Dushanbe Water Supply and Sanitation Project: Economic Analysis

Dushanbe Water Supply and Sanitation Project (RRP TAJ 50437)

ECONOMIC ANALYSIS

A. Country Context

1. Tajikistan achieved lower middle-income status in 2015, fueled by an economic expansion that averaged 7.7% during the 1997–2004 post-war recovery phase. Economic growth from 2005 to 2016 continued but slowed to an average of 6.4%, dampened by the volatility in the international prices of cotton and aluminum, the country’s two primary exports. For the short to medium term, Tajikistan’s economic outlook is more positive because of the improved external environment, including the prices projected for major export commodities. On the supply side, industry will likely expand in 2018 and 2019 as construction on the Rogun hydropower project gains momentum and the mining sector recovers. In addition, the opening of the Tajik segment of a gas pipeline from Turkmenistan to the People’s Republic of China is expected to expand manufacturing. Agriculture will be less sluggish, moderately contributing to the economy, while higher remittances from overseas workers are anticipated to resume.1

2. Since 2000, Tajikistan’s record economic growth has been accompanied by significant poverty reduction. Poverty incidence fell from over 83% to about 47% from 2000 to early 2009, and from 37% to 31% from 2012 to 2016. However, while income poverty has decreased, the country has achieved less decrease in other poverty dimensions. The quality and accessibility of public goods and services have declined, with many residents expressing dissatisfaction.2 The National Development Strategy, 2016–20303 envisions achieving sustained and inclusive growth that is less susceptible to external shocks and capable of generating the jobs required by an increasing population. It aspires to address the multidimensional aspects of poverty and improve the living standards of its population by creating a more favorable environment conducive to increased investment in public infrastructure and services. The proposed project is strategically aligned with the development agenda of Tajikistan and has been designed to improve inclusive and sustainable access to safe and climate-resilient water supply and sanitation (WSS) services in Dushanbe, the country’s capital.

B. Urban Context

3. Dushanbe, with a population of more than 800,000, is the capital and largest city of Tajikistan. Located at the confluence of the Varzob and Kafernigan rivers, it was a small village until the early twentieth century. Now transformed into a leading cotton textile center, Dushanbe also produces electrical appliances, leather goods, machinery, and food products.4 It is home to an increasing number of modern telecommunication, aeronautic, and other business corporations. Dushanbe’s local economy accounts for almost 20% of Tajikistan’s gross domestic product, making it attractive to rural migrants and returning migrant workers. Consequently, it has been exhibiting fast urban growth, which has put a strain on its already overburdened urban infrastructure and aging water supply and wastewater systems.

4. The State Unitary Enterprise Dushanbevodokanal (DVK) is the state-owned municipal enterprise responsible for WSS services in Dushanbe. DVK has had operational and financial difficulties since the post-Soviet era and has been struggling with systems that are obsolete,

1 ADB. 2018. Asian Development Outlook 2018: How Technology Affects Jobs. Manila. 2 The World Bank in Tajikistan. http://www.worldbank.org/en/country/tajikistan/overview. 3 Government of Tajikistan. 2016. National Development Strategy of the Republic of Tajikistan for the Period up to 2030. Dushanbe. 4 ADB. 2009. Tajikistan: Trade Facilitation and Logistics Development Strategy Report. Manila. https://www.carecprogram.org/uploads/Transport-and-Trade-Logistics-Tajikistan.pdf.

2 aging, and in disrepair. Its water supply services have been impaired by high nonrevenue water (NRW), estimated at nearly 65%, with technical system losses reaching as high as 35%. As a result, while most of the population of Dushanbe has access to piped water, many suffer from highly unreliable water supply with prolonged interruptions and very poor quality. The sanitation situation is characterized by a worn-out sewerage network, covering only about 60% of the city; a collector system with insufficient capacity, rendering it almost nonfunctional; and ineffective wastewater treatment caused by infrastructure deficiencies and high dilution of wastewater. The project will directly benefit 100,000 residents by improving their access to safer, more reliable, and climate-resilient water supply services. Rehabilitation of the almost nonfunctional south sewage collector will result in better hygienic and environmental sanitation, with reduced incidence of waterborne diseases for a section of the city that has a catchment area of 5,700 hectares comprising about 352,000 residents.

