic road map, policy framework for the sector and reform implementation plan, and business climate for increased investments from donors.2 A Policy Advisory Technical Assistance has been provided to assist the GoG in developing the Urban Water Supply and Sanitation Sector Strategy for Georgia. Among the important components of this Policy Advisory is the setting of vision and strategy for investment programming. As such, this Strategic Visioning and Multi-Criteria Analysis (MCA) Workshop is proposed to be conducted in a participatory manner aimed at: (i) setting the vision for Urban Water and Sanitation Sector; and ii) undertaking prioritisation of cities and towns for development of urban WSS services through MCA where the key stakeholders are provided an opportunity to be actively involved.

Workshop Approach The approach will be a combination of technical and participatory approach in setting the vision, and prioritising cities for Investment Programming. The vision for the sector should then be developed through a participatory approach to ensure ownership of the desired future condition of the sector. A visioning workshop will be designed to obtain inputs from the different stakeholders. The participants representing different interests will share their image of the sector‟s future. The vision statement should be as vivid as possible, so that it can serve as an inspiration for all stakeholders as well as a reminder and a challenge.

The technical assessment is employed by the Consultants using the Multi-Criteria Analysis (MCA) to enable the government to make rational plans and policy-decisions. MCA is used to identify a single preferred strategic plan to rank or short-list options for more detailed assessment. This applied weighted and scored matrices and required the establishment of measurable criteria to assess the extent to which objectives may be fulfilled. MCA emphasizes the judgment of the decision-making team in the selection of criteria, estimating and assigning weights and in assessing the contribution of options to each performance criterion. Due to associated subjectivity, participatory assessment is employed through consultation among key stakeholders to debate and agree on these subjective scores and weights.3 The analysis also considers the grouping of all cities/towns to ensure an equitable distribution of opportunities among the 68 cities and towns of different classes and among the 10 regions. All cities and towns are ranked based on overall merit. Refer to the questionnaire (Output 2) for the indicators the criteria for categorization and prioritization of Cities/Towns or Urban Water Supply and Sanitation Systems.

2 Appendix 3 – Outline Terms of Reference for Consultants, Technical Assistance Report (Project Number: 43556 –Policy and Advisory Technical Assistance (PATA) February 2010, Georgia: Developing an Urban Water Supply and Sanitation Sector Strategy and Regulatory Framework for Georgia. 3 A survey form developed or workshop may be conducted to obtain different value judgment from key stakeholders to ensure a participatory approach in policy decision making.

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The results of the Strategic Visioning and MCA Workshop which were presented to key policy decision makers for review and confirmation. Service centers to be included in the first tranche of ADB MFF-IP will be defined as the Tranche 1 group and the service centers to be proposed for the next tranche will be recommended based on the regional analysis undertaken, including the socio-economic, physical, environmental dimension and institutional dimensions. The elements of infrastructure for urban WSS services within one city of town will be defined as components.

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Notes: Highlighted in blue are service centers not under UWSCG.

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Table 10 show the different categorization considered in undertaking the MCA to ensure that more sides are covered. One of the categorization classifies the cities according to large, medium and small sized towns such as: i) large (above 100,000 urban population) consisting of Tbilisi (1,072,687), Kutaisi (183,691), Rustavi (114,331) and Batumi (121,221); ii) medium (30,000-89,999 urban population) consisting of Khelvachauri (90,297) Zugdidi (68,558), Poti (46,161), Gori (49,137), Khashuri (38,143), Samtredia (31,690) and Kobuleti (31,651); and iii) small (equal or below 29,999 urban population) consisting of the rest of the 57 cities.

