PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2811 Water Supply Project Project Name Public Disclosure Authorized Region EUROPE AND CENTRAL ASIA Sector Water supply (60%);Sanitation (40%) Project ID P096213 Borrower(s) GOVERNMENT OF REPUBLIC OF AZERBAIJAN Implementing Agencies Azersu Joint Stock Company State Amelioration and Water 67 Tbilisi Avenue, 370112 Management Agency of Azerbaijan Nakhchivan Tel: 9412-300131 Fax: 9412-983814 [email protected] Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Public Disclosure Authorized Date PID Prepared February 14, 2007 Date of Appraisal March 7, 2006 Authorization Date of Board Approval June 5, 2007 Country and Sector Background 1. The Republic of Azerbaijan is located on the western coast of the Caspian Sea. It borders Turkey to the west, Armenia to the north west, Russia to the north, and Iran to the south, and has a surface area of about 86,600 square kilometers. About 52 percent of the country’s population of 8.2 million live in urban areas, and about one quarter of them (2.1 million) live in Baku, the Public Disclosure Authorized capital city. 2. Azerbaijan has one of the fastest growing economies in the Commonwealth of Independent States (CIS). Its GNP per capita rose to US$1,190 in 2005 from a post independence low in 1995 of US$390 per capita. This rapid growth is mainly attributed to positive developments in the oil industry, which accounts for almost one third of Azerbaijan’s GDP. Growth in non-oil output has also risen since 1999, with an average annual growth rate of more than 10 percent. The Government is seeking to build upon the opportunities provided by its oil revenue, as well as to put in place measures that will ensure growth in the non-oil economy to ensure that the full benefits of the economic growth reach all sectors and segments of society in order to attain a sustainable reduction in poverty. 3. Azerbaijan inherited a relatively extensive water supply system from the Former Soviet Public Disclosure Authorized Union (FSU). About 95 percent of the population in Baku and about 83 percent of those living in secondary cities and small towns are connected to piped water supply. Whilst coverage appears generally high in comparison to most other countries of similar income, the quality of infrastructure and services has deteriorated severely over the years as a result of lack of investment and deferred maintenance. In many secondary and small towns water treatment facilities are largely dysfunctional or lacking completely, so that the population in these towns does not have access to safe water supply. In addition, almost everywhere in the country piped water supply is unreliable, and is often less than 12 hours a day. Centralized piped water supply systems are rare in rural areas, and less than 33%1 of the rural population has access to piped water supplies. 4. About 55 percent of Azerbaijan’s population has access to improved sanitation facilities. Access to sanitation facilities in urban areas is higher than in rural areas, with coverage estimated at 73 percent and 36 percent, respectively2. The sewerage network in Baku serves about 78 percent of the population3, although only about 50 percent of wastewater in the area is treated.4 Sewerage coverage in other urban areas is only about 32 percent, and a minor proportion of the sewage undergoes any treatment before disposal. 5. Rural areas primarily depend on on-site sanitation. There is insufficient control by the public health department on the location and condition of on-site sanitation facilities, and there is no effective regulation of the emptying trucks which must periodically remove the sludge, increasing the risk of clandestine and unsafe discharge of this matter to the environment. For both public health and environmental reasons, it is imperative that faecal sludge from these facilities be treated before it is discharged into the environment. Key Issues in WSS: • Deterioration in physical condition of Water Supply Infrastructure: The physical condition and performance of infrastructure for water treatment, transmission and distribution systems in most parts of Azerbaijan has deteriorated seriously due to wear and tear as a result of age, deferred maintenance, and damage due to natural calamities such as the year 2000 earthquake. Many water transmission and distribution pipes are now over 50 years old, and have passed or are approaching the end of their economic lifespan. The subsequent state of many water pipe networks, and the associated problems such as intermittent supplies and heavy leakages affect the quality and reliability of services, and pose risks to public health. • Deterioration in physical condition of Wastewater Infrastructure and the lack of wastewater and faecal sludge treatment facilities: Most rayons do not have functioning sewerage collection and treatment systems, and the few facilities that are available are in a poor state of repair. This is a serious threat to public health and has severe negative impacts on the environment. • Utilities lack modern water supply and sanitation management with focus on technical and financial sustainability: Most utilities face challenges related to their lack of financial viability, which has been caused by various factors, 1 The figure for rural water supply varies between 10 and 33% depending upon the source. 