C. Economic Rationale for Government Intervention

5. Tajikistan’s economic growth prospects and climate vulnerability underscore the need for public interventions to enable more inclusive and sustainable access to safe and resilient WSS services. The growing demand for these services is particularly evident in Dushanbe, which has a fast-growing urban population and an expanding local economy. The old and dysfunctional WSS of Dushanbe reflects market failure and lack of private sector involvement, necessitating government involvement.

6. The project will deliver inclusive and sustainable access to safe and resilient WSS services in Dushanbe. Output 1 will rehabilitate and expand climate-resilient WSS infrastructure. It will include (i) the rehabilitation of 17 wells, 22 pumps and second stage pump stations, water metering, chlorination, and other facilities at Kafernigan-I, including the installation of a supervisory control and data acquisition (SCADA) system; (ii) reduced NRW through the rehabilitation of a 17.2 kilometer (km) transmission main, the establishment of 18 district metering areas (DMAs) with about 5,200 smart meters installed, and the improvement of 57.5 km of distributional network in six DMAs with expansion of the system to serve 2,000 new households; and (iii) rehabilitation of 9.8 km of the south sewerage collector.5 Output 2 will focus on developing a sustainable business model for DVK as well as institutional strengthening. This will cover (i) a business model for DVK that strategically links technical, operational, institutional organizational restructuring, and human resources management; (ii) an accountability and incentive mechanism with a performance benchmarking matrix; (iii) a smart information management system for operational efficiency and seamless integration of the customer database, billing, collection, accounting, and reporting; (iv) an NRW management system operationalized with the installation of SCADA for new network management practices; and (v) customer care service standards and behavior change communication on water conservation and smart metering.

D. Demand Analysis

7. The water supply project area is located in the Shomansur district and has a population of 100,000. Using an average annual urban population growth rate of 2%,6 the population in the

5 The expansion of the water supply system will be made possible with the interventions in output 1 to reduce NRW. By reducing NRW from 64% to 15% in the six selected DMAs and to 40% for the rest of the project areas, efficiency gains in water production and consumption will be achieved—enabling DVK to deliver more efficient water services to more unserved and underserved segments of the city’s population. 6 ADB. 2017. Tajikistan: Key Indicators for Asia and the Pacific 2017. Manila.

project area is projected to be 106,120 by 2025 and 154,588 at the end of the benefit period in 2047. Based on the pre-feasibility study funded by the Cities Development Initiative for Asia and consistent with the findings of the socioeconomic survey conducted during the transaction technical assistance 7(TA), DVK’s water supply system only services about 30% of the population in the project area. The rest of the population, while connected, has intermittent access, with water interruptions lasting for hours because the system is deteriorated. Non-incremental demand, which will replace the existing, more costly water supply as the population switches back from alternative sources to piped water, was calculated from the survey at 37 liters per capita per day (lpcd). Incremental demand, which pertains to the additional demand for water arising from the safer, more continuous supply of water, was assumed to be 80–160 lpcd. Incremental demand was also derived for the increasing urban population in the project area from 2025 to 2044, to be met by the additional water supply from the reduced NRW of DVK. For commercial and institutional users, it was assumed that their consumption would be equivalent to 30% of residential demand, a universally accepted approach for estimating non-domestic water consumption.

8. The population to benefit from the rehabilitation of the south sewage collector was forecast at 373,545 by 2025, reaching 544,185 by 2044.

E. Cost–Benefit Analysis

9. The cost–benefit analysis of the project was undertaken in accordance with the relevant Asian Development Bank (ADB) guidelines.8 The analysis used cost estimates based on the preliminary engineering designs prepared by consultants under TA financed by the Cities Development Initiative for Asia. The estimated costs and benefits of the project were valued using the domestic price numeraire. For the analysis, the shadow price adjustment factors were derived from Tajikistan’s latest labor and trade statistics. The factors used were 1.12 for tradeable goods and services and 0.60 for unskilled labor. The annualized benefits and costs of the project were assessed over a 25-year period, inclusive of a 6-year construction period.

