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 wastewater collection of the size of the settlement 32 Table 9 Applied wastewater treatment technologies and volumes of wastewater collected to sewers in 2001 33 Table 10 Wastewater treatment technologies applied in EKO in 2001 34 Table 11 Installed and utilised capacities of WWTPs in 2001. 34 Table 12 Territorial zoning of WSS problems and their possible solutions 35 Table 13 Dynamics of GRP in Eastern Kazakhstan oblast, 1997-2001 41 Table 14 Revenues of consolidated budget of Eastern Kazakhstan oblast in 2001 42 Table 15 Mactoreconomic developent and consolidated budget revenues in Eastern Kazakhstan in 1999-2001 42 Table 16 Revenues and expenditures of oblast budget in Eastern Kazakhstan in 2001 43 Table 17 Structure of consolidated budget expenditure: financing of capital expenditure of WSS companies in EKO and their share in CBO, 2001 43 Table 18 The average monthly nominal wage in towns and districts of EKO in 2001 49 Table 19 Growth of real monetary income in EKO and RK in 1997-2000 50 Table 20 Affordability of WSS household bill by income groups, 2001 50

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM iv Table 21 Collection rate for WSS payments by consumer groups in 2001 52 Table 21 Structure of budgetary financing of 'Drinking Water' programme, 2003-2010 57 Table 22 Structure of new construction financing from CBO and national budget under 'Drinking Water' programme, 2003-2010 58 Table 23 Structure of rehabilitation and modernisation financing from CBO and national budget under 'Drinking Water' programme, 2003-2010 58 Table 24 Estimated replacement value of installed and utilised WSS capacities in 22 selected towns and urban settlements in 2001 59 Table 25 Estimated annual scheduled capital repairs for the installed and itilised WSS capacities in 22 selected towns and urban settlements in 2001 59 Table 26 Overview of expenditure components for 22 selected WSS companies in 2001 63 Table 27 Share of average monthly bill for WSS in the average AHIC in the baseline scenario in 2001-2012 in 2001 prices 66 Table 28 Forecast of supply of finance from different sources under the baseline scenario in 2001-2012, in 2001 prices 66 Table 29 Assumpptions for expenditure forecast (2003-2012) for the 'no change' and 'Optimisation' scenarios 71 Table 30 Total expenditure for 2003-2012 for 'no change' and 'Optimisation' scenario, million tenge 72 Table 31 Assumpptions for finance forecast (2003-2012) for the 'no change' and 'Optimisation' scenarios 73 Table 32 Tariff and affordability levels for 'Optimisation' scenario without new construction, 2001-2012 76 Table 33 Tariff and affordability levels for 'Optimisation' scenario with new construction, 2001-2012 76 Table 34 Tariff and affordability levels for 'Partial optimisation' scenario without new construction, 2001-2012 77 Table 35 Tariff and affordability levels for 'Partial optimisation' scenario with new construction, 2001-2012 77 Table 36 Tariff and affordability levels for 'Optimisation' scenario without new construction at Ust-Kamenogorsk Vodokanal, 2001-2012 78 Table 37 Tariff and affordability levels for 'Optimisation' scenario with new construction at Ust-Kamenogorsk Vodokanal, 2001-2012 78 Table 38 Approximation of intenational soft loan conditions for WSS company 79 Table 39 Tariff and affordability levels for 'Optimisation' scenario with new construction and loan financing at Ust-Kamenogorsk Vodokanal, 2001-2012 79

List of Figures

Figure 1 Water supply coverage of population in 2001, % of total population 25 Figure 2 Reported and adjusted water loss in distributing network in 2001, % of water supplied to the distribution network 27 Figure 3 Consumption and losses composition of water supplied to network, 2001 27 Figure 4 Reported household water consumption by zones (from 1 to 5, from left to right) in 2001, lcd 30 Figure 5 Energy intensity in water supply systems by zones (from 1 to 5, from left to right) in 2001, kWh/m3 of water produced 31 Figure 6 Population coverage by centralised sewerage system by zones in 2001, % of total population 32 Figure 7 Organisational structure of WSS system administration in EKO 37 Figure 8 Control and regulation of WSS sector at Oblast level 38 Figure 9 Mechanism of tariff and budgetary financing in the WSS sector 39

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM v Figure 10 Existing and suggested procedure for the development of target programs in the WSS sector of EKO 40 Figure 11 The structure of GRP of EKO in 2001 41 Figure 12 Financing 'Clean water' programme from CBO in 1999-2002, million tenge 44 Figure 13 Regulations and procedures in WSS tariff building in EKO 45 Figure 14 Structure of average production costs in water supply in 2001 46 Figure 15 Structure of average production costs in sanitation in 2001 46 Figure 16 The mechanism of development of financing deficit at WSS companies, as reported by WSS companies 47 Figure 17 Cost recovery in the household tariff in 2001, % of the economically justified cost as reported by the WSS companies 47 Figure 18 Monthly WSS bill per person, tenge/person/month in 2001 48 Figure 20 Comparison of wages in the oblasts of RK in 2001, % of average RK wage 49 Figure 21 Structure of accounts receivable of WSS companies in 2001 53 Figure 22 Structure of accounts payable in WSS companies in 2001 53 Figure 23 The distribution of abstracted water by internal consumption, losses and final consumption, measured per connected population in 2001, lcd 55 Figure 24 Financing of 'Drinking Water' programme from COB, % of COB expenditure 57 Figure 25 Estimated replavement value of utilised capacities of 22 WSS companies per 1 connected resident by types of infrastructure, 2001, thd tenge 60 Figure 26 The structure of replacement value of the utilised capacities in 22 selected WSS companies by types of infrastructure, 2001, % 60 Figure 27 The structure of annual capital repair of the utilised capacities in 22 selected WSS companies by types of infrastructure, 2001, % 60 Figure 28 Specific electricity consumption in water supply by territorial zones, kWh/m3 of produced water 62 Figure 29 Estimated dynamics of GRP (EKO) and GDP (RK) in 1998-2012 64 Figure 30 Expenditure financing under the baseline 'no change' scenario, 2003-2012,, million tenge 68 Figure 31 Total expenditure for 2003-2012 for 'no change' and 'Optimisation' scenario, million tenge 72 Figure 32 Financing gap in the 'Optimisation' scenario with the baseline level of tariff financing and no budget financing, 2003-2012, million tenge 74 Figure 33 Bridging the financing gap in the 'Optimisation' scenario (with the baseline level of tariff financing) through budgetary financing, 2002-2012, million tenge or % of CBO 75 Figure 34 Full financing of the 'Optimisation' scenario for 22 selected WSS companies via increased budgetary and tariff contribution, 2003-2012, million tenge 75 Figure 35 Tariff and budgetary financing of 'Partial optimisation' scenario, 2003-2012, million tenge 77 Figure 36 Full financing of the 'Optimisation' scenario for Ust-Kamenogorsk Vodokanal via increased budgetary and tariff contribution, 2003-2012, million tenge 78 Figure 37 Full financing of the 'Optimisation' scenario for Ust-Kamenogorsk Vodokanal via soft loan and budgetary and tariff contribution, 2003-2012, million tenge 79 Figure 38 Full financing of the 'Optimisation' scenario for Ust-Kamenogorsk Vodokanal via soft loan and budgetary and tariff contribution 80 Figure 39 Tariff and budgetary financing of 'Partial optimisation' scenario for 22 selected WSS companies, 2003-2012, million tenge 82 i

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM vi List of Acronyms and Abbreviations

AHIC Average household income used for consumption BOD Biological oxygen demand BPS Booster pumping station BWWTP Biological wastwater treatment plant CEE Central and Eastern Europe COB Consolidated Oblast Budget DANCEE Danish co-operation for environmental protection in the countries of Central and Eastern Europe DPS District (rayon) pumping station EKO Eastern Kazakhstan Oblast KZT National currency unit of the Republic of Kazakhstan (tenge) FS Financing strategy (here: Pilot Financing Strategy for Urban Water Supply and Sanitation in Eastern Kazakhstan Oblast) FEASIBLE Model for calculation of costs and financing, developed by Danish EPA and OECD EAP Task Force Secretariat GDP Gross domestic product GRP Gross regional product Lcd Litres per consumer per day ME Municipal economy MPS Main pumping station NEAP National Environmental Action Plan NIS New Independent States OECD Organisation for Economic Co-operation and Development PS Pumping station RK the Republic of Kazakhstan RVA Regulated Value of Assets Tenge National currency unit of the Republic of Kazakhstan (KZT) VAT Value Added Tax WSS Water supply and sanitation WWTP Wastewater treatment plant

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM vii 1 Introduction

1.1 Financing strategy concept 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. FS tools include a computerised decision support model2, that allows assessing current expenditure required to maintain and operate existing and new water supply and sanitation infrastructure, including expenses for capital and current repairs, as well as new capital investment and scheduled renewal (reconstruction) of depreciated capital assets. The identified financing needs are then compared with forecasted levels and sources of financing, thus defining a financing deficit or surplus. At the same time consideration is given to the size of financing gap and an analysis is performed to determine the capability to cover various expenses such as capital costs (reconstruction and expansion of capacities) and maintenance and operation costs. It is important to understand the structure of a financing gap and to identify main problems and priority measures required to overcome the difficulties. For a rather long period, the urban water supply and sanitation sector in Kazakhstan has suffered from insufficient funding, and with no changes in the existing financing strategy, the level of services will inevitably continue to drop. The sector has two possibilities for solving its problems: To increase resources mobilisation from all sources. This includes increased revenues from tariffs for water and sanitation, subsidies from the budgets of various levels coupled with international donor grants and possible borrowings.

To promote more effective use of resources. This relates to the more efficient operation of water supply and sanitation systems and also to earmarking limited investment resources for priority investment projects that maximise efficiency gains.

A financing strategy will not provide a final answer to all questions but it should help to identify the direction for the actions required. The model that is used for the financing

2 This methodology was developed in 2000 by Danish consulting company COWI under the supervision of OECD EAP Task Force Secretariat and with assistance of the Government of Denmark. More information (including the FEASIBLE model is available on the OECD website:http://www.oecd.org/env/eap. More information about the financing strategy is available at: [email protected]

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 8 strategy preparation and the analysis of various strategic actions and options is also capable of forecasting the effect achieved from the realisation of the key strategic options. The analysis performed prior to the financing strategy development is divided into two principal stages: Stage 1: Justification of strategic targets for the development of water supply and sanitation in selected towns of the Oblast and preparation of a baseline scenario, which includes estimation of costs for operation and maintenance of the existing infrastructure and new priority investments. Then these costs are compared with the available financing resources under the condition of no policy changes in respect to, for example, tariffs, budget subsidies, etc. Assessment of the financing gap is obtained as a result of such comparison; and it usually shows that demand for financing is higher than financial resources available in the sector. Stage 2 Includes identification and analysis of actions that will help to close the financing gap, i.e. to balance the demand for financing with available financial resources. Activities suitable for the scenario analysis include the following: • To limit the ambition in respect to the service level in the sector. This can be achieved by setting less advanced targets of service development, concerning for example the quality of wastewater treatment and the scope of water supply services provided to population, or by postoning the deadline by which the problems are to be solved; • To modify the tariff policy, by changing the factors such as tariff levels, collection rate, degree of cash collections and aross-subsidies to population at expense of other groups of consumers; • To increase financing from other sources, for example budget subsidies, donor grants and borrowings; • To enhance energy saving. This may include for example a reduction of demand for water and/or reduction of water loss. This will result in reduction of energy consumption due to the reduction in the production level, as well as due to the replacement of existing energy-consuming equipment by more effective ones; and • To enhance other operational costs savings (e.g. wage costs) and, in the long-term perspective, capital repairs - subject to optimisation of production levels and capacity size.

THE MODEL

Framework assumption and forecasts (e.g. macroeconomic variables, public revenue, sector outputs, population)

Specific, measurable, Existing situation time-bound targets and • level baseline forecast • year

Demand for financing Supply of financing (forecast) (cost of meeting targets) Financing institutions/ Rules governing: financial products Q Investment expenditure Q (rehabilitation & new) Q Public budgets Q public transfers Q Maintenance expenditure Q private financiers Q private sector finance Q donors and IFIs Q Operations expenditure Q user charges Q retained earnings (e.g.user Q Annual cost charges)

Gaps: Q Financing (cash flow) gap (with and without backlogs) Q National affordability gap

Scenarios for closing the gaps (EFS sensu stricto)

Source: OECD EAP Task Force Secretariat

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 9 The computerised model is used to define the FS in an iterative manner, by changing the assumptions behind the measures used to mobilise the additional or to reallocate the available financial resources. The development of a FS assists in solving two major problems of the sector, which are described at the beginning of this chapter, in the following way: • Analysis may underpin the necessity to raise tariffs in order to finance the required investments; • Accurately documented calculation of required expenditure and financing can strengthen the requests for financing from other sources (like international donors or budget organisations at municipal, regional or national levels); • Defining the sustainable level of services in the sector will promote allocation of limited financial resources to the most effective and prioritised investment projects; and • Analysis of various actions promoting efficiency of the sector may help focusing the work of sector planning authorities on the most promising direction, for example on the calculation of possible energy savings as the result of pumps' replacement and subsequent decrease in water/sewage pumping costs.

1.2 Project implementation plan Project implementation consisted of the following stages: • Establishment of the Steering Committee involving decision makers at the national and oblast levels and the consortium project manager, and and appointment of the Working Group to perform project activities involving stakeholders from the national ministries and agencies, Directorates of the EKO Akimat, consortium and local experts; • Transfer of the computerised model and training of selected Working Group members in its use; • Data collection on the existing technical and financial situation of the municipal systems of water supply and sanitation in accordance with the developed questionnaires; • Data collection on the amounts, sources and mechanisms of WSS companies financing including consumer charges, budget financing and other possible sources (loans, grants etc.); • Application of the computerised model under specific Oblast's conditions, compiling the required databases and calculation of the financing gap for the baseline scenario; • Analysis of various scenarios of infrastructure development and of various measures for attracting additional financial resources needed to achieve a balance between required and available financing; • Submission of the final FS report to the EKO Akimat for discussions and finalisation; • Identification of the priority investments justified by the FS for financing from the oblast and local budgets, as well as potential co-financing by international financing institutions, such as, for example, the World Bank.

1.3 Project reporting In the course of the project implementation the following two reports were prepared: Report 1: Key issues and problems existing in the sector of water supply and sanitation in Eastern Kazakhstan. The report included:

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 10 • initial assessment of the key problems of the sector and summarised for target-setting and selection of a proper financing strategy; • preliminary baseline analysis including evaluation and comparison of estimated water costs sufficient to maintain the long-term (10 years) operating safety of the infrastrucure and available financing; • preliminary set of measures ensuring the closure of the identified financing gap. Report 2 (present report): Approved version of the analysis for the financing strategy development. This report reflects the results of discussions held with the oblast Akimat and the involved national ministries and agencies and includes proposals concerning the long- term financing strategy, general recommendations on the priority investments and a list of urgent measures promoting financing and performance of the sector. The analysis was performed on the basis of data collected from a sample of WSS companies representing 22 towns with a total population of approximately 860 thousand people (about 60% of the total population of EKO). The data represents the technical status of the water infrastructure and its financing as of January 1, 2002. Hence, 2001 was used as a reference year, the analysis was based on constant 2001 prices and all the changes that took place since the beginning of 2002 were disregarded. The assumed forecasting period covered 10 years – from 2003 to 2012.

1.4 Acknowledgements The Working Group of the project wants to express its gratitude to the members of the Steering Committee for their valuable assistance in the course of project implementation and for the provided comments. Project activities were implemented in close co-operation with the Directorate of Municipal Economy (ME) and Transport of the EKO Akimat, the Directorate of Economy of the EKO Akimat, the EKO Antimonopoly Agency, municipal company 'Oskemen-Vodokanal' (Ust- Kamenogorsk Vodokanal) and other organisations directly involved with planning of EKO water supply and sanitation sector. Many experts made a substantial contribution to this report. Mrs. Lydia Sechina (municipal company 'Oskemen-Vodokanal') rendered considerable assistance in collecting and analysing technical and financial data. Mr. Erzhan Aubakirov (municipal company 'Oskemen- Vodokanal') assisted in identifying priority investment projects. Mr. Viktor Teterin and Mrs. Gulshara Mukhamedjanova (Directorate of ME of the EKO Akimat) played an important role in the co-ordiantion of activities. The Project Working Group expresses its special gratitude to the Directorate of Economy of the EKO Akimat and EKO Antimonopoly Agency for the comments to the intermediate report, and also to all those who participated and helped in the implementation of the pilot project.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 11 2 Overview of the EKO financing strategy 2.1 Financing needs for the period 2003-2012 Pricing of water services is currently regulated by legislation developed in the late 1990-s, which states that WSS companies may recover their production costs and receive limited profit for the infrastructure development under the supervision of regulating bodies. For the time being, budget co-financing of WSS companies' operating costs has been suspended and budget financing of capital investments brought to a minimum. However, with water services pricing at the 2001 level WSS companies not only failed to meet scheduled capital repairs and new construction, but also to fully cover operation costs. By the end of 2001 many companies in the water sector were in a poor financial situation. For some companies indebtedness was so high that their owners resorted to special measures – transfer of the assets to newly established financially sound operators - in order to maintain uninterrupted service. Mainly because of affordability constraints, tariff levels for water services in 2001 in practice did not cover the costs for scheduled capital repairs and new constructions. Therefore these costs were still financed mainly from budgets of the different administrative levels, although it contradicted the tariff reforms of the late 1990-s. In order to investigate to what extent the planned budget financing covers the actual capital repair and maintenance requirements of the existing infrastructure, the replacement value of the existing infrastructure was estimated. On the basis of technological and production data collected from selected WSS companies and the use of generic cost functions for different types of infrastructure3 the replacement value was estimated taking into account the current state of the water sector infrastructure. The cost functions used in the FEASIBLE model are derived from international practise cost-levels and include therefore a price correction to reflect local prices of equipment and civil works. The following categories of costs were evaluated on the basis of the estimated replacement values: • Capital repairs (maintenance) divided into: - Priority investment programme (the most critical part of the under-financed scheduled capital repairs of the previous years); and - Scheduled capital repair of the planning period (current capital repair); • New priority capital investments; • Operation costs, including sales and administration cost. The forecast of operation and maintenance costs for the period 2003-2012 was based on the actual costs of 2001 (base year) and took into account the effect of the planned capital investments programme: reduced (increased) O&M costs in case of (in-)sufficient financing of the necessary capital cost, including the priority investment programme. The development of the financing strategy includes the definition of two basic scenarios that are decribed in more detail below. The first scenario, the baseline “No change” scenario describes the currently planned financial resources, including a planned tariff levels. No additional policy measures are inclluded 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.

3 Analysis by cost functions for WSS infrastructure on the basis of FEASIBLE model developed by COWI AS (Denmark) for Danish Agency for environmental protection in 2001

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 12 2.1.1 Baseline 'No change' scenario Available financing In 2002, the EKO Akimat developed a 'Drinking water' programme, that plans budget investments in the water sector for the period 2003-2010. Total investments by this programme for the period of 2003-2010 are estimated at about 5 billion tenge. About 48% of this amount will be financed from the consolidated oblast budget, and 45% from the republican budget. Approximately 25% of the planned investments is allocated to new facilities. Budget financing for the selected 22 analysed towns and urban settlements makes up some 2 billion tenge over 8 years, of which 55% is intended for the construction of new facilities, and the remainder for rehabilitation of existing installations. In addition, some financing is foreseen for sanitation services. In particular, financing is planned for the third stage of the biological wastewater treatment plant in Ust-Kamenogorsk (245 and 255 million tenge from the consolidated oblast budget in 2003 and 2004 respectively) and the biological wastewater treatment plant in Semipalatinsk (500 and 586 million tenge from the national budget in 2003 and 2004 respectively). The baseline 'No change' scenario reflects the development of the the sector under the assumption that capital cost will be financed as envisaged in the 'Drinking Water' programme, but that otherwise no changes in the sector policy will take place. Financing needs The evaluation, at the end of 2001, shows a total replacement value of utilised assets in the 22 sample WSS companies of about 20,5 billion tenge or 140 million USD in 2001 prices. This means that the annual need for scheduled capital repair based on international practise is around 3% of the total replacement value or 4,5 million $/year (666 million tenge/year in 2001 prices) or 7,7 $/year per consumer (1.131 tenge/year in 2001 prices). For the period of 2003-2010, for the 22 sample WSS companies only, the need for scheduled capital repairs is about 5,3 billion tenge. Hence, the 'Drinking water' programme foresees reconstruction of 22 WSS companies at the level of 17% of their current4 needs in capital repairs. This is a big financing gap between planned financial resources and actual financing needs. At present about 40% on average of the infrastucture exceeds their technical lifetime and need replacement. If the financing gap during the planning period is not decreased through additional policy measures to increase financing, then this percentage will rise in 2012 to about 65% of the assets needing replacement. This situation in turn causes at the end of the planning period a very low service level accompanied by increasing operation costs and a continued backlog of asset replacement. Also tariff levels are likely to increase in order to ensure continued opearation of the system, albeit with a detariorating service quality. The figure below shows the financing of expenditures under the baseline 'no change' scenario.

4 Backlog of the under-financed capital repairs of the past is an additional not covered expenditure requirement

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 13 Figure 2.1 Financing of expenditure under 'no change' scenario, million tenge

Capital repair financed from budgetary sources Selling&Admin. Other operational cost Labour remuneration and charges Energy cost Collected revenue of WSS companies

2.500

2.000

1.500

million tenge 1.000

500

- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations 2.1.2 Zoning of the required capital expenditure Systematisation of the many water supply and sanitation problems would allow identification of investment priorities regarding both rehabilitation of the existing infrastructure and new constructions. Therefore an analysis of water supply and sanitation problems and their possible solutions was made and Eastern Kazakhstan was divided into 5 territorial zones with similar geological and/or man-made characteristics. This allowed a better analysis of the specific problems that face WSS companies (see the attached map – Annex 2). The identified zones comprise areas that are mountanous or steppe-like, or have bad water intake quality, or have an industrial character with wastewater and water consuming enterprises.See for more detail about the zones chapter 4) The tables below summarise the water supply and sanitation problems in each of the five zones. Some problems are caused by deterioration of infrastructure and can be solved by rehabilitation. Others require expensive new construction of facilities. Table 2.1 Identified water supply problems Typical problems of water supply Zones 1 2 3 4 5 Unaccounted water consumption/ illegal connections yes yes yes yes yes Metering of water produced and sold yes yes yes yes yes Long-distance water supply mains in poor condition, high water yes losses in distribution Low energy efficiency of existing pumping equipment yes yes yes yes yes Network zoning is not practised yes yes yes Considerable deterioration of networks yes yes Considerable leakage in networks yes yes Low quality of water supply services (regularity) yes yes yes Insufficient water disinfecting yes yes Source: based on information from WSS companies

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 14 Table 1.2 Identified sanitation problems Typical sanitation problems Zones 1 2 3 4 5 Absence of sanitation/treatment facilities in some urban yes yes yes yes settlement No biological treatment of wastewater in some towns and urban yes yes yes yes yes settlements Illegal connections yes yes yes yes yes Low energy efficiency of pumping equipment yes yes Considerable deterioration of sewerage networks yes yes Significant infiltration of groundwater and precipitation water yes yes Pressure network zoning is not practised yes yes Low energy efficiency of existing airblowers and other energy yes yes equipment of wastewater treatment Problem with utilisation of wastewater treatment sludge yes Source: based on information from WSS companies Although some specific zonal problems exist, there are also common problems. These can be characterised as production and cost optimisation problems (hereafter referred to as the “Optimisation” scenario). The water supply and sanitation sector has the following optimisation problems: • Illegal connections and unauthorised water consumption; • Incomplete overview of water produced and sold (metering problem); • Low energy efficiency of existing equipment; • Zoning of networks is not practised; • Poor condition of networks which leads to water leakage as well as a high level of infiltration in sewage networks that leads to an extra need for wastewater treatment capacity and reduces the efficiency of activated sludge process in treatment. 2.1.3 The 'Optimisation' scenario The 'Optimisation' scenario (see Figure 2 below) - or actual financing need scenario - as opposed to the Baseline scenario, is characterised not only by the fact that it envisages implementation of a priority investment programme, but also that it is aimed at the optimisation of production and costs levels for WSS services as well as optimisation of WSS sector capacities and scheduled capital investments. The cost-saving measures that require initial (substantive) investments, are also the ones that have the highest cost saving potential. Annex 7 presents all the measures proposed for priority investment programme using the example of Ust-Kamenogorsk Vodokanal. For the water sector the priority measures include: • Active search for illegal connections and unauthorised water consumers; • Control of water produced and sold (water meters); • Replacement of existing pumping equipment by more effective one; • Optimisation of networks (pressure etc.); • Optimisation of network operation, replacement of networks, elimination of leakages and infiltration of groundwaters and precipitation All the above-mentioned measures were assumed to be implementable within 2003-2008 (6 years) within a priority investment programme under the 'Optimisation' scenario. The size of the priority investment programme is 56 million USD for the 22 selected WSS companies. About 20 million USD is intended for the priority investment programme of Ust- Kamenogorsk Vodokanal.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 15 Non-investment measures for optimisation of the level of production and costs The main activities of this kind relate to water demand management. If billing and metering, tariff levels etc. are improved the average personal consumption of 200 l/person/day for the registered population (official data) may be decreased to around 130 l/person/day. Reduction of water consumption and, hence, the water production will significantly reduce the variable component of WSS companies' costs. Capital repairs of the planning period The 'Optimisation' scenario envisages full-scale annual capital repair over the whole planning period. But the annual requirement for capital repairs will gradually decrease. The most obvious effect of the reduction in water demand and leakages in water networks and sewers is lower production levels and downsizing of the required rehabilitated capacity and new construction. The savings potential in the scheduled capital repair may be demonstrated by the fact that water production levels will fall by 30% for example. Reduction of the need for scheduled capital repair under this scenario was estimated in a conservative way. It was assumed that only utilised capacities will be maintained (not the installed capacities). Savings on capital repairs will be realised only by implementing optimisation measures mentioned above and yet the avoided capital repairs will be proportionally lower than the achieved reduction in the water production level. As a result, the need in the scheduled capital repair will be reduced from 666 million tenge in 2001 to 562 million tenge in 2012 in 2001 prices. Compared with the scenario 'no changes' the avoided capital repairs will conservatively make up about 0,7 billion tenge over the period 2003-2012. Optimistically, the saving on the avoided capital repairs can be 2-3 time higher. The total of scheduled capital repair (compensation for a normal retirement of assets) for the period 2003-2012 will constitute some 5,9 billion tenge in 2001 prices. New investments Despite the fact that new investments are required to solve quite a few of the above mentioned problems (see zonal distribution), in the opinion of the EKO Akimat, the most important new investments are the following three, scheduled to be implemented within the period of 2003 - 2010: • Third stage of biological WWTP in Ust-Kamenogorsk (245 and 255 million tenge to be financed from consolidated oblast budget in 2003 and 2004); • Biological WWTP in Semipalatinsk (500 and 586 million tenge to be financed from the national budget in 2003 and 2004); and • Construction of new reserve groundwater intake in the city of Ridder (577 million tenge during 2008-2012 to be financed from the national budget). Although financing of these investments with a total of 2,2 billion tenge is foreseen in the budget, the costs for operation and maintenance of the new facilities will be borne by tariffs. It was proposed that the annual costs for operation and maintenance of new facilities will be 3% of the capital costs and in the period from 2003 to 2012 will equal about 500 million tenge. Costs of operation, current repair and selling&administration At present, the water system has some reserves for cost savings that can be identified and realised practically with a substantial initial investment and optimisation. Assumptions, estimated cost and cost savings in operation, current repairs and selling&administration under the 'Optimisation' scenario are shown in a table below:

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 16 Table 2.3 Expenditure assumption under 'Optimisation' scenario, million tenge Type of costs Change of costs in the period of 2003-2012 Costs Savings 2003-2012 compared to the baseline 'No change' scenario Consumption and Growth of real price for energy: 1% annually. 2.145 1.121 cost of energy By 2013 reduction of energy consumption up to 60% of the 2001 level, due to scheduled replacement of electrical equipment with more effective and economy in pumping (reduction of leakage and water use) Number of Actual wages with payroll fees increases annually 2.325 1.682 employees at by 1% from the level of 11600 tenge/month in 2001 WSS companies Employment in 2001 made up 2.697 employees in and cost of 22 companies, or about 4 employees per 1000 labour (salaries/ consumers. Scenario envisages reduction of wages and employees by half by 2007 down to the level of payroll fees) 1.294 people, i.e. the average European norm of 2 people per 1000 consumers Other operation Starting level 2001 - 1.87% of the replacement 2.326 1.774 costs value. Reduction to the level of 1% of the running replacement value by 2009 – completion of priority investment programme. Selling&administr Unchanged in real prices at the 2001 level 2.059 - ation Source: Consultant's estimate Initial financing gap in the 'Optimisation' scenario The forecast of the required and available financial resources based on assumptions made for the main parameters show that there is misbalance between volumes of available and required financing, a so-called (cumulative) financing gap for 2003 – 2012 equal to 12,6 billion tenge. Figure 2.2 Initial financing gap under 'Optimisation' scenario, million tenge

Priority investment program New construction Additional operational cost related to the new construction Capital repair Selling&Admin Other operational cost Salaries and payroll fees Energy cost Budget financing 4.500Collected WSS companies' revenue 4.000 3.500 3.000

2.500 2.000 1.500

1.000

500

- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations The next section contains an analysis of the various options directed at reducing the financing gap. This reduction can be obtained by measures either to reduce financing needs or increase the volume of financial resources.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 17 2.2 Measures required to cover the financing gap under the 'Optimisation' scenario A financing gap can be eliminated if combined measures are taken to reduce financing needs and increase the volume of financial resources required by the sector. The financial effect of combined measures is described below. This should serve as basis for the development of a financial strategy presented in the following sections. Consumer payments made in accordance with established tariffs and budgetary funds of different levels serve as basis for the main source of financing in the forecasts. Loans are not considered to be a main source for the sector financing, though in some cases such as in the case of Ust-Kamenogorsk Vodokanal, borrowing could be also considered. 2.2.1 Policy measures directed to increase financial resources Budgetary financing If tariffs are not increased by more than 1% a year in real terms, the need for budget financing increases considerably: to more than 10% of the COB. This includes the total financing requirement for scheduled capital repairs, priority investments and new construction including facilities in Ust-Kamenogorsk, Semipalatinsk and Rudder. The forecasted values are very high in comparison with the 0,4% of the consolidated Oblast budget that was allocated for the entire WSS sector in 2001. It has been regarded as unrealistic to raise budget financing to the levels of 3-11% of CBO. Therefore it is further assumed that financing of water sector from budgetary organisations can be increased to 1,2% by 2007. This will provide additionally about 0,4 billion tenge in 2001 prices. Tariff revenue of WSS companies Unlike the baseline 'No change' scenario where tariffs are increasing proportionally to operational costs (no policy changes), in this scenario the level of tariffs is established after all other financing measures were determined. However, even in this, case payment for WSS services per person including VAT should not be higher than 3.5%5 of AHIC. Tariff revenues of WSS companies were calculated on the basis of the forecasted tariff level, volume of water consumption and collection rate. With the current system of tariff setting where the structure of costs and rate of income is strictly regulated, the WSS companies were not able to cover their current expenditures in 2001. Probably, this situation will change after the Antimonopoly Agency introduces new legislative acts on tariff setting6. As estimated by the Antimonopoly Agency after the new system of tariff setting is introduced, the real tariff level for the population and other consumers may rise by 70-80% within the next 7-8 years, but strictly in accordance with the population affordability. Currently there is no approved methodology to evaluate the affordability of WSS services by the population in Kazakhstan. The average share of the monthly amount to be paid for water supply and sanitation (including VAT) in 2001 was 1,81% of the average income used for consumption. In 2002, this indicator in 2001 prices was lower (estimated 1,75%), because of reduction of VAT from 18% to 16% and increase of real income of population by 1%. It is assumed that this share will be even lower for urban population of oblast, but data to substantiate this assumption is unavailable. From the analysis above it follows that for about 1/3 of population the bill for WSS in 2001 (including VAT) were more than 3% of income. However, WSS bills including VAT did not exceed 1,85% of income for 2/3 of population. It should be noted that only registered population was used in the analysis. However after the optimisation measures, the registered population will have grown and that the cost of service will be divided among a larger number

5 OECD EAP Task Force recommendation (3%-3,5% of AHIC) 6 New RVA-based and price cap tariff formula. At a time of report writing these acts were in the Ministry of Justice for registration.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 18 of consumers and the share of average income used for water services will be accordingly reduced. The following assumptions concerning strengthening of financial and paying discipline as well as water consumption were used in this scenario: Table 2.4 Financing assumptions for the 'Optimisation' scenario Index Changes in the period 2003-2012 compared to the baseline 'No change' scenario Collection from population (year-to-year) Increases from 75% in 2001 to 90% by 2007 Collection from other consumers (year-to- Increases from 90% in 2001 to 95% by 2007 year) Water consumption by population Reduction of individual consumption down to 130lcd in 2007 due to meter installation and campaigns on water supply. Level of 2001 – average 157lcd for evaluated actual number of consumers or 200lcd for registered consumers Water consumption by other consumers Identification of unauthorised consumers will lead to the reduction of water consumption by 8% compared with 2001 during first 2 years of optimisation programme. By 2013 the share of volume for all consumers will increase up to 59% from 54% in 2001 due to the reduction of consumption by population.

Under the above-mentioned assumptions, to close the financing gap it takes to increase the average WSS tariff up to 39,3 tenge/m37 in 2001 prices (against 18 tenge/m3 in 2001). Figure 4 shows the effects of additional budgetary and tariff financing. In terms of affordability it means that in 2006 the price of water services including VAT will reach its maximum level of 3,39% of AHIC and is reduced to 3,14% in 2012 (registered population).

7 Average weighted tariff for water and sewerage

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 19 Figure 2.3 Financing gap under 'Optimisation' scenario with increased budgetary and tariff financing, million tenge

PriorityPriority investment investment program programme программа New constructionNew construction AdditionalAdditional operational operation cost costsrelated connected to the new with construction new construction CapitalOverhaul repair Selling&AdminCosts of the period Other Otheroperational operation cost costs SalariesWages and payroll and extra fees fees EnergyElectric cost power BudgetBudget financing financing 4.500Collected 4.500Collected revenues revenew of WSS of vodokanalscompanies 4.000 4.000

3.500 3.500

3.000 3.000 2.500 2.500 2.000 2.000 1.500 1.500 1.000 1.000 500 500 - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: model-based calculations Attraction of loans Loans cannot be used to solve current financing problems for all WSS companies, but they may be a solution for certain large WSS companies. An example of a loan was considered for the priority investment programme of Ust-Kamenogorsk Vodokanal, the terms of financing being close to those of the World Bank, which is actively co-operating with WSS companies of Kazakhstan. In this particular case if the WSS tariff is raised to 33 tenge/m3 (in 2001 prices, against 15 tenge/m3 in 2001) by 2007 it will be possible to finance: • investment programme in the amount of 2 billion tenge for the period of 2004-2012 (about 25% of the replacement value – about 2/3 of actual needs) through tariff financing only; • or investment programme of 3 billion tenge (about 40% of replacement value – actual need) in the shortest possible time and not postponing modernisation until more favourable years - through borrowed finance with further loan service financing via tariffs. In terms of affordability, it means that in 2006 the price of water services including VAT will reach its maximum level of 2,65% of disposable, and is reduced to 2,20% in 2012 (registered population) 2.2.2 Limiting financing needs and the level of service under 'Optimisation' scenario A phasing of the investments can also bring down the annual costs. It is envisaged that financing of all current capital repairs (compensation of the current retirement of assets) will only start after the financing of priority investments has been completed. This is a compromise that provides financing of urgent measures, but does not assure sustainable growth after the full priority investment programme and therefore does not have such a high level of operational costs savings. To close the financing gap it is necessary to raise the average tariff up to 36 tenge perм3 in 2001 prices (against 18 tenge/m3 in 2001). In terms of affordability it means that in 2006 cost of water services including VAT reaches its maximum of 3,12% from income used for consumption and will be reduced up to 2,88% in 2012 (registered population).

