Completion Report

Project Number: 42408-033 Loan Number: 2842 October 2019

Azerbaijan: Water Supply and Sanitation Investment Program (Tranche 2) This document is being disclosed to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – Azerbaijan manat (AZN)

At Appraisal At Project Completion 16 November 2011 30 December 2017

AZN1.00 = $1.27210 $0.5882 $1.00 = AZN0.7861 AZN1.7000

ABBREVIATIONS ADB – Asian Development Bank AdPI – Aquas de Portugal DSC – design and supervision consultant EIRR – economic internal rate of return EOCC – economic opportunity cost of capital FIRR – financial internal rate of return GAP – gender action plan IEE – initial environmental examination JSC – joint stock company km – kilometer LARP – land acquisition and resettlement plan lpcd – liter per capita per day m3 – cubic meter MFF – multitranche financing facility MLD – million liters per day NAR – Nakhchivan Autonomous Republic O&M – operation and maintenance PMO – project management office POP – public outreach program SAWMC – State Amelioration and Water Management Committee UNICEF – United Nations Children’s Fund WACC – weighted average cost of capital WSS – water supply and sanitation WWTP – wastewater treatment plant

NOTES

(i) The fiscal year (FY) of the Government of Azerbaijan and its agencies ends on 31 December.

(ii) In this report, “$” refers to United States dollars.

Vice-President Shixin Chen, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Director Nariman Mannapbekov, Azerbaijan Resident Mission, CWRD Team leader Sabina Jafarova, Project Officer, CWRD Team members Aziz Haydarov, Senior Portfolio Management Specialist, CWRD Faraj Huseynbeyov, Senior Project Officer, CWRD Afag Javadova, Project Analyst, CWRD Maritess Marcelino, Project Officer, CWRD Lu Shen, Unit Head, Portfolio Management, CWRD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. PROJECT DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 1

A. Project Design and Formulation 1 B. Project Outputs 2 C. Project Costs and Financing 4 D. Disbursements 5 E. Project Schedule 5 F. Implementation Arrangements 5 G. Consultant Recruitment 6 H. Procurement 6 I. Gender Equity 7 J. Safeguards 8 K. Monitoring and Reporting 9

III. EVALUATION OF PERFORMANCE 9

A. Relevance 9 B. Effectiveness 10 C. Efficiency 11 D. Sustainability 11 E. Development Impact 12 F. Performance of the Borrower and the Executing Agency 12 G. Performance of the Asian Development Bank 12 H. Overall Assessment 13

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 13

A. Issues and Lessons 13 B. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework 16

2. Project Cost at Appraisal and Actual 21

3. Project Cost by Financier 22

4. Disbursement of ADB Loan and Grant Proceeds 24

5. Contract Awards of ADB Loan and Grant Proceeds 25

6. Chronology of Main Events 26

7. Status of Compliance with Loan Covenants 29

8. Gender Equality Results and Achievements 37

9. Economic Analysis 48

10. Financial Analysis 57

BASIC DATA A. Loan Identification

1. Country Azerbaijan

2. Loan number and financing source 2842, ordinary capital resources

3. Project title Water Supply and Sanitation Investment Program (Tranche 2)

4. Borrower Republic of Azerbaijan

5. Executing agencies Azersu Open Joint-Stock Company State Amelioration and Water Management Committee of the Nakhchivan Autonomous Republic

6. Amount of loan $300,000,000

7. Financing modality Multitranche financing facility, project loan B. Loan Data

1. Appraisal

– Date started 18 August 2011

– Date completed 25 August 2011

2. Loan negotiations

– Date started 7 December 2011

– Date completed 8 December 2011

3. Date of Board approval 22 December 2011

4. Date of loan agreement 6 June 2012

5. Date of loan effectiveness

– In loan agreement 6 July 2012

– Actual 20 September 2012

– Number of extensions

6. Project completion date

– Appraisal 31 December 2016

– Actual 30 December 2017

7. Loan closing date

– In loan agreement 30 June 2017

– Actual 30 December 2017

– Number of extensions 1

8. Financial closing date

– Actual 4 May 2018

9. Terms of loan

– Interest rate LIBOR + 0.60%

– Maturity (number of years) 24

– Grace period (number of years) 4

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10. Disbursements

a. Dates Initial Disbursement

15 October 2012

Final Disbursement

24 April 2018

Time Interval

66.31 months

Effective Date

20 September 2012

Actual Closing Date

30 December 2017

Time Interval

63.35 months

b. Amount ($million)

Category

Original Allocation

(1)

Increased/Decreased during

Implementation (2)

Cancelled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Works 261.00 35.31 0.00 296.31 296.06 0.252

Consulting

services

7.00 (3.31) 0.00 3.69 3.65 0.038

Unallocated

32.00 (32.00) 0.00 0.00 0.00 0.00

Total 300.00 0.00 0.00 300.00 299.71 0.289

C. Project Data

1. Project cost ($ million) Cost Appraisal Estimate Actual

Foreign exchange cost 410.00 378.22

Local currency cost

Total 410.00 378.22

2. Financing plan ($ million) Cost Appraisal Estimate Actual

Implementation cost

Borrower financed 86.10 68.16

ADB financed 300.00 299.71

Total implementation cost 386.10 367.87

Interest during construction costs

Borrower financed 23.90 10.35

ADB financed

Total interest during construction cost 23.90 10.35

ADB = Asian Development Bank.

3. Cost breakdown by project component ($ million) Component Appraisal Estimate Actual

A. Base Cost

1. Water supply and sanitation development 323.00 358.56

2. Institutional effectiveness and consulting 2.00 9.30

3. Program management facility 6.00 0.00

Subtotal (A) 331.00 367.86

B. Contingencies 55.00 0.00

C. Financing Charges During Implementation 24.00 10.35

Total Project Cost (A+B+C) 410.00 378.22

Note: Numbers may not sum precisely because of rounding.

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4. Project schedule Item Appraisal Estimate Actual

1. Consultants

Consultancy for design, tendering, construction supervision January 2012 October 2012

Consultants for auditing Azersu project accounts April 2011 December 2013

Consultants for auditing SAWMC project accounts April 2011 July 2013

Public outreach program to improve hygiene education and sanitation

July 2012 July 2014

Twinning partnership program July 2012 May 2016

2. Civil works contracts

WSS in Nakhchivan

Date of award June 2012 June 2012

Completion of work June 2013 December 2013

Completion of tests and commissioning June 2014 January 2014

Start of operations October 2014 January 2014

WSS in Nakhchivan

Date of award June 2012 December 2012

Completion of work June 2014 December

2015

Completion of tests and commissioning June 2014 January 2015

Start of operations October 2014 January 2015

WSS in Shikhmahmud

Date of award November 2015

Completion of work

April 2017

Completion of tests and commissioning June 2017

Start of operations June 2017

WWTP in Nakhchivan

Date of award June 2013 June 2014

Completion of work June 2015 July 2017

Completion of tests and commissioning June 2016 September 2017

Start of operations January 2017 September 2017

WSS in Agdash

Date of award June 2012 July 2012

Completion of work June 2014 December 2016

Completion of tests and commissioning May 2015 October 2017

Start of operations September 2015 December 2018

WSS in Beylagan

Date of award November 2012 August 2012

Completion of work January 2014 December 2016

Completion of tests and commissioning January 2015 October 2017

Start of operations July 2015 December 2018

WSS in Goychay

Date of award April 2010 September 2012

Completion of work April 2012 December 2015

Completion of tests and commissioning April 2013 October 2016

Start of operations October 2013 December 2017

WWTP in Goychay

Date of award June 2012 November 2015

Completion of work June 2014 December 2017

Completion of tests and commissioning June 2015 February 2018

Start of operations January 2016 March 2018

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Azersu = Azersu Open Joint-Stock Company, SAWMC = State Amelioration and Water Management Committee, WWTP = wastewater treatment plant.

5. Project performance report ratings Implementation Period Single Project Rating

From 20 September 2012 to 31 December 2012 On track

From 1 January 2013 to 30 June 2013 On track

From 1 July 2013 to 31 March 2014 Potential problem

From 1 April 2014 to 31 December 2014 On track

From 1 January 2015 to 31 December 2015 On track

From 1 January 2016 to 31 December 2016 On track

From 1 January 2017 to 28 December 2017 On track

D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Members

Fact finding 17–25 August 2011

Inception mission 19–22 October 2012 3 12 a, b, c

Project-specific contact/consultation 7–9 February 2013 2 6 b, b

Loan review 1 14–19 April 2013 4 24 b, c, g, f

Loan review 2 13–19 December 2013 5 35 a, b, g

Loan review 3 10–18 June 2014 4 36 b, b, i, a

Loan review 4 15–19 September 2014 4 20 b, b, i, a

Loan review 5 6–16 November 2014 11 44 b, i, a, c

Loan review 6 20–29 April 2015 3 18 a, b

Project-specific contact/consultation 17–22 June 2015 1 6 b

Loan review 7 8–13 September 2015 3 18 a, b

Loan review 8 3–6 November 2015 2 8 a, b

Midterm project review 29 February–11 March 2016 5 60 a, b, i

Loan review 9 1–14 September 2016 3 39 a, b, i

Loan review 10 1–4 November 2016 1 4 b

Loan review 11 8–16 November 2016 1 9 a

Loan review 12 7–17 February 2017 5 55 a, b, i, f

Special loan administration 25 May 2017 2 4 a, c

Loan review 13 6–7 July 2017 4 8 a, c, b, g

Loan review 14 18 October 2017 3 3 a, b

Loan review 15 22–23 October 2017 4 8 i, b, a, e

Loan review 16 12 December 2017 2 2 a, c

Project completion mission 11–14 December 2018 3 12 a, c, d

a = operations officer, b = senior urban development specialist, c = project analyst, d = staff consultant (gender), e = country director, f = social safeguard specialist, g = environmental specialist, i = senior operations officer.

