Document of The World Bank FOR OFFICIAL USE ONLY
Public Disclosure Authorized Report No: ICR00004438
IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD 7518-AZ, IBRD 8381-AZ, and IDA 4397-AZ)
ON A LOAN
IN THE AMOUNT OF US$380 MILLION
Public Disclosure Authorized AND A CREDIT
IN THE AMOUNT OF SDR 18.8 MILLION
(EQUIVALENT TO US$30 MILLION)
TO THE
REPUBLIC OF AZERBAIJAN
FOR THE Public Disclosure Authorized SECOND NATIONAL WATER SUPPLY AND SANITATION PROJECT
December 18, 2019
Water Global Practice Europe And Central Asia Region
Public Disclosure Authorized
CURRENCY EQUIVALENTS
(Exchange Rate Effective {Dec 11, 2019})
Currency Unit = New Azerbaijanian Manat (AZN) AZN 1.6965 = US$1 US$1.38 = SDR 1
FISCAL YEAR January 1 – December 31
Regional Vice President: Cyril E Muller Country Director: Sebastian-A Molineus Regional Director: Steven N. Schonberger Practice Manager: David Michaud Task Team Leader(s): Hadji Huseynov ICR Main Contributor: Toma Alexandrov Yanakiev and Ntombie Z. Siwale
ABBREVIATIONS AND ACRONYMS
AF Additional Financing CBA Cost-Benefit Analysis CMF Construction Management Firm CPF Country Partnership Framework CPS Country Partnership Strategy EBIT Earnings Before Interest and Tax EBITDA Earnings Before Interest, Tax, Depreciation, and Amortization ENPV Economic Net Present Value ERR Economic Rate of Return EU European Union GDP Gross Domestic Product GIS Geographic Information System GoA Government of Azerbaijan HTIC Hovsan Training and Innovation Center ICR Implementation Completion and Results Report IFI International Financial Institution IFRS International Financial Reporting Standards IMC Institutional Modernization Component IRDD International Relations and Development Department IRR Internal Rate of Return ISR Implementation Status and Results Report LA Legal Agreement LDP Letter of Development Policy M&E Monitoring and Evaluation NPV Net Present Value NWSSP National Water Supply and Sanitation Project O&M Operations and Maintenance PAD Project Appraisal Document PAP Project-affected Person PDO Project Development Objective PE Persons Equivalent PIU Project Implementation Unit PMU Project Management Unit RAP Resettlement Action Plan SAWMA State Amelioration and Water Management Agency SAWMC Azerbaijan Amelioration and Water Management Open Joint Stock Company SCADA Supervisory Control and Data Acquisition SNWSSP Second National Water Supply and Sanitation Project WSS Water Supply and Sanitation WWTP Waste Water Treatment Plant
TABLE OF CONTENTS
DATA SHEET ...... 1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ...... 6 A. CONTEXT AT APPRAISAL ...... 6 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION ...... 11 II. OUTCOME ...... 15 A. RELEVANCE OF PDOs ...... 15 B. ACHIEVEMENT OF PDOs (EFFICACY) ...... 15 C. EFFICIENCY ...... 19 D. JUSTIFICATION OF OVERALL OUTCOME RATING ...... 21 E. OTHER OUTCOMES AND IMPACTS (IF ANY) ...... 21 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ...... 23 A. KEY FACTORS DURING PREPARATION ...... 23 B. KEY FACTORS DURING IMPLEMENTATION ...... 23 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 25 A. QUALITY OF MONITORING AND EVALUATION (M&E) ...... 25 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ...... 25 C. BANK PERFORMANCE ...... 28 D. RISK TO DEVELOPMENT OUTCOME ...... 29 V. LESSONS AND RECOMMENDATIONS ...... 30 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ...... 32 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ...... 41 ANNEX 3. PROJECT COST BY COMPONENT ...... 43 ANNEX 4. RESTRUCTURING ...... 44 ANNEX 5. EFFICIENCY ANALYSIS ...... 49 ANNEX 6. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 61 ANNEX 7. SUPPORTING DOCUMENTS (IF ANY) ...... 63 ANNEX 8. MAP ...... 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
DATA SHEET
BASIC INFORMATION
Product Information Project ID Project Name
P109961 Second National Water Supply and Sanitation Project
Country Financing Instrument
Azerbaijan Investment Project Financing
Original EA Category Revised EA Category
Full Assessment (A) Full Assessment (A)
Organizations
Borrower Implementing Agency
Amelioration and Water Management Open Joint Stock Ministry of Finance of Azerbaijan Republic Company
Project Development Objective (PDO)
Original PDO To improve the availability, quality, reliability and sustainability of water supply and sanitation (WSS) services in selected regional (rayon) centers in Azerbaijan.
Revised PDO To improve the quality and reliability of water supply and expand water supply and sanitation services in selected regional(rayon)centers in Azerbaijan.
Page 1 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
PDO as stated in the legal agreement LA dated September 5, 2008. To improve the availability, quality, reliability and sustainability of water supply and sanitation services of the Borrower.
AF and amendment of LA dated October 22, 2014. To improve the quality and reliability of water supply and expand water supply and sanitation services in selected regional (rayon) centers in Azerbaijan.
FINANCING
Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing
30,000,000 30,000,000 27,841,460 IDA-43970
230,000,000 230,000,000 230,000,000 IBRD-75180
150,000,000 150,000,000 150,000,000 IBRD-83810 Total 410,000,000 410,000,000 407,841,460
Non-World Bank Financing 0 0 0 Borrower/Recipient 150,000,000 234,000,000 234,000,000 Total 150,000,000 234,000,000 234,000,000 Total Project Cost 560,000,000 644,000,000 641,841,460
KEY DATES
ApprovalFIN_TABLE_DAT Effectiveness MTR Review Original Closing Actual Closing A 27-May-2008 13-Jul-2009 29-Oct-2012 28-Feb-2013 30-Jun-2019
Page 2 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
RESTRUCTURING AND/OR ADDITIONAL FINANCING
Date(s) Amount Disbursed (US$M) Key Revisions 16-Oct-2009 0 Change in Implementing Agency Change in Results Framework 27-Jan-2012 40.53 Change in Implementing Agency Change in Project Development Objectives Change in Results Framework Change in Components and Cost 26-Feb-2013 129.80 Change in Loan Closing Date(s) 22-Dec-2014 211.89 Additional Financing Change in Implementing Agency Change in Project Development Objectives Change in Results Framework Change in Loan Closing Date(s) 09-Jun-2017 313.12 Change in Loan Closing Date(s) 27-Nov-2018 392.16 Change in Loan Closing Date(s)
KEY RATINGS
Outcome Bank Performance M&E Quality Moderately Satisfactory Moderately Satisfactory Modest
RATINGS OF PROJECT PERFORMANCE IN ISRs
Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 26-Jun-2008 Satisfactory Satisfactory 0
02 07-Dec-2008 Satisfactory Satisfactory 0
03 12-Jul-2009 Unsatisfactory Unsatisfactory 0
04 20-Feb-2010 Unsatisfactory Unsatisfactory 0 Moderately 05 09-May-2010 Moderately Unsatisfactory 2.50 Unsatisfactory Moderately 06 09-Nov-2010 Moderately Unsatisfactory 2.66 Unsatisfactory 07 05-Jul-2011 Moderately Satisfactory Moderately Satisfactory 13.13
Page 3 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
08 05-Feb-2012 Moderately Satisfactory Moderately Satisfactory 40.53
09 02-May-2012 Moderately Satisfactory Moderately Satisfactory 59.98 Moderately 10 26-Dec-2012 Moderately Unsatisfactory 124.75 Unsatisfactory 11 29-May-2013 Moderately Satisfactory Moderately Satisfactory 140.90
12 27-Dec-2013 Moderately Satisfactory Moderately Satisfactory 164.92
13 28-Jun-2014 Moderately Satisfactory Moderately Satisfactory 176.08
14 17-Dec-2014 Satisfactory Moderately Satisfactory 211.89
15 13-May-2015 Satisfactory Moderately Satisfactory 223.58
16 08-Nov-2015 Satisfactory Moderately Satisfactory 246.04
17 02-May-2016 Satisfactory Moderately Satisfactory 271.89
18 09-Nov-2016 Satisfactory Moderately Satisfactory 287.88
19 20-May-2017 Satisfactory Satisfactory 311.41
20 28-Nov-2017 Satisfactory Moderately Satisfactory 351.41
21 22-May-2018 Satisfactory Moderately Satisfactory 364.21
22 21-Nov-2018 Moderately Satisfactory Moderately Satisfactory 389.48
23 05-Jun-2019 Moderately Satisfactory Moderately Satisfactory 403.02
SECTORS AND THEMES
Sectors Major Sector/Sector (%)
Public Administration 1 Central Government (Central Agencies) 1
Water, Sanitation and Waste Management 99 Sanitation 39 Water Supply 60
Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%)
Page 4 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Urban and Rural Development 67
Urban Development 67
Urban Infrastructure and Service Delivery 67
Environment and Natural Resource Management 33
Environmental Health and Pollution Management 33
Air quality management 11
Water Pollution 11
Soil Pollution 11
ADM STAFF
Role At Approval At ICR
Regional Vice President: Shigeo Katsu Cyril E Muller
Country Director: D-M Dowsett-Coirolo Sebastian-A Molineus
Director: Peter D. Thomson Steven N. Schonberger
Practice Manager: Wael Zakout David Michaud
Task Team Leader(s): Andreas Rohde Hadji Huseynov
ICR Contributing Author: Toma Alexandrov Yanakiev
Page 5 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES
A. CONTEXT AT APPRAISAL
Context 1. The Republic of Azerbaijan had one of the world’s fastest growing economies in Europe and Central Asia at the time of appraisal in March 2008. For about a decade its gross national income per capita rose steadily from a post- independence low of US$390 in 1995 to US$1,190 in 2005. After completion, in 2005, of the Baku–Tbilisi–Ceyhan oil pipeline from Baku on the Caspian coast to Cheyan on Turkey’s Mediterranean coast, growth accelerated more rapidly reaching US$2,740 in 2007. Oil and gas accounted for more than half of Azerbaijan’s gross domestic product (GDP). The Government sought to build upon the opportunities provided by its oil and gas revenue, by putting in place policies, institutions, and investments that would continue to sustain strong non-oil growth in the future in all sectors of society. 2. Azerbaijan inherited a relatively extensive water supply system from the former Soviet Union. At appraisal, about 95 percent of the population in Baku and about 83 percent of those living in secondary cities and small towns were connected to piped water, but the quality of infrastructure and services had deteriorated severely since independence due to lack of investment and deferred maintenance. In many small and secondary towns, water treatment facilities were largely dysfunctional or completely lacking, thus the population in these towns did not have access to safe water. Moreover, piped water supply was unreliable and often available for less than 12 hours a day in most of the country. Centralized piped water supply systems were rare in rural areas, with less than 33 percent of the population having access to piped water supply. 3. With regard to sanitation, only about 55 percent of Azerbaijan’s population had access to improved facilities with coverage estimated at 73 percent in urban areas and 36 percent in rural areas.1 The sewerage network in Baku served about 78 percent of the population,2 although only about 50 percent of wastewater in the area was being treated.3 In other urban areas, sewerage coverage was much lower at about 32 percent, and only a minor proportion of the sewage underwent any treatment before disposal. 4. Key issues in water supply and sanitation (WSS). Azerbaijan was, and remains an oil-rich country where public utility companies are heavily subsidized and access to water and sanitation is considered as social service for the population. Although the Government has been steadily increasing the water and sanitation tariff over the last decade, the overall tariff remains below full costs, especially given the massive investments in regions beyond Baku, which have been completely subsidized by the Government through international borrowing from international financial institutions (IFIs). This policy is a key component of the long-term sustainability of the sector and will likely continue as access to affordable piped water and sanitation in regions is considered as a basic element of the Government’s social policy. 5. The physical condition and performance of infrastructure for water treatment, transmission, and distribution systems in most parts of Azerbaijan had severely deteriorated as a result of age, deferred maintenance, and damage from natural calamities (for example, the year 2000 earthquake). Many water transmission and distribution pipes were over 50 years old at the time of appraisal and had passed or were approaching the end of their economic life-span. The state of many water pipe networks and the associated problems such as intermittent supplies and heavy leakages, affected the quality and reliability of services and posed risks to public health and on
1 World Development Indicators Data, 2004. 2 The United Nations Environmental Performance Review, 2004, gave sewerage coverage in Baku as 72 percent. 3 United Nations Environmental Performance Review, 2004.
Page 6 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
the environment. In addition, there was a lack of wastewater and fecal sludge treatment facilities in most rayons (districts). 6. Utilities lacked modern WSS management with a focus on financial sustainability caused by factors such as inadequate price tariff structures, deficient billing systems, and poor collection rates, resulting in profound dependence on operational subsidies from the Government. In addition, due to limited metering, there was excessive water consumption and wastage in most parts of Azerbaijan; additional losses were caused by deteriorated plumbing systems within individual houses and apartment blocks. 7. At the time of appraisal, the Government of Azerbaijan (GoA) was committed to use part of its new oil wealth to address infrastructure deficits in WSS and also to adopt the necessary policy and institutional measures to place the sector on a long-term sustainable path through the following actions: (a) the rehabilitation of the two main water treatment plants serving greater Baku and reduction of technical losses in Baku from about 70 percent to 35 percent (the latter was with the support from the IDA-financed Greater Baku Water Supply Project4); (b) integration of the institutional structure of the sector that previously consisted of a multitude of small ineffective and independent utilities, into one main entity called the AzerSu Open Joint Stock Company (AzerSu) and one smaller one serving the Autonomous Republic of Nakhchivan area—State Amelioration and Water Management Agency (SAWMA); (c) establishment of a Tariff Council to guide tariff policies in the utilities sectors, with a view to promoting commercialization and long-term sustainability; (d) introduction of International Financial Reporting Standards (IFRS) into all utilities as an essential tool to improve financial management and sustainability; and (e) cooperation with the World Bank on analytical work on WSS and irrigation, to develop a Water Sector Strategy. 8. The Water Sector Strategy. A Water Sector Issues and Options Report5 was prepared in August 2007 by both the GoA and the World Bank. This led to development of a Water Sector Strategy in Azerbaijan in the short- to medium- term goals (2006–2015). It addressed both WSS and water resource management issues, including irrigation and drainage, benefitting from international experience and conditions specific to Azerbaijan. The strategy reviewed key issues that were faced by the water economy and articulated an Action Plan to improved operational, financial, and commercial performance of the section and its institutional effectiveness. The National Water Supply and Sanitation Project (NWSSP) and Second National Water Supply and Sanitation Project (SNWSSP) substantially contributed to the implementation of this strategy. 9. Following the aforementioned work on a Water Sector Strategy, in early 2007, the Government negotiated a US$230 million loan from the World Bank for the NWSSP6 that was supported by a Japan Social Development Fund Grant from the Government of Japan and closed on December 31, 2016. At the time of preparation of the NWSSP, the GoA and the World Bank made the initial decision to focus the project on only 22 of the 43 rayons. Given the significant investments needs, a decision was made to start preparing in parallel a second NWSSP project (this project), approved in 2008, less than one year later, to address investments in the remaining 21 rayons. However, in 2012, both projects were reduced7 to 4 and 8 rayons, for the NWSSP and SNWSSP respectively. More details are provided in box 1.
4 World Bank. The Greater Baku Water Supply Rehabilitation Project (P008288). Report No. P-6624-AZ. 5 World Bank. 2007. Azerbaijan Republic: Water Sector Issues and Options. Report No. 33699-AZ. 6 NWSSP, Project ID No. P096213. 7 Due to cost increases and additional investments that were not anticipated, the project resulted in reduced number of rayons.
