Institutional Strengthening of Water Supply and Sanitation in Secondary Towns

Final Report

(with Discussion Papers)

May 2007

TA 4465-AZE Institutional Strengthening of Water Supply and Sanitation in Secondary Towns

Submitted to: Asian Development Bank and The Government of Azerbaijan

TA 4465-AZE Institutional Strengthening of Water Supply and Sanitation in Secondary Towns

Final Report

Report to the Asian Development Bank and The Government of Azerbaijan

May 2007

Table of Contents

1 Introduction 1 1.1 Objectives of the Technical Assistance 1 1.2 Reports Prepared under the TA 2 1.3 Report Objective and Structure 2 2 Project Status and Key Changes 4 2.1 Formation of the Joint Stock Companies 4 2.2 Changes in the Management Contract 6 2.3 The Project TimeLine 7 3 Summary of Findings and Recommendations on New Activities 9 3.1 Customer Service and Complaints Management System 9 3.2 Corporate Development Plans 10 3.3 Human Resources and Staffing 12 3.4 Liquidation of SuKanals 13 3.5 Terms of Reference for International Utility Advisor 15 3.6 Request for Proposal and Terms of Reference for the Loan Consultants 15 3.7 Project Administration Memorandum 16 3.8 Training Needs for the PMUs 16 4 Summary of Activities and Outcomes under this TA 18 4.1 Task 1—Establishment and Development of the Joint Stock Companies 18 4.2 Task 2—Liquidation of the SuKanals 20 4.3 Task 3—Transaction Advisory Services (Design of the Management Contract) 21 4.4 Task 4—Project Management Support 22 5 Final Observations and Next Steps 23

Appendices Appendix A : Discussion Paper on Recommendations on Customer Service and Complaints Management System Appendix B : Discussion Paper on Corporate Development Plans Appendix C : Supplementary Recommendations on Organizational Development and Human Resource

Appendix D : Recommendations on the Liquidation of the SuKanals Appendix E : Terms of Reference for International Utility Advisor for the Nakhchivan JSC Appendix F : Comparison of TA TOR and Activities Undertaken during the TA

Tables Table 3.1: Staffing requirements from 2010 12 Table 3.2: PMU training requirements for managing the ADB loan 17

1 Introduction Under the Urban Water Supply and Sanitation Project (UWSSP), the Asian Development Bank (ADB) is providing loans and a technical assistance (TA) grant to support the improvement of water and sanitation services in three small towns in Azerbaijan: Agdash, Goychay, and Nakhchivan (the Project Towns). The objective of the Project is to improve the quality, reliability, and sustainability of water supply and sanitation services in the Project Towns. This is to be achieved through a combination of investment in new infrastructure and institutional reforms. The Project objectives, activities, and implementation arrangements are set out in the ADB’s Report and Recommendations of the President to the Board of Directors (RRP). The service quality in the Project Towns is extremely poor, largely in part because of the dilapidated state of the current infrastructure. Because of the poor quality of service, customers are reluctant to pay their water bills. It also makes it difficult to justify increase in the tariff. Insufficient tariffs and poor collection rates have lead to serious financial problems which in turn contributes to underinvestment in the maintenance and improvement of the water systems. Building new water supply and sewerage infrastructure is essential to provide adequate service to customers in the Project Towns. However, without fundamental institutional changes in the way services are provided, it is likely that the new infrastructure will not be properly maintained, and overtime it will deteriorate, leaving the towns with the same poor quality service they have today. Therefore, an important focus of the Project is to develop the institutional capacity of the Joint Stock Companies (JSCs) providing water services in each Project Town. Support for the institutional reforms is being is provided by this Technical Assistance project and by the Loan Consultants that will be engaged under the loan to help design and supervise construction of the water systems. Castalia was engaged by the ADB under TA 4465-AZE “Institutional Strengthening of Water Supply and Sanitation in Secondary Towns” to provide support for the institutional reforms. Work under the TA was started in April 2006 and completed in May 2007. This final report summarizes the activities that have been completed under the TA. 1.1 Objectives of the Technical Assistance The objective of the TA is to support the institutional reforms required to develop the JSCs to provide sustainable and reliable water supply and sanitation services over the long term. The TA was comprised of four tasks: Task 1: Establishment and Development of the JSCs—The objective of this task was to provide recommendations for the establishment and organizational development of the JSCs Task 2: Liquidation of SuKanals—The SuKanals have not been liquidated as was originally envisioned in the RRP. Instead they were transformed into the JSCs that have been established in each of the Project Towns. However, under the loan agreement, the ADB requires that the JSCs are not burdened with outstanding debts and liabilities from the former SuKanals. The focus of this work was to provide recommendations on how to manage the debts and liabilities inherited from the former SuKanals Task 3: Transaction Advisory Services—Under the Project, it is envisioned that a Management Contractor will be engaged to manage the JSCs for a

1 period of 3-4 years when the new water systems become operational. The objective of this task was to provide support for the transaction including the preparation of the bidding documents Task 4: Project Management Support—The final task was focused on providing support for developing the loan project including preparing the ADB Project Administration Memorandum. 1.2 Reports Prepared under the TA Under this TA, we prepared a number reports. These include: Inception Report (Final Inception Report with Addendum, July 2006) Interim Report (December 2006) which consisted of: – A Summary Report which presented an overview of our findings and key recommendations from each discussion paper – Five discussion papers on the main topics addressed in Tasks 1 and 3 including: Recommendations on the Governance Structure for the JSCs in the Project Towns Recommendation on Business and Accounting Systems/Procedures for the JSCs in the Project Towns Recommendations on Organizational Structure and Human Resources for the JSCs in the Project Towns Recommendations on the Development of Town Water Users Associations in the Project Towns, and Recommendations on the Management Contract Design Explanatory Note on the Management Contract and Tender Documents for the Agdash and Goychay Open Joint Stock Companies (including draft Prequalification Document and Request for Proposal) (Second Interim Report, March 2007). 1.3 Report Objective and Structure In this Final Report, we: Present the findings and recommendation from our work that was not discussed in the first and second interim reports (This new work focused mostly on Tasks 2 and 4; however, some additional work was undertaken in Task 1), and Provide a brief overview of the activities of the TA, updates on previous work (where applicable) and any outcomes. We also provide a short overview of the developments in Project implementation. This report is structured as follows: Section 2 highlights the important changes that affect Project implementation and our work under the TA Section 3 summarizes the key findings and recommendations of the TA activities that have not been discussed in either Interim Report

2 Section 4 provides a brief overview of the work that has been undertaken under this TA and any outcomes, and Section 5 provides some concluding observations about institutional reforms in the Project Towns.

3 2 Project Status and Key Changes The project preparation work for the UWSSP Project was undertaken between 2002 and 2004. The Project, as defined in the November 2004 RRP, was approved by the ADB Board in December 2004. However, the loan agreements were not signed between the Government and the ADB until the end of November 2006. Work under the TA started in April 2006, prior to the signing of the loans, and as of the writing of this Final Report, the Loan Consultants have not yet been selected. The Loan Consultants will be responsible for designing the water supply and sanitation systems and supervising construction. Because of the delays in signing and implementing the loan, there have been some important changes that affect Project implementation. These have also had an impact on the work undertaken under the TA. In this section, we highlight the key changes and the implications for the Project and our work under the TA.1 Because the Project Towns fall under different government administration structures, there are two Executing Agencies (EAs) for this Project. AzerSu is the EA for Agdash and Goychay and the State Committee on Urban Planning and Architecture of the Autonomous Republic of Nakhchivan (SCUPA-NAR) is the EA for Nakhchivan. During the TA, we worked with both EAs, although we had more contact with AzerSu than SCUPA-NAR.2 2.1 Formation of the Joint Stock Companies The most fundamental change in the Project is the decision by the Government regarding the conversion the SuKanals into the Joint Stock Companies. The PPTA team put forward three options for the transformation of the SuKanals into Joint Stock Companies.3 Option 3, which involved the establishment of new JSCs and the liquidation of the SuKanals, was selected and incorporated into the RRP and the requirements of the Loan Agreements. Under this option: New JSCs would be formed in the three Project Towns as subsidiary companies of AzerSu (Agdash and Goychay) and MED-NAR (Nakhchivan) No assets or old debts would be transferred to the new companies The existing physical assets and equipment would be temporarily transferred to the JSCs to operate while the new WSS systems were under construction The old assets would be decommissioned when the new WSS systems became operational, and The existing staff were to be retired and rehired on a selective basis. The key benefit to this approach was that the new JSCs would be able to start out on an operationally and financial sound basis, and not be burdened with the legacy of the SuKanals. The idea was that with the assistance of the Management Contractor, the JSCs

1 These developments also have implementations for the Loan Agreements signed between ADB and the Government of Azerbaijan. Because the Loan Agreements are considered as law in Azerbaijan, the Loan Agreements will need to be revised to reflect the changes that either already have been or are recommended to be made and submitted to Parliament for approval. We submitted a note highlighting the changes would need to be made to ADB. 2 The TA team was provided office space at the AzerSu office in Baku. 3 These options were: 1) Strengthening of the Existing SuKanals; 2) Transformation/Corporatization of the Existing SuKanals; and 3) Establishment of new JSCs and Liquidation of the Sukanals.

4 could develop good utility operating practices that would enable them to operate on a more sustainable basis over the long term. However, instead of following the option specified in the RRP, AzerSu opted to create the new JSCs for Agdash and Goychay by corporatizing the SuKanals (this essentially was Option 2 from the RRP). The Agdash and Goychay JSCs were registered in March 2006,4 prior to the start of the TA. Following a visit by ADB and the TA team in July 2006, Nakhchivan also created a JSC by merging the existing water supply department and wastewater department and forming a single company. This company was registered in October 2006. The main problem with this approach is that it is at odds with the institutional reform component set out in the RRP, and the approach to Project implementation envisioned in the RRP and the Loan Agreement. In particular: All of the existing assets were transferred to the new JSCs, and appear on their financial accounts. The net value of the assets have been transferred to the JSCs in the form of Chartered Capital The assets include the outstanding receivables for the SuKanals. Because of poor collection rates, the SuKanals had very high levels of uncollected receivables which now appear on the JSCs’ financial accounts as assets All the staff from the SuKanal were transferred to the JSC, with basically the same organizational structure (although there were some changes in the organizational structure in Nakhchivan because of the merger of the two departments), and Involvement of the municipalities was not incorporated into the new structures, despite the requirement of the ADB loan. The decision of the Government has important implications for the Project, as well as on the TA recommendations. In particular: Complications in financial management of assets and existing liabilities—The Project envisioned that the new JSCs would be free of the old assets and existing liabilities. This would essentially give them a “fresh start”. However, the JSCs have assumed the financial assets, debts, and liabilities from the SuKanals. While it is possible for the Government to “write-off” the decommissioned assets and old debts, this now requires a clear action by the Government to meet the loan covenant. For the TA, the focus of Task 2 “Liquidation of SuKanal” changed, focusing on developing a strategy to enable the JSCs to write-off these old assets and existing liabilities so they will no longer be reflected on their financial accounts. Maintenance of existing organization structures—The JSCs have retained all existing SuKanal staff and organizational structures. This means it will be more difficult to restructure the companies, and to ensure that the JSCs operate with staff that have appropriate qualifications. Under the TA, we have developed recommendations on improved organizational structure for the JSCs, prepared job descriptions, and described a basic human resources policy that should be adopted by the JSCs. However, without pressure to reform, the

4 To create the JSCs, AzerSu used the charter that was developed for the KfW project in Ganja and Sheki, only modifying the names and JSC specific information.

5 TA recommendations related to organizational structure and human resource policy are unlikely to be adopted. Limitations in role of Management Contractor—Under the RRP, it was envisioned that the Management Contractor would have the ability to retain or bring in qualified staff to manage the JSCs. Having qualified, reliable staff is essential for the Management Contractor to achieve the objectives of introducing good utility practices and building the JSC capacity to manage the water systems on a sustainable basis. The decision to retain all staff, and to limit (if not reject all) the Contractor’s ability to hire and fire staff will make it difficult for the Management Contractor to achieve the stated objectives. As such, we have proposed a modified role for the Management Contractor in which the Management Contractor will work and train the existing staff rather than assuming overall management responsibility for the JSCs. 2.2 Changes in the Management Contract To support the necessary changes in the institutional arrangements for the JSCs, the Project design features several innovative features. One of these is for the JSCs to engage a Management Contractor to help build the institutional capacity of the new JSCs.5 In our Inception Report we discussed several problems with the approach originally envisioned for the Management Contract. Following discussions with ADB and AzerSu, we recommended a slightly revised approach to the Management Contract. The key changes include: Geographic scope—The scope of the contract was reduced to just Agdash and Goychay instead of all three Project Towns. We recommended this because of: – The risk associated with the Contractor having to work in two jurisdictions (under AzerSu for Agdash and Goychay and under MED-NAR in Nakhchivan). These risks include: different timing for completion of the WSS systems different administrative procedures and requirements increased political/territorial risk of Nakhchivan, and geographical separation. – The increased costs of the Contractor due to: need for staff to travel between the two locations increased fees due to increased political risks of working in Nakhchivan, and larger scope of contract to achieve objectives in three towns rather than two Available fees—We believe that the amount of fees allocated for the Management Contract in the RRP is insufficient to attract competent firms. We recommended that: – The scope be reduced from the three towns to two

5 The other feature was to strengthen consumer participation by giving the municipalities representation of the JSC Boards of Director and establishing Town Water User Associations in the Project Towns.

6 – The total base fee be increased to a minimum of US$2.3 million (to cover fees and expenses) – An additional allocation be made available as an incentive payment that would be available if the overall performance of the JSCs improves (in the amount of at least US$460,000) Scope of services—We recommended a scope of services that reflects the reality of what the Management Contractor can contribute to the institutional development of the JSCs in light of the option that the Government has chosen for the establishment of the JSCs (see discussion in Section 2.1). This role is not as extensive as a traditional Management Contractor that would assume complete responsibility for the management of operations and had control over the staff. Instead, we proposed that the Contractor only take direct control of and be responsible for managing the accounting and commercial functions of the JSCs and be responsible for providing a range of other services to support the institutional development of the JSCs. The proposed scope of services includes: – Preparing the Corporate Development Plans – Proving tariff and regulatory advise and support – Developing a maintenance program – Improving the financial management, billings and collections systems – Advising on utility management and facilities operations – Developing a human resources policy, and – Developing and implementing a customer service program. We believe that this approach is realistic and feasible within the existing arrangements, and will provide a model for improving the institutional capacity for the JSCs. 2.3 The Project TimeLine An important change is the delay in the overall Project implementation. Initially, it was envisioned that the TA consultants would be engaged following loan effectiveness. The start of the TA was to be followed shortly by the selection and mobilization of the Loan Consultants. This timing would allow for overlap in the two consulting teams and enable coordination in the work and for the WSS system works to be far enough advanced for the TA consultant to assist with the procurement of the Management Contractor. However, this timing has changed significantly: The TA team was mobilized in April 20066 prior to the signing of the Loan Agreements The loan agreements were signed in November 2006, and are still not effective The Loan Consultants have not yet been selected (as of May 2007, we understand that the short list has not yet been released, and it is unclear when it will be). The main implications of this change in timing are:

6 The TA timeline was originally intended to be 18 months. This has been changed to 13 months.

7 The delays in selected the Loan Consultant mean that the work on the WSS systems is postponed Even if the Loan Consultants had been mobilized by April 2007, it is unlikely the new WSS systems would have been commissioned before mid-2009, and Assuming asset commissioning in mid-2009, procurement of the Management Contractor would not start until 2008.7 This means that there was a significant mismatch in timing of the TA and the timing for the procurement of the Management Contractor. One of the tasks of the TA was to support the procurement of the Management Contractor; however, due to the problem with timing, it was agreed with ADB that the TA consultant would only be required to prepare the tender documents.8 Another impact on the TA is that because of the delays in engaging the Loan Consultant, work under the Project (other than the TA) has not started. While the PMUs have been formed on paper, they have not become operational, and therefore the support to the PMUs for Project implementation envisioned under TA Task 4 has not been required.

7 In the RRP and Loan Agreements, it is specified that the Management Contractor should start one year before the commissioning of the new WSS systems, and work on a part-time basis during the first year. It was recommended, and subsequently agreed with ADB and AzerSu, that this period should be shorted to approximately three months. We believe that it would be more costly and less effective to have the Management Contractor start work one year in advance, and because of the significant risk of construction delays, this period could even be extended. 8 Should the Management Contract proceed as currently planned, and assistance is required, the TA Consultant could be reengaged to assist with the transaction.

8 3 Summary of Findings and Recommendations on New Activities In this section, we present the final activities that we have undertaken for this TA, summarizing the work and, where applicable, our key recommendations. The main activities we have undertaken to complete the TA include: Task 1—Establishment and Development of the Joint Stock Companies – Prepared a discussion paper with recommendations on the development of a Customer Service and Complaints Management Program for the JSCs – Prepared a discussion paper on the Corporate Development Plans included an annotated outline of a Corporate Development Plan for each JSCs – Prepared a supplementary discussion paper on Human Resources and Staffing Task 2—Liquidation of SuKanals – Prepared a discussion paper on the issues arising from the liquidation of the former SuKanals and the treatment of historic assets and liabilities Task 3—Transaction Advisory Services – Prepared Terms of Reference for an International Utility Advisor Nakhchivan Task 4—Project Management Services – Prepared the Request for Proposal and revised Terms of Reference for the Loan Consultants – Prepared a revised Project Administration Manual – Prepared a summary of training needs for the Project Management Units (PMUs). We briefly describe each of these activities and highlight our key recommendations. 3.1 Customer Service and Complaints Management System In our discussion paper Recommendations on Business and Accounting Systems/Procedures (included in the First Interim Report), we recommended that each JSC develop a formalized customer complaints management system. Because this is a relatively straight forward system for the JSCs to put in place, and one that they can do without additional external support, we prepared a follow on paper which sets out the recommended complaints management system in detail (Recommendations on Customer Service and Complaints Management). We believe that by adopting a formalized customer complaints program, the JSCs could significantly improve their relations with customers which will in turn help to improve their internal management processes. The objectives of the proposed customer service and complaints management system are to: Provide an effective process to respond to and resolve complaints Ensure a high level of satisfaction on the outcome of a customer’s complaint

9 Provide a transparent method of measuring and reporting customer complaints Provide a framework for continuous business improvement based on customer complaint information received, and Provide effective procedures to manage customer enquires to ensure a high level of satisfaction to the customer. Under the proposed complaints management program, the Companies would resolve customer complaints or address customer enquires at the first point of contact by providing a solution, the required information, or negotiating an agreed course of action with the customer. The Companies would then respond to any customer complaint in a prompt, efficient and fair manner to ensure that customer satisfaction is maintained and that its business processes can be improved. Finally, the Companies would maintain records of the complaints received, track the responses, and report on performance in dealing with complaints. The discussion paper: Provides an overview of the system Provides a set of definitions to be used in the system Outlines a set of procedures for the system and illustrates these procedures with a flow diagram Provides sample forms that can be adapted by the Companies for use in their system, and Highlights the roles and responsibilities of the JSC staff, field staff, the Customer Services Officer, and senior managers. This discussion paper is included as Appendix A. 3.2 Corporate Development Plans A Corporate Development Plan (CDP) is a strategic plan for the operation and development of the JSCs. The CDP is intended to enable the JSCs to clearly define their service objectives and set out how they will achieve them. At a minimum the plan should cover the following topics: Revenue and expenditure budgets Tariff requirements and recommendations Operation and maintenance plans Plans for developing and improving internal control systems Customer awareness program, and Staff training plans. Developing CDPs is not only consistent with good utility practices, but it is a requirement of the ADB loan. Under the ADB loan requirements, the JSCs are required to submit their CDPs each February starting in February 2008. The Project envisions that the JSCs will have support of the Loan Consultant to prepare the initial CDP, and later have the support of the Management Contractor in the case of Adgash and Goychay, and the Utility Management Advisor in the case of Nakhchivan.

10 Each plan should have a three-year planning horizon with target deliverables and milestone dates for meeting them. These can then be reviewed against progress for each successive planning year and the targets and dates for following years adjusted in the revised plan. The main sections of the plan should include the following 1. Foreword 2. Background 3. Institutional mission/vision 4. Operating environment 5. Current strategic position of the institution 6. Long-term aims 7. Principal objectives 8. Financial strategy a. Revenue and expenditure budgets b. Tariff review recommendations 9. Main proposals for implementation and associated measurable targets. a. Detailed operations and maintenance plans, including any cost reduction and asset management strategies b. Plans for developing, improving, and implementing internal control systems including financial management, billing and collections, customer management, and operations c. Staff development and training programs d. Customer awareness programs. The discussion paper included in Appendix B discusses the content of each of these sections, and provides a template for the CDP that can be used by the JSCs as a starting point in developing their own CDPs. The first CDP is of particular importance because it will address the transition period in which the new infrastructure is being constructed. During this period, the JSCs should focus on developing their institutional and financial capacity. Key challenges during the transition period include: Identifying the problems posed by the transition period and developing strategies for addressing them (such as temporary subsidies, tariff increases, and cost-cutting) Developing time-bound plans to address the operational and development challenges of the JSC, together with a budget, and presenting these to the Boards of Directors for approval and support Setting goals and deadlines for managers and staff to meet in implementing the plans, and Agreeing longer-term corporate objectives for the JSCs as a whole. After the transition period, the CDPs will evolve to focus increasingly on operational and financial sustainability.

11 3.3 Human Resources and Staffing The discussion paper Recommendations on Organizational Structure and Human Resources Development for the JSCs in the Project Towns (submitted as part of the first Interim Report) included recommendations on the organizational structure for the JSCs and on the development of a human resources strategy for the three Project Towns. The paper reviewed and made preliminary recommendations on human resources and staffing for the JSCs, reviewed current organizational structures, recommend improved organizational structures, and made recommendations on the development of a Human Resources Strategy. This supplementary discussion paper (included as Appendix C) further develops several of the recommendations presented in the earlier discussion paper. Although the JSCs are currently overstaffed, we recommend that no redundancies be carried out at the present time. Because of the age structure of the current staff, the staff numbers will be reduced through natural attrition. In addition, once the new systems are operational and new connections are made, more staff will be needed. However, it is critical that the existing staff be retrained to use more modern utility systems, and any replacements for staff retirements consider the skills requirements for the JSCs. In the paper, we recommend a new organizational structure for the three JSCs. This structure has three major components: The accountability component (Finance Department) The supporting component (Organizational Department), and The operating component (Technical Services Department). While the recommended structure for the three Companies is similar, each Company will have a different number of organizational (work) units within each Department to meet their differing workloads. Table 3.1 provides our recommendation for the required number of staff for each JSC based on the estimated number of connections for the new water supply and sewerage systems. Table 3.1: Staffing requirements from 2010

Agdash Goychay Nakhchivan

1. Existing Staff Numbers (2007) 49 74 40 2. Future Staffing Requirements Finance Department – Accounting/Computer 6 8 9 – Meter Readers 7 9 15 Management 4 4 4 Organizational Department 4 5 6 Technical Services Department – Professional 3 5 6 – Water Supply 18 24 50 – Sewerage 8 10 16 – Laboratory 4 6 8 Total 54 72 114

12 In the earlier paper, we recommended that job descriptions be developed for each of the JSC staff. A job description is a written statement describing the duties and responsibilities of a job. The purpose of a job description is to provide data which are useful in defining the performance required of an employee. In the appendix to the paper, we include draft job descriptions for a number of Senior and Middle Management positions in the JSCs. Lastly, we proposed a training program for JSC staff. Training will be an essential part of developing the institutional capacity of the JSCs and is necessary at all levels of the organization. We recommend that the training program focus on the following topics: Development of skills and capacity relevant to appropriate contemporary design, procurement, construction supervision and commissioning of civil works and equipment for the Project Sustainable O&M of water supply and sanitation systems Improvement of the quality of management, accounting procedures, budget preparation, tariff setting, manpower planning, water demand analysis, performance monitoring Preparation and training in community motivation, gender sensitivity and priority setting Institutional strengthening for Board Members of the JSCs and other operating agencies in business plan preparation, O&M, financial planning and management Operation of computerized accounting systems for financial management and reporting Technical assistance on operational management, particularly aimed at asset management, corporate development and improving customer services Advice to technical specialists in water quality and sampling and analysis Support and training for the establishment, empowerment and development of Town Water User Associations in the areas of project monitoring, identification of needs and affordability Education in consumer rights and consultation and advocacy processes. In the discussion paper, we have suggested a three year training plan to cover these topics. 3.4 Liquidation of SuKanals The original TA design envisioned that the TA consultants would support the formation of the new JSCs and the process of liquidating the SuKanals. However, instead of liquidating the SuKanals, AzerSu (and subsequently Nakhchivan MED) chose to form the JSCs by corporatizing the SuKanals. This means that all the assets, liability, and staff of the SuKanals were simply retained by the JSCs. However, under the ADB Project, the Government agreed that: The existing physical assets that will not longer be used once the new systems are constructed will be decommissioned and written off completely, and None of the assets and liabilities of the former SuKanals will be transferred to the new JSCs set up in the Project Towns.

13 Although this has not been complied with, it is possible for the Government to take steps to comply with the spirit of the ADB requirement. The intention is that the JSCs should start out with a “clean” financial slate when the new water supply and sanitation systems are commissioned. The discussion paper Recommendations on the Liquidation of the SuKanals discusses the historic assets and liabilities of the JSCs and sets out a strategy for the JSCs to address the financial issues associated with their assets and liabilities. Fixed Assets—The fixed assets include anything the former SuKanal purchased or owned including the pipes in the ground and equipment. Depreciation of the fixed assets has followed the rules used in the former Soviet Union whereby the book value of the asset is depreciated by a constant percentage of its residual value each year. This means that the depreciation allowance is too small to provide the cash needed to replace the assets, which has contributed to the deterioration of the water systems. In addition, the residual value of the older assets substantially exceeds their value to the company, which distorts the capital base. To address this problem, we recommended: – The existing infrastructure that is replaced by the new assets or no longer needed is written off completely from the JSC’s balance sheets. We estimate that the total value of these assets is AZN 670,000 for Agdash and AZN 230,000 for Goychay – The full value of the new assets is written into the fixed assets of the JSCs, and – The JSCs should be allowed (and obliged) to apply realistic depreciation rates in their annual accounts to ensure that there is enough cash for the upkeep of the new assets. Current Assets—The current assets of the JSCs are predominately made up of the Accounts Receivable, that is revenue that has been claimed in past financial statements but has not been collected or written off. The JSCs have amassed significant Accounts Receivable because of the historic low collection rates. Our team broke down the accounts receivable into “dead debts” (those that there is no hope of collecting) and those that are likely to be collected. We recommend that the “dead debts” be written off. These dead debts amount to AZN 92,000 in Agdash and AZN 116,000 in Goychay. We also recommend that measures be taken to collect the debts that still have a chance to be paid. Problem Liabilities—These are the JSCs’ unpaid bills to other institutions (such as the electricity company). There are difficult to deal with because a third party has to agree to the debt being written off. However, in this case, many of the institutions that are creditors are state organizations, and therefore the Government is in a position to facilitate addressing these unpaid bills. The discussion paper (included as Appendix D) sets out a strategy for the liquidation of the assets and liabilities that recognizes that this process will take some time. In the interim, critical steps can be taken to achieve the goal of improving the financial health of the JSCs and removing the financial burdens from the poor financial management of the past. The paper also includes draft concession agreements for: 1) the transfer or concession of unpaid invoices owed to the former SuKanals to another organization and 2) the transfer or concession of liabilities owed by the former SuKanals to other, mostly state-owned, organizations.