I. PROJECT DESCRIPTION 1. After the collapse of the Soviet Union, the quality and efficiency of water supply and sanitation (WSS) in Azerbaijan deteriorated because of poor management and inadequate investments. Despite 83% piped-network coverage in secondary towns in 2009, poor water supply sources and deteriorated or absent water treatment facilities left most households in such towns without access to safe water.1 Sewage infrastructure also worsened: wastewater was discharged into ditches or the nearest watercourses, and leaking sewers created serious health risks and environmental hazards, adding to household costs and tangibly diminishing the quality of life in secondary towns. 2. Cognizant of this situation, improving access to basic services has become a strategic priority of the Government of Azerbaijan.2 Specifically, the government targeted improved WSS coverage and service quality in the country by providing 100% coverage and 24-hour water supply in Baku and 80%–85% coverage in secondary towns and villages, all by 2015. 3. To support Azerbaijan in tackling its WSS challenges, on 23 September 2009 the Asian Development Bank (ADB) approved a multitranche financing facility (MFF) for the Water Supply and Sanitation Investment Program for an amount of up to $600 million.3 The program’s impact was improved public health and environment in the participating towns. Its outcome was improved coverage, continuity, and quality of water supply and wastewater disposal in the participating towns. The program was supposed to be delivered in five tranches. The executing agencies were the State Amelioration and Water Management Committee (SAWMC) for projects in the Nakhchivan Autonomous Republic (NAR), and Azersu Open Joint-Stock Company for projects in non-NAR areas. 4. On 22 December 2011, ADB approved the provision of a $300 million loan from the MFF to support the implementation of Project 2. The project’s impact was improved WSS services in Agdash, Beylagan, Goychay, and Nakhchivan towns; and the outcome was improved access to WSS infrastructure in those towns. The project’s outputs were (i) the construction of WSS infrastructure and wastewater treatment plants (WWTPs) in the said four towns; (ii) improvement of the WSS sector’s institutional effectiveness through better service delivery; capacity development for better system planning and operation and maintenance (O&M), including through a twinning arrangement with an external WSS utility; and enhanced cost recovery through metering, billing, and collection tariffs; and (iii) establishment of a program management facility.

II. DESIGN AND IMPLEMENTATION A. Project Design and Formulation 5. At appraisal, the WSS sector in Agdash, Beylagan, Goychay, and Nakhchivan was clearly in poor condition. Water supply in all project towns was unreliable and often had high sediment content, and residents of multistory buildings received little water because of low water pressure. The towns had no wastewater treatment facilities and discharged untreated wastewater into rivers

1 Secondary towns refer to urban settlements with 20,000–100,000 inhabitants. 2 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.

3 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.

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or irrigation canals. Therefore, the project-financed WSS network infrastructure and WWTPs were highly relevant for the people well-being in the towns.4 Project design at appraisal was highly relevant and followed a holistic approach that targeted the full-scale reconstruction of the entire WSS system in all project towns. The project scope complemented the scope of Project 1, which was approved with the program in 2009 and closed in 2017.5 6. The project was aligned with ADB’s country strategy for Azerbaijan at appraisal, during implementation, and at completion.6 ADB’s country partnership strategy, 2014–2018 for Azerbaijan specifically mentioned water and sanitation support for secondary towns, including in the less densely populated towns in the central and northern regions and in the NAR. The project was in line with ADB’s Strategy 2020, where WSS was indicated as a core engagement area.7 7. The project’s legal framework consisted of a loan agreement between ADB and Azerbaijan, and project agreements between ADB and the executing agencies. The loan agreement specified an onlending arrangement between the borrower and the executing agencies. Shortly after loan effectiveness and at the government’s request, the arrangement was changed to ongranting through an amendment to the loan agreement dated 28 September 2012.8 The rationale for changing the fund flow structure from onlending to ongranting was the executing agencies’ limited debt management capacity. 8. A major change took place during implementation. In 2012, the government expanded Agdash’s administrative area from 1,070 to 2,307 hectares,9 which necessitated a change in the design of the WSS network in Agdash. Because of significant cumulative cost overruns (para. 20) in the WSS network contracts in Agdash, Goychay, and Beylagan, WWTP construction in Agdash and Beylagan was moved to Project 4 and eventually was financed through the state budget.10 B. Project Outputs

1. Component A: Water Supply and Sanitation Infrastructure Development 9. This component envisaged physical investments in WSS systems in Agdash, Beylagan, Goychay, and Nakhchivan by (i) improving and expanding water supply and sewerage systems, and (ii) constructing WWTPs. This was supposed to involve the construction of 460 kilometers (km) of water supply distribution networks and 429 km of sewer lines in the project towns.

4 Improvement of the WSS infrastructure in Agdash, Goychay, and Nakhchivan was in the original scope of the Urban

Water Supply and Sanitation Project, which was approved in 2004 and completed in 2010. Because of severe price escalation and cost overruns, the project was restructured and most infrastructure investment was transferred to the program. ADB. 2011. Completion Report: Urban Water Supply and Sanitation Project in Azerbaijan. Manila.

5 An ADB loan of $75 million financed Project 1, whose scope included the improvement of water supply infrastructure in Goychay and Nakhchivan.

6 ADB. 2014. Country Partnership Strategy: Azerbaijan, 2014–2018. Manila. 7 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila. 8 The onlending arrangement was not a precondition for the disbursement of loan proceeds. 9 Government of Azerbaijan. 2012. About Partial Changes in the Administrative Territorial Division of Agdash Region.

Law of the Republic of Azerbaijan. No. 500-IVQ. 11 December. Baku. 10 ADB approved the provision of a $75 million loan to Project 4 on 9 August 2016, but the validity of ADB’s approval

lapsed on 8 August 2017 as the loan agreement remained unsigned. This was because of the government’s decision to halt external borrowing in the aftermath of the stark devaluation of the Azerbaijan manat in 2015, which led to a sharp rise in external public debt. Financing for the scope of Project 4 was eventually allocated from the 2019 state budget. Construction of WWTPs in Agdash and Beylagan is scheduled for completion by December 2019.

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10. Agdash. Significant expansion of the town’s administrative area necessitated changes in the project design that resulted in cost overruns. About 143 km of water and 124 km of sewage networks were constructed, covering a large part of the town’s newly expanded area. To complete the WSS network, the government financed the construction of the remaining 38 km of water and 43 km of sewage networks through an allocation of AZN22 million (about $13 million) from the 2018 state budget.11 The substantial redesign of the water intake facilities also contributed to cost overruns. Because of significant cost overruns related to the WSS network and intake facilities, WWTP construction in this town was transferred to Project 4 (footnote 10). 11. Beylagan. Construction of the WSS network, the water intake facilities, the administrative building and workshop were fully completed in 2016. About 92 km of water and 89 km of sanitation networks were laid under the entire town’s area. The upgraded WSS design (footnote 19) led to cost overruns, and the cost of the administrative building also increased. Subsequently, WWTP construction in this town was also transferred to Project 4 (footnote 10). 12. Goychay. All works were fully completed as designed at appraisal. About 61 km of water supply and 50 km of sanitation networks were constructed and combined with the WSS network completed under Project 1, and the newly constructed WSS network covered the entire town. The WWTP with biological treatment and daily sewage treatment capacity of 20,000 cubic meters (m3)

was completed as planned, marking the completion of the full-scale reconstruction of the entire WSS system in Goychay. While there were sizable cost overruns in the construction of the WSS network, the WWTP was completed within budget. 13. Nakhchivan. All works were completed as designed at appraisal and under budget, resulting in $10.5 million in loan savings. Upon ADB’s endorsement, the savings were used to construct about 205 km of water and 200 km of sanitation networks in Shikhmahmud village in Nakhchivan. Construction of the membrane bioreactor WWTP with a 32,000 m3 per day of sewage treatment capacity marked the completion of the full-scale reconstruction of the WSS system in Nakhchivan, with all works completed within budget.

2. Component B: Institutional Effectiveness 14. This component was intended to improve the operational efficiency of the Agdash Sukanal joint stock company (JSC) and the Beylagan Sukanal (town’s WSS utility) through a twinning program,12 which was supposed to be implemented by engaging a water utility from a developed ADB member country. The project included the implementation of a public outreach program (POP) targeting schoolchildren and teachers to disseminate project benefits, and better hygiene and sanitation practices. Azersu engaged the United Nations Children’s Fund (UNICEF) to implement the POP in Agdash and Beylagan. 15. Agdash, Beylagan. The key objectives of the twinning program were to (i) strengthen WSS service providers’ financial sustainability by achieving improved technical and commercial

11 Government of Azerbaijan. 2018. About Measures on Completion of Water Supply and Sewerage Systems of Agdash

City. 3 July. Baku. 12 Under the Urban Water Supply and Sanitation Project, in 2007 Azersu established the JSCs in Agdash and Goychay,

while SAWMC established the JSC in Nakhchivan (ADB. 2011. Completion Report: Urban Water Supply and Sanitation Project in Azerbaijan. Manila). There was no requirement to establish a JSC in Beylagan as the town was an integral part of Azersu’s United Sukanal.

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efficiency in operations, and (ii) improve O&M and asset management practices.13 The twinning program was, however, substituted with capacity building activities provided to Azersu by Suez Environnement, a France-based utility company; the activities covered a wide area of expertise and were financed by the government.14 Suez organized a study tour for Azersu staff to the WSS facilities it operated in Algeria, France, and Spain, focusing on training and knowledge transfer. Suez also prepared a comprehensive training plan based on the detailed needs assessment it conducted for Azersu.15 16. As a key element of the POP, Azersu engaged UNICEF’s Azerbaijan country office to implement the WASH in Schools program to improve hygiene education and sanitation practices among schoolchildren in Agdash and Beylagan. In addition to school-focused activities, UNICEF targeted communities around the schools with water, sanitation, and hygiene awareness-raising activities. The POP emphasized gender equity, including women empowerment and participation in decision-making and the promotion of girls’ education. 17. Nakhchivan. The Nakhchivan JSC engaged Aquas de Portugal (AdPI), a water and sanitation operator from Portugal, as its twinning partner. The twinning program’s key activities were auditing the present situation; proposing corrective measures and defining the action plan; building staff capacity through seminars and technical visits; and training and supporting the use of modern equipment for improved system maintenance.16 Specialized WSS maintenance equipment was procured as an outcome of the twinning program.

