PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2811 Water Supply Project Project Name Public Disclosure Authorized Region EUROPE AND CENTRAL ASIA Sector Water supply (60%);Sanitation (40%) Project ID P096213 Borrower(s) GOVERNMENT OF REPUBLIC OF AZERBAIJAN Implementing Agencies Azersu Joint Stock Company State Amelioration and Water 67 Tbilisi Avenue, 370112 Management Agency of Azerbaijan Nakhchivan Tel: 9412-300131 Fax: 9412-983814 [email protected] Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Public Disclosure Authorized Date PID Prepared February 14, 2007 Date of Appraisal March 7, 2006 Authorization Date of Board Approval June 5, 2007

Country and Sector Background

1. The Republic of Azerbaijan is located on the western coast of the Caspian Sea. It borders Turkey to the west, Armenia to the north west, Russia to the north, and Iran to the south, and has a surface area of about 86,600 square kilometers. About 52 percent of the country’s population of 8.2 million live in urban areas, and about one quarter of them (2.1 million) live in Baku, the

Public Disclosure Authorized capital city.

2. Azerbaijan has one of the fastest growing economies in the Commonwealth of Independent States (CIS). Its GNP per capita rose to US$1,190 in 2005 from a post independence low in 1995 of US$390 per capita. This rapid growth is mainly attributed to positive developments in the oil industry, which accounts for almost one third of Azerbaijan’s GDP. Growth in non-oil output has also risen since 1999, with an average annual growth rate of more than 10 percent. The Government is seeking to build upon the opportunities provided by its oil revenue, as well as to put in place measures that will ensure growth in the non-oil economy to ensure that the full benefits of the economic growth reach all sectors and segments of society in order to attain a sustainable reduction in poverty.

3. Azerbaijan inherited a relatively extensive water supply system from the Former Soviet

Public Disclosure Authorized Union (FSU). About 95 percent of the population in Baku and about 83 percent of those living in secondary cities and small towns are connected to piped water supply. Whilst coverage appears generally high in comparison to most other countries of similar income, the quality of infrastructure and services has deteriorated severely over the years as a result of lack of investment and deferred maintenance. In many secondary and small towns water treatment facilities are largely dysfunctional or lacking completely, so that the population in these towns does not have access to safe water supply. In addition, almost everywhere in the country piped water supply is unreliable, and is often less than 12 hours a day. Centralized piped water supply systems are rare in rural areas, and less than 33%1 of the rural population has access to piped water supplies.

4. About 55 percent of Azerbaijan’s population has access to improved sanitation facilities. Access to sanitation facilities in urban areas is higher than in rural areas, with coverage estimated at 73 percent and 36 percent, respectively2. The sewerage network in Baku serves about 78 percent of the population3, although only about 50 percent of wastewater in the area is treated.4 Sewerage coverage in other urban areas is only about 32 percent, and a minor proportion of the sewage undergoes any treatment before disposal.

5. Rural areas primarily depend on on-site sanitation. There is insufficient control by the public health department on the location and condition of on-site sanitation facilities, and there is no effective regulation of the emptying trucks which must periodically remove the sludge, increasing the risk of clandestine and unsafe discharge of this matter to the environment. For both public health and environmental reasons, it is imperative that faecal sludge from these facilities be treated before it is discharged into the environment.

Key Issues in WSS:

• Deterioration in physical condition of Water Supply Infrastructure: The physical condition and performance of infrastructure for water treatment, transmission and distribution systems in most parts of Azerbaijan has deteriorated seriously due to wear and tear as a result of age, deferred maintenance, and damage due to natural calamities such as the year 2000 earthquake. Many water transmission and distribution pipes are now over 50 years old, and have passed or are approaching the end of their economic lifespan. The subsequent state of many water pipe networks, and the associated problems such as intermittent supplies and heavy leakages affect the quality and reliability of services, and pose risks to public health.

• Deterioration in physical condition of Wastewater Infrastructure and the lack of wastewater and faecal sludge treatment facilities: Most rayons do not have functioning sewerage collection and treatment systems, and the few facilities that are available are in a poor state of repair. This is a serious threat to public health and has severe negative impacts on the environment.