14 3.5 Terms of Reference for International Utility Advisor Our recommendation is for the proposed Management Contract to focus only on Agdash and Goychay rather than all three Project Towns. The key reasons are: The limited budget available for the Management Contract under the loan The perceived additional risk to the Contract for working in Nakhchivan, and The potential for difficulties in working under one contract in two different environments and with two very entities (AzerSu and the Government of Nakhchivan). This was agreed with ADB and the State Committee for Urban Planning and Architecture of the Nakhchivan Autonomous Republic (SCUPA).9 However, in keeping with the overall objective of the Project to support the institutional reform and strengthening of the JSCs, it was agreed that instead of a Management Contractor, the loan would provide funds for a long term utility advisor for the Nakhchivan JSC. We prepared a Terms of Reference for the International Utility Advisor for Nakhchivan. It is envisioned that this will be a single international consultant who will be based in Nakhchivan over a period of a period of a year. Because the focus of this work is predominately on institutional strengthening, we recommended that the main focus of the advisor be on helping to develop the business and management related practices, including the development of systems related to financial management, customer service, and organizational development. The specific activities included in the TOR focus on: Financial management Billing and collections Organizational structure and development Day-to-day management Preparation of Corporate Development Plans Customer Service Program Capacity Building and Training. The proposed TOR was discussed with Deputy Director of SCUPA, the Director General of the Nakhchivan JSC, and MED, and accepted.10 The draft Terms of Reference are provided in Appendix E. These have been provided to the stakeholders in Nakhchivan. 3.6 Request for Proposal and Terms of Reference for the Loan Consultants We reviewed the draft Terms of Reference for the Loan Consultant and recommended some minor revisions.11 At the request of AzerSu, we also prepared a draft Request for Proposals for the Loan Consultants. One important question that was discussed at length

9 The SCUPA of Nakhchivan sent ADB a letter confirming their preference for an International Utility Advisor. 10 MED requested some minor revision in the language used in the Azeri version for consistency with the JSC Charter. 11 In our Inception Report, we proposed a reallocation of activities between the Loan Consultant, the Management Contractor, and the TA Consultant to eliminate some of the overlap and better reflect what each was best able to do to support the overall Project objectives. This reallocation of tasks was not accepted by ADB; therefore, few revisions were made to the Loan Consultant TOR to maintain the role of Loan Consultant as originally envisioned.

15 with the two EAs was whether there would be one consulting package to cover all three Project Towns or two, one for AzerSu and one for Nakhchivan. Both EAs had an initial preference for two packages. As Nakhchivan functions entirely separately from the rest of the country and neither EA wanted to be dependent on progress of the other. However for practical and budgetary reasons, they agreed with ADB to procure the Loan Consultants under one package, provided that the consultant’s work for each EA would be solely under their respective control. This was accommodated by setting out deliverables that were specific to each EA. The draft Request for Proposal was submitted to ADB and AzerSu in July 2006.12 3.7 Project Administration Memorandum ADB requires that a Project Administration Memorandum (PAM) be prepared for all loan projects. The PAM contains project information that is intended to help the Government of Azerbaijan, the Executing Agencies (AzerSu and SCUPA), the Project Implementation Units (PIUs), and ADB monitor project implementation. We were provided with a draft PAM that was prepared when the loan documents were originally prepared. We updated this draft to reflect changes in the project and changes in ADB procedural requirements. Although there have been some important changes that affect the requirements specified in the Loan Agreement, many of these changes have not yet been formally agreed between the ADB and the Government, and will require a formal amendment to the Loan Agreement (which must be approved by the Azeri Parliament). Because the changes have not yet been formally adopted between the parties, the revised draft PAM indicates what changes should be made to reflect the changes that have been made or will need to be made. The revised draft version submitted to ADB reflects the following changes: Updates to factual information about the project that do not change the Loan Agreement have Updates to ADB procedures based on ADB’s new or revised procedures (footnotes indicate the version of the ADB document that was used to update the information; these should be deleted in the final version of the PAM) Changes in project content that are known or have been agreed in principle but that require review by ADB and the Government, and may need an amendment of the Loan Agreement Changes that are still undergoing discussion or required key decisions by the Government or ADB. In some cases an explanatory footnote is added to provide an explanation of what needs to be changed. The revised draft of the PAM will require further update to reflect the agreements between the Government and ADB, and review of the updated procedures by ADB. 3.8 Training Needs for the PMUs There are two Executing Agencies (EAs) for the Project: AzerSu (for the Agdash and Goychay components) and SCUPA (for the Nakhchivan component). A Project Management Unit (PMU) will be established in each EA. Our understanding is that these PMUs have been established in principle, but since the Loan Project has not yet begun, the PMUs are not yet operational. AzerSu has experience in managing projects from international finance institutions (particularly World Bank), but has not managed an ADB

12 We did not receive any comments on this draft or further requests from ADB or AzerSu to make any revisions.

16 project. SCUPA has more limited experience with loan projects. As such, both PMUs will require training in ADB procedures. We would recommend an initial two-day training session focused on providing the PMUs with an understanding of what they need to do to fulfill ADB’s requirements. Table 3.2 sets out the areas in which the PMUs will require training in order to fully understand ADB requirements and procedures. Table 3.2: PMU training requirements for managing the ADB loan General Purpose of the Project Administration Memorandum Procedures for updating the PAM Project implementation arrangements – roles and responsibilities of the PMU and PIU, role of the Loan Consultant Preparing and updating the Procurement Plan Compliance with loan covenants Procurement Procedures Procurement overview – Type of bidding (International Competitive Bidding, National Competitive Bidding, and International Shopping) – Bidding thresholds – Requirements for each type of bidding Introduction to the Standard Bidding Documents Requirements for ADB approvals during bidding process Disbursement Procedures Introduction to the Loan Disbursement Handbook (January 2007) Requirements for the Imprest Account – Withdrawal procedures, overview of forms, and submission requirements Different payment procedures, requirements, and overview of the forms and submission requirements (Direct payment procedures, commitment procedure, reimbursement procedures) Reporting Project Progress Reports (required information, frequency of reporting) Project Completion Report (purpose, required information)

17 4 Summary of Activities and Outcomes under this TA In this section, we summarize the activities that have been completed under this TA, noting where there have been updates to our work, or where there have been outcomes. Because full discussions of this work are provided in previous reports or in Section 3 of this report, we only highlight our work to provide an overview of the activities that have been undertaken in this TA. In Appendix F, we document our activities against the Terms of Reference for this TA. Where applicable, we specify where there was a change to the original TOR agreed with ADB. 4.1 Task 1—Establishment and Development of the Joint Stock Companies The objective of this task was to provide recommendations for the organizational development of the JSCs. The development of the JSCs into autonomous and accountable water utilities is an essential part of the institutional reform process, and to the long term sustainability of the new WSS systems. An important focus of this work is to prepare the JSCs in the Project Towns for the Management Contractor; however, we have taken the view that many of these reforms are necessary whether or not a Management Contractor is engaged. Therefore, we structured our recommendations so that they can be directly adopted by the JSCs. If a Management Contractor is engaged, the Contractor will support the organizational development of the JSCs. Recommendation on the governance structure for the JSCs and on revisions to the JSC Charters Prior to the start of the TA, AzerSu established the JSCs in Agdash and Goychay using the model charter developed under the KfW project. While these charters included provision for the creation of a Board of Directors, the structure and duties of the Board of Directors was not specified. This was an important omission in the Charters, particularly in light of the ADB requirement for the participation of the municipalities in the Boards of Directors. We reviewed and recommended revisions in the Charters to: Clearly define the role of the Shareholders—As structured, the Charters gave the Shareholders an extensive amount of authority over the decisions of the JSCs. Because the sole Shareholders are AzerSu (Agdash and Goychay) and MED-NAR (Nakhchivan), this significantly impacted the extent of the JSCs’ autonomy. We recommended some changes to limit the role of the Shareholders—to the degree permitted by the Civil Code—and clarify the division of responsibilities between the Shareholders and the proposed Board of Directors Define a structure, the role and responsibilities, and voting procedures of the Board of Directors—The RRP specified that a Board of Directors should be created, and the municipality should have a role on the Board of Directors. To meet this requirement, we proposed a composition of the Board of Directors that included the municipality (with a “blocking minority” vote) as well as customer representation. We also defined the Board’s responsibilities, decision-making authority, and relationship to the Shareholders and the JSC’s management team. This is reflected in the proposed revisions to the JSC Charters.

18 Reflect other minor change to clarify the role of the JSC—We suggested other minor improvements to the Charter. For Nakhchivan, we also suggested some changes to make the Charter consistent with the requirements of the Civil Code.13 As part of our discussion paper “Recommendation on the Governance Structure for the Joint Stock Companies of Adgash, Goychay and Nakhchivan”, we submitted revised versions for both the Adgash/Goychay and Nakhchivan Charters, clearly indicating the suggested changes. Nakhchivan has adopted the revised JSC Charter as proposed by the TA team, and it was registered with the Ministry of Justice in January 2007. As of the writing of this report, no action has been taken by AzerSu to revise the Charters for Agdash and Goychay. Recommendations on the development of business and accounting systems and procedures for the JSCs Improving the business and accounting systems of the JSCs is critical to the overall modernization and development of the JSCs. Currently, the financial management system (including billing and collections systems) is very weak. Revenue collection is poor, all financial systems are manual, and JSC management is not provided the financial information needed to make informed decisions about JSC operations. The most effective way to improve the financial management systems is to adopt computerized financial management systems. The discussion paper Recommendations on Business and Accounting Systems/Procedures for the JSCs in the Project Towns sets our recommendations for the development the financial management system and for improving billings and collections. The paper includes specification for a computerized Financial Management System. Implementing such as system will require expertise to help the JSC design, procure, and implement the system, and to help them to use the financial system. We recommend that this be done by the Management Contractor in Agdash and Goychay and with the assistance of the International Utility Advisor in Nakhchivan. The discussion paper also included recommendations for the improvement of the complaints management system. We developed this recommendation further in the discussion paper Recommendations on Customer Service and Complaints Management described in Section 3.1. Recommendations on the human resource policy and organizational structure of the JSCs All of the staff from the former SuKanals have been transferred to the JSCs, without any reorganization of the companies or significant changes in the staff, except in Nakhchivan. (In Nakhchivan, the JSC was created from water supply and sanitation departments, and therefore there was some reorganization to merge the two departments together.) For the JSCs to improve their business practices and develop their organizational capacity, it is necessary to reorganize the structure of the JSCs to better reflect their functions, and make some staffing changes to realign the functional responsibilities with staff skills. In the discussion paper Recommendations on Organizational Structure and Human Resources Development for the JSCs in the Project Towns, we reviewed the existing staffing practices and recommended strategies for improving practices and procedures related to staff recruitment, employment and training. We provide additional recommendations in our

13 We found that the initial Charter prepared by Nakhchivan varied from the model Charter used by AzerSu, and in part was inconsistent with the requirements of the Civil Code. Our suggested revisions also included changes to bring the Charter in line with these requirements.

19 Supplementary Recommendations on Organizational Structure and Human Resources Development for the JSCs in the Project Towns (see Section 3.3). We believe that many of the recommendations in these discussion papers can be adopted immediately by the JSCs. In particular, the JSCs can restructure their organizations in line with the recommendations, adopt the job descriptions, and put into place a training program designed to upskill the current staff. Although it appears that the JSCs are currently are overstaffed, we believe that no redundancies are required now as additional staff will be required when the new WSS systems come on line; however, the JSCs should make a concerted effort to place retiring staff with new staff that are appropriately qualified. Recommendations on the development of Town Water User Associations One of the innovative features of the Project is to strengthen consumer participation in the provision of water services, including the establishment of Town Water User Associations (TWUAs). We developed recommendations on the development the TWUAs in the discussion paper Recommendation on the Development of Town Water Users Associations for the Project Towns. In Azerbaijan Water User Associations are present in the irrigation sector, but have not yet been created to act as a voice for the community related to water supply and sanitation services. The paper sets out a possible role for the TWUAs, recommends an organizational structure, and gives an indicative budget. We have also recommended that a member of the TWUA be appointed to the JSC Board of Director as a means to ensure consumer participation in the running of the JSC. Recommendations on the development of Corporate Development Plans The development of Corporate Development Plans by the JSCs is a requirement of the ADB loan. In the discussion paper Recommendations on the Development of Corporate Development Plans for the Joint Stock Companies, we discussed the purpose of development a CDP and some of the initial challenges the JSCs will face in becoming institutional and financially viable companies. The discussion paper includes an annotated outline for a CDP that the JSCs can use to begin developing their plans. Because the JSC management has limited or no experience in developing this kind of plan, we recommend that they initially be supported by the Loan Consultant in developing the plans. However, the JSCs themselves should actively be involved in developing the plan because the process of developing the plan is in many ways just as, if not more, important than the plan itself. 4.2 Task 2—Liquidation of the SuKanals In the Project design, it was envisioned that the JSCs would be created as completely new companies and would be responsible for operating the new water supply and sewerage systems developed under the ADB Project. As new companies, the JSCs would be free from the financial burdens of old debts and existing liabilities that plagued the SuKanals. The idea was that once the new JSCs were established and operational, the SuKanals would be liquidated, and their financial assets and liabilities dealt with in the most appropriate manner. The objective of this task was to recommend a way to liquidate the SuKanals. However, instead of creating new JSCs, AzerSu and Nakhchivan MED opted to simply transform the SuKanals into the JSCs. Under this approach, the JSCs continue to be burdened by the financial difficulties of the SuKanals, and will continue to experience financial difficulties without pro-active actions by AzerSu and NAR MED. As discussed in Section 3.4, we recommend the following:

20 The existing infrastructure that is replaced by the new assets or no longer needed is written off completely from the JSC’s balance sheets. We estimate that the total value of these assets is AZN 670,000 for Agdash and AZN 230,000 for Goychay The full value of the new assets is written into the fixed assets of the JSCs The “dead debts” be written off. These dead debts amount to AZN 92,000 in Agdash and AZN 116,000 in Goychay. We also recommend that measures be taken to collect the debts that still have a chance to be paid, and The JSCs are allowed and obliged to apply realistic depreciation rates in their annual accounts to ensure that there is enough cash for the upkeep of the new assets. These measures will help to clear the JSCs financial accounts of problems created by the SuKanals, and enable the JSCs a better chance of being financially sustainable. These actions require the Government to agree to write off the losses incurred under the SuKanal management and recognize the value of enabling the JSCs to have fresh start. 4.3 Task 3—Transaction Advisory Services (Design of the Management Contract) The Project envisions that a Management Contractor will be engaged to manage the JSCs for a period of 3-4 years when the new water systems become operational. The purpose of having an international company manage the JSCs for a specified period of time is to help put into place modern management and commercial practices and train staff to ensure that the new water systems financed through the ADB loan will be properly maintained and operated on a commercially sustainable basis. The intention is to use the Project Towns to pilot using a private management contractor as a way to support the development of the JSCs into commercially viable enterprises. The proposed approach to engage an international firm as the Management Contractor to support the JSCs is sound; however, the strategy proposed for preparing the JSCs for the Management Contractor was not well developed in the RRP. Additionally, as discussed in Section 2.1 in the interim between the Project design and start of the TA, AzerSu chose to create the JSCs by corporatizing the SuKanals rather than establishing the JSCs are completely new entities as was recommended in the RRP. We discussed the inherent challenges to a Management Contract in our Inception Report. Following discussions with AzerSu and ADB, we then prepared the discussion paper Recommendations on Management Contract Design. As discussed in Section 2.3, the timing of the project has changed and it is likely that the Management Contract will not be required until early to mid-2009, and therefore the tender process would not start until 2008. Because this is significantly later than originally envisioned, we agreed with ADB that as part of the TA we would only prepare the draft Management Contract and the bidding documents. We prepared the following: Draft Prequalification Document (PQD) which includes the instructions to applicants, the application data sheet, the qualification criteria, and the application forms. This document was prepared using the standard ADB prequalification template

21 Draft Request for Proposals which includes the Instructions to Bidders for preparing their technical and financial proposals. On the advice of ADB, we adapted the Standard Bidding Documents for the Recruitment of Consultants Draft Management Contract which is the contract that will be signed between the Management Contractor and the State Committee on the Management of State Property (acting on behalf of the JSCs). These documents were submitted in our second Interim Report, together with an Explanatory Note that describes the key features of Management Contract and the tender documents (Second Interim Report: Explanatory Note on the Management Contract and Tender Documents for the Agdash and Goychay Open Joint Stock Companies). The steps that will need to be taken to finalize these documents for use in the bidding process are as follows: The bidding documents should be reviewed by AzerSu and the JSCs including AzerSu’s legal department, and any changes incorporated in the drafts. Changes may also be required to reflect any project developments, and As the tender will use International Competitive Bidding (ICB), the documents will need to be submitted to ADB for review before the start of the tender process. The version of the document that is submitted to ADB should reflect the final changes from AzerSu and the JSCs. 4.4 Task 4—Project Management Support The final task was focused on providing support for developing the loan project. Because of the Government’s delays in implementing the Project, our role in this task has been limited to providing specific outputs to support the process. We: Prepared the draft Request for Proposals for Loan Consultant that will be engaged to design the water and sanitation systems, supervise construction, and support project implementation and updated the Terms of Reference Revised and updated the draft Project Administration Memorandum (discussed in Section 3.7), and Provided limited ad hoc support to AzerSu and ADB for the loan project as needed and requested. This task originally included a component focused on developing a public awareness strategy. However, as agreed with ADB, this activity was removed from our tasks. We considered it premature to develop this type of awareness campaign until it was clear that the Project would move forward, and the civil works would be initiated.

22 5 Final Observations and Next Steps Improving water supply and sewerage systems in secondary towns in Azerbaijan is important for the Government. Building completely new infrastructure or in some cases rehabilitating existing infrastructure is essential to provide good quality services to customers in these towns. The provision of new infrastructure should result in improved water services in the short to medium term. However, without addressing the institutional arrangements for operating the water systems and providing services, the JSCs will continue to suffer operating and financial challenges, leading to the deterioration of the new infrastructure and failure to respond to customer needs. Ultimately the infrastructure will deteriorate to the same state it is today and require significant investment to be replaced. This vicious cycle can only be broken through institutional reforms focused on creating the conditions for the JSCs to operate sustainably. The Government has taken the first steps to restructure the water sector. AzerSu is now responsible for water services throughout the country (except for in Nakhchivan), and AzerSu, under the requirements of a Government decree, has transformed several of former SuKanals into wholly owned subsidiary companies in several secondary towns including the ADB Project Towns. An important component of the ADB Project is to provide support for the institutional reforms of the JSCs in the Project Towns, Agdash and Goychay which are under AzerSu and Nakhchivan which is under the Ministry of Economic Development of Nakhchivan. The objective of this component of the Project is to demonstrate the types of institutional reforms that are required to develop local water companies that are financially and operationally sustainable and able to provide good quality services to local customers. Unfortunately because of delays in the Project, this TA has not been able to provide the extent of institutional support that was envisioned in Project design. This was largely because the Executing Agencies and the JSCs were reluctant to undertaken any of the reform activities before there was progress towards the construction of the new water systems. In the Project design, it was envisioned that the TA consultant would start work to help the EAs to form the JSCs and to engage the Loan Consultant. While the TA was launched in April 2006, the ADB loan documents were not signed until November 2006 and the Government has further delayed the process for engaging the Loan Consultant (as of May 2007, the short listing of the Loan Consultant had not been completed). Without clear progress on the development of the new infrastructure, the EAs and the JSCs have had little interest in undertaking any reform measures. Therefore, most of the work completed under this TA remains as recommendations. We have prepared these recommendations as a series of discussion papers which will allow the Government, EAs, and JSCs to consider each topic. The papers set out a clear set of recommendations that will set the JSCs on a path for institutional reform. It is important to recognize that institutional reform will take time. While some reforms can be started immediately, others can only be implemented once the new infrastructure is completed or at least nearing completion. However, we consider it essential that work get underway on the development of the infrastructure before too much is asked of the JSCs. This is essential to obtain their buy-in of the reform process and their willingness to undertake the needed changes. Suggested next steps for reform Using the discussion papers as a basis for these reforms, we recommend the following strategy:

23 1. Engage the Loan Consultant so that work can begin on the development of the new infrastructure, and establish the PIUs or other local support required for infrastructure development. This is essential to overcome the perception by the Town Governments and the JSCs that nothing will be done under the Project. 2. Adopt the revised JSCs Charters which provide for the establishment of a Board of Directors and a clear separation of functions between the Shareholders, the Board of Directors, and the JSC Management Team (This step is required for AzerSu, but has already been done in Nakhchivan.) 3. Create the Board of Directors and provide training to the Shareholders, Board members, and JSC Management Team of their respective roles and responsibilities under the Charter 4. Develop an initial Corporate Development Plan for the transition period until the new infrastructure is in place that addresses organization and staffing requirements, financial matters, and training requirements 5. Define a strategy for addressing the JSCs’ financial difficulties in the transition period before the new infrastructure is commissioned and tariffs can be increased. This may be through a combination of external subsidies or support from AzerSu/MED-NAR 6. Review and revise the JSCs’ organizational structure, assess staffing requirements, and develop job descriptions. All new staff should be hired through a competitive selection project and in accordance with the future skills requirements of the JSCs 7. Establish the Town Water User Associations and develop processes for consumer input on the development of the new water systems through the TWUAs 8. Engage the Utility Management Advisor (Nakhchivan) and the Management Contractor (Agdash and Goychay). The Utility Management Advisor in Nakhchivan can be engaged at any point, although we recommend that the infrastructure development be underway before the consultant is engaged. The Management Contractor for Agdash and Goychay should be competitively tendered so that it can start work three months before the new infrastructure is complete. Both the Advisor and the Management Contractor will be instrumental in helping the JSCs to implement the reforms 9. Adopt a computerized financial management system for managing the JSC account and doing customer billing. These systems should be rolled out gradually and training provided for the JSC staff to adapt to more modern financial systems. The above provides a framework for implementing the reforms recommended by the TA. Specific action plans are included in the discussion papers. Final Observations Developing sustainable JSCs will require serious commitment by the EAs and the Government, and it will take time to implement. The Government and AzerSu/MED- NAR must be committed to creating an environment that allows the JSCs to operate reasonably independently, yet at the same time must provide the support and oversight to enable the JSCs to develop the capacity to operate sustainably. This will require the clear plan—preferably set out in the Corporate Development Plan—and a commitment

24 by all stakeholders. The ADB Project is designed to provide clear support through the TA Consultants, the Loan Consultants, and the Management Contractor (the Utility Management Advisor in the case of Nakhchivan) for the institutional reform process. However, this process will not work without the buy-in and commitment of the Government, the EAs, and the JSCs. Unfortunately, this was not the case during the implementation of the TA, but we would expect that once the Loan Consultants are in place and the infrastructure development process is started, the EAs and JSCs will be more receptive to the institutional reform process.

Appendix A: Discussion Paper on Recommendations on Customer Service and Complaints Management System

TA 4465 – AZE Institutional Strengthening of Water Supply and Sanitation in Secondary Towns

Recommendations on Customer Service and Complaints Management

Discussion Paper

Report to Asian Development Bank and Government of Azerbaijan

April 2007

Table of Contents

1 Introduction 4 1.1 Objective of this Discussion Paper 4 1.2 Overview of the System 4 2 Definitions 5 3 Principles and Procedures of the Complaints Management System 7 3.1 Key Principles 7 3.2 Customer Complaint Procedures 8 3.3 Sample Forms and Performance Indicators 10 3.4 Methods of Contact 10 4 Roles and Responsibilities 11 4.1 All Staff 11 4.2 Field Staff 11 4.3 Customer Service Officer 11 4.4 Senior Managers 12 4.5 Contractors and Consultants 12

Appendices Appendix A Sample Categories of Customer Complaints 13 Appendix B Sample Complaints Register 15 Appendix C Sample Complaints Form—Water and Sewerage 18 Appendix D Sample Reporting Forms 19 Appendix E Sample Key Performance Indicators for Customer Service and Complaints Management 22 Appendix F Customer Complaints Procedures 23

Figures Figure 3.1: Complaints Management Procedures 9

1 Introduction Under TA 4465-AZE, Castalia has prepared a series of discussion papers providing recommendations for strengthening the institutional capacity of the Joint Stock Companies (Companies) in Agdash, Goychay and Nakhchivan. The Discussion Paper entitled “Recommendations on Business and Accounting Systems/Procedures for the JSCs in the Project Towns” dated December 2006 briefly discussed the current Complaints Management systems used by the water supply companies at Agdash, Goychay and Nakhchivan and recommended the implementation of a more systematic Customer Service and Complaints Management System. Customer Service involves several key actions including the effective management and resolution of complaints, enquires, and the timely completion of service requests. All of these also involve interaction with a customer, whether this interaction is in the field, on the telephone, or at the Companies’ Offices. An important outcome of this interaction is that all customers have an improved perception of the Companies as a result of this interaction. Customer complaints should be viewed by each Company as valuable feedback and an opportunity to improve customer satisfaction. 1.1 Objective of this Discussion Paper This discussion paper outlines a recommended system for the effective management of complaints (including service requests) and enquires with the aim to improve the way each Company manages all contacts with customers and consumers. It also provides a number of sample forms that can be used in the implementation and operation of this system. The overall objective of this paper is to recommend a Customer Service and Complaints Management System that will: Provide an effective process to respond to and resolve complaints Ensure a high level of satisfaction on the outcome of a customer’s complaint Provide a transparent method of measuring and reporting customer complaints Provide a framework for continuous business improvement based on customer complaint information received, and Provide effective procedures to manage customer enquires to ensure a high level of satisfaction to the customer. 1.2 Overview of the System The Companies need to resolve customer complaints or address customer enquires at the first point of contact by providing a solution, the required information, or negotiating an agreed course of action with the customer. The Companies need to respond to any customer complaint in a prompt, efficient and fair manner to ensure that customer satisfaction is maintained and that its business processes can be improved. Each Company should provide a response to all complaints—even where it is not possible to resolve the complaint immediately—within: 48 hours for all complaints made by telephone or in person involving interruptions of services, leaks, or blockages of sewage, or 5 days for all complaints:

4 – made in writing or by fax (including interruptions of service, leaks, or blockages of sewage), or – involving errors in bills and similar matters or replacement of meters for billing (when meters are installed under the Project).1 Where complaints cannot be resolved to a customer’s satisfaction by a company employee, they should be referred to a Manager. 2 Definitions This section provides definitions for the terms that are used in this discussion paper. Where a term that is defined in this section is used in a definition, it is shown in italics. 2.1.1 Actioning Section/Department The “actioning section/department” is the functional area in which the actioning employee is located. This is the section/department that will deal with the complaint. This area may not necessarily be in the initiating section/department. 2.1.2 Actioning Employee The “actioning employee” is the employee responsible for resolving the complaint (such as the Customer Service Officer). 2.1.3 Agreed Course of Action An “agreed course of action” is a method of resolving the issue. The process by which the complaint will be resolved should be negotiated with the customer. The customer must be satisfied with the process and clearly understand what the course of action will be. In circumstances where the complaint cannot be immediately resolved, the customer must be advised of: The time frame for the review (this would include progress reports to the customer if the matter is likely to take some time to resolve) The method by which a further response will be forwarded to the customer (for example, by telephone call, visit, or letter) A contact name and telephone number the customer can call if the customer wants to provide further information or check on the progress of the matter, and A complaint number (if available). 2.1.4 The Company The “Company” is the Water and Sewerage Joint Stock Company for the area. 2.1.5 Complaint A “complaint” is any communication received from a customer or representative of a customer which expresses dissatisfaction with a product, service or disservice of provided by the Company or its representative that relates to its obligations as set out in any relevant legislation or Customer Charter (where applicable).

1 The recommended response times are consistent with good utility practices; however, the Companies are free to set the response times as they believe appropriate to their circumstances. It is, however, important that the required response time be clearly stated in the Complaints Management Procedures so they are clear to all employees and to customers.

5 In addition to this definition, the following interpretation can be used to assist front line staff to more clearly delineate between a contact and a complaint: “A contact is considered to be a complaint if the issue has clearly or is likely to have resulted from an action, omission, error, failure or policy of the Company” For measurement and reporting purposes, every complaint is treated as an individual complaint. If a complaint is received from a customer, and at a later date or time the same customer registers another complaint about the same issue, the second contact is recorded as a separate complaint.2 2.1.6 Customer A “customer” is any consumer of the Company’s products or services whether provided directly by the Company or via its agents. 2.1.7 Customer Services Officer The “Customer Services Officer” is the employee responsible for the compilation and coordination of customer reports. 2.1.8 Enquiry An “enquiry” is any contact by customer that is not a complaint but requires a response or action by Company staff. 2.1.9 Initiating Employee The “initiating employee” is the employee who makes first contact with the customer. This contact may be in person, a telephone conversation, receipt of a letter or fax message. It is the initiating employee’s responsibility to meet all response requirements specified in this procedure. 2.1.10 Initiating Section/Department The “initiating section/department” is the section/department where contact with the customer is first made. 2.1.11 Initial Response An “initial response” can be: A solution presented to, and accepted by the customer, or An agreed course of action by which the complaint will be resolved. Where the complaint or enquiry is received over the telephone or in person and the matter cannot be dealt with immediately, an initial response must be made within 2 working days 2.1.12 Response A “response” is the reaching of agreement with a customer on the action to be taken toward resolving the complaint or addressing the enquiry. 2.1.13 Resolution A “resolution” addresses the issue raised by the customer, and: Resolves it to the customer’s satisfaction, or provides explanation of the relevant policy and explains why no further action is required, or

2 For the purposes of this Discussion Paper, complaints do not include internal Company management issues such as internal staff grievances or employment issues.