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 20 2.3 Recommended strategy In view of the difficult situation prevailing in WSS sector of towns and urban settlements of Eastern Kazakhstan oblast, it is necessary to undertake urgent measures to avoid further decline, in some towns - even crisis, in the services provided by WSS companies. Taking into account the scenario analysis presented in previous chapters, the Project Steering Committee decided that the main strategy for 2003-2012 should consist of: • Maintaining the level of service by implementing the priority investment and management performance improvement programs aimed at modernization and optimization 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.8 Figure 5 shows the expenditures under the Optimisation scenario according to the recommended option of limiting financing needs and service level through phasing of the investments over time. Figure 2.4 Recommended option under the 'Optimisation' scenario, million tenge

4.000

3.500

3.000

2.500

2.000 1.500 1.000

500

- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations More specifically, the political goal consists of gradual (by 2007) escalation of budgetary and tariff financing required for implementing the most important measures that aim to optimise the production and capacity of WSS companies. It also promotes construction of important new installations and ensures full coverage of O&M costs of WSS companies. Scheduled capital repairs of existing and new infrastructure should commence in full scale upon completion of priority investment programme financing. Due to the optimisation programme, the annual capital repairs and operations costs of the existing system are expected to be reduced, and the level of services provided is expected to stabilise. Maximum possible savings in operational costs will, however, not be achieved, since over at least first 6-7 years, while the priority optimisation and new construction programs are implemented, the scheduled capital repairs will not take place. The Akimat of EKO and the project Steering Committee regarded loan financing of the priority investment programme as an option to partially cover the shortfall in financial resources during the first 5 years of this strategy implementation, when the affordability of population is too low to allow major tariff increases. Under consideration is a pilot project of

8 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 21 loan financing of the municipal company 'Oskemen-Vodokanal' in Ust-Kamenogorsk with further dissemination of this experience to other large WSS companies of the region. To achieve the goals identified by this strategy it is necessary to realise new organisational and regulatory framework in the WSS sector of EKO. Some initial measures and projects fitting such a framework are presented in this report (see the list of priority projects and measures in the field of production optimisation, environmental protection and financial- economic, organisational and regulatory improvements in water sector – Annexes 6, 7 and 8)

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 22 3 Current situation with water supply and sanitation in EKO

Eastern Kazakhstan oblast is situated in the North-East of Kazakhstan in the basin of upper Irtish and in a Kazakh part of Altai. The region borders in the North with Altai Territory (krai) of the Russian Federation, in East and southeast with China. Eastern Kazakhstan Oblast inhabits some 1.5 million people, or around 10% of the country's population. Being one of the most important industrial regions in Kazakhstan with developed mining and metallurgical industries, the Oblast is also plagued with the whole spectrum of industrial environmental problems, not least water quality problems. The economic upturn of 2000 and 2001 in Kazakhstan was paralleled by industrial output and income level improvements in Eastern Kazakhstan. Although, being an net contributor to the national budget, and occupying the 4th place by GDP contribution, Eastern Kazakhstan Oblast is characterised by a just above average household income levels and salaries and an above average share of pensioners in the total population. Therefore, Oblast authorities have regarded consumer financing of municipal infrastructure development with caution, although the deterioration of the municipal services, to a large degree, can be attributed to shortfalls of such a policy. 3.1 Technical situation of the sector 3.1.1 Identification of territorial zones of WSS in the region 25 towns and urban settlements with a population exceeding 2000 (in total there are 100 of such towns and urban settlements in EKO) were selected for investigations – two from each district (rayon): rayons' centres and the most representative urban settlements of the rayons. Technical questionnaires were sent to WSS companies of selected towns and urban settlements, most of them were filled out and returned. However part of the returned questionnaires were of limited use since the information provided was incorrect or doubtful. Due to these reasons the analysis involved 22 towns and urban settlements with population from 3 408 to 303 980. Table 1 Population of selected towns and urban settlements Name of urban settlement Population Name of urban settlement Population Ust-Kam. 303.980 Shar 9.103 Semipalatinsk 267.670 v. N. Bukhtara 6.047 Ridder 54.873 City Shemonaikha 19.046 Ziryanovsk 42.717 v. Kokpekti 5.516 Ayagoz 38.491 v. Molodezhni 3.408 Zaisan 15.838 v. Akzhar 8.011 Nov.Sogra 15.416 v. B. Vladimirovka 4.760 Serebryansk 11.800 v. Karaul 5.273 Village Pervomajski 6.972 v. Aksuat 7.297 v. Glubokoe 9.903 v. Kurchum 10.014 v. Samarskoe 6.918 v. Borodulikha 5.914 Source: based on information from WSS companies As of January 1, 2002 the population of Eastern Kazakhstan was about 1.486 thousand people. So, the total number of population selected was about 859 thousand people or 58% of total population. Total water intake of selected towns and urban settlements was over 117 mil.м3 a year. Data analysis and consultations with local experts allowed the conclusion that it is expedient to divide EKO into zones by territorial and topographic characteristics and similarity of problems of the WSS companies. Hence the following 5 zones were identified: Zone 1 Steppe, arid (Ayagoz, Shar, Bordulikha, Karaul, Bolshaya Vladimirovka)

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 23 Zone 2 Mountainous, characterised with great difference of elevation (Zaruianovsk, Samarka, Zaisan, Ridder) Zone 3 The region with insufficient water in supply source and with difference of elevation (Kurchum, Aksuat, Kokpekti, Akzhar, Novaya Bukhtarma) Zone 4 Region subject to the effect of industrial wastewater (Ust-Kamenogorsk, Semipalatinsk, Molodezhni, Novaya Sogra) Zone 5 Region with present or former water intensive industrial production. (Glubokoe, Pervomajski, Serebryansk, Shemonaikha)

Below is a more detailed description of characteristics used for selection of the zones. Zone 1 Steppe, arid region characterised by long-distance water mains and low level of water consumption due to insufficient water reserves of drinking quality. Zone 2 Mountainous or cross-country area characterised with differences of elevation, with WSS companies equipped with pump stations that use much electric power for pumping. Zone 3 Territory well provided with water, located in the vicinity of lake Zaisan and characterised by poor quality of water in sources (increased concentration of Fe and high level of water turbidity), also with unstable composition changing with seasons. Topography of some towns and urban settlements is characterised by the difference of elevation. Zone 4 Territory with mixed types of water inlet subject to the effect of industrial wastewater that have negative impact on the quality of water in water sources. Zone 5 Industrially developed territory, characterised by existence of energy- and water consuming companies. 3.1.2 Characteristics of urban water supply in Eastern Kazakhstan Basic water reservoirs in EKO Eastern Kazakhstan oblast is one of the best water supplied region of the republic when compared with other regions taking into account the fact that Kazakhstan is known to be one of the most dry countries of Eurasia. Over 40% of all water reserves are concentrated in Eastern Kazakhstan. As per water-reserves cadastre in EKO there are 87 rivers with the length of over 10km, 48 rivers – over 50km and 20 rivers – over 100km the longest being the river Irtish (1300 km within the borders of Kazakhstan), the next one is river Ishim (1100 km within the borders of Kazakhstan). About half of the entire volume of surface water is formed outside the republic, and a third passes through Kazakhstan to the territories of neighbouring states.. Average annual surface water resources by water content is equal to 32,6 km3, and 7,78 km3 of average annual flow is being formed outside the territory of the region. Hence, the volume of river flow formed on the territory of the region makes 24,85 km3. Distribution of water use by sector Annual intake in the region is equal to 600-700 mil.m3 of water, of which not less than 49 mil.m3 is lost in transportation. Distribution of annual use by economic sectors is as following:

• Industry 190 mil.m3

• Agriculture 340 mil.m3

• Housing and communal services 125 mil.m3

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 24 Water supply sources and availability of water supply capacities Drinking water is supplied to Eastern Kazakhstan oblast from ground and surface water sources. Currently 20 groundwater sources are being operated with daily intake flows equal to 303,8 thousand m3/d. In addition, there is an intake of 371,3 thousand m3/d from unapproved water reserves. Daily intake from surface water sources of EKO makes up about 1174,2 thousand m3/d (63%). As the experience shows there are sufficient quantities of groundwater sources of good quality in EKO. A number of ground sources are hydraulically connected with polluted rivers, thus running the risk of being polluted also. Main sources of pollution Over 3000 sites that cause pollution of groundwater have been recently disclosed. Polluted groundwater areas reach several hundreds km2. Drastic increase of toxic components is observed (copper, zinc, lead, petroleum products), in particular zinc that is increased more than 10 times over the last 10 years. Increase of wastewater discharge is caused by the growth of water-using companies. Basic water using companies are the following: • Open Stock Company 'Kazzinc', • UMZ, Berezovski and Irtish mines, • 'AES Altai-Power', • ST 'UК ТМК' and others. The main pollutants discharged to water reservoirs and water passages by industrial companies are: zinc – 160 t/year, copper - 3,9 t/year, lead - 2,9 t/year, petroleum products - 14,69 t/year. A big problem is to supply the population with clean water. Every year over 200 mil.m3 of polluted manufacturing water is discharged into surface reservoirs. Coverage of population with water supply Analysis of collected data showed that about 75% of population are supplied with water centrally including those who get water from pipeline or street water pumps. However according to the information of WSS companies the number of agreements signed for the provision of water is 20-25% less than the total number of population actually enjoying services of water supply. Figure 1 Water supply coverage of population in 2001, % of total population

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Aksuat Akzhar Shar Zaisan Ridder Ayagov Kurchum Kokpekty s. B.- Karaul Borodulikha N. Bukhtarma Vladimirovka Ust-Kamenog. Zyryanovsk Samarskoye Semipalatinsk Sogra Nov. Molodezhny Glubokoye Pervomaysky Serebryansk Shemonaikha Bolshenarym.

Source: based on information from WSS companies Existing situation with the coverage is further illustrated in the following table:

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 25 Table 2 Dependence of population coverage with water supply of the size of settlements Category of towns Towns and urban settlements with Towns and urban settlements population over 50.000 with population from 10.000 to 50.000 Centralised water supply 79% 70%

Source: information from WSS companies According to the information received, the majority of towns are supplied 24 hours a day. But consumers have service interruption because of accidents that happen very often in the system. The situation worsens due to the lack of spare parts and equipment required to repair and restore services. Water treatment At present, not all of the WSS companies treat groundwater prior to its supply to consumers. In many cases the iron content is above the maximum allowed concentration of 0.3 mg/l and such water is fed to network after disinfection, but without being treated. As a rule, if groundwater is treated, it happens in treatment plants with aeration process followed by filtration. It is worth noting that to maintain chlorinating plants in small towns and urban settlements with the current small number of qualified personnel is impossible because of considerable expenses connected with chlorine transportation and the danger of handling (small towns and urban settlements of zone 3 in the region of lake Zaisan is a typical example of such situation). In such places water is fed to the network without disinfecting and treating, which means that it is impossible to avoid risks of diseases caused by insufficient quality of water. Water distribution It is often practised to supply water straight from the well or directly from a pump station of second lift. This results in unstable and inefficient water supply and in case if there are no reservoirs and water towers – in low quality of services. Most of the equipment is worn out and should be replaced. As it was mentioned before, pumping equipment installed in some towns and urban settlements is inefficient and results in higher total electricity consumption per 1 m3 of lifted water compared with European norms. This is illustrated in the table. Table 3 Energy intensity in water supply systems as per territorial zones, KWh/m3 Zone Name of populated locality kWh/m3 1 c.Ayagoz 2,38 c.Shar v.Borodulikha v.B.Vladimirovka v.Karaul 2 c.Ziryanovsk 1,77 v.Samarskoe c.Zaisan 3 v.Kurchum 1,01 v.N.Bukhtarma 4 c.Ust-Kam. 0,61 c.Semipalatinsk c.Nov.Sogra 5 v.Glubokoe 1,60 v.Pervomajski c.Serebryansk Source: based on information from WSS companies Energy consumption often exceeds 1kWh/m3 for produced, treated and distributed water. In the countries of Western Europe with similar topographic characteristics this value on average does not exceed 0,6 kWh/m3. However this remark relates only to the flat areas

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 26 (Zones 1, 3, 4) because in mountainous areas of zone 2 high energy consumption is caused by the difference in elevation, and in Zone 5 - by the operation of water intensive industries and low energy efficiency of pumping equipment. Lack of sufficient financing for replacement and reconstruction of water distributing networks results in worn-out equipment and hence in loss of water in the range of 20-50% of total water supplied, which is 5-10 times higher than normative losses in correctly operated and designed networks. The figure below shows the claimed and adjusted (estimated) loss in water distributing networks. The difference is explained by the fact that some of respondents have not stated the level of losses or have given an uncertain (low) value. So expert evaluation was used to obtain more or less realistic reflection of the situation. Figure 2 Reported and adjusted water loss in distributing network in 2001, % of water supplied to the distribution network

100% 90% 80% 70% 60% 46% 50% 37% 33% 40% 29% 32% 30% 30% 22% 23% 24% 20% 11% 10% 0% Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 claimed adjusted

Source: based on information from WSS companies Insufficient replacement of pipelines and stop valves is typical for many WSS companies. It often leads to accidents and results in long disruption of supply thus reducing level of services provided and causing uncertainty of consumers in the efficiency of WSS companies operations. The figure below shows the relation between network losses and water consumption by population and other consumers. Figure 3 Consumption and losses composition of water supplied to network, 2001

Loss in networks Population Others

100%

80% ear

y 60% 40% cub.m/ 20%

Shar Aksuat Karaul Ridder Zaisan Akzhar Ayagoz Kurchum Kokpekty Glubokoye Nov. Sogra Ust-Kamen . Zyryanovsk Borodulikha Molodezhny Samarskoye Serebryansk Bolshenarym Shemonaikha N. Bukhtarma N. Pervomaysky Semipalatinsk B.Vladimirovka

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 27 Source: based on information from WSS companies In some towns and urban settlements, loss in transportation is approximately equal to the volume of water consumed by the population (Ridder, Ust-Kamenogorsk, Semipalatinsk), and in some areas is even higher (Ayagoz, Bordulikha, Serebryansk). Important is the factor that determines the condition of networks: the level of losses per 1km of network per day (m3/km/d) - specific loss. Losses of 3 m3/km/d is typical for a new network in Western Europe. The actual value in a European country fluctuates around 7-8 m3/km/d. The average value for selected towns and urban settlements reaches 60 m3/km/d that only confirms the bad technical condition of the water distributing networks. A more detailed situation in selected towns and urban settlements and zones is shown in the following table: Table 4 Length of water distribution network and specific water loss in 2001 Zone Name Total length of network, km Loss, m3/km/day. 1 c.Ayagoz 84,15 13,2

c.Shar 41,20 0,1 v.Borodulikha 14,00 2,2 v.B.Vladimirovka 12,20 0,7 v.Karaul 19,80 1,9 2 c.Ziryanovsk 179,10 19,0 v.Samarskoe 33,80 0,7 c.Zaisan 102,00 0,9 c.Ridder 124,00 67,4 3 v.Kurchum 11,40 7,5 v.Aksaut 12,30 0,6 v.Kokpekti 15,00 22,4 v.Akzhar 13,50 0,9 v.N.Bukhtarma 45,00 2,3 4 c.Ust-Kamenegorsk 491,29 100,6 c.Semipalatinsk 299,00 105,6 c.Nov.Sogra 33,32 39,4 v.Molodiozhni 46,00 4,7 5 v.Glubokoe 100,00 6,1 v.Pervomajski 66,40 4,2 c.Serebryansk 54,00 40,6 c.Shemonaikha 5,60 8,0 v.Bolshenarim 72,00 0,9 Source: based on information from WSS companies The values that are much lower than the average value for the countries of Western Europe can be explained by lack of accounting for losses/inadequate information. The poor condition of the networks results in more polluted water and may lead to adverse health effects. Water use metering Metering of water use differs by towns and urban settlements and zones. Between 80 to 100% of industrial consumers are metered. The situation with population is quite different; generally very little care was given to the installation of water metering equipment at the entry to houses and directly in the apartments except for few towns and urban settlements. Since there is no information concerning the availability of water meters in some towns and urban settlements, the weighted average value by zones can be considered as an approximation for them.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 28 Table 5 Availability of water metering equipment in 2001 City House Inlet, % % by Total apartments, % % by numbers zones numbers zones total With Total With water water Zone meters meters 1 c.Ayagoz 80 45 56,3% 60,3% 7000 120 1,7% 4,4% c.Shar 6 - 0,0% v.Borodulikha 66 66 100,0% 217 198 91,2% v.Karaul 32 - 0,0% 59 - 0,0% 2 c.Ziryanovsk 52 49 94,2% Insuffic 18376 3784 20,6% 10,1% v.Samarskoe ient 1480 98 6,6% data c.Zaisan 1000 100 10,0% c.Ridder 21709 307 1,4% 3 v.Kurchum 108 - 0,0% Insuffic 285 - 0,0% Insuffici v.Aksuat 6 - 0,0% ient 16 - 0,0% ent data data v.Kokpekti 38 - 0,0% 232 200 86,2% v.N,Bukhtarm 27 - 0,0% 2017 4 0,2% 4 c.Ust-Kam. 1582 19 1,2% 1,5% 96382 12770 13,2% 14,5% c.Semipalatinsk 1132 21 1,9% 52594 9439 17,9% c.Nov Sogra 3998 415 10,4% v.Molodezhni 127 2 1,6% 11146 1185 10,6% 5 v.Pervomaiski 47,9% 3200 447 14,0% 26,3% c.Serebryansk 510 315 61,8% 1711 879 51,4% c.Shemonaikha 14 9 64,3% 234 - 0% v.Bolshenarim 152 - 0,0% 87 31 35,6%

Source: based on information from WSS companies Under existing situation, when the coverage of population having installed water metering equipment does not exceed 13-17%, the WSS companies are not able to accurately take stock of water usage. In most cases WSS companies calculate the volume of water sold to consumers on the basis of water use norms, which do not depict the real situation, especially in such places as, for example, hostels where the claimed number of inhabitants does not correspond to the real number. In similar cases, when no metering equipment is used and the payment is based on the established water use norms, unaccounted water use is observed. Water use norms With Eastern Kazakhstan oblast population of 1,5 million (as of January 1 2002) the average water use norm per person living in apartment block with the maximum level of water services is 250 l/person/day. However the analysis of questionnaires showed significant deviation in both directions – by zone/territorial character and by varying level of water services in towns and urban settlements. The situation is presented in the following table in more details. Table 6 Household water consumption by zones in 2001, lcd Zone Populated locality Population Coverage with Water use per 1 Average value water supply person, lcd per zones, lcd (registered population), % 1 c.Ayagoz 38 491 33% 14 23,89 c.Shar 9 103 53% 22 v.Borodulikha 5 914 7% 22 v.B.Vladimirovka 4 760 49% 19 v.Karaul 5 273 44% 84

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 29 Zone Populated locality Population Coverage with Water use per 1 Average value water supply person, lcd per zones, lcd (registered population), % 2 c.Ziryanovsk 42 717 84% 165 199,35 v.Samarskoe 6 918 70% 62 c.Zaisan 15 838 45% 11 c.Ridder 54 873 88% 267 3 v.Kurchum 10 014 10% 53 164,67 v.Aksaut 7 297 33% 35 v.Kokpekti 5 516 83% 235 v.Akzhar 8 011 18% 9 v.N.Bukhtarma 6 047 90% 225 4 c.Ust-Kamenegorsk 303 980 71% 170 162,47 c.Semipalatinsk 267 670 45% 143 c.Nov.Sogra 15 416 49% 203 v.Molodiozhni 3 800 90% 294 5 v.Glubokoe 9 903 53% 180 129,36 v.Pervomajski 6 972 76% 137 c.Serebryansk 11 800 80% 118 c.Shemonaikha 19 046 38% 102 Source: based on information from WSS companies The table shows an extremely low water use in Zone 1 (steppe, arid). Distribution and use of water supply sources and water use from the point of view of division by zones is shown in the following chart: Figure 4 Reported household water consumption by zones (from 1 to 5, from left to right) in 2001, lcd

Actual water use rate, l/per/day Average weighted level of water use for covered population l/per/day"

350 294 300 267 250 235 225 203 180 200 165 170 143 137 150 118 102 100 84 62 53 50 22 22 35 14 19 11 9

0 Shar

Karaul Ridder Aksuat Akzhar Zaysan Ayagoz Kokpekty Kurchum s. B.- s. Glubokoye Smarskoye Nov. Sogra Zyryanovsk Molodezhny Borodulikha Serebryansk Vladimirovka Pervomaysky Shemonaikha Semipalatinsk N. Bukhtarma N. Ust-Kamenog.

Source: based on information from WSS companies Zone 1 Steppe, arid region. Water is supplied mainly by pipes delivering water over long distances with high losses and a high price of pumped water. The towns and urban settlements that are not connected to the network have to provide themselves with water from ground sources, however there are additional difficulties connected with deeply deposited sources of fresh groundwater. These zones are characterised by a relatively low level of water use.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 30 Figure 5 Energy intensity in water supply systems by zones (from 1 to 5, from left to right) in 2001, kWh/m3 of water produced

8,00 7,57 7,00 6,00

3 5,00 3,70 4,00 kWh/m 3,07 2,94 2,77 3,00 2,17 2,00 1,62 2,00 1,45 1,26 0,82 1,06 1,00 0,66 0,49 0,520,41 0,50 0,62 0,630,59 0,06 0,16 .

a r

- a

Shar Akzha Ayagoz Karaul Ridder Aksuat Zaysan Kurchum

Kokpekty Glubokoye Serebryans k Nov. Sogra Nov. Borodulikh Shemonaikh Zyryanovsk Samarskoye Molodezhny Pervomaysky N. Bukhtarm N. Ust-Kamenog Semipalatinsk B.Vladimirovka

Source: based on information from WSS companies Zone 2 Mountainous country characterised by difference of elevations. Water is supplied from both ground and surface sources, but that involves high expenditures for pumping, as there is a significant elevation difference between water treatment station and end consumers. The value of energy intensity for pumping 1 cubic m of water that is much higher than the indicative European rate of 0,6 kWh/м3 is the best evidence. Zone 4 Territory with mixed types of water inlet subject to the effect of industrial wastewater that have negative impact on the quality of water in water sources. This zone includes highly populated big towns and developed infrastructure of networks, housing stock and high coverage of water supply systems. Zone 5 Industrially developed territory with water intensive industries; special water supply systems with a high capacity have been built in this area to provide industry with required water. At present in most cases these industrial companies are either closed or no longer require that much water. So the demand for water reduced and the capacities remain unused. This is confirmed by data presented in the chart. Intensive energy consumption for pumping 1 cubic m of water in towns and urban settlements of this zone is the result of operating powerful pumps for which there is no need. Analysis of data disclosed inconsistency between rated power of pumping equipment and used power. It is clear from the table that excess of capacity may reach as much as 82% (Ayagoz). Existence of such phenomena indicates that the design and construction of networks did not include long-term planning. Table 7 Excessive pumping capacities in 2001, % of total utilised capacity Populated locality Excessive pumping capacity, % c.Ayagoz 82,44% v.B.Vladimirovka 20,83% c.Ziryanovsk 58,00% v. Samarskoe 9,88% v.Zaisan 50,00% c.Kurchum 76,02% v.Aksuat 60,00% v.Kokpekti 70,90% v.N.Bukhtara 25,25% c.Ust-Kam. 55,66%

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 31 Populated locality Excessive pumping capacity, % c.Semopalatinsk 41,92% c.Nov.Sogra 57,53% v.Molodezhni 63,90% v.Pervomajski 85% c.Serebryansk 82% Source: based on information from WSS companies 3.1.3 Sewage system of towns and urban settlements of the Eastern Kazakhstan Oblast Coverage of population of wastewater services In big towns (with population above 50 000) the majority of people having centralised water supply system are provided with centralised wastewater collection and treatment as well. In the towns with population from 10 to 50 thousand the same proportion of the population is connected to centralised water supply, but collection of wastewater, and especially wastewater treatment is not so common. The current situation is illustrated in the following table. Table 8 Dependence of population coverage with centralised wastewater collection of the size of the settlement Category of towns Towns and urban settlements Towns and urban settlements with population over 50.000 with population from 10.000 to 50.000

Provided with centralised sewerage 71% 35% system

Source: based on information from WSS companies The figure presents towns and urban settlements selected for analysis – centralised sewerage system coverage share. Figure 6 Population coverage by centralised sewerage system by zones in 2001, % of total population

120% 100% 100% 87% 90% 87% 80% 73% 67% 59% 62% 60% 50% 45% 43% 42% 40% 24% 20% 13% 9% 0% 0% 0% 0% 0% 0% 0%

k e

a y a

a y e 0% y

a Shar

Karaul Ridder Akzhar Aksuat Ayagoz Zaysan kokpekr Kurchum Glubokoy Nov. Sogr Nov. S. B- S. Zyryanovs Serebryans Samarskoy Molodezhn Borodulikh Ust- Kamen. Ust- Vladimirovk Pervomaysk Shemonaikh N. Bukhtarm N. Semopalatins

Source: based on information from WSS companies In a number of small settlements with a population less than 10 thousand the sewerage system is not well developed or does not exist. Cesspools are the typical wastewater management solution in these settlements.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 32 Collection and transportation of sewage Below is a brief description of key problems connected with collection and transportation of wastewater. • Highly worn out pipeline networks and hence a number of ruptures and high level of leakage. Presumably about 30-50% of pipes need to be urgently replaced; • There are some facts of infiltration of storm/groundwater into the wastewater system. This increases the volume and leads to dilution thus reducing concentration of BOD and efficiency of treatment; • There are examples of wastewater discharge directly to surface waters or filtration fields without treatment; • Unsatisfactory technical condition of wastewater systems leads to leakage of wastewater into the soil and causing pollution of groundwater; • There is no accurate mechanism of control and accounting of volumes discharged to sewage system and pumped sewage flows. Wastewater treatment Distribution of wastewater by economic sectors is as follows: • Industry 133,0 mil.m3/year • Household and communal services 87,5 mil.m3/year Insufficient financing of the sector, which is common among former Soviet Republics, and lack of funds for capital repairs result in inefficient operation, physical wear and failure of installations. Practically all wastewater treatment plants were designed and constructed as mechanical/biological processes, however, at present most of biological treatment facilities do not function and the plants operate with mechanical treatment facilities only. Table 9 Applied wastewater treatment technologies and volumes of wastewater collected to sewers in 2001 Populated locality Volume discharged to sewerage, m3/year ОСК type

c.Ayagoz 225.600 М/B c.Shar - No sewage system v.Borodulikha - No sewage system v.Vladimikrovka - No sewage system Karaul - No sewage system c.Ziryanovsk 4.995.400 М/B v.Samarskoe 63.000 М c.Zaisan - No sewage system c.Radder 8.596.000 М/B v.Kurchum 27.000 М/B v.Aksuat - No sewage system v.Kokpekti 120.000 Data not available v.Akzhar - No sewage system v.N.Bukhtarma 545500 М/B

c.Ust-Kamenogorsk 53.884.000 М/B c.Semipalatinsk 14.244.000 М c.Nov Sogra 3.925.000 М/B v.Molodezhni 224.400 М v.Glubokoe 1.075.600 М/B v.Pervomajski 220.000 М c.Serebryansk 278.100 М/B Shemonaikha 448000 Data not available

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 33 Source: based on information from WSS companies Only 8 out of 22 selected towns and urban settlements have mechanical/biological treatment plants, while 9 towns and urban settlements have no sewerage system and treatment plant at all. The situation with wastewater treatment looks as follows: Table 20 Wastewater treatment technologies applied in EKO in 2001 Indicator 2001 Mechanically/biologically treated wastewater 26% Mechanically treated wastewater 41% Wastewater discharged without being treated 33%

Source: based on information from WSS companies Analysis of collected data shows the following most typical problems: • Absence of treatment plants in some towns and urban settlements. • Insufficient/unsatisfactory treatment of household/industrial wastewater. Applied mechanical treatment is insufficiently effective; • Intensive energy consumption connected with energy intensive equipment; • There is no organised handling of sludge. Table 31 Installed and utilised capacities of WWTPs in 2001. Zone Settlement Population Type of treatment plants, Total volume Excessive/ capacity discharged to insufficient sewerage, capacities Mech. Mech/biol. m3/year

1 c.Ayagoz 38491 924 - 618 149% c.Shar 9103 - - No sewerage 0% v.Borodulikha 5914 - - No sewerage 0% v.B.Vladimirovka 4760 - - No sewerage 0% v.Karaul 5273 - - No sewerage 0% 2 c.Ziryanovsk 42717 - 28000 13 686 205% v.Samarskoe 6918 500 - 173 290% c.Zaysan 15838 - - No sewerage 0% c.Ridder 54873 - 34000 23 551 144% 3 c.Kurchum 10014 - 700 74 946% v.Aksuat 7297 - - No sewerage 0% v.Kokpekti 5516 No data No data 329 No data available available available v.Akzhar 8011 - - No sewerage 0% v.N.Bukhtarma 6047 - 1500 1 495 100% 4 c.Ust-Kamenogorsk 303980 - 78000 147 627 53% c.Semipalatinsk 267670 94400 - 39 025 242% c.Nov,Sogra 15416 - 10000 10 753 93% v.Molodezhni 3408 2400 - 615 390% 5 v.Glubokoe 9903 - 3500 2 947 119% v.Pervomajski 6972 7647 - 603 1269% v.Serebryansk 11800 - 15000 762 1969% Shemonaikha 19046 No data No data 1 227 No data available available available Source: based on information from WSS companies Available excess capacity of treatment plants (more than 100%) usually leads to inefficient wastewater treatment. On the other hand – lack of capacities (less than 100%) leads to

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 34 partial discharge without treatment, or to failing technological requirements (parameters), or to using only mechanical treatment for the whole volume of wastewater, although biological treatment plant are available for some of the volume. To summarise, the main problems characteristic for the water supply and sanitation systems in the Oblast and possible solution for them have been summarised in the following table. Table 42 Territorial zoning of WSS problems and their possible solutions Zone Problem Possible solution Zone 1: Steppe, Impact of long-distance water pumping via Breaking water supply up into smaller units arid area water supply mains is high leakage and (additional analysis of possibilities for local water contamination. Household water water supply is needed) demand is not completely satisfied. Leakage and water contamination in Replacement and repair of networks distribution networks Energy inefficiency of the system Energy saving equipment Limited coverage with sewers and Increased coverage with sewerage network wastewater treatment and construction of wastewater treatment facilities Zone 2: Hilly Very low energy efficiency of the system Optimisation of water supply system areas including energy audit and optimisation of energy consumption High pressure in the water supply system Replacement and repair of networks. means frequent breakdowns and high Optimisation of network pressure. leakage Installation of frequency converters Zone 3: area of Insufficient quality of natural water Special water treatment approaches (small lake Zaisan with (seasonal variation). Application of standard disinfecting plants) hilly topography disinfection methods is difficult due to remoteness of these settlements Leakage and water contamination in Replacement and repair of networks distribution networks Low energy efficiency of the system Energy saving equipment Limited coverage with sewerage and Increased coverage with sewerage network wastewater treatment and construction of wastewater treatment facilities Zone 4: areas Utilisation of wastwater treatment sludge Legislative solution: needs to be trated at affected by containing heavy metals source and then used in agriculture industrial Industry discharges a share of its Construction of biological WWTPs production wastewater to communal sewerage. There is a need for construction of wastewater treatment plants with higher than Mechanical degree of treatment, especially in big towns. (Example: Ust-Kamenogorsk, Semipalatinsk). Leakage and water contamination in Replacement and repair of networks.. distribution networks Low energy efficiency of the system Energy saving equipment Contamination of drinking water sources Quality monitoring of iffluents (ground and surface) by industrial iffluents. Zone 5: areas Very low energy efficiency of the system Optimisation of water supply system affected by including energy audit and optimisation of industrial energy consumption production, WSS Leakage and water contamination in Replacement and repair of networks. systems were networks designed to supply Utilisation of wastwater treatment sludge Legislative solution: needs to be trated at and receive water containing heavy metals source and then used in agriculture to/from large Industry discharges a share of its Construction of biological WWTPs industrial wastewater to communal sewerage. There consumers is a need for construction of wastewater treatment plants with higher than Mechanical degree of treatment, especially in big towns. (Example: Ust-Kamenogorsk, Semipalatinsk). Contamination of drinking water sources Quality monitoring of iffluents (ground and surface) by industrial iffluents.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 35

3.2 Housing and municipal services policy. Organisation of the sector 3.2.1 Housing and municipal services reform (financial aspects) Before 1992, the government used to regulate price formation process in all spheres of economy in Kazakhstan. However during 1992-1994 price regulation was weakened, tariffs for the products of natural monopolies were regulated only by price adjustment to the level of inflation. In October 1994, the Government issued a Resolution 'On the regulation of prices of natural monopolies', which was the starting point for reforming natural monopolies in Kazakhstan. It prohibited revising prices more often than once in a quarter and established profit level control. Budget subsidies to communal sector were ceased in the period from 1995 to 1997. Population started to pay for water, gas, heat and electricity on the basis of real prices of services. But absence of a regulatory basis allowing regulation of the activities of natural monopolies was a clear restriction. The legislative basis appeared only by the end of 1998 with the adoption of the following documents: the 'Law on natural monopolies', 'Cost composition to be used for pricing the goods and services of natural monopolies', 'Instructions on the procedure of presentation, review, approval and introduction of prices (tariffs) for goods and services of natural monopolies', 'Regulations for establishment and introduction of State register of natural monopolies in RK' and others. Basic components of the regulations are as follows: • Application of special procedure in establishing the cost composition. All natural monopolies are obliged to submit their cost accounting policy to antimonopoly organs for approval. Also control over purchase and consumption of raw materials, fuel, equipment, use of accumulated depreciation, labour payment, overheads, accounting of expenses in connection with repair and renovation of equipment. • One of the new elements of regulation of natural monopolies' activity is public hearings, for example on issues concerning tariffs for communal services. The participants of such hearings are independent experts, NGOs dealing with the consumer protection, etc. The objective is to develop mutual obligations of the service providers and consumers, especially in those towns and urban settlements where the level of payment collection is exceptionally low. But ultimately tariffs are approved by the Akimats of the towns and urban settlements. • Installation of meters. A possibility for an alternative system of payments against meter readings was introduced in the country. Installation of meters is an obligation of the units of natural monopolies. The monopolies are to use their own or borrowed resources to finance the costs of installing the devices; later these costs are to be compensated via tariffs. By the end of 2002, the following regulatory documents were prepared for approval (reviewed in details and compared with current system of tariff setting in Annex 8): • 'Instructions on tariff calculation based on price cap formula'; • 'Rules on introduction of tariffs based on price cap formula'; • 'Instructions on profit calculation as return on the regulated value of assets (RVA)'; and • 'Rules regulating review and approval of investment programmes of natural monopolies'.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 36 3.2.2 Organisation of the sector Antimonopoly Agency (authorised body) of the RK controls and regulates activities carried out by natural monopolies in the field of water supply and sanitation. According to the legislation of RK such regulation is implemented by: • Setting prices (tariffs) or their maximum level; • Special procedure of cost formation; • Other measures envisaged by the legislation of RK. Figure 7 Organisational structure of WSS system administration in EKO

Akim of EKO

Deputy Akim responsible for economics, Akims of towns and finances and ME

Oblast Directorate of ME and Transport Departments of municipal economy

'Oblzhilcomkhozstroi' 'Oblremproekt'

Companies of various forms of ownership:

Specialised WSS Multi-activity municipal

companies economy companies

The following organs at the Oblast level control WSS sector: Oblast Directorate of Municipal Economy and Transport and Departments of Municipal Economy in the Akimats of towns and regions. In addition there are sub-contracting organisations 'Oblzhilkomlhozstroi' and 'Oblremproekt' involved in project preparation and actual implementation of construction, repair and maintenance work. It is assumed that a new design institute will be build on the basis of 'Oblremproekt', and it will be financed from budgetary funds. This new institute shall undertake supervision functions and be responsible for technical supervision of capital repairs, construction, development of design documentation and implementation of project works. 3.2.3 Approval of prices and tariffs The following special procedures concerning approval (change) of prices and tariffs have been established by the legislation of RK for the services provided. • First of all, a natural monopoly submits to the authorised body an application and draft prices and tariffs. • The submitted draft prices and tariffs are considered by an authorised body. • An authorised body makes an examination of draft prices and tariffs. It may involve independent experts, state organisations, including those representing consumers and the companies themselves, into appraisal process, and prepare a preliminary conclusion relating to the prices and tariffs for services. The authorised body has the right to organise public hearing of submitted draft prices and tariffs. • Approved tariffs must cover the cost of production inputs required to provide services, and must take into account the profit. When establishing the level of profit it is

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 37 necessary to take into consideration resources required for infrastructure development. Later the reasons of incompliance with estimated level of profit should be analysed (should there be incompliance), as well as the purpose they are used for. • Prices and tariffs for services provided by the natural monopolies may be reviewed once in a quarter, not more often. Figure 8 Control and regulation of WSS sector at Oblast level

Akim of EKO

Deputy Akim responsible for Oblasts' economy, finance and ME

Oblast Directorate of ME and Transport

Authorised bodies Akims of towns & oblasts

Territorial Agencies of Antimonopoly Agency Departments of of RK Municipal Economy

WSS companies of various forms of ownership

As it was mentioned above, the companies submit draft tariffs to the authorised body for approval. From the illustration it is clear that territorial organs of Antimonopoly Agency and Akimats of towns and regions may represent such authorised body. Oblast Directorate of ME and Transport coordinates the activities of the sector and report to the Oblast Deputy Akim responsible for economy, finances and ME. Actual levels of cost recovery differ in different WSS companies. On average, tariffs for services allow WSS companies to finance current (operational) costs. But some WSS companies have to run deficit (accounts payable are much higher than accounts receivable). The lack of working capital often means that WSS companies have not sufficient financial resources to spend for capital repairs (repairs). The budget allocates certain funds for capital repairs, but it is hardly sufficient to maintain the system. Financing of capital expenditure is done both by the local budgets and the Oblast budget. Funds for the activities of target programme 'Clean water' ('Drinking water' since 2002) are allocated via the COB and, partially, Republical budget. The figure below schematically illustrates financing of current and capital expenditure.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 38 Figure 9 Mechanism of tariff and budgetary financing in the WSS sector

Oblast Budget Authorized bodies (Territorial organ of Antimonopoly Agency or/and City Akimat) Financing of capital expenditure via special budgetary programs, etc.