• Utilities lack modern water supply and sanitation management with focus on technical and financial sustainability: Most utilities face challenges related to their lack of financial viability, which has been caused by various factors,

1 The figure for rural water supply varies between 10 and 33% depending upon the source. 2 World Development Indicators data, 2004. 3 The United Nations Environmental Performance Review, 2004 gives sewerage coverage in Baku as 72%. 4 Data is taken from the United Nations Environmental Performance Review, 2004. including: inadequate price/tariff structures, an inadequate billing system, and poor collection rates, resulting in a heavy dependence on operational subsidies from the Government.

• Poor Demand-side Management Practices: There is excessive water consumption and wastage in most parts of Azerbaijan because the level of metering, which would provide an incentive to save water and an opportunity for monitoring leakages, is still very low. Additional losses in the system are caused by the deterioration in plumbing systems within individual houses and apartment blocks.

• Unplanned and uncontrolled urban sprawl in Baku: The rapid growth of the population and resulting urban sprawl in the Greater Baku area in recent years, is putting additional strain on utility services such as water supply, sanitation energy, gas, and other infrastructure and social services, and hampering effective and sustainable investments in these sectors. There is a need for a coordinated regional development plan for the area.

6. In an attempt to halt the deterioration of water supply and sanitation services in the areas outside of Greater Baku, the Government re-centralized management of water supply and wastewater services for the entire country, with the exception of Nakhchivan Autonomous Republic under one company, Azersu Joint Stock Company (Azersu). Previously management of these services for the Apsheron Penninsula, including Baku was under one company, the Apsheron Regional Water Company, while services in other rayons was under several about fifty seven small utilities. Azersu is structured with several subsidiary companies, in addition to the main company that serves Greater Baku and the Absheron Penninsula. Services in the rayons outside Greater Baku, with the exception of Agdash, Goychay, Ganja and Sheki which are currently being operated under separate subsidiary companies formed under KfW and ADB projects, are being managed by Birleshmish Sukanal, a subsidiary of Azersu. Water supply and wastewater services in the Autonomous Republic of Nakhchivan are under the State Amelioration and Water Management Agency (SAWMA).

Objectives

7. The Development Objective (DO) of the project is to improve the availability, quality, reliability, and sustainability of water supply and sanitation services in twenty of Azerbaijan’s regional (rayon) centers.

8. This objective will be achieved through: (a) rehabilitation and reconstruction of water supply and sanitation infrastructure in 20 rayons outside the Greater Baku Area; and (b) implementation of a comprehensive Institutional Modernization Component to strengthen the WSS sector’s capacity to manage water supply and sanitation services in an efficient, effective, and sustainable manner.

9. Progress towards achieving the above development objectives will be monitored through the following key performance indicators in all 20 rayons in the project area:

• Availability: Number of people serviced by (i) piped water supply, (ii) number of people connected to sewerage network • Quality: Percentage of water samples in project area meeting Azeri water quality standards • Reliability: Daily number of hours of service • Sustainability: Working ratio (operating expenditures divided by collected revenues) of the 20 rayon water utilities.

10. The project contributes to higher-level objectives outlined in the following key strategic documents: (a) the existing Country Partnership Strategy (CPS) (Report No. 37812-AZ) approved by the Bank’s Board on December 14, 2006, (b) the SPPRSD document, (c) the draft Water Sector Strategy, and (iv) the Government's Letter of Development Policy (LDP) associated with the Poverty Reduction Support Credits.

11. The new CPS refers to the proposed project as part of the FY07 deliverables. Improving infrastructure service delivery, including utilities such as water supply and sanitation is consistent with the CPS5 which seeks to support the SPPRSD through supporting four main pillars: (i) Improving the quality and transparency in public sector governance; (ii) Supporting sustainable and balanced growth of the non-oil economy; (iii) Increasing the quality of and access to social services; and (iv) Improving environmental management. The Project will help to achieve the following four year CPS development outcomes: (i) develop rural infrastructure, and (ii) improve coverage of water supply systems. In addition, the Project will assist in achieving one of the CPS governance outcomes, the establishment of accountable public financial management and procurement systems, through introduction of International Financial Reporting Standards (IFRS) and strengthening of procurement capacities in the water sector.

12. The country’s development strategy and priorities are defined in the State Program on Poverty Reduction and Sustainable Development (SPPRSD) for 2006-2015, which identifies infrastructure service improvement, including water supply, telecommunications, and transport as critical for further expansion of the non-oil sectors, hence for improving the standard of living of the poor. Infrastructure improvements also link to other SPPRSD objectives including: (i) creating an enabling environment for growth of income generating opportunities; (ii) maintaining macroeconomic stability; (iii) improving quality and access to basic health and education services; (iv) reforming the social protection system; and (v) improving living conditions of Internally Displaced People (IDPs) of the Nagorno-Karabakh conflict.