Page 7 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Box 1. The First and Second National Water Supply and Sanitation Projects Overview
Background. In early 2000, the GoA started a large-scale water program covering the entire country, with AzerSu, which is the government-owned national WSS operator for the entire Azerbaijan, as the leading agency. The World Bank was asked to finance a portion of the program, alongside other IFIs. A first NWSSP was approved in June 2007, followed less than a year later by the SNWSSP approved in May 2008. Both the projects had a very similar design and were initially implemented by AzerSu, which quickly became overwhelmed with about a dozen other IFI projects that started at the same time as the World Bank’s projects. First restructuring of October 2009. Originally the projects covered all 43 rayons based on tentative cost estimates that were not supported by thorough technical studies before project approval. Lack of proper preparation at entry and AzerSu being overwhelmed with multiple large and complex projects led to several years of weak implementation and low disbursement that resulted in the Government’s decision in 2009 to transfer the implementation responsibility of the SNWSSP to SAWMA, which is the government-owned national irrigation water operator (the NWSSP remained with AzerSu). This change was introduced under the first major restructuring dated October 2009. Second restructuring of January 2012. Once all feasibility and safeguards studies were prepared for all 43 rayons under both projects, the Government and World Bank acknowledged the need to increase the financing or reduce the original scope under both projects to match the available financing. Given the very low disbursement ratio at the time, the World Bank did not agree with the Government’s proposal for Additional Financing (AF) and asked the Government to downsize both projects to match with the realistic scope. Following this decision, the SNWSSP (as well as the NWSSP) was downsized through restructuring dated January 2012 and its scope was reduced from 21 to 8 rayons. The activities in Nakhcivan with SAWMA as the implementation agency were cancelled due to mis-procurement by SAWMA under the project. Its responsibilities were transferred to Azerbaijan Amelioration and Water Management Open Joint Stock Company (SAWMC) as the sole implementing agency. Fourth restructuring and AF of June 2014. After most of the large civil work contracts had been procured and started at the beginning of 2013, AzerSu requested changes in key design criteria derived from (a) the adoption of a new decree legalizing all dwellings in urban areas, responding to a rapid urbanization growth; (b) mandated extension of WSS services to additional areas; and (c) adoption of the European Union (EU) technical standards for WSS services. Due to these policy changes, the detailed designs approved under the contracts needed significant revision to meet these goals, which resulted in the extension of most of the contracts and changes in the number of project beneficiaries. Innovative and flexible procurement and technical solutions were used to adapt ongoing contracts to a changed policy environment, at no damage to contractors, and avoided prolonged delays and financial losses. All these changes resulted in the US$150 million AF and restructuring of the parent project that was processed in June 2014. Through 2012–2018, the project closing date was extended during the third, fifth, and sixth restructurings mainly to (a) address delays under a few large contracts, (b) complete compliance with safeguard policies, and (c) ensure that proper takeover of completed assets for operations and maintenance (O&M) by AzerSu had been properly finalized.
10. Country Partnership Strategy8 (CPS) FY07–FY10. Improving WSS services was also consistent with the World Bank Group’s FY07–FY10 CPS for Azerbaijan that was organized around four main pillars: (a) improving the quality and transparency in public sector governance, (b) supporting sustainable and balanced growth of the non-oil economy, (c) increasing the quality of and access to social services, and (d) strengthening of environmental management. Specifically, modernization of AzerSu and SAWMA, including both capacity building and the greater transparency afforded by the introduction of IFRS contributed to the first pillar and provision of reliable WSS was an essential component of the non-oil growth strategy of the second pillar. The third and fourth pillars were covered by the improvement of quality and access to social service goals and the environmental management objectives, respectively.
8 World Bank, November 8, 2006. CPF FY07-FY10 for the Republic of Azerbaijan, Report No. 37812-AZ.
Page 8 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Theory of Change (Results Chain) 11. A combination of an inherited and relatively extensive water supply system from the former Soviet Union, lack of investment, deferred maintenance, and damage due to natural calamities, such as an earthquake in 2000 with an epicenter just offshore Baku that was the strongest in almost 160 years, resulted in severely deteriorated quality of infrastructure and services over the years. The compounded impact of these developments negatively affected WSS users. In many secondary and small towns, water treatment facilities were largely dysfunctional or lacking completely, to the point that the population in these towns did not have access to safe water supply. Further, most rayons did not have functioning sewerage collection and the few facilities that were available were in a poor state of disrepair. This was a serious threat to public health and had severe negative impacts on the environment. 12. To mitigate these impacts and improve the availability, quality, reliability, and sustainability of WSS services, a two- track approach was followed: (a) Investments in rehabilitation and reconstruction of WSS infrastructure. There was investment in the whole water services cycle—starting from water intake and storage, water supply and sewage network, and wastewater treatment. This was a unique approach as it brought complete processes with all related benefits not only for the population, but higher standards for environmental protection and for future O&M. This is visible from the first two actions in figure 1 with respective outputs and Project Development Objective (PDO)/long-term outputs. (b) Implementation of a comprehensive Institutional Modernization Component (IMC) to strengthen the WSS sector’s capacity to manage WSS services in an efficient, effective, and sustainable manner. The training process for AzerSu’s rayon operational teams was undertaken at AzerSu’s Hovsan Training and Innovation Center (HTIC) that was created with the support of the project. Since then, the theoretical part of all company training has been carried out by on-site, on-the-job trainings by project contractors and using newly built WSS facilities. These trainings were focused at the local utility level for improved O&M, tariff collection improvement, transparency, accountability, and supervisory control and data acquisition (SCADA) automation. This is illustrated by the last two actions with respective institutional development which has the long-term sustainability outcome.
Page 9 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Figure 1. Results Chain for the Second National Water Supply and Sanitation Project
Project Development Objectives (PDOs) 13. PDO: The original PDO defined in the legal agreement Legal Agreement (LA) is to improve the availability, quality, reliability and sustainability of water supply and sanitation services of the Borrower. 14. There is a difference between the PDO of the LA and Project Appraisal Document (PAD). The PDO in the PAD specifies that the project improvement is “in selected regional (rayon) centers in Azerbaijan” instead only “of the Borrower”.
Key Expected Outcomes and Outcome Indicators 15. Progress toward achieving the above development objectives was to be monitored through the following key performance indicators in the project area: a) Availability. (i) Number of people served by piped water supply and (ii) Number of people connected to a sewerage network with an operating wastewater treatment plant. b) Quality. Percentage of drinking water samples in project area meeting Azeri water quality standards. c) Reliability. Average daily number of hours of water supply service. d) Sustainability. Financial working ratio (cash operating expenditures divided by collected revenues) of the project rayons.
Components 16. This project objective would be achieved through the following: Component A: Rayon Investments. The component involved rehabilitation and reconstruction of water supply and sanitation infrastructure, initially in 21 rayons and then reduced to 8 rayons after the 2012 restructuring.
Page 10 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Component B: Institutional Modernization. The component involved sustainable management of these investments to improve service delivery was expected to be leveraged through a comprehensive IMC. An IMC was already part of the NWSSP, and it was extended under the SNWSSP. Component C: Project Implementation and Management. This component supported project implementation by financing project management activities
B. SIGNIFICANT CHANGES DURING IMPLEMENTATION 17. The project had six restructurings and annex 4 tabulates the changes made to the project. Box 1 provides an overview. 18. The key changes made to the project were during the second and fourth restructurings, in January 20129 and December 2014,10 respectively, and included the following: (a) First restructuring of October 2009. The project implementation responsibilities of SAWMA of Nakhchivan were transferred from AzerSu to the SAWMC. (b) Second restructuring of January 2012. The second restructuring involved change to (i) the original PDO, (ii) results indicators, (iii) number of rayons from 21 to 8, (iv) institutional arrangements, (v) components, and (vi) financial reallocations. (c) Third restructuring of February 2013. Closing date of the project was extended from February 2013 to December 31, 2014. (d) Fourth restructuring and AF of December 2014. The AF amounted to US$150 million and the changes made were (i) change to the PDO; (ii) revision of the Results Framework; and (iii) extension of the project closing date by three years to December 31, 2017. (e) Fifth and sixth restructurings of June 2017 and November 2018. The Results Framework was revised to reflect the new project closing dates of December 31, 2018, and June 30, 2019, respectively. 19. Further details on the specific restructuring changes are provided in the subsequent paragraphs. Revised PDOs and Outcome Targets
20. The PDO changes were introduced during the second and fourth restructurings of January 2012 and June 2014 respectively. The original PDO in the PAD was “To improve the availability, quality, reliability and sustainability of water supply and sanitation (WSS) services in selected regional (rayon) centers in Azerbaijan.” The difference of the PDO in the Loan Agreement has been clarified in paragraph 145 above. (a) The revised PDO per the 2012 restructuring was “To provide quality and reliable water supply and sanitation services in selected regional (rayon) centers in Azerbaijan.” This reflected the dropped word ‘the availability’ which was changed to ‘provide’ and the word ‘sustainability’ was also dropped but was not replaced. In addition, the word ‘reliability’ was changed to ‘reliable’. The PDO aspects of quality and reliable WSS services were defined as 24-hour continuous service that complied with water supply quality standards, including treatment in conformity with the EU Wastewater Treatment Directive for secondary treatment. Also, the stated reason for the removal of the sustainability objective from the PDO was that
9 Restructuring Paper, Report No. 59627-AZ. 10 Project Paper on Additional Loan, Report No. 86398-AZ.
Page 11 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
the original time frame allotted for the project was insufficient and would have to be implemented over a longer time frame. Moreover, the water sector receives subsidies from the Government on a regular basis which contribute to sustainability of the service. (b) The PDO was further revised during the restructuring and AF of June 2014, “To improve the quality and reliability of water supply and expand water supply and sanitation services in selected regional (rayon) centers in Azerbaijan.” The word ‘provide’ was replaced by ‘improve the’, ‘reliable’ was replaced with ‘reliability’ and the words ‘and expand water supply’ were added. ‘Quality and reliability’ are now limited only to the water supply aspect of the PDO. The changes to the PDO were to better align it with the existing baseline and expected results of the additional works, which included more villages and settlements adjacent to the main rural centers covered under the original project, thereby allowing more beneficiaries to benefit from the project.
Revised PDO Indicators 21. The PDO indicators were revised as illustrated in the following paragraphs. 22. Second restructuring of January 2012. The Results Framework was revised to reflect the modified PDO and activities and the reduced rayons from 21 to 8 in the project. All indicators that were monitored by SAWMA were dropped and the remaining indicators were reduced in number and simplified to strengthen the overall monitoring framework. 23. New PDO indicators introduced were (a) People in project area receiving improved water supply and sanitation services resulting from the Project,11 and (b) Pollution load measured in persons equivalent (PE) eliminated through adequate wastewater treatment.12 24. Dropped PDO indicators. (a) Number of people served with piped water supply, (b) Number of people connected to functional sewerage network, (c) Percentage of drinking water samples in project area meeting Azeri water quality standards, (d) Average daily number of hours of water supply service, and (e) Financial working ratio (cash operating expenditures divided by collected revenues) of the 21 rayon water utilities in which investment is completed. 25. Third restructuring of February 2013. At the time of this restructuring, the closing date was February 28, 2013. The Results Framework was revised to reflect the new project closing date of December 31, 2014. 26. Fourth restructuring and AF of December 2014. The Results Framework was revised to align with the changed PDO, to reflect the additional activities introduced, refine original performance indicators, and introduce core sector indicators. 27. Revised PDO indicator targets: (a) People in project area receiving improved water supply, original target was revised from 212,000 to 323,00013 and (b) Population load measured in persons equivalent (PE) eliminated through adequate wastewater treatment, original target was revised from 230,000 to 285,000. 28. New PDO indicators introduced were (a) New piped household water connections that are resulting from the project intervention, (b) New household sewer connections constructed under the project, (c) Number of females receiving improved water supply and sanitation services resulting from the project, (d) Percentage of population in
11 Improved water supply is defined as 24-hour continuous service that complies with quality standards. 12 Adequate treatment is defined as conformity with the EU Wastewater Treatment Directive for secondary treatment. 13 This figure was based on the number of additional household connections and includes population of suburb villages which also benefitted from improved water supply because of rehabilitated networks.
Page 12 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
project areas that on average receives 24 hours of water supply per day, and (e) Percentage of drinking water samples in project areas meeting Azeri water quality standards. 29. Project closing date. At the time of this restructuring and AF, the closing date was December 31, 2014, and the project was extended to December 31, 2017. Revised Components
30. During the second restructuring of January 2012, the following changes were introduced. a) Component A: Rayon Investments (i) Subcomponent A.1: Rayon Investments (SAWMC). Because of cost increases and additional investments that were not included in the original investment plan, SAWMC rehabilitated and extended water supply and sewerage systems in 8 rayons (Aghsu, Ismayilli, Jalilabad, Lerik, Masalli, Shabran, Siyazan, and Yardimli) rather than the initial 21 rayons at project approval. (ii) Subcomponent A.2: Rayon Investments (SAWMA). This subcomponent was cancelled due to mis- procurement by SAWMA under the NWSSP (P096213). b) Component B: Institutional Modernization (i) Subcomponent B.2: Institutional Modernization (SAWMA) and Subcomponent C.2: Project Management (SAWMA). As SAWMA was eliminated as a project implementing agency, the related activities were dropped.
Other Changes
31. The first restructuring of October 2009, was undertaken before project effectiveness and included the following changes: (a) as requested by the GoA, project implementation responsibilities of Subcomponents A.1, B.1, and C.1 were transferred from AzerSu to the SAWMC. The change at the time was due to AzerSu implementing and planning to implement, over the following five years, investments amounting to about US$2 billion, and it was concluded that it would not have the capacity to administer additional projects. Also, the investments in Nakhchivan were to continue being implemented by SAWMA; (b) extension of the loan and financing closing dates by 12 months (from February 28, 2013, to February 28, 2014); and (c) changes to the Results Framework to meet the requirements of the new guidance on adoption of core sector indicators. 32. AF. Due to a scale up of the project because of additional activities and costs, the slow take-over by AzerSu and the limited rate of connections by households, the GoA formally requested an AF of US$150 million that would finance additional works under existing civil work contracts for the rehabilitation of WSS systems in Siyazan, Shabran, Aghsu, Ismayili, Lerik, Yardimli, Masalli, and Jalilabad rayons. Further activities included additional household connections and metering and larger capacity of water and wastewater treatment plants. 33. HTIC. In May 2017, the Government agreed with the World Bank’s proposal to use unutilized proceeds under the institutional component for the needs of HTIC owned by AzerSu. The project helped to establish an open-air training ground and laboratory for regional O&M staff of AzerSu. Rationale for Changes and their Implication on the Original Theory of Change
34. The changes made in the restructurings of 2012 and 2014, allowed for the following:
Page 13 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
(a) The PDO revision of 2012. The time frame allocated for project implementation was considered insufficient at the time of restructuring to achieve the ‘sustainability’ objective that would have required a longer period of time. The PDO objective on ‘sustainability’ was therefore removed, thus aligning the PDO with the realistic expectation from the project. Quality and reliable WSS services meant 24-hour continuous service that complies with water supply quality standards, including treatment in conformity with the EU Urban Wastewater Treatment Directive for secondary treatment. (b) The substantially reduced scope of the project from the originally envisaged 21 rayons to 8 rayons (Aghsu, Ismayilli, Jalilabad, Lerik, Masalli, Shabran, Siyazan, and Yardimli) in 2012 was undertaken due to the significant increases in investment costs and additional investments that were not included in the original investment plan. The 8 rayons were selected due to their advanced preparation status and confirmed commitment to the project and the activities would include rehabilitation and extension of the water supply and sewerage systems. Changes to contract scope by the borrower also significantly affected the Theory of Change. (c) The PDO revision of 2014 was to better align with the existing baseline and expected results of additional works which included more villages and settlements adjacent to the main rural centers covered under the original project, thereby allowing a larger number of project beneficiaries. (d) Also, the AF of 2014 financed additional works under existing civil work contracts for the rehabilitation of WSS systems in Siyazan, Shabran, Aghsu, Ismayilli, Lerik, Yardimli, Masalli, and Jalilabad rayons under Component A. The additional activities included extra household connections, further metering, larger capacity of water and wastewater treatment plants, and other activities to scale up achieved results toward reaching the PDO. These investments were undertaken to allow more people to benefit from project activities. In addition, the AF would also finance additional costs associated with construction supervision, institutional modernization, and project management under Components B and C. (e) Since 2016, there was a continued lack of the Government's timely co-financing that resulted in the implementing agency requiring an additional AZN 2 million allocation from the state budget within the 2019 calendar year. This would facilitate the release of the last retention payments under a few closed contracts for which the defect liability period was carried over past the project closing date of June 30, 2019, thus spanning the calendar year. 35. The original project closing date was February 28, 2013. The closing date was extended four times for a total of six years and four months to June 30, 2019. These extensions were considered necessary to achieve the PDO considering that more resources and activities were added to the project as illustrated above. 36. All these changes affected the original ‘Theory of Change’. With the removal of ‘sustainability’ in the PDO and moving it into an undetermined future time, it was assumed that the other elements of the PDO such as availability, quality, and reliability would significantly contribute to service sustainability. In addition, despite the much smaller geographical coverage of the project, the project invested considerably in infrastructure investments and institutional modernization to strengthen the WSS sector’s capacity to effectively manage WSS services at a national level.