Approved Cover Tariff tariff. running Local budgets application Basis: costs and costs justification of the previous Cover period capital costs Financing of capital expenditure

WSS and multi-activity municipal economy companies

3.2.4 Special regional investment programs 'Clean water' and 'Drinking water' The Programme 'Clean water' which is to be implemented within 1999 – 2003 was approved by Akimat of Eastern Kazakhstan oblast in 1999. The Oblast Financial Directorate, Akimats of towns and regions were asked to envisage financial resources in their respective budgets for implementation of activities stipulated by the programme. The programme envisaged 434,5 million tenge for construction, reconstruction and repair of WSS installations over the period 1999-2003. Over the period 1999-2001, the total of 210,2 mln. tenge was invested. The substituting programme 'Drinking water' (2002-2010) was developed and approved in 2000, which included activities, which were not completed within the framework of the previous programme. Currently existing procedure for the development of programmes should be optimised. In the illustration the left side reflects existing situation. WSS companies submit applications to the Oblast Directorate of ME and Transport to be considered for co-financing by the CBO and Republican budget. Very often due to the lack of labour force the Directorate only compiles the received applications and calculates required total volume of financing. Optimisation of target programme development procedure (right side) implies separation of functions on analysis and optimisation of projects and design of technical documentation.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 39 Figure 10 Existing and suggested procedure for the development of target programs in the WSS sector of EKO Provision of population with water of required quantity and guaranteed quality Development/Target Programmes Development/Target Programmes (present) (future) Oblast Directorate of ME and Transport Oblast Directorate of ME and Transport Compilation of the acquired data 1. Department for analysis and optimization Calculation of the total financing of the investment projects (2-3 people)

2. Department for analysis and development of technical project documentation (2-3 people) Submitting applications for financing, Submitting applications for financing, projects preparation, etc projects preparation, etc Municipal economy companies Municipal economy companies

So, after the procedures have been optimised the Oblast Directorate of ME will be able to tackle the following tasks: • To form a long list of projects on the basis of applications submitted by towns and regions accompanied by feasibility studies • To assess and rank proposals according to established criteria and priorities • To develop project documentation for priority projects • To make decisions concerning budgetary investments in medium- to long-term perspective As it was mentioned above, 'Rules regulating review and approval of investment programmes of natural monopolies' and accompanying it 'Annexes on economic and financial assessment of the investment programme efficiency' were prepared for approval by the end of 2002. Most important implications of these documents for future target programme development are: • Requirements to obligatory evaluation of economic efficiency of investment include calculations of the cost optimisation/minimisation potential, reduction potential for the normative and extra-normative losses, potential for the improvement of the quality of services and improvement of the reliability of the system. • Requirements to monitoring the programme implementation: comparison of forecasted and achieved volumes of services provided, costs of services, financial result. It is expected, that under development of the future target programmes in WSS sector much more attention will be given to the cost-saving and optimisation effects of investments than presently can be observed. 3.3 Macroeconomic development and budgetary expenditure Analysis of economic situation in the region is an important factor for establishing the level of future financing in the sector of centralised water supply and sanitation. Budget revenues depend on the growth of the regional economy, which in its turn means that communal sector gets more support from the budget.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 40 3.3.1 Macroeconomic review of EKO External factors in 2000 and 2001 had a favourable impact on the development of economy in Kazakhstan. This was expressed not only by international market opportunities but also by restoration of earlier lost ties with companies of NIS, and first of all of Russian Federation. Russia, as in former times, remains to be the main commercial partner of Kazakhstan, holding a leading role in both export (20.2% of total volume in 2001) and import of goods (45.5% in total volume). Growth of direct investments in fixed capital exceeded 1 billion USD a year. Eastern Kazakhstan was and remains to be one of the most important industrial regions in RF with developed mining and metallurgical industries. Mineral resources industry makes 10.4% of total volume of industrial production in the region. The volume of production of mining and metal processing sectors is 45.1% of the total volume of industrial production and increased by 13,6% in 2001 compared with 2000. This increase is explained by the growth of non-ferrous metal production (by 13,6%), which contributed to price levelling. In Eastern Kazakhstan oblast there are facilities for zinc production, namely in Ust-Kamenogorsk and Leninogorsk that belong to 'Kazzinc' company – the largest producer of zinc in Kazakhstan. In the structure of gross regional product the share of industry is 35%. Annual growth of the share of industry in GRP in 2001 is 112.3%. These two indicators are very close to the share for entire Kazakhstan. Industrial structure of GRP in Eastern Kazakhstan is shown on the diagram below. Figure 21 The structure of GRP of EKO in 2001

Agriculture 10%

Industry 35% Other services 23%

Construction Transport and 5% telecoms 12% Trade 15%

Source: Regional statistic yearbook of Kazakhstan Recent years show a tendency of reduction in the share of the construction sector. It is connected with considerable reduction of construction activities in the region and, first of all, construction of housing for population. The agricultural share remains stable, growth was noted in 2001 that can be explained by favourable climatic conditions for plant growing. Notable changes in the GRP structure is not expected for the coming few years. Table 53 Dynamics of GRP in Eastern Kazakhstan oblast, 1997-2001 1997 1998 1999 2000 2001 Indicator

GRP, mln.tenge 155,5 168,7 191,6 212,6 241,2 Actual change of GRP, % n.a. 1,2 5,6 -2 5,5 GRP in EKO per capita, thd. tenge n.a. 109,1 125,6 141 162,3 Weight of GRP in GDP, % 10,1 10,8 10,6 9,2 8,2

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 41 1997 1998 1999 2000 2001 Indicator

GDP per capita, thd.tenge 109 115 135,1 174,9 221,5 Actual change of GDP, % n.a. -1,9 2,7 9,8 13,2 Exchange rate, tenge/USD 75,4 78,3 119,5 142,1 146,7 Source: Regional statistic year-book of Kazakhstan

Real change of GRP confirms that dynamics of real GRP change depends very much on the changes taking place in world market for non-ferrous metals (rise in 1999, decline in 2000, and again a rise in 2001). At present non-ferrous metal sector is operating at its maximum capacity, which excludes opportunity for quick growth of GRP in coming years, i.e. means stable insignificant growth of GRP under the conditions of sustainable economic conditions in the country. The region is among leaders in contribution of their GRP to consolidated GDP of the country (e.g., in 2001 the region took fourth place after Almati, Atyrau and Karaganda regions). GRP per capita in Eastern Kazakhstan is far behind the level for the Republic and in 2001 was equal to 1110 USD that makes 73% of GDP per capita in Kazakhstan. 3.3.2 Consolidated budget of the region In 2001 the revenues of consolidated oblast budget (COB) increased by almost 17% in nominal value. However, according to more accurate data a decline of budgetary revenues is expected in 2002. This is explained by a general decline of the economic activity that started by the end of 2001. Budget revenues expressed in USD will also considerably decrease. Table 64 Revenues of consolidated budget of Eastern Kazakhstan oblast in 2001 Indicator 2001 Total levied taxes to the COB of EKO, mln.tenge 44 100 in % of GRP 18% Total revenues of COB in EKO, mln.tenge 26795 in % of GRP 11% Levied taxes to the COB of EKO, tenge/pers/year 30 000 Levied taxes to the state budget, average RK, tenge/pers/year 43 000

Source: Financial department of regional administration in EKO Levied taxes in EKO were 18 % of GRP in 2001; in Republic this level comprised 22% of GDP. Since EKO is leading by its contribution to GDP, the share of the levied taxed in GRP should be higher or equal to the share of the levied taxes in GDP. Significance of this difference is obvious when comparing the levied taxes to the COB of EKO per capita and the average Republican level (the latter is 30% higher than in EKO). GRP per capita of EKO is slightly behind the average level in RK, while the level of tax revenues per capita is considerably lower in EKO. This indicates that there is a reserve in the growth of own budget revenues in EKO. Revenues of consolidated budget of Eastern Kazakhstan in 2000-2001 were 10% of GRP. Transfers from federal budget made 9,4% of COB, the rest were own revenues. Table 75 Mactoreconomic developent and consolidated budget revenues in Eastern Kazakhstan in 1999-2001 Indicator 1999 2000 2001 Gross regional product (GRP), mln.tenge 191,6 212,6 241,2 Revenues of consolidated budget (COB), mln.tenge 17331 25892 30459

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 42 Indicator 1999 2000 2001 COB in % of GRP 9% 12% 12,6% Own revenues in % of COB 97% 86% 88.0% Federal transfers in % of COB 1,8% 13% 9,4%

Source: Financial department of regional administration in EKO Oblast budget (as opposed to the consolidated oblast budget) is shown in the table below. Table 86 Revenues and expenditures of oblast budget in Eastern Kazakhstan in 2001 Indicator 2001 Revenues of oblast budget, mln.tenge 16 921 - % in GRP 7% - Including: own revenues, mln.tenge 13 934 Expenditures of the oblast budget, including earmarked funds, mln.tenge 16 014 Capital investment into WSS sector, mln.tenge: 98,4 in % of oblast budget expenditure (0,6%) in % of GRP (0.04%)

Source: Akimat of the region 3.3.3 Budget financing of the water sector All costs of WSS companies are divided into current and capital costs. Current costs are covered by tariffs established for the services provided. Costs for capital repairs are also foreseen in tariff, but due to the insufficiently high tariffs these costs are not sufficiently financed. Budgetary resources are allocated for financing of a share of capital repairs and new construction of the WSS companies in EKO. Financing is provided by budgets of all levels: republican, oblast and local budgets. Budgetary resources directed to these activities in 2001 from the budgets of all levels are shown in the following table, which also demonstrate them as a share of the consolidated oblast budget (COB). Table 97 Structure of consolidated budget expenditure: financing of capital expenditure of WSS companies in EKO and their share in CBO, 2001 Indicator 2001 Expenditures of COB, mln.tenge 29218 Total budgetary financing of capital expenditure for WSS, including: 226,1

- capital expenditure for WSS in expenditure of communal services (local budgets: city 20,7 and region), mln.tenge (0,07%) - financing of capital expenditure for WSS within the frames of programme 'Clean water' 98,4 (oblast budget) , mln.tenge (0,34%) - financing of WSS from the Republican budget , mln.tenge 107 (0,4%) Source: Administration of East-Kazakhstan oblast In 2001 the, budgetary capital expenditure for municipal services comprised 2% of the consolidated budget of East-Kazakhstan oblast. Capital expenditure for water sector were 0,41% of total consolidated budget costs or 20% of budgetary capital expenditure for municipal services. The Oblast budget provided financing for the programme 'Clean water' in the period of 1999- 2001 (as of 2002 - within the framework of the programme 'Drinking water').

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 43 Figure 32 Financing 'Clean water' programme from CBO in 1999-2002, million tenge

180 160 140 120 100

80 160 60 98,4 40 77,8 20 34

0 1999 2000 2001 2002

Source: data provided by the Department of municipal housing economy and development of roads Attention to water sector has been increasing in the recent years. It is confirmed by the positive dynamics of budgetary expenditure in the sector. 3.4 Financial situation of water supply and sanitation companies In connection with reforming of the sector that was carried out in mid 90-s, the following two conflicting dilemmas emerged in the sector: • Full-scale financing of current and capital needs, and • Acceptable tariffs for water supply and sewerage services for the population. At the root of this conflict is the unprofitable production that historically originates from excessive production capacities, lack of economic and administrative incentives for scheduled optimisation of production and end-use consumption, high cost levels, as well as low level of income of population. Financial and economic problems that need to be solved in this respect are connected with a number of current regulations and procedures in the sector: • The existing system of review and approval of costs and tariffs; • The existing mechanism for evaluation of affordable service level and targeted financial support to the population; • The existing procedures for accumulation and resolving of financial liabilities of suppliers and consumers. The figure below shows the interrelation between the said objectives and current regulations and procedures. Their collision leads to financial and economic problems. For example, the existing system of cost composition approval assumes that future costs are similar to those in the previous reporting period. Thus, in the situation of working capital deficit, when the actual need is higher, the company has to choose between various expenditure; prioritising direct operational needs usually result in under-spending on another approved line of expenditure. Capital repairs are out-prioritised most often.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 44 Figure 43 Regulations and procedures in WSS tariff building in EKO

MainÎñíîâíûå objectives

Full financing of current and capital needs Affordable for population tariffs of a cost-intensive infrastructure for WSS services

Resulting financial and economic problems

System for tariff and cost Schemes of population Procedures for settling the

structure review and subsidization financial liabilities with approval consumers & suppliers

Approved current regulations and procedures

T he main problems existing in the water supply and sanitation sector in EKO that have to be resolved in short-term and medium-term perspective are described below. 3.4.2 Composition of costs and tariffs The present system for covering current and capital costs The principles and procedures for establishing and reviewing the tariffs in the sector have already been described. Each company presents a draft tariff to the authorised body for examination. The authority conducts public hearings, consultations, and eventually approves the tariff in more or less modified version. The basic structure of financing of WSS companies is common: • The WSS utilities are allowed to compensate justified production costs and generate limited profit on the expenses (formula 'cost plus a regulated profit margin'). Basically it is the so-called 'economically justified tariff'. • Currently budget subsidization of the household tariff is terminated in the oblast, as well as in the entire republic. Cross-subsidization of the population by the other consumer groups still exists on a minor scale and not in all WSS companies. Thus, the tariff for the population is formed on the basis of common principles of tariff formation in the sector. • There is no differentiation of the household tariff for different consumer categories. Each individual consumer may apply to social welfare institutions for the targeted financial support. If the communal services bill exceeds 25% of the aggregate household income, the household is entitled to apply for such a support. • Scheduled capital costs can be included in the cost structure for approval. However, due to a quite usual shortage of working capital, the capital provisions often get sacrificed for the sake of financing more urgent expenditure. Therefore, capital costs are mainly financed by subsidies from various levels budgets or by own or loan funds of the company. • The amount of budget funds allocated for capital financing is insufficient. In 2001, the total capital financing in the sector was around 266 million tenge.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 45 Production costs and tariff coverage The structure of costs for WSS services in a number of companies in Eastern Kazakhstan is presented below. Figure 14 Structure of average production costs in water supply in 2001

labour remuneration and charges electricity other operational cost 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Shar Ridder Ayagoz Zaisan Zyrianovsk Serebryansk Semipalatinsk UK Vodokanal Uk Novaya Sogra

Source: based on information from WSS companies Electric power and wages with payroll fees are the most significant expenditure items. Expenditure items that could bring long-term benefits for the operation, for example, maintenance, capital repair and modernization of fixed assets are under-financed. Figure 15 Structure of average production costs in sanitation in 2001

labour remuneration and charges electricity other operational cost

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Shar Ridder Ayagoz Zaisan Zyrianovsk Serebryansk Semipalatinsk UK Vodokanal Uk Novaya Sogra Source: based on information from WSS companies The cost of WSS companies are not fully covered in the approved tariff. The legislation justifies full cost recovery, however, the actual tariff covers about 70-80% or declared cost. Water losses exceeding the set norms and unaccounted water use cause further decrease of the actual cost-covering ratio. As a result, the population is billed for just 45-75% of the operational and selling andadministration costs.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 46 Figure 16 The mechanism of development of financing deficit at WSS companies, as reported by WSS companies

WATER LOSS : 1) Billing based on

100% Tariff Tariff examination Approved unbalanced consumption rates (low proposal: and approval 'working' coverage by water meters, about 10%); procedure tariff (cost + profit 2) Commercial losses; 3) Losses in the margin) 70-80% network exceeding the set norms

Decrease of Decrease of cost coverage by cost coverage 20-30% by 15-25%

Actual cost coverage for operation and compensation for replacement of fixed assets in the tariff for population 45-75%

Note: the collection issue is not included here Source: based on information from WSS companies Figure 17 Cost recovery in the household tariff in 2001, % of the economically justified cost as reported by the WSS companies

120%

100% Water supply Sewerage 80%

60%

40%

20%

a e

a a

k k y

k o

h k

s s

n n

k v

n v

a h

o i

a c

p r

a n r

o i

l a

k b

d a

a i

o y

a i

y K e

Source: based on information from WSS companies The future system of tariff formation for water supply and sewerage services

The new regulations on price-cap tariff formula and RVA-based profit margins for natural monopolies mentioned in section 3.2.1 have a number of cardinal differences from the current tariff formation system. The RVA-based profit margin seems to be most applicable to WSS companies in the nearest future.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 47 The 'Instructions on profit calculation as return on the regulated value of assets (RVA)' aims at promotion and encouragement of efficient investment policies. The following are main requirements of the instruction: • The permissible profit level is determined as a product of the profit rate and the regulated value of employed assets (RVA) • RVA directly depends on the coefficient of employed assets (defined by the actual production/ used technological capacity). The coefficient of employed assets will be determined by the WSS companies and is approved by the regulating authorities. • The regulated value of assets is determined on the basis of the residual value of fixed assets revaluation by independent institutions selected on a tender basis. • The profit rate is calculated by the method of accounting for investment risks in the given sector of economy. This method inter alia accounts for technological risks that characterize actual wear of the infrastructure and the probability of incidents More information on the presently applied and the envisaged systems of tariff building is presented in Annex 8

3.4.3 Household affordability and targeted housing subsidy

Increase of tariffs for water and sanitation is a very sensitive issue for the local politicians. Tariffs differ much in different towns of the oblast (see the figure), and their level is directly related not only to the cost of the provided service, but also to the affordability of population in each given town and urban settlement.

Figure 18 Monthly WSS bill per person, tenge/person/month in 2001

250 Water supply

200 Sewerage

r 150

s 100

e t 0

r m

a e

g u r

o h

y e

y r

Source: based on information from WSS companies

Demographic situation in EKO The population of Eastern Kazakhstan is about 1.5 million. Average density of the population in the oblast is 5.3 persons per sq. km, which is less than the average population density in Kazakhstan (5.5 persons per sq. km) and adjacent countries (for example, 6.8 persons per sq. km in Russia). Natural population growth rate is decreasing in Eastern Kazakhstan as well as in the republic due to decreasing birth rate. Natural loss of population is aggravated by emigration. About 20.000 people moved out of the oblast in 2001, three times as much as the number of immigrated.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 48 The share of urban population remains virtually the same in the recent years- around 58.7%. It is somewhat higher than the average value for Kazakhstan, i.e. 56.1%. Ust-Kamenogorsk (300.900 residents), Semipalatinsk (267.100 residents), Leninogorsk (54.100 residents), Zyrianovsk (42.100 residents), Ayagoz (38.200 residents) are the largest towns of Eastern Kazakhstan. The total urban population makes 872.700 inhabitants. Income and expenditure of the population The oblast average monthly wages in 2001 was 16.548 tenge. The average monthly pension at the end of 2001 made 5 454 tenge, or approximately 37 US dollars,. The figure below shows the average monthly wage per employee in oblasts of RK as a share of the national average. For EKO it is 95%, that means that the average monthly wage per employee is almost equal to the average value for Kazakhstan, which was 17.364 tenge in the end of 2001. Figure 50 Comparison of wages in the oblasts of RK in 2001, % of average RK wage

250% 224% 220%

200%

150% 130% 136% 120% 100% 98% 95% 92% 100% 79% 73% 72% 63% 66% 66% 66%

50%

City of AlmatyCity of Astana AlmatinstayaAtyrauskaya O. O. AkmolinskayaAktiubinskaya O. O. Kustanaistaya O. Pavlodarskaya O. Zhambylstakya O. Kyzilordinskaya O. Eastern Kazakhstan Karagandinskaya O. Western Kazakhstan NorthernSouthern Kazakhstan Kazakhstan Mangistauskauskaya O.

Source: Regional Statistical Yearbook Estimated values of average monthly wages in towns and districts of the oblast are shown in the table below. Table 18 The average monthly nominal wage in towns and districts of EKO in 2001 Town or district Average monthly nominal wage Average value in the oblast 16 548 tenge Towns Ust-Kamenogorsk, Leninogorsk, Borodulikha District 21 000 tenge Zyrianovsk District 16 500 tenge Town Semipalatinsk, districts Glubokoe and Shemonaikha 13 500 tenge Districts: Abai, Ayagoz, Ulansk, Zharminsk, Kurchum 10 500 tenge Districts: Beskaragaisk, Zainansk, Katon-Kargaisk, Kokpekti, 8 250 tenge Tarbagatai, Urdzhar Source: the Regional Statistical Yearbook As one can see from the table, the territorial difference in the wage levels is rather substantial. Especially low wage level is a distinctive feature of the former Semipalatinsk Oblast. There is a regular difference between rural and urban areas. According to data of the Oblast Statistical Yearbook, average per capita income used for consumption was 6.613 tenge or about 43 US dollars per month in EKO in 2001. It is 9.5% more than the corresponding national average. Supposedly, the AHIC used for consumption is higher in urban areas of the oblast. However, no supporting data was available.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 49 In 2001 the real monetary income growth was registered at the level of 1.5%. The historical dynamics confirms the assumption that the real monetary income growth in EKO exceeds the corresponding national growth rate. Table 19 Growth of real monetary income in EKO and RK in 1997-2000 Indicator Growth of real monetary income 1997 1998 1999 2000 Eastern Kazakhstan 122.6 106.3 101.9 102.8 Republic of Kazakhstan 102.4 99 104.2 103.2 Source: the Regional Statistical Yearbook According to the 2001 survey data from 1380 families, consumers' expenditure constituted over 95% of all household expenditures. Food expenses accounted for more than a half of the household expenditure, while communal services payments, including those for WSS, made up 13.4 % (data for the 3-rd quarter of 2001) for both rural and urban population. Affordable demand for services of WSS companies No approved method of affordability evaluation exists in EKO. However, there are certain experience and approaches to evaluation of the average level of AHIC of the population and its willingness to pay. For example, analysis of the average nominal wage in economic sectors is used to identify the structure of the AHICs. Analysis of household income by means of a sample survey in Eastern Kazakhstan was not carried out in recent years, which makes it impossible to produce a realistic estimate of affordability for different groups of the population. In EKO, the average monthly household WSS bill (including VAT) made up 1.81% of the average household income used for consumption (AHIC) in 2001. This index was less in 2002 (estimated value 1.75% in 2001 prices) because VAT rate was reduced from 18% to 16% and real income of the population grew by 3%. This share is expected to be even less for urban population of the oblast. However, data were not available to substantiate this assumption. Under the following assumptions: • The average income in towns of EKO included in the survey is equal to the average per capita income in EKO; • The household income distribution in the selected EKO towns in 2001 was similar to the corresponding national distribution in the Republic of Kazakhstan in 2000; and • The average WSS bill including VAT in the sample towns and urban settlements was 120 tenge in 2001; the estimated level of affordability of the population can be presented as shown below: Table 100 Affordability of WSS household bill by income groups, 2001 Average household income Share of population* Share of WSS bill in Share of the average used for consumption AHIC communal services bill (AHIC) in AHIC Below 5 000 tenge 33.1% 3.43% 25.3% 5 001 - 8 000 tenge 43.7% 1.85% 13.6% 8 001- 11 000 tenge 14.8% 1.26% 9.3% 11 001-14 000 tenge 4.8% 0.96% 7.1% 14 001-17 000 tenge 1.9% 0.77% 5.7% 17 001-20 000 tenge 0.7% 0.65% 4.8% Above 20 000 tenge 1.0% 0.38% 2.8%

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 50 * Based on the distribution of population income by deciles on average in Kazakhstan in 2000 The analysis indicates that in 2001 the WSS bill including VAT was over 3% of AHIC for about 1/3 of the population. However, for 2/3 of the population the WSS bill was less than 1.5% of AHIC. The data on household income were adopted from reports of the oblast and republican statistics departments. Some officials of the Oblast Akimat expressed their concern that the used average household income values may be somewhat overstated. However, determining the actual level of income of the population is beyond the scope of this analysis, and, therefore, official statistical data were used for reference. Poverty issue According to the official statistical information, just over 16% of population of EKO was below the poverty line in 2001. However, there are reasons to assume that this indicator is understated. The share of population with income below the minimum subsistence level was 23.8 % in the 1-st quarter of 2002 and it tended to grow. Thus, this indicator was 22.1% in 2001, 23.8% in the 1-st quarter and 25% in the 2-nd quarter of 2002. The official personal minimum subsistence level was just over 30 US dollars in the oblast in 2001, the absolute poverty level according to the World Bank definition. This fact confirms that the issue of poverty and, consequently, affordability of communal services is very pressing in EKO. In compliance with legislation of RK 'On governmental targeted social support', this monetary payment is provided by the government to individuals (or households) with an average monthly income below the poverty line established in the oblast. The targeted housing subsidy is one kind of the targeted social welfare support and it covers services of WSS companies, as well as other communal and housing services. The mechanism and level of targeted housing subsidy At present the current system of targeted social support covers a number of areas, namely: welfare allowances for children, housing subsidy, birth allowances, burial allowance and the unemployment benefits. The total targeted social support made up 699.5 million tenge, or 2.4% of the consolidated oblast budget (COB) in 2001. All together, 91.473 persons received targeted social support in 2001, or 6% of the population of EKO. Housing social subsidy is paid to the households whose payment for housing and communal services exceeds 25% of their aggregated household income. According to data from the Economic Department of EKO, in 2001 67.9 million tenge or 0.24% of COB expenditures was paid in targeted housing subsidy to 13.114 persons or about 1% of the population of EKO. In 2001, with the estimated level of an average oblast monthly bill for communal services of 900 tenge, all residents of the oblast having average monthly income below 3.500 tenge per month should have received the housing subsidy. Judging by the distribution of the population by income levels in the table above, in 2001, the share of the population with a monthly income below 3.500 tenge was at least 10%. Therefore, a very low share of the population who received the housing subsidy in 2001 demonstrates either a poor quality of the data or shortcomings of the housing subsidy distribution mechanism.

3.4.4 Financial obligations in WSS sector

Level of payments collections The bills for communal services are issued separately for those organisations consuming by norms and to those consuming by meters. Calculation of household payments is carried out in a similar way. The payments are transferred to the WSS companies' banks or alternatively are done through cash-and-clearing centres of the Customer Service of the WSS companies.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 51 Sometimes controllers collect payments from the population and hand over the revenue to the cash office of the company. Companies are divided into two groups in the table below. The first group may be conditionally called 'well-off' in payment collection practices (rolling collections, advance payments, settlement of accounts receivables, etc.) for all groups of consumers. The second group includes companies with low collection rates. Table 111 Collection rate for WSS payments by consumer groups in 2001 Town / Group of consumers Population Companies and Industrial companies institutions financed from the budget The 1-st group Ust-Kamenogorsk 90.3% 48.8% 134.4% Semipalatinsk 116.6% 130.5% 157% Zyrianovsk 113,5% 88.2% 101% Borodulikha 145% 103% 143% Serebriansk 124% 131.3% 113.9% Ridder 117% 86% 105% Ayagoz 100% 92.5% 72.2% The 2-nd group Glubokoe 59% 100% 100% Samarskoye 66% 97.4% 98.8% Kurchum 70% 80.6% 95.5% UK Novaya Sogra 82% 87% 56% Kokpekty 35% 45% -

Source: based on information from WSS companies In both groups, however, there are examples of low collection rate. The reason is a lack of efficient enforcement mechanisms, such as, for example, alienation of property to cover liabilities or disconnections. Regarding the structure of the collected payments, the share of non-monetary settlement for communal services (mainly mutual offsets) remains rather high. According to some estimates it reaches 30%. Accounts payable and accounts receivable The sizes of accounts payable and accounts receivable for WSS companies in EKO differ substantially. For example, in 2001 accounts receivable for Semipalatinsk Vodokanal was almost 150% of the collected income. While for Novaya Sogra Vodokanal (Ust- Kamenogorsk) this indicator was only about 8%. The maturity of the major part of the receivables is under 3 months; that means that the bad debt is minimal. Population and other consumers (the industrial sector, construction sector, etc.) occupy two leading positions in the structure of accounts receivable.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 52 Figure 61 Structure of accounts receivable of WSS companies in 2001

Population Budgetary organisations Other consumers (industry, trade, etc.) 120%

100%

29% 80% 1% 60%

40% 70%

20%

Source: based on information from WSS companies The misbalance of price formation methods in natural monopolies may explain the considerable share of the outstanding debt to suppliers and contractors in the accounts receivable. The WSS tariff adjustment typically lags behind (by time and level) the tariff adjustment for the main production inputs of the WSS companies, for example, electric power.

Taxes and mandatory payments to budgets of various levels is the largest component in the accounts payable.