6 Provides a date when the issue will be resolved if the complaint is relating to future planned operational or capital works. A partial response is not a considered resolution. For example, a partial response may be to advise the customer that further investigation is required before a resolution can be made. A resolution must be provided within 48 hours for all complaints involving interruptions of services, leaks, or blockage of sewage and five days for all complaints involving errors in bills and similar matters or replacement and checking of meters for billing. 3 Principles and Procedures of the Complaints Management System This section describes the basic principles that should underpin the Customer Service and Complaints Management System, describes the Customer Complaints Procedures that each Company will need to prepare, and gives an overview of the complaints process and the sample forms. 3.1 Key Principles The emphasis is on satisfying the customer. Consequently, each Company’s staff need to work with the customer to ensure, wherever possible, that a joint resolution of the complaint or enquiry is achieved at the first point of contact. The following sets out the basic principles that should be adopted by each Company. The Company will: Provide a consistent and fair approach to dealing with the complaints and enquiries of all customers Deal with problems through a course of action agreed with the customer Work with customers to ensure a joint resolution of a complaint, wherever possible Act on feedback from our customers so that processes can be continually improved Ensure customers are aware of their right to complain and how to go about it Ensure the lodgment of a complaint is free of charge to the customer Set response standards and complaints handling procedures that can be reasonably delivered by employees of the Company Develop a customer service culture orientated toward quick and courteous responses to customer complaints and enquires Provide adequate staff to effectively manage complaints and enquiries Provide employees with the authority to resolve complaints Meet or exceed the standard set for timeliness of responses Designate individual senior managers the responsibility of reviewing and improving the performance of complaints management and customer service Provide employees with procedures, training, information and work tools, and

7 Comply with the standards and procedures developed for responding to and resolving customer complaints. 3.2 Customer Complaint Procedures Appendix F provides an outline for the Customer Complaints Procedures needed to implement the Customer Service and Complaints Management Program. Each Company needs to develop its procedures in accordance with this outline and follow these procedures. These procedures will apply to all customer complaints and enquires received by the Companies. These procedures provide direction to all employees who receive or respond to customer complaints and enquires.

A flow chart of the Customer Complaints Procedures is shown in Figure 3.1 below. Each step identified in the flow chart is explained in Appendix F.

8 Figure 3.1: Complaints Management Procedures

Receive STEP 4 STEP 5 NO STEP 6 STEP 12 STEP 13 STEP 21 customer Prepare Decide if Inform Actioning Determine if the Advise customer complaint complaints customer customer of section/dept customer had of methods of form can be when you can provides solution indicated that they independent advised on make an to customer wanted to be review and action that interim reply complaint informed of avenues of will be outcome mediation STEP 1 taken to NO resolve STEP 7 YES Determine if NO complaint Refer STEP 14 NO complaint can be complaint to Person who took resolved at point actioning complaint of contact STEP 20 section/dept advises Determine if YES YES customer customer satisfied STEP 8 STEP 2 Contact section YES STEP 15 Inform customer regarding the Determine if STEP 22 of solution course of action to customer is Complete be undertaken satisfied YES complaints form

STEP 3 Determine if NO STEP 9 YES STEP 10 NO customer is Inform NO Determine if STEP 23 satisfied customer of STEP11 & 16/17 customer is Send complaint course of Refer complaint satisfied form to complaints action to Senior service officer for Management for YES analysis reporting review

END

STEP 18 & 19 Investigate & advise Other processes, customer of outcome reporting and analysis and improvement

Source: Castalia

3.3 Sample Forms and Performance Indicators A number of forms should be used in the implementation of the Complaints Management Program. Samples of the forms to support the Customer Service and Complaints Management System are provided in the Appendices A to D. These include: Sample Categories of Customer Complaints (Appendix A) Sample Complaints Register—Summary (Appendix B) Sample Complaints Form—Water and Sewerage (Appendix C) Weekly Report Form—Water and Sewerage (Appendix D). The Companies should modify these forms as needed and adopt them as standard forms. In addition, the Complaints Management Systems should be monitored through the use of a set of Performance Indicators. By tracking performance against these indicators, Company management can evaluate how well the Company is doing in addressing customer complaints. A list of sample performance indicators is proved in Appendix E. 3.4 Methods of Contact The Customer Complaints Management Procedures must be able to handle complaints that are received through any means. A customer complaint can be received in any of the following ways: Telephone – Through the Customer Centers (Administration Office(s)) – Through the Water or Sewage Treatment Plant(s) – Through Staff Mobile Phones (where applicable) Face to face contact – Through Customer Centers (Administration Office(s)) – Through field staff – Through contractors Correspondence – Through the mail system – Through site mail areas – Through the facsimile and/or email (where applicable). The procedures need to specify how complaints received through each of these ways should be handled by staff. An example is the management of mail. Generally, mail is opened in a central area. When a customer complaint is received, the correspondence should be forwarded to the Complaints Service Officer. It would then be the responsibility of this Officer to register the complaint and follow the customer complaints procedure.

10 4 Roles and Responsibilities This section describes the roles and responsibilities of the various types of Company staff. 4.1 All Staff It is the responsibility of all employees to handle any customer contact in a respectful and courteous manner. The customer should complete the contact feeling satisfied with the response of the Company employee. All employees are to respond to customer complaints in accordance with the procedures detailed in this discussion paper. The principle objective is to improve customer service by resolving customer complaints or addressing a customer enquiry in a prompt, efficient and fair manner. All staff have the responsibility for dealing with a customer complaint, even if their regular job is not as frontline staff. The principle of resolution at first point of contact applies to all staff. Whoever receives a complaint is responsible for either: Resolving the complaint (first point of contact) and register it as specified in the Customer Complaints Procedure Following the Customer Complaints Procedure to address the complaint Providing the name and phone number or address of the section/department that will, or Addressing the complaint and register it as specified in the Customers Complaints Procedure. 4.2 Field Staff If contacted in the field by a customer, employees are to do one of the following: Attend to the complaint if it is a complaint that would normally be directed to their section/department. The employee is to take the details of the complaint or communicate with the Administration Office to ensure that a complaints form is filled out Contact the Administration Office on behalf of the customer and register the complaint. This complaint should then to be addressed according to the Complaints Procedure, or Provide customers a Customer Assistance Card that lists contact phone numbers for lodging complaints. In such cases, the response time does not commence until the complaint has been received by a Company officer responding to the subsequent customer contact. 4.3 Customer Service Officer The Customer Service Officer is the main person to ensure that the Company can effectively use the information provided by customer complaints to improve customer service. This person is responsible for: Providing reports to relevant Managers for each reporting period as an indicator against the performance standards Following up complaints that may be incomplete Preparing for audits on the performance against this procedure Understanding the Customer Complaints Procedures

11 Ensuring an adequate supply of Customer Complaint Forms is made available to the relevant areas Keeping records of all Customer Complaint training in a central location Providing staff training according to scheduled requirements, and Seeking opportunities to improve the customer services processes. 4.4 Senior Managers Senior Managers are responsible for developing the Customer Complaints Procedures and ensuring their implementation throughout the Company. Specifically, the Senior Managers are responsible for: Developing a customer service culture orientated toward quick and courteous resolutions to customer complaints and enquiries Providing adequate staff to effectively manage complaints and enquiries Providing employees with procedures, training, information and work tools so they can manage complaints and address enquiries Providing employees with the authority to resolve complaints and enquires Providing employees with the guidelines and standards or service to assist them in advising customers of when they can expect resolution of a complaint Setting response standards and complaints handling procedures that can reasonably be delivered by employees and the Company Carrying out a review of the Customer Service and Complaints Procedures and Guidelines, performance of customer service staff and training requirements on a timely basis Using information gained from reporting, reviews and other sources to continuously improve customer service, and Resolving specific customer complaints that are referred to them by staff when a customer is dissatisfied with the response or course of action offered to them. 4.5 Contractors and Consultants All contractors and consultants carrying out work on behalf of the Water Supply Company must be advised in their contract agreement of their obligations if a customer wishes to lodge a complaint through them against the Company. Any customer who wishes to lodge a complaint with respect to the performance of a contractor or consultant carrying out works or services on behalf of the Company, must be given a Customer Assistance Card which lists contact phone numbers for lodging complaints.

12 Appendix A Sample Categories of Customer Complaints (Note: Additional categories can be added as required)

Water Supply 1. WATER QUALITY – HEALTH 2. WATER QUALITY – DIRTY WATER 3. WATER QUALITY – TASTE AND SMELL 4. WATER QUALITY – OTHER 5. WATER PRESSURE 6. WATER CONTINUITY No Water Water Main Fault 7. WATER OTHER Noisy service 8. CUSTOMER SERVICE (for Water Supply Staff only) 9. DEVELOPMENT SERVICES (Capital Works) 10. DROUGHT / WATER RESTRICTIONS 11. LIABILITY CLAIMS Injury Damage 12. METERS Meter Faults Leakage 13. NOISE (relating to water supply, treatment plant or work crews) 14. RESTORATION (Site rehabilitation)

Sewerage 15. WASTE WATER OVERFLOW Sewer surcharge/overflow Internal surcharge/overflow Plumber confirmed choke 16. WASTEWATER OTHER Manhole displaced 17. ODOR

13 Odor enquiry 18. TRADE WASTE

Administration 19. ACCOUNT BILLING – METER MISREADS (when meters installed) 20. ACCOUNT BILLING – METER READING INCORRECTLY (when meters installed) 21. ACCOUNT BILLING – PAYMENT TO WRONG ACCOUNT 22. ACCOUNT BILLING – OTHER

14 Appendix B Sample Complaints Register B.1 Water (Note: Additional categories can be added as required)

1. Total Complaints Received 2. Total Complaints Attended 3. Total Complaints Resolved 4. Complaints Resolved in 24 Hours 5. Complaints Attended in 48 Hours 6. Complaints Resolved in 48 Hours 7. % Complaints Attended in 48 Hours 8. % Complaints Resolved in 48 Hours 9. Classification of Complaint 1. WATER QUALITY – HEALTH 2. WATER QUALITY – DIRTY WATER 3. WATER QUALITY – TASTE AND SMELL 4. WATER QUALITY – OTHER 5. WATER PRESSURE 6. WATER CONTINUITY No Water Water Main Fault 7. WATER OTHER Noisy service 8. CUSTOMER SERVICE (for Water Supply Staff only) 9. DEVELOPMENT SERVICES (Capital Works) 10. DROUGHT / WATER RESTRICTIONS 11. LIABILITY CLAIMS Injury Damage 12. METERS Meter Faults Leakage 13. NOISE (relating to water supply, treatment plant or work crews) 14. RESTORATION (Site rehabilitation)

B.2 Sewerage (Note: Additional categories can be added as required.)

16 B.3 Administration (Note: Additional categories can be added as required.)

1. ACCOUNT BILLING – METER MISREADS 2. ACCOUNT BILLING – METER READING INCORRECTLY 3. ACCOUNT BILLING – PAYMENT TO WRONG ACCOUNT 4. ACCOUNT BILLING OTHER

17 Appendix C Sample Complaints Form—Water and Sewerage COMPLAINTS FORM No ______Person Complaining ______Address ______Phone No______Complaint ______Is this the first contact on this issue (tick)? Yes/ No Complaint received by ______Date: _____/______/_____ Time ______am/pm ______Signed Complaint referred to ______Date: _____/______/_____ Time ______am/pm ______Signed Cause of Complaint______Action Taken ______Complaint first attended by ______Date: _____/______/_____ Time ______am/pm ______Signed Job completed by ______Date: _____/______/_____ Time ______am/pm ______Signed Customer informed by ______Date: _____/______/_____ Time ______am/pm ______Signed Time taken from when complaint first received until first attended ______hrs Time taken from when complaint first received until completed ______hrs Noted Supervisor______Date______

18 Appendix D Sample Reporting Forms D.1 Water and Sewerage (A separate form is to be used for each function)

Total Total Total Total Week of:______Complaints Complaints Complaints Complaints Received Attended Resolved Outstanding Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

Sunday

Weekly Total

19 D.2 Sewerage Weekly Report by Zones/Areas (Note: Additional categories/zones/areas can be added as required.)

Week of:______ZONE 1 ZONE 2 ZONE 3 ZONE 4 TOTAL WASTE WATER OVERFLOW

WASTEWATER OTHER

ODOR

TRADE WASTE

20 D.3 Water Supply Weekly Report by Zones/Areas (Note: Additional categories/zones/areas can be added as required.)

Week of:______ZONE 1 ZONE 2 ZONE 3 ZONE 4 TOTAL Total Complaints Received Burst Mains Complaints Completed Service Pipes Completed Meter Problems Completed Total Completed Total Pending Complaints Resolved in 24 Hours Complaints Resolved in 48 Hours Number of Repeat Complaints % Resolved in 24 Hours % Resolved in 48 Hours % Repeat Complaints

Appendix E Sample Key Performance Indicators for Customer Service and Complaints Management

Area Reporting Requirements Frequency of Reporting Reporting on operational 1. Total complaints received Reports to be and maintenance matters 2. Breakdown of types of complaints prepared to Water Supply 3. Total complaints completed Management: 4. Total complaints pending Weekly 5. % complaints responded within 24 hours Monthly 6. % complaints resolved in 24 hours Quarterly 7. % complaints responded within 48 hours 8. % complaints resolved in 48 hours 9. % repeat complaints Reporting on operational 1. Total complaints received Reports to be and maintenance matters 2. Breakdown of types of complaints prepared to Sewerage 3. Total complaints completed Management: 4. Total complaints pending Weekly 5. % complaints responded within 24 hours Monthly 6. % complaints resolved within 24 hours Quarterly 7. % complaints responded within 48 hours 8. % complaints resolved within 48 hours 9. % repeat complaints 10. Breakdown of types of complaints 11. Number of sewer chokes cleared 12. Number of broken mains repaired 13. Number of manholes repaired 14. Number of blocked pumps cleared 15. Number of electrical faults attended 16. Number of mechanical faults attended

22 Appendix F Customer Complaints Procedures

1. OBJECTIVE These procedures are to be used for all complaints or service interruptions reported to the Company to ensure customer satisfaction.

2. RESPONSIBILITY It is the responsibility of all staff to follow these procedures when managing any complaints from customers. It is the responsibility of Senior Managers to ensure their staff carry out these procedures and monitor their performance and to provide staff with any requirements they need to carry out these procedures.

3. WORK PROCEDURES Receive Customer Complaint—This contact may be on the phone, in person or in writing. Proceed to Step 1

Step 1. Determine if the Complaint can be resolved at the point of contact YES—Proceed to Step 2 NO—Proceed to Step 4

Step 2. Inform Customer of solution Provide customer with the solution to their complaint. Proceed to Step 3

Step 3. Determine if the Customer is satisfied Ask the customer if they are satisfied with the solution you have offered. You could ask questions like: “Is that OK?” or “Is that acceptable?” YES—Thank the customer and mark on your customer complaint form the details of the complaint to indicate that you received the complaint and resolved it at the point of contact. NO—Proceed to Step 4

Step 4. Prepare a customer complaint form a. Tell the customer you would like to get some details so that we can investigate the problem. (Use words like issue or problem rather than complaint). b. Take the customer’s name, address and contact details. This is so we can get in touch with them once we have solved their problem (if they do not want to be notified then mark this on the complaint form).

23 c. Record whether the customer is an owner or tenant. If unsure, ask the customer. d. Record whether the customer is a residential or commercial customer. If unsure, ask the customer if this is his or her first contact regarding this issue. If NO, take details. f. Record how the complaint was received (phone/ in person/ mail). g. Record the date and time received. h. Take as many details you can about the nature of the complaint so that the person who investigates the complaint can resolve the complaint without having to bother the customer again. If it is a service interruption you may need to ask some specific questions to determine which crew to send out and how urgent it is. i. Print your name, location, phone number in the space provided. Proceed to Step 5

Step 5. Determine if you can advise on the action that will be taken to resolve the complaint Do you know how we will investigate the complaint and the expected time frame for resolution? YES—Proceed to Step 9 NO—This will usually be the case where you need to refer the complaint to another section.—Proceed to Step 6

Step 6. Inform customer of when you can let them know what action we will take a. Tell the customer you will forward the complaint to the relevant people and get back to them regarding the action that will be taken to resolve the complaint. b. Indicate the likely time it will take you get back to them. c. If the customer requires an answer immediately, ask them to wait while you contact the section/department and get some answers. Proceed to Step 7

Step 7. Deliver the complaint to the section/department to determine action a. If unsure of the section/department contact your Supervisor. b. Print the name and location of the person you are forwarding the complaint to in the relevant area on the Complaint Form. c. Sign the form in the place provided and record the date that you are forwarding the complaint to the relevant section/department. Proceed to Step 8

24 Step 8. Contact the relevant section/department regarding the action to be taken a. Telephone the section/department and confirm that they are the correct area to resolve the complaint. b. Determine the action pending and when it may occur. c. Note the details on the complaints form. Proceed to Step 9

Step 9. Inform customer of course of action a. If the customer is not with you contact the customer on the phone number they have given you. b. Tell the customer what action will be taken and when they can expect this to occur . For example: “We will send a work crew out to investigate the problem as soon as possible”. c. If you know more about the current workload, or the Supervisor is at hand to advise you, you can be more specific on response times. “I will forward your complaint to the relevant Manager (insert name) at Head Office. We should have an answer for you by….” d. Give the customer your name and phone number in case they want to provide further information or check the progress of the matter. Proceed to Step 10

Step 10. Determine if the customer is satisfied Ask the customer if they are satisfied with the course of action. YES—Thank the customer, tick the “yes” box provided on the Complaints Form (Initial Response to customer)—Proceed to Step 12 NO—Try to negotiate with the customer to see if you can explain the reason for this course of action. For example, you may say that “due to the number of other more critical jobs, this job cannot be attended to until such and such a time”. If the customer is still dissatisfied, tick the “No” box provided on the complaints form—Proceed to Step 11

Step 11. Determine if the customer would like the complaint referred to a Senior Manager Ask the customer if they would like their complaint referred to a Supervisor or Senior Manager. YES—Tell the customer the name and phone number of the Manager you will be forwarding their complaint to—Proceed to Step 19 and 20 NO—No further action is taken

25 Step 12. Section/Department provides solution to customer’s complaint and completes Complaints Form a. Undertake investigation of problem and rectify fault (operation complaints) or report findings and actions (billing or other complaints). b. Complete the Action Taken section of the Complaints Form. c. If an operational problem and the field staff has check customer satisfaction in the field, tick form or fill out appropriate details on the form. d. Obtain the Supervisor’s signature in the space provided and record the date and time the complaint was resolved. Proceed to Step 13

Step 13. Determine whether “advice required” was requested regarding the solution Did the customer indicate that they would like to be informed on the outcome to their complaint? YES—Proceed to Step 14 NO—Proceed to Step 22

Step 14. Person who took complaint advises customer (if customer has not already been advised by the field staff) a. Contact the customer on the phone number they supplied when they made the complaint. b. Tell the customer what action was taken and the outcome of the complaint. Proceed to Step 15

Step 15. Determine if the customer is satisfied Ask the customer if they are satisfied with the outcome from the action taken. Note: If the original complaint was in writing and solution is given in writing, satisfaction is assumed unless the customer responds to the contrary. YES—Proceed to Step 22 NO—Proceed to Step 16

Step 16. Determine if the customer would like the complaint referred to a Senior Manager Ask the customer if they would like their complaint referred to a Senior Manager. YES—Tell the customer the name and phone number of the Manager you will be forwarding their complaint to—Proceed to Step 17 NO—Proceed to Step 22

26 Step 17. Refer complaint to Senior Management a. Ensure all relevant details of Complaint Form are complete including: Customer details Times and dates of contact Nature of complaint The course of action you had proposed The action that has been taken to date. If necessary, prepare an accompanying memo stating the course of events up to this point and all other relevant details. b. Deliver details immediately and accompanying memos. Proceed to Step 18

Step 18. Senior Manager investigates the complaint and makes decision a. Senior Manager confirms with Supervisors the action taken to date. b. Senior Manager contacts customer to confirm details of complaint and reasons for dissatisfaction with outcome to date. c. Senior Manager makes decision and instigates any further action required to resolve the complaint. Proceed to Step 19

Step 19. Advise customer of outcome from Senior Manager’s review Senior Manager contacts the customer by the method agreed with them during the course of management investigation and advises on the action taken to resolve the complaint. Proceed to Step 20

Step 20. Determine whether customer satisfied Senior Manager asks the customer if they are satisfied with the outcome. YES—Proceed to Step 22 NO—Proceed to Step 21

Step 21. Advise customer of methods for external review This is currently not defined. In the event that no satisfactory solution may be offered, advise the customer of independent bodies for review and mediation. Maintain all records in case they are required by external bodies investigating the matter. Inform the person who took the complaint that customer was advised of other courses of action. Proceed to Step 22

Step 22. Complete Complaints Form If the customer had wanted to be advised on the outcome, record whether they were satisfied or not. Include any comments by customer. Sign the Complaint Form and record the Date Customer advised (if applicable). Ensure all details are complete on the form. Proceed to Step 23

Step 23. File original copy of form so it can be entered into the Complaints Register File copy at section/department for records and analysis.

T +1 (202) 466-6790 F +1 (202) 466-6797 1700 K Street NW Suite 450 WASHINGTON DC 20006 United States of America

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Appendix B: Discussion Paper on Corporate Development Plans

TA 4465-AZE Institutional Strengthening of Water Supply and Sanitation in Secondary Towns

Recommendation on the Development of Corporate Development Plans for the Joint Stock Companies of Agdash, Goychay, and Nakhchivan

Discussion Paper

Report to Asian Development Bank and the Government of Azerbaijan

May 2007

Table of Contents 1 Introduction 1 1.1 What is a Corporate Development Plan? 1 1.2 Why Prepare Corporate Development Plans? 2 1.3 Report Structure 3 2 Principal Issues Facing the JSCs in the Initial Planning Period 4 2.1 Managing Operating Losses 4 2.2 Transition from SuKanal to Efficient Service Company 5 2.3 Obtaining External Financial Support 6 2.4 Key Questions the Transition Period CDPs Should Answer 6 3 Recommended Corporate Development Strategy 8 4 Corporate Development Plan Outline 10 5 Corporate Development Planning Process 14 6 Initial Three-Year Plan 16

Appendices Appendix A Agdash/Goychay JSC Outline Corporate Development Plan 18 Appendix B Nakhchivan JSC Outline Corporate Development Plan 21

Tables Table 5.1: Key Steps in Developing the CDP 14

Boxes Box 1.1: Assistance Envisioned for the Development and Implementation of the CDPs 1

1 Introduction Joint Stock Companies (JSCs) have been set up in Agdash, Goychay and Nakhchivan to provide water supply and wastewater services in the Project Towns. They will assume responsibility for the operation of new water and wastewater infrastructure to be provided with the assistance of Asian Development Bank (ADB) loans. The loan agreements include a requirement for each of the new JSCs to prepare and update rolling three-year corporate development plans (CDPs), and submit them to the ADB no later than 1 February of each year, starting from the second year of Project implementation. This discussion paper is intended to guide and assist the initiation of a continuing corporate development planning process for each of the JSCs. 1.1 What is a Corporate Development Plan? A Corporate Development Plan is a strategic plan for the operation and development of the JSCs. It is intended to enable the JSCs to clearly define their goals and service objectives and set out how they intend to achieve them. A CDP for the JSCs should include at least the following topics: Revenue and expenditure budgets Tariff recommendations Operations and maintenance plans Plans for developing and improving internal control systems Staff development and training programs, and Customer awareness programs. Under the ADB loan requirements, the first CDPs will be due in February 2008 and will cover the period when the existing water and wastewater assets will be retired and replaced by the new infrastructure constructed with the assistance of the ADB loans. The new JSCs will need help in preparing the CDPs, as they have no experience in preparing such plans. It is expected that some support for the preparation and implementation of the CDPs will be provided by the Loan Consultant procured under the ADB loan, as well as the Management Contractor envisioned for Agdash and Goychay. For Nakhchivan, the Utility Management Advisor will also be able to provide some support. Box 1.1: Assistance Envisioned for the Development and Implementation of the CDPs By the time the first CDPs are due, the JSCs should have the assistance of the Loan Consultant in setting up and staffing Project Implementation Units in each town. The PIUs will be tasked with supervising the design, construction and commissioning of the new assets and assist with the decommissioning of the old assets. The Loan Consultant is also expected to provide a range of non-engineering experts that will be qualified to assist the JSCs with the preparation (and implementation) of their CDPs in the period before the Management Contractor is procured. For preparing subsequent CDPs, the JSCs will have the help of the Management Contractor (in the case of Agdash and Goychay) or the Utility Management Advisor (in the case of Nakhchivan).

1 1.2 Why Prepare Corporate Development Plans? Corporate Development Plans (CDPs) for the new JSCs are both a good utility practice and a requirement of the loan agreements signed between the Asian Development Bank and the Government of Azerbaijan. With regard to the latter, the loan agreement states “AzerSu will develop, and cause the JSCs to develop and provide to ADB, no later than 1 February of each year starting from the second year of project implementation, annual corporate development plans consisting of revenue and expenditure budgets, tariff reviews, covenant compliance, and detailed O&M plans. The Nakhchivan JSC will submit a similar corporate development plan to ADB no later than 1 February of each year starting from the second year of project implementation.” The key objective for the first CDPs prepared by the JSCs will be to prepare them to take on the operation of the new infrastructure. Over the next three years, the period covered by the first CDPs, each of the new JSCs needs to put in place the following: Capacity to manage and obtain maximum benefit from the contract with the Management Contractor (in the case of Agdash and Goychay) or the Utility Management Advisor (in the case of Nakhchivan) Procedures and staffing structure in those areas that need to be operational before the management contractor is in place, or for which the management contractor will not be responsible, including the management of the capital works, and Correctly incorporate JSCs in each town, which have clear governance and ownership arrangements, well specified relationships with external stakeholders, and initial staffing structures, plans and procedures. These issues will need to be addressed in the first CDPs prepared by each JSC. Each JSC will have assistance from the PIU to be set up with the assistance of the Loan Consultant. However, each will likely face formidable problems arising from the historic neglect of the former SuKanals they replace. Therefore, the objective and the challenge of the initial corporate development planning process is to anticipate and either overcome or sidestep the problems using all the means that the JSCs will have at their disposal. The JSC Boards of Directors will have the key role in shaping, guiding and motivating this process. The corporate planning process will bring these issues to the attention of all the key stakeholders and provide the JSC Boards and managers with a structured context for: Quantifying the problems posed by the transition period Developing and assessing coping strategies for dealing with those problems (such as government subsidies, steeper tariff increases, and cost-cutting.) Turning these coping strategies into itemized, time-bound, costed plans that can be presented to government and stakeholders for support and funding Setting goals and deadlines for managers and staff to meet in implementing the plans, and Agreeing explicit longer-term corporate objectives that give direction to the organization as a whole. After the initial transition period, the CDPs will evolve to establish the key objectives for each time period covered by the plan and the strategy for achieving the stated objectives.

2 These objectives will likely include operation and financial objectives as well as objectives related to the improvement of customer service. 1.3 Report Structure This discussion paper is structured as follows: Section 2 discusses the principal issues facing the JSCs in the transitional period between now and the time when the new infrastructure is commissioned Section 3 outlines our recommended high-level strategy for the corporate development of the JSCs Section 4 provides and explains an outline of the initial CDPs to be prepared in the transitional period Section 5 sets out the recommended process for developing the initial CDPs Section 6 provides additional detail on our suggested key targets that the JSCs should incorporate into their first CDPs The Appendices provide CDP templates that can be used as a starting point by the JSCs.