13. The SPPRSD is aligned with the MDGs and with other Programs in Azerbaijan. It is intended to be integrated with the Medium-Term Economic Framework (MTEF), the Public Investment Program (PIP) and the State budget processes.

14. Water Sector Strategy: The draft Water Sector Strategy provides guidance on the management and allocation of water resources in Azerbaijan in the short- to medium-term (2006- 2015). It addresses both Water Supply and Sanitation (WSS) issues and Water Resources Management (WRM) issues, including Irrigation and Drainage, drawing on international

5 World Bank, November 8, 2006. Country Partnership Strategy FY 07 – 10 for Republic pf Azerbaijan, Report No. 37812-AZ, South Caucasus Country Unit, Europe and Central Asia Region. experience and the specific conditions of Azerbaijan. The Strategy reviews key issues currently facing the water economy in the country, and articulates an Action Plan to improve the operational, financial, and commercial performance of the sector, and its institutional effectiveness through a combination of: (i) Investments for rehabilitation and reconstruction of infrastructure; and (ii) Institutional modernization, through institutional, financial and governance reforms to ensure accountability, improvement of operational efficiency, and sustainability of the sector. The proposed project will substantially contribute to the implementation of the Water Sector Strategy.

15. The Government’s Letter of Development Policy (LDP) associated with the Poverty Reduction Support Credit (PRSC-I, 2005), includes a commitment to consolidate reforms in the utilities and infrastructure sectors through financial restructuring of the large natural monopolies; separation of commercial and regulatory functions; and introduction of proper regulatory frameworks. In an attachment to the LDP the Government outlines how it will ensure the sustained viability of the utility services sector (water and wastewater, energy and gas), and establishes a medium-term tariff policy. Although the PRSCs closed, the Government remains committed to meeting the reforms in the LDP, which would continue to be supported through on- going dialogue connected with the CPS.

Rationale for Bank Involvement

16. The Bank provided support to the Government of Azerbaijan through the Greater Baku Water Supply Project (GBWSP) which closed in January 2006. The GBWSP, which was the first Bank funded infrastructure operation in Azerbaijan, focused primarily on the Greater Baku area. Under this project substantial improvements to the area’s water supply were made. Works in respect of urgent short term physical improvements to the water supply system including leakage reduction and other facility repairs were completed, resulting in improvements in the reliability of water supply to domestic consumers in Baku. The average number of hours of service increased from the pre-project 6 hours a day to an average of about 13 hours a day. Water production also increased through the rehabilitation of the Jeiranbatan and Kura River Treatment Plant, which are the two main water treatment plants serving the Greater Baku area, and 30 chlorination stations for disinfection of water were installed. Consequently, the quality of water treated at the rehabilitated facilities is fully compliant with the relevant standards of the World Health Organization (WHO). Physical losses in parts of the project area were also reduced through the rehabilitation of the distribution network. The project was also able to make some headway in addressing the needs for longer term planning and recovery of the sector through relevant analytical work including preparation of a Water Supply and Wastewater Masterplan completed in 1999, and restructuring of the sector’s institutional structure to facilitate improvements in overall operational and managerial capacity of the entity. The project was however not able to significantly improve the entity (ARWC, which was later merged with smaller utilities serving the rayons to form Azersu)'s financial viability to set the stage for recovery and financial sustainability of the sector. Given the significant needs in the Greater Baku area and the rest of the country, the GBWSP was designed as a first step in addressing the WSS needs. 17. So far, Bank involvement in supporting the WSS sector has been modest in comparison to the country’s huge investment needs in the WSS sector, particularly outside Baku. To meet its goal of improving public infrastructure under the State Program on Poverty Reduction and Sustainable Development (2006 -15) [SPPRSD], the Government has decided to focus on, among other things, creating the infrastructure needed for regional development and improvement of public utilities. It has adopted a sectorwide approach aimed at covering as much of the sector’s needs through its internal resources and support from various donors and IFIs. Systems in several rayons are currently being funded by the ADB, KFW and SECO, and the World Bank, JICA, and JBIC are currently preparing additional projects. Together the combined effort of these donors are expected to cover the needs of about 80% of the urban population in rayons outside Baku. By contributing to the sector wide approach, the proposed project will provide an opportunity to broaden the Bank’s support to many of Azerbaijan’s rayons, thus contributing to the overall goals of economic development and poverty reduction.