Categories 1 2 3 4 Local Government Upper (regional) Middle level – 6 Lower self-government level consists of Level level independent cities: villages, communities, small towns and towns which are not within the districts. 10 regions Tbilisi4 55 towns, which are 842 communities and Kutaisi under the 165 villages, which Rustavi subordination of the elect local self- Batumi districts, and government Poti 50 small towns, bodies. Sukhumi5 Urban Population Above 90,000 (5) 30,000-89,000 (6) 5,001-29,999 (27) Below 5,000 (RIU) Tbilisi (1,106,700) Zugdidi (56,000) Shouakhevi (5,100) Chokhatauri, Keda Kutaisi (172,339) Poti (42,911) Chkhorotsku (5,200) Tsageri, Abastumani Rustavi (120,000) Gori (38,302) Martvili (5,500) Bakuriani, Ambrolauri, Khelvachauri Samtredia (31,600) Terjola (5,800) Mestia (94,100) Khashuri (30,000) Khobi (5,800) Gudauri, Lanchkhuti Batumi (90,000) Jvari (6,000) Signaghi, Oni Lagodekhi (6,000) Aspindza, Kharagauli Ninotsminda (6,200) Agara, Vani Abasha (6,300) Bagdati, Dmanisi Tetritskaro (6,400) Sachkhere (6,600) Dedoflistskaro (7,300) Akhalkalaki (8,000) Akhmeta, (8,400) Sartichala (9,600) Zestafoni (10,404) Gurjaani (10,500) Dusheti (10,600) Kareli (10,700) Kvareli ( 10,800) Khoni (11,100) Chiatura (11,850) Surami (11,900) Ozurgeti (12,197) Sagaredjo (12,500) Mtskheta (13,100) Tkibuli (14,000) Tsalenjikha (14,000) Kaspi (15,200) Telavi (16,000) Tskaltubo 16,900) Gardabani (17,400) Bolnisi (18,600 ) Kobuleti (19,000) Borjomi (9,500)

4 Vake-Saburtalo, Mtatsminda-Krtsanisi, Didube-Chughureti, Isani-Samgori and Gldani-Nadzaladevi are the 5 ditrictis of the capital city Tbilisi) which is not included in the UWSC coverage. 5 Tbilisi and Batumi are not included in this Study.

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Categories 1 2 3 4 Akhaltsikhe (23,900) Marneuli (24,800 Senaki (28,300) Municipal Major cities Settlement Settlement / Settlement (towns) Population Above 100,000 (secondary cities) (administrative 10,001-49,999 (2009) 50,000-99,999 units) Below 10,000 Gardabani (114,300) Kareli (50,400) Khoni (11,300) Chokhatauri (2,220) Rustavi (16,384) Lagodekhi (51,100) Aspindza (13,000) Kharagauli (3,215) Batumi (121,806) Kaspi (52,200) Mestia (14,300) Bagdati (4,700) Zugdidi (167,800) Chiatura (56,300) Ambrolauri (16,100) Terjola (5,700) Kutaisi (188,665) Sagaredjo (59,200) Tsageri 16,600) Lanchkhuti (8,000) Tbilisi (1,270,800) Akhalkalaki (61,000) Tskaltubo (16,800) Lentekhi (9,000) Khashuri (62,700) Akhaltsikhe (18,500) Oni (9,300) Mtskheta (64,800) Ozurgeti (18,700) Gurjaani (72,600) Keda (20,024) Bolnisi (74,300) Marneuli (20,100) Kobuleti (88,100) Adigeni (20,800) Khelvachauri (90,800) Telavi (21,800) Shouakhevi 21,900 Zestafoni (24,200) Tetritskaro (25,400) Dmanisi (28,000) Senaki (28,082) Abasha (28,700) Samtredia (29,700) Chkhorotsku (30,100) Dedoflistskaro (30,800) Tkibuli (31,200) Borjomi (32,400) Dusheti (33,600) Vani (34,200) Ninotsminda (34,300) Kvareli (37,700) Tsalenjikha (40,200) Khobi (41,200) Akhmeta (41,600) Signaghi (43,600) Martvili (44,600) Sachkhere (46,800) Poti (47,150) Gori (49,500) above 80% above Between 0 and 79% From -.01 to 4% From -5 to 90% Municipal Senaki (84.10) Ninotsminda (0) Tkibuli (3.85) Mtskheta (88.27) Population Samtredia (101.35) Sachkhere (0.21) Gurjaani (3.72) Gardabani (16.27) Growth Rate Akhaltsikhe (153.51) Lagodekhi (0.39) Abasha (3.14) Tbilisi (12.91) Gori (174.34) Batumi (0.57) Borjomi (2.78) Ambrolauri (8.70) Khoni (175.22) Mestia (0.70) Chiatura (2.66) Oni (8.60) Telavi ( 220.18) Dmanisi (0.71) Aspindza (2.31) Tsageri (6.02) Tskaltubo (334.52) Tetritskaro (0.79) Kvareli (2.12) Lanchkhuti (383.75) Rustavi (0.87) Khashuri (2.07) Bagdati (506.38) Shouakhevi (1.83) Dedoflistskaro (1.95) Marneuli (514.43) Kobuleti (1.93) Adigeni (1.92) Terjola (684.21) Akhalkalaki (2.13) Signaghi (1.83) Kharagauli (752.26) Khelvachauri (2.20) Kareli (1.79) Poti (907.42) Zugdidi (2.26) Dusheti (1.49) Chokhatauri (931.53) Bolnisi (3.23) Vani (1.46) Chkhorotsku (4.94) Zestafoni (1.45) Gardabani (1.40) Lentekhi (1.11) Khobi (0.97)

