ReportNo. 20711-AZ Azerbaijan WaterSupply andSanitation SectorReview and Strategy Public Disclosure Authorized June30, 2000 InfrastructureSector In Cooperationwith: Europeand CentralAsia Region Committeefor Housingand CommunalProperty World Bank ApsheronRegional Water Company Public Disclosure Authorized Public Disclosure Authorized Documentof theWorld Bank Public Disclosure Authorized CURRENCY EQUIVALENT Currenc Unit = Azerbaijan M at (A2M) Value Date 1 USD = 1 AZM= 31 Dec 1999 4342 AZM USD 0.00023 31 Dec 1998 3890 AZM USD 0.00026 31 Dec 1997 3890 AZM USD 0.00026 31 Dec 1996 4114AZM USD0.00024 31 Dec 1995 4440 AZM USD 0.00023 31 Dec 1994 970 AZM USD 0.00104 GOVERNMENT'S FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ARWC Apsheron Regional Water Company ARRA Azerbaijan Reconstruction and Rehabilitation Agency AZM Azerbaijan Manat BOD Biological Oxygen Demand BOT Build-Operate-Transfer BWD Baku Wastewater Department CAS Country Assistance Strategy CHCP Committee for Housing and Communal Property DRA Demand Responsive Approach DM Deutsche Mark EBRD European Bank for Reconstruction and Development EU European Union FSU Former Soviet Union GBWSR Greater Baku Water Supply Rehabilitation Project GDP Gross Domestic Product IAS International Accounting Standards IDA International Development Association IDB Islamic Development Bank IDPs Internally Displaced Persons IFAD International Fund for Agricultural Development IFC International Finance Corporation IFI International Financial Institution IMF International Monetary Fund KfW Kreditanstalt fur Wiederaufbau LEA Local Executive Authority Lpcd Liters per capita per day MIGA Multilateral Investment Guarantee Agency NGO Non-Governmental Organization O & M Operations and Maintenance SECO State Secretariat for Economic Affairs of the Government of Switzerland UNDP United Nations Development Program UNHCR United Nations High Commission for Refugees USD United States Dollar Vodokanal Water and Wastewater Utility VU Vodokanal Union WHO World Health Organization WUA Water Users Association WTP Willingness to Pay Vice President: Johannes F. Linn (ECAVP) Count Unit Director: Judy M. OConnor (ECC03) Sector Unit Director: Ricardo A. Halperin (ECSIN) Sector Manager: Walter Stottmann (ECSIN) Program Team Leaders: Ede Iijasz/Jan Drozdz (ECSIN) AZORBAYJANRESPUBLITASI AZERBAIJANREPUBLIC NAZIRLORKABINETI YANINDA MINISTRYOF HOUSINGAND MONZIL-KOMMUNAL MUNICIPALECONOMY AT THE TeSeRROFAT) KOMITOSt CABINETOF MINISTRIES 37M016.84i i* iliumoI cvi lisc n ovcrninwni*,RAtl, 370016 Tt*. 9-O. 93-.U67 TcItayv 142351 MIILYA Tgt: 9Q.O.n V.3.24A'TTictayr 14235] MlLYA O6eCUeCeEHe6030MoaCH, HaAJCENLIX11iiocirymwx yciiyr nOBoAocua6uceHm n Kafnnuanu AiR HaCeJICeKSA3epGaiijzana npn3znao EpaopHTCToMH cJionoto 3falJIrR, cTomeR nCpc crpauotE rlpaBmmcTmo IpepiHKHMaeT HeCKOTopLe pc4opmxu s cerCOpe, B JacT0ocTh HCe,Oe apanrmae 3aXo9ta O BoAocHa6xeune U Omouze C7To01bfxBOA. HacTonmSkoTqer ouenwe Teiymee cocronc cerropa BOA,IOCnaGKHHRU xKHaSm3agU a ropoAcxoA H cemLcKofl mecnioca Pecny6mou. OflHICea AemoHc'Tprpyeo, vro a A3ep6aizawe Bncoxii npoiecT Hnam= BOMiOCna6xems B ropoAax, ogWaKoCxTOp iMVCTMH0oro JlpoGJeM. :TOT 1R'CTE PaCCMa1PKHT MHOZOCTh0 UBI C DOlIPOCOB, fVKUX iax HKCINrTYIKOMThIe pesopww. XnmIco e npo6neMiu,u TCXHHqeCKHCH3MeHCBHN, KeOOXOAMwtu ATM CTparTCMK yny'rmeUiti yczIyr Bgocuwa6zemh H KaHMafl8zWKB VpOACXoKiH VCJLC'KOA MeCCHOCTB. PexomeNgnm Ho aporpaMma eftCBB, IaPWlaMCT8BIeHBMeB OT6, 6yDYT ioaelHjMu pyxOB0ACTBomALux KomINra rXnnuo-IcoMmyHHaro Xo3saca, MeCTH;DCopranon nnacm, fpeAhpmahr nonocaa6acenn a KmHxaHtC, Uacoo6noB B HaUlDAXCOBMCCTHI ycnux 110 yAYqYuIeHLOxaqCcna YCnyr CO3,=Me JcIcTBeHHxH CiCTaMHfa Aonrocpoiwot octOse. Bce CTOfOHmiflOAzlM IZOHLEMaT CPOwOcn maaOR 38aAwa, UeffYBOA, H HCOGXKOJHOCThpeCXpM a ceH pe Awr ucpexoxa X ARCmrvyHROV n3wecOnoco6aouy noogy poema, xoTOpWI GyAr CnYZ)1 Hia ROH]3MY IC TOWILUOHSCCeICHHB, HO U 3KOHOMHtIeCXOPdypasumxIo A3epfattmcaa. 31xre 6 no6naroAapn BccxpHeuBsi Ec 3a CoT)pyWfeCTBO B IWWDOTOBK AnEHorooTqera. flocpe(cnoM HameHpa6cYru B o6cyxAxuft, Mi HUlaJ npoICeoc, KQlOPWl 3aiMe'T MEOrOfCT. MmRaDeeMcX npoaoncrm Hamuypa6oTy co Bceoipimm BaUXOMb 3TOM HaSpa8TeHHH. Ilfa;p FacaNos flpcceaTenab KoMBiCTa )Ksurwwo-KommyuannoroXolltkcma A3ep6AA^xmcxotPeenyGiu LETTER HASANOV May 12, 2000 The supply of safe, reliable, efficient and affordable water and wastewater services to the population of Azerbaijan is recognized as a priority and a challenge for the country. The Government has undertaken some reforms in the sector, most notably the recent approval of the Water Supply and Sanitation National Law. This Report has evaluated the current state of the water supply and sanitation sector in the urban and rural areas of the country. The evaluation shows that Azerbaijan has