18. The draft Water Sector Strategy for Azerbaijan, prepared by the Bank in collaboration with Government provides a vision for the sector, which includes rehabilitation of water supply and sanitation facilities in all urban centers around the country to provide reliable water supply and wastewater services. Meeting the above target will call for careful prioritization of needs, a phased approach in which the most urgent water supply and sanitation needs will need to be addressed first, a strengthening of the sector’s investment capacity, and the implementation of key aspects of the reform articulated in the Strategy to make these investments sustainable. The proposed project will support implementation of this vision.

Description

19. In order to achieve its development objective, the project will include four main components:

(i) Rayon Investment Component (ii) Regional Development Plan for Greater Baku (iii) Institutional Modernization Component (iv) Project Implementation and Management Component.

The Table 1 below provides a project cost estimate and indicative financing plan for the project components and subcomponents.

Table 1: Estimated Project Costs and Financing (in US dollars equivalent) Total Cost IBRD Component A: Rayon Investment Component 268.75 215.00 Component B: Baku Planning Component 5.00 3.50 Component C: Institutional Modernization 12.67 10.00 Component D: Project Implementation and Management 1.95 1.50 Total 310.00 230.00 *Total amount includes physical and price contingencies not included in individual component amounts.

Component A: Rayon Investment Component (Estimated Cost US $ 268.75 million)

20. This component would finance the rehabilitation and extension of water supply and sewerage systems in twenty rayons, as well as water, wastewater and septic sludge treatment facilities in these rayons. It would be implemented in two phases. Phase One would cover the urban centers of ten rayons, including Agstafa, Bilasuvar, Khanlar, Gorenboy, Guba, Oguz, Gabala, Saatli, Tovuz and Zagatala, as well as the villages located in close proximity of the urban centers or along the transmission mains supplying the centers. Phase Two would cover ten additional rayons: Hajigabul, Gazakh, Gakh, Mingechevir, Sabirabad, Samukh, Shamkir, Terter, Sharur and Babek. The last two rayons< Sharur and Babek belong to the Autonomous Republic of Nakhchivan and WSS services in them are managed by the State Amelioration Water Management Agency in Nakhchivan. The Government’s approach is to cover water supply and sanitation improvements in all of Azerbaijan’s rayons. At this time the Government, with support from IFIs, has projects under implementation or preparation in about 80 percent of the rayons and intends to cover the remaining rayons in the near future. Nevertheless, the selection of the rayons included in this project was based on a needs assessment, focusing on factors such as population size, the state of deterioration of facilities, and service quality. This component will also finance costs of design and technical support for construction supervision for the investments. During project implementation, the Government and the Bank could also agree that the project will finance water supply and sanitation infrastructure in Azerbaijan outside the twenty rayons mentioned above, should funds be available.

Component B: Greater Baku Regional Development Plan (US$ 5.00 million)6

21. This component would finance preparation of a Regional Development Plan for the Greater Baku area, and an update of the Water Supply and the Wastewater Master Plan. Development of the Regional Development Plan would be guided by a vision and strategy to support sustainable and inclusive urban development, which would be developed and adopted by key stakeholders. The strategy would provide the guiding principles for subsequently developing land use regulations detailed in the regulatory and zoning plans, which would not

6 The cost estimate for the Regional Development Plan for Baku may be revised after the Terms of Reference for this activity have been prepared and agreed. only guide future development in the area, but would also provide a sensible framework for future investments, not only in water supply and sanitation, but also in electricity, transport, gas supply, roads, schools and other services.

