Validation Report August 2020 Azerbaijan: Water Supply and Sanitation Investment Program (Multitranche Financing Facility and Tranche 3) Reference Number: PVR-691 Project Number: 42408-013 and 42408-043 MFF Number: 0032 Loan Number: 3079 ABBREVIATIONS ADB – Asian Development Bank Azersu – Azersu Joint Stock Company DMF – design and monitoring framework EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return GAP – gender action plan IEE – initial environmental examination IPMC – international project management consultant MFF – multitranche financing facility PCR – project completion report PMO – project management office PPER – project performance evaluation report RRP – report and recommendations of the President SAWMC – State Amelioration and Water Management Committee TWUA – town water users’ association WSS – water supply and sanitation WWTP – wastewater treatment plant NOTE In this report, “$” refers to United States dollars. Director General Marvin Taylor-Dormond, Independent Evaluation Department (IED) Deputy Director General Veronique Salze-Lozac’h, IED Director Nathan Subramaniam, Sector and Project Division (IESP) Team Leader Srinivasan Palle Venkata, Senior Evaluation Specialist, IESP The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of IED management, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. The final ratings are the ratings of IED and may or may not coincide with those originally proposed by the consultants engaged for this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, IED does not intend to make any judgments as to the legal or other status of any territory or area. PROJECT BASIC DATA Project number 42408-033 PCR circulation date 31 October 2019 Loan number 3079 PCR validation date Aug 2020 Program name Water Supply and Sanitation Investment Program (Multitranche Financing Facility and Tranche 3) Sector and subsector Water and other Urban policy, institutional and capacity development urban infrastructure Urban sewerage and services Urban water supply Strategic agenda Environmentally sustainable growth Inclusive economic growth Safeguard categories Environment B Involuntary resettlement B Indigenous peoples C Country Republic of Azerbaijan Approved Actual ($ million) ($ million) ADB financing ADF: 0.00 Total project costs 813.39 663.56 ($ million) OCR:600.00 Loan2571 75.00 74.20 2842 300.00 299.71 3079 150.00 149.02 Project 4 75.00 0.00 Borrower 2571 25.00 21.37 2842 110.00 78.51 3079 53.39 40.79 Project 4 25.00 0.00 Beneficiaries 0.00 0.00 Others 0.00 0.00 Cofinancier Total cofinancing 0.00 0.00 Approval Date Effectiveness 2571 14 Oct 2009 date2571 16 Jan 2010 17 Feb 2010 2842 22 Dec 2011 2842 6 Jul 2012 20 Sep 2012 3079 5 Dec 2013 3079 26 Feb 2015 28 May 2015 Signing Date Closing date 2571 17 Dec 2009 2571 30 Jun 2013 8 Nov 2017 2842 6 Jun 2012 2842 30 Jun 2017 4 May 2018 3079 28 Nov 2014 3079 31 May 2018 10 Dec 2018 Project Officers Location From To L. Zheng ADB HQ Oct 2009 Mar 2010 V. Padmanabhan ADB HQ Apr 2010 Feb 2013 S. Joshi ADB HQ Feb 2013 Mar 2014 L. Shen ADB HQ Apr 2014 Jan 2017 F. Huseynbeyov AZRM Jan 2015 Nov 2017 S. Jafarova AZRM Jan 2017 May 2018 IED review Director N. Subramaniam, IESP Team Leader Srinivasan Palle Venkata, Senior Evaluation Specialist, IESP* ADB = Asian Development Bank, ADF = Asian Development Fund, AZRM = Azerbaijan Resident Mission, HQ = headquarters, IED = Independent Evaluation Department, IESP = Sector and Project Division, OCR = ordinary capital resources, PCR = project completion report. *Team members: H. Hettige (Quality Reviewer), F. De Guzman (Senior Evaluation Officer), W. Zhou and D. Gibson (Consultants). 2 I. PROJECT DESCRIPTION A. Rationale 1. Azerbaijan’s water supply and sanitation (WSS) system was old and generally in a poor state of repair. Secondary towns faced particularly critical situations characterized by missing or dysfunctional water treatment facilities and inappropriately sized and dilapidated distribution network. As a result, most households had no access to safe drinking water, despite a piped- network coverage rate of 83%. The sewerage system in secondary towns was also in poor condition, with a mere 32% coverage in urban areas other than Baku. Poor sanitation and leaking sewers created serious health risks and environmental hazards. 2. With improving access to basic services identified as a strategic priority,1 the government set targets of 100% coverage by 2015 and 24-hour water supply in Baku, and 80%–85% coverage in secondary towns and villages. In view of the magnitude of required investments in WSS improvements and the scale of related policy reforms, the government recognized the need for sequenced interventions linked with reforms for improving WSS service delivery in secondary towns and requested ADB to finance part of its investment program. 