Figure 72 Structure of accounts payable in WSS companies in 2001

Suppliers and contractors Labour and remuneration Taxes and charges

120%

100%

80% 36%

60% 12%

40%

52% 20%

0% 1

Source: based on information from WSS companies In 2001, the accounts payable of WSS companies of EKO was much higher than the accounts receivable - by approximately 1.5 times. Presence of large accounts receivable and priority payment for electric power impose additional pressure on the cash flow. In this situation the funds that are originally intended for capital repairs are often used for payment of urgent bills for electric power and for wages.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 53 4 Forecast of the long-term demand for finance in the WSS infrastructure under the baseline scenario

General financing requirements of the WSS sector include capital expenditures for new investments, operation and maintenance of the newly constructed facilities, as well as the operation and maintenance of the existing infrastructure. Yet, to begin with, it is important to estimate the development of WSS infrastructure under 'no policy changes' assumptions and to simulate the baseline scenario for expenditure and service level, which will serve as a reference point for for the other scenarios. The financing requirement was calculated as a cash flow. This means that depreciation is not qualified as a cost item. This section contains a description of the development of the baseline scenario including discussion of the general principles and assumptions. Furthermore, estimates of the financing requirement and availability of financial funds in the baseline scenario are presented. It is worth mentioning that the baseline scenario is not an attempt to forecast the future development of the WSS sector. It is just a prediction of necessary annual expenditure and expected revenues made on the basis of a number of agreed assumptions. Definition of the initial situation, which will serve as a basis for determining the main measures to decrease the financing gap, is the primary purpose of this scenario. The baseline scenario developed for the water supply and sanitation sector in 22 selected towns and urban settlements covers a population of about 860 000 persons. A comparative analysis of the financing requirements for measures on operation and maintenance of these systems and capital expenditures for extension of the production facilities, and of expected revenues was carried out on the basis of existing WSS tariffs in these towns. In order to carry out such an analysis, a time interval of 10 years, from 2003 to 2012, was used. 4.1 General approach to defining scenarios Generally, a developed strategy or a set of objectives, for example on the service provision, was the basis of preparing a cost estimate for the sector. These objectives can be translated into necessary technical measures, for which the costs are estimated. In the context of this financial strategy, the process of determining necessary capital expenditures was divided into two different steps: • Which facilities need to be operated and maintained and when; in other words, the set of objectives was presented as a strategy for capital repairs and reconstruction of the existing facilities. These can be, for example, new wastewater treatment facilities in specific towns, extension of coverage of the population by WSS services, etc. • The required capacity of various facilities. The required capacity of new facilities has a serious effect on the cost estimate. Alteration of production parameters of existing facilities and equipment (for example, when the design capacity is too high) impacts only on the cost estimate when they are carried out during modernization or replacement of facilities or equipment. Implementation of these steps will allow developing an investment plan for the sector. Then a cost estimate can be made on the basis of the investment plan for the sector. Baseline scenario is therefore is a reference point against which the improvements of service level and additional required finance will be evaluated.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 54 4.2 Objectives to be analysed under different scenarios The objectives used as a basis for evaluating the financing requirement include two main elements: • Restoration and ensuring operational reliability of the engineering infrastructure and WSS facilities by means of gradual replacement of retired assets with new and more efficient equipment during the next 10 years. This means gradual improvement of the functioning of the system. • Construction, operation and maintenance of new facilities of special importance. It is important to note here that the baseline scenario reflects none of these objectives. The baseline scenario is just the reflection of the current situation with operation and capital cost financing, extrapolated into the future by using official policy statements like 'Drinking Water' programme. The costing of the forenamed objectives will be analysed in comparison with the reference baseline scenario in the later chapters. 4.3 Required capacity of facilities Installed and actually utilised capacity if the WSS infrastructure served as a starting point for evaluation of the future required capacity. For modelling purposes, the indicative level of future required capacity of WSS infrastructure was fixed at the level of forecasted volumes of water intake and wastewater discharge. As water intake volumes were the key values for calculation of the required capacity, the accuracy of these data was very important. However, the data leaves much to be desired even after a long analysis and expert evaluation and verification of the data provided by WSS companies. The figure below shows quantities of water intake per capita of population, split into consumption, losses and internal use of water in 2001 according to data provided by WSS companies of the oblast. Figure 83 The distribution of abstracted water by internal consumption, losses and final consumption, measured per connected population in 2001, lcd

Internal consultion Distribution losses Household consumption Non-household consumption

2.000

1.800

1.600

1.400

1.200

1.000

800

600 lcd (registered population) 400

200

- Karaul c.Zaisan v.Aksuat v.Akzhar c.Radder v.Kokpekti v.Kurchum v.Glubokoe c.Nov Sogra c.Nov v.Molodezhni c.Ziryanovsk v.Samarskoe v.Borodulikha v.Pervomajski v.N.Bukhtarma c.Serebryansk v.Bolshenarym v.Shemonaikha c.Semipalatinsk v.Vladimikrovka c.Ust-Kamenogorsk

Source: based on information from WSS companies

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 55 4.4 Cost functions As in the capacity calculations, calculation of costs for capital repairs of existing facilities was carried out on the basis of cost functions that were determined for all main types of facilities in the water supply and sanitation system. Cost functions allowed determining the mean ratio of productivity of a facility, for example, a water treatment station, and specific capital expenditures corresponding per unit of output. By multiplying capital costs per unit of output the value was determined for the total investment costs for construction of this particular facility. Cost functions were developed for the following types of facilities: 1. Water intake facilities, including: - Boreholes and abstraction groundwater pumps; and - Surface water intake stations and surface water pumps. 2. Water treatment facilities (water conditioning): 3. Water reservoirs; 4. Pumping stations (second lift); 5. Water supply networks; 6. Wastewater collectors; 7. Wastewater pumping stations; 8. Wastewater treatment plants (WWTP) Cost functions are successfully used in Western Europe for assessment of various types of WSS facilities. However, costs of such facilities in the towns of Eastern Kazakhstan differ considerably from costs of Western European companies. The approach used during the preparation of the present financing strategy implied adjustment of western cost functions based on specific investment costs per unit of capacity of various types of WSS facilities to EKO conditions. 4.5 Cost estimates for operation and maintenance of existing facilities in the baseline scenario with no policy changes ('no change' scenario) 4.5.1 Program 'Drinking Water' During 2001 the Directorate of ME and Transport of the EKO Akimat submitted for approval draft Oblast program 'Drinking Water' which included an extensive list of investment projects to be implemented in the housing and communal sector in the period from 2003 to 2010. According to the program, total amount of investment in 2003-2010 will be about 5 billion tenge. It is supposed that 2.4 billion tenge of this sum will be assigned from the consolidated oblast budget (including financing from district and town budgets) and about 2.3 billion tenge will be financed from the republican budget. Approximately 0.3 billion tenge will be supplied from other sources. The funds assigned from the consolidated oblast budget for financing of capital investments in the water supply and sewerage sector in 2001 made up 0.4% of the CBO expenditure. In 2002 this share increased to 0.67%. Assumptions made in the frame of this analysis regarding the future general budget expenditures in the sector up to 2012 are described in more detail in section 4.6.2. The assumptions are based on increased levied taxes up to 20% of GRP by 2007, which will naturally increase oblast budget revenues and expenditures.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 56 Currently the share of CBO revenues assigned to capital investment in WSS is rather small. Even with an increase of budget revenues, if this share remains the same, the funds will be insufficient to finance adequate maintenance of the infrastructure at a technically safe level. And the funds will also be insufficient to finance 'Drinking Water' at the planned level. The diagram shows the dynamics of change in the share of assigned funds from the consolidated oblast budget (COB) to 'Drinking Water' as it planned at present. Figure 94 Financing of 'Drinking Water' programme from COB, % of COB expenditure

1,4%

1,2%

1,0%

0,8%

0,6%

0,4%

0,2%

0,0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Consultant's estimates The diagram shows that the oblast administration plans to increase the financing of the sector by almost three times in the period of 2006-2007 as compared to the 2001 level (from 0.4% to 1.2% of COB) in order to realize planned measures in the period. The share of assigned funds will change sharply from year to year. Total sum of funds that will be assigned from the consolidated oblast budget in the period from 2003 to 2010 will be 2.37 billion tenge. The structure of the program financing can be seen in the following table. It shows the following policy intentions: • A major part of funds from the CBO and republican budgets will be assigned to smaller towns and urban settlements. That means that larger towns will have to base their activities on the tariff to a larger extent; • Budgetary financing of construction of new facilities in larger towns will be provided almost entirely from the republican budget; • Budget financing of reconstruction and modernization will be assigned mainly to WSS companies of smaller towns and urban settlements. Table 121 Structure of budgetary financing of 'Drinking Water' programme, 2003-2010 Item Total budget % of total CBO % of total Republican % of total financing budget financing budget financing financing Total 4622 100% 2377 51% 2245 49% program Sample 1954 42% 836 43% 1119 57% towns and urban settlements Source: the summary of the draft program prepared for approval by the Directorate for ME and Transport in December 2002

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 57 Table 132 Structure of new construction financing from CBO and national budget under 'Drinking Water' programme, 2003-2010 Item Financing of % of total CBO % of Republican % of construction budget financing of budget financing of of new financing construction construction facilities of new of new facilities facilities Total 1093 24% 207 19% 887 81% program Sample 1072 23% 146 14% 887 83% towns and urban settlements Source: the summary of the draft program prepared for approval by the Directorate for ME and Transport in December 2002 Table 143 Structure of rehabilitation and modernisation financing from CBO and national budget under 'Drinking Water' programme, 2003-2010 Item Financing of % of total CBO % of Republican % of reconstructio budget financing of budget financing of n and repair financing reconstructio reconstructio n and repair n and repair Total 3529 76% 2170 61% 1359 39% program Sample large 882 19% 690 78% 232 26% towns and urban settlements Source: the summary of the draft program prepared for approval by the Directorate for ME and Transport in December 2002 If a decision is made at the oblast level to gradually increase the share of assigned funds from the consolidated oblast budget to 'Drinking Water' program to 1.2% by 2007, and to maintain it at that level thereafter, it would increase the financing to 2.93 billion tenge in total (against 2.38 billion tenge planned) for the programme measures during the period from 2003 to 2010. For the sample 22 towns and urban settlements analysed for this strategy, 0.86 billion tenge will be assigned from the consolidated oblast budget and 1.12 billion tenge will be assigned from the republican budget for capital investments under 'Drinking Water' programme in the period of 2003-2010. 1.07 billion tenge is planned for construction of new facilities and 0.88 billion tenge is planned for reconstruction and modernization. 4.5.2 Evaluation of asset replacement values of WSS companies In order to compare the planned budget financing and the real requirement of capital financing of the existing infrastructure during the next 10 years, the replacement value for the 22 sample WSS companies was estimated. The forecast of financing requirement for the baseline scenario will be based on the costs for capital repair (planned replacement of equipment and repair of existing facilities). The replacement value of existing water supply and sewerage facilities is an important indicator of the value of long-term capital costs for maintenance of existing production facilities. In the long-term, the average investment costs that are necessary for capital repair (maintenance) of a certain facility can be estimated by the replacement value divided by the technical lifetime of the facility (in years). By adding up annual investment costs for replacement of all facilities a cost estimate is made for annual investment expenditure necessary for proper capital repair and maintenance of the existing fixed assets. This calculation method may be not exactly accurate in the short-term perspective. If the system is new, it will not require high costs for repair and maintenance in the first years. On

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 58 the contrary, if the system was not repaired and maintenance was not carried out for some lengthy period, then there is a requirement for considerable amounts of investment for capital repair and reconstruction, and this is the case in Eastern Kazakhstan. The actually utilised capacity of the facilities is another factor determining annual costs of planned replacement of fixed assets. If the designed capacity of the facilities was too high, in future they need to be replaced with facilities of lower capacity that would correspond more to the future demand for services of WSS companies. The cost of replacement of installed and utilised capacity was estimated on the basis of a detailed list of existing facilities. The total replacement value of fixed assets in the water supply and sanitation sector in 22 towns of the oblast was estimated by means of a computer model as follows: Table 154 Estimated replacement value of installed and utilised WSS capacities in 22 selected towns and urban settlements in 2001 Indicator Cost of replacement of installed capacity Cost of replacement of utilised capacity Total, thousand Per 1 connected Total, thousand Per 1 connected US$ resident, US$ US$ resident, US$ Water supply system 103.503 160,0 82.573 127,6 Sewerage system 72.301 137,1 57.793 109,6 Total 175.804 297,1 140.366 237,2 Source: model-based calculations

The residual value of these facilities will be 40-60% of these values as the systems have not been properly repaired and maintained during many years. It is assumed in the scenario that the facilities will be reconstructed gradually in compliance with their expected life-time. Treatment facilities and pump stations are completely depreciated in 20 years, the pumps serve 8 years, well boreholes serve 25 years, and pipes serve 40 years. On the basis of the above one can make a conclusion that the required costs for capital repair of existing systems of the 22 sample WSS companies will constitute: Table 165 Estimated annual scheduled capital repairs for the installed and itilised WSS capacities in 22 selected towns and urban settlements in 2001 Indicator Capital repair of the unchanged installed Capital repair of the unchanged utilised capacity capacity Total in Annually, Annually per Total in Annually, Annually per 2003-2012, thousand 1 connected 2003-2012, thousand 1 connected thousand US$ resident, thousand US$ resident, US$ US$ US$ US$ Water supply 36.044 3.604 5,6 25.757 2.576 4,0 system Sewerage 28.386 2.839 5,4 19.870 1.987 3,8 system Total 64.431 6.443 11,0 45.627 4.563 7,7 Source: model-based calculations There are excess capacities both in the water supply system and in the sanitation system. In the beginning of 2002 the excess installed capacity was approximately 20% of the replacement value. This means an additional annual requirement of 25% – 30% in terms of planned capital repairs as compared to planned capital repair requirements adjusted only for the used capacities. For the time being, there is still an unused potential for production and capacities optimisation. The utilised capacity will be used for assessing the assumed baseline replacement value for further scenario analysis. Different replacement values of used fixed assets in 22 sample WSS companies are shown in the diagram below.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 59 Figure 105 Estimated replavement value of utilised capacities of 22 WSS companies per 1 connected resident by types of infrastructure, 2001, thd tenge

boreholes pumps of ground/surface w ater w ater treatment facilities pumping stations reservours w ater distribution net sew er sew er pumping stations w astew ater treatment plants 180,0 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0 c.Ust- c.Shar v.Karaul c.Ridder v.Aksuat v.Akzhar c.Zaysan c.Ayagoz v.Kokpekti c.Kurchum v.Glubokoe c.Nov,Sogra c.Ziryanovsk v.Samarskoe v.Molodezhni v.Borodulikha v.Pervomajski v.N.Bukhtarma v.Serebryansk v.Shemonaikha c.Semipalatinsk v.B.Vladimirovka Source: model-based calculations

The average structure of replacement values in 22 towns and urban settlements is shown below: Figure 116 The structure of replacement value of the utilised capacities in 22 selected WSS companies by types of infrastructure, 2001, % Water supply Sanitation boreholes pum ps of ground/surface water water treatment facilities pum ping stations sewer sewer pum ping stations wastewater treatm ent plants reservours water distribution net

3% 0% 17% 30%

4% 5% 66% 70%

Source: model-based calculations

The structure of annual requirement for the annual scheduled replacement of assets (capital repair) looks somewhat different: Figure 127 The structure of annual capital repair of the utilised capacities in 22 selected WSS companies by types of infrastructure, 2001, % Water supply Sanitation

boreholes pum ps of ground/surface water

water tre a tment facilities pum ping stations sewer sewer pum ping stations wastewater treatment plants

reservours water distribution net

4% 2%

28% 43% 48%

56 %

8% 9% 3%

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 60 Source: model-based calculations Though water supply and sewerage networks are the most massive and expensive components of WSS infrastructure, they constitute only half of the annual capital repair costs. In order to ensure normal functioning of the system, the other half of the repair funds should be assigned to pump stations, WSS treatment facilities, etc. This is seldom reflected in oblast target investment programs in the sector. These programs are mostly focused on the repair of networks. Subject to a condition that the required amount of funds will be assigned annually for the necessary planned replacement of assets, water intake quantities will decrease against the used water supply system capacities as of 2001. This is explained by the fact that, when changing pipelines, water losses decrease proportionally to the increased length of replaced pipelines. It is assumed in this scenario that water loses will decrease to 10 m3/km/day in the case of quality replacement with new pipes. In 2001 losses in the distribution network in the considered 22 WSS companies ranged between 0.1 m3/km/day in Shar and 105.6 m3/km/day in Semipalatinsk, with an average value of approximately 60 m3/km/day. This is a considerable potential for reduction provided that the worn out pipes will be replaced on a regular basis. Decreased water losses will result in reduced pumping. In the long term, this may result in a decrease of required capacities and capital repair requirements. According to this assumption, the water intake quantity will reduce to 93% of the level of 2001 in the next 10 years. This will result in a further decrease of capital repair requirements in the long term. 4.5.3 Capital repair requirement and budgetary financing By estimates, the cost of replacement of existing assets in the sample 22 towns and urban settlements at the end of 2002 was about 205 billion tenge or 140 million US$ in 2001 prices. This means that the requirement for capital repair will constitute about 5.3 billion tenge (without new construction) in the period of 2003-2010, and programmed budgetary financing of the reconstruction of facilities in the period of 2003-2010 will cover only 17% of the current capital repair requirement. It is evident that the budget finances the most critical parts of the under-financed capital repair of assets of the past years rather than substitution of the currently retiring fixed assets. At the same time, current asset replacement is not compensated for and this debt to the infrastructure is carried over to the future at the expense of decreased service levels. Based on the analysed data from the 22 WSS companies, it is possible to argue that water supply and sanitation assets have lost 30% – 60% of their replacement value as of early 2002. This is an evaluation of actual physical (technological) wear, and not an accounting depreciation. The average value of complete physical wear of the system was approximately 40% in early 2002. In 2001 most of the 22 analysed WSS companies were unable to finance capital repair from tariffs and relied exclusively on budget financing. In the next 10 years normal asset retirement will constitute approx. 30% of their value. If the situation with their replacement and financing of capital repairs does not change during this time, and only 17% of the current capital repair requirement will be financed through 'Drinking Water', than at the end of 2012 the depreciation of the assets will reach 65%: 40% + (1 – 17%) * 30% = 65% A depreciation of 65% means very low service levels with increasing operational costs. 4.5.4 Operational costs and overhead Current costs of the existing facilities were estimated from their reported levels and sub- divided into operational cost and overhead. Operational cost were in their turn also sub- divided in three categories: electricity costs, labour costs and other operational costs. Amortization charges are not actual costs and therefore they are not included in this

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 61 calculation. Overhead costs include annual costs that are not directly related to operation of the facilities (selling and administration expenses). In 2001 the sum of current costs for the sample 22 WSS companies was 1.25 billion tenge (ref. to the forecast in Annex 3). Electricity costs Electricity cost constitutes a considerable part of current costs. According to data obtained from WSS companies, electricity costs constituted about 1/4 of all current costs in 2001. Future electricity costs will depend on a number of factors, in particular, on electric power tariffs, specific norms of electric power consumption and quantities of water and wastewater production. They are discussed below. Electricity prices/tariffs At present, prices for electric power for WSS companies of Eastern Kazakhstan are much lower than the long-term (marginal) cost of electric power production, for example, for a newly constructed combined heat and power plant. According to the provided data, in 2001 the average electric power tariff for WSS companies was 2.35 tenge/kWh. In 2001 the tariff that would ensure complete compensation for electric power production costs in abroad was 0.06 US$/KWh, an equivalent of 8.76 tenge/KWh at the exchange rate of 2001. Therefore, regarding future electric power prices for WSS companies, it was assumed that they will grow in real terms by 1% percent every year and will reach 2.62 tenge/KWh in 2001 prices by 2012. Electricity consumption of individual WSS companies In order to carry out a comparative analysis of the provided data on consumption of electric power, specific electricity consumption measured in KWh per 1 m3 of water intake, was calculated for each individual company in the water supply system (see figure below). Figure 28 Specific electricity consumption in water supply by territorial zones, kWh/m3 of produced water

8,00 7,57 7,00 6,00

3 5,00 3,70 4,00 kWh/m 3,07 2,94 2,77 3,00 2,17 2,00 1,62 2,00 1,45 1,26 0,82 1,06 1,00 0,66 0,49 0,520,41 0,50 0,62 0,630,59 0,06 0,16 .

a r

- a

Shar Akzha Ayagoz Karaul Ridder Aksuat Zaysan Kurchum

Kokpekty Glubokoye Serebryans k Nov. Sogra Nov. Borodulikh Shemonaikh Zyryanovsk Samarskoye Molodezhny Pervomaysky N. Bukhtarm N. Ust-Kamenog Semipalatinsk B.Vladimirovka

Source: based on information from WSS companies In the case of complete one-time replacement of old electricity consuming equipment of WSS companies with new more efficient pumps, a reduction can be achieved of specific electricity consumption by 50% on average, though the potential in zones 1, 2, and 5 is much higher. In ten years, from 2003 till 2012, it is possible to achieve up to 10% of electricity saving on average in the sample companies by replacing electric power consuming equipment with more energy efficient equipment gradually along with retirement of old equipment and

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 62 reduced pumping requirements (for example due to decreased number of leakages in the networks). With relatively low existing prices for electricity, the cost savings are not significant in the beginning of the 10-year period. As prices for electric power increase, such replacement will result in financial benefits for the companies. Installation of more reliable pumping equipment also will allow cutting current maitenance costs and increasing the level of provided services by ensuring continuous non-interrupted water supply. Labour costs Labour remuneration and charges are estimated on the basis of data provided by WSS companies. They constitute approximately 30% of the total amount of current costs. Labour remuneration and charges differ considerably in different companies of the WSS sector. In order to determine future labour remuneration and charges, an estimate should be made of the level of costs on the basis on provided data on personnel resources and the average wage, which was 11 600 tenge on average in the oblast in 2001. However, it is assumed that the average wage will grow annually by 1% in 2001 prices. According to the baseline forecast, the number of employees of WSS companies in the 10-year period is assumed constant at the level of 2 697 employees. That constitutes a little more than 4 employees per 1000 service connections. Other operational costs and overhead Operational costs not included in the two above categories are included in the category 'other operational costs', and overhead, and vary for different WSS companies. Therefore it was assumed that overhead costs were at a constant level of 206 million tenge in 2001 prices, and other operational costs were estimated as the constant level of 1.87% of the estimated asset replacement value (at the level of 2001). 4.5.5 Overview of costs in existing WSS systems Based on the data supplied by 22 WSS companies and the expert evaluation, the costs and production for 2001 were summarised and presented in a table. These indicators were used as a starting point for development of a forecast of financing requirements. Detailed information on costs and financial data for water supply and sanitation systems are presented in Annex 3. Table 176 Overview of expenditure components for 22 selected WSS companies in 2001 Indicator Unit Value Water intake million m3 117 Replacement value of utilised assets * million tenge 20 493 Annual capital repair requirement * million tenge 666 Total current costs, of which million tenge 1 252 * Overhead costs (selling&admin) million tenge 206 * Operational costs million tenge 1 046 Electricity costs million tenge 287 Electricity consumption million KW-hr 121.9 Electricity tariff tenge/KW-hr 2.35 Electricity tariff US$/KW-hr 0.016 Labour costs million tenge 375 Other operational costs million tenge 384

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 63 Indicator Unit Value Share of the replacement value % 1.87%

Source: * Consultant's estimate, otherwise based on information from WSS companies 4.6 Forecast of financing resources Consumer payments for water supply and sanitation services and budgetary funds are the sources of financing in the baseline scenario. The amount of budgetary funds directly depends on the economic development of the region. That is why the assumptions of the baseline scenario include: • Macroeconomic assumptions • Assumptions for change in the consolidated oblast budget (COB) • Payments of service consumers and assumptions for change Determination of the most probable developments is not the purpose of baseline scenario forecasts. The purpose is designing a scenario that could be implemented within the available financial resources. In other words, it is assumed that any considerable changes in the present policy will not occur. All forecasted values in the baseline scenario are expressed in real 2001 prices. 4.6.1 Macroeconomic assumptions The economic development of Eastern Kazakhstan Oblast lags somewhat behind that of the Republic of Kazakhstan (RK). Real growth of GRP (gross regional product) in the historical perspective was persistently lower that real growth of GDP (gross domestic product) of RK. This can be explained by a number of factors, including the effect of current transfer price regulations in the oblast that has a high share of exports. Data on real change of GRP and GDP in 1998-2001 are presented in section 3.3.1. The figure below shows the dynamics of real growth of GRP and GDP in 1998-2012. The forecast of GDP growth was prepared by specialists of the Economic Intelligence Unit (EIU) under the assumption of a stabilization of GDP growth in 2005 at the level of 5% per year. Figure 29 Estimated dynamics of GRP (EKO) and GDP (RK) in 1998-2012

14 12 Ðåàëüíîå 10 Real èçìåíåíèåchange ÂÐÏ 8 of GRP % Ðåàëüíîå 6 Real èçìåíåíèåchange 4 of GDPÂÂÏ 2 0

-2 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 -4

Source: Economic Intelligence Unit, Statistical Yearbook of EKO for 2001 On the basis of the EIU forecast on stabilization of growth of gross domestic product (GDP), experts of the project made an assumption on stabilization of a similar indicator for Eastern Kazakhstan Oblast, gross regional product (GRP) at the level of 3% in 2003. This

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 64 (conservative) estimate allows levelling the fluctuations of real growth of GRP in the long term. 4.6.2 Assumptions for change of the consolidated oblast budget The share of levied taxes in the GRP is one of the indicators of economic welfare of the region. The share of levied taxes that remains in the CBO directly influences the amount of own funds available in the consolidated oblast budget. As it was already mentioned in section 3.3.1, this share in EKO was 18% of GRP in 2001. According to preliminary data, the total amount of levied taxes at the end of 2002 was 16% of the predicted value of GRP of the oblast. This will result in 16-percent reduction of COB revenues against the level of 2001 (in 2001 prices). There are grounds to view this value as not sufficiently high because this ratio was 22% for the Republic of Kazakhstan in 2001. To compare, the level of levied taxes in the Russian Federation is approximately 30% of GDP on average. The project experts made an assumption that levied taxes in the Republic of Kazakhstan (as a share of GDP) will remain stable at the level of 22% during next 10 years. They assumed a uniform increase of the tax burden in Eastern Kazakhstan Oblast in order to achieve the level of 20% of GRP in 2007. It will still lag behind the republican budget by 2%. Furthermore, it was assumed that the share of levied taxes assigned to the COB of Eastern Kazakhstan Oblast would remain at the level of 15% of all levied taxes in the oblast and would constitute 100% of own revenues of EKO and approximately 79% of COB revenues during the entire planning period. As a result, real growth of COB revenues presumably will be above 60% in 2012 against 2002 (in comparable 2001 prices). Some 0.41% of COB expenditures were allocated to financing of capital costs of water supply and sewerage facilities in 2001. It was planned to assign 160 million tenge for capital financing of WSS from the CBO. This is 60% more than the last year's financing. This means that the share of WSS sector in the budgetary expenditures will increase to 0.67% as soon as in 2002. It was assumed in the baseline scenario that the share of funds assigned for financing of WSS capital costs in the budgetary expenditures would remain at the level that was actually necessary for financing of measures included in program 'Drinking Water'. The cumulative value of budgetary funds of the oblast (the oblast budget and local budgets) that will be assigned to the WSS sector will be 2.8 billion tenge in 2003–2012. The corresponding value for the sample 22 towns and urban settlements will be approximately 1 billion tenge in 2001 prices. Financing from the republican budget will be non-uniform, taking into account the financing of 'Drinking Water'. The cumulative value of funds from the republican budget that will be assigned to the WSS sector during 10 years, in the period of 2003-2012, in total will be 2.4 billion tenge. The corresponding value for the sample towns and urban settlements will be 1.2 billion tenge in 2001 prices. A detailed forecast of macroeconomic development of the oblast and budgetary financing according to the baseline scenario is presented in Annex 3. 4.6.3 Payments by consumers and assumptions on change The billed revenues are calculated as water quantity (in m3) billed to the given group of consumers on the basis of water consumption norms or water meter readings, multiplied by the corresponding approved tariff. Actual revenues of the WSS companies are usually lower because collection rate is usually less than 100%. It was assumed in the baseline scenario that revenues of WSS companies paid by the population and other consumers would grow in real terms by 1% every year9.

9 The assumption was suggested in the seminar on 9-10 October in Ust-Kamenogorsk by

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 65 Also in was assumed that the affordability of the population in the baseline scenario would grow faster than the tariffs for water supply and sewerage. An assumption was made that per capita income would grow slower than gross regional product, by only 1% every year. In so doing, with VAT rate of 16 percent, the share of the average monthly bill for water supply and sewerage in the per capita income was assumed to be at the constant level of 1.78%. 10 It is not ruled out that there are some possibilities for increasing the tariffs. Thus, according to estimates made by OECD and the World Bank, population of countries with transition economies are entirely capable of spending 3-5% of the average monthly family income on payment for WSS services. Table 27 Share of average monthly bill for WSS in the average AHIC in the baseline scenario in 2001-2012 in 2001 prices

Indicator 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Average monthly bill for WSS as % of ADI, with VAT (officially 1,81 1,78 1,78 1,78 1,78 1,78 1,78 1,78 1,78 1,78 1,78 1,78 registered population) Average monthly bill for WSS in % of ADI, with VAT (actual number of 1,43 1,41 1,41 1,41 1,41 1,41 1,41 1,41 1,41 1,41 1,41 1,41 consumers) Per capita AHIC in EKO (thd. tenge) 6.6 6.68 6.75 6.81 6.88 6.95 7.02 7.09 7.16 7.23 7.31 7.38

Source: Statistical Yearbook of EKO for 2001, expert estimate This is an estimate of the share of income of WSS service consumers with officially registered domicile. In actuality there are unregistered consumers of WSS companies. This means that the monthly bill of an actual customer is even less. Detection of such consumers is a priority task of WSS companies as it brings in net revenues to the company. When installing water meters (see also to the priority investment program in annexes), detection of such consumers becomes inevitable. According to data provided by the 22 WSS companies unaccounted consumers constitute approximately 20% of the real number of consumers. The part of billed revenue not paid by consumers in the same year is regarded as lost revenues in this analysis. The assumed value of the payment collection rate is 75% for the population and 90% for other consumers in the period of 2003-2012. A detailed forecast of financing sources according to the baseline scenario is presented in Annex 3. A brief forecast of the same is shown in the table below (in billion tenge). Table 28 Forecast of supply of finance from different sources under the baseline scenario in 2001-2012, in 2001 prices Indicator 2003 -2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Collected 1.02 1.03 1.04 1.05 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 10.9 revenues of

representatives of WSS companies and regulating authorities of EKO on the basis of existing practice of raising of tariffs in the oblast. This means that the tariffs will grow in real values in addition to inflation-related growth. 10 The data on incomes of the population were taken from reports of the oblast and republican statistics departments. Some Akimat officials believe that the used figures of average income of the population may be somewhat overstated. However, determining the actual level of income of the population is beyond the scope of this analysis, and, therefore, official statistical data are used.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 66 Indicator 2003 -2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 WSS companies Budgetary 0.13 0.16 0.24 0.39 0.37 0.24 0.24 0.22 0.14 0.11 0.11 0.11 2.2 financing (program 'Drinking Water') Total 1.15 1.19 1.28 1.44 1.44 1.31 1.33 1.32 1.25 1.23 1.24 1.26 13.1 financing Source: Consultant's estimate 4.7 Forecast of demand and supply of financing of the WSS sector according to the baseline 'no change' scenario 4.7.1 Costs of the WSS sector in the planned period Total financing requirement of the sample 22 WSS companies over the 10 year period is nearly 20 billion tenge, or approximately 2 billion US$ per year. The following are main items that need financing (also see Annex 3): • Costs for current technical maintenance and operation of the existing infrastructure are estimated as 13.4 billion tenge. • Capital costs for planned (current) replacement of fixed assets are approximately 6.7 billion tenge. This is approximately 30% of the replacement value of used capacities in 2001 prices.11 Operational costs and overhead form the major part of the production costs. The planned capital repair of the current period constitutes 1/3 of the required annual costs. However, this this is not the only capital requirement of the system. The existing infrastructure was built a long time ago and proper repair was not carried out for many years. At present, under- financed capital repair of the previous years constitutes at least 40% of the replacement value. In addition to this debt of previous years, assets will continue to retire by 2-4 % per year during the next 10 years (the forenamed 30% of the planning period). It is worth repeating again that the method of evaluation of replacement value of the existing structures is a the key factor in making estimates of the required expenditure. The cost functions used in the model provide only indicative figures. 4.7.2 WSS sector financing in the planned period The existing level of financing of the sector is taken as a basis combined with assumptions regarding expected growth of tariffs, payment collection rate and budgetary financing level.. The total sum of available funds is estimated at 13,1 billion tenge. This virtually covers operational costs and overhead. Budgetary funds constitute only 17%, or 2 183 million tenge, of this sum. Decisions on budgetary financing of WSS sector depend on political agenda, therefore it is impossible to make a reliable estimate of the amount of budgetary funds that might be actually assigned to towns and urban settlements of Eastern Kazakhstan Oblast under programs of local budgets, the oblast budget and the republican budget in the 10-yer perspective. Presumably, in the period of 2003-2012, collected revenue of the 22 WSS companies according to the baseline scenario will be:

11 Please, note that this is only current capital repair requirement. Backlog of the past underfinanced capital repairs have not been included here.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 67 • Total: 10 918 million tenge • Population: 4 531 million tenge • Other consumers: 6 388 million tenge

4.7.3 Forecasted financing gap in the baseline scenario The forecast of financing requirements and available funds for the 10-year period, based on the described assumptions, is presented in Annex 3. The forecasted amount of required financing is much higher than the forecasted amount of available funds. The accumulated deficit over the 10-year period will constitute about 7 billion tenge in 2001 prices. And this deficit does not include the capital backlog of the past (some 40% of replacement value of the facilities). The figure shows the forecast of provided financing and financing requirement during 10 years on the basis of the described assumptions. The chart shows also that capital repair requirements of the planning period are almost not covered financially. Figure 30 Expenditure financing under the baseline 'no change' scenario, 2003-2012,, million tenge Electricity Labour remuneration Other operational cost Selling&Admin Capital repair Underfinanced capital repair of the current period Collected revenue Budget financing 2.50

2.00

1.50

1.00

- 200 200 200 200 200 200 200 200 200 201 201 201

Source: model-based calculations Baseline scenario foresees financing of capital expenditure at the level planned in the 'Drinking Water' programme. Detailed analysis of the 'Drinking water' programme has shown that capital financing for existing infrastructure reconstruction is not envisaged as a compensation for the current retirement of assets (capital repair of the planning period), but instead are to be used for the replacements of assets that have been in most critical condition for some time (backlog - capital repairs of the past). This scenario assumes that financing of the capital repair requirement will not exceed 17% of the current requirement on average, even without taking into account accumulated capital repair in previous years. It is assumed that all capital financing is provided from budgets of different levels. This means that compensation for the current retirement of assets is not planned at all and the new debt to the infrastructure will be fully postponed until further notice at the expense of further deterioration of the provided services. Under-financing of capital repairs means that assets will continue to deteriorate and will require more and more operational financing to eliminate increased ruptures of networks, failures of equipment and other consequences of accidents.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 68 The figure above shows that without sufficient capital repair, the operation costs will continue to increase, and that by itself will lead to tariff increases, in order to ensure that the system is somehow operated and service, although of deteriorating quality, is provided.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 69 5 Measures for decreasing the financing gap

It was shown in the previous section that the difference between the forecasted amounts of required funds and supply of available funds in the baseline scenario would be approximately 7 billion tenge during the next 10 years, not taking the account of the capital financing backlog of the past. An attempt to analyse and estimate the main options for decreasing the financing gap is made in this section. The main options for decreasing the financing gap are the following: • Reduction of operational costs. (This is frequently connected with an investment program for modernization and rehabilitation of WSS production facilities). • Reduction of capital costs. For example, decrease of the required productivity of facilities. (This is frequently connected with an investment program for modernization and rehabilitation of WSS production facilities). • Increase of revenues received from customers through the established tariffs. • Increase of budgetary financing. • Loan financing of capital costs. Furthermore, several version of the following 2 main scenarios with different levels of operational costs and capital repair in the 10-year period are compared: • 'No change' scenario. This is the baseline scenario, which was described in the previous chapter, with no policy changes and with increasing operational costs and constantly decreasing level of service. It is the reflection of the situation when the depreciated assets are not replaced and the level of accumulated depreciation of assets approaches the critical value. • Scenario 'Optimisation and modernization of the infrastructure and planned replacement of depreciated assets’ (hereafter - 'Optimisation') builds upon bridging the capital backlog of the past. It includes a priority investment program, installation of water meters, decrease of water consumption and leakages in water supply and sewerage networks, optimisation of operational costs and size of infrastructure. In addition to the investment program, planned capital repairs are included. This scenario ensures sustainable development of the system with improving and reliable service levels and optimised current costs, capital repairs and capacities of the infrastructure. There are two main options in the scenario 'Optimisation’: the option without new construction and the option with new construction. The latter includes construction of some new facilities in the period from 2003 to 2010. These facilities are of high priority to the oblast. They include: • The third stage of the biological treatment plant in Ust-Kamenogorsk (planned financing from the COB: 245 million tenge in 2003 and 255 million tenge in 2004); • The biological treatment plant in Semipalatinsk (planned financing from the republican budget: 500 million tenge in 2003 and 586 million tenge in 2004); • Construction of the standby groundwater intake in Ridder (planned financing from the republican budget: 577 million tenge in the period 2008 – 2012). Budgetary financing of these investments is envisaged. However, costs of operation and maintenance of the new facilities will be covered from tariffs. Therefore a number of scenarios were formulated that reflect this situation.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 70 5.1 Measures for cost reduction for different scenarios The assumptions for calculation of costs in three scenarios are presented in the following table:12 Table 29 Assumpptions for expenditure forecast (2003-2012) for the 'no change' and 'Optimisation' scenarios Indicator Baseline scenario 'No change' (Annex 3) Scenario 'Optimisation’ (Annexes 4,5,7) General Insufficient replacement of depreciated A priority investment program, planned characteristic assets, similar to the situation in 2001. replacement of assets starting from 2003, Increased number of accidents, increasing cost savings and management of water current costs and decreasing service level demand (installation of water meters), decrease of water consumption and leakages in the networks, optimisation of infrastructure capacities. Replacement Replacement value of used capacities as By 2013, a decrease by 16% against value of assets per 2001: 20.5 billion tenge replacement value of used capacities as of 2001 due to decrease of consumption and reduction of leakages in the network. Capital repair As per financing level of 2001. (17% of the 3.25% of the replacement value of utilised current requirement for the planning period. assets Increase of under-financed capital repairs from 40% to 65% on average.) Water As per the level of 2001: on average, 157 Reduction of individual consumption to 130 consumption by lcd for the estimated actual number of lcd in 2007 due to installation of water population residents or 200 lcd for residents with meters and implementation of public water- registered domicile; 46% of the intake saving awareness campaigns. quantity delivered to all consumers. Water Without change (the level of 2001): 54% of Detection of unauthorised consumers will consumption the quantity delivered to all consumers. result in a decrease of water consumption by 8% against the level of 2001 in the first two years of the production optimisation program. The share of the quantity delivered to all consumers will go up to 59% due to decrease of consumption by the population. Unauthorised On average, unauthorised consumption is Detection of unauthorised consumers (a consumption 20% in the population consumption and part of the priority program of production 10% in other consumers. optimisation) Losses in Losses increase by 1 % every year (due to Decrease of losses down to 10 m3/km/day networks capital repairs) against the level of 30% in in all replaced pipes: the priority investment 2001. program covers 30% of worn out pipes. The annual planned capital repairs also produces water savings due to the general high depreciation of the network. In 2012 leakages will decrease down to 35% as compared to 2001 and will be 14% of the quantity supplied to the network as a result of the priority investment program. Total quantity of Will increase from the level of 2001 (117 Decrease of quantity supplied to the water supplied to million tenge per year) due to increasing network to 70% of the level of 2001, due to the network losses in the network. decrease of consumption level and leakages in the network by 2013. Electricity costs Increase of real tariff for electricity: 1% annually. and consumption Increase in electricity consumption: 1% Decrease of electricity consumption to 60% annually (due to insufficient capital repairs). of the level of 2001 due to planned replacement of equipment with more efficient ones and saving on pumping (decrease of losses and water consumption) by 2013. Number of Real wages with charges increase annually by 1% from the level of 11600 tenge per employees in month in 2001.