Component C: Institutional Modernization Component (US$ 12.67 million)

22. This component would support development and implementation of key reforms needed for the modernization of Azersu and its subsidiary companies, to improve the efficiency and sustainability of WSS services. It would specifically finance services and investments to carry out the following activities:

• Develop a Financial Restructuring and Recovery Plan for Azersu that would include reconciliation and restructuring of the company’s outstanding debt and receivables. • Carry out a twinning arrangement with an internationally experienced water utility company, designed to enhance Azersu’s technical and financial performance. This twinning arrangement will be performance based and result oriented. • Implement a Meter-reading, Billing and Collection system within Azersu and the State Amelioration and Water Management Agency in Nakhchivan (including strategy and provision of necessary software). • Introduce a modern Financial Accounting System (including the strategy and software required) for Azersu and the State Amelioration and Water Management Agency in Nakhchivan, allowing the companies to comply with the Government’s requirement to adopt International Financial Reporting Standards (IFRS) no later than January 1, 2008, and move gradually to cost center accounting in the rayon water utilities. • Strengthening of the Tariff Council to carry out their tariff setting and utility monitoring mandates. • Develop regional subsidiaries of Birleshmish Sukanal covering several rayon utilities each, to increase the company’s operational efficiency and effectiveness, and gradually increase local stakeholder participation, while maintaining economies of scale. • Implement a demand management program that would include installation of meters and public education on water conservation. • Increase the monitoring of technical and financial performance of the rayon water utilities. • Assist in the establishment of Consumer Panels to enable those who use water to interact directly with the management of the utilities about problems and opportunities. Component D: Project Implementation & Management Component (US$ 1.95 million)

23. This component would support project implementation and management by financing incremental operating expenditures, training and annual audits.

1. Financing Financing Plan (US$m) Source Local Foreign Total BORROWER 60.00 20.00 80.00 INTERNATIONAL BANK FOR 126.50 103.50 230.00 RECONSTRUCTION AND DEVELOPMENT Total: 186.50 123.50 310.00

Implementation

Institutional and implementation arrangements

24. The project would be implemented by Azersu through its International Relations & Development Department (IRDD) (largely staffed by former members of the Corporate Development Unit (CDU) that was responsible for implementation of the completed Greater Baku Water Supply Project), and its subsidiary company Birleshmish Sukanal. The investments in Nakhchivan will be implemented by the State Amelioration and Water Management Agency (SAWMA). Procurement and financial management for the investments in Nakhchivan will also be carried out by IRDD. However, from the beginning SAWMA will participate in some procurement activities such as preparation, selection and signing of contract. After the staff has been trained and their capacity assessed by the Bank to be adequate, all procurement functions for the investments in Nakhchivan will be handed over to SAWMA. This is expected to take place during the first year of project implementation. SAWMA and the IRDD will be supported by an individual, internationally recruited Construction Manager and an individual, internationally recruited Procurement Specialist. The Procurement Specialist would support the IRDD on a declining base until IRDD’s in house procurement capacity is sufficient to carry out the procurement for this large infrastructure investment.

25. The IRDD would also be in charge of procurement for the two rayons in Nakhchivan, for the TA to the Tariff Council and for the Baku Urban Masterplan. However, in all these cases the preparation of Terms of Reference and Bidding Documents, as well as the evaluation and selection of bids and consultants, and the approval of the final deliverable would be the responsibility of the beneficiary (the Tariff Council, Amelioration and Irrigation Open Stock Company in Nakhchivan, and the Steering Committee for the Baku Urban Masterplan). Azersu’s responsibility would be to assist the beneficiaries in preparing bidding documents and evaluation reports in accordance with the Bank’s Guidelines, and to request the Bank’s no objection, if necessary..

26. Steering Committee for the Regional Development Plan for Greater Baku : For the preparation of the Regional Development Plan for Greater Baku, the Government will maintain the Steering Committee for the Regional Development Plan for Greater Baku, which was created during project preparation at all times until the Plan is completed. The Steering Committee is comprised of members from the Ministry for Economic Development, the Ministry of Finance, the Baku City Government, the Ministry of Environment and Natural Resources, the Ministry of Energy and Industry, the Ministry of Transport, the Ministry of Emergency, the Ministry of Communication and IT, the Land and Mapping Committee, Azerenergy, Azerigaz, Azersu, and the Former Construction and Architecture Committee

27. Funds Flow: The Government will grant or on-lend the loan proceeds to Azersu, the Municipality of Baku, State Amelioration and Water Management Agency in Nakhchivan and the Tariff Council under subsidiary loan or/and grant agreements satisfactory to the Bank.

