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Support to the Implementation of the Environmental Policies and Neaps in the NIS

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Support to the Implementation of the Environmental Policies and Neaps in the NIS European Commission Project: SCRE/111232/C/SV/WW Support to the Implementation of the Environmental Policies and NEAPs in the NIS Development of the Pilot Financing Strategy for Urban Water Supply and Sanitation in Eastern Kazakhstan Oblast Final Report May 2003 Published May 2003 Copyright 2003 by Europeaid, European Commission Enquiries concerning reproduction should be sent to the Tacis Information Office, European Commission, 170 Rue de la Loi, B-1049 Brussels This report has been prepared by the BCEOM-HALCROW GROUP LTD.-COWI Consortium. The findings, conclusions and interpretations expressed in this document are those of the Consortium alone and should in no way be taken to reflect the policies or opinions of the European Commission. Executive Summary In 2002, a Consortium of BCEOM French Engineering Consulting, HALCROW Group Ltd and COWI Consulting Engineers and Planners AС (hereinafter referred to as Consortium) in co-operation with Akimat of Eastern Kazakhstan, Ministry of Environmental Protection, Ministry of Economy and Budget Planning, Ministry of Finance and Antimonopoly Agency of RK implemented a Tacis project 'Support to the Implementation of Environmental Policies and NEAPs in the NIS'. The project focused on the problems with the drinking water quality supplied to the population of RK and wastewater treatment, and aimed at the development of a pilot oblast financing strategy for urban water supply and sanitation (hereinafter referred to as sub-project) in Eastern Kazakhstan Oblast (hereinafter referred to as pilot region or EKO). The sub-project was implemented under general management of the Steering Committee including representatives of the above mentioned ministries and agencies, the EKO Akimat, selected WSS companies and local experts. The financing strategy (FS) uses a methodology that allows developing a long-term (5 to 15 years) financing programme of current and capital expenditure in the selected sector, including a programme of priority capital investments that could be realistic and balanced from the point of view of the required and available financing (see aslo Chapter 1). Due to lack of financing during the past years, around 40% on average of the infrastructure exceeds their technical lifetime and need (urgent) replacement. As a result service quality is deteriorating. Two basic scenarios have been defined: 1) the baseline “No change” scenario, and 2) the “Optimisation” scenario. The first scenario, the baseline “No change” scenario describes the currently planned financial resources, including a planned tariff levels. No additional policy measures are included in this scenario. The second scenario is the “Optimisation” scenario. This scenario includes a comprehensive priority investment programme for rehabilitation and construction of new facilities. These scenarios are then compared with available (budget) financing. The financing gap is assessed and additional policy measures are defined in order to increase the available financing. Chapter 2 gives an overview of the financing strategy development, while the chapters 3,4 and 5 provide detail on the background analyses and detailed scenario discussions.The long-term sustainable solution to the problems is not only a considerable increase of budget and tariff financing, but also in optimising the production level and capacities in water supply and sanitation infrastructure, while taking into account affordability constraints of the population. Taking into account the scenario analysis presented in the report, the Project Steering Committee decided that the main strategy for 2003-2012 (see also Chapter 6) should consist of: • Maintaining the level of service by implementing the priority investment and management performance improvement programs aimed at modernization and optimisation of the existing capacities, level of production and cost; and scheduled current capital repair financing after the priority programmes have been implemented. • Construction of the most important new facilities.1 Implementation of an ambitious production optimisation programme and considerable additional financing necessitates developing a new regulatory framework at the municipal, oblast and national levels, covering a number of technical, regulatory and financial-economic changes (see annexes 6-8). 