10. Economic costs. Capital and recurrent operation and maintenance costs, inclusive of physical contingencies but excluding all transfer payments, i.e., taxes and duties as well as price contingencies, expressed in constant mid-2018 prices, were converted into economic prices by applying the relevant conversion factors.

11. Economic benefits. The economic benefits of the project were derived primarily from three sources: (i) the incremental water consumption benefits estimated using the willingness to pay of the consumers; (ii) the nonincremental benefits in terms of resource cost savings as a result of the shift by the target household beneficiaries from alternative water sources to piped water; and (iii) the health benefits ensuing from improved sanitation brought about by the project. A willingness-to-pay survey determined that households were willing to pay at least TJS33.66 per cubic meter (m3) for safer, cleaner, and more reliable water services in the project areas.9 To

7 ADB. 2018. TA9407-TAJ: Dushanbe Urban Water Supply and Sanitation Project. Transaction Technical Assistance Report 8 ADB.2017.Guidelines for the Economic Analysis of Projects. Manila, ADB.1998. Economic Analysis of Water Projects. ADB , and ADB. 2002. Handbook for Integrating Risk Analysis in the Economic Analysis of Projects. Manila. 9 In accordance with ADB guidelines, the survey used a contingent valuation methodology to estimate the willingness to pay of TJS33.7/m3. This is almost 10 times the current flat tariff rate for water of TJS3.45 per 7.5 m3, which is very low compared with tariffs charged in other Central Asia countries. Safer, cleaner, and more reliable water supply is linked by the project beneficiaries to significant public health improvements; and time and other resource savings.

4 arrive at an estimate of the incremental water consumption benefits from the project, this estimated willingness to pay of TJS33.66/m3 was multiplied by 80 lpcd in 2025, gradually increasing to 160 lpcd by 2037 through to 2044.

12. The resource cost savings associated with switching from alternative water sources to piped water through the project were calculated, starting at TJS7.44/m3 and decreasing gradually to TJS2.81/m3 by 2044 using the results of the socioeconomic survey conducted under TRTA.10 These savings were derived mostly from costs associated with the purchase and consumption of bottled and purified water, water delivered by trucks, and water storage containers. Additional resource cost savings were also determined based on the survey, which reported that about 9,200 households, involving mostly women, spent an average of 2.48 days per month sourcing water from vendors, delivery trucks, grocery stores, hand pumps, and water bodies. The economic value of the time spent by these women fetching water outside their homes was calculated by applying a shadow price factor of 0.40 on the weighted average daily income of TJS102 in the project areas.

13. The estimated health benefits of the project were quantified through savings in the disability adjusted life years (DALYs) as a result of the improved sanitation stemming from the rehabilitation of the south sewerage collector in the city.11 This will potentially reduce the incidence of waterborne diseases in the project area, particularly diarrhea. In determining the annual economic value of a DALY, the gross national income per capita of Tajikistan was projected to 2025 when the benefit year begins. Using a modest annual growth rate of 5%, Tajikistan’s gross national income per capita was calculated to reach $1,213 by 2024. Based on a conservative estimate of the environmental burden of diseases linked to waterborne diseases in Tajikistan, it was assumed that the project would result in savings of about 9.7 DALYs per 1,000 capita per year.12 The project will generate co-benefits that were not quantified because of lack of relevant data at the time the analysis was conducted or lack of a universally accepted valuation methodology for the co-benefit. They include benefits from reduced incidence of flooding, energy savings from reduced consumption as a result of the switch to SMART and climate risk-mitigating technologies, and incremental income and employment from new business investments, specifically relevant to micro, small, and medium-sized enterprises, or from business expansions induced by the project’s WSS improvements and increased climate resiliency.13