Page 14 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
II. OUTCOME
A. RELEVANCE OF PDOs Assessment of Relevance of PDOs and Rating
37. Alignment with Country Partnership Framework (CPF). The project contributed to higher-level objectives outlined in the following key strategic documents: (a) the CPS14 FY07–FY10 for Azerbaijan; (b) analytical work on Azerbaijan's water sector, prepared by the World Bank with support from the Government; (c) the Government's Letter of Development Policy (LDP) associated with the Poverty Reduction Support Credit;15 (d) CPF for Azerbaijan covering FY16–FY20.16 Under Focus Areas 1 and 2 (Economic competitiveness), the CPF promotes investments into infrastructure for better access to public services and infrastructure for growth. Another focus area of the CPF (Public sector management and service delivery), Objective 1.1: Strengthen capacity for public resource management, is aligned with the training provided under the project-financed HTIC. Following the FY16 Azerbaijan Systematic Country Diagnostic17 of recommendations, the CPF places a special focus on rural development (Focus Area 2) through investments in quality infrastructure that will contribute to enhanced competitiveness. The CPF also focuses on improved human development outcomes and increased prosperity through better access to water and sanitation and improved quality of the environment that has proven impact on health and social welfare outcomes where the project contributed. 38. Alignment with national policies. The Government was implementing the third State Program of Social and Economic Development of Regions for 2014–2018, which aimed at reducing regional inequalities and providing households in all rayon centers with reliable basic services, such as water and sanitation and other communal services. There is a National Water Strategy under preparation also aligned to the respective goals. Government authorities, as well as local contractors reported that the design, supply, and installation contract was new to the local industry. Forming joint ventures benefitted them and they have developed expertise and confidence to handle similar work in the future. 39. Given the current alignment of the ‘expansion’, ‘reliability’, and ‘quality’ aspects of the PDO and dropping of the ambitious ‘sustainability’ aspect, the PDO is rated to be of Substantial relevance to the current World Bank CPF and GoA priorities. B. ACHIEVEMENT OF PDOs (EFFICACY) 40. The project had six restructurings that included reduced number of rayons, PDO revision, PDO indicators and targets changed, AF, funds reallocated, and several closing date extensions. Due to the narrowed scope, a split rating is applied. Some of the restructurings are related only to time extension or implementation entity change. Table 1 summarizes the key changes during the restructurings.
14 World Bank. 2006. CPF FY07–FY10 for the Republic of Azerbaijan. Report No. 37812-AZ. 15 Credit 4061-AZ, project closed June 30, 2006. 16 Report No. 95860-AZ. 17 Report No. 97113.
Page 15 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Table 1. Key Changes during Project Restructurings Restructuring Change in: Included in the N Date Scope PDO PDO PDO Targets Closing Date Other split rating ** Indicators 1 Oct. 2009 Change in implementation NO agency 2 Jan. 2012 Reduced Changed Changed Changed YES 3 Feb. 2013 Extended NO 4 * June 2014 Increased Changed Changed Changed Extended Correct legal name of due to AF existing Implementation YES agency 7 June. 2017 Extended NO 8 Nov. 2018 Extended NO Note: a. The AF and fourth restructuring, where the PDO and Results Framework indicators were revised, became effective on December 22, 2014, and August 2015, respectively. However, they are referring to the very same changes in the PDO, PDO indicators, and targets. Thus, they are considered as a one-time action effective from August 2015 for the split rating. b. Some of the restructurings are related only to time extension or implementation entity change. They are not included in the weighted split rating as they do not have a direct impact or change in ratings.
Assessment of Achievement of Each Objective/Outcome 41. Pre-restructuring: For the assessment of the efficacy the PDO, the original PDO as in the LA (To improve the availability, quality, reliability, and sustainability of water supply and sanitation services of the Borrower) has been split into four sub-objectives/outcomes: (a) Availability (b) Quality (c) Reliability (d) Sustainability 42. The sections below summarize the ratings as per the different restructurings included in the split rating in Table 2: Efficacy Rating, which summarizes the PDO indicator changes during the project: 43. Improved availability of WSS services. The ‘improved availability’ aspect of the PDO was assessed by the following two indicators and respective targets: (a) ‘Number of people served by piped water supply’ with the target of 496,000 and (b) ‘Number of people connected to a sewerage network with an operating wastewater treatment plant’ with the target of 439,000. ‘Availability’ was removed from the PDO along with the respective indicator in the January 2012 restructuring. However, for the split rating, the achieved result was assessed through (i) the indicator ‘People in project area receiving improved water supply and sanitation services resulting from project’, which reached 324 292 instead of 496 000; (ii) estimate of number of people connected to sewerage network based on Intermediate indicator of “New household sewer connections constructed under the project” multiplied by average number of people in HH, which reached 224 614 instead of 439 000. Because the results are significantly below the target at this first split, ‘availability’ is rated ‘Modest’. 44. The PDO was also revised during the restructuring and the AF of June 2014, where ‘availability’ was replaced by ‘expand water supply and sanitation services’. While the change was to better align it with the existing baseline and expected results of the additional works, for the split rating, this objective is considered similar to ‘availability’. The associated indicator for ‘expand’ is ‘People in project area receiving improved water supply and sanitation services resulting from the project’. It’s original Water Supply and Sanitation target was 212,000 and the formally revised target was 323,000 only for Water supply, which were both exceeded at the end of the project with 324,292 people.
Page 16 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
It should be noted that the sanitation-related part of the indicator was removed in the 2015 restructuring, while a new core indicator was introduced: ‘New household sewer connections constructed under the project’. It reached 43,283, which is above the target of 42,795. Furthermore, using this indicator, the number of people connected to Waste water was estimated to 224,614. This result is above the target after second restructuring. Thus, ‘expand’ was rated High for the last two splits after it was introduced. 45. Improved quality of WSS services. The ‘quality’ outcome is assessed by two indicators: (a) Percentage of drinking water samples in project area meeting Azeri water quality standards—the project achieved 98 percent which is rated Substantial before the fourth restructuring when the target was 100 percent and rated High as the target was revised to 98 percent; (b) Pollution load measured in persons equivalent—this was introduced, during the January 2012 restructuring, as a PDO indicator with the respective target of 230,000 that was increased to 285,000 after restructuring in 2015. The change reflects different and more targeted measures of the sanitation aspect of the ‘quality’ PDO—both indicators are considered for this part of the objective. The second PDO indicator on ‘quality’ reached 248,850, which is assessed as High after the second restructuring as the target was achieved by the end of the project and as Substantial after the fourth restructuring, with a revised target that was not reached. It is expected that the target will be reached once household connection rates to the sewer increases, which depends on the GoA and WSS companies to introduce additional regulations, penalties, and public awareness campaigns with the aim to increase connectivity. 46. Improved reliability of WSS services. The ‘reliability’ dimension reflects the achievement of the indicator ‘Daily number of hours of water supply service’. The initial target was 24 hours, which was revised during the second restructuring to ‘Percentage of population in project areas that on average receives 24 hours of water supply’. The project reached 98 percent, which is rated Substantial before the fourth restructuring when the target was 100 percent and High after the restructuring—as the target was revised to 98 percent. The Results Framework reported progress as above the targets and the indicator is rated High. As there are no dedicated PDO indicators for reliability of sanitation, the intermediate indicator of sewerage network rehabilitated (in kilometers) was used for this evaluation. The original target was 750 after the second restructuring and 923 after the fourth restructuring. The end project result of 982 is more than both targets. Thus, the reliability of sanitation is rated High. 47. Improved sustainability of WSS services. The capacity of the operator (AzerSu group) was assessed with regard to the financial sustainability of the investments, based on the results of the Independent Auditor's Reports of the consolidated financial statements for 2012–2018 of AzerSu. 48. Historically, the group has had operating losses, negative cash flows from operations, and working capital deficits. The main reason was that the tariffs (established by the Tariff Council of the Republic of Azerbaijan) had been below the cost of the group’s water and sewerage services. However, on May 13, 2016, (effective on May 16, 2016), the Tariff Council of the Republic of Azerbaijan approved an increase in water and wastewater treatment tariffs charged to customers. An improvement of the group’s financial position because of this was observed in 2017 and 2018, where for the first time, the group achieved positive earnings before interest, tax, depreciation and amortization (EBITDA) and earnings before interest and tax (EBIT). Nevertheless, the group continued to realize financial losses (mainly due to ‘impairment of property, plant, and equipment’, and it remained dependent on its ability to obtain sufficient funding from the Government to sustain operations and complete its current investment projects (financial results for 2012–2018 are presented in Annex 5). The Government as an ultimate shareholder of the group has an incentive to continue to support financing the group because of its social contribution and importance to the country. 49. A key objective at appraisal had been to move toward achieving financial sustainability through gradual phasing out of government subsidies by the end of the project for all project rayons, where the key financial target was an
Page 17 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
average working ratio equal or less than 1.0 for all the 21 project rayons. According to the ex-ante financial analysis, both AzerSu as a group and the 22 rayons under the NWSSP and 21 rayons under the SNWSSP, had been forecast to produce a positive EBITDA. A minimum financial target had been set—the operating cost recovery, as well as the positive operating cash flows. One of the main factors influencing AzerSu’s financials had been the future tariff adjustments. The tariff increase of 2016 was a key step toward achieving the needed financial sustainability. The ongoing public awareness campaigns are another crucial step in the right direction. 50. At the PDO level, the sustainability dimension is measured through the decrease of the working ratio (operating expenditures divided by collected revenues) of the water utilities. While the average working ratio for all eight rayons that were supported by the project after the second restructuring, has reached the expected target at appraisal, half of the rayons, namely Yardinli, Lerik, Masalli, and Jalilabad, still maintain very high working ratios, and the trends for Lerik and Jalilabad even indicate further increases. Therefore, ‘sustainability’ is rated Modest. Justification of Overall Efficacy Rating
51. Given the achievement of the targets set out in the PDO indicators and weighted split rating, the overall efficacy can be rated from Modest to Substantial in the different project period splits as shown in table 2.
Table 2: Efficacy Rating
PDO (2008) Before 2nd After Restructuring 2 After Restructuring 4 incl AF Restructuring (January 2012) (August 2015) / END of project
To provide quality and To improve the quality and reliable water supply reliability of water supply and sanitation services and expand water supply and To improve the availability, quality, reliability, and sustainability in selected regional sanitation services in selected of water supply and sanitation (WSS) services of the Borrower. centers of Azerbaijan. regional centers in Azerbaijan. Efficacy (PDO) Modest Substantial Substantial Availability. Number of people: 496,000 WS* Target (i) served with piped water supply 439,000 WW* (ii) connected to sewerage network 324,292 WS
Progress
224,614 WW** PDO indicator changed in 2012 to: Efficacy Modest Expand (Availability). People in Target 212,000 323,000 WS project area receiving improved water (both WS and WW) supply and sanitation services resulting Progress 324,292 WS from project (2012 new PDO indicator; 224,614 WW** 2014 sanitation is removed) Efficacy High New household sewer connections Target 42,795 WW constructed under the project (New Progress 43,283 WW Intermediate Results Indicator after 2014) Efficacy High Quality WS. Percentage of drinking Target 100% 100% 98% water samples in project area meeting Progress 98% Azeri water quality standards. Efficacy Substantial High Quality WW. Pollution load measured Target 230,000 285,000 in persons equivalent (PE) eliminated Progress through adequate wastewater 248,850 treatment Efficacy High Substantial (New PDO indicator) Reliability WS. Daily number of hours Target 24h 100% 98%
Page 18 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
of water supply service (revised after Progress 98% 2012): Percentage of population in Efficacy project areas that on average receives Substantial High 24 hours WS Reliability WW: Sewerage network Target 750 km 923 km rehabilitated (Intermediate Results Progress 983.7 km Indicator after 2012) Efficacy High Sustainability. Working ratio Target 1.01 (operating expenditures divided by Progress 4 out of 8 rayons reached the collected revenues) of the 21 rayon target water utilities. (Dropped in 2012 PDO indicator) Efficacy Modest Note: WS = Water Supply; WW = Wastewater; * Target data adjusted as difference between target and baseline in order to be comparable with the new indicator; **Estimate of number of people connected to sewerage network based on Intermediate indicator of “New household sewer connections constructed under the project” multiplied by average number of people in HH C. EFFICIENCY 52. Economic analysis. A project-level ex ante cost-benefit analysis (CBA) had been prepared at project appraisal using a ‘with- and without-project’ methodology to calculate the economic rate of return (ERR) and net present value (NPV) of the water supply investments in the 21 SNWSSP rayons. The only benefits measured in monetary terms had been (a) resource savings from improved efficiency, (b) increased water sales due to reduction of illegal consumption and leakages, and (c) improved collections. Lack of data had prevented a quantitative evaluation of other impacts, such as health-, economic-, and environment-related aspects, because of insufficient input data and lack of sophisticated methodologies at the time of the appraisal. During the AF, the economic analysis included additional benefits of (a) welfare gains at household level associated with reduced cost of service delivery, (b) reduced coping cost due to better water quality and sufficient and reliable supply, and (c) reduced discharge of pollutants due to increased wastewater treatment. Therefore, only the main economic results from the ex post economic analysis (that is, the economic net present value [ENPV] and economic internal rate of return [IRR]) were compared with the corresponding values from the ex-ante CBA, and the ex post analysis also included a more comprehensive benefits assessment. Using this approach, the ex-ante NPV of expected benefits had been estimated at US$14.5 million (AZN 76.2 million) and the IRR of the investments at 13.0 percent, for a total cost of US$410 million for 21 rayons. 53. The ex post economic analysis is performed for the project, based on a bottom-up approach, that is, an economic analysis at rayon level is developed first, and then all rayons covered by the project are aggregated at the project level. Results of the ex post project-level economic analysis are summarized in the following paragraphs. 54. The economic analysis envisages gradual increase in water supply and wastewater connection rates, but the benefits will only materialize once people in the project area physically connected to the newly constructed networks (the economic analysis is more complex as this private household connection is outside the project scope and Results Framework measurement). Because the GoA and WSS operators are already taking action on introduction of additional regulations, penalties, and public awareness campaigns, the team expects to reach 100 percent by the end of the project horizon in 2049. However, it should be noted that if the ongoing action and appropriate measures are not taken in the long run, the connection rates may be significantly lower. According to the projection of the Project Implementation Unit (PIU), figure 2 demonstrates the expected connection rate increase over the next 30 years. Figure 2: Water Supply and Wastewater Connection Rates Under Economic Ex Post Analysis as well as Sensitivity Analysis of Project NPV and Connection Ratesa.