3. Component C: Establishment of a Program Management Facility 18. The outputs for this component included the provision of management and technical support to SAWMC’s program management office to implement the project in Nakhchivan, and to Azersu to prepare subsequent projects under the program. Civil works in Nakhchivan were supervised by a design and supervision consultant (DSC) selected and appointed by SAWMC and financed by the project loan.17 The DSC developed detailed engineering designs for the WSS networks in Nakhchivan’s peri-urban areas, which were financed under Project 3. C. Project Costs and Financing 19. The total project cost at appraisal, including interest charges and contingencies, was estimated at $410 million, comprising an ADB loan of $300 million (73.17% of the project cost) and government funding of $110 million (26.83% of the project cost). The actual project cost at completion was $378.21 million, of which $299.71 million was funded by the ADB loan and $78.5

13 To alleviate financial constraints in the WSS sector, in April 2011 the government wrote off the equivalent of about

$370 million of accounts receivables incurred cumulatively by Azersu’s residential customers as of 1 February 2011, including those in Agdash, Beylagan, and Goychay; and an equivalent amount of account payables from Azersu’s balance sheet (Government of Azerbaijan. 2011. Decree of the President of the Republic of Azerbaijan on Writing Off Debts Arising from the Population’s Access to Potable Water and Sewerage Services. 8 April. Baku).

14 Azersu and Suez signed a 5-year operational training and knowledge transfer contract on 12 May 2014. 15 Suez prepared the on-the-job training and knowledge transfer program and in 2015 conducted 49 specialized training

sessions for more than 900 technical staff of Azersu. 16 Ten staff of Nakhchivan JSC and SAWMC went on a study tour to AdPI’s WSS facilities in Portugal. 17 The international project management consultant under Azersu, financed under Project 1, supervised the civil works

in Agdash, Beylagan, and Goychay.

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million was funded by the government. Actual costs were lower because financial charges during implementation were lower and O&M expenses were included in the civil works contracts.18 20. At completion, civil works costs totaled $358.56 million, compared with $308.26 million at appraisal, because of cost overruns in the Agdash, Beylagan, and Goychay WSS construction contracts.19 Consulting service contracts totaled $9.3 million, compared with $4.9 million at appraisal, because Azersu had to pay for the redesign of the water intake facilities in Agdash and for the increased scope of construction supervision resulting from the expansion of works. To cover increased civil works costs, the government requested on 15 May 2017 to reallocate loan proceeds from consultancy and unallocated categories to civil works. ADB approved this request on 29 June 2017.20 D. Disbursements 21. Disbursement of loan proceeds followed ADB’s Loan Disbursement Handbook (2007, as amended from time to time). The direct payment procedure was used for both executing agencies. No major disbursement problem occurred during implementation, and overall the assessment of disbursements at appraisal was realistic. Loan disbursements for 2012–2013 were ahead of schedule ($115 million against $85 million at appraisal) because of the smooth implementation of SAWMC subprojects but lagged in 2014 ($52 million against $148 million planned) because of the delays in Azersu subprojects caused by design changes. Disbursement for 2015–2017 progressed without major delays. ADB closed the loan account on 4 May 2018 and canceled the unused loan amount of $0.289 million. In 2018, there were the following payments done under the project: (i) under SAWMC, $5,000 to the auditor, and (ii) under Azersu, $4,954,585.62 retention money the Goychay WWTP civil works contractor, and $32,634 to the auditor. Disbursement of ADB loan proceeds is in Appendix 4 and contract awards are in Appendix 5. E. Project Schedule 22. The project was approved on 22 December 2011, the loan agreement was signed on 6 June 2012, and loan effectiveness was declared on 20 September 2012 (2.5 months later than expected). The project was expected to be physically completed by 31 December 2016 and the loan to be closed by 30 June 2017. However, because of the delayed construction of the Goychay WWTP (para. 33), the project was completed, and the loan closed on the same date – 30 December 2017. The chronology of main events is in Appendix 6. F. Implementation Arrangements 23. As envisaged at appraisal, the project was implemented through the project management offices (PMOs) at Azersu and SAWMC that were first established under the Urban Water Supply

18 Actual financial charges were $10.35 million, instead of $23.9 million at appraisal, because of the lower-than-

expected London interbank offered rate (LIBOR) during project implementation. 19 The cost overruns were because of changes in technical parameters, time delay, and administrative changes. In

2013 Azersu increased water consumption from 120 liters per capita per day (lpcd) to 180 lpcd for all service areas under its coverage. Engineering designs for the Agdash, Beylagan, and Goychay networks based on the 120 lpcd consumption rate were modified to comply with the new parameters, resulting in a significant cost increase, as all assumptions, including diameters of pipes, number of wells, size of reservoirs, increased. The design change delayed civil works implementation, with starting dates for awarded contracts delayed by 2 years on average. Meanwhile, the cost of raw materials and equipment increased during the time delay, which also contributed to cost overruns. The expanded Agdash town borders also required a redesign of the WSS network to cover a much larger area.

20 Estimated and actual project costs are in Appendix 2.

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and Sanitation Project and then continued under Project 1. Project implementation arrangements designed at appraisal were adequate to deliver the project outputs. Azersu and SAWMC had overall responsibility for project implementation. Project supervision support was provided by DSCs contracted under Project 1 for Azersu subprojects and under Project 2 for NAR subprojects. The PMO at Azersu coordinated activities in project towns with subsidiary Sukanal JSCs.21 24. In January 2015, Azersu abolished its PMO as part of its efforts to streamline the implementation of all investment projects into a newly formed unit for the administration of facilities under construction. This arrangement adversely affected civil works implementation, as the new unit’s poor project planning led to frequent and significant changes during construction and, therefore, to substantial implementation delays. In addition, the new unit, by its nature, focused on construction activities and hence less attention was paid to the implementation of the project’s soft components, such as the gender action plan (GAP) and institutional capacity building. G. Consultant Recruitment 25. Consultant recruitment followed ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). At appraisal, the procurement plan included (i) the engagement of a DSC for SAWMC subprojects, (ii) audit services for Azersu and SAWMC subprojects, (iii) twinning arrangements for the executing agencies, and (iv) the POPs in Agdash and Beylagan. As planned at appraisal, POP implementation by UNICEF was contracted through single source selection. 26. Design and supervision consultant. SAWMC recruited the DSC using quality- and cost-based selection. The consultant input was 196 person-months initially, but it was extended to 296 person-months because of the delayed construction of the Nakhchivan WWTP and the construction of an additional WSS system in Shikhmahmud. The DSC for the Azersu subprojects was financed under Project 1 and covered all projects under the program. 27. Audit. SAWMC requested to change the selection method for audit services from least-cost to single source selection to enable the engagement of the same audit company as under Project 1. ADB approved this request as the NAR’s location would preclude competitive selection or lead to overly high project costs. Azersu engaged an audit firm using least-cost selection, per the procurement plan. 28. Twinning. SAWMC engaged AdPI as a twinning partner using single source selection, given the small assignment size (less than $100,000) and the NAR’s location (para. 27). The twinning program for Azersu was canceled as it overlapped with the project implemented by Suez under a cooperation agreement between the governments of France and Azerbaijan. H. Procurement 29. At appraisal, the project procurement plan included nine civil works packages to be procured through international competitive bidding: (i) three WSS facilities and three WWTPs for Azersu, and (ii) two WSS facilities and one WWTP for SAWMC. The actual number of civil works contracts implemented was eight, four under each executing agency, because of the transfer of WWTP construction in Agdash and Beylagan to Project 4, and the construction of an additional

21 The program was supposed to establish a program steering committee and project implementation review

committees for each participating town. However, they were not established as they were found to be incompatible and overlapping with the government’s project supervision and decision-making processes. At the government’s request, the requirement to set up the committees was waived by amending the program’s framework financing agreement on 11 January 2012.

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WSS network in Shikhmahmud. Post-qualification was used to select all civil works contractors, and procurement for all contracts—all in United States dollars—followed ADB’s single-stage, one-envelope procedure. 30. Azersu. All three WSS civil works contracts were signed on time, but implementation was delayed because of the change (i) in the design of the WSS networks; (ii) in the administrative boundaries of Agdash; and (iii) of the water intake site because of the collapse of wells at the original site.22 Civil works under the Goychay WWTP contract were also delayed by 6 months because of the delayed supply of equipment. 31. State Amelioration and Water Management Committee. There were no delays in the procurement and implementation of the SAWMC WSS contracts, and cost savings under these contracts allowed the construction of an additional WSS network in Shikhmahmud, which was not envisaged in the project’s scope. The contract for the Nakhchivan WWTP was re-tendered as the bidders did not have the construction experience for a 25-million-liter-per-day (MLD) membrane bioreactor-type sewerage treatment plant.23 The lack of qualified bidders can be explained by isolated geographical location of the NAR. The contract was eventually awarded in June 2014 for $45.67 million. Implementation of civil works under this contract also lagged because of the delayed supply of equipment from Europe to the NAR. The contract was extended twice, and civil works were completed on 5 June 2017 with a 17-month delay. I. Gender Equity 32. The project preparatory documents recognized that inadequate and poor quality WSS services disproportionately affected women—the main collectors of water in households and the main users of water for household work, gardening, and in micro and small enterprises. Hence, the project placed special importance on involving women in consultation and outreach activities to determine their WSS issues, needs, and preferences. At start-up, social assessments and surveys were undertaken to determine water-related issues and needs in the project areas, and interventions were integrated in the GAP.24 At completion and despite the issues encountered, 9 of 11 GAP activities were implemented and 9 of 10 GAP numerical targets were achieved. Key achievements include the successful completion of surveys and social assessments from 2010 to 2011, establishment of complaint and redress mechanisms, and establishment of customer care hotlines with regular reporting. Most importantly, the provision of 24-hour clean water supply in households significantly improved lives in the communities, especially women. Continuous availability of clean water not only considerably lightened women’s physical labor, but it also gave them peace of mind knowing that they can do their work anytime. 33. GAP targets on female employment in Sukanals and JSCs; and the development of information and education campaign materials and policy on hygiene, water, and sanitation were not achieved, partly because of the limited number of women with the needed expertise. The

22 WSS construction was completed in Goychay on 31 December 2015 with a 19.5-month delay, in Agdash on 15

December 2016 with a 31.5-month delay, and in Beylagan on 30 December 2016 with a 20.0-month delay. 23 One bidder, which was previously contracted for the construction of the WSS network in Nakhchivan, was sanctioned

by the Office of Anticorruption and Integrity in 2015 for engaging in fraudulent and collusive practices that improperly influenced and misled the procurement process. Despite the contractor’s good performance under the project, it was barred from participating in ADB-financed contracts from 2015 to 2020.