14. Economic internal rate of return calculation and sensitivity analysis. The resulting base case economic internal rate of return is 12.6%, which exceeds the prescribed minimum discount rate of 9.0% (Table 1). This confirms that the project is economically viable, with anticipated economic benefits greater than the estimated economic costs. A sensitivity analysis, undertaken to test economic viability further, ascertained that the project will remain economically robust under the following scenarios: (i) a 10% increase in investment cost, possibly arising from a delayed implementation schedule or higher than expected inflation; (ii) a 10% increase in

10 ADB. 2018. TA9407. Transaction technical assistance report. Manila. 11 A DALY is an indicator of life expectancy combining mortality and morbidity into one summary measure of population health to account for the number of years lived in less than optimum health. The World Health Organization’s approach to determining the economic value of a DALY is to equate it with the gross national per capita income. 12 World Health Organization. 2016. Estimated DALYs ('000) by cause, sex, and WHO Member State (1), 2015. http://www.who.int/healthinfo/global_burden_disease/estimates/en/index2.html. For the analysis, the following estimated environmental burden of diarrhea, vector and parasitic diseases, and worm infections in terms of DALYs was used: 9.72 DALYs/1,000 capita/year, which assumes that about 9.5% of DALYs potentially saved from improved water and sanitation in Tajikistan can be attributed to the project interventions as estimated under the TA. 13 The co-benefits approach refers to the fact that many green infrastructure and green growth initiatives are designed to contribute simultaneously to reducing the impacts of global climate change while targeting other positive development impacts such as health improvements and energy efficiency.

operation and maintenance costs, which can result from higher-than-budgeted personnel salaries and other related costs; (iii) a 10% decline in benefits, possibly resulting from lower-than-projected resource cost savings, consumption benefits, and health benefits; (iv) a combination of scenarios (i), (ii), and (iii); and (v) a delay in subproject benefits by 1 year (Table 2).

Table 1: Summary Cost–Benefit Analysis ($’000) Economic Costs Economic Benefits Resource Cost Savings from Incremental Capital Incremental Switching to Water Health Year Cost O&M Piped Water Consumption Benefits Net Benefits 2019 192 (192) 2020 3,485 (3,485) 2021 9,726 (9,726) 2022 12,767 (12,767) 2023 11,832 (11,832) 2024 2,672 (2,672) 2025 1,131 2,944 487 4,625 6,198 2026 1,131 2,903 539 4,671 6,253 2027 1,131 2,864 592 4,718 6,311 2028 1,131 2,827 647 4,765 6,373 2029 1,131 2,792 660 4,813 6,402 2030 1,131 2,758 673 4,861 6,434 2031 1,131 2,727 709 4,910 6,486 2032 1,131 2,697 723 4,959 6,522 2033 1,131 2,668 738 5,008 6,560 2034 1,131 2,641 752 5,058 6,599 2035 1,131 2,615 767 5,109 6,641 2036 1,131 2,590 783 5,160 6,684 2037 1,131 2,567 824 5,212 6,751 2038 1,131 2,545 841 5,264 6,798 2039 1,131 2,524 858 5,316 6,847 2040 1,131 2,504 875 5,370 6,898 2041 1,131 2,485 892 5,423 6,951 2042 1,131 2,467 910 5,478 7,005 2043 1,131 2,450 928 5,532 7,060 2044 1,131 2,433 947 5,588 7,118 EIRR = 12.56% NPV at 9%= 10,483 ( ) = negative, EIRR = economic internal rate of return, NPV = net present value, O&M = operation and maintenance. Source: Asian Development Bank estimates.

Table 2: Economic Evaluation and Sensitivity Analysis Switching EIRR NPV Value Sensitivity Scenario (%) ($’000) ($’000) Indicator Base Case 12.56 10,483 Case 1: 10% increase in capital cost 11.42 7,588 4.90 20.41 Case 2: 10% increase in O&M 12.37 9,867 29.06 3.44 Case 3: 10% decrease in benefits 11.09 5,925 3.82 26.18 Case 4: 10% increase in capital cost 9.80 2,414 10% decrease in benefits Case 5: Delay in project benefits by 1 year 10.89 5,844 EIRR = economic internal rate of return, NPV = net present value, O&M = operation and maintenance. Source: Asian Development Bank estimates.