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Categories 1 2 3 4 Kaspi (0.77) Ozurgeti (0.57) Tsalenjikha (0.50) Martvili (0.45) Sagaredjo (0.34) Akhmeta (0.24) Keda (0.12)

Above 1,000 Below Municipal 200-999 persons/km2 100-201 persons/km2 persons/km2 100 persons/km2 Population density Kutaisi, Tbilisi6 and Khelvachauri (226) Chiatura (101) Poti, Mtskheta Rustavi Terjola (235) Tskaltubo (104) Mestia, Oni, Lentekhi, Samtredia (245) Khashuri (105) Dusheti, Rustavi (1,957) Zugdidi (252) Chokhatauri (113) Dedoflistskaro Tbilisi (2,196) Marneuli (526) Khoni (117) Ambrolauri Kutaisi (2,694) Kobuleti (125 Aspindza, Akhmeta Kharagauli (134) Tsageri, Gudauri Zestafoni (177) Tetritskaro, Dmanisi, Ninotsminda Adigeni, Borjomi Signaghi, Bagdati Kvareli, Shouakhevi Ozurgeti, Akhaltsikhe Sagaredjo, Batumi Keda, Kareli Chkhorotsku Martvili, Akhalkalaki Sachkhere, Khobi, Lagodekhi, Gardabani Gori, Vani, Tsalenjikha, Tkibuli Kaspi, Telavi, Gardabani, Lanchkhuti, Gurjaani, Abasha, Bolnisi, Senaki Urbanization Regional Growth Administrative Satellite Towns Rural Villages hierarchy – Center Center role as urban Tbilisi Ozurgeti, Zugdidi, All other 50 small 842 communities and growth centers Kutaisi Telavi, Sagaredjo, towns which are under 165 villages, which Rustavi Mtskheta, Marneuli, the subordination of the elect local self- Batumi Sukhumi districts, and government Poti bodies.

6 Tbilisi is not included in UWSCG coverage.

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Categories 1 2 3 4 Service Tourism Industrial/Mining Agricultural Resource base Tbilisi Bakhmaro (Guria) Kutaisi and Economic Kutaisi Kumistavi and Sataplia Area Near the Khoni, Khobi, Abasha Potential Rustavi (cave systems in international airport Kaspi, Kareli Sukhumi7 Imereti) Tkibuli (coal) Khashuri, Surami, Zugdidi Gudauri, Bakuriani Chiatura (manganese) Agara Gori (winter resorts) Marneuli, Mtskheta Mestia (Upper Svaneti) Dusheti, Gudauri Signagi (Kakheti) Bolnisi, Dmanisi Service-transport- Batumi, Tetritskaro, Sartichala industries Kobuleti, Ureki (Sea Gardabani Batumi resorts), Shovi (Racha) Poti Martvili Agri-tourism Chkhorotsku Akhaltsikhe Transport Adigeni Samtredia Aspindza Akhalkalaki Borjomi Ninotsminda Abastumani Bakuriani

Source: Georgia Statistics Office, 2002.

Second Categorization Level – Geographic and Physical

Region Independent Cities Municipalities Khoni, Samtredia, Vani, Tskaltubo, Bagdadi, Tkibuli, Terjola, Imereti Kutaisi Zestaponi, Kharagauli, Thchiatura, Sachkhere Kakheti Akhmeta, Telavi, Kvareli, Sagarejo, Gurjaani, Lagodekhi, Sighnaghi

and Dedoplistskaro Samegrelo-Zemo Mestia, Tsalendjikha, Zugdidi, Khobi, Senaki, Martvili, Abasha, Poti Svaneti Chkhorotsku Guria Lanchkhuti, Ozurgeti and Chokhatauri Shida Kartli Tbilisi Gori, Kaspi, Khashuri, Kareli, Kurta, Eredvi and Tigvi Kvemo Kartli Rustavi Tsalka, Dmanisi, Tetri Tskaro, Bolnisi, Marneuli, Gardabani Mtskheta-Mtianeti Mtskheta, Dusheti, Kazbegi, Akhalgori and Tianeti Samtskhe-Javakheti Adigeni, Akhaltsikhe and Ninotsminda Racha-Lechkhumi Lentekhi, Tsageri, Ambrolauri and Oni Autonomous 8 Batumi Kobuleti, Kedi, Khulo, Shuakhevi, Khelvachauri Republic of Adjara

7 Tbilisi and Batumi are not included in UWSCG coverage. 8 http://www.justice.gov.ge/index.php?lang_id=ENG&sec_id=117 retrieved on 8 June 2010.