28. The IBRD Loan of US$ 230 million equivalent will be disbursed based on Country Financing Parameters approved for Azerbaijan through transaction based disbursement methods. These methods include reimbursements with full documentation, reimbursements on basis of Statements of Expenditures for small expenditures with defined thresholds, direct payments and payments through Designated Account(s). As this is an IBRD Loan, the Borrower has the choice between two loan products: fixed–spread loans (FSL) and variable-spread loan (VSL). That provides the Borrower with the choice to select terms that are consistent with the Borrower’s debt management strategy and suited for its debt servicing capacity. The Borrower has selected [to be confirmed with borrower]

29. Onlending Terms: The subsidiary loans will carry repayment terms of _____ years with a ____ year grace period at ___ percent interest rate. Signing of at least one of the subsidiary agreements would be a condition of IBRD Loan effectiveness. [Still we have no clear indication what the terms will be, but we made clear that we would be flexible and could even agree to on- granting because the water supply investment can be regarded as initial investment because of the degree of dilapidation of the existing one, similar arguments plus the externality argument can be applied to the WSS sector. It is assumed that grants will be provided to the Tariff Council and the Municipality of Baku.]

Sustainability

30. The long term sustainability will mainly depend on the following factors:

• The extent to which the water utilities and the Tariff Council are pursuing a cost recovery policy. The proposed rehabilitation of infrastructure under the project helps in this respect because it is designed in a way to minimize operation cost and provides the utilities with tools to (i) carry out successful demand management by providing for universal metering, and to (ii) carry out leakage reduction by providing water supply systems with different pressure zones and district meters to detect and manage leakages. The utilities will also be provided with tools for increasing collection rates with the assistance of the computerized billing and collection system to be installed under the project. All this needs to be accompanied by tariff adjustments, to which both, the water utilities and the Government seems to be highly committed, especially in the anticipated event, that these adjustments are accompanied by major service improvements, and the poor are protected by the economic assistance program the Government has recently launched. • The extent to which the public can participate in the discussion about service delivery. The creation of Consumer Panel to be supported under this project will be instrumental for public support and participation which is needed for sector reform. • The extent to which Azerbaijan’s program of economic assistance to the poor can avoid any negative impact that the necessary tariff adjustment could otherwise have on the poor. • The extent to which the utility staff can be motivated through vocational training, improved human resource management, competitive and performance based salaries, the creation of a corporate identity, and recognition by Government officials and the public.

Lessons Learned from Past Operations in the Country/Sector

31. There are several lessons emerging from the design and implementation of the Greater Baku Water Supply Project, and from several other water supply and sanitation projects in the region. These key lessons include the following:

(i) Assumptions used in projecting future performance, including project implementation pace, need to be as realistic as possible, and to take due consideration of prevailing political, economic, and social risks.

(ii) Technical Assistance alone cannot bring about reforms unless it is combined with strong political support and the commitment of all stakeholders. Ultimate responsibility for reform lies with the Government and implementing agency/utility, and even where TA may be provided to facilitate required actions its success will not only depend on the advice given, but also on the advice taken. All stakeholders need to fully appreciate the principles behind the reforms rather than just focusing on the associated activities.

(iii) Technical Assistance for implementation of reform components should be packaged separately from consultancy services for investment operations. This is to ensure that both the reform and investment actions are given adequate attention, rather than focusing mainly on the latter which produces more visible results.

(iv) Development outcomes of investment projects can be enhanced when done in parallel with a strong overall policy dialogue. 32. The proposed project will take these lessons learned into consideration in the following way:

• The investment program is accompanied by an institutional modernization program which is not overly ambitious, but is very focused on the main issues and on concrete steps to improve the financial viability of Azersu and it subsidiary Birleshmish Sukanal, particularly in the rayons under the project. The Financial Restructuring and Recovery Plan for Azersu will provide the Government with the necessary tool to gradually achieve long term financial sustainability in the sector. Other measures included under this component will assist Azersu directly in improving its revenue stream and keeping its operation costs under control through (i) a demand management program which this time is fully supported by the Government, (ii) the tools to implement it with the help of a meter-reading, billing and collection system, (iii) a modern financial accounting system, (iv) a reorganization of Birleshmish Sukanal into more efficient multi-rayon utilities, and (v) assistance in planning and implementing the above activities through a performance based and result oriented twinning arrangement. • A comprehensive investment program that focused on delivering good quality of services at the lowest possible operation and maintenance cost. To allow for full demand management, the investment program, with the assistance of Government funds and possibly funds sourced from other donors, will extend beyond the utility are and address the need to change the plumbing system in apartment buildings in the rayon centers to allow for individual metering. • Strengthening of Azersu’s, the Government’s and the Bank’s capability to implement and to monitor the investment program. To secure good quality of workmanship, the bidding documents were carefully drafted and reviewed, the number of Azersu’s staff for project implementation was increased and trained. In addition consultants’ services and a Twinning arrangement with an experienced international utility operator were designed to assist Azersu in procurement and construction supervision, and the Bank increased its own supervision capacity in Azerbaijan by recruiting additional local staff. Project monitoring capacity will also be strengthened through Technical Assistance to the Tariff Council and provision of support for a comprehensive monitoring system covering all rayon utilities in Azerbaijan. • In the project design the linkage to other Bank financed projects and initiatives was made, for instance: (i) the availability of appropriate water resources for the hospitals included in the Bank financed Health Project was taken into consideration; (ii) technical assistance to Azersu for the establishment of International Financial Reporting Standards (IFRS) will be coordinated with the technical assistance which Azersu will receive from the proposed Corporate and Public Sector Accountability Project (CAPSAP); (iii) the project will be implemented in the same two rayons in Nakhchivan (Babek and Sharur) which are supported by the Irrigation Distribution and Management Improvement Project, and (iv) the project will be coordinating closely with the Rural Investment Project to facilitate Azersu’s early involvement in the planning of water infrastructure investments in rural areas as well as its later operation and maintenance. Regular coordination with other key donors in the sector was carried out to assure a common approach of sector issues and synergies in project implementation, such as a unified billing and accounting system for Azersu that will be used in other donor financed projects as well. • The project includes a comprehensive modernization component for Azersu, yet is less ambitious with the reform of the State Amelioration and Water Management Agency in Nakhchivan, only focusing in the latter region on selected reforms such as the compliance with International Financial Reporting Standards and the introduction of a meter-reading, billing and collection system, the project design is focused on key issues and is realistic in what can be achieved under this project.

Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [X] [ ] Projects in Disputed Areas (OP/BP/GP 7.60)* [ ] [X] Projects on International Waterways (OP/BP/GP 7.50) [X] [ ]

Environmental Assessment [OP/BP/GP 4.01]:

33. The Bank’s OP/BP/GP 4.01 on Environmental Assessment (EA) is triggered and the category required is A for the wastewater part of the project. A draft Framework EA and EMP have been prepared and received the Bank’s No Objection for public disclosure. The final versions will be approved following scheduled public consultations, and their provisions will be incorporated in the Operational Manual.

Involuntary Resettlement [OP/BP 4.12]:

34. There are no indications for an involuntary resettlement under the project. In the event that OP/BP 4.12 would be triggered, then measures will be taken by the borrower to prepare a resettlement plan or a resettlement policy framework. This is clearly stated in the Operational Manual.

Safety of Dams [OP/BP 4.37]:

35. The project will not finance any new large dams, but in some of the rayons (at least in one:Babek in Nakhchivan) rehabilitation of water supply schemes which are supplied from small existing dams will take place and trigger the Banks OP/BP 4.37 on Safety of Dams.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas Investigations of the safety of these dams will be carried out by an independent dam safety expert in accordance with OP 4.37.

International Waters [OP/BP/GP 7.50]:

36. The project triggers the World Bank’s Operational Policy on International Waters OP 7.50 and falls within the exception to the notification requirement under Paragraph (7a).

2. List of Factual Technical Documents

Bank Assessments

1. Project Concept Document 2. Project Information Document 3. Aide memoires of Project Preparation Missions 4. Financial Management Assessment 5. Agency’s Procurement Assessment

Other Reports and Studies

1. Arcardis Euroconsult, September 2006, WISF-02 Investment Planning and Prioritization Study 2. World Bank, April 2003. Country Assistance Strategy for Azerbaijan Republic, Report No. 25790-AZ, South Caucasus Country Unit, Europe and Central Asia Region 3. Castalia, 2004. Social and Poverty Analysis Report, PPIAF 4. Environmental Assessment Report 5. Draft Social Assessment Report 6. Draft Resettlement Framework 7. Rayon Selection Report 8. Azersu Investment Needs Assessment Report 9. Procurement Schedule 10. Feasibility Study for Saatli Rayon Water Supply and Sanitation 11. Rayon level financial assessments Contact point Contact: Andreas Rohde Title: Sr Sanitary Engineer Tel: (202) 473-6672 Fax: Email: [email protected]

12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: [email protected] Web: http://www.worldbank.org/infoshop