24 Interviews with female beneficiaries revealed the hardships they had to endure because of the lack of clean water, including fetching water from different sources many times a day, boiling water to make it potable, and having to schedule cleaning and washing of clothes.

8

Sukanals did not consistently collect sex-disaggregated data, as they did not fully grasp the importance of establishing a sex-disaggregated database for their customers (many times, if there is a male in the house, it is his name that is registered). GAP implementation was affected by the inadequate institutionalization of gender equity issues in the executing agencies: for example, several gender actions were unclear to Sukanals, and some GAP targets were not applicable to their functions.25 Despite these challenges, most GAP targets and activities could still be implemented. Hence, the project’s overall rating for GAP implementation is successful. J. Safeguards 34. Environmental safeguards. The project was classified category B for the environment at appraisal and during implementation.26 Environmental impacts were minimal, manageable, and limited to project sites during construction. The executing agencies prepared initial environmental examination (IEE) reports for each site, including environmental management plans. The contractors prepared site-specific environmental management plans that included more detailed mitigation measures and monitoring requirements. PMO environmental specialists and the DSC monitored the implementation of the environmental management plans and the site-specific environmental management plans. Each executing agency submitted semiannual environmental reports during the project implementation, and prepared and submitted final environmental audit reports to ADB in May 2018. 35. The exclusion of WWTP construction in Agdash and Beylagan from the project scope required the revision of the relevant IEE reports to reflect the environmental and public health risks from the discharge of additional volumes of untreated wastewater through the new sewerage network. The revised IEE reports reflected the potential adverse impacts and required mitigation measures, which included the provision that the government should finance the construction of the WWTPs in these towns from the state budget.27 36. Based on the technical designs developed under the project, WWTP construction started in February 2019 and is expected to be completed in December 2019. Initially, the WWTPs will involve the mechanical treatment of wastewater, and the WWTP sections for biological treatment will be constructed afterwards.28 As these WWTPs are considered associated facilities of the project, ADB’s environmental safeguard requirements should be followed before, during, and after construction; and semiannual environmental reports should be submitted to ADB. 37. Social safeguards. The project was classified category B for involuntary resettlement and category C for indigenous people. The project was not expected to involve permanent land acquisition and resettlement, except in Beylagan where one household’s sheep farm on state land had to be displaced. A land acquisition and resettlement plan (LARP) was prepared for this, but its implementation became unnecessary as WWTP construction in Beylagan was dropped from the project scope. The change in Agdash’s administrative boundaries and the subsequent change in the location of water intake facilities necessitated land acquisition. Azersu identified the owners

25 For example, Azersu and the Sukanals are not responsible for hygiene and sanitary issues at the local level, except

for the cleanliness of the water they provide. 26 In terms of environmental and social safeguards, the project was prepared and implemented following ADB’s

Safeguard Policy Statement (2009). 27 Deputy prime minister’s instruction to Ministries of Finance and Economy and Azersu dated 8 September 2017.

ADB’s letter dated 14 September 2018 to the Prime Minister of Azerbaijan reiterated the importance of the speedy construction of WWTPs in these towns.

28 Azersu has yet to confirm the timeline, which will be coordinated with the government.

9

of private lands and compensated them without a LARP. At ADB’s request, Azersu prepared and submitted a LARP compliance report with relevant documents, such as the result of the impact assessment, an outline of information on the affected persons, and an entitlement matrix.29 The compliance report has been disclosed on the ADB website. K. Monitoring and Reporting 38. The executing agencies complied with all loan covenants, although they only partially complied with the covenants on (i) the tariff level and payment recovery because tariffs were not reviewed annually, and (ii) gender compliance because of inadequate implementation of GAP provisions on equal job opportunities for women and national hygiene educational policy.30 The covenants of the project agreements have been fully complied with, except for one covenant in the project agreement with Azersu: subprojects were implemented with substantial cost overruns and negatively impacted project efficiency.31 39. The PMOs prepared and submitted quarterly progress reports and semiannual environmental monitoring reports to ADB and established financial management systems with internal financial and accounting controls that met ADB’s requirements. Annual audits of the project financial statements for FY2012–FY2017 followed a format and manner acceptable to ADB. All audit reports were unqualified. The FY2017 audited project financial statement did not cover 2018 transactions (para. 21). Azersu and SAWMC could not conduct the FY2018 audit after loan financial closing as they had no budget for it.

III. EVALUATION OF PERFORMANCE A. Relevance 40. The project is rated highly relevant. Components on WSS infrastructure improvement and institutional strengthening were relevant at appraisal, during implementation, and at completion. The project was fully in line with ADB’s and the government’s strategies. Relevance of the project focus on WSS in secondary towns was further underscored by two objectives of the government’s 2016 Strategic Road Map for the Development of Utilities: (i) provide countrywide coverage through high quality WSS infrastructure and services, and (ii) increase efficiency of the WSS system.32 Full-scale reconstruction of entire WSS systems was completed in Goychay and Nakhchivan—the first two towns outside the capital Baku with operational technologically advanced WWTPs.33 41. The project was supposed to deliver WWTPs in four project towns and cover the entire Agdash with a WSS network. Because of significant cost overruns, WWTP construction in Agdash and Beylagan was transferred to Project 4 (footnote 19) and eventually financed by the state budget.34 Agdash’s administrative boundary changes also made financing the entire network from 29 As of 30 September 2019, Azersu had yet to submit to ADB the official documentation on acquisition of two land

plots in Dehne village of Agdash. 30 Gender equality results and achievements are in Appendix 8. 31 The status of compliance with loan and projects agreements is in Appendix 7. 32 Government of Azerbaijan. 2016. Presidential Decree of the Azerbaijan Republic No. 1138 on 6 December 2016.

About Approval of Strategic Road Maps on National Economy and the Main Sectors of Economy. Baku. The Strategic Road Map for the Development of Utilities (electricity and thermal energy, and water and gas supply) was approved under the decree.

33 No WWTP using biological treatment was operational in any other secondary town as of December 2017. 34 Contracts for WWTP construction in Agdash and Beylagan were signed in 2018.

10

project funds impossible, and the state budget had to finance the rest. These changes did not impact project relevance negatively as they were caused by unforeseeable external events, and state budget financing will ensure the completion of the project at its original scope. 42. In Nakhchivan, using nanofiltration technology35 is a significant departure from traditional approaches to water and wastewater treatment. Traditional water and wastewater treatment technologies were contemplated at appraisal, but SAWMC initiated extensive research on other technologies, including reverse osmosis and nanofiltration. SAWMC’s up-front investment in understanding and determining its technology of choice—nanofiltration—enabled it to complete its projects faster than Azersu. Securing nanofiltration for the water supply and the WWTPs is a standout in the region.36 B. Effectiveness 43. Overall, the project is rated effective as it achieved the outcomes per the revised scope (Appendix 1). Access to WSS infrastructure in all four towns significantly improved because of the project activities, with 100% of beneficiaries receiving access to 24-hour potable water and sanitation services. Deferral of the WWTP construction in Agdash and Beylagan delayed the full-scale use of the sewerage networks because of potential environmental and public health risks. The outcome is likely to be achieved because construction of WWTPs in these towns, financed from the state budget, is to be completed by end of 2019. After construction is finished, all four towns will have completed a full-scale reconstruction of their WSS systems, including WSS networks and WWTPs. 44. Physical outputs were fully achieved. The project exceeded WSS infrastructure targets, expanding the water distribution network from 460 to 500 km, sewer lines from 427 to 458 km, and water reservoirs from 7,000 to 10,000 m3. It also enabled 24-hour supply of pressurized water at 180 liters per capita per day (lpcd) instead of 140 lpcd. The only physical output indicator that was not achieved is the sewage treatment plant capacity; instead of 83 MLD as planned, only 52 MLD is achieved because WWTP construction in Agdash and Beylagan is not yet completed. 45. Institutional development and public awareness outputs were also mostly achieved, although indicators on females in management and the POP were only partially achieved.37 Despite project implementation issues, the project’s GAP has been largely implemented. Safeguard compliance was ensured through timely remedial and mitigation measures of issues at construction sites. After completion, the beneficiaries in Agdash, Beylagan, and Goychay expressed satisfaction with the project outcomes.38

35 Nanofiltration is a treatment method that uses fiber-reinforced pressure cylinders with 6 membrane filters per cylinder,

with water passing through the filters under high pressure. Filtration pores that are 1–10 nanometers in size, smaller than the filtration pores for microfiltration and ultra-filtration, but slightly larger than those used in reverse osmosis

36 The systems used gravity as a standard design feature to reduce electricity costs and were built with power shortage in mind. Even without power, water can still be filtered with ozone and sodium hypochlorite, and people will continue to receive clean water even during disasters. The Nakhchivan WWTP could actually be referred to as a water reuse plant because of the high quality of water it produces.

37 The design and monitoring framework is in Appendix 1, and gender equality results and achievements are in Appendix 8.

38 ADB conducted informal interviews with selected beneficiaries in the project towns during the project completion review mission on 11–14 December 2018.