3 2 Principal Issues Facing the JSCs in the Initial Planning Period In this section we set out the principal issues that the JSCs will have to deal with (and therefore plan for) in the period covered by the first CDPs, and the key questions the CDPs will attempt to answer. The key task is to prepare the JSCs to take on the operation of the new infrastructure with input from a Management Contractor (in the case of Agdash and Goychay) or Utility Management Advisor (in the case of Nakhchivan). The JSCs are responsible for the provision of water supply and sanitation (WSS) services to the consumers they serve. The JSCs will also take on the ownership of the new assets created with the help of ADB loans and assume responsibility for the financial obligations that come with the new assets, including the servicing and repaying the ADB loans (indirectly, through sub-loan agreements). Of particular note is that the loan agreements require that the JSCs will not be encumbered with any of the assets and liabilities of the SuKanals they replace. The key issues for this initial period are: Managing operating losses The successful transition of JSCs from former SuKanals to efficient service companies, and The need for external financial support. We briefly discuss each of these below. 2.1 Managing Operating Losses The ADB supported Urban Water Supply and Sanitation Project was developed from a feasibility study completed in 2003. This included financial and economic projections that identified the Project Towns, demonstrated the affordability of the proposed schemes and provided detailed financial projections for each of the town water and wastewater utilities. These suggested that each scheme is feasible, and that each utility company will be able to generate sufficient revenue from its tariff income to service the ADB loans, provided that the proposed tariff increases are approved. While these projections show that the JSCs should be able to charge an affordable tariff, cover the debt service on the ADB loans and still make a profit in the medium to long term, they paint a different picture for the transition period during project implementation to be covered by the first two CDPs. The projections show that in the years preceding the commissioning of the new works, the existing water companies are likely to incur an annual operating loss, despite steep projected increases in tariffs and collection rates. The new JSCs do not have the financial reserves or backing to cope with such operating losses, making this one of the most important issues that the first CDPs should address. The former SuKanals were administered by the State Committee for Construction and Architecture (SCCA) until its abolition in 2005, when they were transferred to the newly created, state-owned, AzerSu Joint Stock Company. The structure of the AzerSu JSC (AzerSu) was also defined by Presidential Decree and includes branch JSCs for: Each of the two mainland towns, Agdash and Goychay Each of the two towns covered by a parallel KFW project, and

4 A fifth JSC for the remaining 47 SuKanals that AzerSu has inherited from the SCCA. During a two-year delay in starting the Project, AzerSu has essentially reconstituted the former SuKanals in Agdash and Goychay as the JSCs decreed for those two towns, with charters that give the JSCs ownership of all the assets and liabilities of the former SuKanals they replace. The ADB has accepted this new situation. Nakhchivan, meanwhile, is the capital city of the Nakhchivan Autonomous Republic (NAR). Nakhchivan enjoys a considerable degree of autonomy but has followed the precedent set by AzerSu. Nakhchivan has adopted a similar charter for the JSC to that of the Agdash and Goychay JSCs and has also transferred all the assets, liabilities and operations of its former SuKanal to the new JSC. Although, to progress the Project, these asset transfers have to be accepted as part of the new context, the current and projected operating losses of the former SuKanals during the next three years will seriously compromise the ability of the JSCs to undertake their main role which is overseeing the design and construction of the new infrastructure, and reforming the operations of the former SuKanals. A possible solution would be to revert to the situation anticipated in the loan agreements through transferring the assets, liabilities and staff that the JSCs have inherited from the former SuKanals to either: The AzerSu sister company responsible for the management of all but the four former SuKanals covered by the ADB and KFW projects (in the case of Agdash and Goychay), or The NAR Government (in the case of Nakhchivan) The payment to the JSCs for the transfer would be the minimum needed for them to continue to operate legally as a company. Freed from the burdens of the anticipated operating losses of the former SuKanals, the JSCs will be able to focus on their key role as PIUs for the development of the new infrastructure. In the meantime, the former SuKanals will get the specialized support and help for their continued operation from AzerSu, the NAR Government and their peer organizations. An alternative and most likely solution, given the logistical difficulties of implementing the asset transfer described above, would be for the JSCs to continue to own and operate the water supplies and sewage disposal systems in the Project Towns with additional funding assistance from the Government. This is discussed in more detail in Section 2.3. 2.2 Transition from SuKanal to Efficient Service Company The CDPs for the first three years of the JSCs’ existence will cover the period of transition in which the assets, liabilities and operations of the old SuKanals are phased out and the new infrastructure and management are designed, constructed and implemented. This transition is key to the success of the Project but raises some difficult problems that were not explicitly addressed in the Feasibility Studies, the Report and Recommendation of the President to the Board of Directors (RRP), or the Loan Agreements. The most crucial of these is how to fund the transition, a problem compounded by the current state of the new JSCs. There is a clear mismatch between what is envisioned in the Project documents and the actual state of the JSCs that have been established in the Project Towns. The JSCs were intended to be created as separate entities from the former SuKanals and to take over the

5 SuKanals’ resources and operations in a very selective manner, using additional managerial and technical resources provided by the Loan Consultant. However, instead the JSCs are essentially corporatized SuKanals that have inherited all the SuKanals’ resources, assets, liabilities and problems. This essentially makes the JSCs part of the problem rather than the transformational tool they were intended to be. 2.3 Obtaining External Financial Support The financial projections in the feasibility studies incorporate implicit, but unspecified, external financial support for the JSCs in that: Projected operating costs, which exclude depreciation and interest, exceed projected income in all years up to the commissioning of the new infrastructure, despite planned sharp increases in tariffs and collection ratios during the period of project implementation, resulting in unfunded operating losses for the JSCs, and The operating costs do not include any allowance for the additional cost of setting up and staffing the PIUs in each town or of resourcing the anticipated improvements in operations, billing, collection and management. These projected deficits occur despite an assumption in the Feasibility Study that both tariffs and collection ratios will increase considerably over the period, despite the absence of any corresponding increase in either investment or operating costs. The new JSCs have no financial reserves or liquid assets, and the values of both their fixed and current assets are grossly overstated. Thus, in principle, the only sources of funds to cover these anticipated operating losses are short term borrowing or additional equity contributions. For the foreseeable future, neither short term borrowing, nor equity contributions, could be sourced from the private sector. Therefore, the additional funds required, will need to be obtained from the public sector. Only the government, as sole shareholder, can assume responsibility for either providing or procuring the additional funds needed by each of the JSCs to cover their predicted operating losses and additional expenses. The Government of Azerbaijan has committed to increasing tariffs as part of the project, and it is important that this commitment is fulfilled, especially given that the projections show there is scope for tariff increases without making the service unaffordable. However, the planned tariff increases will be phased in over time and will not provide sufficient revenue increases for the JSCs during the transition period. Another parallel Feasibility Study assumption, crucial to the affordability calculations and to willingness-to-pay, is that customers will be able to moderate their consumption and expenditure in response to the higher tariffs. This will only be possible if consumption is metered. While customers will eventually have their consumption metered as part of the project, metering will not be implemented in the short term. This means that any tariff increases in the transition period will be imposed on the basis of the current unrealistic consumption norms. In these circumstances, the most probable outcome is that collection rates from domestic and commercial customers will not rise during the transition period as assumed, but will fall as tariffs are increased. Therefore, direct funding from the Government in the form of subsidies will likely be required. 2.4 Key Questions the Transition Period CDPs Should Answer Given that there is no realistic expectation that the operation of the existing assets would be a profitable exercise, even under the optimistic scenario envisaged in the Feasibility Study financial projections, the essential questions for the CDPs to attempt to answer are:

6 Should the operating losses in the transition period be recognized and dealt with within the new JSCs or in some other way? If the losses are to be recognized within the JSCs, what will be the best mechanism for injecting the public sector funds that will be needed to keep the JSCs solvent: loans or equity? Should the boards and management of the new JSCs be focused on dealing with the problems inherited from the historic neglect of the former SuKanals or on ensuring that new assets created through the project are given the best possible start? What are the matters that the new JSCs must deal with in the period leading up to the commissioning of the new assets? How will the time and resources needed to deal with these matters be funded?

7 3 Recommended Corporate Development Strategy The recommended strategy for developing the new JSCs is to: 1. If possible, isolate them from the assets, liabilities and losses of the former SuKanals. If not possible, obtain additional financial support from the Government to cover projected operating losses over the transitional period 2. Minimize their running costs during the transition period by making maximum use of the Loan Consultant 3. Prepare them to take over the ownership, operation and maintenance of the new infrastructure, the income from the customers it serves and the burden of servicing the debts incurred for its construction, and 4. Employ and supervise a Management Contractor (or, in the case of Nakhchivan, a Utility Management Advisor) to ensure that the JSC has the staff, practices and material to run the new infrastructure in an efficient and sustainable manner. Corporate Development is ultimately the responsibility of the JSC Boards of Directors, so it is essential that these be constituted and meet formally to take charge of their respective companies. We therefore propose a two-stage approach to corporate development. The first stage will focus on: 1. If possible, detaching the new JSC from the financial assets and liabilities, revenues and operating costs of the former SuKanals, or obtaining additional government funding to cover projected operating losses, and 2. Securing sufficient income from government and donors to satisfy the JSC’s basic legal obligations as a branch joint stock company, house the offices of the PIU, hold board meetings, prepare and circulate board minutes and pay for secretarial services, communications, transport and other basic needs. Once these two issues are addressed, the JSCs will be free to focus on the second stage: Overseeing the design and construction of the new water and sewerage infrastructure, making full use of the PIU to be set up with inputs from the Loan Consultant Selecting and training suitable personnel for the JSCs’ future operation Computerizing the customer records with the assistance of the Loan Consultant and funding from the Government of Azerbaijan and donors Working with the Loan Consultant, the Municipalities and local NGOs to prepare the public in each town for the temporary inconvenience that will come from the construction of the new infrastructure and for the improved service levels, higher tariffs and more rigorous collection policy that will follow the commissioning of new infrastructure Assisting the operators and managers of the existing systems to maintain services, improve their internal organization and management, coordinate with the designers and builders of the new infrastructure and decommission the old infrastructure Preparing for the procurement and supervision of the Management Contractor (or, in the case of Nakhchivan, Utility Management Advisor) to be

8 engaged for the first three years of the operation of the new infrastructure, and Preparing for the JSCs eventually taking over full management of the new water and sewerage infrastructure at the end of the Management Contractor’s term.

9 4 Corporate Development Plan Outline This section outlines our recommended structure and content for the CDPs to be developed for each JSC. We recommend that the JSCs themselves take this as the starting point for their individual CDPs during 2007. This exercise will provide ownership of the plan, because it is important that the plan not be seen as something imposed from outside. The key outputs at this stage will be applications for external funding to assist with the implementation of the first phase of the plan in 2007, and an application for a tariff increase sufficient to allow each JSC to cover as much of its current operating costs as possible, based on realistic assumptions regarding the collection rate. Each plan should have a three-year planning horizon with target deliverables and milestone dates for meeting them. These can then be reviewed against progress for each successive planning year and the targets and dates for following years adjusted in the revised plan. The main sections of the plan should cover the following areas, which follow a logical sequence and will be comprehensible to both the general public and to the JSC’s board, managers and staff. 1. Foreword 2. Background 3. Institutional mission/vision 4. Operating environment 5. Current strategic position of the institution 6. Long-term aims 7. Principal objectives 8. Financial strategy a. Revenue and expenditure budgets b. Tariff review recommendations 9. Main proposals for implementation and associated measurable targets. a. Detailed operations and maintenance plans, including any cost reduction and asset management strategies b. Plans for developing, improving, and implementing internal control systems including financial management, billing and collections, customer management, and operations c. Staff development and training programs d. Customer awareness programs. We briefly highlight the content of each of these sections. Section 1 Foreword A very short introduction by the Chairman of the newly appointed board of directors, endorsing the CDP and highlighting its key objectives and constraints. Section 2 Background A maximum of two pages outlining the history of the JSC and its precursor organizations and a summary of its key characteristics (area and population served, staff and customer

10 numbers, water sources, sewage outfalls, treated water production, water sales, tariff rates, billed revenue, collected revenue, total and breakdown of operating costs). Section 3 Institutional mission/vision A one sentence statement of the JSC’s view of its role and duties in the community it serves, for example: “[Place name] JSC will support the economic and physical health of [Place name] by efficiently and sustainably providing a continuous supply of safe and wholesome drinking water to its population, businesses and institutions and hygienically disposing of the resulting sewage, ensuring that the cost of providing these services is fully and equitably recovered from its customers.” Section 4 Operating environment A summary of the important environmental factors that the JSC management expects will shape its actions over the period covered by the CDP. Particular emphasis should be placed on the first 12 months. The factors covered will be specific to the institution, its staff and infrastructure. These might include: Water shortages due to seasonal reductions in rainfall and river flows The expected retirement of key members of staff The impending closure (or opening) of a major water user The introduction of new regulations and penalties on sewage discharges Cyclical changes in costs, revenue and collection rates and their impact on cash flow. Section 5 Current strategic position of the institution A realistic review of the JSC’s current position with respect to its customers and peers, as well as the JSC’s future prospects for improvement. Section 6 Long-term aims of the JSC The long term aims of the JSC will depend on its current circumstances and the ambitions of its board of directors. In the case of the three Project Towns, these will certainly include the successful commissioning and operation of the new facilities to be financed from the ADB loan. They should also include service level and efficiency targets. Section 7 Principal objectives of the current corporate development plan The time horizon of the first corporate development plan covers a period of major transformation of both the JSC and its infrastructure, starting with the formation of the PIU and culminating in the commissioning of the new facilities, as well as the commencement of the management contract for Agdash and Goychay. The prime objective must be to provide continuity of service from the existing infrastructure right up to the time that customers are connected to the new water mains and sewers. This will be a major challenge and will depend greatly on being able to retain the loyalty of and enhance the support for existing staff. Important secondary, and often related, objectives will include: Increasing revenue to a level where normal operating costs are covered with a small profit margin, after including depreciation and an allowance for bad debt (or as close to that level as is possible under the circumstances)

11 Preparing for the introduction of International Accounting Standards Restructuring of the JSCs into divisions headed by managers with delegated authority and responsibility for delivering plan targets (work on this objective will be informed by the recommendations made on organizational development by the Transaction Advisor) Upgrading operating procedures and staff productivity through carefully targeted investment in training and equipment (provided additional funding for this can be obtained from Government) Undertaking a progressive clean-up of the JSC’s balance sheet through the transfer or liquidation of historic liabilities. This can only be performed once a combination of tariff increases, cash injections and cost reductions (if possible) has provided the JSC with an operating surplus that guarantees that no further debts and liabilities will need to be incurred. Section 8 Financial strategy The current circumstances of the former SuKanals have fostered a reactive, protective and very short term approach to the management and reporting of their finances. The whole financial accounting system is manual and hand written, with no computerized support for the system. The current financial resources of the JSCs deny them access to any kind of computer software and hardware, but any significant improvement in financial management will require investment in modern financial management tools. We recommend that AzerSu and the NAR Government provide basic computer software and hardware to their respective project JSCs as a loan or gift, together with support and basic training on computer operation. Section 9 Main proposals for implementation and associated measurable targets Output based goals Objective Actions Performance Indicator Water quality Record baseline data Samples taken and tested per 1000 subscribers per year Percentage of samples failing physical/chemical standards Percentage of samples failing to meet bacteriological standards Supply continuity Record baseline data Average subscriber hours per day for the year Supply pressure Record baseline data Percentages of subscribers whose maximum delivery pressure at the property boundary does not exceed 0.0, 0.5, 1.0 and 1.5 bar Supply coverage Record baseline data Percentage of the population in the supply area with an active (as opposed to disconnected) direct connection to the: Water supply network Sewerage network

12 Input based goals Objective Actions Performance Indicator Improve Governance Appoint Board, including local First Board Meeting representation Create a formal management Prepare organization chart and Job description for each role structure job descriptions in the organization structure Delegate day-to-day Interview and appoint Signed performance contracts management managers between the JSC and each of its managers, including the Director Meet all financial Prepare a financial plan that Quarterly reports to the board commitments in full and on ensures the JSC maintains a of directors giving monthly time positive cash balance while results and ratios: meeting all its obligations, Collection ratio with specific targets for Operating loss ratio collection rates and time to pay bills

13 5 Corporate Development Planning Process Part of the value of a corporate development plan for a public utility is that it expresses and makes a public commitment to a set of goals that can be shared by the owners, managers, staff and customers of the utility. The strength of the plan and the likelihood of its success will be linked to the degree to which each of these stakeholders subscribes to the plan. Consultation can be expensive and time-consuming. Fortunately, the project includes the setting up and support of Town Water User Associations (TWUAs) that will gauge public opinion and represent consumer interests in relation to water and wastewater topics. In our Interim Report we have proposed that, for each JSC, one board seat should be reserved for a TWUA representative, and two more seats for representatives of the local Municipality(ies). The participation of these board members should help facilitate stakeholder buy-in and ensure that, once approved, the CDP is robust and fit for purpose. The work of drafting the plan and facilitating the consultation process will have to be undertaken by the JSC staff. However, for the first set of CDPs, the JSC will have the assistance of the Loan Consultant specialists assigned to the PIU, especially the Community Participation Specialist and the Accountant. The main thrust of the first set of CDPs will be to improve the internal organization of the former SuKanals, to deal with the treatment of assets, liabilities, operations and losses inherited from the SuKanals (either through transferring them out of the JSCs or obtaining government subsidies), to set preliminary performance targets and measure baseline performance against these. As these are essentially internal reforms, with little or no immediate impact on customers, full public consultation will not be necessary. The plan should nevertheless be fully discussed between any other stakeholders not involved in the drafting process (e.g. the employees) and made public on its completion. The starting point for each subsequent CDP will be the performance of the utility against the performance targets it set for itself in the previous CDP. Ideally, each CDP should be completed before the start of the next year, so that the CDP can guide the development of the utility over the full year. This means that the performance review part of the planning process will have to be based on incomplete monitoring information for the current year, together with information for the end of the previous year. The finished plan will not be completed until the end of the current year, so publication can be deferred until the beginning of the following year. This means that the plan can be published early in the following year and include performance data for the whole year. The key steps and timings for preparing the CDP are set out in the table below. Table 5.1: Key Steps in Developing the CDP

Timing Step October Internal review of performance to date, problems encountered during the current year and priorities for the following year October Presentation to key stakeholders (Board, staff representatives, Local Executive Authority, Municipality, TWUA) of preliminary performance results against plan targets, current problems and planning goals October First draft of corporate development plan and presentation materials November Presentation of the draft corporate development plan to stakeholders followed by a facilitated discussion

14 Timing Step November Revision of the draft plan following consultation with the wider stakeholder community November Final review of the plan with stakeholder representatives December Approval of the finished plan by the JSC Board of Directors February Publication of the finished plan, complete with performance monitoring data for the whole of the previous year, and submission of plan to ADB

15 6 Initial Three-Year Plan Below we suggest potential key targets for each JSC for the next three years. Year 1 (2007) a) Appointment of a board of Directors to set policy and oversee the management of the JSC b) Formation of a PIU to oversee the development of the new infrastructure, the reorganization of the former SuKanals and the procurement of a Management Contractor (Utility Management Advisor in the case of Nakhchivan), staffed mainly by the Loan Consultant c) Either return of the assets, liabilities, revenues, operating costs and staff of the former SuKanals to AzerSu’s main operating company for Agdash and Goychay and to the NAR Government for Nakhchivan, or request for government subsidies to help meet resulting liabilities d) Reorganization of the former SuKanals to delegate the management of and responsibility for most day-to-day operations from the Director General to departmental managers reporting to him e) Preparation of job descriptions for each role in the future JSC organization structure and comparison with the aptitudes, experience and qualifications of the employees of the former SuKanals f) Provision of at least one personal computer, printer and scanner, to assist the former SuKanals with financial management and reporting g) Training of at least one former SuKanal staff member from each of the financial, technical and human resources departments in using the PC and software h) Development of key performance indicators and measurement of baseline values i) Application for a tariff increase or interim government subsidy to ensure that the JSC has the cash to meet its predicted current obligations throughout the year, based on realistic assumptions of billing and collection rates j) Preparation and submission of monthly financial reports to the JSC Board k) Setting of target values for Year 2 (2008) for each of the performance indicators l) Updating of operating and maintenance plans, and budgets for Years 2 and 3 m) Preparation of operating and maintenance plan, and budget for Year 4, n) Performance review for each of the former SuKanal and JSC employees and managers. Year 2 (2008) a) Review and refinement of the organization structure established in Year 1 b) Reassignment, training and voluntary severance of former SuKanal employees following the Year 1 performance review and Year 2 restructuring c) Provision of at least another two personal computers and a local area network so that the financial, technical and human resources departments in each former SuKanal can start computerizing their records and using this information to identify potential performance and efficiency improvements

16 d) Application for a tariff increase or interim government subsidy to cover the additional cost of the PIU and finance some investment in operational improvements, training, staff reductions and tools (both hard and soft) to meet the performance targets set in Year 1 e) Monitoring of performance indicators at the intervals determined in Year 1 f) Monthly reporting of financial and other performance indicators to the JSC Board g) Review and, if necessary, revision of the performance indicators developed in Year 1 in light of the Year 2 experience h) Setting targets for Year 3 for each performance indicator i) Updating the operating and maintenance plans, and budgets for Years 3 and 4 j) Preparation of operating and maintenance plans, and budget for Year 5, and k) Performance review for each of the former SuKanal and JSC employees and managers. Year 3 (2009) a) Preparation for the start of the management contract, in close liaison with the future Management Contractor, once appointed b) Supervision of the construction of the new infrastructure and the phasing out of the old infrastructure by the PIU c) Review and revision of the former SuKanal organization structure established in Year 2 d) Reassignment, training and severance of former SuKanal employees following the Year 2 performance review and Year 3 restructuring e) Provision of additional personal computers, software and peripherals as required, in consultation with the future Management Contractor f) Application for a tariff increase or interim government subsidy to cover the additional cost of the PIU and finance further investment in operational improvements, training and tools required by the Management Contractor g) Monitoring of performance indicators at the intervals determined in Year 1 h) Monthly reporting of financial and other performance indicators to the JSC Board i) Review and, if necessary, revision of the performance indicators developed in Year 2 in light of the Year 3 experience j) Setting targets for Year 4 for each performance indicator k) Updating the operating and maintenance plans, and budgets for Years 4 and 5 l) Preparation of operating and maintenance plans, and budget for Year 6, and m) Performance review for each of the former SuKanal and JSC employees and managers.

17 Appendix A Agdash/Goychay JSC Outline Corporate Development Plan Section 1 Foreword [A very short introduction by the Chairman of the newly appointed board of directors, endorsing the CDP and highlighting its key objectives and constraints.] Section 2 Background [A maximum of two pages outlining the history of the JSC and its precursor organizations and a summary of its key characteristics (area and population served, staff and customer numbers, water sources, sewage outfalls, treated water production, water sales, tariff rates, billed revenue, collected revenue, total and breakdown of operating costs).] Section 3 Institutional mission/vision [Example] The [Agdash/Goychay] JSC will support the economic and physical health of [Agdash/Goychay] by efficiently and sustainably providing a continuous supply of safe and wholesome drinking water to its population, businesses and institutions and hygienically disposing of the resulting sewage, ensuring that the cost of providing these services is fully and equitably recovered from its customers. Section 4 Operating environment [A summary of the important environmental factors that the JSC management expects will shape its actions over the period covered by the CDP. Particular emphasis should be placed on the first 12 months. The factors covered will be specific to the institution, its staff and infrastructure. These might include: Water shortages due to seasonal reductions in rainfall and river flows The expected retirement of key members of staff The impending closure (or opening) of a major water user The introduction of new regulations and penalties on sewage discharges Cyclical changes in costs, revenue and collection rates and their impact on cash flow.] Section 5 Current strategic position of the institution [A realistic review of the JSC’s current position with respect to its customers and peers, as well as the JSC’s future prospects for improvement.] The former SuKanal for [Agdash/Goychay] is the sole provider of water and wastewater services to the town and to its surrounding villages. The quality of the services provided suffers from the dilapidated state of the infrastructure and the inadequate income from customer charges. This constitutes a threat to the health of the citizens of [Agdash/Goychay] and of the environment. [Agdash/Goychay] is fortunate to have been identified as one of only three medium-sized towns to qualify for support in the form of a loan from the Asian Development Bank to replace the dilapidated water and sewerage infrastructure and retain the services of an international specialist Management Contractor to operate them efficiently and sustainably. AzerSu has created a new branch Joint Stock company to supervise the design and construction of the new infrastructure and to manage its operations on completion.

18 Section 6 Long-term aims of the JSC [The long term aims of the JSC will depend on its current circumstances and the ambitions of its board of directors. In the case of the three Project Towns, these will certainly include the successful commissioning and operation of the new facilities to be financed from the ADB loan. They should also include service level and efficiency targets.] Section 7 Principal objectives of the current corporate development plan [The time horizon of the first corporate development plan covers a period of major transformation of both the JSC and its infrastructure, starting with the formation of the PIU and culminating in the commissioning of the new facilities, as well as the commencement of the management contract. The prime objective must be to provide continuity of service from the existing infrastructure right up to the time that customers are connected to the new water mains and sewers. This will be a major challenge and will depend greatly on being able to retain the loyalty of and enhance the support for existing staff. Important secondary, and often related, objectives will include: Increasing revenue to a level where normal operating costs are covered with a small profit margin, after including depreciation and an allowance for bad debt (or as close to that level as is possible under the circumstances) Preparing for the introduction of International Accounting Standards Restructuring of the JSCs into divisions headed by managers with delegated authority and responsibility for delivering plan targets (work on this objective will be informed by the recommendations made on organizational development by the Transaction Advisor) Upgrading operating procedures and staff productivity through carefully targeted investment in training and equipment (provided additional funding for this can be obtained from Government) Undertaking a progressive clean-up of the JSC’s balance sheet through the transfer or liquidation of historic liabilities. This can only be performed once a combination of tariff increases, cash injections and cost reductions (if possible) has provided the JSC with an operating surplus that guarantees that no further debts and liabilities will need to be incurred.] Section 8 Financial strategy [The current circumstances of the former [Agdash/Goychay] SuKanal have fostered a reactive, protective and very short term approach to the management and reporting of their finances. The whole financial accounting system is manual and hand written, with no computerized support for the system. The current financial resources of the JSC deny them access to any kind of computer software and hardware, but any significant improvement in financial management will require investment in modern financial management tools. Therefore, this section will need to set out a detailed request for AzerSu to: Either remove the assets, liabilities and operations of the former SuKanal from the JSC and transfer them to the main AzerSu operating company, which can then consolidate and deal with the problems it has inherited from the former SuKanals in the most cost-effective way, or help the JSC obtain sufficient government subsidies to meet the liabilities resulting from inheriting the SuKanal’s problems Allocate office space and services to the [Agdash/Goychay] JSC PIU, to be staffed in the first instance by the Loan Consultant, supported on a part-time basis by selected staff from the former SuKanal, who will receive on-the-job training in computer skills, accounting and project management from the Loan Consultant;

19 Provide sufficient grant income to the new JSC, preferably sourced from the Ministry of Finance, to cover the cost of servicing and auditing the JSC in its first year of operation as a shell company and PIU Provide basic computer software and hardware to their respective project JSCs as a loan or gift, together with support and training from their own experts in setting up new, computerized accounting and reporting systems. The precise details of the financial plan for the JSC will depend on whether, how and when it is allowed to transfer on the assets, liabilities and operations of the former [Agdash/Goychay] SuKanal to the main AzerSu operating company. The details of the arrangement would be such that the [Agdash/Goychay] JSC is left with a clean balance sheet and at least the minimum legal capital requirement for a branch JSC.] Section 9 Main proposals for implementation and associated measurable targets Output based goals Objective Actions Performance Indicator Water quality Record baseline data Samples taken and tested per 1000 subscribers per year Percentage of samples failing physical/chemical standards Percentage of samples failing to meet bacteriological standards Supply continuity Record baseline data Average subscriber hours per day for the year Supply pressure Record baseline data Percentages of subscribers whose maximum delivery pressure at the property boundary does not exceed 0.0, 0.5, 1.0 and 1.5 bar Supply coverage Record baseline data Percentage of the population in the supply area with an active (as opposed to disconnected) direct connection to the: Water supply network Sewerage network

Input based goals Objective Actions Performance Indicator Improve Governance Appoint Board, including local First Board Meeting representation Create a formal management Prepare organization chart and Job description for each role structure job descriptions in the organization structure Delegate day-to-day Interview and appoint Signed performance contracts management managers between the JSC and each of its managers, including the Director Meet all financial Prepare a financial plan that Quarterly reports to the board commitments in full and on ensures the JSC maintains a of directors giving monthly time positive cash balance while results and ratios: meeting all its obligations, Collection ratio with specific targets for Operating loss ratio collection rates and time to pay bills

20 Appendix B Nakhchivan JSC Outline Corporate Development Plan Section 1 Foreword [A very short introduction by the Chairman of the newly appointed board of directors, endorsing the CDP and highlighting its key objectives and constraints.] Section 2 Background [A maximum of two pages outlining the history of the JSC and its precursor organizations and a summary of its key characteristics (area and population served, staff and customer numbers, water sources, sewage outfalls, treated water production, water sales, tariff rates, billed revenue, collected revenue, total and breakdown of operating costs).] Section 3 Institutional mission/vision [Example] The Nakhchivan JSC will support the economic and physical health of Nakhchivan by efficiently and sustainably providing a continuous supply of safe and wholesome drinking water to its population, businesses and institutions and hygienically disposing of the resulting sewage, ensuring that the cost of providing these services is fully and equitably recovered from its customers. Section 4 Operating environment [A summary of the important environmental factors that the JSC management expects will shape its actions over the period covered by the CDP. Particular emphasis should be placed on the first 12 months. The factors covered will be specific to the institution, its staff and infrastructure. These might include: Water shortages due to seasonal reductions in rainfall and river flows The expected retirement of key members of staff The impending closure (or opening) of a major water user The introduction of new regulations and penalties on sewage discharges Cyclical changes in costs, revenue and collection rates and their impact on cash flow.] Section 5 Current strategic position of the institution [A realistic review of the JSC’s current position with respect to its customers and peers, as well as the JSC’s future prospects for improvement.] The former SuKanal for Nakhchivan is the sole provider and main distributor of potable water and the main provider of wastewater service to city and to the municipal area. The quality of the services provided suffers from the dilapidated state of the infrastructure and the inadequate income from customer charges. This constitutes a threat to the health of the citizens of Nakhchivan and of the environment. Nakhchivan is fortunate to have been identified as one of only three medium-sized towns to qualify for support in the form of a loan from the Asian Development Bank to replace the dilapidated water and sewerage infrastructure and retain the services of an international specialist Utility Management Advisor to advise on how to operate them efficiently and sustainably.