2 World Development Indicators data, 2004. 3 The United Nations Environmental Performance Review, 2004 gives sewerage coverage in Baku as 72%. 4 Data is taken from the United Nations Environmental Performance Review, 2004. including: inadequate price/tariff structures, an inadequate billing system, and poor collection rates, resulting in a heavy dependence on operational subsidies from the Government. • Poor Demand-side Management Practices: There is excessive water consumption and wastage in most parts of Azerbaijan because the level of metering, which would provide an incentive to save water and an opportunity for monitoring leakages, is still very low. Additional losses in the system are caused by the deterioration in plumbing systems within individual houses and apartment blocks. • Unplanned and uncontrolled urban sprawl in Baku: The rapid growth of the population and resulting urban sprawl in the Greater Baku area in recent years, is putting additional strain on utility services such as water supply, sanitation energy, gas, and other infrastructure and social services, and hampering effective and sustainable investments in these sectors. There is a need for a coordinated regional development plan for the area. 6. In an attempt to halt the deterioration of water supply and sanitation services in the areas outside of Greater Baku, the Government re-centralized management of water supply and wastewater services for the entire country, with the exception of Nakhchivan Autonomous Republic under one company, Azersu Joint Stock Company (Azersu). Previously management of these services for the Apsheron Penninsula, including Baku was under one company, the Apsheron Regional Water Company, while services in other rayons was under several about fifty seven small utilities. Azersu is structured with several subsidiary companies, in addition to the main company that serves Greater Baku and the Absheron Penninsula. Services in the rayons outside Greater Baku, with the exception of Agdash, Goychay, Ganja and Sheki which are currently being operated under separate subsidiary companies formed under KfW and ADB projects, are being managed by Birleshmish Sukanal, a subsidiary of Azersu. Water supply and wastewater services in the Autonomous Republic of Nakhchivan are under the State Amelioration and Water Management Agency (SAWMA). Objectives 7. The Development Objective (DO) of the project is to improve the availability, quality, reliability, and sustainability of water supply and sanitation services in twenty of Azerbaijan’s regional (rayon) centers. 8. This objective will be achieved through: (a) rehabilitation and reconstruction of water supply and sanitation infrastructure in 20 rayons outside the Greater Baku Area; and (b) implementation of a comprehensive Institutional Modernization Component to strengthen the WSS sector’s capacity to manage water supply and sanitation services in an efficient, effective, and sustainable manner. 9. Progress towards achieving the above development objectives will be monitored through the following key performance indicators in all 20 rayons in the project area: • Availability: Number of people serviced by (i) piped water supply, (ii) number of people connected to sewerage network • Quality: Percentage of water samples in project area meeting Azeri water quality standards • Reliability: Daily number of hours of service • Sustainability: Working ratio (operating expenditures divided by collected revenues) of the 20 rayon water utilities. 10. The project contributes to higher-level objectives outlined in the following key strategic documents: (a) the existing Country Partnership Strategy (CPS) (Report No. 37812-AZ) approved by the Bank’s Board on December 14, 2006, (b) the SPPRSD document, (c) the draft Water Sector Strategy, and (iv) the Government's Letter of Development Policy (LDP) associated with the Poverty Reduction Support Credits. 11. The new CPS refers to the proposed project as part of the FY07 deliverables. Improving infrastructure service delivery, including utilities such as water supply and sanitation is consistent with the CPS5 which seeks to support the SPPRSD