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C. Efficiency 46. The economic internal rates of return (EIRRs) were calculated using a methodology similar to that at appraisal and based on data collected after project implementation. The economic reevaluations compared economic costs and benefits of with- and without-project scenarios. The re-calculated EIRRs—13.8% for Goychay, 13.9% for Agdash, 14.5% for Beylagan, and 15.9% for Nakhchivan—are higher than the economic opportunity cost of capital of 12% but lower than the EIRRs at appraisal (17.8% for Goychay, 15.1% for Agdash, 15.5% for Beylagan, and 16.4% for Nakhchivan). The lower-than-appraised EIRRs were caused mainly by higher actual capital costs for the individual subprojects. As all EIRRs are above the ADB-recommended social discount rate of 12%, the project is considered economically viable.39 On-time and on-budget implementation in the NAR freed up funds to enable the construction of a water supply network in Shikhmahmud. Despite delays and cost overruns in Azersu’s subprojects, on balance the project is rated efficient. D. Sustainability 47. Financial sustainability. Based on a reevaluation of the financial internal rates of return, the project is financially unsustainable for full cost recovery, as the financial internal rates of return are –5% for Agdash, –5% for Nakhchivan, –9% for Goychay, and –15% for Beylagan (Appendix 10). This is because of the lower-than-planned increase in WSS tariffs, two sharp devaluations of the Azerbaijan manat against the United States dollar in 2015, and Azersu’s operational inefficiency. Azersu had net loss of AZN347 million in 2015 and total comprehensive loss of about AZN612.9 million in 2016,40 of which AZN39.8 million was from currency losses. Accumulated losses in 2016 were about AZN5.6 billion, despite the government’s AZN3.3 billion investment in Azersu.41 The situation can be improved with adequate tariff increases (tariffs were not reviewed annually as planned during the project lifetime) and nontariff efficiency improvements in the executing agencies. In this regard, the shift from onlending to ongranting ADB loan proceeds to Azersu and SAWMC reflected the government’s recognition of these entities’ inability to repay the loan within the existing sector policy, institutional, and regulatory frameworks. 48. Operational sustainability. Overall, the project helped the executing agencies improve collection efficiency and the level of nonrevenue water in all four towns.42 An assessment of each town’s ability to sustain O&M costs showed that Nakhchivan has been operationally sustainable since 2017.43 The three other towns will achieve operational sustainability by 2022, subject to tariff increases every 2 years and 90% collection efficiency. If WSS tariff optimization is implemented as envisaged under the Strategic Road Map for the Development of Utilities, it will complement budget transfers and improve the sustainability of the project’s results in the long run (footnote 32). Detailed financial analysis is in Appendix 10. 49. Institutional and environmental sustainability. WSS policy and regulatory challenges include the ability to (i) progressively increase tariffs and overcome shortfalls in O&M costs to

39 The EIRRs were subjected to a sensitivity analysis under 20% increase in O&M costs and 20% decrease in project

benefits. All subprojects generated EIRRs that are higher than the economic opportunity cost of capital under both sensitivity scenarios, but with greater sensitivity to the benefit reduction scenario.

40 World Bank. 2017. Republic of Azerbaijan: Corporate Governance and Ownership of State Owned Enterprises. Washington, DC.

41 K Hashimova and Z. Kadyrov. 2017. The Current Situation and Problems of State-Owned Enterprises in Azerbaijan. Baku: Center for Economic and Social Development Press.

42 In all four towns, metering allowed the collection rate to reach almost 100%. Azersu and SAWMC data showed nonrevenue water decreased from 50.0% to 10.0% in Nakhchivan, 70.0% to 11.0% in Agdash, 66.0% to 10.5% in Beylagan, and 63.0% to 9.5% in Goychay.

43 O&M sustainability assumes no viability gap funding from the state budget for O&M costs of the water utilities.

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achieve financial sustainability; (ii) develop staff capacity to plan, design, and manage the WSS system and services; and (iii) ensure infrastructure asset creation. Under the project, sequenced actions were implemented to address these challenges, including (i) institutional improvements for WSS service delivery; (ii) capacity development for better system planning and O&M; (iii) enhanced cost recovery through metering, billing, and collection tariffs; and (iv) a twinning arrangement with an external WSS utility to support capacity development. 50. Considering these financial, O&M, institutional, and environmental dimensions of sustainability, the project, on balance, is rated likely sustainable. E. Development Impact 51. The project is rated satisfactory on development impact as almost all relevant targets were achieved. The population in all four towns receives 24-hour access to potable water. After the new WSS systems became operational, families no longer need to spend considerable time, effort, and money on collecting, filtering, boiling, and chemically treating water. Female family members, who traditionally do this work, can now better plan their housework and are relieved from additional physical labor. Operationalization of the new sewerage network and WWTPs in Goychay and Nakhchivan eliminated the negative public health and environmental impact from discharging wastewater into streets and nearby watercourses because of blocked and collapsed sewers.44 Households now save financial resources previously spent on cleaning septic tanks, which used to serve as the main sewerage method in the project areas. F. Performance of the Borrower and the Executing Agency 52. The borrower is rated satisfactory, as it (i) ensured timely submission of the periodic financing request, (ii) effectively facilitated loan negotiations and loan agreement signing, (iii) timely provided adequate counterpart financing, and (iv) supported efficient and timely oversight and actions during project implementation. 53. The PMOs established by Azersu and SAWMC (with assistance from the consultants) administered project implementation on-site and prepared all required reports. Azersu and SAWMC facilitated and supported ADB’s review missions during implementation and at completion. The PMOs were headed by directors and supported by qualified staff and an externally contracted team of qualified technical, safeguard, financial, and support staff. The PMOs managed project activities, including planning, progress monitoring, and reporting, but Azersu’s abolishment of its PMO in January 2015 adversely affected project implementation (para. 24). External auditors acceptable to ADB audited the project accounts and financial statements, and the audit reports were submitted to ADB as required by the loan agreement.45 However, the very few project transactions that took place in 2018 after loan closing were not audited (para. 40). On balance, SAWMC’s performance is rated satisfactory, and Azersu’s performance is rated less than satisfactory. G. Performance of the Asian Development Bank 54. ADB’s performance was satisfactory. The project was processed and administered by the Urban Development and Water Division of ADB’s Central and West Asia Department and delegated to the Azerbaijan Resident Mission in December 2016, which facilitated provision of

44 Similar impact is expected in Agdash and Beylagan after their WWTPs become operational in 2020. 45 SAWMC engaged BKR ISIK Consulting for 2012–2017, and Azersu engaged RSM Azerbaijan for 2012–2017.

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timely support to the executing agencies in addressing implementation issues. Close coordination between the resident mission and the division enabled the provision of comprehensive support to the executing agencies. Through the regular project review missions, ADB provided input and advice to improve implementation, and timely approvals during implementation. Frequent changes of ADB’s project officers affected project performance during the early implementation stages. ADB’s fiduciary oversight performance was also affected when the project’s clean-up transactions in 2018 were not included in the 2017 audit of the project financial statements. H. Overall Assessment 55. Overall, the project is rated successful, as it was assessed as highly relevant, effective, efficient, and likely sustainable (Table).

Overall Ratings Criteria Rating

Relevance Highly relevant

Effectiveness Effective

Efficiency Efficient

Sustainability Likely sustainable

Overall Assessment Successful

Development impact Satisfactory

Borrower and executing agency Satisfactory

Performance of Asian Development Bank Satisfactory Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 56. Realistic sector and institutional assessments. Implementation of the soft components of infrastructure projects—such as gender equality, safeguards, or capacity building—financed by development organizations in Azerbaijan is often challenging because of the lack of capacity and motivation of the executing agencies. It is important to ensure in-depth assessment of the country and sector context as part of transaction technical assistance to guide the design of the soft components of public utility projects in a well contextualized manner. Weak planning systems; business processes; and technical, administration, and financial capacity of the executing agencies can also put project outcomes at risk. Efficiently tailored technical assistance and closer supervision could have helped mitigate this risk. 57. Dedicated gender equity support. Capacity building on sector-specific gender equity issues, ADB requirements on GAP implementation and monitoring, and reporting on gender equality results should be undertaken for the executing agencies that will implement projects with an explicit gender equity agenda.46 Specifically, capacity building training on GAP targets should be undertaken for the executing agencies at the start of project implementation, and consistent follow-ups should be done at different stages of the project to ensure that the executing agencies fully understand the gender targets and what they need to do to ensure successful implementation

46 In such projects, special attention should be paid on strengthening the executing agencies’ institutional set-up and

staff capacity on gender equity; establishing a coordination mechanism with the State Committee on Women and Children Affairs, and local administrations and municipalities; and providing adequate funding for capacity building at communities.

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of GAP activities. The requirement to collect sex-disaggregated data should be explained clearly to the executing agencies at the start of the project. 58. Challenging loan covenants. The borrower failed to increase tariffs annually to a level that will ensure the financial sustainability of the executing agencies, whose limited mandate prevents them from implementing such a challenging policy action. Such action requires a complex approach through a well-designed communication strategy; effective coordination and capacity building, if needed, with all government stakeholders (Tariff Council, Ministry of Economy, Ministry of Finance, and the Cabinet of Ministers’ concerned departments); and development of the public utilities’ capacity and tools on scenario-based estimation of WSS tariffs. 59. Separate project completion reports for multitranche financing facility tranches. During project implementation, the executing agencies moved activities and resources between tranches, which made it challenging to assess a particular project’s outcome without considering the other projects of the MFF. This is particularly the case with WSS where it is impossible to assess the water supply and sewerage infrastructure without assessing the wastewater treatment facilities. Preparation of a single completion report for the whole program, especially when the MFF tranches close together or in a very close time span, might help avoid these challenges, provide a conceptually more solid assessment of the investment, and save ADB and government administrative resources. B. Recommendations 60. In-depth assessments and project readiness. Transaction technical assistance costs should include a thorough assessment of the political, social, institutional, and regulatory contexts, as well as experiences of other development partners in the sector and with the executing agencies. ADB’s project readiness financing modality should be used to ensure project procurement readiness by having detailed engineering designs and bidding documents ready by loan agreement signing. Project management quality should be ensured by building the capacity of executing agencies in ADB fiduciary and safeguard policies. 61. Well-resourced gender equity agenda. To ensure efficient and effective GAP implementation and achievement of intended gender results, the executing agencies should be properly oriented on the project’s gender commitments. The executing agencies and ADB should ensure that GAP implementation is aligned and kept on track with project implementation. Future projects should ensure that a gender specialist is on board during reconnaissance and fact-finding missions to thoroughly discuss details of the GAP with the executing agencies and agree on implementation arrangements. This will ensure executing agencies’ ownership of the GAP and that the targets identified will be fully aligned with the capacity and key functions of the executing agency, thus facilitating more effective GAP implementation. 62. Technical assistance for institutional and regulatory issues. Technical assistance should be attached to the project to support implementation of the soft components, including those on tariffs, nontariff measures, corporate governance, and gender, given the reluctance of executing agencies to finance such activities from the loan. Having these measures supported through an ADB-administered technical assistance will enable ADB to play a more active catalytic and facilitation role among key government stakeholders, thus raising the chances of the soft components being more effectively implemented. 63. More efficient arrangement on project completion reports under multitranche financing facility. ADB should consider allowing the facility completion report to include all

