Economic Analysis
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Tashkent Province Water Supply Development Project (RRP UZB 46135) ECONOMIC ANALYSIS A. Macroeconomic Context 1. Uzbekistan has grown rapidly in the last 10 years, with economic output expanding annually at an average of 8%. A robust industry sector has driven the country's sustained growth, fueled by a strong natural resources sector and a manufacturing base led by the automobile, chemical, and machinery industries. Construction activities spurred by a vibrant public investment program and a dynamic services sector have also boosted growth.1 In 2015, despite a challenging external environment caused by the economic slowdown of the Russian Federation (Uzbekistan's largest trading partner and source of remittances), growth of 8% was still achieved through expansionary fiscal policies comprising increased public spending and cuts in business and personal taxes. 2. The weak global environment and historically low energy prices exerted downward pressures on the economy in 2016, slowing down growth to less than 7% for the first time in years. Faster growth is expected from 2017 and beyond, driven by an investment-led industry and propelled by a program of structural reforms, modernization, and diversification. The program will develop a high-tech industry, make production less energy intensive, and increase the output of goods with high value added, potentially generating a more diverse and sophisticated export base.2 Over the long term, the government's main challenge is to sustain the country's remarkable economic growth by increasing the economy’s competitiveness, improving the business environment, and developing infrastructure to support rapid job creation. B. Urban Sector Context 3. Apart from Tashkent city which is governed independently, Tashkent province is made up of 14 districts, 12 component cities, 61 urban villages, 146 rural councils, and 981 settlements. It is endowed with natural resources which include copper, coal, gold, silver, natural gas, petroleum, and granite. Kibray and Zangiota, two districts in the province which are closest to Tashkent city, are strategically important to accelerating growth and strengthening urban–rural linkages. Kibray has growth prospects in agro-industrial development, the textile industry and, to a lesser extent, in coal energy production. Zangiota is similarly positioned in agro-industrial development and the textile industry but has stronger tourism potential with its outstanding monuments reminiscent of medieval architecture. The district has also been identified as a potential special industrial zone.3 The project will respond to the anticipated increase in the demand for clean and reliable water as the districts of Kibray and Zangiota prosper to keep pace with the development of Tashkent city and the rest of Tashkent province. C. Economic Rationale for Government Intervention 4. Uzbekistan’s development goal and economic growth projections underscore the need for adequate municipal infrastructure and services. The country’s level of urbanization and robust growth prospects are generating increased demand for basic infrastructure and utilities. Aging infrastructure which must be replaced has become synonymous with poor quality and unreliable 1 With an average annual rate of growth of 8% over the last 10 years, Uzbekistan has emerged as one of the fastest growing economies in Europe and Central Asia. 2 Currently, Uzbekistan's exports depend heavily on prices of a few major commodities and developments in a handful of countries. Minimizing external shocks and achieving export competitiveness will entail reforms towards a more diversified and advanced export mix. 3 Tashkent Region's Socio-Economic Development Strategy. 2015. Institute of Forecasting and Macroeconomic Research under the Cabinet of Ministers of the Republic of Uzbekistan, Tashkent city mayor's office, and the offices of the United Nations Development Programme (UNDP) in Uzbekistan. 2 utility services. They manifest market failure and the inadequacy of private sector investment, necessitating government intervention. In the districts of Kibray and Zangiota, households and business activities are hampered by the constant interruptions in their piped water supply, forcing them to use alternative water supply sources such as shallow wells, stand pipes, and trucked water. The situation will only worsen as Kibray and Zangiota develop further as agro-industrial, textile, and tourism centers and attract more migrants from other provinces because of their proximity to Tashkent city. The project will address the market’s failure to rehabilitate and expand the 46-year- old regional water distribution system servicing the districts of Kibray and Zangiota. It is essential to the development plan of the government for the province of Tashkent to double its gross domestic product in the next 10–15 years. The project will also foster the sustainable urban development of Tashkent city, transforming the capital and its nearby areas into a more economically competitive, inclusive, and livable urban agglomeration. D. Least-Cost Analysis 5. The project has been designed to address water supply shortages, quality, and operational and maintenance issues. A two-phased technical feasibility study was followed. In the first phase, technically practicable water supply system development options were formulated to improve water supply in four districts—Chinaz, Kibray, Yangiyul, and Zangiota. These options include surface water sources, ground water sources, and a combination of the two. In the second phase, because of fiscal considerations the project was geographically restricted and oriented towards the improvement of water supply in Kibray and Zangiota districts. Alternative technical options were further analyzed and the optimum design solution was identified based on the earlier schemes, taking into account local water resource availability, investment efficiency, future operational expenditures, and reduction of social and environmental impacts. The project development technology, which is in essence a component in each of the options developed in the first phase, was ultimately selected based on a criteria that focused on sustainability, highlighting the conservative use of water resources, use of materials, and construction technologies. E. Demand Analysis 6. Residential demand for water was based on the Institute of Forecasting and Macroeconomic Research’s population projections for Kibray and Zangiota over the benefit period.4 For Kibray, the population in the project area was projected at 55,520 in 2022, reaching 63,980 at the end of the benefit period in 2047. For Zangiota, the population in the project area in 2022 was estimated at 269,211, reaching 367,911 by 2047. Using the Institute of Forecasting and Macroeconomic Research population projections for the two districts, nonincremental demand which will replace the existing, more costly water supplies from alternative sources was estimated based on the survey conducted in the project areas.5 In Kibray, the survey showed that 42.2 liters/capita/day were consumed from alternative water sources; in Zangiota, a higher consumption rate of 87.2 liter/capita/day was reported. 7. For incremental demand which pertains to the additional demand for water induced by the project, the consumption rate was assumed to be in the range of 90–120 liters/capita/day based on the government’s planning parameters, supplemented by the socioeconomic survey conducted in 4 The demand projections used were based on the population estimates of the Institute of Forecasting and Macroeconomic Research for Kibray and Zangiota. The Institute of Forecasting and Macroeconomic Research was established in 2008 and it provides the forecasts used for Uzbekistan’s socioeconomic development and structural transformation plans. 5 A socioeconomic and willingness to pay survey was conducted by the Uzbekistan Agency under the project preparatory technical assistance during April–June 2016. 3 the project areas. For commercial and institutional users, it was assumed that their consumption will be equivalent to 30% of residential demand as concluded by the Uzbekistan Agency (UCSA) based on an analysis of its historical sales performance. This was increased by a factor of 5% annually to incorporate the incremental increase in water demand coming from the expansion of existing businesses and the establishment of new ones as a result of the planned economic growth in the two districts. Unaccounted-for water losses were estimated at 30% of total residential demand as determined by the UCSA. F. Cost–Benefit Analysis 8. The cost–benefit analysis of the project was conducted in accordance with relevant ADB guidelines.6 The analysis was based on forecasts of capital and operation and maintenance (O&M) costs and the estimated costs and benefits of the project which were valued using the domestic price numeraire. This valuation methodology converted border price equivalent values to their equivalent domestic price levels by applying shadow prices. The shadow price adjustment factors used were taken from a similar recent Uzbekistan project.7 The factors used were 1.11 for tradeable goods and 0.80 for unskilled labor. The annual costs and benefits of the project were assessed over a 30-year period, allowing a 5-year construction period followed by a benefit period of 25 years. 9. Economic costs. Capital and recurrent O&M costs, including physical contingencies and in constant 2016 prices, were converted into economic costs by subtracting