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West-North (Humid) East (Arid) Central (Semi-Arid) South (Continental) 5 Ajara Cities & towns Telavi Gori Akhaltsikhe Kutaisi, Chiatura, Tkibuli, Akhmeta Kaspi Adigeni Tskaltubo Kvareli Kareli Aspindza Zestafoni, Samtredia Gurjaani Khashuri Akhalkalaki Khoni, Bagdati, Vani, Lagodekhi Surami Borjomi Terjola,Sachkhere, Signaghi Agara Ninotsminda Kharagauli Dedoflistskaro Abastumani Sagaredjo Mtskheta, Dusheti Bakuriani Chokhatauri, Lanchkhuti, Gudauri, Bolnisi Ozurgeti Dmanisi, Tetritskaro Sartichala, Gardabani Tsalenjikha, Khobi, Abasha, Marneuli, Tbilisi, Martvili, Chkhorotsku, Poti, Rustavi Senaki, Jvari, Zugdidi, Anakliya, Mestia, Ambrolauri, Lentekhi, Oni,Tsageri

Surface Ground Combination Unidentified Tskaltubo, Terjola, Khelvachauri, Kobuleti Khoni, Poti Bagdati, Vani Chokhatauri, Ozurgeti Batumi, Keda Senaki, Ambrolauri Lanchkhuti, Mestia (glacier), Lentekhi Shouakhevi, Kutaisi, Akhaltsikhe, Aspindza Zugdidi (formerly Akhmeta, Gurjaani Chiatura, Tkibuli Akhalkalaki, Borjomi located in Abkhasia) Gori, Marneuli, Surami Zestafoni, Samtredia Ninotsminda, Bakuriani Sachkhere, Kharagauli Mtskheta, Gudauri Tsalenjikha, Khobi Dmanisi, Sartichala Abasha, Martvili Chkhorotsku Anakliya, Jvari Oni, Tsageri Telavi, Kvareli Lagodekhi, Signaghi Dedoflistskaro Sagaredjo, Adigeni Abastumani, Dusheti Kaspi, Kareli, Khashuri Agara, Bolnisi, Tetritskaro

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Among the visible donors for UWSS of Georgia are: the World Bank, EIB, European Bank for Reconstruction and Development, Asian Development Bank, MDC, Swedish International Development Agency, and USAid. The following table shows the donors and present status of immediate improvement for each city.

Region/Cities Present Fund Arrangement Region/Cities Present Fund Arrangement

Imereti Samtskhe-Javaneti Kutaisi EIB EBRD MCG Akhalkalaki ADB Tskaltubo EIB WB Akhaltsikhe ADB Sachkhere WB Ninotsminda Zestafoni EIB Adigeni inc Abastumani Samtredia EIB WB ADB Borjomi inc Bakuriani MCG Chiatura EIB Aspindza Khoni ADB Mtskheta-Mtianeti Terjola ADB Mtskheta Vani EIB ADB Dusheti ADB Kharagauli WB Akhalgori Bagdati EIB ADB Tianeti Tkibuli EIB WB Kazbegi Guria Inner Kartly Ozurgeti EIB ADB Khashuri Chokhatauri ADB Kaspi EIB ADB Lanchkhuti EIB ADB Kareli EIB ADB Samegrelo Zemo-Svaneti Gori EIB Zugdidi EIB WB Eredvi Poti EIB EBRD & SIDA MCG &ADBADB Tighvi ADB Senaki Kurta Tsalenjikha EIB WB Lower Kartly Martvili EIB WB ADB Tbilisi Khobi EIB Rustavi Mestia WB Marneuli EIB Chkhorotsku Bolnisi EIB Abasha ADB Tsalka Racha-Lechkhumi Dmanisi ADB Tsageri EIB ADB Tetritskaro (inc Manglisi) EIB ADB Lentekhi EIB ADB Gardabani ADB Ambrolauri ADB Ajara Oni ADB Batumi KfW Kakheti Keda Sagaredjo Khelvachauri ADB Lagodekhi EIB ADB Khulo Telavi EIB Kobuleti MCG ADB Akhmeta ADB Shuakhevi Signaghi & Sartichala EIB Kvareli EIB Gurjaani EIB Dedoflistskaro ADB