1 The opinion of the enlarged Steering Committee meeting on December 19, 2022 in Astana supported by deputy Akim at a project completion meeting on February 3,2003 in Ust-Kamenogorsk. BCEOM HALCROW GROUP LTD. COWI CONSORTIUM i Table of Contents Executive Summary i 1 Introduction 8 1.1 Financing strategy concept 8 1.2 Project implementation plan 10 1.3 Project reporting 10 1.4 Acknowledgements 11 2 Overview of the EKO financing strategy 12 2.1 Financing needs for the period 2003-2012 12 2.1.1 Baseline 'No change' scenario 13 2.1.2 Zoning of the required capital expenditure 14 2.1.3 The 'Optimisation' scenario 15 2.2 Measures required to cover the financing gap under the 'Optimisation' scenario 18 2.2.1 Policy measures directed to increase financial resources 18 2.2.2 Limiting financing needs and the level of service under 'Optimisation' scenario 20 2.3 Recommended strategy 21 3 Current situation with water supply and sanitation in EKO 23 3.1 Technical situation of the sector 23 3.1.1 Identification of territorial zones of WSS in the region 23 3.1.2 Characteristics of urban water supply in Eastern Kazakhstan 24 3.1.3 Sewage system of towns and urban settlements of the Eastern Kazakhstan Oblast 32 3.2 Housing and municipal services policy. Organisation of the sector 36 3.2.1 Housing and municipal services reform (financial aspects) 36 3.2.2 Organisation of the sector 37 3.2.3 Approval of prices and tariffs 37 3.2.4 Special regional investment programs 'Clean water' and 'Drinking water' 39 3.3 Macroeconomic development and budgetary expenditure 40 3.3.1 Macroeconomic review of EKO 41 3.3.2 Consolidated budget of the region 42 3.3.3 Budget financing of the water sector 43 3.4 Financial situation of water supply and sanitation companies 44 3.4.2 Composition of costs and tariffs 45 BCEOM HALCROW GROUP LTD. COWI CONSORTIUM ii 3.4.3 Household affordability and targeted housing subsidy 48 3.4.4 Financial obligations in WSS sector 51 4 Forecast of the long-term demand for finance in the WSS infrastructure under the baseline scenario 54 4.1 General approach to defining scenarios 54 4.2 Objectives to be analysed under different scenarios 55 4.3 Required capacity of facilities 55 4.4 Cost functions 56 4.5 Cost estimates for operation and maintenance of existing facilities in the baseline scenario with no policy changes ('no change' scenario) 56 4.5.1 Program 'Drinking Water' 56 4.5.2 Evaluation of asset replacement values of WSS companies 58 4.5.3 Capital repair requirement and budgetary financing 61 4.5.4 Operational costs and overhead 61 4.5.5 Overview of costs in existing WSS systems 63 4.6 Forecast of financing resources 64 4.6.1 Macroeconomic assumptions 64 4.6.2 Assumptions for change of the consolidated oblast budget 65 4.6.3 Payments by consumers and assumptions on change 65 4.7 Forecast of demand and supply of financing of the WSS sector according to the baseline 'no change' scenario 67 4.7.1 Costs of the WSS sector in the planned period 67 4.7.2 WSS sector financing in the planned period 67 4.7.3 Forecasted financing gap in the baseline scenario 68 5 Measures for decreasing the financing gap 70 5.1 Measures for cost reduction for different scenarios 71 5.2 Measures for increased financing for different scenarios 73 5.3 Analysis of financing deficit for different scenarios 74 5.3.1 Budgetary financing under 'Optimisation' scenario 74 5.3.2 Budgetary and tariff financing of 'Optimisation' scenario 75 5.3.3 Financing options for scenario 'Optimisation' for Ust-Kamenogorsk Vodokanal 77 6 Recommended Financing Strategy 81 6.1 General policy objectives 81 6.2 Indicative targets of the strategy implementation 82 6.2.1 Investment priorities 83 BCEOM HALCROW GROUP LTD. COWI CONSORTIUM iii 6.2.2 Optimisation of capacity size, production volumes and costs 83 6.2.3 Tariff setting recommendations 84 6.2.4 Recommendations related to budgetary financing 85 6.2.5 Recommendations on loan financing 85 6.2.6 Recommendations on improvement of contractual relations 85 Annexes 87 Annex 1 Minutes of the final project meeting 88 Annex 2: Map of Eastern Kazakhstan Oblast 89 Annex 3: Calculation of the baseline scenario for the sample WSS companies 90 Annex 4: Calculation of the 'Optimisation' scenario for the sample WSS companies 94 Annex 5: Calculation of the scenario 'Optimisation' for Ust-Kamenogorsk Vodokanal 98 Annex 6: Project ideas for environmental projects in the EKO WSS sector 101 Annex 7: Project ideas on modernisation of Ust-Kamenogorsk Vodokanal 106 Annex 8: Project ideas on improvement of management and regulation of WSS companies 122 Annex 9: Cost functions applicable to the sample WSS companies 132 List of Tables Table 1 Population of selected towns and urban settlements 23 Table 2 Dependence of population coverage with water supply of the size of settlements 26 Table 3 Energy intensity in water supply systems as per territorial zones, KWh/m3 26 Table 4 Length of water distribution network and specific water loss in 2001 28 Table 5 Availability of water metering equipment in 2001 29 Table 6 Household water consumption by zones in 2001, lcd 29 Table 7 Excessive pumping capacities in 2001, % of total utilised capacity 31 Table 8 Dependence of population coverage with centralised
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