21 The Ministry of Economic Development of the Nakhchivan Autonomous Republic has created a new branch Joint Stock company to supervise the design and construction of the new infrastructure and to manage its operations on completion. Section 6 Long-term aims of the JSC [The long term aims of the JSC will depend on its current circumstances and the ambitions of its board of directors. In the case of the three Project Towns, these will certainly include the successful commissioning and operation of the new facilities to be financed from the ADB loan. They should also include service level and efficiency targets.] Section 7 Principal objectives of the current corporate development plan [The time horizon of the first corporate development plan covers a period of major transformation of both the JSC and its infrastructure, starting with the formation of the PIU and culminating in the commissioning of the new facilities, as well as the recruitment of the Utility Management Advisor. The prime objective must be to provide continuity of service from the existing infrastructure right up to the time that customers are connected to the new water mains and sewers. This will be a major challenge and will depend greatly on being able to retain the loyalty of and enhance the support for existing staff. Important secondary, and often related, objectives will include: Increasing revenue to a level where normal operating costs are covered with a small profit margin, after including depreciation and an allowance for bad debt (or as close to that level as is possible under the circumstances) Preparing for the introduction of International Accounting Standards Restructuring of the JSCs into divisions headed by managers with delegated authority and responsibility for delivering plan targets (work on this objective will be informed by the recommendations made on organizational development by the Transaction Advisor) Upgrading operating procedures and staff productivity through carefully targeted investment in training and equipment (provided additional funding for this can be obtained from Government) Undertaking a progressive clean-up of the JSC’s balance sheet through the transfer or liquidation of historic liabilities. This can only be performed once a combination of tariff increases, cash injections and cost reductions (if possible) has provided the JSC with an operating surplus that guarantees that no further debts and liabilities will need to be incurred.] Section 8 Financial strategy The current circumstances of the former Nakhchivan SuKanal have fostered a reactive, protective and very short term approach to the management and reporting of their finances. The whole financial accounting system is manual and hand written, with no computerized support for the system. The current financial resources of the JSC deny them access to any kind of computer software and hardware, but any significant improvement in financial management will require investment in modern financial management tools. Therefore, this section will need to set out a detailed request for the Ministry of Economic Development of the Nakhchivan Autonomous Republic to: Either remove the assets, liabilities and operations of the former SuKanal from the JSC and transfer them directly to the State Committee for Urban Planning and Architecture, which is better placed, than the new JSC, to own and dispose of the former SuKanal’s historical assets and liabilities, or help the JSC obtain sufficient government subsidies to meet the liabilities resulting from inheriting the SuKanal’s problems

22 Allocate office space and services to the Nakhchivan JSC PIU, to be staffed in the first instance by the Loan Consultant, supported on a part-time basis by selected staff from the former SuKanal, who will receive on-the-job training in computer skills, accounting and project management from the Loan Consultant Provide sufficient grant income to the new JSC to cover the cost of servicing and auditing the JSC in its first year of operation as a shell company and PIU Provide basic computer software and hardware to the JSCs as a loan or gift, together with support and training from their own experts in setting up new, computerized accounting and reporting systems. The precise details of the financial plan for the JSC will depend on whether, how and when it is allowed to transfer the assets, liabilities and operations of the former Nakhchivan SuKanal to the State Committee for Urban Planning and Architecture. The details of the arrangement would be such that the JSC is left with a clean balance sheet and at least the minimum legal capital requirement for a branch JSC.] Section 9 Main proposals for implementation and associated measurable targets Output based goals Objective Actions Performance Indicator Water quality Record baseline data Samples taken and tested per 1000 subscribers per year Percentage of samples failing physical/chemical standards Percentage of samples failing to meet bacteriological standards Supply continuity Record baseline data Average subscriber hours per day for the year Supply pressure Record baseline data Percentages of subscribers whose maximum delivery pressure at the property boundary does not exceed 0.0, 0.5, 1.0 and 1.5 bar Supply coverage Record baseline data Percentage of the population in the supply area with an active (as opposed to disconnected) direct connection to the: Water supply network Sewerage network

23 Meet all financial Prepare a financial plan that Quarterly reports to the board commitments in full and on ensures the JSC maintains a of directors giving monthly time positive cash balance while results and ratios: meeting all its obligations, Collection ratio with specific targets for Operating loss ratio collection rates and time to pay bills

Appendix C: Supplementary Recommendations on Organizational Development and Human Resource

TA 4465 – AZE Institutional Strengthening of Water Supply and Sanitation in Secondary Towns

Supplementary Recommendations on Organizational Structures and Human Resources Development for the JSC in the Project Towns (Agdash, Goychay and Nakhchivan)

Report to Asian Development Bank and the Government of Azerbaijan

April 2007

Table of Contents

1 Introduction 1 1.1 Objectives of this Discussion Paper 1 2 Staffing of the JSCs 1 2.1 Legal Basis 1 2.2 Review of Existing Staff Qualifications and Experience 2 2.3 Staff Appointment Procedures 2 2.4 Staff Termination and Redundancies 3 3 Organizational Structures 4 3.1 Recommended Structures 5 3.2 Staffing Numbers 6 4 Job Descriptions 8 5 Training Program 9 6 Summary of Recommendations, Action and Training Plans 10 6.1 Summary of Recommendations 11 6.2 Action Plan 12 6.3 Training Plan 13

Appendices Appendix A Staff Qualifications and Experience (Senior and Middle Level Staff) 15 Appendix B Recommended Organizational Structures 18 Appendix C Draft Job Descriptions 20 Appendix D Training Requirements 34

Tables Table 2.1: Age Structure of Water Supply Company Staff (2007) 3 Table 2.2: Summary of Staff Numbers Due for Retirement (2010-2012) 4 Table 3.1: Statistical Information—Project Water Supply Companies 7 Table 3.2: Staffing Requirements from 2010 8 Table 6.1: Action Plan 12

Table 6.2: Training Plan 14 Table A.1: Agdash Sukanal Open Joint Stock Company 15 Table A.2: Goychay Sukanal Open Joint Stock Company 16 Table A.3: Nakhchivan Sukanalizasiya Open Joint Stock Company 17

Figures Figure B.1: Agdash and Goychay Joint Stock Companies 18 Figure B.2: Nakhchivan OJSC 19

1 Introduction To support the broader institutional reforms in the water and sanitation sector (WSS) in Azerbaijan, the Asian Development Bank (ADB) is providing Technical Assistance (TA) to help the Government develop the capacity of new urban WSS service providers and management institutions. The TA complements an ADB loan that aims to develop new water and sanitation systems in three Project Towns: Agdash, Goychay, and Nakhchivan. The TA objective is to strengthen the water supply companies so they can provide reliable water services to consumers over the longer-term. 1.1 Objectives of this Discussion Paper One of the objectives of the TA is to support the establishment of Joint Stock Companies (JSCs) for the provision of water supply and sanitation services in each of the Project Towns, and provide assistance for their institutional development. This includes: Assisting with the development of their corporate structures based on the principles of good corporate governance Recommending good business and commercial systems that can be adopted by the JSCs, and Recommending strategies for human resources management. The Discussion Paper prepared in December 2006 “Recommendations on Organizational Structure and Human Resources Development for the JSCs in the Project Towns” provided recommendations on the organizational structure for the JSCs and on the development of a human resources strategy for the three Project Towns. The paper reviewed and made preliminary recommendations on human resources and staffing for the JSCs, reviewed current organizational structures, recommend improved organizational structures, and made recommendations on the development of a Human Resources Strategy. This supplementary paper further develops several of the recommendations presented in the earlier discussion paper. 2 Staffing of the JSCs This section discusses the current staffing numbers and process for hiring and dismissal of JSC staff. 2.1 Legal Basis The Labor Code of the Azerbaijan Republic regulates the legal relationship between the employer and employee of the Project’s Affiliate Joint Stock Companies. According to Articles 57.1 and 57.2 of the Code an employer must define, in an employment contract, the responsibility, profession and scope of work an employee must carry out or these employment responsibilities can be in accordance with the “General Tariff and Profession Inquiry Manual”, which was approved by Decree on 5 September 2005. Despite the above provisions in the Labor Code, it appears that the Companies are not aware of the manual even though it was approved in 2005.

1 2.2 Review of Existing Staff Qualifications and Experience Appendix A provides details of the qualifications and experience of the senior and middle level staff for the Water Supply Companies in the three Project Towns. Even though many of the staff at all levels of the Companies have years of experience in their areas of expertise, we found that few of the Senior and Middle level staff have qualifications that match with the positions that they hold with the Company. Furthermore, even where staff have years of experience, this experience often relates to the operation and maintenance of outdated plant and equipment, or to the manual financial management and accounting systems that are currently used. These skills and experience will not be relevant when the Companies’ financial and technical systems are upgraded. The previous Discussion Paper on Human Resources Development (December 2006) recommended “that all staff be encouraged to improve their qualifications and the JSC provide annual budget allocations for staff to attend workshops and training courses, relevant to their positions of responsibility, to upgrade their skills”. Because of its importance, we wish to repeat this recommendation. Unless staff upgrade their qualifications and improve their experience, it will be difficult to improve the operation and management of the Companies despite improvements being provided under the Loan Project. 2.3 Staff Appointment Procedures The present procedure for the filling of vacant positions in the Companies is carried out by three methods. First, the Director can invite a person that is known or recommended to fill the position. If the person agrees to the terms and conditions attached to the position they can then sign an employment contract with the Company. The form of the contract is defined in accordance with the Labor Code and can be for an indefinite or fixed period. Second, the positions can be advertised in the mass media and suitable applicants interviewed. These interviews are generally carried out by the Director and the relevant Department Head where the vacancy has occurred. Last, the Companies can also carry out recruitment through the Town’s Government Employment Agencies and follow an interview process as described above. The authority to employ staff is delegated to the Company’s Director, who is also designated as Chairman of the Management Staff. Directors or Chairman of the Management Staff are appointed or dismissed in accordance with the provisions of the Company Charter. All Companies have advised that at the present time that there are no vacant positions within their organizational structures. When vacancies arise we recommend that before filling such positions, management should give consideration to the future staffing levels required for the Company and the possibility of filling replacement vacant positions from within the Company’s existing staff. Where positions need to be filled from outside the Company, we recommend that all positions be filled by public advertisement, to ensure that the most qualified and experience applicant is appointed to the position.

2 2.4 Staff Termination and Redundancies Staff termination and redundancy provisions for the JSCs are detailed in the Labor Code. The Code provides for the following steps to be followed where staff are to be terminated or made redundant: JSCs must prepare a list of staff to be employed Existing staff that are not shown on the list must be given at least two months notice of the termination of their employment contract (Article 77.1 of Code) Unemployment benefits, which must not be less than their average salary, are paid to terminated/redundant staff for two months after their services cease (that is, in months three and four) With the employee’s consent the employer can pay two months salary in lieu of two months notice of termination/redundancy, and Average salary is only paid to employees for months three and four, referred to above, where such employee provides a reference letter advising that they are registered at Recruitment Agencies. With the amalgamation of the Water and Sewerage Companies in Nakhchivan, the combined staff numbers have been reduced from 102 to 40. From information supplied by the new Company, the redundancies were achieved by a combination of the above redundancy provisions and by the transfer of some staff to other Government Departments and Enterprises. We have reviewed the staff numbers required by the Project Companies (see Section 3.2) once they become fully operational after improvements are carried out under the Loan Project. Although present indications are that the Companies are overstaffed for the functions that they are required to carry out, we recommend that no redundancies be carried out as additional appointments will be required at a later date. (Table 2.1 provides information on the Staff Age Structure of the Water Companies) Table 2.1: Age Structure of Water Supply Company Staff (2007)

Agdash Goychay Nakhchivan Staff Age Group Men Women Men Women Men Women 20 – 35 3 1 5 4 6 1 36 – 50 21 4 31 10 13 1 51 – 55 5 3 10 1 8 2 56 – 601 8 0 5 1 2 2 61 – 622 4 0 7 0 5 0 TOTALS 41 8 58 16 34 6

1 Female Retirement Age 60. 2 Male Retirement Age is 62.

Table 2.2 indicates that a number of employees at each Company will reach retirement age within the next 4-6 years. We recommend that any replacements for staff retirements take into consideration the future staffing requirements of the Companies. Table 2.2: Summary of Staff Numbers Due for Retirement (2010-2012)

Company Men Women TOTALS (Age 56-62) (Age 56-60) Agdash 12 0 12 Goychay 12 1 13 Nakhchivan 7 2 9

3 Organizational Structures The guiding principles and parameters we adopted and applied to develop the new draft structures for the Water Supply Companies include: Where possible and logical, like and closely related functions and responsibilities are grouped in the same organizational department The placement of functions and responsibilities within the Department should be clear and unambiguous The location of authorities for decision making within the Department should be clearly identified Decision making should be devolved to the field to the maximum extent feasible and prudent The prime focus and responsibility of each organizational unit should be its essential “core business” There should be an appropriate balance between governance, operations and accountability There should be a diverse range of performance measurement, monitoring and accountability mechanisms for both organizational units and individuals Channels of communication, both internally and externally, should be clear and transparent Support for front line service delivery staff should be maximized The devolution of decision making should be consistent across all elements of managerial responsibility

4 Responsibilities for specific functions and activities should be concentrated in single work units wherever possible, to provide a “critical” mass and maximum staff resources to the relevant area Responsibilities for direct service delivery should be placed with the organizational unit best placed to deliver those services, together with the resources to effect that delivery, and Organizational structures should be as “flat” as practical. 3.1 Recommended Structures Using the above principles and parameters, we recommend that a new organizational structure for the three Companies be implemented that reorganizes each Company into three major components as follows: The accountability component (Finance Department) The supporting component (Organizational Department), and The operating component (Technical Services Department). While the recommended structure for the three Companies is similar, each Company will have a different number of organizational (work) units within each Department to meet their differing workloads. We discussed the recommended organizational structures with the Nakhchivan, Goychay and Agdash JSCs at workshops held on 13 (Adgash and Goychay) and 16 (Nakhchivan) March 2007. General agreement was received for the structures recommended; however, the Goychay and Agdash representatives considered that a Customer Service Department should be included in the structure. At present the Companies’ existing Customer Service Departments receive many complaints relating to poor service, leaking pipes, sewerage blockages and breakdowns as well as deal with the preparation of consumer contracts. With the improvement in service delivery, which will be carried out under the proposed loan project, we would expect that this volume of activities will be reduced. We also propose in the new structure that work on customer contracts be carried out by the Organizational Department. The existing number of customers for the three Companies does not justify the creation of a Customer Services Department in the recommended structure. However, when there is a substantial increase in the number of customers, a Customer Service Department could be created by transferring functions from existing Departments. The recommended functions to be transferred to such a new Department are detailed below. The functions that are recommended to be carried out by each Department are as follows: Finance Department Accounting Budgeting Financial Control Billing

5 Revenue Collection Stores (Inventory) Meter Reading and Repairs Organizational Department Administration Services Human Resource Management Public Relations and Community Development Corporate Planning Staff Training Security Customer Complaints Management Secretarial Technical Services Department Water Operations and Maintenance Sewerage Operations and Maintenance Plant and Equipment Infrastructure Construction and Management Mechanical Building Maintenance Customer Services Department (functions to be transferred when new Department Established) Billing Revenue Collection Meter Reading and Repairs Public Relations and Community Development Customer Complaints Management. We include diagrams for the proposed organizational structures for the Companies in Appendix B. 3.2 Staffing Numbers Manpower requirements for water supply agencies (developing and developed countries) fall generally into a broad range of two employees per 1000 connections (Singapore) to 25 employees per one thousand connections (Pakistan). These numbers are influenced by such factors as government policy, employment regulations, staff productivity, management effectiveness, terrain, level of sophistication of systems and other operational requirements.

6 Sewerage staffing numbers mainly take into consideration the method of treatment used at the treatment works. Table 3.1 provides details of the existing size of the Companies as well as the increase in the size of the individual Company’s connections when the proposed infrastructure improvements have been completed. The proposed new connections for water and sewerage show substantial increases in both Agdash and Nakhchivan. Table 3.1: Statistical Information—Project Water Supply Companies

Description Agdash Goychay Nakhchivan A. Existing 1. Water Connections (No.) Households 2,550 6,492 3,010 Industrial 5 3 51 Commercial 33 90 192 Government (including Educational 38 91 75 Institutions) Totals 2,628 6,676 3,328 2. Sewerage Connections (No.) Households 1,417 4,205 2,800 Industrial 5 6 51 Commercial 33 43 185 Government (including Educational 30 35 75 Institutions) Totals 1,485 4,289 3,111 3. Length of Water Mains (kms) 57.6 391.7 175 4. Length of Sewer Mains (kms) 18.0 47.3 158 B. Projected3 2010 5. Population Served 28,295 38,987 79,530 6. Water Connections 5,625 7,362 11,992 7. Sewerage Connections 5,149 6,994 11,392

A commonly accepted range, which is considered suitable for Azerbaijan, is approximately eight to ten staff per one thousand water connections. Sewerage staffing was made by assessing the treatment works processes to be used on completion of the improvement works. This initial assessment of human resource requirements has adopted manning ratios within a middle range taking into account the various technologies employed and operational and management systems in place or proposed as well as those recommended by recent

3 This figure is taken from the Scott Wilson Final Report (2004).

7 studies.4 By using these manning ratios, both Agdash and Goychay are overstaffed and the same comments apply to Nakhchivan prior to the forming of the new company. We recommended that the staffing requirements for the Companies, detailed in Table 3.2, be adopted from 2010 when all systems improvements have been completed and the new schemes are fully operational. Table 3.2: Staffing Requirements from 2010

Agdash Goychay Nakhchivan

4 Job Descriptions Under the concept of corporate planning and management, Job Descriptions form an important part of the human resource development processes of the Project Companies. They can help the Human Resources staff to forecast the Company’s human resource requirements, assist in the setting up of staff training and development programs, as well as to clarify the staff’s roles and responsibilities within the Company. A job description is a written statement describing the duties and responsibilities of a job. The purpose of a job description is to provide data which are useful in defining the performance required of an employee. A job description explains to the employee: The employee’s authority, that is his right to make decisions, and

4 Asian Water Supplies – Reaching the Poor by Arthur C McIntosh ADB Publication 2003

8 The employee’s responsibility, that is the duties and objectives he is expected to accomplish. The purpose of a job description is to define exactly for an employee, for fellow employees, and for supervision: What the employee is expected to do What standard is expected To whom the employee is responsible, and, where appropriate, Whose work the employee supervises. Work should be arranged so that each individual uses their special skills and talents. There should be no overwork or underwork. Job descriptions are one way to help distribute tasks among a group. The distribution of work among the members of an organization is one of the most important functions of a manager. When work is distributed unfairly it causes dissatisfaction. Likewise, when work is distributed unclearly, people lack information about who to go to in solving problems, and are unclear about their own areas of freedom and responsibility. Writing job descriptions can also give a manager a basis for pinpointing and defining training needs. By specifying exactly what an employee’s duties are, a manager can also determine what the employee needs to be able to do to fulfill those duties. If the employee is unable to perform adequately, then the manager or supervisor may diagnose a training need. Job Descriptions have been prepared for a number of Senior and Middle Management positions in the Companies and are detailed in Appendix C. In the preparation of these Job Descriptions the “General Tariff and Profession Inquiry Manual”, which provides details of education, experience and responsibility requirements of employees, was also taken into consideration.

We recommend that Job Descriptions be prepared for all staff employed by the Companies 5 Training Program Training and staff development is a key aspect of capacity building of the Companies so that they can effectively manage the new assets being created, as well as existing assets. The objectives of the Training Program are to: Identify the staff development needs and specific training Specify the requirements of staff so as to effectively manage (operate and maintain) the assets of the Water Supply Companies Provide customer service to the Company’s customers, and Contribute to the Company’s financial viability through well trained staff. Following discussions with the Companies, they have advised that their training requirements include the following:

9 Water supply system operation and maintenance Sewerage system operation and maintenance Accounting and financial management Plant and equipment operation and maintenance Human resource management; and Management training for Directors and Department Heads. We have also made an assessment of the Companies training requirements. We agree with the list provided by the JSCs, but also add a number of additional areas of operation as follows. We recommend that the focus of the capacity building program be in the following areas: Development of skills and capacity relevant to appropriate contemporary design, procurement, construction supervision and commissioning of civil works and equipment for the Project Sustainable O&M of water supply and sanitation systems Improvement of the quality of management, accounting procedures, budget preparation, tariff setting, manpower planning, water demand analysis, performance monitoring Preparation and training in community motivation, gender sensitivity and priority setting Institutional strengthening for Board Members of the JSCs and other operating agencies in business plan preparation, O&M, financial planning and management Operation of computerized accounting systems for financial management and reporting Technical assistance on operational management, particularly aimed at asset management, corporate development and improving customer services Advice to technical specialists in water quality and sampling and analysis Support and training for the establishment, empowerment and development of Town Water User Associations in the areas of project monitoring, identification of needs and affordability Education in consumer rights and consultation and advocacy processes. Appendix D provides further information on training requirements for the Companies. 6 Summary of Recommendations, Action and Training Plans This section summarizes our recommendations for organizational development and staffing and presents and action and training plan for implementing these recommendations.

10 6.1 Summary of Recommendations For the Project Towns to improve their human resources management, and decision-making processes, we recommend the following: All staff should be encouraged to improve their qualifications and the JSC provide annual budget allocations for staff to attend workshops and training courses, relevant to their positions of responsibility, to upgrade their skills Before filling replacement positions, consideration be given to the future staffing levels required for the Company and the possibility of filling such vacant positions from within the Company’s existing staff All positions should be filled by public advertisement to ensure that the most qualified and experience applicant is appointed to the position No redundancies should be carried out because additional appointments will be required at a later date Any replacements for staff retirements should take into consideration the future staffing requirements of the Companies. A new organizational structure for the three Companies should be implemented that reorganizes each JSC into three major components as follows: – The accountability component (Finance Department) – The supporting component (Organizational Department), and – The operating component (Technical Services Department) Staffing requirements for the Companies, as detailed in Table 3.2, should be adopted from 2010 when all systems improvements have been completed and the new schemes are fully operational Job Descriptions should be prepared and adopted for all staff employed by the Companies The focus of the capacity building program should be in the following areas: – Developing the skills and capacity relevant to appropriate contemporary design, procurement, construction supervision and commissioning of civil works and equipment for the Project – Adopting sustainable O&M practice for the water supply and sewerage systems – Improving the quality of management, accounting procedures, budget preparation, tariff setting, manpower planning, water demand analysis, performance monitoring – Preparing and training staff in community motivation, gender sensitivity and priority setting – Institutional strengthening for Board Members of the JSCs and other operating agencies in business plan preparation, O&M, financial planning and management

11 – Operationalizing computerized accounting systems for financial management and reporting – Developing human resources – Providing technical assistance on operational management, particularly aimed at asset management, corporate development and improving customer services – Providing advice to technical specialists in water quality and sampling and analysis – Supporting and training for the establishment, empowerment and development of Town Water User Associations in the areas of project monitoring, identification of needs and affordability – Providing education in consumer rights and consultation and advocacy processes. 6.2 Action Plan Table 6.1 presents an Action Plan to implement our recommendations. The starting year for these activities is assumed to be 2008, although the JSCs could start on some of these activities immediately. Table 6.1: Action Plan

Action Responsible Party Requirements Year 1. Staff should be encouraged to improve Water Supply Budget Annually their qualifications and the Companies should Companies Allocation provide annual budget allocations for staff to attend Workshops relevant to their positions of responsibility 2. Before filling replacement positions, Water Supply Local Effort Immediate consideration be given to the future staffing Companies with TA levels required for the Company and the Assistance possibility of filling such vacant positions from within the Company’s existing staff

3. All positions should be filled by public Water Supply Local Effort Immediate advertisement, to ensure that the most Companies qualified and experience applicant is appointed to the position

4. No redundancies should be carried out as Water Supply Local Effort Immediate additional appointments will be required at a Companies later date 5. Any replacements for staff retirements Water Supply Local Effort Immediate should take into consideration the future Companies staffing requirements of the Companies 6. A new organizational structure for the Water Supply Board Decision 1 three Companies should be implemented that Companies when appointed reorganizes each JSC into three major

12 components as follows: The accountability component (Finance Department) The supporting component (Organizational Department), and The operating component (Technical Services Department). 7. Staffing requirements for the Companies, Water Supply Examine the 1 as detailed in Table 3.2 of this paper, should Companies Functional be adopted from when all systems Requirements of improvements have been completed and the the WSC new schemes are fully operational

8. Job Descriptions should be prepared for Water Supply Examine Duties 1 all staff employed by the Companies Companies and Functions of Staff 9. The capacity building program should Water Supply Local Effort and As per focus on the areas detailed in Section 5 – Companies and TA Assistance Training Training Program External Assistance Plan

6.3 Training Plan Table 6.1 presents a Training Plan to implement our recommendations on Training. The starting year for these activities is assumed to be 2008, although the JSCs could start on some of these activities immediately.