Page 19 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Note: a. Connection rate is average between water supply and wastewater Table 3: Summary of the Results From Ex Post Project-level Economic Analysis versus Ex Ante Base-case Scenario
At Appraisal Actual Project Forecast Actual Project Forecast Year (21 Rayons) (8 Rayons) - Ex Post at (8 Rayons) - Ex Post at - Ex Ante 10% Discount Rate 6% Discount Rate People in project area receiving improved water supply 596,415 331,191 331,191 (Number) Investment (US$, millions) 410 633 633 ENPV (AZN, millions) 76.2 2.1 348.8 IRR (%) 13.0 10.04 10.04 55. The economic analysis indicates marginal economic viability at project level and is slightly below the expected results as per the ex-ante CBA. This is mainly due to the reductions of the number of the affected population. Also, three of all eight rayons, namely Yardimli, Lerik, and Masilli, demonstrate insufficient economic feasibility. This is shown by the very high water supply investment per capita for Yardimli and Lerik which is US$1,500 and US$1,900, respectively. Similarly, the investment for wastewater service in Masilli and Lerik is above US$1500 per capita. Following consultation with other IFIs which support the WSS sector in Azerbaijan, it was noted that the change of specifications also led to similar increase of investment per capital. (See detailed assumptions and calculations in annex 5). Assessment of Efficiency and Rating
56. The economic efficiency based on the quantified and monetized benefits are expected to deliver the ENPV projection by 2049. However, it is below the target set at appraisal. Although WSS projects financed by other IFIs are at comparable investment cost per capita, the very high cost per capita in three rayons of the SNWSSP results in negative NPV for the specific rayons. It is important to continue with the additional activities to be able to increase the connection rate as projected. Otherwise the NPV will be highly negative for the overall project. There were also numerous extensions of the project closing date which made the contract implementation very long. The latter generated an increased cost of supervision and implementation. Thus, the efficiency is rated Modest.
Page 20 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
D. JUSTIFICATION OF OVERALL OUTCOME RATING Table 4: Overall Outcome Rating
PDO (2008) Before 2nd After Second Restructuring After Fourth Restructuring (AF) / end of project Restructuring (January 2012)
To provide quality and reliable To improve the quality and reliability of water To improve the availability, quality, reliability, and water supply and sanitation supply and expand water supply and sanitation sustainability of water supply and sanitation (WSS) services in selected regional services in selected regional centers in Azerbaijan. services of the Borrower. centers of Azerbaijan. Disbursement (M$ at the end of the period) 40.53 227.14 407.84 Share of disbursement 9.9% 45.8% 44.3% Relevance of Objective Substantial Efficacy (PDO) Modest Substantial Substantial Efficiency Modest Outcome ratings Moderately Moderately Moderately Unsatisfactory Satisfactory Satisfactory Numerical value of the outcome ratings 3 4 4 Weighted value of the outcome rating 0.30 1.83 1.77 Rounded value 3.90 Final Outcome Rating Moderately Satisfactory E. OTHER OUTCOMES AND IMPACTS (IF ANY) Gender 57. The FY16 Systematic Country Diagnostic and FY16–FY20 CPF program recognized that gender aspects were critical for social inclusion and accumulation of diversified assets. Therefore, as part of the fourth restructuring, the project team was encouraged to monitor the gender impact of this large project to help better document the positive development impacts of such projects. There was a PDO indicator for ‘Number of females receiving improved water supply and sanitation services resulting from the project’ introduced in 2015 which specifically monitored the result related to women. Institutional Strengthening 58. The HTIC of ‘AzerSu’ was established under the project to improve employee training and professionalism and organize trainings in accordance to international standards. All key supply and construction contracts for the HTIC were implemented, and, thus, the HTIC is equipped with new training hardware and software, vehicles, communication equipment, and training furniture. The training process for AzerSu’s rayon operational teams under the project was started by contractors at AzerSu’s HTIC in November 2017. The center has since provided a wide range of opportunities for international and regional trainings, training of specialists, modern logistics, and international testing and certification for relevant professions. The center organizes trainings for up to 350 people at a time and covers departments of mechanics, power engineering, automation and metrology, computers, geographic information systems (GISs), SCADA, and control cabinets. There are 2,500–3,000 people that are trained there annually. The training process has been International Organization for Standardization (ISO) standardized and HTIC has been hosting its students. 59. During construction supervision of the NWSSP, the World Bank team also developed an innovative GIS web solution to supervise construction under multiple contracts in an online mode. The system was later expanded by AzerSu’s IT
Page 21 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
department and transformed into a countrywide GIS asset management tool that contributes to the overall sustainability of project investments. All investments in eight rayons are digitized in the GIS asset management system operated by AzerSu. AzerSu also established a separate GIS department aiming to use the most advanced GIS technologies in the design and operational activities implemented by the company, as well as the automated SCADA management systems that are available in the regional utilities. This process benefitted from significant technical assistance from the World Bank.
Poverty Reduction and Shared Prosperity 60. The quality of environmental assets is a critical contributing factor to the well-being of people, affecting their health and economic opportunities, especially for the B40.18 If the depletion of resources continues at the rate of the last decade, and water contamination is not properly addressed, Azerbaijan will be at substantial risk of significant deterioration of its environmental assets with gloomy prospects for environmental sustainability. In particular, landscape degradation, desertification, and limited wastewater treatment leading to significant pollution of river waters and of the Caspian Sea and poor quality of drinking water are major concerns. The project contributed to improved health outcomes and increased prosperity through targeting water and sanitation services, quality of environmental assets, and reforms in the delivery of WSS services. 61. The effect on poverty reduction was significant since the project focused on the rural population where poverty is much higher than in the capital Baku. Interviews with small businesses and the rural population were made in Masally rayon, confirming beneficiary satisfaction with the improved quality of life (link to underlying video is in the footnote).19 . Other Unintended Outcomes and Impacts 62. The project contributed to the development of the national consulting and construction industry. The national WSS industry was not developed at the time of both NWSSP projects’ appraisals. Pipes and other WSS material were imported from abroad. During the project implementation, many WSS companies were established in Azerbaijan. Initially there were two or three companies in this sector with turnover around US$5 million–US$15 million equivalent. Because of the Government’s WSS program supported by the project, the local market has developed large companies in the WSS sector, with turnover of more than US$1 billion. Outside the domestic market, Azeri companies are now implementing projects in Uzbekistan, Tajikistan, Ukraine, and Georgia. The project also influenced the development of local expertise in implementation of international contracts, procurement, construction supervisions, and financial management. By the end of the project, more than 10 consulting companies were working in local and foreign WSS consulting markets. 63. During SNWSSP implementation, the PIU had meetings with the contracting community to explain project objectives with a view to increase the participation among bidders. Several awareness programs were conducted and foreign embassies located in Baku were approached and informed of the bidding opportunities. Participation of bidders increased and local contractors started forming joint ventures with both local and foreign contractors. Forming joint ventures benefitted them and they have developed expertise and confidence to handle similar work in the future. Local consulting companies and contractors involved in the project also reported that the design, supply, and installation contract improved their engineering design and implementation skills. Overall the project has contributed
18 People belonging to the bottom 40 percent income group. 19 https://www.youtube.com/watch?v=ixqKjJDCREM.
Page 22 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
to building the capacity of the national private sector in engineering design with regard to water sector and contract management. 64. The project developed good practices to address temporary land impacts. Before the project, all private land for the purpose of public infrastructure could only be acquired by the Government. The SNWSSP developed and introduced the practice of servitude agreements (long-term land easement) for public infrastructure. 65. The project developed designs that supported the national WSS program. Consulting companies that were involved in the two NWSSP projects prepared design and safeguard studies for 43 rayons instead of the 12 implemented, paving the way for a significant scale-up of the program with national resources. 66. The project introduced the concept of modern wastewater reuse. Currently treated effluents discharged from wastewater treatment plants (WWTPs) in eight rayons are used for agriculture purposes and farmers are entering into individual and collective agreements with AzerSu to pay for the irrigated water that is rich with nutrients.
III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME
A. KEY FACTORS DURING PREPARATION 67. Overall government program. The GoA was committed to address infrastructure deficits in WSS across the country, undertake policy and institutional measures needed to place the sector in a financially sustainable position, and implement institutional modernization activities. To this end, the preliminary actions that were taken before this project in the sector are outlined in paragraph 7. At the time of project preparation, with support from the World Bank and other IFIs, the Government had several projects under implementation or preparation, as described in the background section. 68. Background analysis. This project was underpinned by (a) the Azerbaijan Water Sector Issues and Options Report20 that was jointly prepared by the GoA and the World Bank, which led to the development of a Water Sector Strategy discussed between the Government and World Bank in 2006; (b) analytical work on WSS and irrigation; and (c) the Government’s LDP associated with the Poverty Reduction Support Credit.21 Feasibility studies were also undertaken after project effectiveness. It was foreseen that in some rayons, it would be necessary to arrange for additional investigations and analyses to supplement information in the feasibility studies. 69. Delays in effectiveness. At the request of the Government, the project effectiveness due date was extended twice and the project was finally declared effective in July 2009, 14 months after Board approval. The delays were due to (a) the extension of the deadline for submission of proposals for the Construction Management Firm (CMF) for AzerSu and SAWMA at the request of the bidders; (b) the complexity of the assignment as that led to longer-than- expected negotiations with the winning firm; and (c) approval of the Operations Manual. It was during this time that feasibility studies for five rayons (Djulfa, Ordubad, Kangarli, Sadarak, and Shahbuz) in Nackhchivan were prepared with financing from the NWSSP. This meant that the CMF could immediately begin with the preparation of the bidding documents once contracted.
B. KEY FACTORS DURING IMPLEMENTATION 70. Mis-procurement in SAMWA. Under the NWSSP, on January 19, 2011, the World Bank declared mis-procurement of two contracts for water supply and sewerage systems for the Sharur and Babek Rayons of the Nakhchivan
20 Azerbaijan Republic: Water Sector Issues and Options, Report No. 33699-AZ 21 Credit 4061-AZ, closed June 30,2006
Page 23 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Autonomous Republic with the cancellation of the loan proceeds. This affected the SNWSSP as the implementation agency, SAMWA, had to be removed, including all corresponding activities. 71. Change of design standards. Furthermore, in 2011, after the change of the top management of AzerSu, the design requirements to WWTPs were significantly changed. The design and construction of facilities was suspended until 2014. Criteria changes and suspensions caused long delays and additional costs. The best illustration of effects may be the Siyazan and Shabran contracts—at the time when AzerSu decided to change the requirements, the design of WWTP was already approved and 40 percent of the works had already been completed. 72. Slow approval process for final designs. Approval of designs (especially for WWTPs) took much more time than expected. In the years at the beginning of the project, the respective authorized approval authority of Azerbaijan was not ready to work with foreign contractors. The design of facilities and the system was prepared in accordance with European Standards, as was required in the contracts. 73. Capacity of implementing agency. During the 2009 restructuring, the GoA requested a transfer of the implementation responsibilities for Subcomponents A.1, B.1, and C.1 of the project from AzerSu to the SAWMC. The change was justified by the fact that AzerSu was implementing and planning to implement in the next five years, investments amounting to around US$2 billion and did not have the capacity to manage more than this. Project restructuring was expected to secure timely implementation of the respective part of the project due to the following: (a) the SAWMC had implemented similar complex infrastructure projects, including the Irrigation Distribution System and Management Improvement Project that had been completed and Rehabilitation and Completion of Irrigation and Drainage Infrastructure Project that closed in March 2010, both satisfactory to the World Bank and (b) had good track records in the implementation of projects funded by other IFIs such as the Asian Development Bank and Islamic Bank. 74. Delays in counterpart financing. The other reasons that affected implementation progress were shortage of funds, allocated by the GoA. According to the LA, 25 percent of expenses and also value added tax in the amount of 18 percent of the contract price that would be covered by the GoA. Each year, the allocations were almost half of the demand. This problem started to become critical from 2016, when according to changes in the tax law, no payment could be made before allocation of value added tax. Before that time, the project could provide payments to contractors with the World Bank portion so that contractors could have some cash flow. The project experienced challenges from these changes after the local currency devaluation against the U.S. dollar severely affected the project costs. The implementing agency required an additional AZN 2 million allocation from the state budget within the 2019 calendar year. This facilitated the release of the last retention payments under a few closed contracts for which the defect liability period was carried over the project closing date of June 30, 2019, thus spanning the calendar year. 75. Challenges with operational take-over. By project closure, the preliminary operational handover of completed assets to AzerSu was finalized in all project rayons. Concerns were raised and discussed with the Government on the sustainable operation of the new assets, particularly the WWTPs and SCADA systems. It was agreed that the required sustainability of the investments would need an institutional model in which the regional operators in the field have access to more technical and financial resources (such as local tariffs). 76. Slow uptake by end-sewer customers. A systematic campaign to incentivize or enforce potential customers to connect to centralized wastewater systems is needed. This would help ensure that the population in the project areas would experience the full environmental and health benefits of project investments.
Page 24 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME
A. QUALITY OF MONITORING AND EVALUATION (M&E) M&E Design 77. The PDO outcomes were significantly revised during implementation. The PDO was initially disaggregated succinctly into the four main PDO indicators. Two of them, ‘availability’ and ‘sustainability’ were removed in 2012. Subsequently ‘expand’ was added and ‘quality’ and ‘reliability’ were referred only to water supply in 2014. The revisions of the PDO indicators were well aligned with the revisions of the PDO.
M&E Implementation 78. The Project Management Unit (PMU) implemented the data collection and monitoring systems from the beginning of the project. Effective systems were put in place and indicators were systematically monitored by the PMU. The M&E teams proceeded with continuous data collection and field investigation throughout project implementation and timely monitoring on the project’s overall progress. It was diligent in data collection and reporting on performance data to the World Bank. M&E was also supported by quarterly progress reporting from the project construction supervision firm.
M&E Utilization 79. The results of the M&E process were compiled and used by project management and decision makers to monitor progress closely and make changes to the project’s structure during restructurings. Project management stakeholders were able to identify major issues regarding scope and status of the implementation progress and align the targets of the Results Framework indicators accordingly so that almost all of them were achieved upon completion.