12 Here the option without new construction is described.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 71 Indicator Baseline scenario 'No change' (Annex 3) Scenario 'Optimisation’ (Annexes 4,5,7) WSS companies The number of employees will not change Decrease of the number of employees by 2 and labour costs (at the level of 2001): 2 697 employees in times by 2007, to the level of 1 294 22 WSS companies, approximately 4 employees, i.e. to the average European employees per 1000 connected consumers norm of 2 employees per 1000 connected consumers. Other operational Starting level of 2001: 1.87% of the Decrease down to the level of 1% of the costs replacement value. Increase by 1% current replacement value by 2009 (The annually (due to insufficient capital repair). year when the priority investment program ends.) Overhead Unchanged (in real prices) at the level of Unchanged (in real prices) at the level of 2001 (16.5% of current costs). 2001.

The priority investment program has the value, on average, of 40% of the assets replacement value and is planned for 6 years (assumed from 2003 till 2008) and its effects on operational costs of WSS companies was analysed in sufficient detail for the case of Ust- Kamenogorsk Vodokanal. Conclusions based on this analysis are applicable to almost all WSS companies of the sample. The analysis of investment priorities in Ust-Kamenogorsk Vodokanal and other WSS companies of the sample is presented in Annex 7. These assumptions are expressed in monetary terms as follows: Table 180 Total expenditure for 2003-2012 for 'no change' and 'Optimisation' scenario, million tenge Indicator Scenario 'No change' Scenario 'Optimisation' Current costs 13.432 8.855 Electric power 3.266 2.145 Labour costs 4.007 2.325 Other operational costs 4.100 2.326 Overhead (Selling&Admin) 2.059 2.059 Capital repair 6.662 5.925 Source: model-based calculations The effects on the current costs and capital repair of the WSS companies of the sample in the period from 2003 till 2012 for the two scenarios are shown in the figure below: Figure 131 Total expenditure for 2003-2012 for 'no change' and 'Optimisation' scenario, million tenge

ElectricÝëåêòðîýíåðãèÿ power LabourÇàðïëàòà remuneration è íà÷èñëåíèÿ and charges OtherÏðî÷èå ýêñïëóàòàöèoperationalîííûå costs çàòðàòû CostsÐàñõîäû of ïåðèîäà the period CapitalÊàï.ðåìîíò repai r

25.000

20.000

15.000

10.000

5.000

- 'Optimization and modernization of the ScenarioÑöåíàðèé "Áåç 'No èçìåíåíèé" change' "Îïòèìèçàöèÿ è ìîäåðíèçàöèÿ èíôðàñòðóêòóðû è infrastructureåæåãîäíîå çàìåùåíèå and planned âûáûâàþùèõ replacement àêòèâîâ of èíôðàñòðóêòóðû"the retired assets'

Source: model-based calculations

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 72 The saving of current costs in the latter scenario as compared to the baseline scenario is approximately 4.6 billion tenge in the period from 2003 till 2012. The estimated additional saving on planned capital repairs is another 0.7 billion tenge for the same period. 5.2 Measures for increased financing for different scenarios Three main ways, besides their possible combinations, are proposed for analysis of measures aimed at increased financing in the period from 2003 till 2012: • Increase of financing from the consolidated oblast budget; • Increase of tariff financing; and • Loan financing Assumptions for calculation of financing for the two main scenarios are shown in the table below: Table 191 Assumpptions for finance forecast (2003-2012) for the 'no change' and 'Optimisation' scenarios Indicator 'No change' scenario Increase of tariff and budgetary financing Financing of the water Fluctuates between 0.4% and Increased financing from COB from 0.4% supply sector from COB 1.2% of COB for the entire water in 2001 to 1.2% by 2007, and from 0.67% supply sector (program 'Drinking in 2003 to 0.8% in 2007, the share Water'), with 35% of that allocated corresponding to sample towns is 35% on to sample towns over the period. average for the period. Includes financing of a new water intake facility in Ridder. Financing of the The oblast budget in 2003 and 2004 will finance at least 0.5 billion tenge in wastewater sector from each year, by instalments approximately equal to 1% of COB expenditures, to COB the 3-rd stage of the biological treatment plant in Ust-Kamenogorsk. Tariffs for the population Real increase of tariffs by 1% Increase of the water services bill (with every year, in proportion to growth VAT) from 1.75% of the population income of costs. used for consumption in 2001 to a level not exceeding 3% (the maximum level that international financial institutions (IOECD EAP Task Force) do not recommend to exceed). Tariffs for other consumers The tariff is made equal to the tariff for the population. Annual payment collection 75% Increases from 75% in 2002 to 90% by rate from the population 2007. Annual payment collection 90% Increases from 90% in 2002 to 95% by rate from other consumers 2007.

If the share of funds assigned from the budget is increased to 1.2% and is kept at a constant level, the additional financing for the entire water sector will be 1.1 billion tenge, and the additional financing for the sampled towns and urban settlements will be 0.4 billion tenge. The target level of 1,2% of COB expenditures was proposed because this level was planned in the program 'Drinking Water' for 2006 and 2007. Probably, it will be possible to maintain this share of COB allocated to WSS sector also after 2007. For comparison, financing of the WSS sector reaches 4–5% of the budget expenditures in many countries of Eastern and Central Europe. The financial effects of an increase in tariff financing, increase in collection rate, and attraction of loan financing, will be different depending on the selected scenario. Some interesting combinations are discussed in the next section.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 73 5.3 Analysis of financing deficit for different scenarios 5.3.1 Budgetary financing under 'Optimisation' scenario This scenario is a version of the 'Optimisation' scenario with two options: including construction and operation of new facilities or without them. This scenario also assumes that the tariff revenues increase by 1% per year in real terms, the same way as in the baseline scenario. It means that the budget is the only possible source for covering of financing deficit according to the priority investment program, planned annual capital repair, operation and overhead cost and the cost of the new infrastructure., which are shown below. Figure 142 Financing gap in the 'Optimisation' scenario with the baseline level of tariff financing and no budget financing, 2003-2012, million tenge Without new construction Including new construction

Priority investment program Priority investment program New construction New construction Additional operational cost related to the new construction Additional operational cost related to the new construction Capital repair Capital repair Selling&Admin. Selling&Admin. Other operational cost Other operational cost Salary and payroll fees Salary and payroll fees Energy cost Energy cost Budget financing Budget financing 4.500Collected revenue of WSS companies 4.500Collected revenues of the WSS companies

4.000 4.000

3.500 3.500

3.000 3.000

2.500 2.500 2.000 2.000 1.500 1.500 1.000 1.000 500 500 - - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations In the period of 2003 - 2012, for the option 'without new construction' of this scenario, the financing gap remaining after tariff financing is over 12 billion tenge, while in the option 'including new construction'13 it is approximately 14.8 billion tenge, taking into account also additional operational costs for new facilities. A deficit of such a scale requires some very large budgetary inflows. For information, the figure below shows the financing deficit for the selected towns and urban settlements and the share of the expenditures of the consolidated oblast budget needed to cover the deficit. There is a huge difference between the values given below - up to 8–10% of the COB expenditure only for the selected towns and urban settlements - and the current level of financing from COB, even if the entire 'Drinking Water' program is taken (maximum 1.2% of the COB expenditure).

13 Including new biological treatment facilities in Semipalatinsk and Ust-Kamenogorsk and a new water intake plant in Ridder. Financing from the oblast budget and the republican budget is stipulated.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 74 Figure 153 Bridging the financing gap in the 'Optimisation' scenario (with the baseline level of tariff financing) through budgetary financing, 2002-2012, million tenge or % of CBO Without new construction Including new construction

3.500 12,00% 3.500 12,00% Financing gap Financing gap 3.000 % of CBO expenditures 3.000 10,00% % of CBO expenditure 10,00%

2.500 2.500 8,00% 8,00% 2.000 2.000 6,00% 6,00% 1.500 1.500

4,00% 4,00% 1.000 1.000

2,00% 500 2,00% 500

- 0,00% - 0,00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: model-based calculations

Probably, a combination of budgetary and tariff financing is necessary when seeking a solution for the financing deficit. 5.3.2 Budgetary and tariff financing of 'Optimisation' scenario This scenario is another version of the 'Optimisation’ scenario. Figure 164 Full financing of the 'Optimisation' scenario for 22 selected WSS companies via increased budgetary and tariff contribution, 2003-2012, million tenge Without new construction Including new construction Priority investment program Priority investment program New construction New construction Additional operational cost related to the new construction Additional operational cost related to the new construction Capital repair Capital repair Selling&Admin. Selling&Admin. Other operational cost Other operational cost Salaries and payroll fees Salaries and payroll fees Energy cost Energy cost Budget financing Budget financing Collected revenues of WSS companies Collected revenues of WSS companies 4.500 4.000 4.000 3.500 3.500 3.000 3.000 2.500 2.500 2.000 2.000 1.500 1.500 1.000 1.000 500 500 - - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations In this scenario, budgetary financing never stays at 1.2% of the COB expenditure after 2007 and includes financing of new facilities in towns Ust-Kamenogorsk, Semipalatinsk and Ridder. The remaining financing deficit (the priority investment program, under-financed capital repairs, operational costs of the new facilities) is covered from the tariff. The tables below show that an increase of the tariff up to the level of 36.6 tenge/m3 is needed in order to cover the deficit in this version of scenario 'Optimisation' without new construction, and increase up to the level of 39.3 tenge/m3 is needed in order to cover the deficit in scenario 'Optimisation' with new construction.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 75 Table 202 Tariff and affordability levels for 'Optimisation' scenario without new construction, 2001-2012 Indicator 2001 2002 2003 2004 2005 2006 2007 2012 Tariff without VAT in 2001 prices, 18,0 18,2 23,0 28,0 33,4 36,6 36,6 36,6 tenge/m3 The maximum monthly bill for water and 1,43 1,41 1,73 2,05 2,36 2,51 2,43 2,31 sanitation (estimated population), with VAT, % of AHIC The maximum monthly bill for water and 1,81 1,78 2,18 2,59 2,99 3,18 3,08 2,93 sanitation (population with registered domicile), with VAT, % of AHIC Source: model-based calculations Table 213 Tariff and affordability levels for 'Optimisation' scenario with new construction, 2001-2012 Indicator 2001 2002 2003 2004 2005 2006 2007 2012 Tariff without VAT in 2001 prices, 18,0 18,2 23,0 28,0 33,4 39,1 39,3 39,3 tenge/m3 The maximum monthly bill for water and 1,43 1,41 1,73 2,05 2,36 2,68 2,61 2,48 sanitation (estimated population), with VAT, % of AHIC The maximum monthly bill for water and 1,81 1,78 2,18 2,59 2,99 3,39 3,30 3,14 sanitation (population with registered domicile), with VAT, % of AHIC Source: model-based calculations The average required affordability level of the population, who pay for services of WSS companies in accordance with domicile registration, in the sample towns will be higher than 3% in 2006–2007. However, in compliance with the priority investment program, detection of unauthorised consumers and installation of water meters is expected by 2006. This means that all actual water consumption can be billed to the consumers and the average required affordability level will not be higher than 2.5% – 2.6% of AHIC. 2.3.2 Limiting financing needs of the 'Optimisation' scenario and the level of service This scenario is similar to the previous scenario in the combination of measures. The main difference of the 'Partial optimisation' scenario is that the start of full-scale capital repairs financing is planned no sooner than after completion of the financing of the priority investment program. This is a compromise scenario that includes financing of the most urgent measures while not providing sustainable increase of the level of service as the previous scenario does. A saving of operational costs is still achieved. However, under-financing of the planned capital repair implies lower cost saving in the medium-term.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 76 Figure 175 Tariff and budgetary financing of 'Partial optimisation' scenario, 2003-2012, million tenge Without new construction Including new construction Priority investment program Priority investment program New construction New construction Additional operational cost related to the new construction Additional operational cost related to the new construction Capital repair Capital repair Selling&Admin Selling&Admin. Other operational cost Other operational cost Salaries and payroll fees Salaries and payroll fees Energy cost Energy cost Budget financing Budget financing 4.500Collected revenues of WSS companies 4.500Collected revenues of WSS companies 4.000 4.000 3.500 3.500 3.000 3.000 2.500 2.500 2.000 2.000 1.500 1.500 1.000 1.000 500 500 - - 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations

Table 224 Tariff and affordability levels for 'Partial optimisation' scenario without new construction, 2001-2012 Indicator 2001 2002 2003 2004 2005 2006 2007 2012 Tariff without VAT in 2001 prices, 18,0 18,2 23,0 28,0 33,4 33,4 33,4 33,4 tenge/m3 The maximum monthly bill for water and 1,43 1,41 1,73 2,05 2,36 2,29 2,22 2,11 sanitation (estimated population), with VAT, % of AHIC The maximum monthly bill for water and 1,81 1,78 2,18 2,59 2,99 2,89 2,80 2,67 sanitation (population with registered domicile), with VAT, % of AHIC Source: model-based calculations Table 235 Tariff and affordability levels for 'Partial optimisation' scenario with new construction, 2001-2012 Indicator 2001 2002 2003 2004 2005 2006 2007 2012 Tariff without VAT in 2001 prices, 18,0 18,2 23,0 28,0 33,4 36,0 36,0 36,0 tenge/m3 The maximum monthly bill for water and 1,43 1,41 1,73 2,05 2,36 2,47 2,33 2,27 sanitation (estimated population), with VAT, % of AHIC The maximum monthly bill for water and 1,81 1,78 2,18 2,59 2,99 3,12 3,01 2,88 sanitation (population with registered domicile), with VAT, % of AHIC Source: model-based calculations On the other hand, the required level of affordability is also lower as compared to the previous scenario, and it will not exceed the critical level of 3% of the income of the population used for consumption for a major part of the period. 5.3.3 Financing options for scenario 'Optimisation' for Ust- Kamenogorsk Vodokanal This scenario is a version of the 'Optimisation’ scenario for the Ust-Kamenogorsk Vodokanal (refer to Annex 5). Under-financed capital repairs during the previous 10-15 years are the main cause of low operational safety of the infrastructure of the Vodokanal. The exact value of actual

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 77 depreciation of the Vodokanal's facilities is not known because revaluation of fixed assets has not been done since long ago. However the value of the priority investment program for WSS was estimated at the level slightly higher than 20 billion US$ (in 2001 prices), that constitutes about 40% of the assets replacement value. A description of the priority investment program for WSS companies of town Ust-Kamenogorsk is given in Annex 7. Figure 186 Full financing of the 'Optimisation' scenario for Ust-Kamenogorsk Vodokanal via increased budgetary and tariff contribution, 2003-2012, million tenge Without new construction Including new construction Additional operational cost related to the new construction Additional operational cost related to the new construction New construction New construction Priority investment program Priority investment program Capital repair Capital repair Selling&Admin. Selling&Admin. Other operational cost Other operational cost Salaries and payroll fees Salaries and payroll fees Energy cost Energy cost Budget financing Budget financing Collected revenues of WSS companies Collected revenues of WSS companies

1.400 1.400 1.200 1.200 1.000 1.000 800 800 600 600 400 400 200 200 - - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations The level of per capita income in Ust-Kamenogorsk is 25% higher on average than the average oblast level. In 2001 it was 8266 tenge per month. That is why the affordability level does not reach the mark of 3% even if additional operational costs connected with construction of the 3rd stage of biological treatment facilities (the latter is financed from CBO) are included in the tariff. Table 246 Tariff and affordability levels for 'Optimisation' scenario without new construction at Ust-Kamenogorsk Vodokanal, 2001-2012 Indicator 2001 2002 2003 2004 2005 2006 2007 2012 Tariff without VAT in 2001 prices, 14,7 15,8 21,4 27,6 34,6 37,4 37,4 37,4 tenge/m3 The maximum monthly bill for water and 1,24 1,27 1,49 1,81 2,13 2,16 2,01 1,91 sanitation (population with registered domicile), with VAT, % of AHIC The maximum monthly bill for water and 1,62 1,66 1,95 2,36 2,78 2,82 2,63 2,50 sanitation (population with registered domicile), with VAT, % of AHIC Source: model-based calculations Table 37 Tariff and affordability levels for 'Optimisation' scenario with new construction at Ust-Kamenogorsk Vodokanal, 2001-2012 Indicator 2001 2002 2003 2004 2005 2006 2007 2012 Tariff without VAT in 2001 prices, tenge/m3 14,7 15,8 21,4 27,6 34,6 38,3 38,3 38,3 The maximum monthly bill for water and 1,24% 1,27% 1,49% 1,81% 2,13% 2,21% 2,06% 1,96% sanitation (population with registered domicile), with VAT, % of AHIC The maximum monthly bill for water and 1,62% 1,66% 1,95% 2,36% 2,78% 2,88% 2,69% 2,56% sanitation (population with registered domicile), with VAT, % of AHIC Source: model-based calculations

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 78 However, such a considerable increase of the tariff is not absolutely necessary if one considers an option of taking a preferential loan for financing of the priority investment program for Ust-Kamenogorsk Vodokanal, for example, on the following conditions: Table 38 Approximation of intenational soft loan conditions for WSS company Investment program value 20.35 million US$ Share of the Vodokanal's assets replacement value approx. 40% Duration of loan 20 years Interest rate 4% Grace period 5 years Funds reserved in the net annual revenues for working capital 10% of the annual loan service provisions Source: approximation to the financing conditions of the World Bank The result of financing of the investment program by loan in 5 instalments, that would be completely utilised in the period of 2004 – 2007, with attribution of current costs, annual capital repair and loan service from the tariff, is shown below: Figure 197 Full financing of the 'Optimisation' scenario for Ust-Kamenogorsk Vodokanal via soft loan and budgetary and tariff contribution, 2003-2012, million tenge Using a loan Without a loan Additional operational cost related to the new construction Additional operational cost related to the new construction New construction New construction Priority investment program Priority investment cost Capital repair Capital repair Selling&Admin. Selling&Admin. Other operational cost Other operational cost Salaries and payroll fees Salary and payroll fees Energy cost Energy cost Budget financing Budget financing Collected revenues of WSS companies Collected revenues of WSS companies

1.400 1.400

1.200 1.200 1.000 1.000 800 800 600 600 400 400 200 200 - - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations When increasing the tariff up to 33 tenge/cub.m by 2007, the following measures could be financed: • An investment program of 2 billion tenge in the period from 2004 to 2012 (approximately 25% of the replacement value, or approximately 2/3 of the actual requirement) by means of tariff financing; or • An investment program of 3 billion tenge (approximately 40% of the replacement value, the actual requirement) in the shortest possible term without delaying modernization till more prosperous years, by means of loan financing, with subsequent covering by the tariff. Table 39 Tariff and affordability levels for 'Optimisation' scenario with new construction and loan financing at Ust-Kamenogorsk Vodokanal, 2001-2012 Indicator 2001 2002 2003 2004 2005 2006 2007 2012 Tariff without VAT in 2001 prices 14,7 15,8 21,4 27,6 33,0 33,0 33,0 33,0 The maximum monthly bill for water and 1,24 1,27 1,49 1,81 2,03 1,90 1,77 1,69 sanitation (population with registered domicile), with VAT, % of AHIC

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 79 Indicator 2001 2002 2003 2004 2005 2006 2007 2012 The maximum monthly bill for water and 1,62 1,66 1,95 2,36 2,65 2,48 2,31 2,20 sanitation (population with registered domicile), with VAT, % of AHIC Source: model-based calculations The loan financing results in a lower affordability level in the critical years of 2005 and 2006 until the income level of the population reaches a sufficiently high level (a 5-year grace period). Figure 38 Full financing of the 'Optimisation' scenario for Ust-Kamenogorsk Vodokanal via soft loan and budgetary and tariff contribution Tariff and affordability Loan repayment schedule Repayment of the principle (cumulative sum) Repayment of interest (cumulative sum) Outstanding loan Tariff for water and sanitation, net of VAT 4.500 Monthly bill for water and sanitation (estimated population), with VAT, % of income income % of 4.000 40,0 2,50% 3.500 35,0

2,00% 3.000 30,0

25,0 2.500 1,50%

20,0 2.000

1,00% tenge/m3 15,0 million tenge 1.500

10,0 1.000 0,50% 5,0 500

- 0,00% - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: model-based calculations Under the forenamed assumptions, repayment of a loan with a grace period of 5 years taken at the end of 2003 will start as late as 2009 and will end in 2023.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 80 6 Recommended Financing Strategy 6.1 General policy objectives The urban population of Eastern Kazakhstan is predominantly connected to centralised water supply systems and to a high degree also to centralised wastewater collection. Unfortunately, the water supply and sanitation infrastructure has not been properly maintained for the last 10-15 years. However, the Soviet tradition of continuous expansion of the services is still being practised, and even the insignificant budget resources currently allocated to the sector are used not only for reconstruction and repair, but also for the construction of new facilities thus increasing the costs for annual maintenance and operation of the system. In view of the difficult situation prevailing in WSS sector of towns and urban settlements of Eastern Kazakhstan oblast, it is necessary to undertake urgent measures to avoid further decline, in some towns - even crisis, in the services provided by WSS companies. The problems begin to show in the centralised system of water supply and sanitation in EKO. Average depreciation of the system is not less than 40% of the replacement value; the level of services measured by the regularity of water supply, water quality and wastewater treatment constantly decreases, while annual costs for operation and emergency repairs continue to rise. Taking into account the scenario analysis presented in previous chapters, the Project Steering Committee decided that the main strategy for 2003-2012 should consist of: • Maintaining the level of service by implementing the priority investment and management performance improvement programs aimed at modernization and optimization 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.14 More specifically, the political goal consists of gradual (by 2007) escalation of budgetary and tariff financing required for implementing the most important measures that aim to optimise the production and capacity of WSS companies. The priority programme of WSS development will include the replacement of the worn-out and/or inefficient equipment that will lead to savings in operating costs and scheduled capital repair, i.e. energy consuming equipment and pipelines. Moreover this programme will include measures on water demand optimisation (water meters, detection of unauthorised consumption, etc.) and minimisation of leakage in water supply and sanitation pipelines. It has also been decided to promote promote construction of important new installations and ensures full coverage of O&M costs of water companies. Scheduled capital repairs of existing and new infrastructure should commence in full scale upon completion of priority investment programme financing. Although the recurrent costs of the existing system are expected to be reduced and the level of services - stabilised due to the optimisation programme, the maximum possible savings and service level improvements will, however, not be achieved, since over at least first 6-7 years, while the priority measures are being implemented, the scheduled capital repairs will not take place. Partial financing of such an optimisation programme can be realised by future cost savings. However, significant additional financial resources are required at the initial stage, and they can be found through additional budget and tariff financing. Over the period 2003-2012, the required annual financing is on average 2 times higher than that available at the end of 2001. This additional financing will be required to cover a priority programme targeted at production optimisation, normal level of operation cost, as well as scheduled capital repair of water system.

14 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 81 Visually, this strategy can be characterised as follows; see the figure below: Figure 39 Tariff and budgetary financing of 'Partial optimisation' scenario for 22 selected WSS companies, 2003-2012, million tenge Priority Investment Programme New Construction Additional operational costs, related to the new construction Capital repair Selling&Admin Other operational costs Wages and charges Energy cost Budget financing 4.500Collected payments of the vodocanal

4.000

3.500

3.000

2.500

2.000

1.500 1.000

500

- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: model-based calculations The EKO Akimat and the Project Steering Committee consider loan financing of the priority investment programme as an option for partial coverage of the financing gap during the first 5 years of the strategy implementation, when affordability levels of the population is too low to provide sufficient tariff financing. As a pilot option loan financing can be considered for the priority investment programme of the municipal company 'Oskemen-Vodokanal' of Ust- Kamenogorsk, with future dissemination of this experience to other large WSS companies of the Oblast. Therefore, budgetary financing will be used for the priority programmes of the smaller WSS companies of the oblast. Implementation of this ambitious production optimisation programme and considerable required 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. Some initial measures and projects fitting such a framework are presented in this report (see the list of priority projects and measures in the field of production optimisation, environmental protection and financial-economic, organisational and regulatory improvements in water sector – Annexes 6, 7 and 8) This financial strategy has been developed for the Oblast Akimat. However, it is municipalities who are responsible for the provision of water supply and sanitation services. Thus, this strategy is aimed at determining respective objectives and measures that can be used by the Oblast Akimat to influence Akimats of the towns in order to achieve the desired results. 6.2 Indicative targets of the strategy implementation The strategy objectives may be used as guide to select the main direction for development of the sector. However, to support implementation of this strategy it may be useful to set targets for the key strategy measures. The quality of available data and general uncertainty with regards to sector financing, for example, the level of expected funding from the federal budget, does not allow setting targets and tasks clearly. They should be considered as a definite qualitative level to be attained by the Oblast Akimat. Similar targets should serve as additional tasks to be co-ordinated with the WSS companies. The main value of the indicative targets for the strategy components includes the opportunity for determining subsequent actions and measures aimed at achieving the objectives.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 82 6.2.1 Investment priorities The Oblast administration has ranked the investment priorities in the following manner • Priority new construction of wastewater treatment plants and drinking water intake facilities; • Priority reconstruction of the existing water supply and sanitation installations; • Maintaining the WSS companies’ assets in operational and reliable conditions by performing annual planned capital repair, after the priority reconstruction has been finalised. Despite a lack of financing resources for the existing infrastructure, the Government and the Oblast Akimat have nevertheless took a decision about priority budgetary financing of certain new facilities because of their national and even international importance, such as: • The third line of biological WWTP of the Ust-Kamenogorsk Vodokanal; • Biological WWTP for Semipalatinsk Vodokanal; and • The standby groundwater intake for Ridder Vodokanal. These investments total over 2.2 billion tenge (excluding additional annual operational costs). Furthermore, the priority reconstruction and modernisation of the currently operated facilities of 22 WSS companies included into the sample (the priority investment programme) would require about 8.2 billion tenge in 2001 prices, which on average makes result in about 95 US dollars per consumer of services provided by these WSS companies. These actions include first of all15: • Water demand management (installation of water meters, awareness raising campaigns, rational water use, reduced water loss by identification of leakages, etc.); • Financially viable projects aimed at reducing costs through increase of energy efficiency (replacement of outdated inefficient pumps and other energy-intensive equipment by more efficient equipment). To perform annual scheduled repair of the existing production facilities of 22 WSS companies, following implementation of the priority investment programme, would require over 0.5 billion tenge in 2001 prices (annually), which makes 2,3 billion tenge over the period 2009-2012 or 6.5 US dollars per consumer of services provided by these WSS companies. Financing of other measures, such as increased coverage by water supply and sanitation networks and improved quality of drinking water and wastewater treatment through construction of new plants, must be set aside for a while. Nevertheless, many problems, especially environmental problems, demand immediate solution (see Annex 6), therefore additional financing of such measures (above finances provided for priority projects), coming for example from the Republican budget, can only be welcomed. 6.2.2 Optimisation of capacity size, production volumes and costs The main factor facilitating the reduction of financing needs is the decrease of operational costs. Here, it is recommended to introduce monitoring and analysis of basic international indicators, which may become the basis for a continuous improvement process. The following factors should be monitored: • Specific electricity consumption (kWh/m3 of consumed water) • Number of personnel (number of serviced population per employee of the WSS companies and the volume of water disbursed to consumers (m3 according to bills) per employee of the WSS companies)

15 See also Annex 7

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 83 • Total operational costs (tenge/m3 of water supplied to the consumer; tenge/m3 of water supplied to the network). Specific recommendations in the field of optimisation of the WSS companies production and operation parameters are indicated in the assumptions of the priority investment programme, and taking for example the Ust-Kamenogorsk Vodokanal (see also Annex 7), and can be summarised along the following basic lines: For the water supply sector: • Active search of unaccounted water use; • Control of generated and sold water volumes (water meters); • Replacement of the existing pumping equipment by more efficient one; • Optimising the network pressure; • Replacement of the network and liquidation of leakages. For the wastewater sector: • Active search for unaccounted connections; • Preparation for the network operation optimization; • Increasing emergency efficiency; Optimizing the network operation, replacing the network, liquidating infiltration of groundwater and precipitation.

The most important indicative targets, which can be attained through implementation of an additional (non-investment) set of measures, include: • Reducing water use by population to 130 l/man/day by 2007;

• Reducing the number of personnel at companies to the level of 2 employees per 1000 persons serviced (the average European indicator) by 2007.

The maximum potential savings in operational costs for the period of 2003-2012 is about 4.6 billion tenge, basically due to savings in electricity costs, wages/payroll fees, as well as other operational costs and long-term capital repair. However, this potential cannot be used fully, but only for 2.3 billion tenge, because of under-financing of planned capital repair over the period of up to 2009 (by 3.7 billion tenge over 2003-2008). 6.2.3 Tariff setting recommendations Implementation of this financial strategy poses special requirements for tariff financing. Most importantly, raising additional financing resources through increased tariffs is not feasible without enhancing payment discipline. Actual increase of revenues through tariff increases will depend on the collection rates, which should in 2007 be at the average level of: • 90% for population (75% by the end of 2001); and

• 95% for other consumers (90% by the end of 2001).

Besides, there is every reason to believe that implementation of a new legislation on the introduction of a price-cap tariff and the profit based on return on regulated value of assets (RVA) taking the account of the technological risk, will in the medium term bring the level of tariffs for WSS services to a level that is much higher than today (see Annex 8). Closing the financial deficit according to the scenario taken as a basis for such a strategy will require an

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 84 increase of the average tariff to the level of 36 tenge/m3 in 2001 prices (against 18 tenge/m3 in 2001 prices). In terms of affordability this means that in 2006 payments for the water services including VAT will reach, on average, a maximum value of 2.47% of AHIC, and will decrease to 2.27% in 2012. In terms of additional resources, over the period of 2003-2012 this measure may ensure additional (taking into account increased payment collection) cash resources amounting to 9.3 billion tenge. In 2002, the average payment for WSS services was estimated at 1.75% of the average family income. In the world, a level equal to 3-4% of family income is considered as acceptable. The problem related to these estimations is, however, that in the Oblast and in the Republic there is no generally accepted method of affordability analysis and acceptability of water tariffs for the population. Drafting and implementing such a methodology must become a central link in the tariff system implemented now by the Anti-monopoly Agency of the RK (see section 3.2.1 and Annex 8). 6.2.4 Recommendations related to budgetary financing Budgetary financing will still remain one of the basic financing source for the sector. This strategy assumes setting the following indicative targets concerning financing from the Oblast consolidated budget: • Financing of capital costs in the water supply sector will reach 1.2% of the EKO expenditures by 2007 (against 0.4% in 2001), thus ensuring the total amount of financing at 1.4 billion tenge in the sample including 22 WSS companies (3.9 billion tenge for the whole Oblast). Additional 0.5 billion tenge in 2003 and 2004 will be allocated from the EKO for the 3rd stage of biological treatment plants of the Ust- Kamenogorsk Vodokanal;

• Financing of capital costs in the water supply sector from the national budget will be, according to the programme on 'Drinking Water', 1.2 billion tenge for the period of 2003-2012 in this sample of WSS companies (2.4 billion tenge for the whole Oblast). An additional 1.1 billion tenge in 2003 and 2004 will be allocated for biological treatment plants of the Semipalatinsk Vodokanal.

This does not exhaust the budgetary opportunities. However, according to general international practice of the WSS sector operations, budgetary funds should be used to provide targeted housing support, the need for which will increase when tariffs for WSS services go up. 6.2.5 Recommendations on loan financing Loan finances should be considered here as an opportunity and, hence, as an additional scenario to the basic financing strategy. The loan financing scenario for the Ust- Kamenogorsk Vodokanal will change the need for increasing the average tariff in the sample for the period of 2003-2012. A loan amounting to about 20 million US dollars in 2001 prices will cover 1/3 of the priority investment programme for the sample of 22 populated centres. Loan financing will result in replacing the need for tariff financing of the priority investment programme in the town of Ust- Kamenogorsk and will release more budgetary funds for small towns and urban settlements in the EKO.

6.2.6 Recommendations on improvement of contractual relations

To attain objectives and priorities set by the strategy, it would be required to specify in more concrete terms the contractual commitments, both on the part of WSS companies for development of the infrastructure and on the part on the owner on financing capital costs and stimulating managers and personnel of WSS companies. The latter includes development of

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 85 a system of indicators on economic and business activities of the WSS companies and the status of the engineering infrastructure that will help the WSS companies' owners and the Oblast Akimat to follow the achievement of such contractual commitments. One of the possible options for reforms of the relations between the owner and the operator may be a management contract at one of the WSS companies in the Eastern Kazakhstan Oblast, for example at the Ust-Kamenogorsk Vodokanal (see Annex 8) according to the scheme recommended by the World Bank for WSS companies in Kazakhstan. It has already been prepared by the Bank for WSS companies of the towns of Karaganda, Temirtau and Kokshetav. In addition, the owners of the infrastructure and the regulating agency (the Antimonopoly Agency) should determine, as fast as possible, a new principle for measuring the production efficiency of the WSS companies: not based on the volume (costs) of the previous periods, but based on providing optimisation incentives and encouraging cost saving. This will also impact the system of the production norms, the performance (output) indicators system and the system of administrative and economic incentives for managers and personnel of the WSS companies (see also Annex 8: Project on development of the programme for improvement of financial and business indicators of WSS companies as a management tool).