13 Table 6.2: Training Plan

Training Year 1 Year 2 Year 3 Requirement 1. Financial management including accounting systems and X X X computerized water billing systems 2. Human Resources X X Management (Policies and Procedures) 3. Corporate legal and X management structures applying to the Companies, including the Charter 4. Management of X X waste water collection, treatment and disposal 5. Management of X community awareness 6. Customer service X X X and public relations management 7. Project Management X 8. Contract X X Management 9. General Operational X X Skills 10. Water Treatment X X Operational Skills 11. Waste Water X X Treatment Operational Skills

Appendix A Staff Qualifications and Experience (Senior and Middle Level Staff)

Table A.1: Agdash Sukanal Open Joint Stock Company5

Position Education Profession Professional Experience (Years) 1 Director Agdash Technical School for Technician – 29 Agriculture Water 2 Accountant Accounting School in Mingechevir Accountant 39 Town 3 Economist Agdash Technical School for Accountant 17 Agriculture 4 Engineer Technical School for Construction Construction 29 in Ganja city Technician 5 Personnel Specialist Agdash Technical School for Accountant 15 Agriculture 6 Secretary Pedagogical Secondary School in Primary School 5 Agdash Teacher 7 Head, Customer Polytechnical Institute Water 34 Service Group Engineer 8 Accountant, Accounting School in Mingechevir Accountant 32 Customer Service Town Group 9 Chief, Water Field Secondary Education Technician 40 Operations 10 Chief, SewageField Secondary Education Technician 14 Operations 11 Mechanic Construction and Engineering Engineer- 32 Institute mechanic

5 Information received from Director of Company

15 Table A.2: Goychay Sukanal Open Joint Stock Company6

Position Qualifications Profession Professional Experience (Years) 1 Director Construction and Engineering Construction 22 University Engineer 2 Deputy Director Construction and Engineering Construction 37 University Engineer- Technician 3 Chief Accountant University of Economics Economist 27 4 Accountant Planning and Registration Planner- 18 Secondary School Technician 5 Chief Engineer Construction and Engineering Construction 6 University Engineer 6 Economist Planning and Registration Planner- 23 Secondary School Technician 7 Personnel Specialist Secondary education Personnel 24 Specialist 8 Chief of Field Secondary School for Agriculture Technician- 52 Mechanic 9 Head, Customer University of Economics Economist 31 Service Department 10 Chief, Field Politechnical Secondary School Technician- 35 Operations Mechanic 11 Chief, Field Secondary School for Agriculture Electrician- 34 Operations Mechanic

6 Information received from Director of Company

Table A.3: Nakhchivan Sukanalizasiya Open Joint Stock Company7

Position Qualifications Profession Professional Experience (Years) 1 Chairman 1. Azerbaijan Institute of Oil and 1. Engineer- 20 Chemistry Electrician 2. Azerbaijan State Institute of 2. Economist- Economics Lawyer 2 Deputy Chairman Nakhchivan Politechnical Construction - 25 Secondary School Materials 3 Chief Accountant Nakhchivan Secondary School for Accountant 30 Agriculture 4 Accountant Accounting Courses at the House Accountant 36 of Officers 5 Chief Engineer Azerbaijan Institute of Oil and Engineer – 25 Chemistry Systems Technician 6 Personnel Specialist Secondary Education Specialist 29 7 Chief Field Secondary School for Construction Constructor- 42 Operations in Ganja Technician 8 Chief Field Nakhchivan Poltechnical Constructor- 31 Operations Secondary School Technician 9 Chief Field Secondary Education Technician 16 Operations 10 Chief Field Secondary Education Technician 38 Operations 11 Chief Field Secondary Education Technician 4 Operations 12 Chief Field Secondary Education Technician 41 Operations

7 Information received from Chairman of Company

17 Appendix B Recommended Organizational Structures Figure B.1: Agdash and Goychay Joint Stock Companies

Azersru OJSC (Shareholder)

Board of Directors (Supervisory Board)

Executive Body

Director General

Finance Department Organizational Department Technical Department Financial Director Administration Director Technical Director

Senior Accountant Snr Admin. Officer Supervisor Expenditure Word Processing Water/Sewerage Filing/Telephonist Mtce & Repair

Senior Accountant Supervisor Supervisor Revenue Human Resources Water/Sewerage Construction

Senior Accountant Supervisor Supervisor Computers Buildings Mtce/Repair Plant/Equipment Security Mtce & Repair

Supervisor Customer Services/ Complaints Mgt

18 Figure B.2: Nakhchivan OJSC

MEDNAR (Shareholder)

Board of Directors (Supervisory Board)

Executive Body Management Board Director General

Finance Department Organizational Department Technical Department Financial Director Administration Director Technical Director

Senior Accountant Supervisor Supervisor Expenditure Word Processing Water/Sewerage Filing/Telephonist Mtce & Repair

Senior Accountant Supervisor Supervisor Revenue Personnel Water/Sewerage Construction

Senior Accountant Supervisor Supervisor Computers Buildings Mtce/Repair Plant/Equipment Security Mtce & Repair

Appendix C Draft Job Descriptions This appendix provides draft job descriptions for the following positions: 1. Management Director General

2. Finance Department Financial Director (Department Head)

Senior Accountant (Revenue)

Senior Accountant (Expenditure)

3. Organizational Department Administration Director (Department Head)

Senior Administration Officer

Supervisor Human Resources

Supervisor Building Maintenance/Repair & Security

Supervisor Customer Services and Complaints Management

4. Technical Department Technical Director (Department Head)

POST: DIRECTOR GENERAL

LEVEL: Director General

RESPONSIBLE TO: President of “Azersu” JSC and Board of Directors of Company

RESPONSIBLE FOR: Subject to directions of the Board and the Company’s Charter, responsible for planning, organizing, managing and controlling the activities of Water and Sewerage Company

DUTIES:

1. As the Management Head of the Company, exert due authority in accordance with pertinent Laws, Rules and Regulations of the Government 2. Be responsible for implementation of lawful decisions of the Board 3. Provide management support to the Board as well as guidance and advice on policy and operational matters 4. Assist the Board to develop policy agendas that can be implemented effectively and are responsive to public needs 5. Be responsible for overall management and administration of the Departments and staff including coordination, delegation, staff development, supervision and monitoring of performance 6. Support budgetary and financial control, revenue enhancement and service delivery improvements 7. Facilitate team building and teamwork, and 8. Liaise with the Government and other organizations as required.

SKILLS LEVEL:

1. Experience at a senior management level in Government or private enterprise 2. Good analytical, problem-solving and leadership skills 3. Applied computer skills 4. Formal qualifications in finance, management and/or technical areas of expertise preferable, and 5. Five years experience in leadership position in private or Government sector

Approved by ………………………………. Date………………………

POST: FINANCIAL DIRECTOR (Department Head)

LEVEL: Department Head

RESPONSIBLE TO: Director General

RESPONSIBLE FOR: Under the direction of the Director General, responsible for financial management services for the Company relating to accounting operations, expenditure, financial control and reporting. Principally responsible to ensure that all money due is promptly collected, deposited with the banks and brought to account, that all expenditure is properly authorized and promptly brought to account. Also responsible to ensure that the financial records are sufficiently accurate and up-to-date to give a true and fair view of the state of the Company’s finances, that budgets are accurately drafted, accounting systems are such as to provide prompt and accurate information and the annual accounts are accurately prepared.

DUTIES:

1. Be responsible for the overall management of the Finance Department (FD) to ensure that the Company is getting good value-for-money for the service 2. Set financial standards and targets for the Company 3. Ensure that all transactions are performed in accordance to these standards as well as any legislative requirements 4. Monitor progress against targets on a regular basis through regular meetings with staff 5. Implement and monitor proper controls to ensure that financial procedures are carried out on a proper and acceptable manner 6. Coordinate any proposed developments in financial matters 7. Be the principal adviser to the Board and the Director General on all matters relating to financial management services 8. Ensure discipline throughout the FD and to report any staff requiring disciplinary action to be taken against them 9. Prepare Budgets, Financial Plans, Final Annual Accounts and regular Financial Reports in a timely manner, and make sure they are distributed as required to the necessary parties 10. Be responsible for Revenue Collection and Compliance, including: Ensuring uniform processes and procedures of revenue collection Ensuring uniform processes and procedures of compliance and enforcements Maintaining liaison and support with other revenue collection staff, and Monitoring and reporting collection processes and payments. 11. Be responsible for Bank, Cash and Debt Management, including: Ensuring that all bank accounts are regularly reconciled Ensuring that revenue collected are banked and properly brought to account Ensuring that there is sufficient cash to meet day-to-day needs, and Monitoring and advising on the long-term debt position 12. Ensure that accounts are kept up to date and are accurately posted 13. Ensure adequate training opportunities (either internal or external) are given to make sure employees are adequately trained to perform their duties 14. Review the performance of all staff in the FD against their job description

15. Review the job description of all staff in the FD to accurately describe the actual role at least one a year, or as directed 16. Interact with internal and external auditors and participate in occasional auditing projects or provide information and access to accounting records as required 17. Perform any other duties, commensurate with status, as directed by the Director General

SKILLS LEVEL:

1. Experience in a senior financial management position in public or private sector institutions for at least five years 2. Good analytical, problem solving and leadership skills 3. Formal qualifications in financial management 4. Knowledge of budgeting, cost estimating, and fiscal management principles and procedures 5. Knowledge of financial recordkeeping and tax reporting procedures, laws, regulations, and standards 6. Ability to supervise and train employees, to include organizing, prioritizing, and scheduling work assignments 7. Applied computer skills in Word, Excel and utilization of computerized financial management packages.

Approved by ………………………………. Date………………………

POST: SENIOR ACCOUNTANT (Revenue)

LEVEL: Accountant

RESPONSIBLE TO: Financial Director (Department Head)

RESPONSIBLE FOR: Under the direction of the Financial Director, responsible for ensuring the prompt and accurate processing of all income of the Company

DUTIES:

1. Receive and receipt cash and non-cash payments 2. Prepare cash receipts for bank deposit, prepare daily cash reports and balance the cash drawer, reconcile cash and check receipts daily, and investigate and resolve any out-of- balance problems 3. Promptly verify and post all revenue data into the appropriate books of accounts 4. Balance daily batches and reports and prepare regular income/collection reports and statistics to the Financial Director 5. Regularly review the revenue collection and recording systems and monthly report thereon to the Financial Director with recommendations for any necessary corrective action 6. Perform any other duties, commensurate with status, as directed by the Financial Director

SKILLS LEVEL:

1. Knowledge of accrual accounting methods and procedures 2. Prior working experience in a similar position in Government and/or private enterprise 3. Ability to calculate numbers, correct entries, and post to records 4. Ability to secure and handle cash 5. Preferable to have qualifications in accounting (optional) 6. Computer skills required

Approved by ………………………………. Date………………………

POST: SENIOR ACCOUNTANT (Expenditure)

LEVEL: Accountant

RESPONSIBLE TO: Financial Director (Department Head)

RESPONSIBLE FOR: Under the direction of the Financial Director, responsible for ensuring the prompt and accurate processing of all payments, including payroll, as well as the regular review of the accounting systems to ensure the production of prompt and accurate information. DUTIES:

1. Oversee and coordinate the day-to-day Accounts Payable duties 2. Ensure that all data are received, reconciled and entered promptly into the appropriate books of accounts 3. Investigate and resolve problems associated with processing of invoices and purchase orders 4. When the systems are fully computerized, ensure that all Computer input/output is reconciled and take immediate action to clear any unallocated item 5. Maintain and administer accounts payable databases, analyze and manipulate data, and prepare standard and ad hoc reports as required 6. Ensure that all payments due to third parties are made accurately and promptly 7. Process complex and/or detailed invoices for payment 8. Provide customer service and support to internal departments and vendors with respect to various accounts payable and related accounting inquiries 9. Ensure that all salaries, wages and allowances are paid accurately and promptly 10. Prepare all Journal Entry vouchers 11. Enter all Journal Entry vouchers into the records/computer and to check resulting output 12. Ensure that all Journal Entry Vouchers are posted 13. Manage the local area computer network and security for department and end users 14. Provide regular reports on actual expenditure against budget to the Financial Director and reasons for the variance 15. Perform any other duties, commensurate with status, as directed by the Financial Director

SKILLS LEVEL:

1. Knowledge of standard accounts payable policies, procedures, and regulations 2. Knowledge of general accrual accounting principles 3. Ability to supervise and train employees, to include organizing, prioritizing, and scheduling work assignments 4. Ability to utilize an automated accounting system 5. Ability to understand and interpret vendor invoices, statements, and other requests for payment 6. Prior working experience in a similar position in Government and/or private enterprise 7. Preferable to have qualifications in accounting 8. Knowledge of computer and/or network security systems, applications, procedures, and techniques

Approved by ………………………………. Date………………………

POST: ADMINISTRATION DIRECTOR (Department Head)

LEVEL: Department Head

RESPONSIBLE TO: Director General

RESPONSIBLE FOR: Under the direction of the Director General, responsible for all aspects of the Company’s human resource management, corporate services, compliance operations, and various other administrative support services. The Administration Director will also coordinate organization-wide strategic planning and policy/procedure development.

DUTIES:

1. Plan and oversee all administrative support, human resources management, and office services including establishing work priorities 2. Assist in resolving problems related to the day-to-day operations of the Company 3. Plan, develop, and coordinate the execution of program policy, procedures, and operations 4. Monitor compliance with the Company’s operational and personnel policies, procedures, regulations, and appropriate laws 5. Establish and implement short- and long-range organizational goals, objectives, policies, and operating procedures; monitor and evaluate operational effectiveness; and effect changes required for improvement 6. Coordinate strategic planning and goal development for the organization and monitor achievement of goals and objectives and provide reports 7. Facilitate the resolution of inter- and intra-departmental problems concerning such issues as employee management, and utilization of facilities, equipment, and supplies 8. Administer building security and safety procedures as appropriate to the operating environment; develop procedures to control and assign building and/or office space and equipment 9. Perform any other duties, commensurate with status, as directed by the Director General

SKILLS LEVEL:

1. Knowledge of office management principles and procedures 2. Ability to make administrative and procedural decisions and judgments on sensitive, confidential issues 3. Skill in examining and re-engineering operations and procedures, formulating policy, and developing and implementing new strategies and procedures 4. Preferable to have qualifications in economics and/or management 5. Knowledge of human resources concepts, practices, policies, and procedures 6. Knowledge of project management principles, practices, techniques, and tools 7. Ability to develop and deliver presentations 8. Ability to supervise and train employees, to include organizing, prioritizing, and scheduling work assignments 9. Employee development and performance management skills

10. Ability to lead, guide, and integrate strategic planning processes and organizational goal development 11. Prior working experience in a similar position in Government and/or private enterprise 12. Knowledge of computer applications, procedures, and techniques

Approved by ………………………………. Date……………………

POST: SENIOR ADMINISTRATOR OFFICER

LEVEL: Senior Clerk

RESPONSIBLE TO: Administration Director

RESPONSIBLE FOR: Under the direction of the Administration Director, responsible for assisting in managing the Company’s human resource management, corporate services, compliance operations, and various other administrative support services.

DUTIES:

1. Plan and assist in the overseeing all administrative support, work processing, and office services 2. Register all correspondence received by the Company 3. Supervise the Company’s filing system 4. Assist in resolving problems related to the day-to-day operations of the Company 5. Assist in monitor compliance with the Company’s operational and personnel policies, procedures, regulations, and appropriate laws 6. Perform any other duties, commensurate with status, as directed by the Administration Director

SKILLS LEVEL:

1. Knowledge of office management principles and procedures 2. Preferable to have qualifications in economics and/or management 3. Knowledge of project management principles, practices, techniques, and tools 4. Ability to develop and deliver presentations 5. Ability to assist in training employees 6. Employee development and performance management skills 7. Prior working experience in a similar position in Government and/or private enterprise 8. Knowledge of computer applications, procedures, and techniques

Approved by ………………………………. Date………………………

POST: SUPERVISOR HUMAN RESOURCES

LEVEL: Senior Clerk

RESPONSIBLE TO: Administration Director

RESPONSIBLE FOR: Managing the day-to-day activities of the Human Resources functions of the Company to ensure that the utilization of staff and resources is maximized and that service levels are appropriate to the needs of the organization and ensuring that all legislative requirements, policies, directives and guidelines are disseminated throughout the organization and complied with

DUTIES:

1. Be responsible for preparation of human resource policies and procedures 2. Provide assistance to all Department in staff appointments and dismissals 3. Implement the Company’s terms and conditions of employment for all staff 4. Be responsible for implementing the Staff Training Plan 5. Be responsible for maintaining staff records

SKILLS LEVEL:

1. Qualified in Human Resources at least at Diploma level 2. Knowledge of human resources concepts, practices, policies, and procedures 3. At least two years experience in human resource management in Government and/or private enterprise 4. Knowledge of Government rules and regulations relating to employment matters 5. Knowledge of computer applications, procedures, and techniques

Approved by ………………………………. Date………………………

POST: SUPERVISOR BUILDING MAINENANCE/REPAIRS & SECURITY

LEVEL: Senior Officer

RESPONSIBLE TO: Administration Director

RESPONSIBLE FOR: Providing management and security for the Company’s property

DUTIES:

1. Be responsible for maintaining Company buildings and facilities 2. Maintain inventories of the Company property, plant and equipment 3. Arrange transport services for the Company 4. Arrange provision of communication and services such as electricity, water, gas and other public utility services used by the Company 5. Maintain fire services to Company property in accordance with relevant rules and regulations

SKILLS LEVEL:

1. At least two years previous experience in providing building security services 2. Knowledge of regulations regarding maintenance, fire protection and building services 3. Qualified in Building Technology and/or Asset Management services

Approved by ………………………………. Date………………………

POST: SUPERVISOR CUSTOMER SERVICES AND COMPLAINTS MANAGEMENT

LEVEL: Senior Clerk

RESPONSIBLE TO: Administration Director

RESPONSIBLE FOR: Managing the day-to-day activities of the Customer Services and Complaints Management functions of the Company to: provide an effective process to respond to and resolve complaints; ensure a high level of satisfaction on the outcome of a customer’s complaint; provide a transparent method of measuring and reporting customer complaints; provide a framework for continuous business improvement based on customer complaint information received, and provide effective procedures to manage customer enquires to ensure a high level of satisfaction to the customer.

DUTIES:

1. Be responsible for preparation of custom services and complaints management policies and procedures 2. Provide assistance to all Department in staff in the administration of the complaints management system 3. Be responsible for maintaining complaints management records 4. Provide reports to relevant Managers for each reporting period as an indicator against the performance standards for customer service management 5. Follow up complaints that may be incomplete 6. Prepare for audits on the performance against customer service procedures 7. Ensure adequate supply of Customer Complaint Forms are made available to the relevant areas 8. Maintain records of all Customer Complaint training 9. Provide staff training according to scheduled requirements 10. Seek opportunities to improve the customer services processes.

SKILLS LEVEL:

1. Relevant tertiary qualifications in customer service and complaints management 2. Knowledge of customer service and complaints management concepts, practices, policies, and procedures 3. At least two years experience in customer service and complaints management in Government and/or private enterprise 4. Experience in working with people at all levels of the Company and external stakeholders 5. Knowledge of computer applications, procedures, and techniques

Approved by ………………………………. Date………………………

POST: TECHNICAL DIRECTOR (Department Head)

LEVEL: Department Head

RESPONSIBLE TO: Director General

RESPONSIBLE FOR: Managing the Operational Divisions of the Department and improving its effectiveness and efficiency in the production and distribution of potable water and in sewage collection, transportation and treatment services. Providing high-level support to the Director General, in managing the Technical department, changing its culture and developing its operational capacity .

DUTIES:

1. Ensure that a strategic management approach is implemented across the Company and that agreed plans and program are developed and are implemented in an efficient, effective and sustainable manner 2. Regularly monitor the performance of Department through the management meetings network, reporting processes and consultation with managers and staff 3. Ensure that the programs, operations and activities of the Department are reported appropriately through annual and other reports 4. Ensure that the activities of Department comply with governments legislative, regulatory and procedural requirements 5. Ensure that the levels of service delivered by the Company are the most appropriate for the people of the area are provided at the least cost 6. Regularly communicate with the Director General both verbally and in writing, on matters associated with technical management and operations of the organization 7. Bring about a noticeable and measurable change in the efficiency, effectiveness and sustainability of the organization

SKILLS LEVEL:

1. Qualified in engineering at degree level 2. Experience in operation and management of water supply and sewerage systems 3. Experience in contract and project management 4. Knowledge of computer applications, procedures, and techniques 5. A thorough knowledge and understanding of Government legislations and regulations affecting the operations of Water and Sewerage Systems 6. Good communication skills

Approved by ………………………………. Date……………………

Appendix D Training Requirements D.1 Management Training Needs Financial management including accounting systems and computerized water billing systems Human Resources Management (Policies and Procedures) Corporate legal and management structures applying to the Companies, including the Charter Management of waste water collection, treatment and disposal Management of community awareness Customer service and public relations management Project Management Contract Management D.2 Operational and Technical Training Needs General Operational Skills Operating computerized accounting and book-keeping systems Operating computerized water billing systems Operating and maintaining water treatment plants Operating and maintaining water distribution systems Pipe laying Meter repairs Water supply planning Computer skills Procurement Water Treatment Operational Skills Sampling and Testing Record Keeping Water Treatment Maintenance of Building, Equipment, Infrastructure Assets Plant Operation Water Storage Control Waste Water Treatment Operational Skills Solids Handing Biological Treatment Laboratory Work (Process Control) Use, Maintenance and Operation of Plant and Equipment

Maintenance of Sewer System Operation and Maintenance of Pump Stations Public Relations and Complaints Management Preparation of press releases Preparation of public presentations Administration of a complaints system Prioritizing customer concerns Telephone protocol Handling difficult customers

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Appendix D: Recommendations on the Liquidation of the SuKanals

TA 4465-AZE Institutional Strengthening of Water Supply and Sanitation in Secondary Towns

Recommendations on the Liquidation of SuKanals

Discussion Paper

Report to Asian Development Bank and the Government of Azerbaijan

May 2007 Table of Contents 1 Introduction 1 2 Background 2 3 Historic Assets and Liabilities 3 3.1 Fixed Assets 3 3.2 Current Assets 3 3.3 Problem Liabilities 5 4 Transitional Issues 6 4.1 Treatment of Ongoing Operating Losses 6 4.2 Simultaneous Operation of Old and New Systems 6 4.3 Operation of Old Infrastructure outside Project Area 8 5 Legal Issues 9 6 Liquidation Strategy 11

Appendices Appendix A Sample Agreement on Transfer of a Liability 13 Appendix B Sample Agreement on the Concession of the Right to Demand 15 Appendix C Suggested Assets to be Written Off—Agdash and Goychay 17 Appendix D Break Down of Accounts Receivable—Agdash and Goychay 19

1 Introduction Under the Urban Water Supply and Sanitation Project (UWSSP), the run-down infrastructure in the three Project Towns (Agdash, Goychay and Nakhchivan) will be rehabilitated and replaced with the help of loans from the Asian Development Bank (ADB). These loans will provide for the design and construction of new water and sewerage infrastructure and assistance to improve the quality of management, maintenance and operation of the new assets. As a part of this process, the Government of Azerbaijan and the ADB have agreed that: The existing physical assets will be decommissioned and written off completely New Joint Stock Companies (JSCs) will be set up to own the new assets, and None of the assets and liabilities of the former SuKanals will be transferred to the new JSCs set up for the project. The ADB Project has not been implemented as originally envisaged in the Feasibility Study and the Report and Recommendations to the President of the Board of Directors (RRP) paper. Because of delays in the Project, AzerSu went ahead and constituted the subsidiary JSCs in Agdash and Goychay, as required by Presidential Decree 252. AzerSu did this in the most expedient way by closing down the precursor SuKanals and transferring their assets, customers, staff and operations to the new JSC for each town. This was not anticipated in the texts of the Loan Agreements signed between the Government of Azerbaijan and the ADB, which called for the JSCs to be created unencumbered by any of the liabilities and fixed assets of the former SuKanals and to take on staff in a selective manner. This Discussion Paper examines the issues arising from the liquidation of the former SuKanals in the current context, in which the new JSCs have taken over all the operations, assets, customers and liabilities of the precursor SuKanals, and the Project has been delayed by two years.

1 2 Background Presidential Decree (PD) 252, entitled “On Improvement of the Water Supply Management in the Azerbaijan Republic” indicated that: (i) the JSC Apsheron Regional Water Company (supplying water to Greater Baku and the Apsheron Peninsula) is to be renamed and reorganized into the JSC AzerSu (AzerSu); and (ii) the AzerSuKanal of SCCA is liquidated, and its functions and assets transferred to AzerSu. AzerSuKanal had 51 local branches, water and wastewater enterprises known as SuKanals. These SuKanals were responsible for providing water supply and sanitation (WSS) services in provincial towns and other residential areas. AzerSuKanal’s responsibilities included monitoring and supervision of all activities of local SuKanals, personnel management, evaluation and approval of investment contracts and budgets, and allocation of budget funds. Despite these extensive responsibilities, AzerSuKanal’s capacity to undertake long-term and strategic planning was weak. AzerSu was structured to include a number of branch JSCs, five of which were intended to take over the assets, staff and operations of the former SuKanals. Four of these JSCs are SuKanals in the four towns selected as project towns by the ADB and KfW. AzerSu completed the registration of the JSCs for Agdash and Goychay in March 2006 and has transferred the assets, staff and operations of the former SuKanals to the JSCs. Nakhchivan is an autonomous republic (NAR) physically separated from the main part of Azerbaijan by Armenia. Its capital city, also Nakhchivan, is the third city to be covered by the ADB loan. The Nakhchivan SuKanal was taken over by the Ministry of Economic Development of NAR (MED) when the Nakhchivan State Committee for Construction and Architecture (SCCA) was disbanded and faces problems very similar to those found in Agdash and Goychay. Although the MED has no connection to AzerSu, the MED decided to follow a similar procedure to AzerSu and has constituted a new JSC to take over the customers, assets, liabilities and operations of the former SuKanal using a charter based on the one prepared for Agdash and Goychay. The current financial performance of the JSCs in all of the Project Towns is poor. Billing and recording of outstanding amounts are outdated and ineffective. Tariffs are low and customers resist paying water bills because of poor service. Revenues are inadequate to undertake proper operation and maintenance (O&M) and there is no funding for major repairs and rehabilitation. Although, in principle, JSCs are meant to be self-financing agencies, they are unable to raise finance directly. SuKanals relied on additional funds from the Local Executive Authority and AzerSuKanal for non-routine repairs, but those funds were not always forthcoming. It remains to be seen whether AzerSu and MED can provide significant finance for the JSCs’ non-routine repairs and investment. Available cash is insufficient to cover O&M costs without deferring payment of electricity bills. This situation has led to the progressive deterioration of WSS systems.

2 3 Historic Assets and Liabilities In this section we discuss the historic assets and liabilities of the JSCs. 3.1 Fixed Assets The fixed assets of the former SuKanals consist of everything that the SuKanal has ever purchased or owned, including pipes in the ground and equipment (some of which is unusable and has been abandoned). Depreciation of the fixed assets has essentially followed the rules laid down in the former Soviet Union, whereby the book value of the asset is depreciated by a constant percentage of its residual value each year. In the case of the former SuKanals this means that: Allowances for depreciation are too small to provide the cash needed to replace an asset when it is no longer economic to repair, and The residual value of the older assets substantially exceeds their value to the company, distorting its capital base. It also appears that depreciation allowances are purposefully decreased in difficult years to avoid the appearance of a paper loss in the financial reporting for the year. Once the new infrastructure has been constructed and replaces the existing fixed assets, three things will have to happen for the JSCs to avoid the cycle of decline experienced by the former SuKanals: Decommissioning of the existing infrastructure and other assets, as they are replaced by the new assets provided from the ADB loan. The decommissioned assets will need to be written them off completely from the JSCs’ balance sheets. Suggested assets to be written off for Agdash and Goychay JSCs are provided in Appendix C. The total depreciated value of these assets is 670,000 AZN for Agdash and 230,000 AZN for Goychay Writing the full value of the new assets into the fixed assets of the new JSCs, and Authorizing and obliging the JSCs to apply realistic depreciation rates in their annual accounts to ensure that they have sufficient cash for the upkeep of the corresponding assets and for their eventual renewal when they are no longer serviceable. Depreciation allowances will be higher than in the past and will be included in the costs to be recovered from the tariffs. 3.2 Current Assets While in theory current assets can include a broad range of short term assets, in the case of all three former SuKanals the category is completely dominated by Accounts Receivable, that is the revenue that has been claimed in past financial statements but has been neither collected, nor written off. This is because public sector companies in Azerbaijan are not allowed to write off bad debts, once they have been deemed uncollectible (as might be the case if the debtor is a company that no longer exists). The collection rate (the proportion of billed revenue that is received as income) is never 100 percent and is likely to be much less in a weak economy, or where the service provided does not meet the expectations of customers. Normal practice would allow a utility company to write off a proportion of its unpaid bills each year as an operating expense that is recoverable through the tariff.