Justification of Overall Rating of Quality of M&E 80. Considering the need to revise the PDO, not having an indicator for sanitation in the original Results Framework even if it was part of the PDO, the overall rating of quality of M&E is ‘Modest’. B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE 81. Environmental Assessment (OP/BP 4.01). The project was classified as a Category A—full assessment project triggering OP/BP 4.01 because it included financing that was for several new wastewater treatment plants of considerable size and potential impacts. The Environmental Impact Assessment Framework report was prepared and publicly disclosed on December 27, 2007. An Environmental Assessment for Agstafa rayon was publicly disclosed on March 1, 2008, under the (first) NWSSP. Site-specific Environmental Impact Assessments were approved by the World Bank for each selected site and were adhered to by contractors. The World Bank conducted regular due- diligence missions to confirm that site-specific Environmental Management Plans were implemented by contractors. 82. International Waters (OP/BP 7.50). The project triggered the World Bank’s Operational Policy on International Waters (OP 7.50) as several identified rayons included under the project were located within the catchments of (a) the Kura River, which flows to the Caspian Sea through Azerbaijan from Turkey and Georgia and (b) the Araks River which flows from Turkey and Armenia, and along Azerbaijan's border with Iran, joining the Kura River near the town of Sabirabad in Azerbaijan. Both these rivers, as well as the Caspian Sea, are international waterways under OP 7.50. International agreements that exist between the Republic of Azerbaijan and other riparians on the international waterways involved in this project identified that the agreement between Iran and the former Soviet Union for the
Page 25 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
joint utilization of the frontier parts of the Aras and Araks for irrigation and power concluded in August 1957. Additionally, a Memorandum of Understanding was signed on September 16, 1997, between the Ministry of Environment of Georgia and the State Committee for Ecology and Natural Resources of the Republic of Azerbaijan, on Collaboration in the Development and Implementation of the Pilot Project on Monitoring and Assessment in the Mtkvari/Kura River Basin. The SNWSSP activities did not present any issues with any of the principles of the above agreement or with the Memorandum of Understanding, nor did the agreements require notification in the case of minor works, as was planned under the project. However, the project was restructured in 2012 bringing the number of rayons down from 21 to 8, and rayons such as Zardab and Imishli that are dependent on canals linked to the Kura River were dropped from the project. 83. Safety of Dams (OP/BP 4.37). Even though the project did not finance any new large dams, OP/BP 4.37 on safety of dams was triggered, as some of the rayons where rehabilitation of water supply schemes might have taken place, obtained their water supply from small existing dams. Eventually, most of these were dropped off the project scope under the 2012 restructuring. A Dam Safety Assessment22 for Vileshchay Water Reservoir in Masalli was undertaken in 2016 to (a) evaluate the condition of the Vileshchay Water Reservoir and its appurtenant structures based on a review of inspection and monitoring reports; (b) perform an independent technical review of the available design documents to evaluate the safety of the dam and its appurtenant structures in accordance with the World Bank’s OP/BP 4.37, DIN 4084, EC-7, or other internationally accepted analysis methods; (c) determine if the dam has been inspected regularly and satisfactorily; (d) review the available documents and data and provide recommendations for Phase II construction; and (e) develop a Dam Safety Assessment Report including any safety concerns and recommendations for remedial action. 84. Involuntary Resettlement (OP/BP 4.12). The project triggered the World Bank’s Operational Policy on Involuntary Resettlement OP/BP 4.12 as the construction of WSS systems implied a need for land acquisition and temporary access to land. The project also implied certain restrictions on land use, for example, prohibition of building of structure and planting of trees over water pipes. The project piloted the use of easement or servitude compensation in the country to avoid large-scale permanent land impacts. On the whole, the project affected approximately 169.24 ha, which included 43.22 ha of private land, 99.74 ha of municipality owned land, and 26.28 ha of state land. In Yardimli and Lerik rayons, five structures were affected by the project, of which one entailed physical resettlement and the remaining affected auxiliary structures. In addition, the project affected fruit trees in gardens and backyards of 246 households. In total, 755 private plots were affected by the project, of which 54 were permanent and 701 were under easement (servitude). These entailed impacts on private land (land acquisition, servitude, and impacts on crops and trees). 85. As civil works were commissioned on design-build contract basis, and there were ongoing changes in the alignment of infrastructure, the exact footprint and resettlement impacts could not be identified until shortly before the beginning of civil works. The PIU and the contractor made detailed inventories of impact and proceeded with civil works before providing compensation to the project-affected persons (PAPs). Eight Resettlement Action Plans (RAPs) (‘Land Acquisition and Monetary Valuation Plans’) were prepared between 2014 and 2017 and implemented retroactively. Thus, although civil works on the project were almost completed in 2018, compensations to affected households were substantially delayed. Compensations were paid to PAPs 2–5 years after impacts occurred. 86. Once the World Bank became aware of noncompliance of OP 4.12 in June 2016, the World Bank flagged this issue to the Government in a series of Aide Memoires and Management Letters. Long-term delays with completing compensations were experienced due to the need for PAPs to complete land registration of their properties and the mandatory verification process of impacts and compensations on the part of the Government. Thus, the project was
22 Final Dam Safety Assessment for Vileshchay Water Reservoir in Masalli, Azerbaijan. June 2016 and Revised December 2016.
Page 26 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
in noncompliance with OP 4.12 between the start of civil works and end of September 2019 when all outstanding compensations were transferred into local notary accounts. As of October 31, 2019, 99 percent of compensations have been received by PAPs and the remaining funds are available in notary accounts. 87. A resettlement audit review was carried out from May to October 2018 and included desk study, site observations, focus group discussions, face-to-face meetings, and consultations with key stakeholders. Interviews were undertaken with PAPs in the second half of 2018 and covered 125 severely affected and vulnerable households. The audit report indicates that despite the delay, the compensations were sufficient to improve or at least restore impacts and losses incurred by PAPs. The level of consultation and quality of information provided was also deemed satisfactory despite the long-term delays in compensation. In the initial stages of project implementation, individual and group meetings were held informally but were not properly documented. However, extensive public consultations and individual discussions were held in all project rayons several times during preparation of the eight RAPs for the respective rayons—Agshu, Ismayilli, Siyezen, Shabran, Lerik, Yardimli, Masalli, and Jalilabad. 88. Grievance Mechanism. The Grievance Redress Mechanism was part of the RAPs that covered the project areas, to redress and mitigate any negative impacts of the project. The respective RAPs were prepared by the borrower and approved by the World Bank. Through the use of the identified communication and public awareness mechanism, the public was adequately informed of the Grievance Redress Mechanism. The process was (a) for minor matters, the rayon representative and the social staff of the project were responsible for addressing complaints received from the PAPs, (b) verbal or written complaints were registered in the office of the resident engineer by entering it in the complaint register and closely monitoring their resolution, and (c) in the next level, the Grievance Redress Committee would be called upon to provide resolutions to complaints. This committee’s functions and composition were illustrated in the RAPs. In November 2018, the client prepared the Resettlement Completion Report and conducted a review and it was concluded at the time that the grievance redress process could have been better managed. There were 84 complaints registered that were effectively addressed. Table 5: Registered complaints under the project Years Number of Grievances Resolved Responded 2015 6 6 0 2016 7 7 0 2017 21 18 3 2018 24 20 4 2019 26 23 3 TOTAL 84 74 10 Note: a. 'Responded’ means that PAP’s claims have been reviewed and rejected with explanation provided. 89. Fiduciary. The project was initially designed so that the International Relations and Development Department (IRDD) within AzerSu would have the overall responsibility for financial management, loan disbursements, and auditing arrangements. The IRDD was extensively assessed during the preparation of the first NWSSP, for which it was also the implementing agency, and further evaluated during appraisal of the SNWSSP. A financial specialist was hired to strengthen the staff who were implementing the NWSSP and help with the initially identified 21 rayons under the SNWSSP (which were then reduced to 8 rayons as indicated in paragraph 301). 90. Financial management matters included delays in counterpart funds and slow implementation. Despite delays of submission of the interim financial reports later in project implementation, these were found to be satisfactory. The audits were carried out over the course of project implementation with two delayed audit submissions.
Page 27 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
91. Procurement. Procurement for the SNWSSP was built upon the work that was already undertaken during the preparation of the NWSSP, thus benefitting from the experience gained by Aserzu. WWTPs were procured using a Standard Bidding Document for design, supply, and installation with lump-sum type contracts. One advantage in design, supply, and installation contracts is that the contractor submits its bid based on the preliminary design and is responsible to carry out a detailed design which has to be approved by the employer before commencement of work. This model saves time for the employer in preparing detailed designs and bills of quantities. Preliminary designs and a detailed bill of quantities of work items in the price schedules made the document a hybrid of lump sum and admeasurement. This model was advantageous during implementation especially dealing with the extensive scope modifications. Also, the payments under the lump-sum contracts are made on percentage of the contracts sum upon agreed milestones. Therefore, there is no requirement to take measurements on a daily or a monthly basis to make payments. This contributes to ease of contract management. 92. In addition, a CMF was hired to supervise construction covering the various rayons. The CMF supported the implementing agency in day-to-day contract management, preparation of progress reports, and advising and guiding the agency in taking remedial measures for issues faced by the contractors with local authorities and communities. In addition, the CMF reviewed contract scope modifications following procedures outlined in the contracts, and guided the implementing agency to prepare and submit contract amendments to the World Bank, thus helping execute the project. 93. Contracts were bid through International Competitive Bidding, Least-Cost Selection and Selection Based on the Consultants’ Qualifications. The Single-Source Selection procedure was followed for a consultant to prepare RAPs for four rayons, Siyazan, Shabran, Aghsu, and Ismayilli, as construction was advanced and urgent action was needed to avoid delays in construction. Some of the issues faced were delays in implementation of the contracts, contract amendments, finalizing of the designs, and identification of locations of the WWTPs, all of which affected the closing date of the project and the need for an AF. There were also some shortcomings in procurement and contract management of a few post-review contracts procured for AzerSu needs under the institutional development component, which were ultimately addressed.
C. BANK PERFORMANCE Quality at Entry 94. The World Bank team incorporated relevant lessons from the Greater Baku Water Supply Project, and from several other WSS projects in the region. The design of the project ensured that the objectives were fully aligned with the issues highlighted in strategic documents, namely the CPS and the draft Water Sector Strategy of the GoA. Initial focus on ‘sustainability’ and the working ratio was to a significant extent wishful thinking and a World Bank-driven agenda that led to the need for project restructuring. The project’s design was further aligned with key government priorities at the national and provincial levels. The World Bank ensured that a team of specialists was mobilized to address all relevant project aspects, including technical aspects, safeguards, and M&E.
95. At appraisal stage, the assessment and the budget of the project had been estimated, as feasibility investigations were not carried out by that time. The feasibility studies for 16 regions were then developed during project implementation by the consultant (Gauff&Temelsu), hired under the project, for preparation of feasibility studies and procurement and construction supervision. Feasibility studies were developed using key design criteria (that is, daily consumption per capita, planning horizon, trench standard, and so on) based on the best international practices and agreed between AzerSu and the World Bank. All those studies along with feasibility studies required several years to bring the project to procurement readiness stage, thus using up valuable implementation time.
Page 28 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Feasibility studies subsequently appeared to have underestimated costs and the investment price was significantly higher than envisaged.
Quality of Supervision 96. Considering the nature of the SNWSSP design and the numerous changes that took place during the implementation period (scope and technical requirements), intense supervision and follow-up by the World Bank was required. The World Bank undertook regular supervision (and more frequent supervision when needed) missions, including field visits and physical checks of investments. The project task team leaders were mostly based in the Azerbaijan Country Office during the entire project life. This resulted in well-facilitated day-to-day client engagement, stronger field presence, and strengthened project supervision. The same team was also supervising the NWSSP in parallel, leading to synergies and efficiencies. The rest of the key team members such as procurement, financial management, and environmental specialists were based in the country office from the beginning until project closing. Critical problems and bottlenecks were identified as early as possible and solutions sought in collaboration with the PMU. Although, the midterm review dated October 29, 2012, is recorded in the portal, there is no Aide Memoire dedicated to the midterm review and the economic benefits assessment was not updated. 97. The civil works on the project were almost completed in 2018. However, compensation to affected households was substantially delayed. Compensations were paid to PAPs 2–5 years after impacts occurred. Once the World Bank became aware of this OP 4.12 noncompliance in June 2016, the World Bank flagged this issue to the Government in a series of Aide Memoires and Management Letters. 98. The strengths of the supervision performance included a proactive supervision team, well balanced in skills between headquarters and the field and with substantive experience in WSS infrastructure as well as in institutional strengthening. 99. The team was very proactive in addressing necessary project adjustments. Moreover, the different changes in client requirements were introduced. They had to overcome a lot of profound challenges in adjusting the project to the client’s specific needs as evidenced by six restructurings and an AF and still staying aligned with the World Bank CPF.
Justification of Overall Rating of Bank Performance
100. The World Bank’s overall performance is rated Moderately Satisfactory. It is important to note that the collaboration between the borrower and the World Bank, particularly the PIU at SAWMA and AzerSu as a beneficiary, has been valuable and critical for the project’s final achievements. As reported by the clients, the World Bank team was continuously engaged throughout the project preparation and implementation and demonstrated sufficient professionalism. However, there were some shortcomings in the preparation phase (scale of the project scope, Results Framework, underestimation of investment costs, and so on), which led to delays at the beginning of implementation.
D. RISK TO DEVELOPMENT OUTCOME 101. The authorities and all different stakeholders continue to be committed to the project development outcomes and continuous improvement of WSS service. However, there are several challenges for the authorities in the post- completion phase of the project. The following risks need to be addressed to maintain the project achievements:
Page 29 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
a) Cost recovery for water supply and wastewater services provision. The financial sustainability of AzerSu is still precarious and dependent on GoA subsidies, as tariffs have remained below costs. AzerSu has and continues to be actively involved in investing activities covering the construction of new water pipelines and sewerage systems in the Republic of Azerbaijan and receives subsidies from the Government on a regular basis. Subsides are the Ministry of Finance’s decision, however, the calculation is coordinated with the Ministry of Economy. New investments are fully covered by the GoA. There is a specific commission of five ministries (led by the Deputy Prime Minister) that analyzes the cost and revenue of 14 institutions (including AzerSu), which decides, on a regular basis, what the subsidy should be. There is also an option for ad hoc requests in extraordinary situations. Historically, the group has had operating losses, negative cash flows from operations, and working capital deficit. However, the subsidization process gives, to some extent, certainty that this company will continue its operation in a financially sustainable manner. Overall, the commitment of the Government to maintaining WSS services remains strong, mitigating the overall risk that services will be substantially disrupted as a result of failure to achieve cost recovery. b) Willingness of customers to connect to sewer networks. For the project to develop all of its environmental and public health benefits and meet its financial and economic projection assumptions, the unserved population within the services area needs to physically connect to the sewer network. Figure 2: Water Supply and Wastewater Connection Rates Under Economic Ex Post Analysis as well as Sensitivity Analysis of Project NPV and Connection Ratesa. describes the connection rate projection. AzerSu is conducting awareness campaigns and along with other actions is promoting further connections. The long-term impact of the project depends on people continuing to connect in the coming months and years. Under some of the early subprojects, it was already experience that within 3 years, the connection rate could go close to 100%. c) Technical capacity for WWTP operations. The limited technical capacity of AzerSu staff to manage the wastewater assets is an important risk as well. If specific care is not taken to continue institutional development, the development outcome and reliability of the project is at risk. The project-financed contractors trained all of the relevant AzerSu staff, but continuous training programs as staff rotates will be important to ensure that the assets built – wastewater treatment plants in particular – continue operating to satisfaction.
V. LESSONS AND RECOMMENDATIONS 102. Project readiness and undertaking due diligence at the preparation stage is very important for efficient implementation. Ensuring project readiness would help to avoid unforeseen lags during implementation and costly implementation support efforts taken to correct design-related issues as was encountered during implementation of the project. The following are considered as key factors during project preparation and implementation: (a) feasibility investigations to be carried out before the budget of the project is estimated; (b) review of the master plans of rayon development would have benefitted project preparation; (c) design of a modern system should be aligned with demand, willingness, and readiness; and (d) land acquisition and environment and social assessments to be carried out well in advance before project approval without waiting until contracts are awarded and implemented. 103. Low connectivity to the sewer network is not only a technical issue but also a social and citizen engagement issue that needs to be properly addressed. As described in the efficiency section, the project teams should be aware and the design of project activities should address the unwillingness to change with respective communication campaigns and citizen engagement, alongside possible legal or financial incentives for people to connect. Feasibility
Page 30 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
studies to consider the growth aspect of service connection rates following investments have to be prepared before project appraisal. 104. Teams must invest more into understanding long-term sector financing and government strategies. The main objective at appraisal had been to move toward achieving financial sustainability through gradual phasing out of government subsidies by the end of the project for all project rayons, where the key financial target was an average working ratio. Although the tariff increased in 2016, which was a key step toward achieving financial sustainability, AzerSu is still precarious and dependent on GoA subsidies. The water sector receives subsidies from the Government on a regular basis as access to water and sanitation is rather considered as social service for the population. This contributes to the sustainability of the service. 105. Institutional capacity building is important for ensuring sustainability of services. The training process for AzerSu was undertaken at HTIC, created with the support of the project. These trainings were focused at the local utility level for improved O&M, tariff collection improvement, transparency, accountability, and SCADA automation. This improved the WSS sector’s capacity to manage WSS services and respective complex infrastructure in an efficient, effective, and sustainable manner. 106. Use of innovative approaches in procurement is important for complex infrastructure. As discussed in the procurement section, (a) turnkey design and built contracts for WWTPs were proven to be the right choice given frequent modifications of the original design, design modifications did not affect original requirements, and contracts were modified within their original lump-sum price; (b) scope of the contract needs to be precise to avoid any major modifications such as locations, number of beneficiaries, and standards; and (c) it is recommended to conduct a market survey to establish the capacity of the contractors and availability of design capacity, construction materials, and skilled labor within the country. .