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 86 Annexes

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 87 Annex 1 Minutes of the final project meeting

TACIS Support to the Implementation of the Environmental Policies and NEAPs in the NIS

MINUTES of the meeting with V.N. Sukhorukova, Deputy Akim for Eastern Kazakhstan Oblast

Town of Ust-Kamenogorsk 5 February 2003

Attended by: AKAZHANOVA Gulmaya Yestayevna, Deputy Manager, Economic Reforms Directorate, EKO Akim BALGEREYEV Marat Akhmedjanovich, National Coordinator of the TACIS Project 'Support for the Implementation of Environmental Policies and NEAPs in the NIS' in Kazakhstan, Ministry of Environmental Protection POPKOVA-SORENSEN Oxana Nikolayevna, Manager of the subproject on 'Development of the Pilot Financing Strategy for Urban Water Supply and Sanitation in Eastern Kazakhstan Oblast' TETERIN Victor Ivanovich, Acting Manager of the Directorate of Municipal Economy and Transport of the EKO

Agenda: Discussion of the results of the subproject 'Development of the Pilot Financing Strategy for Urban Water Supply and Sanitation in Eastern Kazakhstan Oblast'

Exchange of opinions resulted in the following: 1. The Oblast Akimat, represented by the Directorate of Municipal Economy and Transport of the EKO, recognised the results of the work performed by the project group to be satisfactory. 2. Additional budget and tariff financing of capital cost in urban water supply and sanitation sector of the EKO is very much needed and has been proven feasible. The analysis has demonstrated the reserves of production optimisation and cost savings at WSS companies that can be realised through a priority investment programme. In particular, the priority investment programme has been identified and detailed for the municipal company 'Oskemen-Vodokanal', Ust-Kamenogorsk. 3. The list of priority measures identified by this project is of interest for the EKO. The support of international financial organisations and donors is resirable to foster their implementation. 4. Of special interest for the EKO is the continuation of the subprojects as regards the development of the methodology for analysis of affordability and willingness of population to pay for the water supply and sanitation services. 5. Participation of the municipal company 'Oskemen-Vodokanal', Ust-Kamenogorsk, in the project of the World Bank “Water Supply and Sanitation of North-Eastern Kazakhstan' is desirable in order to implement the identified priority investment programme. 6. The possibility of introduction of management contract system at the municipal comapny 'Oskemen- Vodokanal', Ust-Kamenogorsk, is interesting for the Oblast Akimat and will be considered.

Deputy Akim of Eastern Kazakhstan Oblast (signature) V.N. Sukhorukova

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 88 Annex 2: Map of Eastern Kazakhstan Oblast

4&5 2

The map is divided into the identified territorial zones as described in the main text.

BCEOM HALCROW GROUP LTD. COWI CONSORTIUM 89 Annex 3: Calculation of the baseline scenario for the sample WSS companies

Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003-2012 meas. Price level current price of price of price of price of price of price of price of price of price of price of price of 2001 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. Macro economy and budget Consumer price index 1.08 VAT rate 18% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% thousand 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 EKO population, total people thousand 859 859 859 859 859 859 859 859 859 859 859 859 Population of the town sample, total people Growth % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% billion 27.8 28.3 30.6 32.6 34.8 37.2 39.2 41.1 43.2 45.3 47.6 50.0 GDP tenge Real growth % 13.2 8 6.8 6.6 6.9 5.3 5.0 5.0 5.0 5.0 5.0 5.0 billion 241.2 Nominal gross regional product (GRP) tenge Nominal growth of GRP % 13.5% billion 248.4 255.9 263.6 271.5 279.6 288.0 296.6 305.5 314.7 324.2 333.9 Real gross regional product (GRP) tenge Real growth of GRP % 5.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% COB (consolidated Oblast budget) in % of GRP % 12.6% 10.3% 10.6% 11.0% 11.5% 11.9% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% Revenues of the consolidated budget (RCB), mil tenge mil tenge 30459 25583.3 27044.9 29055.7 31163.2 33371.5 35684.6 36740.7 37828.5 38948.9 40103.0 41291.6 351,233 Growth of the revenues % 17.637% -16.0% 5.7% 7.4% 7.3% 7.1% 6.9% 3.0% 3.0% 3.0% 3.0% 3.0% Own incomes mil tenge 26793.6 20,126 21,298 22,910 24,599 26,370 28,225 29,071 29,943 30,842 31,767 32,720 277,745 Growth of own revenues % 20% -25% 5.8% 7.6% 7.4% 7.2% 7.0% 3.0% 3.0% 3.0% 3.0% 3.0% Republic’s transfers mil tenge 2,872 4976 5266 5665 6083 6520 6979 7188 7404 7626 7855 8091 68,677 Repay of main debts mil tenge 793 481 481 481 481 481 481 481 481 481 481 481 4,811 Revenue of the consolidated budget (RCB) % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Own revenues in % of COB % 88.0% 78.7% 78.7% 78.8% 78.9% 79.0% 79.1% 79.1% 79.2% 79.2% 79.2% 79.2% Republic’s transfers in% of COB % 9.4% 19.5% 19.5% 19.5% 19.5% 19.5% 19.6% 19.6% 19.6% 19.6% 19.6% 19.6% Total levied taxess in EKO mil tenge 44100 40,326 43,464.4 46,754.6 50,203.0 53,816.2 57,601.1 59,329.1 61,109.0 62,942.3 64,830.5 66,775.4 566,826 to the budget of RK mil tenge 17306 20,201 22,166.9 23,845 25,604 27,446 29,377 30,258 31,166 32,101 33,064 34,055 289,081 to the budget of EKO mil tenge 26794 20,126 21,297.6 22,910 24,599 26,370 28,225 29,071 29,943 30,842 31,767 32,720 277,745 Total levied taxess in EKO in % of GRP % 18.3% 16.2% 17.0% 17.7% 18.5% 19.2% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% tenge/ma/y 29,677 27,137 29,249 31,463 33,784 36,215 38,763 39,925 41,123 42,357 43,628 44,936 Levied taxess in EKO ear tenge/man/ 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 Levied taxess in RK year Total expenses, COB mil tenge 29,218 25,583 27,045 29,056 31,163 33,371 35,685 36,741 37,829 38,949 40,103 41,292 351,233 Growth % 16.1% -12.4% 5.7% 7.4% 7.3% 7.1% 6.9% 3.0% 3.0% 3.0% 3.0% 3.0% Total budget financing of capital costs mil tenge 226 279 526 867 823 590 615 546 365 291 291 291 5,204 Total budget financing of capital costs in the WSS mil tenge 240 388 374 235 243 221 140 114 114 114 2,183 sector for the sample capital costs for the WSS sector in the housing and mil tenge 20.7 21 - communal (HV) sector costs (town and district budgets) in the sample mil tenge - financing of HC sector costs from COB (Clean mil tenge 98.4 151 150 301 248 400 432 345 287 214 214 214 2,805 Water/Drinking water programmes) in the sample 35% 35 53 53 106 87 141 152 121 101 75 75 75 987

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 90 Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003-2012 meas. Price level current price of price of price of price of price of price of price of price of price of price of price of 2001 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. financing of the HC sector form the republic’s mil tenge 107 107 376 566 575 190 183 201 77 77 77 77 2,400 budget, mil tenge in the sample 50% 53 53 187 282 286 95 91 100 39 39 39 39 1,196 financing of capital costs of the HC sector from COB % 0.41% 0.67% 0.55% 1.04% 0.80% 1.20% 1.21% 0.94% 0.76% 0.55% 0.53% 0.52% in % of COB 0.92% 0.86% WSS companies expenses m3/year 93% 116,748,33 116,748,33 115,973,60 115,198,87 114,424,15 113,649,42 112,874,70 112,099,97 111,325,24 110,550,52 109,775,79 109,001,07 Water intake 0 0 4 8 2 6 1 5 9 3 7 1 Change in water intake % 0.00% -0.66% -0.67% -0.67% -0.68% -0.68% -0.69% -0.69% -0.70% -0.70% -0.71% -0.71% million 20,493 20,493 20,425 20,425 20,425 20,424 20,424 20,423 20,423 20,422 20,422 20,421 204,233 Cost of assets replacement tenge Change in the costs of assets replacement % 0.00% -0.33% -0.33% -0.34% -0.34% -0.34% -0.34% -0.35% -0.35% -0.35% -0.35% million 1,918 1,925 1,926 1,931 1,936 1,941 1,946 1,951 1,956 1,961 1,966 1,971 19,486 Annual expenses tenge million 666 666 664 664 664 664 664 664 664 664 664 664 6,639 Maintenance tenge million 1,252 1,259 1,262 1,267 1,272 1,277 1,282 1,287 1,292 1,297 1,302 1,308 12,847 Operation costs and expenses of the period tenge million 287 289 290 292 293 294 295 296 297 298 299 300 2,952 Electricity tenge kW*h/year 94% 121,907,67 121,907,67 121,156,13 120,404,60 119,653,06 118,901,53 118,150,00 117,398,46 116,646,93 115,895,39 115,143,86 114,392,33 Electricity consumption 0 0 6 2 8 4 0 6 2 8 4 0 Electricity price tenge/kW*h 2.35 2.37 2.40 2.42 2.45 2.47 2.49 2.52 2.54 2.57 2.60 2.62 2.65 Electricity price $US/kW*h 0.016 0.0163 0.0164 0.0166 0.0168 0.0169 0.0171 0.0173 0.0174 0.0176 0.0178 0.0180 0.0181 Growth of electricity price % 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% million 375 379 383 387 391 395 399 403 407 411 415 419 4,007 Wages and charges tenge Growth of wages and charges % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% million 384 384 383 383 383 383 383 383 383 383 383 383 3,829 Other operation costs tenge Share in the replacement values % 1.87% 1.87% 1.87% 1.87% 1.87% 1.87% 1.87% 1.87% 1.87% 1.87% 1.87% 1.87% Expenses of the period million 206 206 206 206 206 206 206 206 206 206 206 206 2,059 tenge Revenues of the WSS companies 1,231,037 1,243,348 1,255,781 1,268,339 1,281,022 1,293,833 1,306,771 1,319,839 1,333,037 1,346,367 1,359,831 1,373,429 13,138,249 Other consumers of WSS companies services Used in the sample (other) cubic m 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 Sewerage sector m3/year 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 Growth of consumption % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Tariff for other water supply and sanitation services tenge\m3 18.0 18.2 18.3 18.5 18.7 18.9 19.1 19.3 19.5 19.7 19.9 20.1 consumers Percent change of the tariff % 0% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Expenses (operation costs, expenses for the period, thousand 1,147,408 1,150,984 1,151,740 1,154,382 1,157,041 1,159,717 1,162,409 1,165,118 1,167,844 1,170,587 1,173,346 1,176,123 11,638,309 maintenance) tenge Tariff on costs with VAT tenge\m3 31.1 30.7 30.7 30.8 30.9 30.9 31.0 31.1 31.1 31.2 31.3 31.4 310 thousand 665,013 671,663 678,380 685,164 692,015 698,936 705,925 712,984 720,114 727,315 734,588 741,934 7,097,356 Revenues from water supply and sanitation tenge % of costs coverage % 58% 58% 59% 59% 60% 60% 61% 61% 62% 62% 63% 63% Tariff on costs – VAT tenge\m3 21.2 17.9 18.1 18.3 18.5 18.6 18.8 19.0 19.2 19.4 19.6 19.8 189 Collection rate % 90% 90% 90% 90% 90% 90% 90% 90% 90% 90% 90% 90% 9 Collected revenues thousand 598,512 604,497 610,542 616,647 622,814 629,042 635,332 641,686 648,103 654,584 661,130 667,741 6,387,620

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 91 Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003-2012 meas. Price level current price of price of price of price of price of price of price of price of price of price of price of 2001 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. tenge Services of WSS companies used by population (for 22 WSS companies) Monthly average income per capita in EKO used for tenge 6,613 6,679 6,746 6,813 6,882 6,950 7,020 7,090 7,161 7,233 7,305 7,378 70,577 consumption Real growth of incomes per year % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Reduced to the number of consumers who have officially registered domicile Water supply and sanitation services bill per person who tenge 101.6 102.6 103.6 104.7 105.7 106.8 107.9 108.9 110.0 111.1 112.2 113.4 has official domicile, without VAT Water supply and sanitation services bill per person who tenge 119.9 119.0 120.2 121.4 122.6 123.9 125.1 126.4 127.6 128.9 130.2 131.5 has official domicile, with VAT % of incomes 1.81% 1.78% 1.78% 1.78% 1.78% 1.78% 1.78% 1.78% 1.78% 1.78% 1.78% 1.78% Number of people connected to water supply system persons 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 (WS) Number of people connected to wastewater removal persons 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 system (WR) Bills for WS and WR services for population, without thousand 566,024 571,684 577,401 583,175 589,007 594,897 600,846 606,854 612,923 619,052 625,243 631,495 VAT tenge Reduced to the number of consumers acc. to assessment Monthly bill for water supply and sanitation services per tenge 80.3 81.1 81.9 82.8 83.6 84.4 85.3 86.1 87.0 87.9 88.7 89.6 857 real consumer, without VAT Growth of the monthly bill for water supply and % 1.18% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% sanitation services Monthly bill for water supply and sanitation services per tenge 94.8 94.1 95.1 96.0 97.0 97.9 98.9 99.9 100.9 101.9 102.9 104.0 995 real consumer, with VAT Monthly bill for water supply and sanitation services with % 1.43% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% VAT, in % of the incomes Number of population connected to water supply persons 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 Growth in the population connected to water supply % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Number of population connected to wastewater persons 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 collection system Growth in the number of population connected to % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% wastewater collection system Average specific water use by population l/man/day 157 157 157 157 157 157 157 157 157 157 157 157 000 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 Water use by population, total m3/year 000 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 wastewater collection from population, total m3/year thousand 976,634 979,678 980,321 982,571 984,834 987,111 989,403 991,709 994,029 996,363 998,712 1,001,076 9,906,128 Expenses tenge % of expenses with VAT in the income used for % 2.47% 2.41% 2.39% 2.37% 2.36% 2.34% 2.32% 2.30% 2.29% 2.27% 2.25% 2.23% consumption Expenses with VAT per m3 of used water tenge/m3 31.1 30.7 30.7 30.8 30.9 30.9 31.0 31.1 31.1 31.2 31.3 31.4 Revenues from water supply and sanitation for the thousand 566,024 571,684 577,401 583,175 589,007 594,897 600,846 606,854 612,923 619,052 625,243 631,495 6,040,893 population sample, without VAT tenge % of expenses coverage in the billed revenues, without thousand 58% 58% 59% 59% 60% 60% 61% 61% 62% 62% 63% 63% 6 VAT tenge Average weighted tariff for water supply and sanitation tenge/m3 18.0 18.17 18.35 18.53 18.72 18.90 19.09 19.28 19.48 19.67 19.87 20.07 without VAT Average weighted tariff for water supply and sanitation tenge/m3 21.2 21.1 21.3 21.5 21.7 21.9 22.1 22.4 22.6 22.8 23.0 23.3 with VAT

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 92 Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003-2012 meas. Price level current price of price of price of price of price of price of price of price of price of price of price of 2001 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. Maximum monthly bill for water supply and sanitation 1.43% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% with VAT, as % of the incomes Fee collection rate % 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% thousand 424,518 428,763 433,051 437,381 441,755 446,173 450,634 455,141 459,692 464,289 468,932 473,621 4,530,670 Collected revenues tenge Total operation costs and expenses of the period in the thousand 1,457,886 1,464,505 1,468,115 1,473,021 1,477,958 1,482,927 1,487,926 1,492,956 1,498,018 1,503,111 1,508,236 1,513,393 14,905,661 water supply sand wastewater collection sector tenge thousand 670,336 673,379 675,039 677,295 679,565 681,849 684,148 686,461 688,788 691,130 693,487 695,858 6,853,620 Population tenge thousand 787,550 791,126 793,076 795,726 798,393 801,077 803,778 806,495 809,230 811,981 814,749 817,535 8,052,041 Other consumers tenge thousand 666,157 666,157 663,946 663,932 663,917 663,902 663,886 663,871 663,855 663,839 663,823 663,806 6,638,776 Total maintenance tenge thousand 306,299 306,299 305,282 305,276 305,269 305,262 305,255 305,248 305,240 305,233 305,226 305,218 3,052,508 Population tenge thousand 359,858 359,858 358,664 358,656 358,648 358,640 358,631 358,623 358,614 358,606 358,597 358,588 3,586,268 Other consumers tenge 000 80,519 80,519 80,519 80,519 80,519 80,519 80,519 80,519 80,519 80,519 80,519 80,519 805,189 Total water use m3/year 000 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 37,023 370,226 Population m3/year 000 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 434,963 Other consumers m3/year Source: model-based calculations

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 93 Annex 4: Calculation of the 'Optimisation' scenario for the sample WSS companies

Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003- meas. 2012 Price level current price of price of price of price of price of price of price of price of price of price of price of 2001 2001 2001 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. Macro economy and budget Consumer price index 1.08 VAT rate 18% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% thousand 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 1,486 EKO population, total people thousand 859 859 859 859 859 859 859 859 859 859 859 859 Population of the town sample, total people Growth % - 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% GDP billion tenge 28 28.3 30.6 32.6 34.8 37.2 39.2 41.1 43.2 45.3 47.6 50.0 Real growth % 13 8 6.8 6.6 6.9 5.3 5.0 5.0 5.0 5.0 5.0 5.0 Nominal gross regional product (GRP) billion tenge 241 Nominal growth of GRP % 13% Real gross regional product (GRP) billion tenge 0% 248.4 255.9 263.6 271.5 279.6 288.0 296.6 305.5 314.7 324.2 333.9 Real growth of GRP % 5.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Revenues of the consolidated budget (RCB), mil tenge mil tenge 30459 25583.3 27044.9 29055.7 31163.2 33371.5 35684.6 36740.7 37828.5 38948.9 40103.0 41291.6 351,233 COB (consolidated Oblast budget) in % of GRP % 12.6% 10.3% 10.6% 11.0% 11.5% 11.9% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% Growth of the COB revenues % 17.637% -16.0% 5.7% 7.4% 7.3% 7.1% 6.9% 3.0% 3.0% 3.0% 3.0% 3.0% Own incomes mil tenge 26,793.6 20,126 21,298 22,910 24,599 26,370 28,225 29,071 29,943 30,842 31,767 32,720 277,745 Own incomes of COB in % of GRP % 11% 8% 8% 9% 9% 9% 10% 10% 10% 10% 10% 10% Growth of own revenues % 20% -25% 5.8% 7.6% 7.4% 7.2% 7.0% 3.0% 3.0% 3.0% 3.0% 3.0% Republic’s transfers mil tenge 2,872 4976 5266 5665 6083 6520 6979 7188 7404 7626 7855 8091 68,677 Repay of main debts mil tenge 793 481 481 481 481 481 481 481 481 481 481 481 4,811 Revenue of the consolidated budget (RCB) % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Own revenues in % of COB % 88.0% 78.7% 78.7% 78.8% 78.9% 79.0% 79.1% 79.1% 79.2% 79.2% 79.2% 79.2% Republic’s transfers in % of COB % 9.4% 19.5% 19.5% 19.5% 19.5% 19.5% 19.6% 19.6% 19.6% 19.6% 19.6% 19.6% Repay of the main debts in % of COB % 1.9% 1.8% 1.7% 1.5% 1.4% 1.3% 1.3% 1.3% 1.2% 1.2% 1.2% Total levied taxess in EKO mil tenge 44,100 40,326 43,464.4 46,754.6 50,203.0 53,816.2 57,601.1 59,329.1 61,109.0 62,942.3 64,830.5 66,775.4 566,826 to the budget of RK mil tenge 17,306 20,201 22,166.9 23,845 25,604 27,446 29,377 30,258 31,166 32,101 33,064 34,055 289,081 to the budget of EKO mil tenge 26,794 20,126 21,297.6 22,910 24,599 26,370 28,225 29,071 29,943 30,842 31,767 32,720 277,745 to the budget of RK % 39% 50% 51% 51% 51% 51% 51% 51% 51% 51% 51% 51% to the budget of EKO % 61% 50% 49% 49% 49% 49% 49% 49% 49% 49% 49% 49% Total levied taxess in EKO in % of GRP % 18% 16% 16.99% 17.74% 18.49% 19.25% 20% 20% 20% 20% 20% 20% tenge/man/ 29,677 27,137 29,249 31,463 33,784 36,215 38,763 39,925 41,123 42,357 43,628 44,936 Levied taxess in EKO year tenge/man/ 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 43 000 Levied taxess in RK year Total expenses, COB mil tenge 29218 25,583 27,045 29,056 31,163 33,371 35,685 36,741 37,829 38,949 40,103 41,292 351,233 Growth % 16.1% -12.4% 5.7% 7.4% 7.3% 7.1% 6.9% 3.0% 3.0% 3.0% 3.0% 3.0% 0 Total budget financing of capital costs mil tenge 226 279 586 822 883 555 611 642 531 545 559 573 6,307 Total budget financing of capital costs in the WSS mil tenge 261 372 395 223 242 255 198 203 208 213 2,570 sector for the sample capital costs for the WSS sector in the housing and mil tenge 20,7 21 - communal (HV) sector costs (town and district budgets) in the sample mil tenge - financing of HC sector costs from COB (Clean mil tenge 98.4 151 210 256 308 365 428 441 454 467 481 495 3,907 Water/Drinking water programmes) in the sample 35% 74 90 108 128 151 155 160 164 169 174 1,374

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 94 Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003- meas. 2012 Price level current price of price of price of price of price of price of price of price of price of price of price of 2001 2001 2001 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. financing of the HC sector form the republic’s budget, mil tenge 107 107 376 566 575 190 183 201 77 77 77 77 2,400 mil tenge in the sample 50% 187 282 286 95 91 100 39 39 39 39 1,196 financing of capital costs of the HC sector from COB in % 0.41% 0.67% 0.78% 0.88% 0.99% 1.09% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20% 0 % of COB WSS companies expenses thousand 1,457,886 1,464,505 1,378,299 1,292,203 1,206,201 1,120,274 1,034,406 990,464 970,303 972,101 973,906 975,717 Total operation costs and expenses of the period in the tenge 10,913,87 water supply sand wastewater collection sector 4 thousand 670,336 673,379 621,862 571,519 522,394 474,538 428,003 409,822 401,480 402,223 402,970 403,720 4,638,531 Population tenge thousand 787,550 791,126 756,437 720,684 683,806 645,736 606,403 580,643 568,824 569,878 570,935 571,997 6,275,344 Other consumers tenge thousand 666,157 666,157 650,307 634,457 618,608 602,758 586,908 571,058 568,757 566,439 564,104 561,754 5,925,150 Total maintenance tenge thousand 306,299 306,299 293,406 280,609 267,913 255,323 242,843 236,285 235,333 234,374 233,408 232,435 2,511,929 Population tenge thousand 359,858 359,858 356,901 353,848 350,694 347,435 344,065 334,773 333,424 332,065 330,697 329,319 3,413,220 Other consumers tenge 000 80,519 80,519 79,254 77,990 76,725 75,461 74,196 74,196 74,196 74,196 74,196 74,196 754,609 Total water use m3/year 000 37,023 37,023 35,758 34,494 33,229 31,965 30,700 30,700 30,700 30,700 30,700 30,700 319,645 Population m3/year 000 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 43,496 434,963 Other consumers m3/year m3/year 94,526,190 88,970,655 83,415,120 82,608,270 81,795,804 80,977,644 80,153,711 69% 116,748,33 116,748,33 111,192,79 105,637,26 100,081,72 Water intake 0 0 5 0 5 Change in water intake % 0.00% -4.76% -9.52% -14.28% -19.03% -23.79% -28.55% -29.24% -29.94% -30.64% -31.34% million 20,493 20,493 20,006 19,518 19,031 18,543 18,055 17,568 17,497 17,426 17,354 17,282 84% Cost of assets replacement tenge Change in the costs of assets replacement % 0.00% -2.38% -4.76% -7.14% -9.52% -11.90% -14.28% -14.62% -14.97% -15.32% -15.67% million 1,918 1,925 1,823 1,721 1,619 1,517 1,415 1,356 1,333 1,333 1,332 1,332 14,780 Annual expenses tenge million 666 666 650 634 619 603 587 571 569 566 564 562 5,925 Maintenance tenge million - - 25 51 51 54 58 61 64 68 68 68 567 Additional operation costs connected with new construction tenge million - - 9 18 18 18 18 18 18 18 18 18 171 3rd stage of the BWWTP in Ust-Kamenogorsk tenge million - - 16.29 32.58 32.58 32.58 32.58 32.58 32.58 32.58 32.58 32.58 310 BWWTP in Semipalatinsk tenge million - - 3.46 6.92 10.38 13.84 17.30 17.30 17.30 87 Water intake in the town of Ridder tenge million 1,252 1,259 1,172 1,086 1,000 914 829 785 764 766 768 770 8,855 Operation costs and expenses of the period tenge million 287 289 273 257 240 223 206 188 189 189 190 190 2,145 Electricity tenge kW*h/year 98,254,981 90,370,752 82,486,522 74,602,292 74,086,714 73,571,135 73,055,557 72,539,979 60% 121,907,67 121,907,67 114,023,44 106,139,21 Electricity consumption 0 0 0 1 Change in electricity consumption % 0.0% -6.5% -6.9% -7.4% -8.0% -8.7% -9.6% -0.7% -0.7% -0.7% -0.7% Electricity price tenge/kW*h 2.35 2.37 2.40 2.42 2.45 2.47 2.49 2.52 2.54 2.57 2.60 2.62

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 95 Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003- meas. 2012 Price level current price of price of price of price of price of price of price of price of price of price of price of 2001 2001 2001 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. million 375 379 343 306 269 230 191 193 195 197 199 201 2,325 Wages and charges tenge Growth of wages % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Average wages tenge/mont 11600 11,716 11,833 11,951 12,071 12,192 12,314 12,437 12,561 12,687 12,814 12,942 h Number of personnel persons 2,697 2,697 2,417 2,136 1,855 1,575 1,294 1,294 1,294 1,294 1,294 1,294 Number of personnel per 1000 persons receiving persons 4.17 4.17 3.74 3.30 2.87 2.43 2.00 2.00 2.00 2.00 2.00 2.00 services million 384 384 350 317 285 255 226 198 175 174 174 173 2,326 Other operation costs tenge Share in the replacement values % 1.87% 1.87% 1.75% 1.62% 1.50% 1.37% 1.25% 1.12% 1.00% 1.00% 1.00% 1.00% Expenses of the period million 206 206 206 206 206 206 206 206 206 206 206 206 2,059 tenge Revenues of the WSS companies 1,231,037 Other consumers of WSS companies services Used in the sample (other) cubic m 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 43,496,333 59% Sewerage sector m3/year 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 30,447,433 Growth of consumption % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Tariff for other water supply and sanitation services tenge\m3 18.0 18.2 18.3 18.5 18.7 18.9 19.1 19.3 19.5 19.7 19.9 20.1 consumers Percent change of the tariff % 0.0 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Expenses for water supply and sanitation acc. to the sample thousand 1,147,408 1,150,984 1,113,338 1,074,532 1,034,501 993,172 950,468 915,416 902,247 901,942 901,632 901,316 9,688,564 for other consumers tenge Tariff on costs with VAT tenge\m3 31.1 36.1 34.9 33.7 32.5 31.2 29.8 28.7 28.3 28.3 28.3 28.3 Revenues from water supply and sanitation acc. to the thousand 665,013 671,663 727,424 783,185 838,946 894,707 950,468 915,416 902,247 901,942 901,632 901,316 8,717,284 sample for other consumers, when costs are covered in the tenge target year % of costs coverage % 58% 65% 73% 81% 90% 100% 100% 100% 100% 100% 100% Tariff with VAT tenge 21.2 21.1 22.8 24.6 26.3 28.1 29.8 28.7 28.3 28.3 28.3 28.3 Revenues from water supply and sanitation acc. to the thousand 665,013 671,663 848,580 1,036,181 1,235,184 1,446,388 1,451,971 1,451,971 1,451,971 1,451,971 1,451,971 1,451,971 sample for other consumers, for the maximum solvency of tenge 13,278,16 population 1 Tariff without VAT 18.0 18.2 23.0 28.0 33.4 39.1 39.3 39.3 39.3 39.3 39.3 39.3 Surplice: over costs thousand 0 0 0 0 200,683 453,217 501,503 536,555 549,724 550,029 550,339 550,656 3,892,706 tenge Fee collection % 90% 90% 91% 92% 93% 94% 95% 95% 95% 95% 95% 95% 117% 117% 122% 126% 131% 136% 142% 142% 142% 142% 142% 142% 117% 117% 120% 122% 125% 128% 131% 131% 131% 131% 131% 131% Services of WSS companies used by population (for 22 WSS companies) Monthly average income per capita in EKO used for tenge 6,613 6,679 6,746 6,813 6,882 6,950 7,020 7,090 7,161 7,233 7,305 7,378 70,577 consumption Real growth of incomes per year % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Reduced to the number of consumers who have officially registered domicile Water supply and sanitation services bill per person who tenge 101.60 102.62 127.04 151.95 177.34 203.22 199.55 199.55 199.55 199.55 199.55 199.55 has official domicile, without VAT Water supply and sanitation services bill per person who tenge 119.89 119.03 147.37 176.26 205.71 235.74 231.48 231.48 231.48 231.48 231.48 231.48 has official domicile, with VAT % of incomes 1.81% 1.78% 2.18% 2.59% 2.99% 3.39% 3.30% 3.26% 3.23% 3.20% 3.17% 3.14% Number of people connected to water supply system (WS) persons 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 508,110 Number of people connected to wastewater removal system persons 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 420,408 (WR)

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 96 Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003- meas. 2012 Price level current price of price of price of price of price of price of price of price of price of price of price of 2001 2001 2001 2001. 2001. 2001. 2001. 2001. 2001. 2001. 2001. Reduced to the number of consumers acc. to assessment Monthly bill for water supply and sanitation services, without tenge 80.3 81.1 100.5 120.1 140.2 160.7 181.5 183.4 185.2 187.0 188.9 190.8 1,638 VAT Monthly bill for water supply and sanitation services, with tenge 94.8 94 116.5 139.4 162.7 186.4 210.6 212.7 214.8 217.0 219.1 221.3 VAT Growth of the monthly bill for water supply and sanitation % -1% 24% 20% 17% 15% 13% 1% 1% 1% 1% 1% services Maximum monthly bill for water supply and sanitation % 1.43% 1.41% 1.73% 2.05% 2.36% 2.68% 3% 3% 3% 3% 3% 3% services with VAT, in % of the incomes Number of population connected to water supply persons 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 646,997 Growth in the population connected to water supply % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Number of population connected to wastewater collection persons 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 527,317 system Growth in the number of population connected to % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% wastewater collection system Average specific water use by population l/man/day 157 157 151 146 141 135 130 130 130 130 130 130 000 37,023 37,023 35,758 34,494 33,229 31,965 30,700 30,700 30,700 30,700 30,700 30,700 Water use by population, total m3/year 000 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 25,916 wastewater collection from population, total m3/year thousand 976,634 979,678 915,268 852,128 790,307 729,860 670,847 646,107 636,812 636,597 636,378 636,155 7,150,460 Expenses tenge % of expenses with VAT in the income used for % 2.47% 2.41% 2.23% 2.06% 1.89% 1.73% 1.57% 1.50% 1.46% 1.45% 1.43% 1.42% consumption Expenses with VAT per m3 of used water tenge/m3 31.1 30.7 29.7 28.7 27.6 26.5 25.3 24.4 24.1 24.1 24.0 24.0 16.2 17.2 18.2 19.3 20.5 21.7 23.0 24.4 25.8 27.4 29.0 thousand 566,024 571,684 707,771 846,522 987,977 1,132,177 1,111,717 1,111,717 1,111,717 1,111,717 1,111,717 1,111,717 Revenues from water supply and sanitation for the tenge 10,344,74 population sample, without VAT 9 Revenues from water supply and sanitation for the thousand 566,024 571,684 707,771 846,522 987,977 1,132,177 1,279,162 1,291,954 1,304,873 1,317,922 1,331,101 1,344,412 population sample, without VAT, acc. to their maximum tenge 11,543,87 solvency 0 % of expenses (costs) coverage thousand 58% 58% 77% 99% 125% 155% 166% 172% 175% 175% 175% 175% tenge Surplice: excess over costs thousand 0 0 0 0 197,670 402,316 440,870 465,610 474,905 475,120 475,339 475,562 3,407,393 tenge Tariff with VAT for the maximum population solvency tenge/m3 21.2 21.1 26.6 32.5 38.8 45.4 52.4 52.9 53.5 54.0 54.5 55.1 Tariff without VAT for the maximum population solvency tenge/m3 18.0 18.2 23.0 28.0 33.4 39.1 45.2 45.6 46.1 46.6 47.0 47.5 Tariff with VAT for the targeted revenues from population tenge/m3 21.2 21.1 26.6 32.5 38.8 45.4 45.6 45.6 45.6 45.6 45.6 45.6 Tariff without VAT for the targeted revenues from tenge/m3 18.0 18.2 23.0 28.0 33.4 39.1 39.3 39.3 39.3 39.3 39.3 39.3 population Maximum monthly bill for water supply and sanitation 2.16 1.43% 1.41% 1.73% 2.05% 2.36% 2.68% 2.61% 2.58% 2.56% 2.53% 2.51% 2.48% (estimated population) with VAT, as % of the incomes Maximum monthly bill for water supply and sanitation 1.81% 1.78% 2.18% 2.59% 2.99% 3.39% 3.30% 3.26% 3.23% 3.20% 3.17% 3.14% (population with officially registered domicile) with VAT, as % of the incomes Growth of tariff % 1.0% 27.6% 55.8% 85.7% 117.5% 118.3% 118.3% 118.3% 118.3% 118.3% 118.3% Collection rate % 75% 75% 78% 81% 84% 87% 90% 90% 90% 90% 90% 90% 1.69% 1.66% 2.00% 2.34% 2.66% 2.96% 2.83% 2.80% 2.77% 2.74% 2.72% 2.69% 2.96% Source: model-based calculations

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 97 Annex 5: Calculation of the scenario 'Optimisation' for Ust-Kamenogorsk Vodokanal

Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 meas. Price level current price of price of price of price of price of price of price of price of price of price of price of price of 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 VAR rate % 18% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% Costs including additional expenses for thousand 808,604 809,711 783,856 758,753 725,400 692,794 660,934 629,818 628,901 627,974 627,036 626,087 625,139 servicing of the new stage of treatment tenge plants Additional expenses for servicing of the new thousand - - 9,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000 stage of treatment plants tenge Total operation costs and expenses for the thousand 808,604 809,711 774,856 740,753 707,400 674,794 642,934 611,818 610,901 609,974 609,036 608,087 607,139 period in the water supply and sanitation sector tenge thousand 402,219 402,770 364,157 328,135 304,076 280,777 258,237 245,740 245,372 245,000 244,624 244,243 243,863 Population tenge thousand 406,385 406,941 410,699 412,618 403,324 394,018 384,697 366,078 365,529 364,974 364,412 363,844 363,276 Other consumers tenge thousand 254,535 254,535 248,479 242,423 236,367 230,311 224,255 218,198 217,319 216,433 215,541 214,643 213,745 Total maintenance tenge thousand 126,612 126,612 116,777 107,387 101,602 95,831 90,073 87,641 87,287 86,932 86,574 86,213 85,853 Population tenge thousand 127,923 127,923 131,702 135,036 134,764 134,480 134,182 130,558 130,032 129,501 128,968 128,430 127,892 Other consumers tenge 000 35,054 35,054 35,356 35,657 34,836 34,015 33,195 33,195 33,195 33,195 33,195 33,195 33,195 Total water use m3/year 000 17,437 17,437 16,616 15,795 14,974 14,154 13,333 13,333 13,333 13,333 13,333 13,333 13,333 Population m3/year 000 17,617 17,617 18,740 19,862 19,862 19,862 19,862 19,862 19,862 19,862 19,862 19,862 19,862 Other consumers m3/year Water intake m3/year 53,845,500 53,845,500 51,283,232 48,720,963 46,158,695 43,596,426 41,034,158 38,471,890 38,099,762 37,725,045 37,347,701 36,967,695 36,587,689 Change in water intake % 0.00% -4.76% -9.52% -14.28% -19.03% -23.79% -28.55% -29.24% -29.94% -30.64% -31.34% -32.05% million 7,410 7,410 7,233 7,057 6,881 6,705 6,528 6,352 6,326 6,301 6,275 6,248 6,222 Cost of assets replacement tenge Change in the costs of assets replacement % 0.00% -2.38% -4.76% -7.14% -9.52% -11.90% -14.28% -14.62% -14.97% -15.32% -15.67% -16.03% million 809 810 775 741 707 675 643 612 611 610 609 608 607 Annual expenses tenge million 255 255 248 242 236 230 224 218 217 216 216 215 214 Maintenance tenge million 463 464 435 407 380 354 328 303 303 303 303 302 302 Operation costs and expenses of the period tenge million 111 112 106 99 93 86 80 73 73 73 73 73 74 Electricity tenge Electricity consumption kW*h/year 56,000,000 56,000,000 52,378,268 48,756,537 45,134,805 41,513,074 37,891,342 34,269,611 34,032,772 33,795,934 33,559,096 33,322,258 33,087,091 Change in electricity consumption % -6.5% -6.9% -7.4% -8.0% -8.7% -9.6% -0.7% -0.7% -0.7% -0.7% -0.7% Adjustment of costs 90% 33,100,000 33,100,000 31,063,614 29,027,228 26,990,842 24,954,455 22,918,069 20,881,683 20,737,369 20,593,055 20,448,741 20,304,428 20,161,132 22,900,000 22,900,000 21,314,655 19,729,309 18,143,964 16,558,618 14,973,273 13,387,927 13,295,403 13,202,879 13,110,355 13,017,830 12,925,959 Electricity price tenge/kW*h 1.98 2.00 2.02 2.04 2.06 2.08 2.10 2.12 2.14 2.16 2.18 2.21 2.23 million 166 166 166 166 166 166 166 166 166 166 166 166 166 Wages and charges tenge Growth of wages % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 0.0% Average wages tenge/mont 16816 16,984 17,154 17,154 17,326 17,499 17,674 17,851 18,029 18,209 18,391 18,575 18,575 h