3 The collection ratio is not an issue in a competitive environment, because market pressure means that those businesses cannot to collect sufficient revenue from their customers cannot compete with those who can. Also, businesses in a competitive environment are generally free to not supply services to customers that do not pay. However, the collection ratio is an issue for utilities because they often face a legal or political obligation to continue to supply services, regardless of the utility’s ability to cover its costs. Even with a low collection ratio, a utility can ensure cost recovery by increasing overall tariffs and collecting more from those customers that do pay. While this might be thought unfair to the customers who pay their bills, it is the only way to ensure that the company is financially secure enough to provide an adequate service in a sustainable manner. It is also normal commercial practice and does not have an excessive effect on individual customers, provided that the collection ratio is not too low. Nevertheless, to minimize this effect, it is important to ensure that the utility’s managers have the incentives and the tools to keep the collection ratio as high as possible and, ideally, over 90 percent. To ensure proper accountability for current assets and a high collection ratio, the following five issues need to be addressed: The Project Town JSCs must be allowed and obliged to write off unpaid bills that have aged beyond normally-accepted limits and declare this in their financial reporting. This is likely to include a very large proportion of the JSCs’ historic Accounts Receivable The JSCs must also have the ability to disconnect customers that have not paid their bills, without undue political pressure to avoid disconnections The JSCs must be allowed to set tariffs that cover the cost of writing off a reasonable proportion of Accounts Receivable as bad debt The collection ratio should be one of the most important parameters used to evaluate the utility managers’ performance, and The utility managers’ contracts should be written such that failure to meet targets in this and other important areas will result in sanctions. It is important to remember that writing off bad debt does not imply abandoning all hope of collecting individual unpaid bills, merely that the company’s financial statements are adjusted to reflect the likely conversion of revenue into cash. For Agdash and Goychay, our team has estimated a breakdown of accounts receivable into “dead debts” (those that will never be collected) and debts that will likely be collected. For Agdash, the dead debts make up 92,000 AZN (84 percent) of accounts receivable and for Goychay they are 116,000 AZN (93 percent). The detailed estimates are provided in Appendix D, broken down by Budget Organizations (national and local), industrial and commercial organizations, and the general population. There are many cases of water utilities succeeding in the collection of unpaid bills and revenue lost through fraud. In many countries debts can also be converted to cash by being sold as an asset for some proportion of their face value, so the purchaser takes on the task of recovering the debt. It may be that, for Agdash and Goychay, the simplest and most cost-effective way of removing Accounts Receivable will be to sell them to AzerSu. AzerSu is in a unique position to consolidate them with the Accounts Receivable of the many other former SuKanals that it owns, before negotiating settlements with its larger debtors, likely to be other state-owned institutions, taking legal action or writing

4 them off. Similarly in Nakhchivan, the MED as owner of the new JSC, is best placed to take over ownership the JSC’s inherited Current Assets. 3.3 Problem Liabilities The counterweight to the overloading of the JSCs’ Current Assets with Accounts Receivable is the Accounts Payable item in Current Liabilities. Each of the JSCs carries a backlog of unpaid bills to the electricity company and to other state-owned enterprises and institutions (notably the fund that provides social security and retirement benefits to public employees). There are also small debts to private suppliers and, in the short term, employees are owed all or part of their salaries when the former SuKanals fail to generate sufficient cash to pay them in full. Everyone uses water, and so water customers are often also creditors of the water utility. Accounts Payable to such suppliers are sometimes crossed with Accounts Receivable, so that the two balance out to some degree. This is a form of virtual barter that is common in countries where government-owned entities never have the cash to settle their debts with each other. Liabilities are more difficult to deal with than assets, because a third party has to agree to the debt being written off by the debtor. In theory, this should be simpler if both debtor and creditor are owned by the State, as ultimately the State owes the money to itself. However, these situations usually arise because state-owned services under-charge their customers or carry excessive staff and other operating costs, starving them of cash for other purposes. Although they may not be accompanied by infusions of State cash at the time, the consequent deficits and other problems eventually require an injection of state funds, or painful reforms, or both, or lead to a breakdown in services of a kind that is very familiar in Azerbaijan.

5 4 Transitional Issues The desired final result of the liquidation of the former SuKanals, their assets and their liabilities is clear, this is having professionally managed and profitable JSCs with new water supply and sewage disposal infrastructure providing excellent, responsive service to their customers. However, the present situation is equally clear. The JSCs are under-funded, have demoralized staff, and a management team that is struggling to provide the most basic services to their customers from unserviceable infrastructure. The period of transition will run from mid-2007 to 2009, and the process of transformation will be assisted (but should not be driven) by the Asian Development Bank loans and the Loan Consultant that will be funded through the loan. The most important transformation will be the complete replacement of the existing infrastructure in the urban areas covered by each JSC. The construction will need to be carefully planned by the Loan Consultant and the contractors to ensure that interruptions in service to customers are minimized and that temporary facilities are provided when interruptions are unavoidable. 4.1 Treatment of Ongoing Operating Losses The new JSCs, which have taken over the assets, liabilities, staff and customers of the old SuKanals, currently just about break even on paper, but, in practice, do not generate the cash needed to cover their operating costs. They get by through suspending payments to Government, suppliers and staff. The result is an accumulation of Accounts Receivable, Accounts Payable and under-depreciated Fixed Assets in the JSCs’ accounts. The financial modeling that underpins the ADB project assumes that both tariffs and collection rates will be increased during the transition period to the point where the JSCs become sufficiently profitable to maintain their infrastructure, service their debts and carry the non-fee costs of supervising and working with the Management Contractor (in Agdash and Goychay), or the Utility Management Advisor (in Nakhchivan). In the meantime the same financial projections show losses continuing throughout the transition period. Currently, while tariffs are being increased, they are not increasing at the rate envisioned in the Feasibility Study financial projections. There is also no evidence of the assumed corresponding increase in collection rates. It is therefore likely that the JSCs will continue to operate at a loss. This means that the JSCs will require ongoing support from the Government in the transitional period, to ensure the fulfillment of the Loan Agreement requirement that the JSCs will take over the new physical assets free of any inherited assets and liabilities. 4.2 Simultaneous Operation of Old and New Systems The water supply infrastructure clearly has to be operational before customers can be connected to the new distribution pipes. Similarly, the main sewers, sewage pumping stations and sewage treatment facilities must be operational before customers are connected to the new sewers. The precise organization of the transfer of customers from the old infrastructure to the new will be the responsibility of the JSCs with assistance from the Loan Consultant and the contractors carrying out the works. The transfer will likely take the following general form: Replacement of the water distribution mains and local sewers will be disruptive to traffic in each street or section of a street for a period of several

6 days. Therefore, the extent of works being carried out at any one time will need to be limited to minimize the disruption The contractors will excavate trenches for both sets of services and will test the pipes for water-tightness to the specified pressures, before any connections can be made. The water pipes will also be cleaned, sterilized and tested to ensure that they are free of any bacterial contamination New water supply and sewer connections will be provided to every property on the newly constructed and tested section The water connections will be flushed, sterilized and fitted with a meter, before the existing supply is disconnected from the existing supply pipe and reconnected to the new one The existing sewage system will be disconnected from the old sewers and reconnected to the newly constructed replacement sewer Once this has been completed for the whole street section, the existing water main and sewer will be abandoned and decommissioned. Abandoned water pipes and sewers represent a potential future health hazard as there is a risk that: The contractors may not be successful in entirely separating the old systems from the new. For example, this can happen if some customers have illegal connections that can form a bridge between the two water supply networks, and New properties may mistakenly connect to the old system, rather than the new pipes. It is therefore vital that the existing pipes are either removed completely once they have been abandoned, or are rendered completely unusable by induced collapse, grout injection or some other effective and foolproof method. It is likely that the transfer of customers from the old systems to the new will take several months and that the two systems will be operated in parallel. The key operations staff of the JSCs will be the only people competent to run the existing infrastructure during that time and their knowledge of the existing networks will be invaluable to the contractors responsible for constructing the new systems. The contracts for the construction of the new infrastructure must therefore allow for temporary operation of the newly constructed facilities by the Loan Consultant (or their subcontractors) until the transfer is complete and the staff of the JSC can be re-assigned from operating the existing infrastructure and trained in the operation of the new. The Loan Consultant will be expected to demonstrate that the new water supply and distribution systems and the new sewers and sewage treatment facilities perform according to the specification and to provide maintenance period guarantees. Only the water supply system can be adequately tested before the transfer of customers is completed. The water distribution network, the sewers and the sewage treatment plant can only be fully tested once the whole system is fully operational. This will give the Loan Consultant an additional direct interest in ensuring that: The works are properly maintained and operated until they can be handed over to the JSC for operation, and

7 The JSC technicians and operators are properly trained in the maintenance and operation of the new facilities. 4.3 Operation of Old Infrastructure outside Project Area The terms of the loan agreements require that the service areas of the new JSCs do not extend beyond the area served by the new infrastructure to be constructed from the loans. In practice, however, the Agdash and Goychay JSCs have taken over supply for the neighboring villages that are not covered by the Project. There will be marked differences in the levels of service and tariffs between the re-equipped urban areas and the rural areas falling outside the scope of the Project. In the early years of operation the JSCs are predicted to need to impose tariffs that approach the limits of what their customers can afford in order to service the ADB loans and maintain the new assets in good condition. These tariffs will only be bearable, collectable and profitable if: Customers are provided with meters and billed on the basis of the volume of water that they actually consume, allowing them to exercise some control of their water bills The quality of the service provided matches the tariff, with continuous supplies of safe water, good water pressure, reliable sewage collection and effective wastewater treatment, and The water company can realize the operational savings that will come from running a new, low-leakage, highly reliable water and sewerage system. None of these conditions will apply to the rural areas outside the scope of the Project. If the JSC is required to service these areas, some form of Government subsidy will be required to bridge the gap between the high operating costs of the old systems and the limited willingness to pay of their poorly served customers in order for the JSCs to meet the costs of providing services in these areas.

8 5 Legal Issues According to the conditions of the Loan Agreement, the Government of Azerbaijan has committed to ensuring that no debts and liabilities of an old SuKanal will be transferred to a new JSC. This commitment was required to protect the integrity and financial sustainability of JSCs. Given that this commitment (a requirement under the Loan Agreements) is not currently fulfilled, we have recommended steps that could be taken to meet the commitment. We suggest that: Outstanding Accounts Receivable should be classified according to the likelihood of being collected and uncollectible amounts should be written off, and Prompt measures should be taken, including court action, to recover collectable amounts. Uncollectible Accounts Receivable could be written off either under the provisions of the Law on Accounting or under the provisions of any another applicable law. If for any reason this procedure cannot be followed for the JSCs, the uncollectible amounts could be transferred to another organization in the form of a Concession of Claim, stipulated in the Civil Code. A similar approach could also be taken to write off the liabilities to other organizations that the JSCs have inherited from the SuKanals. Therefore, there are two specific cases that need to be addressed: 1. The transfer or concession of the unpaid invoices owed to the former SuKanals and transferred to the new JSC as Accounts Receivable—This can be arranged by mutual consent between the JSC and its owner (ultimately the Government of Azerbaijan), and 2. The transfer or concession of liabilities owed by the former SuKanals to other, mostly state-owned, organizations—This may also require the consent of the former SuKanal’s creditors. We have provided draft concession agreements for each of these cases in Appendix A and Appendix B, respectively, and discuss the process in more detail below. State ownership of the shares of the JSCs means that the methodology for writing off their assets is defined in legislation. At present, this procedure is regulated by the “Rules on selling of material securities obtained as a result of disposing of and writing off redundant or worthless assets which are still carried on the balance sheets of enterprises and organizations and enterprises whose shares are owned wholly or in part by the government” (the Rules). Article 2.1 of the Rules defines that the following assets can be written off: Fully outdated, physically and culturally useless buildings, works, transmission works, machinery and equipment, transport means, production tools, household equipment and other assets which are thought to be inexpedient, unprofitable after repair or reconstruction and can not be sold, or have expired, as well as demolished buildings and works and assets destroyed as a result of a natural disaster According to Article 2.2 of the Rules, a commission should be constituted at the relevant JSC to draw up a liquidation statement for the assets to be written off using the forms provided in the Rules to write off assets. To this end, the companies should start by defining the composition of the old physical assets.

Depending on the initial value of the property, the liquidation statement is approved either by the head of the JSC (if the value of assets to be written off is 25 million old mantas or less), by AzerSu, or by getting a relevant recommendation from the State Committee on the Management of State Property. The Rules also provide guidelines on asset disposal to the State Committee on the Management of State Property. It is important to note that the writing off of vehicles from the balance sheets of JSCs is separately covered by Article 2.7 of the State Committee on the Management of the State Property Rules.

10 6 Liquidation Strategy In this final section, we set out the essential elements of the strategy that can be used to liquid the JSCs assets and liabilities. The steps are as follows: Prepare the public in each town for the changes to come, using the specialist resources to be provided by the Loan Consultant (International Social Specialist, Community Participation Specialists) and the Town Water Users Associations, with special emphasis on the links between service quality, collection rates and tariffs Raise tariffs progressively as follows: – Initially to stabilize the finances of the JSCs during the transition period to ensure that each JSC has enough cash income to cover its operating costs before depreciation and tax, without adding to the value of its current assets and liabilities – Then significantly when construction starts and customers can see that the promised service improvements will soon become a reality – Significantly again once the new infrastructure becomes operational and customers start to be connected to it – Progressively thereafter until the JSCs’ revenue is sufficient to meet the debt service requirements of the corresponding ADB loan, as set out in the loan agreements Transfer the Accounts Payable and Accounts Receivable inherited from the former SuKanals from the newly created JSCs to the JSCs’ owner/principal shareholder or its nomine (see the draft forms of agreement given in Appendix A and Appendix B) Introduce a realistic allowance for bad debts into the JSC accounts Pursue through the court system payment of any subsequent outstanding amounts invoiced to private citizens and companies Negotiate with the Government of Azerbaijan for payment of any outstanding amounts owed to the JSC by state organizations and state-owned companies In consultation with the Loan Consultant, identify the existing Fixed Assets that will be replaced by the new infrastructure to be constructed under the ADB loan and adjust their values in the JSC balance sheet to reflect their remaining operating lives Similarly identify those remaining existing physical assets that will be retained or refurbished to form part of the future physical infrastructure and equipment of the JSC, and assess their current and, if necessary, refurbished value and remaining working lives Before the start of construction, adjust the capital values and depreciation rates of the existing physical assets to reflect the estimated value and remaining useful lives of the existing physical assets. Also make corresponding adjustments to shareholders’ equity, retained earnings and short term liabilities that will result from the revaluation of physical assets

11 As construction proceeds, and especially as the new infrastructure is commissioned, recognize the value of the new assets and the decommissioning of existing assets in the book value of the JSCs’ fixed assets and depreciation allowances Identify any customers, fixed assets, current assets, loans and other short term liabilities associated with areas currently supplied by the JSCs’ former SuKanal but outside the supply area of the new assets and prepare to transfer their ownership and operation from the JSCs to the JSCs’ principal shareholder or its nominee Identify the staff needed to operate any assets transferred to the JSCs’ principal shareholder or its nominee and negotiate the terms of their transfer from the JSC to that organization Identify existing or new staff to be trained by the contractor and the Loan Consultant in the maintenance and operation of the new infrastructure and arrange a timetable for their training Liaise closely with the Loan Consultant and the construction contractors on the connection of existing customers to the new water pipes and sewers to minimize disruption and coordinate all the effort needed to identify connections, pipe routes and customers On completion of the phasing out and decommissioning of the redundant physical assets, assign the selected operations staff to the Loan Consultant (or its sub-contractor) for training in the maintenance and operation of the new assets Transfer operation and control of the new assets from the Loan Consultant (or its subcontractor) to the JSC.

12 Appendix A Sample Agreement on Transfer of a Liability Agreement on Transfer of a Liability

[Town Name] town “____”______[year]

This agreement (the Agreement) is concluded between [Name, Surname], Director General of the Affiliate Joint Stock Company on behalf of “[Town Name] SuKanal” functioning on the basis of its charter hereinafter referred to as the First Party and the head [Name, Surname] of [the organization which takes over the responsibility] functioning on the basis of its charter hereinafter referred to as the Second Party.

1. The First Party hands over the execution of its obligations as stipulated in the agreement made on “____”______20__ [subject of the agreement] (the Liability) with an organization [name of the organization] (the Creditor) and the Second Party takes over the responsibility to fulfill these obligations.

2. The First Party passes the Liability in the amount and subject to the conditions that shall pertain at the time this Agreement becomes effective. The Parties define the amount of the Liability as _____ Azeri Manats.

3. The First Party shall provide the Second Party with the following legal documents related to the transfer of the Liability within 3 days after the signing of this Agreement by both Parties:

- agreement dated “____”______20__ - (other document) - (other document)

4. The First Party shall provide the Second Party with the all information regarding the Liability and the Creditor completely and in a timely manner.

5. The Second Party takes over the Liability of the First Party stipulated in the agreement dated “____”______20__ from the moment this Agreement comes into force and it is a debtor according to this Agreement.

6. The Creditor has given written consent to the transfer of the Liability by the First Party to the Second Party and such written consent is attached to and forms an integral part off this Agreement.

7. In the event that the First Party shall be in breach of Article 3 of this Agreement the First Party shall pay the Second Party a penalty in the amount of ______for each additional day it is in breach.

8. Both Parties shall abide by the provisions of this Agreement in accordance with the Civil Code of the Azerbaijan Republic.

9. This Agreement comes into force from the moment of its signing by both Parties.

10. This Agreement is prepared in three copies, which shall have equal legal force. One copy shall be given to each of the Parties and the third copy shall be given to the Creditor.

11. [Addresses, bank details and signatures].

14 Appendix B Sample Agreement on the Concession of the Right to Demand

Agreement on the Concession of the Right to Demand Settlement of Debts

[Town/City Name] “____”______[year]

This agreement (the Agreement) is concluded between [Name, Surname], Director General of the Affiliate Joint Stock Company on behalf of “[Town Name] SuKanal” functioning on the basis of its charter hereinafter referred to as the First Party and the head [Name, Surname] of [an organization which takes over the responsibility] functioning on the basis of its charter hereinafter referred to as the Second Party.

1. Subject of the agreement

1.1. The First Party transfers to the Second Party the right to require settlement of the amount owed to the First Party (the Debt) by virtue of the agreement dated “____”______20__ [subject of the agreement] between the First Party and[name of the Debtor] (the Debtor).

1.2. The amount and conditions of the Debt are defined by the agreement signed between the First Party and the Debtor.

1.3. The agreement between the First Party and the Debtor referred to in articles 1.1. and 1.2. of this Agreement is attached to and forms an integral part of this Agreement.

2. Rights and duties of the parties

2.1. The First Party shall provide the Second Party with documentary evidence of its right to require settlement of the Debt, as shown in the article 1.1. of this Agreement.

2.2. The First Party shall within 3 days after signing of the Agreement inform the Second Party about the transfer of the Debt to the Second Party and make the documents related to this matter official.

2.3. The First Party shall within 1 day after compliance notify the Second Party that the requirements of article 2.2 have been satisfied.

2.4. The First Party shall notify the Second Party of all outstanding debts of the Debtor to the First Party.

3. Responsibilities of the parties

3.1. The First Party shall be liable to the Second Party for any debt covered by article 1 of this Agreement that the Debtor is able to show is unfounded or improperly valued.

15 3.2. The First Party shall be liable for of the consequences of its failure to comply with the requirements of article 2.2. of this Agreement.

3.3. If either Party shall be in breach of its obligations under this Agreement it shall reimburse the other Party for any losses arising from such breach.

4. Final provisions

4.1. This Agreement shall become effective immediately upon signature of the Agreement by both Parties.

4.2. This Agreement may be changed with the consent of both Parties and any such change shall become effective upon signature of the change by both Parties.

4.3. No changes or deletions of the conditions of one or more articles of this Agreement shall invalidate the whole Agreement.

4.4. This agreement is prepared in 3 copies, which shall have equal legal force. One copy shall be given to each of the Parties and the third one will be given to the Debtor.

5. Settlement of disputes

5.1. The Parties shall make every effort to settle any disputes arising from this Agreement by negotiation.

5.2. In the event that negotiations between the Parties in accordance with article 5.1 do not reach a mutually acceptable outcome within a period of 21 days, then either Party may apply to a court to settle the dispute.

6. [Addresses and bank details of the Parties].

16 Appendix C Suggested Assets to be Written Off— Agdash and Goychay

THE MAIN ASSETS OF THE WATER AND SEWAGE SYSTEMS SUGGESTED TO BE WRITTEN OFF IN AGDASH TOWN

Date of Depreciated # Name of the main assetsputting into Unit Quantity value (AZN) operation 1 Agdash-Turyanchay water line N 1, reservoir 1963 p/m* 11,000 265,687 2Agdash-Turyanchay water line N 2 1963 p/m 11,000 229,808 3 Water line in the town D100-300 mm 1963 p/m 32,000 9,550 4 Artesian well 1963 unit 1 360 5 Chlorinating works LONO 100 1997 unit 1 380 6 Chlorinating works LONO 100 1997 unit 1 760 7 Artesian well/Yurjuva 1963 unit 1 26,670 8 Pump station 1998 unit 1 5,200 9 Water pump (Builiding N 80) 1990 unit 1 19 10 Water pump (near the department of finance) 1982 unit 1 19 11 Water pump, Yurcuva water reservoir 1982 unit 1 19 12 Water reservoir (Builiding N 76) 1982 unit 1 10 13 Deep water pump EUB-8-25-10 2002 unit 2 2,882 14 Deep water pump EUB-8 1963 unit 1 1,100 15 Sewage system of the town, pipes with the d. 100 mm - 500 mm 1963 p/m 18,000 21,465 16 Line 1 taking rain water away 1963 unit 1 11,700 17 Line 2 taking rain water away 1963 unit 1 22,580 18 Line 3 taking rain water away 1963 unit 1 22,940 19 Car Gaz-53 41-82 AQR 1985 unit 1 2,032 20 Car Gaz-53 32-65 AQR 1989 unit 1 2,563 21 Car Gaz-53 03-AC 080 1984 unit 1 3,073 22 Car Gaz-52 5201 15-31 AQP 1982 unit 1 2,443 23 2DTS-4 1982 unit 1 169 24 Tractor G-130 1981 unit 1 35,495 25 Clorinating building 1963 unit 1 62 26 Water pump KV-45-30 1998 unit 1 1,256 27 Water pump 3 KM - 100/32 1998 unit 1 1,978 28 Transformer TM-100/10-4kv 1998 unit 1 1,761 29 Sanitary protection zone, metal door and wire entanglement 1998 unit 1 476 TOTAL 672,457 * - pipe / meter

17 SUGGESTIONS ON ASSETS TO BE WRITTEN OFF FROM WATER AND SEWAGE SYSTEMS OF GOYCHAY TOWN

# Name of the main assets Date of putting Unit Qty. Depreciated Value into operation (000s of AZM) 1 Chlorinating building 1930 unit 1 405.00 2 Metallic door 1959 unit 1 3 Metallic fence 1959 m2 393 1,064.10 4 Water pool 195 m2 800 m3 1927 unit 1 411.20 5 Water pool 81 m2 400 m3 1932 unit 1 802.40 6 Pipe, metal D - 150 1930 p/m* 11,291 7 Pipe, metal D - 75 1935 p/m 580 75,600.90 8 Main water line, steel D - 500 mm 1969 p/m 5,700 157,147.70 9 Water collecting pipe, asbestos D-400 mm 1969 p/m 1,579 80,069.10 10 Water line in the town, cast iron D-100 mm 1973 p/m 12,838 147,416.00 11 Bearing water pipe between reservoirs D - 400 - 500 1981 p/m 1,055 93,444.60 12 Distributing water line, cast iron D - 100, 150, 200 1981 p/m 14,001 181,167.40 13 Pool, 188 m2 750 m3 1959 unit 1 3,833.10 14 Artesian well A. Kerim 16-41 1967 unit 1 5,774.10 15 Artesian well S. Vurgun 16-41 1966 unit 1 780.90 16 Artesian well N. Tusi 15-44 1968 unit 1 17 Artesian well H. B. Aliyev 16-47 1968 unit 1 4,005.50 18 Artesian well J. Afandiyev 16-51 1969 unit 1 5,362.70 19 Artesian well Chemical 16-53 1969 unit 1 6,254.70 20 Artesian well Z. Tagiyev 16-54 1969 unit 1 3,905.80 21 Artesian well, internat school 16-55 1970 unit 1 22 Artesian well Nasimi 16-56 1971 unit 1 3,681.60 23 Artesian well school N 9, 16-65 1971 unit 1 3,229.30 24 Artesian well Vagif 16-66 1977 unit 1 6,101.80 25 Artesian well M. Mushvig 16-90 1981 unit 1 5,002.30 26 Artesian well 20 Yanvar 16-45 1983 unit 1 2,673.30 27 Artesian well Repair works 1983 unit 1 17,835.90 29 Water line, Z. Najafov, Steel D - 200 mm 1981 p/m 620 11,553.00 30 Building made of stones with 2 rooms 1981 unit 1 3,784.20 31 Pool 50 m3 1981 unit 1 5,507.40 32 Pool 1000 m3 1981 unit 1 24,248.80 33 Pool 100 m3 1981 unit 1 8,359.20 34 Welding tool 4-2172 1976 unit 1 35 Excavator (Belarus) B-2621 1987 unit 1 4,481.00 36 Motor scooter TQA-200 1990 unit 1 1,363.60 37 Truck for irrigation ZIL - 130 1982 unit 1 7,667.00 38 Cargo carrier QAZ - 52 1985 unit 1 3,367.00 39 Electrical engine 45 kvt 1997 unit 1 3,166.90 40 Car 53 (Az-23-AC-227) 1989 unit 1 41 Pool 50 m3 1981 unit 1 1,673.20 42 Collector for fekal-fenal water, Natavan str. 1977 unit 11 48,006.80 43 Treatment works, collector 1977 unit/P/M 30,560.80 44 Sewage/collector, Natavan str. 1977 unit/P/M 1/1080 45 Length of internal lines of the channel 1977 p/m 1,200 52,463.70 46 Local street network 1977 unit/P/M 1 49,562.80

47 Channel collector up to the fence of the treatment works 1983 p/m 37,225 53,550.60 48 Typing machine (List Vica) 1991 unit 1 293.00 49 Building consisting of 4 rooms 1991 unit 1 34.30 50 Moskvich car IJ 2715-01401 1988 unit 1 25,994.90 TOTAL 1,141,607.60 * - pipe / meter

18 Appendix D Break Down of Accounts Receivable— Agdash and Goychay

Information on accounts receivable by Agdash JSC on 01 October, 2006

in new AZN Certain to be #NameDead debts Total collected

I Budget organizations in Agdash 1 Executive Power of Agdash district and town 11,381.32 0.00 11,381.32 2 Education Department of Agdash 4,027.72 392.00 4,419.72 3 Health Department of Agdash 3,382.00 202.00 3,584.00 4 Department of Culture of Agdash 1,567.72 489.00 2,056.72

Total for the local budget 20,358.76 1,083.00 21,441.76

II Budget organizations 1 Ministry of Education - units located in Agdash 1,000.44 430.00 1,430.44 2 Ministry of Health - units located in Agdash 629.86 205.00 834.86 3 Ministry of Internal Affairs - units located in Agdash 288.00 0.00 288.00 4 Prosecutor's Office - units located in Agdash 637.76 290.00 927.76 5 Ministry of Agriculture - units located in Agdash 519.72 49.00 568.72 6 Ministry of Ecology and Natural Resources - units located in Agdash 131.84 93.00 224.84 7 State Statistics Committee - units located in Agdash 0.00 21.00 21.00 8 Ministry of Emergency situation - units located in Agdash 0.00 7.00 7.00

Total for the budget of the Republic 3,207.62 1,095.00 4,302.62

Total for Budget organizations 23,566.38 2,178.00 25,744.38

III Service organizations 1 Agdash Postal Office 0.00 172.96 172.96 2 Agdash Telecommunication hub 0.00 70.00 70.00 3 Agdash Branch of Kapital Bank 266.10 20.00 286.10 4 Road Maintenance Office No. 14 1,989.60 0.00 1,989.60