.
Page 31 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS
A. RESULTS INDICATORS
A.1 PDO Indicators
Objective/Outcome: To improve the quality of water supply in selected regional (rayon) centers of Azerbaijan Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Percentage of drinking water Percentage 0.00 100.00 98.00 98.00 samples in project areas meeting Azeri water quality 05-Feb-2012 28-Feb-2013 31-Dec-2018 30-Jun-2019 standards
Comments (achievements against targets): 98% achieved.
Objective/Outcome: To improve the reliability of water supply in selected regional (rayon) centers of Azerbaijan Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Percentage of population in Percentage 40.00 98.00 98.00 98.00
Page 32 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
project areas that on average 05-Feb-2012 31-Dec-2017 31-Dec-2018 30-Jun-2019 receives 24 hours of water supply
Comments (achievements against targets): 100% achieved.
Objective/Outcome: To expand water supply and sanitation services in selected regional (rayon) centers of Azerbaijan Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion
People in project areas Number 0.00 212000.00 323000.00 324292.00 receiving improved water supply 05-Feb-2012 28-Feb-2013 31-Dec-2018 19-Apr-2019
Comments (achievements against targets): 100.4% achieved.
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of females receiving Number 0.00 160000.00 160000.00 164524.00 improved water supply and sanitation services resulting 05-Feb-2012 31-Dec-2017 31-Dec-2018 08-Nov-2017 from the project
Page 33 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Comments (achievements against targets): 102% achieved.
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Pollution load measured in Number 0.00 230000.00 285000.00 248850.00 persons equivalent (PE) eliminated through adequate 05-Feb-2012 28-Feb-2013 31-Dec-2018 30-Jun-2019 wastewater treatment
Comments (achievements against targets): 87% achieved.
A.2 Intermediate Results Indicators
Component: Component A: Rayon Investments
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of rayons in which Number 0.00 21.00 8.00 8.00 the water supply and wastewater systems in the 05-Feb-2012 28-Feb-2013 31-Dec-2018 30-Jun-2019 project areas are
Page 34 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
rehabilitated and operational
Comments (achievements against targets): 8 rayons out of the initially identified 21 were rehabilitated and operational. thus 38% achieved.
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Water network rehabilitated Kilometers 0.00 900.00 1048.00 1224.20
05-Feb-2012 28-Feb-2013 31-Dec-2018 30-Jun-2019
Comments (achievements against targets): 117% achieved.
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Sewerage network Kilometers 0.00 750.00 923.00 983.70 rehabilitated 05-Feb-2012 28-Feb-2013 31-Dec-2018 08-Nov-2017
Comments (achievements against targets): 106% achieved.
Page 35 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion New reservoir capacity Cubic 0.00 31000.00 52000.00 35080.00 provided Meter(m3)
05-Feb-2012 28-Feb-2013 31-Dec-2018 30-Jun-2019
Comments (achievements against targets): 67% achieved.
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion New piped household water Number 0.00 30000.00 41577.00 46344.00 connections that are resulting from the project 05-Feb-2012 31-Dec-2014 31-Dec-2018 30-Jun-2019 intervention
Comments (achievements against targets): 111% achieved.
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion
Page 36 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
New household sewer Number 0.00 2850.00 42795.00 43386.00 connections constructed under the project 05-Feb-2012 31-Dec-2014 31-Dec-2018 30-Jun-2019
Comments (achievements against targets): 101% achieved.
Component: Component B: Institutional Modernization
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Rayons equipped and with Number 0.00 21.00 8.00 8.00 trained personnel for O&M 05-Feb-2012 28-Feb-2013 31-Dec-2018 30-Jun-2019
Comments (achievements against targets): 38% achieved.
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of trained O&M Number 0.00 140.00 140.00 140.00 personnel in project rayons 05-Feb-2012 31-Dec-2017 31-Dec-2018 30-Jun-2019
Page 37 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Comments (achievements against targets): 100% achieved.
Page 38 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
B. KEY OUTPUTS BY COMPONENT
Objective/Outcome 1 To improve the quality of water supply in selected regional (rayon) centers of Azerbaijan
Outcome Indicators 1. Percentage of drinking water samples in project areas meeting Azeri water quality standards
Intermediate Results Indicators n.a.
Key Outputs by Component 98% of drinking water samples in project areas meeting Azeri water quality standards
Objective/Outcome 2 To improve the reliability of water supply in selected regional (rayon) centers of Azerbaijan
Outcome Indicators 1. Percentage of population in project areas that on average receives 24 hours of water supply
1. Number of rayons in which the water supply and wastewater systems in the project areas are rehabilitated and operational Intermediate Results Indicators 2. Water network rehabilitated 3. Sewerage network rehabilitated
1. 98% of population in project areas that on average receives 24 hours of water supply Key Outputs by Component 2. 8 rayons in which the water supply and wastewater systems in the project areas are rehabilitated and operational
3. 1224.2 km. water network rehabilitated 4. 983.8 km. sewerage network rehabilitated
Objective/Outcome 3 To expand water supply and sanitation services in selected regional (rayon) centers of Azerbaijan
1. People in project areas receiving improved water supply Outcome Indicators 2. Pollution load measured in persons equivalent (PE) eliminated through adequate wastewater treatment 3. Number of females receiving improved water supply and sanitation services resulting from the project
1. New reservoir capacity provided Intermediate Results Indicators 2. New piped household water connections that are resulting from the project intervention 3. New household sewer connections constructed under the project
Page 39 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
1. 324,292 people in project areas receiving improved water supply 2. 248,850 pollution load measured in persons equivalent (PE) eliminated through adequate wastewater treatment Key Outputs by Component 3. 164,524 number of females receiving improved water supply and sanitation services resulting from the project 4. 35,100 m3 new reservoir capacity provided 5. 46344 new piped household water connections that are resulting from the project intervention 6. 43386 new household sewer connections constructed under the project
Objective/Outcome 4 Institutional modernization
Outcome Indicators n.a.
1. Number of trained O&M personnel in project rayons Intermediate Results Indicators 2. Rayons equipped and with trained personnel for O&M
Key Outputs by Component 1. 140 trained O&M personnel in project rayons 2. 8 rayons equipped and with trained personnel for O&M
Page 40 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION
A. TASK TEAM MEMBERS
Name Role Preparation Andreas Rohde Task Team Leader and Senior Sanitary Engineer Kanthan Shankar Lead Operations Officer Sanyu Lutalo Environmental Engineer Junko Funahashi Senior Counsel Ida Muhoho Senior Financial Management Specialist Hannah Koilpillai Senior Finance Officer Hadji Huseynov Infrastructure Specialist Gulana Hajiyeva Environmental Specialist Karl Skansing Procurement Consultant Hermine de Soto Social Specialist Klas Ringskog Peer Reviewer Manuel Marino Lead Water and Sanitation Specialist and Peer Reviewer Milane Reyes Program Assistant Teresa Lim Program Assistant
Supervision/ICR Hadji Huseynov Task Team Leader(s) Tanvir Hossain Procurement Specialist(s) Tural Jamalov Financial Management Specialist Sylvie Ngo-Bodog Team Member Gulana Enar Hajiyeva Environmental Specialist Fabiola Altimari Montiel Counsel Lidija Vukic Team Member Vusala Mamed Asadova Team Member
Page 41 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Ida Srbec Team Member Sophia V. Georgieva Social Specialist Sabina Guliyeva Team Member Khaled Mohamed Ben Brahim Team Member Aysel Asgarova Team Member Ntombie Z. Siwale ICR Co-Author
B. STAFF TIME AND COST
Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY08 21.881 147,078.38
Total 21.88 147,078.38
Supervision/ICR FY08 0 1,630.01 FY09 32.746 119,563.71 FY10 35.349 196,024.11 FY11 27.846 126,669.30 FY12 24.625 132,169.37 FY13 26.334 157,222.96 FY14 23.224 137,008.39 FY15 14.359 75,259.00 FY16 21.552 105,485.18 FY17 20.330 69,663.26 FY18 27.864 168,581.34 FY19 12.407 131,593.33 FY20 8.082 32,358.32 Total 274.72 1,453,228.28
Page 42 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
ANNEX 3. PROJECT COST BY COMPONENT
Note to Task Teams: The data in this section has been pre-populated for the first time for your convenience, but it is completely editable. Please delete this note when finalizing the document.
Actual at Project Amount at Approval Percentage of Approval Components Closing (US$Millions) (US$Millions) (US$Millions) Component A: Rayon 392.0 534.80 136% Investments Component B: Institutional 15.8 20.60 130% Modernization Component C: Project Implementation and 1.6 3.60 225% Management Total 409.4 559.00 137%
Page 43 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
ANNEX 4. RESTRUCTURING
Table 4.1.Evolution of Pre- and Post -Restructuring Indicators, Targets, and Changes PRE-RESTRUCTURING INFORMATION FROM POST-RESTRUCTURING CHANGES PAD 2012 PDO revision: To provide quality and reliable water supply and sanitation services in selected Original PDO: To improve the availability, regional (rayon) centers in Azerbaijan quality, reliability and sustainability of water 2014 final PDO: to improve the quality and reliability of water supply and expand water supply and supply and sanitation services of the Borrower sanitation services in selected regional (rayon) centers in Azerbaijan Original PDO Indicators Targets PDO Indicators Targets Other Changes Availability: Number of people AzerSu: Dropped in 2012 restructuring and replaced with 212,000 n.a. (i) served with piped water 484,000 WS ‘People in project area receiving improved water supply, (ii) connected to 339,000 WW supply and sanitation services resulting from the sewerage network Project’ SAWMA: 323,000 145,000 WS Revised in 2014: ‘People in project areas receiving 100,000 WW improved water supply’ Number of people connected to AzerSu Dropped in 2012 restructuring and replaced with 923 n.a. functional sewerage network 339,000 the intermediate result indicator ‘Sewerage network rehabilitated’ SAWMA 100,000 Quality: Percentage of drinking 100% Dropped in 2012 restructuring and replaced with 230,000 n.a. water samples in project area ‘Pollution load measured in persons equivalent (PE) to meeting Azeri water quality eliminated through adequate wastewater 285,000 (in standards treatment. 2014) Target was revised in 2014 AF and restructuring.
Added in 2014: ‘Percentage of drinking water 98% samples in project areas meeting Azeri water quality standards’ Reliability: Daily number of 24 hours Dropped in 2012 restructuring and replaced with 98% n.a.
Page 44 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
hours of water supply service ‘Percentage of population in project areas that on average receives 24 hours of water supply’ in 2014 restructuring. Sustainability: Financial working 1.01 Dropped in 2012 restructuring n.a. ratio (cash operating expenditures divided by collected revenues) of the 21 rayon water utilities in which investment is completed. Original Intermediate Results Targets Intermediate Results Indicators Targets Other changes Indicators Number of rayons in which the 21 Modified target in 2012 restructuring Reduced to 8 water supply and sanitation rayons systems in the project area are rehabilitated and operational In the project area; AzerSu has Yes Dropped in 2012 restructuring n.a. n.a. eliminated its core operational deficit Collection rate (%) 80 Dropped in 2012 restructuring n.a. n.a. % of metered customers 100 Dropped in 2012 restructuring n.a. n.a. % of contracts under 100 Dropped in 2012 restructuring n.a. n.a. implementation Restructurings Targets Other Changes 2009 Restructuring Change in Implementing Agency (prior to project effectiveness) from AzerSu to SAWMC.
Introduction of core indicators23 Project closing extension date by New piped household water connections that are 27,955 12 months from February 28, resulting from the project intervention (Number) 2013, to February 28, 2014.
Piped household water connections that are 111,822 benefiting from rehabilitation works undertaken by the project (Number)
23 Core Indicators as reflected in Implementation Status and Results Report (ISR) #4
Page 45 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Improved community water points constructed or 35 rehabilitated under the project (Number)
2012 Restructuring Rayons reduced from 21 rayons PDO revised to drop ‘availability’ and to 8 rayons. ‘sustainability’. Results Framework revised to All indicators monitored by SAWMA were dropped. align with changes to the PDO.
New PDO indicators introduced 212,000 SAWMA eliminated as People in project area receiving improved water implementing agency, leaving supply and sanitation services resulting from the SAWMC as sole implementing Project agency. 230,000 Pollution load measured in persons equivalent (PE) Revision of Components A and eliminated through adequate wastewater treatment B. 900 km Water network rehabilitated Reallocation of funds for both 750 km IBRD and IDA financing to reflect Sewerage network rehabilitated the dropped activities. 31,000 m3 New reservoir capacity provided 8 Rayons with monitoring system in place 8 Rayons equipped and with trained personnel for O&M 2013 Restructuring Extension of the project closing date from February 28, 2013, to December 31, 2014. 2014 Restructuring and AF Revision of the Results PDO revision: ‘to improve the quality and reliability Framework reflect additional of water supply and expand water supply and activities, refine original sanitation services in selected regional (rayon) performance indicators, and
Page 46 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
centers in Azerbaijan’. It aligned with the AF’s introduce sector core indicators. expected results. Correction of the legal name of Revised indicator targets the implementing agency People in project area receiving improved water Revised to supply and sanitation services resulting from the 323,00024 Project Extension of the project closing date by 3 years from December Pollution load measured in persons equivalent (PE) Revised to 31, 2014, to December 31, 2017. eliminated through adequate waste water 285,000 treatment
New core indicators New piped household water connections that are 41,577 resulting from the project intervention
New household sewer connections constructed 42,795 under the project
Number of females receiving improved water supply 160,000 and sanitation services resulting from the project
New custom indicators Percentage of population in project areas that on 90 average receives 24 hours of water supply per day
Percentage of drinking water samples in project 98 areas meeting Azeri water quality standards
Number of trained O&M personnel 140 in project rayons
Revised indicator targets
24 Based on number of household connections and includes population of suburb villages which will also benefit.
Page 47 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Water network rehabilitated 1,048 km
Sewerage network rehabilitated 923 km
New reservoir capacity provided 52,000 m3
Dropped indicator Rayons with monitoring system in place n.a.