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Developing an Urban Water Supply and Sanitation Sector Strategy & Regulatory Framework for Georgia Final Report: Output 1 – Urban Water & Sanitation Sector Strategy - Annexes

Annex 1-10: Inventory of Laws and Policies

Table 1: Inventory of Laws and Policies

International Agreements, Laws and Date and Amendments Responsibility Regulations

Constitution of Georgia 24.08.1995 GoG/State

International Agreements applying to water GoG/State Supply and consumption

Convention on Black See Protection from 21.04.1992 GoG/State Pollution

Protocol to above Convention on Protection of 17.04.2009 GoG/State Black See environment from Activities and Sources on the Land

Laws Applying to Water Supply and Consumption

Law No. 936 on Water 17.10.1997 MEPNR

Amended by:

Law No. 465 of 30.06.2000

Law No. 2279 of 08.05.2003

Law No. 2192 of 07.05.2003

Law No. 2365 of 06.06.2003

Law No. 445 of 16.09.2004

Law No. 863 of 29.12.2004

Law No. 2569 of 28.12.2005

Law No. 3161 of 25.05.2006

Law No. 624 of 05.12.2008

Law No. 2296 of 11.12.2009

Law No. 2805 of 23.03.2010

Law No. 5069 on Public Health 27.06.2007 MLHSA

amended by: MEPNR

Law No. 1920 of 03.11.2009 SPH

Law No. 2729 of 09.03.2010

Law No. 2793 of 23.03.2010

Law No. 1506 on Fundamentals Space Organization 02.06.2005 MESD and Urbanization LMB amended by:

Law No. 4574 of 30.03.2007

Law No. 4689 27.04.2007

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International Agreements, Laws and Date and Amendments Responsibility Regulations

Law No 4709 of 08.05.2007

Law No 2521 of 28.12.2009

Law No. 946 on Fees for Utilization of Natural 29.12.2004 MEPNR Resources amended by:

Law No. 1504 of 02.06.2005

Law No 1757 of 23.06.2005

Law No. 2393 of 20.12.2005

Law No 3497 of 24.07.2006

Law No. 4225 of 29.12.2006

Law No. 5238 of 11.07.2007

Law No 2323 of 15.12.2009

Law No. 2324 15.12.2009

Law No. 2808 of 23.03.2010

Law No. 2918 of 08.04.2010

Law No. 151 on Consumer Protection 20.03.1996 MESD

Law No. 5274 on Declaring Ownership Right on the 11.07.2007 Land Possessed by Individuals and Private Legal amended by: Entities Law No. 5673 of 28.12.2007

Law No. 5993 of 21.03.2008

Law No. 88 of 27.06.2008

Law No. 386 of 23.10.2008

Law No. 614 of 05.12.2008

Law No. 1134 of 27.03.2009

Law No. 1565 of 31.07.2009

Law No. 1941 of 03.11.2009

Law No. 2463 of 25.12.2009

Law No. 2887 of 08.04.2010

Law No. 2911 on Control of Technical Danger 08.04.2010 TCI

Construction supervision authorities of the local municipalities

Tax Code of Georgia - Law No. 692 22.12.2004

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International Agreements, Laws and Date and Amendments Responsibility Regulations

Law No.816 on Electrical Energy and Natural Gas 27.06.1997 GNEWRC

amended by:

Law No. 984 of 17/10/1997

Law No. 1934 of

30.04.1999

Law No. 122 of 15.06.2004

Law No.1124 of 22.03.2005

Law No. 1738 of 23.06.2005

Law No. 2537 of 27.12.2005

Law No. 3292 of 09.06.2006

Law No. 4911 of 08.06.2007

Law No. 5466 of 20.11.2007

Law No. 5803 of 07.03.2008

Law No. 92 of 05.07.2008

Law No. 317 of 02.10.2008

Law No. 1558 of 31.07.2009

Decision of the Constitutional Court No. 1/2/411 of 19.12.2008

Law No. 1666 on Independent National Regulatory 13.09.2002 Authorities Amended By:

Law No.2535 of 22.07.2003

Law No. 2951 of 14.08.2003

Law No. 1796 of 24.06.2005

Law No. 1859 of 01.07.2005

Law No. 2673 of 17.02.2006

Law No. 2829 of 31.03.2006

Law No. 3970 of 14.12.2006

Law No. 4297 of 29.12.2006

Law No. 4595 of 30.03.2007

Law No. 4864 of 05.06.2007 Law No. 5468 of 20.11.2007

Law No. 310

02.10.2008 Law No. 1693 of 24.09.2009

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International Agreements, Laws and Date and Amendments Responsibility Regulations

Organic Law No. 2304 on Local Municipal Bodies 16.12.2005 LMB

Amended by:

Law No. 3391 of 23.06.2006

Law No. 5298 of 11.07.2007

Law No. 5422 of 26.10.2007

Law No. 1892 of 22.10.2009

Amendment 5463 of 20.11.2007

Law No. 2480 of 25.12.2009

Code of Administrative Violations 15.12.1984

Crime Code of Georgia Law No. 2287 22.07.1999

Law on Environment Protection No. 519 10.12.1996 MEPNR

Regulations applying to Water Supply and Consumption

Order No. 1-1/1254 of MED 08.07.2007 MESD

Amended by Decree No. 2117 of 06.10.2008

Order No. 1-1/2288 of MED 07.10.2009 MESD

Decree No. 18 of GNEWRC 29.08.2008 GNEWRC

Decree No. 32 of GNEWRC 26.11.2008 GNEWRC

Decree No. 24 of GNEWRC 18.09.2008 GNEWRC

Order No. 745 of MEPNR 13.11.2008 MEPNR

Resolution No. 80 of the Government of Georgia 19.03.2010

Order No. 250 of MLHSP 15.09.2006 MoLHSP

Order No. 2-44 of MAF 14.03.2006 MAF

Amended by: NSFSVFP

Order No. 44 of 13.04.2007

Order No. 349 of MLHSP 17.12.2007 MLHSP

Order No. 15 of MLHSP 22.01.2004 MLHSP

Order No. 31 of MF 21.01.2005 MF

Order No. 306 of MLHSP 11.07.2007

Decree No. 137 of the Government of Georgia 11.08.2005 MEPNR

Amended by Decree No. 62 of 16.03.2006

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Abbreviations: - GNEWRC - Georgia Energy and Water Supply Regulatory Commission - LMB – local municipal bodies - MA – Ministry of Agriculture and Food - NSFSVFP – National Service for Food Safety, Veterinary and Flora Protection - MESD: Ministry of Economic and Sustainable Development - TCI - Technical and Construction Inspection at the Ministry of Economic Development - MEPNR - Ministry of Environment Protection and Natural Resources - SPH - Service of Public Health under MEPNR - MLHSP - Ministry of Labour, Health and Social Protection - MF – Ministry of Finance

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Annex 1-11: UWSCG Staff

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UWSCG Staffing for Service Center

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Annex 1-12: Urban WSS Infrastructure Needs

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Annex 1-13: Unit Cost and Assumptions for Urban WSSS

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One limitation of the assumptions to be used in estimating investment cost is that the size of investments considered are unrestrained by financial issues and do not consider the financial capacity and the technical capacity and capability of the UWSCG. The urban WSS sector infrastructure requirements of the cities and towns whether big or small in terms of land area, population size and condition of the local economy are accounted for regardless of the UWSCG capacity to finance such infrastructure projects. Another set of assumptions are in the following Table:

Assumptions Factor

Per capita consumption per day (lcpd) 200

Percentage of rural population (2010) to be served/peri-urban growth (fast) 0.30

Percentage of rural population (2010) to be served/peri-urban growth (slow) 0.10

Commercial and institutional connection factor 0.50

Transient population (tourism-related population growth) 0.40

Waste Water Generated (80% of water utilised) 0.80

Service Coverage (100%) 1.00

Average Annual Growth Rate (2002-2009); assumed long-term growth rate of municipality, if 0.22 growth rate is 0 or negative

Average Annual Growth Rate (2002-2009); assumed short to medium-term growth rate of 0.15 municipality, if growth rate is 0 or negative

Production m3 per line meter per day at 0.1 liter/sec = 3.6 m3/hour 86.4

Reduced non-revenue water from 40-60% to 25% 0.25

Conversion factor liter to cubic meter 0.001

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Annex 1-14: Investment Cost

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