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 98 Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 meas. Price level current price of price of price of price of price of price of price of price of price of price of price of price of 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 Number of personnel persons 825 825 776 825 677 627 578 578 578 578 578 578 578 Number of personnel per 1000 serviced persons 2.94 2.94 2.76 2.94 2.41 2.23 2.06 2.06 2.06 2.06 2.06 2.06 2.06 consumers million 186 186 163 142 121 101 82 64 63 63 63 62 62 Other costs tenge Share in the replacement values % 2.51% 2.51% 2.26% 2.01% 1.75% 1.50% 1.25% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Expenses of the period million 91 91 91 91 91 91 91 91 91 91 91 91 91 tenge Revenues of the WSS companies Other consumers of WSS companies services Bills to other consumers without VAT (financial thousand 200,226 113% sample) tenge Used acc. to the sample (other) m3/year 17,617,300 17,617,300 18,739,603 19,861,906 19,861,906 19,861,906 19,861,906 19,861,906 19,861,906 19,861,906 19,861,906 19,861,906 19,861,906 Sewerage 7,756,200 7,703,900 8,194,674 8,685,448 8,685,448 8,685,448 8,685,448 8,685,448 8,685,448 8,685,448 8,685,448 8,685,448 8,685,448 Consumption growth % 0% 6% 6% 0% 0% 0% 0% 0% 0% 0% 0% 0% Consumed cubic m 17,617,300 Tariff for other water consumers tenge\m3 15.8 18.6 18.8 19.0 19.2 19.3 19.5 19.7 19.9 20.1 20.3 20.5 20.5 Percent change of the tariff % 0% 18% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 0% Costs for water supply and sanitation acc. to the thousand. 534,308 534,865 542,401 547,654 538,088 528,498 518,879 496,636 495,561 494,475 493,380 492,274 491,168 sample for other consumers tenge Tariff on costs with VAT tenge\m3 35.8 35.2 33.6 32.0 31.4 30.9 30.3 29.0 28.9 28.9 28.8 28.8 28.7 Revenues from water supply and sanitation acc. thousand 200,226 235,331 292,041 348,750 405,460 462,169 518,879 496,636 495,561 494,475 493,380 492,274 491,168 to the sample for other consumers, provided tenge coverage is reached for the target year % of costs coverage % 44% 54% 64% 75% 87% 100% 100% 100% 100% 100% 100% 100% Tariff with VAT tenge 18.6 21.6 25.2 28.3 33.0 37.6 42.2 40.4 40.3 40.2 40.1 40.0 39.9 Revenues from water supply and sanitation acc. thousand 200,226 235,331 287,746 393,485 493,194 546,185 546,185 546,185 546,185 546,185 546,185 546,185 546,185 to the sample for other consumers, targeted tenge revenues from population 18% 44% 97% 146% 173% 173% 173% 173% 173% 173% 173% 173% Tariff without VAT 15.8 18.6 21.4 27.6 34.6 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.3 Surplice: excess over costs thousand 0 0 0 0 0 17,687 27,306 49,549 50,624 51,710 52,805 53,911 55,017 tenge Collection rate % 90% 90% 91% 92% 93% 94% 95% 95% 95% 95% 95% 95% 95% 70% 79% 81% 90% 95% 101% 107% 107% 107% 107% 107% 107% 107% 65% 65% Services of WSS companies used by population (for 22 WSS companies) Monthly average income per capita in EKO tenge 8,266 8,349 8,432 8,517 8,602 8,688 8,775 8,863 8,951 9,041 9,131 9,222 9,315 used for consumption Real growth of incomes per year % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Reduced to the number of consumers who have officially registered domicile tenge/mont 113.6 119.3 141.5 173.5 206.2 215.8 203.3 203.3 203.3 203.3 203.3 203.3 203.3 Water supply and sanitation services bill h Water supply and sanitation services bill, with tenge/mont 134.1 138.4 164.1 201.2 239.1 250.3 235.8 235.8 235.8 235.8 235.8 235.8 235.8 VAT h % of incomes 1.62% 1.66% 1.95% 2.36% 2.78% 2.88% 2.69% 2.66% 2.63% 2.61% 2.58% 2.56% 2.53% Number of people connected to water supply persons 215,129 215,129 215,129 215,129 215,129 215,129 215,129 215,129 215,129 215,129 215,129 215,129 215,129 system (WS) Number of people connected to wastewater persons 203,177 203,177 203,177 203,177 203,177 203,177 203,177 203,177 203,177 203,177 203,177 203,177 203,177 removal system (WR)

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 99 Indicator Unit of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 meas. Price level current price of price of price of price of price of price of price of price of price of price of price of price of 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001 Reduced to the number of consumers acc. to estimates Monthly bill for water supply and sanitation tenge 87.0 91.3 117.4 144.0 171.1 198.8 226.9 229.2 231.5 233.8 236.1 238.5 240.9 services, without VAT Monthly bill for water supply and sanitation tenge 102.7 106.0 136.2 167.0 198.5 230.6 263.2 265.9 268.5 271.2 273.9 276.7 279.4 services, with VAT Growth of the monthly bill for water supply and % 5.0% 28.6% 22.6% 18.8% 16.2% 14.2% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% sanitation services Growth of the monthly bill for water supply and % 3% 29% 23% 19% 16% 14% 1% 1% 1% 1% 1% 1% sanitation services Maximum monthly bill for water supply and % 1.24% 1.27% 1.62% 1.96% 2.31% 2.65% 3% 3% 3% 3% 3% 3% 3% sanitation services with VAT, in % of the incomes Number of population connected to water supply persons 280,980 280,981 280,982 280,983 280,984 280,985 280,986 280,987 280,988 280,989 280,990 280,991 280,992 Growth in the population connected to water % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% supply Number of population connected to wastewater persons 265,370 265,370 265,370 265,370 265,370 265,370 265,370 265,370 265,370 265,370 265,370 265,370 265,370 collection system Growth in the number of population connected % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% to wastewater collection system Average specific water use by population l/man/day 170 170 162 154 146 138 130 130 130 130 130 130 130 000 17,437 17,437 16,616 15,795 14,974 14,154 13,333 13,333 13,333 13,333 13,333 13,333 13,333 Water use by population, total m3/year 000 21,468 20,372 19,413 18,454 17,495 16,536 15,577 15,577 15,577 15,577 15,577 15,577 15,577 wastewater collection from population, total m3/year thousand 528,831 529,382 480,934 435,522 405,678 376,607 348,310 333,380 332,660 331,932 331,198 330,457 329,716 Expenses tenge % of expenses with VAT in the income used % 2.30% 2.24% 2.02% 1.81% 1.67% 1.53% 1.40% 1.33% 1.32% 1.30% 1.28% 1.27% 1.25% for consumption Expenses with VAT per m3 of used water tenge/m3 32.1 32.5 31.0 29.5 29.0 28.5 28.0 26.8 26.7 26.6 26.6 26.5 26.5 Revenues from water supply and sanitation for thousand 285,203 299,414 384,905 472,076 560,952 651,558 743,921 751,362 758,877 766,467 774,133 781,876 789,696 the population sample, without VAT tenge Revenues from water supply and sanitation for thousand 285,203 299,414 355,025 435,429 517,406 541,590 510,182 510,183 510,185 510,187 510,189 510,191 510,193 the population sample, without VAT, acc. to their tenge maximum solvency 5% 24% 53% 81% 90% 79% 79% 79% 79% 79% 79% 79% % of expenses (costs) coverage thousand 54% 57% 74% 100% 128% 144% 146% 153% 153% 154% 154% 154% 155% tenge Surplice: excess over costs thousand 0 0 0 0 111,728 164,983 161,872 176,803 177,526 178,255 178,991 179,734 180,477 tenge Tariff with VAT for the maximum population tenge/m3 17.3 18.4 24.8 32.0 40.1 49.3 59.7 60.3 60.9 61.5 62.1 62.7 63.4 solvency Tariff without VAT for the maximum population tenge/m3 14.7 15.8 21.4 27.6 34.6 42.5 51.5 52.0 52.5 53.0 53.6 54.1 54.6 solvency Tariff with VAT for the targeted revenues from tenge/m3 14.7 15.8 21.4 27.6 34.6 38.3 38.3 38.3 38.3 38.3 38.3 38.3 38.3 population Collection rate % 75% 75% 78% 81% 84% 87% 90% 90% 90% 90% 90% 90% 90% Maximum monthly bill for water supply and 1.24% 1.27% 1.49% 1.81% 2.13% 2.21% 2.06% 2.04% 2.02% 2.00% 1.98% 1.96% 1.94% sanitation (estimated population) with VAT, as % of the incomes Source: model-based calculations

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 100 Annex 6: Project ideas for environmental projects in the EKO water supply and sanitation sector

Content 1 Introduction 2 Dissemination of experience related to the development of the environmental protection strategy for water supply and sanitation sector in other regions of the Republic of Kazakhstan 3 Project on survey of opportunities for disaggregation of group water pipelines located in the territory of Eastern Kazakhstan Oblast 4 Project on utilization of sludge 5 Project on reduction of threats to safety of drinking water supply caused by pollution of groundwater

1 Introduction In the course of analysis of the current situation in the water supply and sanitation sector of Eastern Kazakhstan Oblast the following project ideas were determined aimed at improving the environmental conditions: Dissemination of experience related to the development of the environmental protection strategy for water supply and sanitation sector in other regions of the Republic of Kazakhstan; the project on survey of opportunities for disaggregation of group water pipelines located in the territory of Eastern Kazakhstan Oblast; construction of biochemical treatment plants in large towns of the Oblast (Ust-Kamenogorsk and Semipalatinsk); project on utilisation of sludge; project on reduction of threats to safety of drinking water supply caused by pollution of groundwater. 2 Dissemination of experience related to the development of the environmental protection strategy for water supply and sanitation sector in other regions of the Republic of Kazakhstan Project objectives In 2002, the TACIS project 'Support to the Implementation of the Environmental Policies and NEAPs in the NIS' started. The project pays special importance to the problem of provision to the population of Kazakhstan towns of good quality drinking water and the problem of wastewater treatment and includes development of a demonstration financing strategy for the urban water supply and sanitation sector in Eastern Kazakhstan Oblast. The pilot regional financing strategy is a second project on the development of a similar strategic document for the water supply and sanitation sector in Kazakhstan. In 1999, with financial support provided by the Danish Environmental Protection Agency (DEPA), the national environmental financing strategy was developed for the centralised water supply and sanitation sector of the Republic of Kazakhstan. The financing strategy uses a methodology that makes up it possible to develop a long-term (5-15 years) programme of financing of current and capital expenses in this sector, including a programme of high priority capital investments that would be feasible and balanced as regards the scope of required and available financial resources. The financing strategy analyses, in a thorough way, the need for investment of capital based on the goals set for the centralised water supply and sanitation sector.

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 101 The financing strategy is based on the modelling of the required costs and qualitative analyses. The financing strategy tools also include a computer model16 that allows a quantitative assessment of current expenses required for a normal maintenance and operation of available and newly commissioned engineering infrastructure in the water supply and sanitation sector, including also costs for current and maintenance, as well as capital costs for commissioning of new fixed assets or a planned update (reconstruction) of worn fixed assets. The project to be completed at present in the Eats Kazakh Oblast demonstrated advantages of the development of an environmental financing strategy for the water supply and sanitation sector at the regional level. This is connected, above all, with opportunity to make up a more detailed analysis of data and organise a closer cooperation with large companies of the water supply and sanitation sector, when we speak about certain regions of the country. The basic goals of the regional project on development of a similar long-term document include, first of all, the following: • To provide technical support to the regional bodies of government of the water supply and sanitation sector by making an independent assessment of the existing situation, as set in this sector, as well as analysis and prioritisation of the set objectives and tasks and ranking of investment demands. • To make up it a tool for involvement of additional finances needed for environmental protection. Thus, taking into account positive experience of the project implemented in Eastern Kazakhstan Oblast, the environmental bodies of the republic’s level (Ministry of environmental protection) are recommended to disseminate this experience in other regions of the Republic of Kazakhstan. For example, Kyzyl-Orda Oblast could become the next regions. Project components Component 1 Justification of selection of strategic goals for the development of the water supply and sanitation sector in the towns of the Oblast and development of a baseline scenario, calculating the demand for finances required to cover costs of operation and maintenance of the existing infrastructure and new targeted investments. Then these costs are compared with the available financial resources, provided the policy remains unchanged with regard to, for instance, budget subsidies in the sector, etc. This comparison provides estimation of financial deficit, which means that the demand for finances exceeds the level of resources available in this sector. Component 2 The second stage includes identification and analysis of actions that can help covering financial deficit, i.e. to balance the demands for finances with the available financial resources. 3 Project on survey of opportunities for disaggregation of group water pipelines located in the territory of Eastern Kazakhstan Oblast In Eastern Kazakhstan Oblast there are several group water pipelines, mainly in the 1st group towns and urban settlements. The 1st group or the 1st zone means steppe regions with low water supply, characterised by group water pipelines and low water consumption, due to insufficient reserves of accessible potable quality water. Towns and urban settlements in this area include Ayagoz, Shar, Bordulikha, Karaul, and Bolshaya Vladimirovka. The group water pipelines are characterised by the following main features: • High water supply;

16 This methodology was developed by the firm COWI guided by the OECD Secretariat and supported by the Danish Government.

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 102 • Wear and tear of water supply networks;

• High water losses;

• Secondary pollution due to network destruction;

• Irregularities in water supply;

• High consumption of electricity per cubic metre of pumped water.

Due to above causes, water supplied in such way becomes costly and low quality in steppe conditions of the arid regions of the Eats Kazakhstan Oblast. For many areas of this zone the use of groundwater is the only solution of the present problem. However, only a few towns and urban settlements have prospected reserves of potable quality water. In the village of Borodulikha water is supplied through a group water pipeline, 270 km. This water is fed along the group water pipeline from the town of Aguzayev to the town of Shar. One of the ways to solve the water supply, problem for the 1st zone is replacement of group water pipelines by groundwater intake facilities; to this end, it is necessary to make up systematic drilling of boreholes so as to prospect water deposits suitable for drinking water supply and compile fresh water deposits maps. Thus, there is a need for research into the possible ways for disaggregation of group water pipelines, which would allow optimisation of its operation and using of water saved in other regions without any detriment to the operation of the group water pipelines. 4 Project on utilization of sludge The main idea of the project is to solve the problem of handling the sludge at the biological treatment plants in the town of Ust-Kamenogorsk, containing a big amount of heavy metals. The immediate project goal is development and introduction of actions for utilization of sludge generated at biological treatment plants in the town of Ust-Kamenogorsk, containing heavy metal salts. As has been noted several times before, the problem of utilisation of sludge at the treatment plants is very urgent and relevant for Ust-Kamenogorsk Vodokanal. At present, about 8-9 tons of sludge are generated per day (by data provided by WSS companies). Considering the fact that treatment plants are overloaded, it can be expected that if all required technological parameters of the wastewater treatment are observed, the volume of generated sludge will be much higher. The capacities available for storage of accumulated sludge are almost exhausted, which makes up it necessary to allocate new sludge sites. This problem could be solved by constructing new sludge facilities and purchasing respective equipment for mechanic dewatering of newly generated and accumulated sludge. These actions would include the following: Assessment of the existing situation:

• The relevant situation as regards construction of sludge handling facilities;

• The composition of the existing and newly generated sludge;

Designing of a sludge treatment and burial scheme: • Feasibility studies;

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 103 • Coordination of feasibility studies with the inspecting organizations;

• Drafting of a working project;

Building of structures for mechanical dewatering of sludge: • Reconstruction of the building for mechanical dewatering equipments (chamber-type filter presses); • Purchasing of mechanical dewatering equipments and auxiliary equipment; • Erection operations and start-up adjustment operations. Such actions will reduce areas of the sites used today for storage of contaminated sludge. 5 Project on reduction of threats to safety of drinking water supply caused by pollution of groundwater Project objectives Eastern Kazakhstan Oblast is characterized by an extensive use of surface water sources for water supply and a comparatively low use of ground sources of drinking water. This can be explained by an insufficient number of prospected ground sources as well as by not always satisfactory quality of groundwater. Given consideration of the industrial production concentrated around and inside the territory of the town of Ust-Kamenogorsk, we can state that in this region there exists a very acute problem related to human-induced contamination of ground sources. Here we speak about the so-called 4th zone as it is designated in our analysis. This is a territory with a mixed type of water intake, affected by the discharges from industrial companies which exert an adverse impact on the quality of water in water sources. Besides, this Oblast includes areas with the insufficient coverage of the centralised drinking water supply or where the existing water supply schemes require new alternative options, for example disaggregation of group water pipelines in the village of Borodulikha. In these locations, the transition to ground drinking water sources could become a way for solution the problem. In addition to importance of the problem connected with improvement of water supply for population, there exist serious grounds to apprehend of possible entry of toxic metals together with groundwater to the basin of the Irtysh River. Thus, the danger of transboundary pollution here is already high. For example, specialists of the water supply and sanitation sector have repeatedly pointed to presence of heavy metals in samples taken from boreholes in different places of the region. Project components Identification and analysis of the present pollution of groundwater caused by industrial activities in the town of Ust-Kamenogorsk, which affects the drinking water supply. This component will also include an examination of available information: geological, hydrogeological, as well as information about distribution of pollutants and pollution sources. This project component as well as the entire project, assumes participation in these actions and close cooperation of industrial companies of the town together with the implementing agency. Besides, environmental protection nature of such actions implies active support and interest on behalf of local environmental protection authorities. Analysis of scenarios for control over groundwater pollution and rehabilitation of quality of ground sources. Surveys at this stage of the project imply making of analysis of costs/benefits of the planned actions as well as of analysis of risks for each of the suggested options (thus, paying special attention to low-cost options that may not require complete rehabilitation of groundwater quality, but aimed at environmental protection and maintaining safety of water sources for human health). Setting up a system for monitoring of water quality.

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 104 Large companies located in the Irtysh River basin, namely close to the town of Ust-Kamenogorsk, were recognised as the main sources of water pollution. Regular analyses of quality of natural water are considered to be unsatisfactory and the available information scope insufficient; this means that there is a significant potential for improvement of the situation. Thus, there is a need to set up a monitoring system. It may expedient in this respect to exchange experience with Omsk Oblast of the Russian federation, which is located downstream the Irtysh River and is also using water of the Irtysh River basin for drinking water supply. Some time ago the so-called points or regular sampling of groundwater were organised in Omsk Oblast. On the south border with Kazakhstan a post was set up to control pollution of water with mercury.

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 105 Annex 7: Project ideas on technical modernisation and optimisation of production facilities. Example of Ust-Kamenogorsk Vodokanal

Content 1 The reasons for the development of the priority investment programme 2 The range of priority measures on optimising operation of the water supply and sanitation infrastructure using the Ust-Kamenogorsk Vodokanal as an example 3 Conclusions on priority investments of the EKO WSS companies

1 The reasons for the development of the priority investment programme Priority measures can include the range of actions aimed at optimising the entire size of the water supply and sanitation system, increasing work efficiency, reducing the level of costs and constrained losses and a significant growth of the level and quality of provided services. Due to historic reasons the water supply and sanitation companies have seen, in the last decades, lasting and insufficient financing of current maintenance; modernisation of fixed production assets has not been made up or has been insufficient; debts for the planned annual network replacement have been accumulated – all this has resulted in the general ageing of the water-distribution and sewerage pipelines and of production facilities that are now in operation. This could not but lead to the often unpleasant situation that we see today. For successful achievement of the goals related to development of the WSS companies in towns and urban settlements in the EKO and stabilisation of their further development, the current condition has been analysed and hidden potential of the water supply and sanitation sector have been assessed. Typical problems by zones If we consider towns and urban settlements in the EKO, included into the surveyed sample, then we can see some similarity of problems typical for various zones. Below is the table demonstrating presence of different problems in each of the 5 zones, for separate sectors: Table 25 Identified water supply problems in 5 urban zones of EKO Typical problems of water supply Zones 1 2 3 4 5 Unaccounted water consumption/ illegal connections yes yes yes yes yes Metering of water produced and sold yes yes yes yes yes Long-distance water supply mains in poor condition, high water losses in yes distribution Low energy efficiency of existing pumping equipment yes yes yes yes yes Network zoning is not practised yes yes yes Considerable deterioration of networks yes yes Considerable leakage in networks yes yes Low quality of water supply services (regularity) yes yes yes Insufficient water disinfecting yes yes Source: based on data from WSS companies

Table 26 Identified sanitation problems in 5 urban zones of EKO Typical problems of sanitation Zones 1 2 3 4 5 Absence of sanitation/treatment facilities in some urban settlement yes yes yes yes No biological treatment of wastewater in some towns and urban settlements yes yes yes yes yes Illegal connections yes yes yes yes yes Low energy efficiency of pumping equipment yes yes

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 106 Typical problems of sanitation Zones 1 2 3 4 5 Considerable deterioration of sewerage networks yes yes Significant infiltration of groundwater and precipitation water yes yes Pressure network zoning is not practised yes yes Low energy efficiency of existing airblowers and other energy equipment of yes yes wastewater treatment Problem with utilisation of wastewater treatment sludge yes Source: based on data from WSS companies As a result of analyses of data received for the sample WSS companies in the EKO we determined the most topical problems for the water supply and sanitation sectors where there is a significant potential for saving. In the water supply sector, such problems may include the following: • Illegal connections and unauthorised water consumption; • Incomplete overview of water produced and sold (metering problem); • Low efficiency of existing pumping equipment; • Zoning of networks is not practised; • Considerable wear of networks which leads to leakage. In the wastewater collection sector, such problems may include the following: • Low energy efficiency of existing pumping equipment; • Low energy efficiency of existing airblowers at wastewater treatment plants; • Illegal connections; • Poor condition of networks and high level of infiltration, which leads to excessive need for extra wastewater treatment capacity and reduces the efficiency of activated sludge process in treatment. 2 The range of priority measures on optimising operation of the water supply and sanitation infrastructure using the Ust-Kamenogorsk Vodokanal as an example To solve the above-enumerated problems, the range of measures was developed aimed at optimising the operation of the water supply and sanitation sectors, taking the Ust-Kamenogorsk Vodokanal as an example. For the water supply sector the priority measures include: • Active search for illegal connections and unauthorised water consumers; • Control of water produced and sold (water meters); • Replacement of existing pumping equipment by more effective one; • Optimisation of pressure in network; • Replacement of network and elimination of leakages For the sanitation sector the priority measures include: • Active search for for illegal connections and unauthorised consumers; • Preparation to network optimisation; • Improvement of energy efficiency of pumping equipment • Optimisation of network operation, replacement of network, elimination of infiltration of groundwaters and precipitation

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 107 To implement the range of urgent actions, a detailed list of work was identified for each line. A brief list of these work operations, the expected outcome and the tentative implementation period and volumes of costs, including purchase of required equipment, compulsory training of personnel, costs related to installation, construction and other work operations are presented below. Table 27 Summary table for the identified priority investment 'Optimisation' programme at Ust-Kamenogorsk Vodokanal Description of the action/component I priority II priority III priority Water supply Reduction and control of water consumption level • Water saving campaigns 20 000 20 000 20 000 • Development of a programme for installation of water meter for all 3 000 3 000 3 000 groups of consumers • Installation of water meters for non-household consumers 96 000 96 000 96 000 • Installation of individual water meters at households; 2 608 694 2 608 694 Preparation for optimisation of the network performance • Purchase of equipment for leakages identification, including training 50 000 50 000 50 000 • Search of leakages 27 360 27 360 27 360 • Search for unauthorised connections to the water supply network 7 200 7 200 7 200 • Compiling a programme of prioritisation of leakages liquidation 5 000 5 000 5 000 Increasing energy efficiency of the pumping equipment and optimising pressure in the network • Analysis of energy efficiency of the water supply system operation 5 000 5 000 5 000 • Developing a programme for optimisation of energy efficiency of the 5 000 5 000 5 000 water supply system • Partial replacement of pumps at the boosting pumping station by 239 789 239 789 239 789 energy-efficient pumps with frequency converters • Replacement of pumps at pumping station 2 by energy-efficient 580 031 580 031 pumps with frequency converters • Replacement of pumps at pumping station 1 by more energy-efficient 192 400 pumps Optimisation of the network operation and liquidation of leakages • Making an electronic water supply network model 32 000 32 000 32 000 • Analysing the hydraulic situation in the network 5 000 5 000 • Optimisation of the water supply network operation 5 000 5 000 • Development of a programme for replacement of pipelines 5 000 • Replacement of pipelines 7 369 500 Subtotal amount: 490 349 3 689 074 11 255 974 Contincency (technical) 20 000 100 000 300 000 Contincency (financial) 20 000 100 000 300 000

Sanitation Preparation for optimisation of the network performance • Purchasing equipment for inspection, including training costs 50 000 50 000 50 000 • Search for infiltration points 27 360 27 360 27 360 • Search for unauthorised connections to the wastewater collection 21 600 21 600 21 600 network • Compiling a plan of leakages liquidation and replacement of pipelines 5 000 5 000 5 000

Increasing energy efficiency of the pumping equipment • Analysis of energy efficiency of wastewater collection systems 5 000 5 000 5 000 • Development of a programme for optimisation of energy consumption 5 000 5 000 5 000 in the wastewater collection system • Partial replacement of pumps at the main pumping station by energy- 112 401 112 401 112 401 efficient pumps with frequency converters • Partial replacement of sewage pumps at the district pumping station 52 785 52 785 by energy-efficient pumps with frequency converters • Replacement of air-blowing equipment at the biological treatment plant 264 500 by energy-efficient equipment with a regulated drive

Optimisation of the network operation and liquidation of leakages

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 108 Description of the action/component I priority II priority III priority • Making an electronic wastewater collection network model 32 000 32 000 32 000 • Analysing the hydraulic situation in the network 5 000 5 000 • Development of a programme for replacement of pipelines 5 000 • Replacement of pipelines 7 406 250 Subtotal amount: 258 361 316 146 7 991 896 Contincency (technical) 20 000 75 000 250 000 Contincency (financial) 20 000 75 000 250 000 Total cost of the investment programme: 828 710 4 355 220 20 347 870 Source: Consultant's estimate Water supply sector of the Ust-Kamenogorsk Vodokanal Works for identifying unaccounted water consumption • Purchase of the set of equipment required for search of leakages (correlator, route finder, sound microphone, etc.) • Training of personnel how to use the equipment • The range of actions to identify water consumers who have no contracts with the Vodokanal • Search for unauthorised connections to the water-distribution networks • Compiling an information map showing undocumented and unattended networks • Period of implementation – 2 years Work operation related to control of sold water Industrial water meters At present, the area of the town of Ust-Kamenogorsk serviced by the Vodokanal includes about 2000 legal entities; of them only 80% (1600 units) are operating and paying for the water according to their water meter. • It is required to install additionally – 20% (400 ps.) of water meters • The aggregate cost of a water meter with the average diameter (Dc = 150 mm), as well as the cost of its installation is 120 USD. • The service life of a water meter is 10 year • Frequency of calibration of a water meter – once every 4 years • Predicted reduction of water consummation after installation of a water meter – 30% • It is planned that search of unaccounted consumers and installation of required water meters will be performed by personnel of the Vodokanal. A special team will be formed, including 4 trained persons (a foreman, two technicians, a driver), and a motor vehicle. • The period for search of unaccounted consumers and installation of required water meters is 2 years Individual water meters At present, the area of the town of Ust-Kamenogorsk serviced by the Vodokanal includes about 13% of households (12 770 households) that are using individual water meters. • It is required to install additionally – 87% of individual water meters (83 612 households) • Number of water meters per household – 1.3 water meters (this figure is due to the fact that there are households having two or more inlets of cold water) • The service life of a water meter is 10 year

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 109 • Frequency of calibration of a water meter – once every 4 years • Predicted reduction of water consummation after installation of a water meter – 24% • It is planned that search of unaccounted consumers and installation of required water meters will be performed by personnel of the Vodokanal and other interested organisations because of a significant number of elements to be installed • The period for search of unaccounted consumers and installation of required individual water meters is 6 years Work operations for increase of energy efficiency of pumping equipment and optimisation of network pressure • Analysis of energy efficiency of the water supply system operation • Development of a programme of optimisation of energy use in the water supply system • Replacement of pumps at pumping station 1 by more energy-efficient pumps • Replacement of pumps at pumping station 2 by energy-efficient pumps with frequency converters • Replacement of pumps at the boosting pumping station by energy-efficient pumps with frequency converters 1st lift pumping stations The total number of pumps at all water intake facilities is 74. The average service life of one pump does not exceed 4 years; as a result, all available pumps will be replaced during the time period equal to the pump service life according to the plan by more energy-efficient pumps. This approach will allow avoiding significant single-time capital investments and redistribute more evenly the replacement procedure and costs (in brackets are given data on the existing pumps). • The period of complete installation of new pumps – 4 years • Cost of a pump – 2500 USD (600 USD) • Service life of a pump – 15 years (4 years) • Cost of installation and start-up and adjustment operations – 100 USD • Operation costs – 100 USD/year • Maintenance costs – 50 USD/single maintenance • Frequency of maintenance – once a year (not applied because maintenance is made up every year) • Average cost of maintenance – 500 USD (200 USD) • Frequency of maintenance – once every 7.5 years (once a year) • Expected saving of electricity used – 20% 2nd lift pumping stations (In brackets are given data on the existing pumps). • Number of pumping stations – 7 stations. • Period of complete replacement of the required number of pumps – 5 years • Service life of a pump – 20 years (10 years) • Cost of a pump – 26000 USD

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 110 • Cost of installation and start-up and adjustment operations – 3890 USD • Operation costs – 129.7 USD/year (300 USD/year) • Maintenance costs – 259 USD/year (300 USD/year) • Frequency of maintenance – once every 20 years (once 5 year) • Consumed electricity – 345 kW*h (384 kW*h) • Consumed electricity with frequency converters – 269 kW*h. Boosting pumping stations (relift pumping station) • Number of relift pumping stations – 64 stations • Period of complete replacement of the required number of pumps – 5 years • Service life of a pump – 20 years (10 years) • Cost of a pump – 1460 USD • Cost of installation and start-up and adjustment operations – 218 USD • Operation costs –7.3 USD/year (30 USD/year) • Maintenance costs – 14.6 USD/year (30 USD/year) • Frequency of maintenance – once every 5 years (once 3 year) • Cost of maintenance – 218.7 USD (600 USD) • Consumed electricity – 16.2 kW*h (18 kW*h) • Consumed electricity with frequency converters – 12.6 kW*h. Works for searching leakages in networks and replacement of pipelines • Purchase of equipment required for search of leakages and compulsory training of personnel, Current condition and parameters of the water distribution networks: • The average age of the water distribution networks – 50 years • The length of the network in critical condition, thus requiring replacement – 30% (147 km) • Technological leakages per km of the network in critical condition – 150 m3/km/day • Technological leakages per km of updated network – 10 м3/km/day • Network repair, in share – 2.5% per annum • Costs of replacement of one metre of the pipeline (Dc 200) – 7500 tenge • Cost of repair of one leakage – 200 USD • It is expected that search of leakages will be made up by a special team representing an independent unit in the organizational structure of the company, including 4 properly trained specialists (a foreman, an operator, a technician, a driver). The team will have a motor vehicle. Replacement of pipelines will be – performed by Vodokanal personnel and specialized companies • Period of replacement of the pipeline in critical condition is 6 years. Implementation period The following assumptions were made up when the investment programme parameters were identified:

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 111 Table 28 Implementation periods for various components of the priority investment programme at Ust-Kamenogorsk Vodokanal Duration of actions Years Duration of search of unaccounted consumers and installation of water meters 2 Duration of actions for leakage detection 2 Period of replacement of old pumping equipment by energy-efficient equipment • Replacement of pumps at the 1st lift pumping station 4 • Replacement of pumps and installation of a frequency converter at the 2nd lift pumping 5 station • Partial replacement of pumps and installation of a frequency converter at boosting 5 pumping stations Period required to reduce water consumption by population from 170 to 130 l/ma/day and 6 installation of individual water meters Period required for replacement of the network in critical condition (30% - 147 km) 6

Source: Consultants's estimate Expected effect of the implementation of the investment programme in the water supply sector Change in electricity consumption in the water supply sector As a result of the above-described actions, the structure of water and energy consummation will change. The nature of such changes can be seen in the figures below. The year 2002 was taken as the basic year (preceding the beginning of the investment programme). In this year, all parameters are at the current level. Figure 20 Reduction in the energy consumption in water supply in 2003-2012 as a result of the optimisation programme, kWh/year

PS1 PS2 Booster stations

25 000 000

20 000 000

15 000 000

kW*h/year 10 000 000

5 000 000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Consultant's estimate The figure shows the scale of reduction of general energy consumption on the replaced equipment (the complete height of the columns) and the share of energy consumption for each type of pumping stations (1st lift stations, 2nd lift (relift) stations and boosting stations). In 2008, stabilisation of the energy consumption level is expected, because a part of the investment programme covering the water supply sector should be completed by that time. A more derailed change characterisation is given in the table below:

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 112 Table 29 Change in energy consumption in water suply in 2003-2012 as a result of optimisation programme, million kWh/year Energy 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 consumption PS 1 15,4 14,6 13,0 11,7 10,4 9,9 9,4 9,4 9,4 9,4 9,4 PS 2 5,0 4,7 4,1 3,6 3,2 2,8 2,7 2,7 2,7 2,7 2,7 Boosting PS 2,1 2,0 1,8 1,6 1,4 1,2 1,1 1,1 1,1 1,1 1,1 Unreplaced 10,6 10,0 9,4 8,9 8,5 8,0 7,7 7,7 7,7 7,7 7,7 equipment Total per 33,1 31,3 28,3 25,8 23,5 21,9 20,9 20,9 20,9 20,9 20,9 annum kWh/m3 0.66 0.62 0.59 0.55 0.51 0.49 0.49 0.49 0.49 0.49 0.49 Source: Consultant's estimate It can be seen from the table, that implementation of the investment programme will allow saving over 12 million kW*h of electricity per annum and reducing energy costs for pumping of 1 m3 of water from 0.66 to 0.49 kW*h/m2. Characterization of changes in the energy consumption in the water supply sector The figure below shows how the energy consumption will be changing during the entire period of prediction for each group of energy consumers. The reduction process will stabilise after completion of replacement of all planned elements. It should be noted that this figure indicates energy consumption only for the share of equipment to be replaced separately for 1st lift pumping stations (100% of pumps to be replaced), second lift (relift) pumping stations (40% of pumps to be replaced) and boosting pumping stations (40% of pumps to be replaced). The “new equipment' schedule shows changes in energy consumption at the replaced equipment, while the “total consumption' schedule shows the total energy consumption during the analysed period, including also equipment that is not to be replaced within the investment programme. The expected saving of energy consumption will be about 63% (the ratio of energy consumption in the year of the programme completion to the energy consumption in the basic reference year). Figure 21 Total energy consumption in water supply in 2003-2012 as a result of the optimisation programme, kWh/year

PS1 PS2 BPS New equipment Total energy consumption

35 000 000

30 000 000

25 000 000

20 000 000

15 000 000 kWh/year 10 000 000 5 000 000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Consultant's estimate

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 113 Change in the water consumption in the water supply sector The figure below shows the relations between the consumption of water by population, other consumers and leakages. Figure 22 Change in water production, leakage and consumption in 2003-2012 as a result of the optimisation programme, m3/year

population other leakage 25 000 000

20 000 000

15 000 000

M3./year 10 000 000

5 000 000

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Consultant's estimate It can be seen from the figure that repair of networks, installation of frequency converters and other water-saving measures will result in the reduction of irrevocably lost water by almost 3 times. Also, installation of water meters will help to significantly reduce water consumption by population and other consumers. The structure of leakages during the forecast period as well as impact of various water-saving actions on the value of leakageing is shown below in the figure: Figure 23 Water leakage composition in 2003-2012 as a result of various water concervation measures and investments, m3/day

45 000

40 000 Leakage in 2002

m3/day 35 000 Leakage after investment 30 000 program

25 000 Leakage reduction from frequency converters 20 000 Leakage reduction from 15 000 network repair 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Consultant's estimate

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 114 The structure of leakages can be shown in a tabular form as follows: Table 30 Water leakage composition in 2003-2012 as a result of various water concervation measures and investments, m3/ day Item 2002 2003 2004 2005 2006 2007 2008 Leakages in 2002 41 596 41 596 41 596 41 596 41 596 41 596 41 596 Resultant leakage 41 596 37 911 34 472 31 033 27 594 24 155 20 715 Reduction of leakages after 41 596 39 630 38 022 36 770 35 874 35 335 35 335 installation of frequency converters Reduction of leakages after 41 596 39 876 38 046 35 859 33 315 30 415 26 976 repair of the network Source: Consultant's estimate The structure of water consumption The actions recommended will help decrease the volume of water fed to the network in the year 2012 to 104,400 cubic metre/day; for comparison this volume was 146,400 cubic metre/day in 2002. Redistribution of the ratio between water consumption and leakages before the beginning of the programme implementation and after its completion is demonstrated in the figure below: Figure 24 The structure of water production, leakage and consumption in 2002 (before optimisation) and in 2012 (after optimisation), %

Consumption of the population

Other consumption

Total leakage

Source: Consultant's estimate Wastewater collection sector of Ust-Kamenogorsk Vodokanal Operations for optimisation of the network operation • Search for unauthorised connections to the water supply network • Making of service-provision contracts with the consumers • Analysis of operation of pressure pipelines • Compiling an information map showing undocumented and unattended networks • Period of implementation – 2 years Operations for increasing energy efficiency of pumping and air-blowing equipments • Analysis of energy efficiency of the water supply system

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 115 • Development of the programme for optimisation of energy consumption in the water supply system • Replacement of pumps at district pumping stations by more energy-efficient pumps with frequency converters • Replacement of pumps at the main pumping station by more energy-efficient pumps with frequency converters • Partial replacement of air blowers at the BWWTP by more energy-efficient pumps with a regulated drive District pumping stations (DPS) The total number of available pumps at all district pumping stations to be replaced is 17. The average service life of one pump does not exceed 10 years. (In brackets are given data on the existing pumps). • The period of complete installation of new pumps – 5 years • The share of replaceable pumping equipment – 40% • Cost of a pump with a frequency converter - 2700 USD (600 USD) • Pump service life – 15 years (15 years) • Costs of installation and start-up and adjustment operations – 405.0 USD • Operation costs – 13.0 (6.0) USD/year • Maintenance costs – 27.0 (6.0) USD/year • Frequency of maintenance – once (1) a year • Average cost of maintenance – 405 USD (202.5 USD) • Frequency of maintenance – once every 5 years (once every 3 years) • Expected saving of consumed electricity – 30% Main pumping station of the sanitation (MPS) (In brackets are given data on the existing pumps). • The number of pumping stations – 1 station • The share of replaceable pumping equipment – 50% • The period of complete installation of the required number of pumps – 1 year • Pump service life with a frequency converter – 20 years (10 years) • Cost of a pump – 97740 (16000) USD • Costs of installation and start-up and adjustment operations – 14661 USD • Operation costs – 488.7 USD/year (80 USD/year) • Maintenance costs – 2590 USD/year (3000 USD/year) • Frequency of maintenance – once every 5 years (once every 3 years) • Consumed electricity – 432 kW*h (540 kW*h) • Consumed electricity with frequency converters – 378 kW*h. Air blowers at biological treatment plants (BWWTP) • The number of air blowers to be replaced – 1 blower

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 116 • The share of replaceable pumping equipment – 40% • The period of complete installation of the required number of pumps – 1 year • Air blower service life – 20 years (10 years) • Cost of an air blower – 230000 (45000) USD • Costs of installation and start-up and adjustment operations – 34500 USD • Operation costs –1150 USD/year (225 USD/ year) • Maintenance costs – 2300 USD/ year (450 USD/ year) • Frequency of maintenance – once every 5 years (once every 3 years) • Cost of maintenance – 34500 USD (6750 USD) • Consumed electricity – 400 kW*h (320 kW*h) Operations for optimisation of the network operation, liquidation of leakages and infiltration of groundwater and precipitation • Purchase of equipment required for TV inspection and search of leakages. Compulsory training of personnel. Current condition and parameters of sewers • The average service age of the water-takeoff network – 30 years • The length of the network in critical condition to be replaced – 25% (99 km) • Share of network repair – 2.55 per annum • Average cost of replacement of one metre of the pipeline (Dc 200) – 7500 tenge • Cost of repair of one leakage – 200 USD • It is expected that search of leakages will be made up by a special team representing an independent unit in the organizational structure of the company, including 4 properly trained specialists (a foreman, an operator, a technician, a driver). The team will have a motor vehicle. Replacement of pipelines will be – performed by Vodokanal personnel and specialized companies • Period of replacement of the pipeline in critical condition is 6 years. Expected effects of the investment programme implementation in sanitation As a result of the above-described actions, the structure of energy consummation in this sector will change. The nature of such changes can be seen in the figures below. The year 2002 was taken as the basic year (preceding the beginning of the investment programme). In this year, all parameters are at the current level.

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 117 Figure 25 Reduction in the energy consumption in sanitation in 2003-2012 as a result of the optimisation programme, kWh/year

Airblowers DPS MPS 12.000.000

10.000.000

8.000.000

6.000.000

4.000.000

2.000.000

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Consultant's estimate It is assumed that in the basic (reverence) year of 2002 the old equipment will be still used, while staring from 2003 a gradual partial replacement of the old equipment by new more energy-efficient equipment will be performed according to the conditions described before. For the wastewater collection sector the conclusions concerning changes in the energy consumption are similar to the conclusions described for the water supply sector; the only difference is that the period of replacement of equipment (especially as regards air blowers of the BWWTP and the pump at the MPS) will be different. More detailed characterization of changes in shown in the following table. Table 31 Reduction in the energy consumption in sanitation in 2003-2012 as a result of the optimisation programme,, million kWh/year Energy 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 consumption Air blowers. 3,1 2,5 2,5 2,5 2,5 2,5 2,5 2,5 2,5 2,5 2,5 DPS 2,0 1,6 1,3 1,0 0,8 0,6 0,5 0,5 0,5 0,5 0,5 MPS 5,2 3,1 2,7 2,3 1,9 1,6 1,3 1,3 1,3 1,3 1,3 Non- 12,7 11,9 11,2 10,7 10,1 9,6 9,1 9,1 9,1 9,1 9,1 replaced equipment Total: 22,9 19,1 17,6 16,4 15,3 14,3 13,4 13,4 13,4 13,4 13,4 Source: Consultant's estimate Graphically, the change in the energy consumption structure can be shown as follows:

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 118 Figure 26 Total energy consumption in sanitation in 2003-2012 as a result of the optimisation programme, kWh/year

BTP air blowers - DPS - MPS New equipment

Total energy consumption 25 000 000

20 000 000

15 000 000

10 000 000

5 000 000

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Consultant's estimate Conclusions in this case are similar to conclusions made up above for the water supply sector concerning changes in the energy consumption by a partial replacement of main electricity consumers. Basic conclusions as to the investment programme outcomes Implementation of the proposed investment programme will allow the following positive outcomes: • A significant reduction of energy consumption in the water supply and sanitation sectors. • Reduction of volumes of water fed to the water-distribution network through: - Reduced water volumes sold at the set norms, - Reduced water consumption by all categories of water consumers, - Reduced volumes of irrevocably lost water (repair of networks, installation of frequency converters, reduction of the indicator reflecting loss of water per km of the pipeline), • Reduced amount of wastewater discharged to the wastewater treatment plants (reduced amount of water fed to the network, sanitation of the sewerage pipelines). • Decrease of costs for possession of networks (reduced number of brakes and leakages in the network will allow also going back to the previous level of network renovation - 2.5% a year - as before implementation of the programme). • Solution of sludge utilization problem. • Increase of the company operation efficiency and of the quality of services provided. 3 Conclusions on the priority investments for the WSS companies of EKO Basic conclusions for the water supply sector • There is a potential for reduction of lost water, which is at present considered as leakages – search of unaccounted consumers. • There is a significant potential for reduction of irrevocably lost water – by replacement of worn-out pipelines sections.

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 119 • Also, it is possible to reduce lost water provided a systematic search and repair of leakages is organised. • There is a potential for reduced water consumption by population – by installing individual water meters and liquidating in-house leakages from sanitation equipment. • There is a potential for reduced water consumption by other consumers 0 by installing water metering equipment. • There is a potential for reduced energy consumption – by replacement of the existing pumps by more energy-efficient pumps. • Installation of frequency converters at the pumping equipment will give a whole range of positive changes; most effective among them are: - optimisation of pressure in the network, which will result in increased quality of services, reduced number of breaks and leakages (especially during least water- intake periods); - reducing the volume of pumped (used) water by decreasing the volume of lost water during the period of excessive pressure in the network; - a significant saving of electricity. Basic conclusions for the wastewater collection sector • There is a clear potential for saving of electricity – by replacement of pumps at the sewerage pumps stations and the WWTP, as well as installation of more economical air blowers together with the effective aeration systems. • Implementation of water-saving measures in the water supply sector will result in reduced volume of discharge collected in the wastewater collection system. • Regular sanitation of sewers using TV inspection methods as well as timely repair of small diameter networks will result in reduced infiltration of water through un-tight walls. • Reduction of infiltration, rain and other conventionally clean water penetrating to the sanitations will reduce the discharge dilution rate and increase of BOD5, which will have direct impact on the clean efficiency. • Use of trench-free and other methods of networks renovations and the use of pipes made up from modern materials will result in decrease of costs of repair, increased service life and better reliability of networks. • There is a potential for reduction of discharge amounts fed form the WWTPs, which may become a starting point for reassessment of the required additional capacities of wastewater treatment plants. • Construction of structures for processing of sludge will allow solving the problem of utilisation of both generated and accumulated sludge. • It is expedient to construct local treatment plants at industrial companies so as to bring the composition of the discharged wastewater to the standard composition of communal (housing) wastewater, which will make up it possible to use WWTP sludge in agriculture. Conclusions characteristic of the identified zones In some towns and urban settlements, the increased cover by water supply and sanitation systems as well as significant investment into the sector may be futile due to the changes in the demographic situation in such towns and urban settlements, deterioration of water quality and other factors. Zone 1 Bad condition of transportation water lines (including the now available group water lines) and the associated significant loss of generated water do not rule out their possible replacement by

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 120 groundwater intake (alternative water supply sources). However, after a detailed analysis of the problem of disaggregation a conclusion was made up that in certain cases such measures may face significant difficulties of political nature and thus become inexpedient. Zone 2 High degree of deterioration of the network is caused by pressure drops due to elevation variations; frequency of breaks is especially high – frequency converters and optimisation of network pressure are highly needed. Improvement of energy efficiency of equipment is also very important due to a high number of pumping. Zone 3 Due to complexity in the operation of the decontamination systems on the basis of chlorinated reagents as well as problems with delivery of such reagents (especially in winter) it is recommended to use small bactericidal plants. Zone 4 To decrease the degree of pollution of drinking water sources by discharge from industrial companies, it is expedient to introduce circulation water supply systems. In some larger inhabited centres there is an acute demand for construction of biological treatment facilities in addition to the existing mechanical treatment facilities. Zone 5 There is a potential for replacement of pumping equipment of high capacity by smaller capacity equipment, which will result in electricity saving and in reduction of the irrevocably lost water due to increased pressure in the networks. However such replacement may be problematic due to presence of water-distribution networks rated for a significant established power. In planning of investments for the water supply and sanitation sectors it is mandatory to organise a technical auditing, make up a thorough survey of expedience and economic feasibility of the planned actions.

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 121 Annex 8: Project ideas on improvement of management and regulation of WSS companies

Content

1 Basic problems and opportunities of the water supply and sanitation sector in Eastern Kazakhstan Oblast 2 Short description of the forthcoming tariff regulation on price-cap and RVA-based profit rate tariff regulation to be applied in WSS companies 3 Project on the study of affordability and willigness of the consumers to pay for services provided at the Oblast level 4 Project on the development of a programme for improvement of financial and economic indicators of the WSS companies as a management instrument 5 Project on preparation of a Contract for the management of one of WSS companies in Eastern Kazakhstan Oblast

1 Basic problems and opportunities of the water supply and sanitation sector in Eastern Kazakhstan Oblast In the course of analysis of the water supply and wastewater sector in Eastern Kazakhstan Oblast it proved that there is insufficient analysis of the ability to pay of the population for the provided services. Therefore we suggest considering, among other possible project topics, the following: a study of affordability and willigness of consumers to pay for a definite level of services provided by the WSS companies. The project idea on tariffs for the territory of Eastern Kazakhstan Oblast would include setting of a price cap tariff for a certain period of time using as example a Vodokanal. The urgency or relevance of this project is obvious. Such tariff-formation scheme includes economic incentives for the operator – cost-effective operation of the water supply and sanitation sector infrastructure. Figure 27 Organisational and regulatory options for enhancing WSS efficiency Increasing work efficiency

Tariff setting (Price-cap tariff Reforming the relations and RVA-based profit rate, Assessment of the with the owners taking the account of affordability and technological risks) * willingness to pay for the improved quality of services •Setting development Improved possibilities for including the targets, monitoring of rehabilitation and modernization cost their achievement into tariff •Creating incentives for management of WSS Stimulation of costs savings companies •Inflow of investments

* See the description of the tariff-setting methodology in section 3.4.2 in the main report and below in subsection 2

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 122 One of the main problems associated with the provision of water supply and sanitation services is shortage of long-term development strategies. Long-term strategic plans contain feasible time- defined goals, including the priorities and ways for achievement of such goals. To this end a whole range of methods are used, and a thorough economic and financial analysis must constitute the ground for decision-making regarding investment and other issues. One of possible ways for solving such a problem is the development of indicators characterising the technical, financial and economic activities of the WSS company for use as a management tool. Other objectives of the development of such programme should be increasing operatoinal efficiency, and better control over the WSS company activities by the property owner/Akimat. Another aspect to be considered is the contractual relationship between the Akimat and service provider in the water supply and sanitation sector. Exisitng contracts have not been properly developed in order to give the service provider incentives. Another project idea is thus the preparation of a management contract. 2 Short description of the forthcoming price-cap tariff and RVA-based profit rate tariff regulation to be applied in WSS companies By the end of 2002, the following regulatory documents were prepared for approval (reviewed in details and compared with current system of tariff setting in Annex 8): • 'Instructions on tariff calculation based on price cap formula'; • 'Rules on introduction of tariffs based on price cap formula'; • 'Instructions on profit calculation as a return on the regulated value of assets (RVA)'; The new regulations on price-cap tariffs and RVA-based profit margins for natural monopolies have a number of important differences from the current tariff setting system and the RVA-based profit margin seems to be most applicable to WSS companies in the nearest future. The 'Instructions on profit calculation as return on the regulated value of assets (RVA)' aims at promotion and encouragement of efficient investment policies. The following are the main points of the regulation: • The permissible profit level is determined as a product of the profit rate and the regulated value of employed assets (RVA) • RVA directly depends on the coefficient of employed assets (defined by the actual production/ used technological capacity). The coefficient of employed assets will be determined by the WSS companies and is approved by the regulating authorities. • The regulated value of assets is determined on the basis of the residual value of fixed assets revaluation by independent institutions selected on a tender basis. • The profit rate is calculated by the method of accounting for investment risks in the given sector of economy. This method inter alia accounts for technological risks that characterize actual wear of the infrastructure and the probability of incidents • Natural monopolies can make their own decisions on the use of profits generated by increased production efficiency. • Use of the method is based on whether the company meets a number of criteria: financial and economic stability, profitability, stable production output, having an investment program, availability of results of revaluation of fixed assets, etc. As to the price-cap tariff, the following are the main requirements applied to the subject who requests establishment of such a tariff: • The subject owns fixed assets. Compliance with this requirement is impossible for WSS companies of Eastern Kazakhstan at present. Local authorities (Akimates) own the majority

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 123 of water supply and sanitation facilities, and the existing practice of handing over of property 'to others' didn't produce sufficient positive results. • The profit from the basic and non-basic activities in two preceding years. This requirement is rather difficult to meet in Eastern Kazakhstan at present. The analysis in the framework of this project demonstrated that actually there are no WSS companies that could operate with a positive balance. • Current tariff collection must be at least 90%. Actual current tariff collection for services is 75% maximum. It is necessary to carry out a number of measures in order to achieve compliance with this requirement. • Availability of expert advice statements after technical and financial examination carried out by independent experts. Compliance with this criterion requires, first of all, availability of necessary funds and taking actions. Currently it is known that such expert examination will be carried out in the framework of a republican-wide program and Eastern Kazakhstan will be included in the program. • Revaluation of fixed assets. The last revaluation of fixed assets was carried out several years ago. Determining the actual residual value of assets is very important for all WSS companies. • Actual and expected stability of the amount of delivered service. It is assumed here that there will be no abrupt decrease of demand for water supply and sanitation services and there will be no additional customers connecting to the central system. • Calculation of the profit rate for regulated fixed assets. This issue was discussed above. Table 32 Advantages and disadvantages of the present and the new tariff building methods Tariff formula Advantage Disadvantage Cost-Plus Relatively simple to use for all engaged Adverse incentives for overstating of costs, parties overstating of required investment, capital- intensive production technologies Price-cap and RVA Economic incentives to operators for cost- Adverse incentives for cutting the level of tariffs efficient operation service (quantity and quality). Careful approach to external factors is needed.

3 Project on the study of affordability and willigness of the consumers to pay for services provided at the Oblast level Objectives and components of the project The main objective of the project is the development of methods for assessment of affordability and wilingness to pay of the population for water supply and wastewater services, based on a pilot analysis in Eastern Kazakhstan Oblast. It is assumed that the methodology developed would include the following components: • Determining the initial situation according to technical aspects and possible level of costs for operation and maintenance of water supply and sanitation systems. • Undertake a formal survey based upon a leading Western European methodology in three pilot towns and urban settlements with low, medium and high levels of incomes so as to identify: - preferences of the consumers as regards the ratio of prices to quality of services;

- preferences of the consumers as regards the relation between prices and demand for water;

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 124 - readiness of population to pay for higher quality services;

- the level and the structure of costs in the surveyed households.

• Analysis of the survey results and assessment of the acceptable level of tariffs and the level of services for which population is ready to pay an increased tariff. • Presentation of the formal methodology for such analysis to the tariff setting authorities and social protection authorities in the Oblast and the Republic for their further dissemination and use. Figure 28 Mechanism of encorporating affordability and willingness to pay analysis into the WSS sector planing Targets for service levels

Demand for water Technical profile and Infrastructure and service services possibilities for the levels Expectations and willingness improving the service of the consumer to pay level in WSS sector Costs Acceptability of tariffs Operator/ for the population Services provider Incomes: level of tariffs and (level of affordability) collection rate

Institutional structure Political Acceptability

Project scope and objectives Considering options for participation of the private sector in management of the WSS companies, it is necessary to take into account the creation of transparent and predictable mechanisms for setting and change of service tariffs. Besides, it is also necessary to consider potentials for self- financing of the WSS companies that allow covering financial deficits; to this end, it is needed to put in place effective tariff-formation mechanisms. Tariffs for water supply and wastewater services in Eastern Kazakhstan Oblast, in fact tariff restrictions set by the Oblast (regional) regulatory authorities, do not allow the WSS companies companies to cover such costs in full. Tariff for water set for population and other consumers in the town of Ust-Kamenogorsk, for example, are 0.06 USD per cubic metre, in 2001; at the same time, the tariff calculated according to recover costs was 1.4 USD per cubic metre. So, achievement of the cost coverage goal will inevitably result in an increased water tariff. However, there are grounds to assume that such measure will lead to increased operational reliability of the water supply and sanitation sector infrastructure and reduce frequency of faults in the systems, thereby allowing timely maintenance. National regulatory authorities regulating activities of natural monopolies recognise the importance of institutional reforms for increasing efficiency and stability of the water supply and sanitation sector. However, despite transformation and initiatives of the last decade to make the WSS companies companies fully autonomous in terms of financing, the real level of company autonomy still remains rather limited. Setting of tariffs for water supply and sanitation is effected on the basis of approval of expenditure items according to the actual expenditures of the period of reporting, with due account of

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 125 acceptability and readiness to pay of the population for the services. However, no formal study has been organised to examine readiness of consumers to pay for better services. Thus, this has resulted in the situation when current tariffs do not cover all costs and, hence, services are provided at an non-adequate level. As a result, WSS companies do not have opportunities to increase the level of coverage of population with centralised water supply and sanitation services. Quality of provided water also is affected, which is especially important for industrial and commercial consumers, for which quality and reliability of water supply is much more important than the level sand the rate of the tariff. Consequently, there is a clear need to organize a formalized survey so as to study readiness of consumers to pay for the received services, which in turn will be a contribution into the process of the tariff system reformation in the water supply and sanitation sector, which was initiated by the republic’s regulatory authorities. Components of analysis in the pilot Oblast For implementation of the project three towns/districts are selected where data will be collected needed to assess the willingness to pay. These towns/districts must be representative and reflect towns/districts with low, medium and high levels of population incomes, respectively. In towns/districts there must be all categories of consumers: population, commercial and industrial consumers. The project must include the following components: • Identifying the initial situation by the technical aspects, costs and services. • Examination of feelings/preferences of consumers, “readiness to pay' and demand for water. • Analysis of acceptability of tariffs for the consumers. • Assessment of political acceptability of tariffs. Component 1 Identification of the initial situation according to technical aspects, costs and services The objective of the component is to make up the initial technical assessment: current production activities, services goals, infrastructure, level of services and respective costs. Current technical assessment will be described in terms of existing service level. The current level of services will be used as the basis for identification of the future list of service goals and periods for achievement of such goals, together with respective estimates of capital and operation cost required. Current technical situation and service goals will be used to formulate questions to analyse and study “willingness to pay', and as the basis for prediction of tariffs that will be used to analyse acceptability as well as for structured management for analysis of political acceptability. Component 2 Examination of feelings/preferences of consumers, “willigness to pay', and demand for water Demand for water supply and sanitation services and “willigness to pay' are analysed applying all factors that may affect potentially the demand. Then main factors affecting “willigness to pay', as a rule, include the quality of services as perceived by population and their incomes. In addition, there are factors involved, for instance, awareness of public about environmental situation. The list of possible questions will be formulated so as to test new schedules and levels of services during qualitative survey. The goal of qualitative analysis is, above all, identification of most important, from the point of view of consumers, factors, i.e. checking whether earlier determined factors are relevant. Qualitative analysis is a key part of the methodology for assessment of the “readiness to pay' by the

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 126 consumers. At this stage questions are determined that must be analysed during qualitative survey. The objective of the itirative analysis is to obtain assessment of the “willingness to pay' for different levels of services as well as assessment of the future demand for water supply and sanitation services. The questionnaire that will be prepared will contain questions about preferential choices so that “willigness to pay' could be assessed for future potential improvements. Component 3 Analysis of affordability of tariffs for consumers Affordability of tariffs implies the upper limit costs for water supply and sanitation services. Indicators required to estimate affordability for public include income, costs and water consumption. Affordability analysis results affect the level of services, the level of tariff and may become an input for development of a plan for subsidising low-incomes groups. By using available macroeconomic data one can make an lysis of affordability, taking into account data about public spending, income distribution and prices. Component 4 Political acceptability Political acceptability of tariffs at the Oblast level is a key factor for a full coverage of costs in the water supply and sanitation sector. Such analysis will include examination of main factors, including impact of acceptability for public and institutional factors (for example, the procedure of water supply tariff setting), and will provide assessment of political acceptability. Levels of political acceptability will be analysed from the point of views of local politicians about certain initiatives in the water supply and sanitation sector, for example, increase of tariffs for improvement of services. 4 Project on development of programme for improvement of WSS companies' financial and economic activity indicators as a tool of management Project objectives It is necessary to develop and implement in practice effective mechanisms, practices and procedures of external regulation that are required for ensuring monitoring of the achieved final results. These regulating mechanisms must ensure monitoring and assessment of both qualitative and quantitative aspects of activities of each company. Among others, it is necessary to pay attention to the following issues: • Ensuring achievement of outlined final results, including planned parameters of quality, quantity and execution of coordinated levels of services; • Compliance with definite parameters with regards to service quality; • Analysis and assessment of financial activities of the company, paying special attention to issues of effective management of financial resources as well as to measures aimed at maintaining the available facilities; • Long-term development goals, paying special attention to capital investments aimed at maintaining and expanding fixed assets and increasing service levels. Development of such mechanism as a programme is required both for the assets owner and for the managers of the company. Therefore, in our opinion, the idea of implementation of a similar project devoted to development of a programme for a specific water supply and sanitation company in Eastern Kazakhstan Oblast is an objective need. Project components Step 1: Assessment of the company’s financial condition Step 2: Formulating financial performance goals Tariffs • Principles of tariff formulation and a plan for stabilisation of activities

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 127 • Subsidies (if the tariff does not cover current costs while increase of tariffs, with the current tariff collection, is not possible, then financial resources can be provided from the budget). • Inflation component Collection of tariffs from consumers • Improvement of the procedure of billing and collection of fees for the services • Reduction of costs related to billing Operation costs excluding depreciation and interests on loans • Identification of a qualified and optimal number of personnel • The goal is that operational costs grow proportionallyto the expected rate of inflation Short-term liabilities • Payment is deferred untill the loan agreement requirements are fulfilled or the liability is reassigned to the indebted service consumer. Fixed assets and investments in reconstruction • The goal is to introduce depreciation deductions in accordance with the international accountancy practices • Annually, at the end of the fiscal year, the company deducts a certain amount to the reserve fund (for example, 2.5% of the total cost of fixed assets) for financing the fixed assets rehabilitation. Step 3: Formulating financial management goals • Improvement of corporate planning and budgeting, and of systems of reporting and information • Development of the business plan • Increasing regularity of submission of financial reporting forms • Ensuring compliance of the accountancy system of the company with international accountancy standards Step 4: Formulating goals for organizational and administrative management ⇒ Development of a corporate strategy and a development plan ⇒ Increasing efficacy of the organizational structure ⇒ Assessment of personnel Step 5: Formulating goals for technical activities - water supply ⇒ Improving technical activity/services indicators ⇒ Raising knowledge and assessing conditions for functioning of the water supply system. Development of indicators. • Planning of reconstruction work. Development of indicators • Develop and implement the system development plan • Increase opportunities for planning of the system development within the company. Indicators. • Develop and implement an investment plan for development of the system Step 6: Formulating goals for technical activities - sanitation

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 128 • Improving technical activity/services indicators • Develop and implement the system development plan Step 7: Monitoring and reporting Stages of planning and implementation of the programme are followed by a stage of monitoring, assessment of implementation and update/alteration of the programme. Reports on implementation of the programme must include actual indicators and the initial goals for comparison. 5 Project on preparation of a Management Contract for one of WSS companies of Eastern Kazakhstan Oblast Project objectives There exist different ways for involving the private sector into the communal services infrastructure; these different options give different benefits and have different underlying requirements. The main objectives for involvement of the private sector are as follows: • To increase incentives for effective performance; • To use external experience; and • To increase financial resources. When a management contract is made, the contractor is responsible for general management of water supply and sanitation services; however, he does not bear responsibility for financing of costs related to operation, maintenance, repair and capital costs related to service provision. Management contracts are usually made up for a period of three to five years. Payments for management contracts usually include payment of a fixed amount plus a variable component. The variable component is paid when the contractor achieves specified performance goals or exceeds such goals. The contractor who has a management contract does not bear the risk related to the collection of tariffs form the consumers, although a high level of tariff collection may entail payment of incentives for the contractor. Analysis of performance of water supply and sanitation companies in Eastern Kazakhstan Oblast showed that relations between the WSS company and the Owner/Akimat should be changed, i.e. reformed. Changes include the following opportunities: • Introduction of corporatisation of communal companies that makes it possible to perform activities more independently • Transfer of fixed assets to these companies results in broader opportunities for their operation. Complete inventory of fixed assets should be made up. Transfer of assets should be implemented within 5-10 years • New contracts for the services should be signed between companies and local administrations. Such contracts should include descriptions of rights and duties of the parties to the contract, the level of service quality, the level of tariffs, capital investment plans, assets support plans, reporting, etc • A new contract with the director should be made up. This contract should include a financial incentive for achievement of the specified level of services and efficiency. Currently, the most prepared WSS companies in the EKO for implementation of pilot activities related to the management contract are Vodokanals of Ust-Kamenogorsk and Ridder. Project components Stage 1 – Development of the contract structure Collection and processing of initial information

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 129 • The WSS company is given a questionnaire related to different aspects that should be filled in by the company for the development of the contract • A list of WSS company tasks is made up that should be included into the tentative contract form and in all technical annexes to the contract • Discussion with the WSS company authorities so as to explain the process of preparation of documents to be included into the Request for tender. Stage 2 – Development of tender documents for the Request for pre-qualification The tentative form of the tender document for the Request for pre-qualification The request must be developed including consideration of the following issues: • Process of selection for pre-qualification • Schedule of pre-qualification • Methods for assessment of qualified requests • Experience and financial demands for pre-qualification Stage 3 – Development of document for the Request for tender proposals Preparation of the Request for tender proposals • Preparation of a list of documents that should make up the package of documents for the Request for tender proposals (the Request, the tentative contract, addenda) • Development of procedures for explanation of the proposal documents • Schedule for submission of proposals (dates of submission, pre-tender conference, etc.) • Costs for perpetration of proposals • Rules for setting up consortiums for submission of proposals • Ensuring confidentiality of submitted proposals • Opening and assessment of submitted proposals Development of the General contractual conditions • Rules on translation of the contract • Regulation/legislation framework for the contract • Dispute Settlement • Identification of services and standards for assessment of provided services • Duration, beginning and end of the contract • Management inspection, inspection of accountancy, and audit • Compensation of losses and insurance • Remuneration for the operator Preparation of Terms of References • Description of services for which the operator is responsible • Description of structures for operation for which the operator will be responsible • Description of testing procedures and laboratory analyses • Personnel policy applied to the available and new personnel

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 130 • Remunerations envisaged for the operator • Description of the investment programme

Stage 4 – Management of the tendering process after distribution of the Request for proposals • Detailed answers to questions • Development of addenda, when required Stage 5 – Assessment of submitted proposals The reference list of questions/requirements listed in the Request for proposals should be drafted, and their compliance should be used as a guide to define the winner. Stage 6 – Final stage The parties should arrive to an agreement about the final document/contract. Legal assessment An important factor is involvement of a lawyer at the stage of preparation of the management contract so as to ensure general compliance with the local legislation.

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 131 Annex 9: Cost functions applicable to the sample WSS companies

Cost functions (for the Oblast)) Basic parameters Unit of measurement Other operation costs at the existing Other costs (including electricity costs % of the cost of available 1.00% structures and wages) fixed assets Period for attainment of the set level of Years 1 costs

Rehabilitation of operational reliability of production structures Water supply system Boreholes Costs per unit Thousand tenge /unit 2607 Service life Years 25 Submersible pumps Costs per efficiency unit, pumps type 1 Thousand tenge /m3/day 1.158 Costs per efficiency unit, pumps type 2 Thousand tenge /m3/day 0.115 Service life, pumps type 1 Years 15 Service life, pumps type 2 Years 8 Service life, pumps types available when Years 8 maintain is performed 7.8 * 'power in -0.3 Surface water pumps (including stations) Costs per efficiency unit = (m3/day)' ^ Service life 15 26.1 * 'power in -0.12 Water conditioning plant Costs per power unit Thousand tenge /m3/day = (m3/day)' ^ Service life Years 20 26.1 * 'power in -0.24 Pumping station Costs per power unit Thousand tenge /m3/day = (m3/day)' ^ Service life Years 20 23.5 * 'power in -0.125 Reservoir Costs per volume unit Thousand tenge /m3 = (m3/day)' ^ Service life Years 50 Water supply network Costs per unit Thousand tenge /km 4672 Service life Years 40 Water loss in the new network m3/km/day 10

wastewater collection system Sewerage network Costs per unit Thousand tenge /km 5840 Service life Years 40 Thousand tenge 24.6 * 'power in -0.2401 Sewerage pumping station (SPS) Costs per power unit = /m3/day. (m3/day)' ^ Costs per power unit, mechanical 127.8 * 'power in -0.27 Wastewater treatment station Thousand tenge /m3/day = treatment (m3/day)' ^ Costs per power unit, mechanical- 276.4 * 'power in -0.27 Thousand tenge /m3/day = biological treatment (m3/day)' ^ Service life Years 20

New capital investments Broader coverage of population by water Costs per power unit Thousand tenge /km 4672 supply services Operation costs % of capital investment 2.0% Broader coverage of population by Production costs per unit of products Thousand tenge /km 5840 sewerage services Operation costs % of capital investment 2.0% Thousand tenge 26.1 * 'power in -0.12 Water treatment plant Costs per power unit = /m3/day. (m3/day)' ^ Operation costs % of capital investment 3.0% Costs per power unit, mechanical 127.8 * 'power in -0.27 Wastewater treatment plant Thousand tenge /m3/day = treatment (m3/day)' ^ Costs per power unit, mechanical- 276.4 * 'power in -0.27 Thousand tenge /m3/day = biological treatment (m3/day)' ^ Operation costs % of capital investment 3.0%

Source: Consultant's estimate

BCEOM-HALCROW GROUP LTD.-COWI CONSORTIUM 132