15

tranches, especially if such tranches financed major network infrastructure investments in the same locations and the concerned tranches were completed at the same time or within a short time span from each other. 64. Further action or follow-up. ADB should continue monitoring (i) the status of WWTP construction and commissioning in Agdash and Beylagan, including ensuring expeditious completion of the WWTP sections that would enable biological treatment of wastewater following ADB’s Safeguard Policy Statement (2009); and (ii) the operational sustainability of project facilities by promoting the adoption of adequate tariffs and collection efficiency. 65. Timing of the project performance evaluation report. The WWTPs in Agdash and Beylagan are expected to be commissioned in the first half of 2020. Given this and the time required for these WWTPs to become fully operational, it may be expedient to conduct the project performance evaluation report in the second half of 2021. Given the discussion in para. 65, the report could cover all three tranches to enable a holistic and more accurate evaluation of the development impact of the improved WSS infrastructure in the towns covered under the program.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Indicators and Targets Project Achievements Impact Improved WSS services in the urban centers of Agdash, Beylagan, Goychay and Nakhchivan

By the end of Tranche 2 plus three years (2020): • Pressurized water supplied for 24 hours daily • Nonrevenue water less than 20% • Residual chlorine at tail ends of water supply system

maintained at 0.2–0.4 parts per million • Sewage pumps operating daily and discharging sewage

to the treatment plant

• Effluent from the sewage treatment plant meets Azerbaijan effluent discharge standards

• By December 2017 pressurized water of 180 liters per

capita supplied for 24 hours daily in all towns • In 2011-2016 nonrevenue water went down to 11% in

Agdash, 10.5 % in Beylagan and 9.5 % in Goychay. Data for Nakhchivan is not available.

• Agdash: no chlorine added • Beylagan: 0.7 parts per million • Goychay: 0.15 parts per million • Nakhchivan: ozone, not chlorine is used for water

disinfection • WWTPs constructed in Goychay and in Nakhchivan in

2017 • WWTPs in Agdash and Beylagan financed through the

state budget are expected to be operational in early 2020 • Goychay WWTP designed to achieve the EC directive

91/271/EC on Urban Wastewater Treatment with nutrient removal requirements. Process calculations are based on ATV Standards (German Association for Water Pollution Control)

• Nakhchivan WWTP: membrane bio reactor type treatment plant which meets drinking water standards

Outcome Improved access to WSS infrastructure in Agdash, Beylagan, Goychay and Nakhchivan

By end of Tranche 2 (2017): • Residents’ (including 100% female headed households)

access to sanitation facilities increased from 36% in 2011 to 95% by 2017

Achieved • Agdash: access to sanitation facilities increased from

19% in 2011 to 100% by 2018. • Beylagan: access to sanitation facilities increased from

10% in 2011 to 100% by 2018. • Goychay: access to sanitation facilities increased from

14% in 2011 to 100% by 2018. • Nakhchivan: access to sanitation facilities increased

from 60% in 2011 to 100% by 2018

Appendix 1 17

Design Summary Performance Indicators and Targets Project Achievements

• Residents’ (including 100% female headed households) access to 24-hour potable water supply increased from 56% in 2011 to 95% by 2017

• Agdash: access to 24-hour potable water supply increased from 31% in 2011 to 100% by 2018.

• Beylagan: access to 24-hour potable water supply increased from 35% in 2011 to 100% by 2018.

• Goychay: access to 24-hour potable water supply increased from 59% in 2011 to 100% by 2018.

• Nakhchivan: access to 24-hour potable water supply increased from 60% in 2011 to 100% by 2018

Outputs A. WSS Infrastructure Development

A1: Water supply system efficiency improved through rehabilitation and replacement, and coverage expanded

By 2017:

461 km of distribution networks constructed 7,000 m3 of storage reservoirs constructed Pressurized water of 140 liters per capita supplied for 24-hour daily by 20171

Achieved Total of 500.5 km of distribution networks constructed:

Agdash: 143 km by 2016 Beylagan: 92 km by 2016 Goychay: 61 km by 2016 Nakhchivan: 205 km by 2016

Total of 10,000 m3 of storage reservoirs constructed and 4,000 cum renovated:

Agdash: 1x5,000 m3 by 2016 Beylagan: 2x 500 m3 constructed and 2x2,000m3 renovated by 2014 Goychay: 2x 2000 m3 by 2014

Pressurized water supplied for 24-hour daily by 2017

Agdash: 180 liters per capita Beylagan: 180 liters per capita Goychay: 180 liters per capita Nakhchivan: 167 liters per capita

A2: Sewerage and sanitation system efficiency improved through rehabilitation and reconstruction, and coverage expanded

By 2017: • 429 km of sewer lines constructed

Partly achieved

• Total of 458 km of sewer lines constructed: Agdash: 124 km by 2016 Beylagan: 89 km by 2016 Goychay: 50 km by 2016 Nakhchivan: 200 km by 2016

1 PFR for Tranche 4 indicated level of initial expected water supply is 1201 liters per capita

18 Appendix 1

Design Summary Performance Indicators and Targets Project Achievements

• Sewage treatment plants constructed to treat and safely discharge 83 MLD of sewage by 2017

• Separate and adequate latrines and washing facilities

provided in 15 public schools in project towns by 2017

• WWTPs constructed can treat 52 MLD of sewage: Goychay: 20 MLD by 2017 Nakhchivan: 32 MLD by 2017

• Separate and adequate latrines and washing facilities

provided in Agdash (8 schools); Beylagan (4 schools); Goychay (10 schools) and Nakhchivan (24 schools).

B. Institutional Effectiveness

B1: Management Information System Developed

By 2017: Sex-disaggregated human resource database maintained by Azersu and SAWMC for human resource management

Partly achieved2 Azersu: There is sex-disaggregated database for human resources. By project completion, sex-disaggregated information on the number of staff/personnel in Azersu JSC as well as in Goychay, Agdash, and Beylagan were provided by Azersu OJSC. SAWMC: sex-disaggregated database for human resources not available

B2: Management capacity of Sukanals and JSCs enhanced

By 2017:

Women in 30% of key management staff positions in Sukanals and JSCs by 2017

Sukanals and JSCs staff trained in financial management and accounting (30% of them women)

Not achieved Women comprise 14.5 % of total employees of Azersu JSC staff in Baku (168 out of 1,157) by 2018 Women comprise 13.8% of total employees in Goychay, Agdash, and Beylagan Sukanals (26 out of 188) by 2018 Women comprise 6% of total employees in Nakhchivan SAWMC (11 out of 172) by 2018 Agdash: women comprise 33% of staff of JSC central office by 2018 Beylagan: women comprise 0% of staff of JSC central office by 2018 Goychay: women comprise 0% of staff of JSC central office by 2018. Nakhchivan; women comprise 15.6% of staff of SAWMC central office (5 out of 32) by 2018. Azersu periodically conducts trainings for all staff, including women. All persons working in accounting, O&M have training per year in Baku. Beylagan: available data shows that all the 6 female staff have been trained

2 Data from GAP monitoring table prepared by Gender Consultant

Appendix 1 19

Design Summary Performance Indicators and Targets Project Achievements Women comprise 30% of customer care unit staff in project towns and inform, educate, and communicate on water, hygiene, and sanitation

Nakhchivan:17 % (10 out of 56) staff trained are women

Azersu: Goychay: 50% (2 out of 4). Beylagan: 0 % (o out of 1) SAWMC: 0 %

B3: Institutions improved for WSS delivery By 2017:

Twinning program established with a WSS utility from a developed member country by 2013 JSCs and Sukanals achieve revenue surpluses annually from 2015

Achieved Azersu: Twinning arrangement under ADB program was substituted by the capacity building activities provided to Azersu by the Suez Environnement, France SAWMC: Aguas de Portugal June 2016 – May 2017. Goychay: fee collection increased from AZN386,000 in 2015 to AZN696,800 in 2018 Agdash fee collection increased from AZN109,228 in 2015 to AZN280,680 in 2018 Beylagan fee collection increased from AZN68,100 in 2015 to AZN161,400 in 2018

C. Program Management Facility

C1: Better hygiene and sanitation practices in the community

By 2017: Sex-disaggregated customer database maintained by Azersu, SAWMC, Sukanals, and JSCs to develop targeted marketing campaigns for women by 2017 Public outreach program (POP) targeting 150 teachers as hygiene and sanitation advocates rolled out in project towns by 2017 Public outreach program targeting 5,000 women in the community on hygiene and sanitation practices rolled out in project towns by 2017

Achieved Sex-disaggregated data of customers is available. Based on Sukanal lists and updated in a report by Azersu OJSC: in Goychay, there are 1,531 female customers and 3,578 males; in Agdash, 1,531 females and 4,874 males; in Beylagan, 65 females and 5,185 males

Azersu: UNICEF was engaged to implement the POP in

Agdash, Beylagan and Agjabedi.3.Total of 129 teachers as hygiene and sanitation advocates have been covered. Program was completed in March 2015. POP for Goychay was implemented under Tranche 1 of WSSIP MFF. SAWMC: POP for Nakhchivan was implemented under Tranche 1 of WSSIP MFF.

Azersu: UNICEF was engaged to implement the POP in Agdash, Beylagan and Agjabedi. Total of more than 700 women was covered Program was completed in March

3 Agjabedi was included in scope of Tranche 3 of WSSIP MFF

20 Appendix 1

Design Summary Performance Indicators and Targets Project Achievements

Public outreach program targeting 2,000 children as hygiene and sanitation advocates rolled out in project towns by 2017

2015. POP for Goychay was implemented under Tranche 1 of WSSIP MFF. SAWMC: POP for Nakhchivan was implemented under Tranche 1 of WSSIP MFF

Azersu: UNICEF was engaged to implement the POP in Agdash, Beylagan and Agjabedi. Total of more than 12000 children was covered. Program was completed in March 2015. POP for Goychay was implemented under Tranche 1 of WSSIP MFF SAWMC: POP for Nakhchivan was implemented under Tranche 1 of WSSIP MFF.