Total for Service organizations 2,255.70 262.96 2,518.66

IV Offices and organizations liquidated in 1995-1996 2,647.74 0.00 2,647.74

Total for offices and organizations liquidated in 1995-1996 2,647.74 0.00 2,647.74

V Commercial organizations 1,387.56 805.05 2,192.61

Total for Commercial organizations 1,387.56 805.05 2,192.61

VI Population 62,214.56 14,392.00 76,606.56

Total for Population 62,214.56 14,392.00 76,606.56

GRAND TOTAL 92,071.94 17,638.01 109,709.95

19 Information on accounts receivable by Goychay JSC on 01 October, 2006 in 000s of AZM From which: Total accounts Name Certain to be receivable Dead debts collected I. Budget organizations 1. Ministry of Education - units located in Goychay 9,411.14 805.00 8,606.14 2. Ministry of Health - units located in Goychay 1,529.12 872.00 657.12 3. Ministry of Internal Affairs - units located in Goychay 5,078.40 38.00 5,040.40 4. Ministry for Emergencies - units located in Goychay 331.16 48.00 283.16 5. Ministry of Defence - units located in Goychay 3,772.54 3,772.54 6. Ministry of National Security - units located in Goychay 120.00 120.00 7. Ministry of Labor and Social Protection - units located in Goychay 122.00 22.00 100.00 8. Prosecutor's Office - units located in Goychay 492.00 100.00 392.00 9. Supreme Court - units located in Goychay 20.00 20.00 10. Ministry of Ecology and Natural Resources - units located in Goychay 195.12 195.12 11. State Committee for Refugees (to Azersu JSC) 58,302.52 6,777.16 51,525.36

Total 79,374.00 8,782.16 70,591.84

II. Budget organizations in Goychay 1. Executive Power of Goychay district 398.00 398.00 2. Health Department (Ministry of Health) 150,856.54 100.00 150,756.54 3. Boarding school (Ministry of Education) 14,926.96 150.00 14,776.96 4. Social Protection Centre 363.73 363.73 5. Executive Power of Goychay town 73,861.52 1,000.00 72,861.52

Total 240,406.75 1,250.00 239,156.75

Total for budget organizations 319,780.75 10,032.16 309,748.59

III. Industrial and commercial organizations

1. Azerenergy (Goychay PESH) 4,744.38 4,744.38 2. Weaving mill 50.00 50.00 3. Health services organizations 61.16 61.16 4. Chemical treatment 170.42 170.42 5. Agrotechservice enterprises 1,400.66 14.00 1,386.66 6. Transport enterprises 1,123.16 1,123.16 7. Different private enterprises 102.00 102.00 8. Car and motorcycle service centers 30.00 30.00

Total for Industrial and Commercial organizations 7,681.78 427.58 7,254.20

IV. Population 252,402.77 29,402.77 223,000.00

Total for Population 252,402.77 29,402.77 223,000.00

TOTAL 579,865.30 39,862.51 540,002.79

NORTH T +33 (1) 45 27 24 55 F +33 (1) 45 20 17 69 7 Rue Claude Chahu PARIS 75116 France

------www.castalia.fr

SOUTH T: +64 (4) 913 2800 F: +64 (4) 913 2808 Level 2, 88 The Terrace PO Box 10-225 WELLINGTON New Zealand

Appendix E: Terms of Reference for International Utility Advisor for the Nakhchivan JSC

Utility Management Advisor for Nakhchivan Joint Stock Company Terms of Reference

March 8, 2007

1 Project Overview and Objectives Water supply and sanitation services (WSS) in Nakhchivan City in the Nakhchivan Autonomous Republic (NAR) are provided by the “Nakhchivan Sukanalizasiya Open Joint Stock Company” (NOJSC). The NOJSC was established from a merger of the Water Pipes and Works Operations Office and the Sewer Lines and Works Operations Office of Nakhchivan City in October 2006. The Nakhchivan Autonomous Republic is separated from the rest of Azerbaijan by Armenia, and also borders Iran and Turkey. It has an area of about 5,500 km2 with a population of 350,000. Although part of Azerbaijan, Nakhchivan is an autonomous region and has its own government structure. The population of Nakhchivan City is approximately 80,000 people, of whom 45 percent are currently connected to the piped water supply systems (an estimated 3000 water supply connections). The water supply is unreliable and provides poor quality service. In addition, only about 41 percent of the population is connected to the sewerage system. Much of the sewerage system is ineffective, and there is no treatment of the collected wastewater. The Asian Development Bank (ADB) is providing a loan to the Government of Azerbaijan for the development of new WSS systems in three project towns: Agdash, Goychay, and Nakhchivan. In Nakhchivan the new works are expected to increase water supply coverage from 45 to 70 percent and sewerage coverage from 41 to 67 percent. The new works will include: Providing a new and reliable gravity fed trunk main from the Xiaxai to Didivar infiltration galleries Constructing four new reservoirs and refurbishing the existing six reservoirs and interconnecting them Improving the distribution system to reduce leakage and installing a ring main to service high-rise buildings by gravity Introducing metering and adding connections to expand piped water supplies Constructing a series of water stabilization ponds to treat sewerage to acceptable levels before discharging it and constructing new main and branch sewers. The construction and rehabilitation of the WSS system is essential to improve the quality of services provided to the residents of Nakhchivan City. However, the institutional capacity of the NOJSC to manage the water system is weak, and the concern is that, unless the utility can improve its business and management practices, the new system will not be sustainable. The ADB loan program also aims to support the institutional development of the NOJSC. The objective of the institutional development component is to help the NOJSC develop and adopt good utility management practices that will allow it to operate on a more sustainable basis and continue to provide good quality service to customers over the longer term. The focus of this activity will be to provide support for the development of good utility management practices. This will include: Advising on the development and implementation of an improved financial management system, including providing training budgeting and reporting Advising on the improvement of the billings and collections system to increase the level of collections of tariff revenue Advising on the restructuring of the organization to improve efficiency and communication among the management team and the operations and administration staff Advising the management team on improving day-to-day management of the water utility Advising on the preparation of Corporate Development Plans Advising on the development of customer service program, and Developing and implementing a capacity building program for the utility management and staff. The State Committee for Urban Planning and Architecture of the Nakhchivan Autonomous Republic (SCUPA) will engage an individual consultant to provide utility advisory services for the NOJSC over a period of 12 months. 2 Scope of Work The objectives of the Utility Advisor are to advise the NOJSC on the development and implementation of good utility practices and to increase the capacity of the management team to effectively manage the NOJSC. The focus of this consultancy is on the development of business and management related utility practices and systems relating to financial management, customer service, and organizational development. The specific activities of the Utility Advisor are as follows:

2 Financial Management NOJSC currently uses a manual accounting system for processing all transactions. The General Ledger is posted and balanced manually on a quarterly basis, and all reports are produced manually. It is envisioned that the NOJSC would in time adopt a computerized accounting system. The Utility Advisor will undertake the following activities: Providing recommendations on the improvement of the financial management system to provide a better system of financial control and reporting. The recommendations should include but not be limited to improving the following systems: – Financial controls – External reporting to Shareholders and the Government – Internal reporting for use by the NOJSC management team – Performance reporting to compare planned performance with actual performance and to report on the variances Developing a strategy with a time-bound action plan for the NOJSC to adopt these recommendations and develop the capacity of the financial management staff to implement improved financial management practices Developing, through consultation with NOJSC, management guidelines and procedures for financial management that can be used by the NOJSC’s financial and accounting staff Providing training to the NOJSC management and financial and accounting staff on, at a minimum, the following topics: – Principles of good financial management and accounting – The implementation of the guidelines for financial management of the NOJSC – Preparation and use of financial reports for management purposes – Developing budgets and reporting against budgets – Developing procedures for cash receipts and payments and the preparation of Cash Flow Projections – Performance reporting and developing performance targets for financial and operational matters – Adoption of accrual accounting systems and procedures – Developing the Chart of Accounts Advising on the development and installation of a computerized financial management system, and Providing advice on the setting of tariffs.

3 Billing and Collections The collection ratio for NOJSC’s domestic customers is estimated at 54 percent for water supply and 70 percent for wastewater. The NOJSC does not currently issue written monthly water and sewerage bills to their customers. Customers receive verbal advice of the monthly amount outstanding and are expected to pay the collectors or pay to the bank or post office. This low collection rate contributes to the financial problems experienced by the NOJSC. Because much of the low collection rate is related to the poor quality of service that customers currently receive, this should improve when the new systems are in place. However, collections will continue to suffer without an improved system of billing and collections. The Utility Advisor will undertake the following activities: Advising on and supporting the development of a system for providing customers with monthly invoices for their water supply and sewerage services that at a minimum provide information on monthly consumption, amount due, previous amounts paid, and any balance outstanding through the installation of a computerized billing system Advising on and supporting the development of an improved collections system appropriate for the NOJSC Advising on the development of improved reporting on billing and collections Advising on the development of policies and practices for disconnecting customer for non-payment. Organizational Structure and Development The NOJSC has been created through combining the former water services department and the sewerage department. This has created some overlap in functions, and there is a need to restructure the NOJSC to create a management team, clear departmental responsibilities, and improved supervision and reporting. Recommendations were made under the ADB Technical Assistance project “Institutional Strengthening of Water Supply and Sanitation in Secondary Towns” for the organizational development of the Joint Stock Companies in the project towns including Nakhchivan. These recommendations should be taken into account. The Utility Advisor will undertake the following activities: Advising the NOJSC on an improved organizational structure to reflect its core activities and support its implementation by the Management Team Assisting the NOJSC in preparing job descriptions for all NOJSC management and staff, modifying and updating the job descriptions prepared by the TA team as appropriate, and Developing reporting procedures to ensure proper flow of information from department leaders and management to staff and from staff to management, and Providing advice on responsibilities of the different management levels of the organization.

4 Day-to-day Management Day-to-day management is currently undertaken on an ad hoc basis. More formalized procedures with regular meetings and defined activities would help to improve the overall management of the NOJSC. The Utility Advisor will undertake the following activities: Advising the Director on the development of a Management Team and good practices for increasing communication among the Management Team, including the introduction of delegated authority to allow different levels of the organization to make decisions in accordance with the Board’s policies Advising the Board of Directors and the Director on reporting and communication strategies between the Director and the Board of Directors Providing ad hoc advise to the Director and members of the Management Team on day-to-day management activities Assisting in the development and implementation of procedures to support ongoing management activities. Preparation of Corporate Development Plans The NOJSC is required to prepare a Corporate Development Plan on an annual basis. This Corporate Development Plan covers operational, financial, budgeting, customer service, asset management, and human resources activities. The Utility Advisor will undertake the following activities: Conducting capacity building on the preparation of the Corporate Development Plan, including on the planning process and the purpose of the Corporate Development Plan Assisting with and facilitating the development of the Corporate Development Plan, and Providing advice on annual performance monitoring to be carried put on the Plan. Customer Service Program To ensure the long term sustainability of NOJSC, it is important to develop a good customer service program that enables customer feedback and a system for effectively responding to customer complaints. An objective of the institutional reform process is to help the NOJSC develop a more customer focused program that is responsive to customer complaints as well as improve service levels and delivery. The Utility Advisor will undertake the following activities: Advising and supporting the development of an effective customer complaints system that records all customer complaints and provides for follow-up and resolution of customer complaints. This system should include a monthly reporting mechanism to track customer complaints by type of complaint, time taken to resolve the complaint and action taken to resolve the complaint, and

5 Advising on the development of a customer outreach program that ensures that customers receive timely information on issues related to the water supply and sanitation services through community meetings and the improvement of public relations. Capacity Building and Training A main objective of this assignment is to build the capacity of the NOJSC management and staff. The Utility Management Advisor will be required to develop a capacity building program during the first month of the assignment and implement that program by conducting regular training sessions to develop the capacity of the NOJSC management and staff in the topic areas covered by these Terms of Reference. Capacity building should be a mix of formal training sessions, short training sessions on specific topics, and on-the-job training. The training should provide the participants with an understanding of the basic principles of good utility management as well as the practical application of the recommended practices to be implemented by NOJSC. In the last month of the Advisor’s contract, the Advisor shall prepare a training program for the NOJSC for the following year, identifying where applicable internal and external resources to support the training program. 3 Consultant Qualifications The Utility Advisor should have at least 10 years of experience in utility management, of which at least 5 years should be in the water sector. The Advisor should, in particular, have experience in developing and managing financial management and human resource development systems. In addition, it is desirable that the Advisor have experience in the following: Developing or managing billing and collections systems Developing or managing customer service programs Day-to-day utility management Developing asset management programs Training.

Appendix F: Comparison of TA TOR and Activities Undertaken during the TA

Table F.1: Clarification and amendment to Castalia’s scope of work

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase)

1. Establishment of JSCs

(i) Formation, registration, and The JSCs for Agdash and Suggest amendments to Charters as Agdash and Goychay: establishment of JSCs within Goychay have been registered needed for Agdash and Goychay. This The Adgash and Goychay JSCs were existing legal framework. using the Ganja/Sheki model will include advice on amendments already registered. We suggested charter. Modify task to necessary to address the loan revisions to the Charters and prepared a recommend amendments to requirements. The situation for NAR is revised version of the charter charters. still to be determined. incorporating these revisions for AzerSu. No action has been taken by AzerSu to amend the charter. Nakhchivan: Following a visit by ADB and the team in July 2006, Nakhchivan prepared a charter and registered the JSC (no input from the team was requested). Subsequently, we reviewed the Charter and recommended revisions to make it consistent with the applicable Azeri law and project requirements. The new charter was accepted in totality and has been registered by Nakhchivan. The revised Charters for both were provided in our discussion paper on Recommendations on the Governance Structure for the Joint Stock Companies of Agdash,

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) Goychay, and Nakhchivan.

(ii) Development of JSCs

Corporate charters Revise to amend charters as Suggest amendments to charters as We prepared revised charters for Agdash above needed and Goychay and for Nakhchivan as describe in 1(i).

structures, functions, These structures, functions, Suggest amendments to charters as The structures, functions, authorities, authorities, duties, authorities, duties, obligations, needed duties, obligations, and responsibilities obligations, and and responsibilities will be are set out in the Charters. In particular, responsibilities, and outlined in the Charter the revisions focused on clearly defining the structure, functions, and authority of the Shareholders, the Board of Directors, and the Management Team.

corporate development JSCs are required to develop 3 Facilitate the development of the first We prepared a discussion paper on plans in consultation year rolling corporate corporate development plan. This plan Corporate Development Plans that with MC development plan. is due at the end of Year 2 of the discussed their purpose and provide an project. annotated outline to be used by the JSCs in developing their plans.

composition of board of The composition of the board of Suggest amendments to charters as The composition, functions, duties and directors and functions, directors and functions, duties needed obligations of the Board of Directors duties and obligations and obligations will be outlined in were suggested in the revised Charters. the charter

participation of Municipality participation will be Suggest amendments to charters as The role and level of participation of the municipalities outlined in the charter needed Municipalities was defined in the revised Charters, and described in the Interim Report and discussion paper on

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) Recommendations on the Governance Structure of the Joint Stock Companies of Agdash, Goychay, and Nakhchivan.

(iii) Development of JSCs We understand this to mean the Proposed strategy was to: We provide an analysis of the existing standard business procedures that will be used for business process (including financial Document and analyze existing procedures the JSC to operate the WSS management systems, billings and business processes business including financial collections, and complaints management, billing and Document proposed future business management) and our proposed collections, personnel process requirements recommendations for improvement in management. Develop transition strategy and Recommendations on Business Accounting TOR for Management Contractor to Systems/Procedures for the JSCs in the Project assist in development of business Towns. The recommendations for procedures improvements to the financial management and billings and collections system involved the adoption of a computerized financial management system. The discussion paper also includes a Specifications Document for the Financial Management System Computerization Requirements. We did further work to develop the recommendation that the JSCs develop an improved complaints management system. This is documented in the discussion paper: Recommendations on Customer Service and Complaints Management.

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase)

(iv) Relationship of JSCs with We understand this to be the No change We discuss this in Recommendations on the AzerSu, local executive structural/institutional Governance Structure for the Joint Stock authorities, and other state relationships between the JSCs Companies of Agdash, Goychay, and authorities to maintain the and other organizations. As Nakhchivan and set out in the Charters. autonomy of JSCs in appropriate this may be set out in operations and management, the Charter.

staffing, management We understand this to be the Proposed strategy was to: We prepared a discussion paper on structure, and human overall staffing and human Recommendations on Organizational Structure Document and analyze existing resource strategy resources strategy for the JSC and Human Resources Development for the organizational structure including operations staff. JSCs in the Project Towns which looked at Document proposed future existing practices and made We suggest that our role be to organizational structure and recommendations on improvements of propose the organizational procedures the organizational structure and human design, staffing arrangements and Develop transition strategy for resources. strategy that would be reviewed staffing procedures and finalized by the Management This work was further developed to Contractor for agreement with review the current staffing arrangements, the JSC. recommend required staffing numbers, recommend an organizational structure for the JSCs, and provide draft job descriptions for senior and middle management positions.

(v) Relationship between JSC This will be defined in the No change We discuss this in the discussion paper with MC transaction strategy and set out in Recommendations on Management Contract the Management Contract Design and further developed in the Explanatory Note on the Management Contract and Tender Documents for the Agdash and Goychay Open Joint Stock

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) Company.

(vi) Relationship with proposed The regulator has not yet been No change We have recommended that the regulatory office established and it unlikely to be in Management Contract be responsible

the near future. We will review for providing tariff and regulatory advice the various regulatory functions and support and incorporated this and incorporate these as required requirement in the draft contract. This in the Management Contract would include preparing tariff proposals (once approved by the respective Boards) for submission to the Tariff Council.

(viii) JSC staff training and Who should be trained at what We defined our tasks under this activity Because of the delays with overall development type of training is required must as: Project, it was difficult to constructively be defined. engage the JSCs in institutional reforms. Conduct training for the Boards Therefore, we focused our (once established) on its role and workshops/training sessions mostly on functions discussing our proposed Conduct training for the Board and recommendations with JSC management Senior Management on the and staff. With regard to the identified Management Contract and contract tasks: supervision Identify management and The Boards were not appointed operational staff training and during the timeframe of our TA development needs for the proposed The Boards were not appointed future business procedures during the timeframe of the TA. We Define training obligations of the conducted two workshop/training Management Contractor and sessions that discussed the incorporate them into the Management Contract Management Contract We conducted sessions that

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) discussed the organizational structure and staffing requirements for the JSCs We developed a recommended training program to develop the institutional capacity of the JSCs We have defined the training obligations of the Management Contractor and incorporated them into the draft contract. This is included in Schedule B (Services) and Schedule C (Know-how Transfer and Training) of the draft contract. (ix) Relationship with Town Our focus will be on defining the No change We focused on two activities for this Water Users’ Associations institutional roles for consumer task. First, we prepared a discussion (TWUA), ways of consumer participation and defining how paper on Recommendations on the participation, and customer participation and rights Development of Town Water User Associations recognition of consumer will be reflected in the for the Project Towns. rights in providing WSS Management Contract Second, we made developing a services Customer Service program and important focus of the Management Contract. This is reflected in the contract and discussed in the Explanatory Note on the Management Contract and Tender Documents for the Agdash and Goychay Open Joint Stock Company.

(x) Coordinate with project No change We discussed the projects with KfW. management office of KfW- The KfW projects are proceeding

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) funded projects in Ganja forward but they have taken a different and Sheki on relevant issues approach and have not yet prepared the Management Contract for their project towns.

2. Liquidation of SuKanals

(i) Closure and liquidation of The SuKanals have been Delete this task. It is redundant since No action required as the JSCs had the SuKanals within the transformed into the JSC. The the JSCs have already been transformed already been transformed into JSC based existing legal and treatment of the existing assets into the JSCs on conversion from the SuKanals. administrative frameworks and debts is still under discussion. Follow up and clarification is required for these matters (see Task 2(ii))

(ii) Personnel management We understand that the staff has Revise to preparation of high level See discussion of work undertaken in strategy and effectively been transferred to personal management strategy to task 1(iv). Because the Management administrative AzerSu and will be to the JSC. prepare for Management Contractor to Contractor will not assume control of arrangements for Clarification is required. There is review and finalize. the JSC staff, the focus of our work was SuKanal closures limited scope for staff on improving the organizational This task would be handled as part of retrenchment at this point in structure and human resources policies preparing a human resources strategy time. We propose to develop a and procedures for the JSCs. Improved for the JSCs. Delete from this section high level strategy but that the human resources procedures will benefit and refer to activities in task 1(iv). actual staff management process the Management Contractor be handled by the MC.

Public awareness We suggest that there be one Delete from this section and See comment in task 4(v). campaign public awareness campaign as set consolidate below out below. This reference should be deleted as the SuKanals no

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) longer exist.

(iii) Old assets, debts and We understand that there are two No change See below obligations of SuKanals parts to this: 1) the financial treatment of assets and debts on the JSC/AzerSu accounts and 2) the physical decommissioning of assets

Financial treatment of We see this as part of our scope. No change We recommended an approach to write assets and debts This will include advice to help off the assets that would be AzerSu and CSAC to address the decommissioned once the new water loan requirement that the JSCs and sewerage systems are operational. don’t retain debts or liabilities With regard to current assets from the SuKanals. It will likely (uncollected invoices), we analyzed these include an analysis of the existing and divided them into “dead debts” assets and debts and preparation (those that cannot be collected) and of decrees from AzerSu and those that could still be collected, and NAR for the GoA to write-off recommended strategies for dealing with old assets and debts. both categories.

Physical We will assist the Loan No change Because of the Project delays, this decommissioning of Consultant with identifying the activity could not be undertaken. It will assets assets that will be be the responsibility of the Loan decommissioned. We will also Consultant to asset with the physical work with the Loan Consultant decommissioning of the assets. to prepare a plan for gradually phasing in new assets and decommissioning old assets. Actual decommissioning should

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) be done by the Loan Consultants during the asset design/construction phases and the phase in of the new assets.

(iv) Interim arrangements for All SuKanal staff have been taken Advise on arrangements as needed Because of the delays in the Project, this operation of WSS facilities over by the JSCs and are activity could not be undertaken. in Agdash & Goychay operating the WSS systems. during the construction These arrangements will continue period until the Management Contractor is in place

Agreement on a temporary We understand that the assets Advise as needed No advice needed as the JSCs have fully transfer of assets to JSC will be in the care of the JSCs so assumed responsibility for operating the project implementation units there is no need for any transfer WSS systems. It is no longer envisioned of assets that the PIUs will operate the systems.

Gradual phasing in and This should be the responsibility Delete (see comments in iii above) decommissioning of the old of the Loan Consultants in the assets design and construction phase

3. Transaction Advisory Services

NEW TASK Scenario Assessment and Propose and discuss various Add this task We proposed different options for the Description of Management options for the contract. contract in our Inception Report and Assistance Contract discussed these with AzerSu and ADB. It was decided to continue with the Discuss options with the Management Contract. Government and the ADB and agree an approach

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase)

NEW TASK Market Sounding Seek feedback from the market Add this task We prepared a market sounding and about the Management Contract reported the results in the discussion paper Recommendations on Management Contract Design.

(i) Develop arrangements for No change We have recommended a transaction the performance-based MC strategy for the Management contract. in line with the proposed This is documented in our discussion project concept and the paper Recommendations on Government’s preference Management Contract Design and the for the medium term second Interim Report Explanatory Note on the Management Contract and Tender Documents for the Agdash and Goychay Open Joint Stock Company.

(ii) Develop the detailed No change We have developed Performance measurable and verifiable Measures and Targets for the performance-based Management Contract and proposed a indicators and mechanisms remuneration structure that includes an for an incentive-based incentive payment. This is set out in the remuneration structure to draft Management Contract and ensure maximum efficiency documented in the second Interim gains Report Explanatory Note on the Management Contract and Tender Documents for the Agdash and Goychay Open Joint Stock Company.

(iii) Prepare the necessary No change We have prepared the bidding bidding documents for documents including the draft Management Contractor Prequalification document, the draft

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) Request for Proposals and the draft contract.

Help identify potential No change As part of the market sounding, we bidders and their pre- helped to identify potential bidders. qualification In September 2007, we agreed with ADB that we would not undertake the task of supporting the actual transaction process for the Management Contractor because of the mismatch between the time frame for our contract and when the Management Contractor will be engaged.

Evaluation of award of No change See comment above. Management Contractor

(iv) Incorporate lessons learned No change We have reviewed the experiences with and experience from WSS other Management Contracts and projects with participation incorporated the experiences in the draft of a performance MC in contract. Central Asia, CIS and worldwide

(v) Incorporate capacity No change An important part of the required building activities of MC services of the Management Contractor into the contract design, is training/capacity building. This is built public awareness and into the scope of services. The education campaign on WSS Management Contractor is also required tariff increases, payment to develop and implement a public

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) culture, and water awareness program that include conservation education about water conservation and water tariffs.

(vi) Include a review option in No change The Management Contract may be the final year of MC extend or deepened with agreement between the parties.

4. Support to Project Management and Public Awareness Campaigns

(i) Assist with establishment of We proposed that we have a role Assistance to PMU until Loan Because of the delays in the Project, PMU and developing PMU in supporting the establishment Consultant is mobilized both EAs have really only established procedures, of the PMU until the Loan the PMUs in name only. Support has Consultant is mobilized. After been offered to help the PMUs to that our role would be phased engage the Loan Consultant; however, out the EAs have informed us that support is not required.

including preparation of No change We have revised the draft PAM the Project provided to us by ADB to reflect 1) Administration Manual change in the Project and 2) changes in ADB guidelines and procedures. Some of the proposed changes are subject to changes that have been proposed in the Loan Agreement to reflect the decisions made by the GoA on the establishment of the JSCs.

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase)

(ii) Assist with developing This is a significant larger task No change We prepared the draft Request for detailed terms of reference that initially agreed with ADB. It Proposals for the Loan Consultant and for loan consulting services should be noted that this task provided the EAs and ADB with a and their procurement requires more resources than revised Terms of Reference. originally anticipated. This is further complicated by the potential requirement for separate contracts for the two EAs.

(iii) Identify training needs of As identified above, there is a Provide inputs to training needs plan As the Loan Consultant has not been the PMUs/PIUs staff and need to agree on who needs to be prepared by the Loan Consultant selected, this training plan has not been coordinate with ADB on trained on what. Much of the developed. In our Final Report, we training arrangements training will related to the tasks identify the types of training the of the Loan Contractor and the PMU/PIU staff will need to fulfill the Management Contractor. This requirements of the PAM. task will require careful coordination with the Loan Consultant.

(iv) Assist with other project This task could take considerable Our deputy team leader, Mr. Rakif implementation issues time and resources. To ensure Khojayev, provided some ad hoc (procurement, management, that we manage this assistance support to the AzerSu EA during the review of detailed within the existing number of project. Because of delays of the EAs in engineering designs, cost days and budget, we propose to short listing the Loan Consultants, there estimates, construction allocate a specific number of was little activity on the Project. In supervision, implementation ‘Project Management mentoring addition, at ADB’s request, Mr. schedule, relationships with assistance’ days to this task. We Khoyayev prepared an analysis of some MC, public awareness will track our time spent assisting options for advancing some work in the campaign, etc). in this way until the total number project towns; however, this work was

TOR Tasks TOR Clarification Comment Agreed Change to TOR (Inception Activities Undertaken Phase) of days has been expended. We later suspended at the request of ADB. propose to ‘budget’ a certain number of project management assistance days per month to ensure that we do not run out of assistance time before the project is over.

(v) Assist with preparation and We propose to design a public No change. We proposed to develop At ADB’s request, this activity was implementation of public awareness and implement a public awareness suspended and it was agreed to remove

awareness and education campaign/communications campaign. this activity from our Terms of campaigns on WSS tariff strategy to explain the program Reference. Given the delays in the civil increase and water objectives and the services that works and the uncertainty about the conservation, and will be provided. This will include status of the loan, it was agreed that it engagement of MC; informing community about the was too early to focus on public coordinate closely on these upcoming WSS works, the awareness, and in fact any sort of public issues with loan consultants changes in the JSC, the awareness campaign could raise and TWUAs Management Contract, the tariff expectations and potentially negatively increases. We will design the impact the project. strategy and hire a Public Relations firm to implement the strategy

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