a high coverage of water supply in urban areas but the sector faces numerous challenges. This Report deals with very important issues, such as institutional reforms, financial issues, and technical changes needed to achieve a strategy to improve the water supply and wastewater services in urban and rural areas. The recommendations and actions presented in this report will be an useful guide to the Committee for Housing and Communal Property, the local authorities, the water and wastewater enterprises, and the communities in our joint efforts to improve the quality of services and make the systems sustainable. Every group needs to understand the urgency of the task, the value of water, and the need to reform the sector to initiate the change towards a sustainable approach that will not only benefit the urban and rural populations but also the economic development of Azerbaijan. I would like to thank the World Bank for its collaboration in the preparation of this Report. Through our joint work and workshops, we have started a process that will take many years. We hope to continue our work in the World Bank in this endeavor. Shair Hasanov Chairman of the State Committee of Housing and Communal Property Azerbaijan Republic AZERBAIJAN REPUBLIC WATER SUPPLY AND SANITATION SECTOR REVIEW AND STRATEGY CONTENTS EXECUTIVE SUMMARY ................... i . BACKGROUND. 1 II. THE STATE OF THE WATER SUPPLY AND SANITATION SECTOR: MAIN ISSUES AND CONSTRAINTS. 3 A. Population, settlement pattern and poverty distribution. 3 B. Water supply and sanitation service coverage. 3 C. Safety and reliability of water supply services. 4 D. Consumer coping strategies and impacts on the poor. 6 E. Physical condition of water and wastewater systems..................................... 7 F. Technical efficiency of operations. 8 G. Water resources and environment - linkages to the water supply and sanitation sector.10 H. Sector organization, legal framework and governance relationships.12 I. Financial situation of the water and sanitation sector.16 J. Investment planning and selection.26 K. Similarities with other utility sectors.27 L. Activities of bilateral donors, international financing organizations and non- governmental organizations.28 III. THE NATURE AND DIMENSION OF THE CHALLENGE AHEAD: ELEMENTS OF A WATER AND SANITATION SECTOR VISION.33 IV. STRATEGY FOR SECTOR REFORM AND STRENGTHENING.36 A. Institutional and governance refor .36 1. Greater Baku Area - Autonomous full-service utility with private sector involvement 2. Medium and small urban areas - Autonomous commercially-run utilities under the regulatory control of local government 3. Rural settlement and villages - A demand responsive approach with conmmunity choice, ownership and responsibility 4. Urban fringe and refugee areas B. Financial reform .50 1. Financial viability of urban water and wastewater enterprises 2. Financial viability of the rural water supply and sanitation sector 3. Financing the sector investment through a concerted effort with stakeholders C. Technical reform.59 1. Metering as a tool to reduce consumption, wastage and operational costs and improve revenue collection 2. Improvement of operational efficiency of the system as a means to reduce operational costs 3. Cost-effective selection of investments: A combined path of service improvement with lower unit operational expenses D. Service reform .............................................................. 64 1. Water supply and sanitation services to the poor 2. Standards and level of water supply and wastewater services 3. Human resource capacity needs to improve services 4. Protection of the environment: a service of the sector V. NEXT STEPS TO IMPLEMENT THE SECTOR REFORM PROCESS .............................................................. 71 A. Programs to implement sector reform ......................................................... 71 1. Private sector involvement in the provision of water supply and wastewater services in the Greater Baku area 2. Municipal water supply and wastewater program 3. Rural water supply and sanitation program 4. Policy and human resource capacity program B. Assistance by the World Bank.............................................................. 76 C. Detailed Matrix of Recommendations ......................................................... 77 FIGURES Figure 2.1: Distribution of urban population Figure 2.2: Urban and rural population Figure 2.3: Water availability - selected cities Figure 2.4: Water availability by floor level - Greater Baku Figure 2.5: Water availability by income groups - Greater Baku Figure 2.6: Coping expenditures by income groups - Greater Baku Figure 2.7: Total coping cost composition by income groups - Greater Baku Figure 2.8: Pipe breaks/100