3. ADB approved a multitranche financing facility (MFF) in September 2009 for the WSS Investment Program up to $600 million from ADB's ordinary capital resources.2 The program aimed to improve public health and environment in the participating towns with about 500,000 residents, through enhanced coverage, continuity and quality of water supply and wastewater disposal. It proposed five tranches, and adopted a long-term and holistic approach to improve facilities, institutions, and capacities, which would collectively contribute to enhanced service delivery. The use of MFF modality was justified as it allowed an 8-year partnership between ADB and the government. A combination of interrelated physical and non-physical investments in a phased manner was backed by a clear strategy and policy framework. An MFF also had lower transaction costs and enhanced the possibility for a long-term partnership more than in a stand- alone project, and for relatively large investments as compared to a sector loan. More so, it had broader coverage than a program loan, which could only focus on policy reforms.3 4. Following the approval of tranche 1 in 2009 and tranche 2 in 2011, tranche 3 under the investment program was approved in December 2013 for $150 million. It aimed to improve the WSS infrastructure in Agjabedi and the peri-urban areas of Nakhchivan,4 benefiting over 70,000 residents. ADB prepared three project completion reports (PCRs), two tranche-specific PCRs and one PCR for the facility and tranche 3.5 The latter is the subject of this validation. Two PCRs for tranches 1 and 2 were validated separately.6 1 Government of Azerbaijan. 2008. State Program on Poverty Reduction and Sustainable Development in the Republic of Azerbaijan for 2008–2015. Baku; and Government of Azerbaijan. 2009. State Program on Socio-Economic Development of Regions of the Republic of Azerbaijan for 2009–2013 Years. Baku. 2 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to the Republic of Azerbaijan for the Water Supply and Sanitation Investment Program. Manila. 3 ADB. 2019. ADB's Multitranche Financing Facility, 2005–2018: Performance and Results Delivered. Manila. 4 The peri-urban areas covered by this tranche included Qaracuq, Qarahanbeyli, Bulgan, Haciniyyet and Tumbul, located south and southwest of Nakhchivan city. 5 ADB. 2019. Completion Report. Azerbaijan: Water Supply and Sanitation Investment Program (Tranche 1). Manila; ADB. 2019. Completion Report. Azerbaijan: Water Supply and Sanitation Investment Program (Tranche 2). Manila; and ADB. 2019. Completion Report. Azerbaijan: Water Supply and Sanitation Investment Program (Multitranche Financing Facility and Tranche 3). Manila 6 Independent Evaluation Department. 2020. Validation Report: Water Supply and Sanitation Investment Program in Azerbaijan (Tranche 1). Manila: ADB; and Independent Evaluation Department. 2020. Validation Report: Water Supply and Sanitation Investment Program in Azerbaijan (Tranche 2). Manila: ADB. 3 B. Expected Impacts, Outcomes, and Outputs 5. As stated in its design and monitoring framework (DMF) and the PCR, the investment program’s expected impact was improved public health and environment in participating towns. Its intended outcome was improved coverage, continuity and quality of water supply and wastewater disposal in participating towns. The outputs underpinning its outcome were in three components: WSS infrastructure development, institutional effectiveness, and establishment of a program management facility. Component 1 consisted of four parts involving rehabilitation, replacement and expansion. The first two parts dealt with piped-water supply systems, water works, and treatment facilities and sewerage networks. The third was concerned with developing and implementing a water quality monitoring system, while the fourth with constructing new wastewater treatment plants (WWTPs). Component 2 had six parts: (i) improving institutions for service delivery, (ii) developing capacity for better system planning, operation and maintenance, (iii) enhancing cost recovery through metering, billing and collecting tariffs, (iv) increasing efficiency for timely processing of effective WSS projects, (v) finalizing twinning arrangement with an external WSS utility to support capacity development, and (vi)