2017 Restructuring n.a. Extension of the project closing date from June 2017 to December 31, 2018. 2018 Restructuring n.a. Extension of the project closing date from December 31 to June 30, 2019
Page 48 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
ANNEX 5. EFFICIENCY ANALYSIS
1. A project-level ex ante CBA had been prepared at project appraisal using a ‘with and without project’ methodology to calculate the ERR and NPV of the water supply investments in the 21 SNWSSP rayons. The only benefits measured in monetary terms had been (a) resource savings from improved efficiency, (b) increased water sales due to reduction of illegal consumption and leakages, and (c) improved collections. Lack of data and sophisticated methodologies at the time of the appraisal had prevented a quantitative evaluation of other impacts, such as health- , economic-, and environment-related aspects. Furthermore, due to the numerous and significant restructurings the project boundaries of the ex-ante analysis differ from those in the ex post analysis. Therefore, only the main economic results from the ex post economic analysis (that is, the economic NPV and economic IRR) were compared with the corresponding values from the ex-ante CBA. Using this approach, the ex-ante NPV of expected benefits had been estimated at US$14.5 million (AZN 76.2 million) and the IRR of the investments at 13.0 percent, for a total cost of US$410 million for 21 rayons. 2. The ex post economic analysis is performed for the project, based on the bottom-up approach, that is, an economic analysis at rayon level is performed first, and then all rayons covered by the project are aggregated at project level. Results of the ex post project-level economic analysis are summarized in the next paragraphs. 3. The economic analysis envisages a gradual increase in water supply and wastewater connection rates, but the benefits will only materialize once people in the project area physically connect to the newly constructed networks (the economic analysis is more complex as private household connection is outside the project scope and Results Framework measurement). Since the GoA and WSS operators are already taking action on introduction of additional regulations, penalties, and public awareness campaigns, the team expects to reach 100 percent by the end of the project horizon in 2049. However, if the ongoing action and appropriate measures are not taken in the long run, a significantly lower connection rate may be achieved. According to the projection of the PIU, figure 5.1 demonstrates the expected connection rate increase over the next 30 years. Figure 5.1. Water Supply and Wastewater Connection Rates Under Economic Ex Post Analysis as well as Sensitivity Analysis of Project NPV and Connection Rates (average between water supply and wastewater)
Source: Project Implementation Unit projection Under Economic Discount Rate of 10%
Page 49 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Sensitivity 120.0% 99.5% 100.0% 100.0% 69.1% 80.0% 60.0% 40.0% 20.0%
Average connection rate connection Average -129.2 0 2.1 0.0% -150 -130 -110 -90 -70 -50 -30 -10 10 NPV, million US$
Under Social Discount Rate of 6% Sensitivity 120.0% 100.0% 100.0% 69.1% 80.0% 53.1% 60.0% 40.0% 20.0%
Average connection rate connection Average 0 117.9 348.8 0.0% -100 -50 0 50 100 150 200 250 300 350 400 NPV, million US$
4. The main results of the ex post economic analysis per rayon and aggregated for the project are summarized in table 5.1. Table 5.1. Main Results of the Ex Post Economic Analysis
Under Social Discount Rate of 10% RESULTS FROM THE ECONOMIC ANALYSIS 2019 2023 2049 ENPV, US$ Investment per capita, US$ People connected to: People connected to: People connected to: Rayon (@10% discount IRR rate) WS WWC WWT WS WW WS WW WS WW Ismailli 14,879,356 12.2% 629 891 466 25,970 16,418 29,454 29,454 39,055 39,055 Aghsu 4,318,630 10.7% 598 824 446 18,870 12,210 22,644 22,644 37,248 37,248 Siyezen 31,580,036 15.8% 368 531 461 21,070 12,040 29,819 29,819 40,570 40,570 Shabran 29,370,823 15.5% 390 534 374 21,308 11,364 28,458 28,458 41,608 41,608 Yardimli (15,428,906) 5.2% 1,502 619 488 7,560 1,680 8,287 7,318 14,774 14,774 Lerik (25,107,529) 3.4% 1,921 789 886 6,734 1,820 7,746 7,746 13,447 13,447 Masalli (37,755,271) 5.9% 916 1,376 186 22,798 317 24,218 23,460 42,678 42,678 Jalilabad 34,124,501 12.4% 438 802 232 55,685 35,613 65,476 65,476 101,809 101,809 TOTAL 2,102,975 10.04% 633 813 361 179,994 91,461 216,102 214,375 331,191 331,191
Under Social Discount Rate of 6%
Page 50 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
RESULTS FROM THE ECONOMIC ANALYSIS 2019 2023 2049 ENPV, US$ Investment per capita, US$ People connected to: People connected to: People connected to: Rayon (@6% discount IRR rate) WS WWC WWT WS WW WS WW WS WW Ismailli 63,146,613 12.2% 629 891 466 25,970 16,418 29,454 29,454 39,055 39,055 Aghsu 44,770,290 10.7% 598 824 446 18,870 12,210 22,644 22,644 37,248 37,248 Siyezen 81,126,687 15.8% 368 531 461 21,070 12,040 29,819 29,819 40,570 40,570 Shabran 77,708,782 15.5% 390 534 374 21,308 11,364 28,458 28,458 41,608 41,608 Yardimli (3,568,181) 5.2% 1,502 619 488 7,560 1,680 8,287 7,318 14,774 14,774 Lerik (14,210,685) 3.4% 1,921 789 886 6,734 1,820 7,746 7,746 13,447 13,447 Masalli (1,843,280) 5.9% 916 1,376 186 22,798 317 24,218 23,460 42,678 42,678 Jalilabad 137,680,292 12.4% 438 802 232 55,685 35,613 65,476 65,476 101,809 101,809 TOTAL 348,754,134 10.04% 633 813 361 179,994 91,461 216,102 214,375 331,191 331,191
5. In table 5.2, the results from the two ex post scenarios are compared with the results of the base case ex ante economic analysis.
Table 5.2. Summary of the Results from Ex Post Project-level Economic Analysis versus Ex Ante Base-case Scenario At Appraisal Actual Project Forecast Actual Project Forecast Year (21 Rayons) - (8 Rayons) - Ex Post at 10% (8 Rayons) - Ex Post at 6% Ex Ante Discount Rate Discount Rate People in project area receiving 596,415 331,191 331,191 improved water supply (Number) Investment (US$, millions) 410 633 633 ENPV (AZN, millions) 76.2 2.1 348.8 IRR (%) 13.0 10.04 10.04 6. The economic analysis indicates marginal economic viability at project level and is slightly below the expected results as per the ex-ante CBA. This is mainly due to the twofold reductions of the number of affected population, where three of the eight rayons, Yardimli, Lerik, and Masilli, demonstrate insufficient economic feasibility. This is shown in table 5.3 by the very high water supply investment per capita for Yardimli and Lerik which is US$1,500 and US$1,900, respectively. Similarly, the investment for wastewater service in Masilli and Lerik is above US$1,500 per capita. Following consultation with other IFIs which support the WSS sector in Azerbaijan, it was noted that the change of specifications also led to similar increase of investment per capita. Methodology for the Ex Post Economic Analysis
7. The traditional economic evaluation method, based on the incremental benefit and cost flows between the situation ‘with’ and ‘without’ the project was applied, to catch only the ‘pure project’ impacts, where the specifics provoked due to the introduced changes in the project implementation were well considered in the ex post analysis. 8. A bottom-up ex post CBA was prepared using the ‘with and without project’ methodology to calculate the ERR and NPV of the WSS investments for each of the eight project rayons and aggregated at project level, on the basis of the following assumptions: A total of US$633 million were spent for eight rayons in Azerbaijan, namely Aghsu, Ismailli, Siyezen, Shabran, Yardimli, Lerik, Masalli, and Jalilabad, where a breakdown by rayon was implemented. The project implementation took place during 2011–2018, with a project operation horizon of 30 years (typical for this kind of project).
Page 51 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
A 10 percent economic discount rate was applied and compared with a 6 percent social discount rate. Each of the rayons was analyzed separately, based on the assumptions described in the next subsection, and the results were aggregated at project level. The following costs and benefits were considered: Costs: The project-related capital investments were based on the actual project investments incurred per rayon. The incremental O&M costs (directly resulting from the project) were calculated applying the 2018 working ratio for the rayon to the corresponding incremental financial revenues, where the incremental financial revenues were calculated based on the average specific consumption rate of the incremental people connected to the water and wastewater service, respectively, multiplied by the corresponding tariff, and adjusted for the demographic trends. The incremental O&M costs include all incremental direct and fixed O&M related to the water supply, sewerage, and wastewater treatment services resulting from the project, including energy costs, materials, salaries, repair and maintenance, water charges, and so on. Only constant 2019 values were used. Benefits25: Benefits from improved access to drinking water, that is, the benefits to human health from availability of improved drinking water as a result of the project. As per JASPERS CBA methodology this benefit is to be applied to all households, benefiting from the project, in the project service area,26 that is, to the households newly connected to centralized piped water. The unit value of this benefit per household, for Azerbaijan, was estimated at US$162.62 in 2008 value. Benefits from improvement in the overall conditions of water bodies (lakes and rivers) in the project area as a result of pollution prevention. As per JASPERS CBA methodology this benefit is to be applied to the persons benefiting from improved status of the water bodies, that is, persons living in the project area,27 as the local communities are likely to be the first ones ready to pay for improved condition of the water bodies in their surroundings. The unit value of this benefit per person was estimated at US$22.42 in 2008 value. Benefits from costs savings for households due to access to centralized piped water. This benefit is linked to the benefits accruing to households switching from individual water supply to centralized piped water due to no longer needing to rely on private reservoirs, private wells, private pumps, and so on, and no longer having to buy bottled water. This benefit as per JASPERS CBA methodology is to be applied to newly connected households as a result of the project,28 and its unit value was estimated at US$346.12 in 2008 value. Connection costs (US$50 per meter, on average 5 m per household) to centralized water supply for the newly connected households are deducted.
25 All economic benefits are calculated as per JASPERS CBA methodology for water and wastewater, Romania, 2008 (JASPERS CBA Methodology). This is the only internationally recognized CBA methodology tailored to the sector. A unit benefit transfer approach from Romania based on the household income was applied, and the annual values of this benefit were projected by adjusting them for the changes in the real GDP growth over the project reference period (as recommended on page 20 of JASPERS CBA methodology). 26 Page 20 of JASPERS CBA Methodology. 27 Page 20 of JASPERS CBA Methodology. 28 Page 21 of JASPERS CBA Methodology.
Page 52 of 64
The World Bank Second National Water Supply and Sanitation Project (P109961)
Benefits from cost savings from sewerage disposal due to access to wastewater connection network. This benefit is linked to the benefits accruing to households switching to centralized wastewater collection from individual wastewater solutions due to escaping capital expenditure and operating expenditure costs of maintaining appropriate29 individual sewerage disposal. As per JASPERS CBA methodology it is to be applied only to newly connected households as a result of the project interventions.30 The unit value of this benefit was estimated at US$382.38 in 2008 value. Connection costs (US$100 per meter, on average 5 m per household) to centralized wastewater connection for the newly connected households are deducted. Assumptions for the Ex Post Economic Analysis
9. The main assumptions used in the ex post analysis are given in table 10, while the economic analysis is presented in Table 8
29 It is very important to note that for these calculations, and thus for a valid benchmarking, it has been considered that the cost of a ‘correct individual treatment system’: composed of tanks acting as pretreatment (settler + digestor) before drain systems. If the correct individual treatment (tank + filtration/drain) is not always technically possible (for example, insufficient surface, slope, impermeable soil, and so on) then the ‘reservoir’ option could be needed as a fallback position. 30 Ditto
Page 53 of 64
Table 5.3. Assumptions for Ex -Post Analysis DESCRIPTION YEAR 2008 Currency exchange EUR in US$, 2008 EUR→US$ 1.35 Source: ECB Currency exchange US$ in AZN US$→AZN 1.70 As per 4 June 2019 Access to drinking EUR 120.46 As per JASPER' CBA Methodology for Water and Wastewater, 2008, transferred water, unit value USD 162.62 from Romania to Azerbajan based on annual household income per capita Improvement of EUR 16.60 water bodies, unit As per JASPERS CBA Methodology for Water and Wastewater, 2008, transferred USD 22.42 value from Romania to Azerbajan based on annual household income per capita Individual water EUR 256.39 supply solution, As per JASPERS CBA Methodology for Water and Wastewater, 2008, transferred unit value USD 346.12 from Romania to Azerbajan based on annual household income per capita Individual sewerage EUR 283.25 disposal solution, As per JASPERS CBA Methodology for Water and Wastewater, 2008, transferred unit value USD 382.38 from Romania to Azerbajan based on annual household income per capita. Annual household income https://www.ceicdata.com/en/indicator/azerbaijan/annual-household-income- per capita (PPP) in AZN USD 2,836.58 per-capita Annual household income https://www.ceicdata.com/en/indicator/romania/annual-household-income-per- per capita (PPP) in Romania USD 3,485.06 capita Annual increase in the population from 2020 onward Source: Internet-based regional statistics Ismailli 0.90% Based on the average annual demographic trends for the rayon in 2000–2018 Aghsu 1.74% Based on the average annual demographic trends for the rayon in 2000–2018 Siyezen 1.00% Based on the average annual demographic trends for the rayon in 2000–2018 Shabran 1.28% Based on the average annual demographic trends for the rayon in 2000–2018 Yardimli 1.90% Based on the average annual demographic trends for the rayon in 2000–2018 Lerik 1.31% Based on the average annual demographic trends for the rayon in 2000–2018 Masalli 1.00% Based on the average annual demographic trends for the rayon in 2000–2018 Jalilabad 1.52% Based on the average annual demographic trends for the rayon in 2000–2018
Working ratio Ismailli 0.49 Constant 2018 values Aghsu 0.93 Constant 2018 values Siyezen 0.68 Constant 2018 values Shabran 0.99 Constant 2018 values Yardimli 1.67 Constant 2018 values Lerik 1.87 Constant 2018 values Masalli 1.18 constant 2018 values Jalilabad 2.78 constant 2018 values Assumptions for ex post economic analysis 2011–2019 Input data: as provided by the project office (equal to pessimistic scenario) Input data: as provided by the project office + adjustment for demographic change from 2020 onward and slight increase in 2020–2022 water supply connection ratio, following the corresponding public awareness campaigns From 2023 Slight increase in water supply and wastewater connection ratios to reach 100% by the end of the project horizon, following onwards the corresponding public awareness campaigns Note: PPP = Purchasing Power Parity.
Page 54 of 64
10. Due to some inconsistencies between the baseline data reported by AzerSu and the PIU, for 2014–2018, the team assumed that the first source of information is more reliable for the financial analysis, while the latter is more relevant as a baseline for the economic analysis. Table 5.4. Ex Post Economic Analysis
0 1 2 3… …30 YEAR 2019 2020 2021 2022… …2049 US$, I. TOTAL INVESTMENT COSTS 633,301.68 thousands US$, II. OPERATING COSTS 3,756.62 4,061.20 4,469.63 5,217.46 8,507.08 thousands US$, III. BENEFITS 32,979.01 38,173.62 45,239.05 53,661.19 140,537.29 thousands Access to drinking water for the households in the project area Real GDP growth % 3.38 3.08 2.10 1.57 1.66 Benefiting population # 179,994 183,483 191,422 212,882 331,191 Persons per average # 5.2 5.2 5.2 5.2 5.2 household Benefiting households # 34,685 35,358 36,889 41,026 63,875 Unit benefit US$ 213 220 225 228 355 III.1 Access to drinking water US$, for the households in the 7,403.19 7,778.97 8,285.99 9,360.15 22,687.73 thousands project area Improvement of water bodies as a result of the project Benefiting people # 91,461 133,566 175,863 210,718 331,191 Unit benefit US$ 29.4 30.3 31.0 31.4 49.0 III.2 Improvement of water US$, 2,690.81 4,050.41 5,444.88 6,626.66 16,214.66 bodies thousands Sewerage disposal savings to
customers Benefiting households # 17,624 25,739 33,891 40,609 63,875 Unit benefit US$ 454 468 478 486 756 III.3 Sewerage disposal US$, 5,459.32 8,109.21 12,293.13 16,580.01 48,288.08 savings thousands Water supply savings to customers Benefiting households # 34,685 35,358 36,889 41,026 63,875 Unit benefit US$ 502 517 528 536 835 US$, 17,425.69 18,235.03 19,215.05 21,094.37 53,346.83 III.4 Water savings thousands US$, (601,550.28) 38,111,68 44,946,78 52,497,80 132,030.21 FREE CASH FLOW (III-I-II) thousands NPV (10% economic discount US$, 2,102.98 rate) thousands IRR 10.04% US$, NPV (6% social discount rate) 348,754.13 thousands
Page 55 of 64
0 1 2 3… …30 YEAR 2019 2020 2021 2022… …2049 IRR 10.04% Financial Analysis
11. The capacity of the operator (AzerSu group) was assessed with regard to the financial sustainability of the investments, based on the results of the Independent Auditor's Reports of the consolidated financial statements for 2012–2018 of AzerSu. 12. AzerSu (100 percent owned by the GoA) is part of the Government monopoly for supply of water and sewerage services and the Government keeps on investing to sustain the operations of the group along with current investment projects. The group is actively involved in investing activities of construction of new water pipelines and sewerage systems in the Republic of Azerbaijan and receives subsidies from the Government on a regular basis. Having considered that contributions and additions in capital depend on government decisions and there are no requirements and limits set on the level of capital, no specific capital risk management policies were developed by the group.31 13. Results from the financial analysis of AzerSu are presented in table 5.5 and figure 5.2. Table 5.5. Financial Analysis of AzerSu
Table 4.1. Azersu Group - Profit and Loss Account (AZN) 2012 2013 2014 2015 2016 2017 2018 Sales revenue 122,896,791 134,857,367 140,979,000 139,086,000 159,837,000 165,745,000 176,715,000 Sale of water 112,939,128 110,303,567 119,162,000 117,542,000 115,545,000 110,621,000 115,549,000 Sewerage service 3,146,051 17,154,754 17,730,000 19,645,000 41,183,000 51,449,000 54,397,000 Other sales revenue 6,811,612 7,399,046 4,087,000 1,899,000 3,109,000 3,675,000 6,769,000 Cost of sales (105,753,543) (93,253,890) (87,991,000) (77,220,000) (84,578,000) (85,727,000) (92,937,000) Gross Revenues 17,143,248 41,603,477 52,988,000 61,866,000 75,259,000 80,018,000 83,778,000
Administrative expenses (31,652,611) (30,655,935) (29,875,000) (31,169,000) (19,883,000) (31,216,000) (22,989,000) Selling and distribution expenses (91,854,266) (74,547,050) (94,912,000) (89,420,000) (89,938,000) (66,737,000) (76,102,000) Other operating expenses (388,314,161) (987,521,327) (837,190,000) (357,646,000) (543,282,000) (567,416,000) (492,876,000) Foreign exchange losses (140,440,000) (39,800,000) (3,129,000) 5,007,000 Other income - 17,323,325 23,338,000 9,761,000 5,840,000 83,866,000 26,300,000 Operating expenses (511,821,038) (1,075,400,987) (938,639,000) (608,914,000) (687,063,000) (584,632,000) (560,660,000)
Operating result (EBIT) (494,677,790) (1,033,797,510) (885,651,000) (547,048,000) (611,804,000) (504,614,000) (476,882,000)
Finance cost (309,009) (725,956) (370,000) (2,815,000) (840,000) (3,574,000) (2,250,000) Loss before tax (494,986,799) (1,034,523,466) (886,021,000) (549,863,000) (612,644,000) (508,188,000) (479,132,000)
Income tax benefit/(expense) (282,737) 61,770 (11,000) (797,000) (277,000) (162,000) (1,069,000) Loss for the year (495,269,536) (1,034,461,696) (886,032,000) (550,660,000) (612,921,000) (508,350,000) (480,201,000)
Net result/sales (including other income) -403% -680% -539% -370% -370% -204% -237%