Appendix 2 21

PROJECT COST AT APPRAISAL AND ACTUAL ($'000)

Appraisal Estimate Revised2 Actual Item Foreign Exchange Foreign Exchange Total Cost A. Civil Works 1. Construction of water intake facilities and rehabilitation of WSS network

a. Goychay 25.00 33.78 33.78 b. Agdash 64.00 79.18 79.18 c. Beylagan 49.26 66.00 66.00 2. Construction of water distribution and sewerage network

a. Nakhchivan 85.00 91.98 91.98 b. Shikhmahmud 0.00 21.37 21.37 3. Construction of WTP 0.00 0.00 0.00 a. Goychay, Agdash, Beylagan 38.00 20.98 20.98 b. Nakhchivan 47.00 45.25 45.25 Subtotal (A) 308.26 358.54 358.54 B. Consultants1 4.88 9.30 9.30 Environment and Social Mitigation 0.32 0.00 0.00 Subtotal (B) 5.20 9.30 9.30 C. Recurrent Costs 1. IPMO 2.80 0.00 0.00 2. System Operations and Maintenance 14.88 0.00 0.00 Subtotal (C) 17.68 0.00 0.00 D. Contingencies 1. Physical 33.11 0.00 0.00 2. Price 21.85 0.00 0.00 Subtotal (D) 54.97 0.00 0.00 E. Financing Charges During Implementation

1. Interest During Construction 23.00 9.29 9.29 2. Commitment charges 0.90 1.06 1.06 Subtotal (E) 23.90 10.35 10.35 Total (A+B+C+D+E) 410.00 378.22 378.22

1. The Consultants fee Includes: a) estimated audit fees of $360,848.72 for the audit of the annual project financial statements for 2012–2017 to be financed from government resources ($55,044)

and ADB loan ($325,604) resources. b) The IPMO staff salaries were financed from government resources and booked under consultant fee category. Sources: P42408 PFR2, Azersu and SAWMC estimates

22 Appendix 3

PROJECT COST BY FINANCIER

Table A3.1: Project Cost at Appraisal by Financier

ADB

Government Total Costa

Amount % of Cost Category Amount

% of Cost Category Amount

Taxes and Duties

Item A. Investment Costs

1. Civil works 261.23 84.75% 47.02 15.25% 308.26 47.02 3. Environment and social mitigation 0.27 84.75% 0.05 15.25% 0.32 0.05 4. Consultantsb 4.14 84.75% 0.74 15.25% 4.88 0.74

Subtotal (A) 265.64 84.75% 47.82 15.25% 313.46 47.81 B. Recurrent Costs

1. IPMO 2.37 84.75% 0.43 15.25% 2.80 0 2. Equipment operation and

maintenance 0.00 0.00% 14.88 100.00% 14.88 0

Subtotal (B) 2.37 13.42% 15.31 86.58% 17.68 0 Total Base Cost (A+B)

268.01 80.94% 63.12 19.06% 331.14 47.81

C. Contingencies 1. Physical 28.06 84.75% 5.05 15.25% 33.11 2. Price 3.92 17.84% 17.93 82.06% 21.85 Subtotal (C) 31.98 58.19% 22.99 41.81% 54.97 D. Financial Charges During

Implementation 0 0.00% 23.90 100.00% 23.90 0

Total Project Cost (A+B+C+D) 300.00 73.17% 110.00 26.83% 410.00 47.81 % Total Project Cost

73.17%

26.83%

100%

a. Numbers may not sum precisely because of rounding. b. The Consultants fee Includes estimated audit fees of $0.5 million for the audit of the annual project financial statements for 2012–2017 to be financed from ADB loan and government resources, DSC of $4 million. Sources: Asian Development Bank, Azersu and SAWMC estimates

Appendix 3 23

Table A3.2: Project Cost at Completion by Financier ADB Government Total Cost

Amount % of Cost Category Amount

% of Cost Category Amount

Taxes and Duties

Item A. Investment Costs

1. Civil works 296.06 82.57% 62.50 17.43% 358.56 53.34 2. Environment and social mitigation 0 0.00% 0 0.00% 0 0 3. Consultants1 3.65 39.25% 5.65 60.75% 9.30 0.75

Subtotal (A) 299.71 81.47% 68.15 18.53% 367.86 54.09 B. Recurrent Costs

1 IPMO 0 0.00% 0 0.00% 0 0 2 System Operation and Maintenance 0 0.00% 0 0.00% 0 0

Subtotal (B) 0 0.00% 0 0.00% 0 0 Total Base Cost (A+B) 299.71 81.47% 68.15 18.53% 367.86 54.09

C. Contingencies 0 0.00% 0 0.00% 0 0 D. Financial Charges During Implementation 0 0.00% 10.35 100.00% 10.35 0

Total Project Cost (A+B+C+D) 299.71 79.24% 78.50 20.76% 378.22 0 % Total Project Cost

79.24%

20.76%

100%

Notes: 1. Numbers may not sum precisely because of rounding. 2. The Consultants fee Includes: a) audit fees of $360,848.72 for the audit of the annual project financial statements for 2012–2017, $55,044 financed from government resources and $360,848.72

from ADB loan resources. b) The IPMO staff salaries were financed from government resources and booked under consultant fee category Sources: Asian Development Bank, Azersu and SAWMC audit reports

24 Appendix 4

DISBURSEMENT OF ADB LOAN AND GRANT PROCEEDS

Table 4.1: Annual and Cumulative Disbursement of ADB Loan Proceedsa ($ million)

Annual Disbursement Cumulative Disbursement

Year Amount

($ million) % of Total Amount

($ million) % of Total 2012 35.43 11.82% 35.43 11.82% 2013 79.40 26.49% 114.84 38.32% 2014 52.13 17.39% 166.96 55.71% 2015 46.88 15.64% 213.84 71.35% 2016 56.60 18.88% 270.44 90.23% 2017 24.28 8.10% 294.72 98.33% 2018 4.99 1.67% 299.71 100% Total 299.71 100.00%

ADB = Asian Development Bank. Source: Asian Development Bank.

Figure 4.1: Projection and Cumulative Disbursement of ADB Loan Proceeds

($ million)

Years 2012 2013 2014 2015 2016 2017 2018

Plan 15.81 85.77 234.48 267.7 267.98

Actual 35.43 114.83 166.95 213.85 270.44 294.71 299.7

Appendix 5 25

CONTRACT AWARDS OF ADB LOAN AND GRANT PROCEEDS

Table 5.1: Annual and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Annual Contract Awards Cumulative Contract Awards

Year Amount

($ million) % of Total Amount

($ million) % of Total 2012 233.00 77.74% 233.00 77.74% 2013 0.11 0.04% 233.11 77.77% 2014 38.61 12.89% 271.72 90.66% 2015 27.98 9.33% 299.71 100% Total 299.71 100.0%

ADB = Asian Development Bank. Source: Asian Development Bank.

Figure 5.1: Projection and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Years 2012 2013 2014 2015

Plan 158.17 265.35 267.99

Actual 233 233.11 271.72 299.7

26 Appendix 6

CHRONOLOGY OF MAIN EVENTS No. DESCRIPTION DATE

2009 1 First Entry in eOperations 20 August

2 Concept Paper 7 May 2011

3 Receive PFR from Government 5 November 4 MRM / SRM 29 November

5 Submit PFR Report to Management 9 December 6 Loan Approval 22 December

2012 7 Loan Agreement signed 6 June 8 Contract with Gemigaya company on Nakhchivan WSS1 signed 7 June 9 Contract with Alke Inshaat on Agdash WSS signed 20 June 10 Contract with TTS INSAAT LTD LUDWIG PFEIFFER on Beylagan WSS signed 15 August 11 Contract with ATINAK MUH. INS. SAN VE TIC A.S. on Goychay WSS2 signed 14 September 12 Loan effectiveness 20 September 13 First amendment to LA (waiving requirement to relend loan proceeds to EAs) 28 September 14 Contract with YOLSU ENGINEERING SERVICE LTD. CO. for design, tendering and

construction supervision in NAR signed 2 October

15 ADB Loan Inception Mission 14-22 October

16 Amendment 1 to contract agreement on Agdash WSS

17 December 17 Amendment 1 to contract agreement on Goychay WSS2 18 Amendment 1 to contract agreement on Beylagan WSS 19 Contract with Gemigaya on WSS2 in Nakhchivan signed

2013 20 ADB Consultation Mission 7-11 February 21 ADB Loan Review Mission 10-18 April 22 Contract with BKR ISIK CONSULTING for audit services in NAR signed 25 July 23 ADB Loan Review Mission 14-18 December 24 Contract with RSM AZERBAIJAN LIMITED LIABILITY COMPANY for audit services to

Azersu part of the project signed 25 December

2014 25 Amendment 2 to contract agreement on Agdash WSS 2 May 26 Amendment 2 to contract agreement on Beylagan WSS 2 May 27 Amendment 2 to contract agreement on Goychay WSS2 14 May 28 Contract with DIZAYN INSAAT MMC & BIOWORKS VERFAHRENSTECHNI for

construction of WWTP in Nakhchivan signed 5 June

29 ADB Loan Review Mission 10-18 June 30 Contract with UNICEF for public outreach program signed 23 July 31 Amendment 3 to contract agreement on Beylagan WSS 1 August 32 ADB Loan Review Mission 15-19 September 33 Amendment 3 to contract agreement on Goychay WSS2 30 September 34 Amendment 1 to contract agreement with IPMC (SAWMC) 31 October 35 ADB Loan Review Mission 6-16 November

36 Amendment 3 to contract agreement on Agdash WSS 11 November

37 Amendment 4 to contract agreement on Beylagan WSS 11 November

38 Amendment 4 to contract agreement on Agdash WSS 24 December

39 Amendment 4 to contract agreement on Goychay WSS2 24 December

40 Amendment 5 to contract agreement on Beylagan WSS 24 December

2015

41 ADB Loan Review Mission 20-29 April

Appendix 6 27

No. DESCRIPTION DATE 42 ADB memo on minor change to Loan agreement (inclusion of Shikhmahmud) 22 May

43 ADB Contract Consultation Mission 17-22 June

44 Amendment 5 to contract agreement on Goychay WSS2 30 June

45 Amendment 5 to contract agreement on Agdash WSS 31 August

46 ADB Loan Review Mission 8-13 September 47 Amendment 6 to contract agreement on Goychay WSS2 2 October 48 ADB Loan Review Mission 3-6 November

