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 Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance on this document. Castalia is a part of the worldwide Castalia Advisory Group. 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