31 Source: 2018 Independent Auditor's Report of AzerSu.
Page 56 of 64
Table 4.2. Azersu Group - Profit and Loss Account (AZN) 2012 2013 2014 2015 2016 2017 2018 Sales revenue 122,896,791 134,857,367 140,979,000 139,086,000 159,837,000 165,745,000 176,715,000 Sale of water 112,939,128 110,303,567 119,162,000 117,542,000 115,545,000 110,621,000 115,549,000 Sewerage service 3,146,051 17,154,754 17,730,000 19,645,000 41,183,000 51,449,000 54,397,000 Other sales revenue 6,811,612 7,399,046 4,087,000 1,899,000 3,109,000 3,675,000 6,769,000 Cost of sales (82,064,131) (76,168,890) (81,698,000) (74,232,000) (73,925,000) (80,561,000) (86,304,000) Gross Revenues 40,832,660 58,688,477 59,281,000 64,854,000 85,912,000 85,184,000 90,411,000
Administrative expenses (22,443,505) (26,410,935) (27,657,000) (30,174,000) (17,873,000) (30,828,000) (22,716,000) Selling and distribution expenses (77,681,873) (66,371,050) (91,229,000) (81,071,000) (83,596,000) (61,022,000) (70,248,000) Other operating expenses (629,821) - (1,019,000) (389,000) (70,000) (44,000) (14,000) Foreign exchange losses - - - (140,440,000) (39,800,000) (3,129,000) 5,007,000 Other income - 17,323,325 23,338,000 9,761,000 5,840,000 83,866,000 26,300,000 Operating expenses (100,755,199) (75,458,660) (96,567,000) (242,313,000) (135,499,000) (11,157,000) (61,671,000)
EBITDA (59,922,539) (16,770,183) (37,286,000) (177,459,000) (49,587,000) 74,027,000 28,740,000
Depreciation (47,070,911) (29,506,000) (12,194,000) (12,332,000) (19,005,000) (11,269,000) (12,760,000) Operating result (EBIT) (106,993,450) (46,276,183) (49,480,000) (189,791,000) (68,592,000) 62,758,000 15,980,000
Finance cost (309,009) (725,956) (370,000) (2,815,000) (840,000) (3,574,000) (2,250,000) Loss before tax (107,302,459) (47,002,139) (49,850,000) (192,606,000) (69,432,000) 59,184,000 13,730,000
Income tax benefit/(expense) (282,737) 61,770 (11,000) (797,000) (277,000) (162,000) (1,069,000) Loss for the year (107,585,196) (46,940,369) (49,861,000) (193,403,000) (69,709,000) 59,022,000 12,661,000
Net result/sales (including other income) -88% -31% -30% -130% -42% 24% 6% 2012 2013 2014 2015 2016 2017 2018 Working ratio 1.49 1.25 1.43 2.35 1.35 1.06 0.99 Operating ratio 1.87 1.47 1.52 2.43 1.47 1.13 1.06 Target 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Figure 5.2. Financial Analysis of AzerSu (2)
2.50
2.00
1.50 Working ratio Operating ratio
1.00 Target Linear (Working ratio)
0.50
- 2012 2013 2014 2015 2016 2017 2018
14. Historically, the group has had operating losses, negative cash flows from operations, and working capital deficit. The main reason is the tariffs (established by the Tariff Council of the Republic of Azerbaijan) had been below the cost of the group's water and sewerage services. However, on May 13, 2016 (effective on May 16, 2016), the Tariff Council of the Republic of Azerbaijan approved an increase in water and wastewater treatment tariffs charged to customers.32 An improvement of the group’s financial position as a result of this was observed in 2017 and 2018, where for the first time the group achieved a positive EBITDA and EBIT. Nevertheless, the group continued to realize financial losses (mainly due to ‘Impairment of property, plant, and equipment’, and it remained dependent on its ability to obtain sufficient funding from the Government to sustain operations and complete its current investment projects. The Government as an ultimate shareholder
32 Source: 2018 Independent Auditor's Report of AzerSu
Page 57 of 64
of the group has an incentive to continue to support financing the group because of its social contribution and importance to the country.33 15. The main objective at appraisal had been to move toward achieving financial sustainability through gradual phasing out of government subsidies by the end of the project for all project rayons, where the key financial target was an average working ratio equal to or less than 1.0 for all the 21 project rayons. 16. As per the ex ante financial analysis, both AzerSu as a group, and the 22 rayons under the NWSSP and 21 rayons under the SNWSSP, had been expected to produce a positive EBITDA. A minimum financial target had been set; the operating cost recovery, as well as the positive operating cash flows. One of the main factors influencing AzerSu’s financials had been the future tariff adjustments. The tariff increase of 2016 is a key step toward achieving the needed financial sustainability. The ongoing public awareness campaigns are another crucial step in the right direction. As a result, the project working ratio in 2018 is already below 1.00, and the group’s EBITDA became positive in the last two financial years. Nevertheless, half of the rayons, namely Yardinli, Lerik, Masalli, and Jalilabad, are continuing to maintain very high working ratios, and the trends for Lerik and Jalilabad display even further increases.
33 Source: 2018 Independent Auditor's Report of AzerSu
Page 58 of 64
Figure 5.3. Working Ratio by Rayon
Figure 5.4. Project-level Working Ratio
2.40
2.20
2.00
1.80 Operating ratio (incl. depreciation)
1.60 Working ratio (excl. depreciation) Target 1.40 Linear (Operating ratio (incl. depreciation)) 1.20
1.00
0.80 2014 2015 2016 2017 2018
17. A comparison between the ex-ante and ex post working ratios per rayon and on average for the project are presented in table 5.6. Table 5.6. Projected Working Ratios at the End of Project Horizon (per rayon and on average for the project area) Rayon Ex Ante (Base-case Scenario) Ex Post Ismailli 0.63 0.49 Aghsu 0.64 0.93 Siezen 0.63 0.68 Shabran n.a. 0.99 Yardimli n.a. 1.67a
Page 59 of 64
Rayon Ex Ante (Base-case Scenario) Ex Post Lerik n.a. 1.87 a Masalli 0.68 1.18 a Jalilabad n.a. 2.78 a Average working ratio for total 0.63 0.90 project area Note: a. These are due to still low connection rates and incomparably high salary costs. Table 5.7Summary of the Results From Ex Post Financial Analysis versus Ex Ante Base-case Scenario Rayon Working ratio Ex ante (base-case scenario) working ratio for project area 0.63 Ex post aggregated working ratio for total project area 0.90 Ex ante working ratio for the operator <1.00 Ex post working ratio for the operator 0.99 18. Although the operator has improved its financial performance, it remains dependent on its ability to obtain sufficient funding from the Government to sustain operations and complete its current investment projects. Furthermore, half of the rayons, namely Yardimli, Lerik, Masilli and Jalilabad do not demonstrate financial self- sustainability.
Page 60 of 64
ANNEX 6. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS 1. The Project Implementing Unit provided minor comments to the World Bank’s Implementation Completion Results Report that have been addressed. 2. The Republic of Azerbaijan prepared a Project Completion Report (PCR) documenting the final outcomes of project implementation. The following sections summarize the main points from the Client’s PCR regarding: (a) Benefits of the Project; and (b) the Clients evaluation of the performance and responsibilities of parties to the project. Project Benefits 3. The Second National Water Supply and Sanitation Project (SNWSSP) has been an integral part of the State Program on Poverty Reduction and Sustainable Development regions in the Republic of Azerbaijan from 2009 to 2013, following a similar Program for 2014-2018. This project was primarily socially oriented and is one of the benchmarks of the Government's efforts to improve the living conditions in selected regions, as well as economic development and poverty reduction. 4. Economic aspects. The project provided substantial public infrastructure such as reliable water supply and sanitation services that has had a significant impact on the income of the local population and has contributed significantly to the achievement of poverty reduction and welfare goals. In life-style areas, at least, it has stimulated the development of individual farming and livestock to meet basic household needs. 5. Environmental impact aspects. Provision of sustainable WSS systems stimulated the illumination of environmental pollution and this has led to significantly increased greenery. 6. Health improvement of population. As a result of the level of utility services provided, this has played an important role in the improvement of the people’s health. Provision of safe and quality water and sewerage services has positively affected the reduction of many water borne diseases. 7. Impact on Gender equality. In general, the high level of utility services means that people are less likely to spend time on household issues, thus providing more time for the development of human capital, such as reducing poverty risks and gender inequality, and expanding access to income and education. Considering the fact that most of beneficiaries are mainly women and children, the provision of services positively affected the life of the inhabitants. The Client’s Evaluation of the Performance and Responsibilities of Parties to the Project 8. Critical to the success of the project was the active involvement of several key players who were directly responsible for important aspects of the Project. 9. The Republic of Azerbaijan was the Borrower and Co-Financier for the implementation of the Second National Water Supply and Sanitation Project (SNWSSP). 10. The Ministry of Finance (MoF), the Borrower's representative, key responsibilities under the SNWSSP was to provide timely co-financing funds for the project in accordance with the Loan and Financing Agreement, and to ensure that the other project implementing institutions carry out their respective responsibilities in accordance with the terms of the Loan and Financing Agreement. In addition, the MoF maintained and coordinated the Steering Committee during the course of project implementation, with clear structure, functions and membership as agreed with the Bank. Furthermore, the Ministry ensured that project implementing institutions, carried out their respective responsibilities in accordance with the terms of the Financing Agreement. 11. The World Bank was a donor and co-financer of the Project. The Client acknowledged the significant value the World Bank brought to the project at inception, preparation, implementation:
Page 61 of 64
The World Bank worked closely with the Borrower to support its efforts to successfully implement the Project and achieve the desired results. This included regular communication and valuable support from inception to completion of the Project. Further, the extensive experience available through the World Bank staff members involved in the Project provided sound insight on the means of achieving the individual elements of the Project as well as overcoming various issues that arose during its implementation. The World Bank’s oversight of the Project was one of the major factors in successfully meeting the PDO outcomes by creating the close collaboration that existed between the World Bank and the Amelioration and Water Management Open Joint Stock Company. 12. Implementing Agencies (IA). At the beginning of the Project, AZERSU Open Joint Stock Company and SAWMA in Nakhcivan were designated as the Implementing Agencies and at the same time Operators. However, within a very short time period, the Government and World Bank came to the conclusion to change the Implementing Agency and assigned State Amelioration and Water Management Company (SAWMC) as the sole IA, while Operator and End User remain unchanged. 13. The SAWMC OJSC. A state-owned joint-stock company, is a legal entity, owning an independent balance, treasury and bank accounts, the main objective is to provide state services in the field of land reclamation and water management, to ensure water supply for the lands, to implement the operation of state-owned land reclamation and irrigation systems, and other activities related to the development of this area. The Company carries out its activity in accordance with the Constitution and law of the Republic of Azerbaijan, decrees and orders of the President of the Republic of Azerbaijan, decrees and orders of the Cabinet of Ministers, other normative legal acts and its Charter. 14. Project Implementation Unit (PIU). The PIU was established as a legal entity to accelerate and complete the Second National Water Supply and Sanitation Project in a timely manner. According to the regulations, the PIU has a separate property, seal and corner stamp of the emblem of Azerbaijan Republic, Special Account and currency accounts in banks. The activity of PIU is financed by the World Bank’s loan, the funds of the Government of Azerbaijan and other foreign investment within the project. 15. AZERSU Open Joint-Stock Company. Azersu Open Joint Stock Company is an Operator and End –User of all deliverables of the Project and is in charge of policy and strategy for the water supply and sanitation services in Azerbaijan. The Company makes necessary arrangements for extraction of water from sources followed by treatment, transportation, and sales and takes necessary actions for wastewater treatment. Azersu OJSC engages in the design, construction, operation, and maintenance of intake structures, reservoirs, pumping stations, water pipelines and sewerage collectors. 16. Consultants, contractors and suppliers. Throughout the Project, numerous national and international consultants, contractors and suppliers were engaged to provide the critical services, works and goods necessary to accomplish the required elements of the Project. Through an effective and efficient procurement process managed by the PIU, all consultants, contractors and suppliers were provided with clear direction as to the services, works and goods that they were to provide under the Project.
Page 62 of 64
ANNEX 7. SUPPORTING DOCUMENTS (IF ANY)
1. Project Appraisal Document (PAD), dated May 2, 2008. 2. Financing Agreement for Credit Number 4397-AZ. 3. Loan Agreement for Loan Number 7518-AZ. 4. Loan Agreement for Loan Number 8381-AZ. 5. Project Agreements. 6. Implementation Supervision Reports, numbers 1 -23. 7. October 2009 Restructuring Paper. 8. January 2012 Restructuring Paper. 9. February 2013 Restructuring Paper. 10. December 2014 Restructuring Paper (Additional Financing). 11. June 2017 Restructuring Paper. 12. November 2018 Restructuring Paper. 13. Country Partnership Framework FY07-FY10 for the Republic of Azerbaijan, Report No. 37812-AZ. 14. Country Partnership Framework FY16-FY20 for the Republic of Azerbaijan, Report No. 95860-AZ. 15. Azerbaijan Project Completion Report, 2019. 16. Azerbaijan Water Sector Strategy for 2006 – 2015.
Page 63 of 64
ANNEX 8. MAP
Page 64 of 64