49 Amendment 6 to contract agreement on Agdash WSS 3 November

50 Contract with TTS INSAAT LLC AND ALKATAS INSAAT VE TAAHUT for Goychay WWTP contract signed

13 November

51 Amendment 6 to contract agreement on Beylagan WSS 13 November 52 Contract with Cahan Insaat llc construction of water distribution network and sewerage

networks for Shikhmahmud town in NAR signed 26 November

53 Amendment 1 to audit contract (Azersu) 20 November 54 ADB memo on minor change to Loan agreement (on Twinning project) 4 December 55 Amendment 1 to contract agreement on Nakhchivan WWTP 5 December 56 Amendment 7 to contract agreement on Beylagan WSS 29 December 57 Amendment 7 to contract agreement on Agdash WSS 29 December

2016 58 ADB Midterm Review Mission 29 February-11

March 59 Amendment 7 to contract agreement on Goychay WSS2 7 March 60 Amendment 2 to contract agreement with IPMC (SAWMC) 15 April 61 Contract with AGUAS DE PORTUGAL for Twinning Partnership Program signed 2 May 62 Amendment 2 to contract agreement on Nakhchivan WWTP 10 May 63 Amendment 3 to contract agreement with IPMC (SAWMC) 15 May 64 Amendment 8 to contract agreement on Agdash WSS 9 August 65 Amendment 8 to contract agreement on Beylagan WSS 29 August 66 Amendment 9 to contract agreement on Agdash WSS 30 September 67 ADB Loan Review Mission 1-14 September 68 ADB Loan Review Mission 1-16 November 69 Amendment 2 to audit contract (Azersu) 20 November 70 Amendment 1 to contract agreement on Goychay WWTP 30 November 71 Loan administration delegated to AZRM 7 December 72 Amendment 9 to contract agreement on Beylagan WSS 30 December

2017 73 Amendment 1 to contract agreement on Shikhmahmud WSS 11 January 74 Amendment 3 to contract agreement on Nakhchivan WWTP 11 January 75 ADB Loan Review Mission 30 March 76 Amendment 2 to contract agreement on Shikhmahmud WSS 30 March 77 ADB Special Administration Mission 11-19 May 78 ADB Special Administration Mission (field visit, AZRM) 25 May 79 ADB Loan Review Mission 6-7 June 80 Second Amendment to Loan Agreement (closing date extension and reallocation of

loan proceeds) 29 June

81 Amendment 2 to contract agreement on Goychay WWTP 30 June 82 Amendment 3 to audit contract (Azersu) 20 July 83 Amendment 1 to audit contract (SAWMC) 28 July 84 ADB Loan Review Mission 18-23 October 85 PAM updated and disclosed November 86 ADB Loan Review Mission 12 December 87 Project completion 30 December

28 Appendix 6

No. DESCRIPTION DATE 2018

88 SAWMC submitted draft Borrower PCR 11 March 89 Azersu submitted draft Borrower PCR 10 April 90 AZRM provided comments to SAWMC PCR 3 May 91 AZRM provided comments to Azersu PCR 21 May 92 SAWMC submitted revised PCR 24 May 93 Azersu submitted revised PCR 31 May 94 SAWMC submitted final PCR 20 June 95 Azersu submitted final PCR 8 August 96 PCR mission 11-14 December

Appendix 7 29

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan Agreement

Status of Compliance Azersu

Status of Compliance SAWMC

(a) The Borrower shall cause the Project to be carried out with due diligence and efficiency and in conformity with sound applicable technical, financial, business and development practices b) In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 to this Loan Agreement. The Borrower shall make available or cause to be available promptly as needed the funds, facilities, services, land and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project. The Borrower shall enable ADB’s representatives to inspect the Project, the Goods and Works, and any relevant records and documents. The Borrower shall take all actions which shall be necessary on its part to enable Azersu and SAWMC to perform their obligations under the Project Agreements and shall not take or permit any action which would interfere with the performance of such obligations.

Particular Covenants Section 4.01 (a) Section 4.01 (b) Section 4.02. Section 4.03. Section 4.04

Partially complied. The PMO of the project has been established and managed efficiently. The separate accounts for the Project have been maintained and the financial reports have been submitted in time. The engineering and safeguards specialists have been engaged to implement the Bank’s adequate practices. At the same time, Project had significant cost overruns and time delays. Complied. Project was carried in accordance with the conditions set out in Schedule 5 of the Loan Agreement Complied. According to the Audit reports sufficient counterpart funds were allocated in time. Complied. Complied.

Complied. The PMO of the project has been established and managed efficiently. The separate accounts for the Project have been maintained and the financial reports have been submitted in time. The engineering and safeguards specialists have been engaged to implement the Bank’s adequate practices. Complied. Project was carried in accordance with the conditions set out in Schedule 5 of the Loan Agreement Complied. According to the Audit reports sufficient counterpart funds were allocated in time. Complied. Complied.

30 Appendix 7

Schedule 5: Execution of Project; Financial Matters

The Borrower, Azersu and SAWMC shall ensure that the Project is implemented in accordance with the detailed arrangements set forth in the PAM. Any subsequent change to the PAM shall become effective only after approval of such change by the Borrower and ADB. In the event of any discrepancy betüeen the PAM and this Loan Agreement or the Project Agreements, the provisions of this Loan Agreement or the Project Agreement shall prevail.

Implementation Arrangements

Complied. Complied.

The Borrower shall appoint Azersu and SAWMC as the Project Executing Agencies for the Project. Azersu shall be the Project Executing Agency under the Project in all areas except in Nakhchivan. SAWMC shall be the Project Executing Agency for activities in Nakhchivan.

Project Management Complied Azersu appointed as the Project Executing Agencies for all areas. The PMO established and staffed in August 2010.

Complied. SAWMC was appointed as the Project Executing Agencies for Nakhchivan. The PMO established and staffed in March 2008.

The Borrower shall ensure that tariffs are reviewed annually for customers receiving improved WSS services to ensure that they are set at appropriate levels, taking into account the real costs of delivering the improved services. The Borrower shall cause Azersu and SAWMC to ensure that such revised tariffs are implemented. The Borrower shall cause Azersu and SAWMC to ensure that the WSS service providers in the towns of Agdash, Beylagan, Goychay and Nakhchivan have an adequate enforcement mechanism for effective collection of service fees and penalizing defaulters, deterring non-payment and ensuring sustainability of their operations.

Tariff Levels and Payment Recovery

Partly complied. The tariffs are not reviewed annually. The utility tariff rates are fixed by the Tariff Council of the Azerbaijan Republic. The last water tariffs were revised in May 2016 by the Tariff Council. From 16 May 2016 water tariffs for the regions increased from AZN0.25 to AZN0.30 per m3; and sewage tariffs from AZN0.06 to AZN0.15. Complied. The smart meters installed under the project have helped monitor and ensure service provision upon payment. Collection rates from population increased steadily from 54% to 100%.

Partly complied. The tariffs are not reviewed annually. The utility tariff rates are fixed by the Tariff Council of the Azerbaijan Republic. The last water tariffs were revised in May 2016 by the Tariff Council. From 16 May 2016 water tariffs for the regions increased from AZN0.25 to AZN0.30 per m3; and sewage tariffs from AZN0.06 to AZN0.15. Complied. The smart meters installed under the project have helped monitor and ensure service provision upon payment. Collection rates from population increased steadily from 54% to 100%.

The Borrower shall cause Azersu and SAWMC to ensure that the preparation, design, construction, implementation, operation and decommissioning of the Project comply with: (a) all applicable laws, and regulations of the Borrower relating to environment, health and safety; (b) the Environmental Safeguards; (c) the EARF; and (d) all measures and requirements set forth in the respective IEE and EMP, and any corrective or preventative actions set forth in a Safeguards Monitoring Report.

Environment Complied. The safeguard reports were submitted and disclosed in time.

Complied. The safeguard reports were submitted and disclosed in time.

Appendix 7 31

The Borrower shall cause Azersu and SAWMC to ensure that all land and all rights-of-way required for the Project are made available to the Works contractor in accordance with the schedule agreed under the related Works contract and all land acquisition and resettlement activities are implemented in compliance with: a) all applicable laws and regulations of the Borrower relating to land acquisition and involuntary resettlement; b) the involuntary Resettlement Safeguards; (c) the LARF; and (d) all measures and requirements set forth in the respective LARP, and any corrective or preventive actions set forth in a Safeguards Monitoring Report. Without limiting the application of the Involuntary Resettlement Safeguards, the LARF or LARP, the Borrower shall cause Azersu and SAWMC to ensure that no physical or economic displacement takes place in connection with the Project until: compensation and other entitlements have

been provided to affected people in accordance with the LARP; and a comprehensive income and livelihood restoration program has been established in accordance with the LARP.

Land Acquisition and Involuntary Resettlement

Complied. The LARP compliance report for the new Agdash water intake facilities were submitted and disclosed on ADB website 12 January 2018.

Complied. No acquisition of lands and resettlement is required

No impact on indigenous people is expected for the Project. However, if there is any such impact, the borrower shall cause Azersu and /or SAWMC, as appropriate, to ensure that it shall adhere to applicable laws and regulations of the Borrower and the SPS.

Indigenous People Not Applicable. Not Applicable.

The Borrower shall cause Azersu and SAWMC to make available budgetary and human resources to implement the EMP and LARP.

Human and Financial Resources to Implement Safeguards Requirements.

Complied. Complied.

The Borrower shall cause Azersu and SAWMC to ensure that all bidding documents and contracts for Works contain provisions that require contractors to: (a) comply with the measures and requirements relevant to the contractor set forth in the IEE, the EMP and the LARP (to the extent they concern impacts on affected people during construction), and any corrective or preventative actions set out in a Safeguards Monitoring Report; (b) Make available a budget for all such environmental and social measures; (c) Provide the Borrower with a written notice of any unanticipated environmental, resettlement or indigenous peoples risks or impacts that arise during construction, implementation or operation of the Project that were not considered in the IEE, the EMP or the LARP;

Safeguards-Related provisions in Bidding Documents and Works Contracts

Complied. On 15 Dec 2015, Azersu requested for a variation to fund a new water intake in Agdash, including wells, reservoir and transmission pipes. The IEE for Agdash was revised to add new water supply source after 2 of the wells had collapsed in Qolqati. Azersu also updated LARP detailing the safeguard issues connected with the new water source and transmission pipeline.

Complied.

32 Appendix 7

(d) Adequately record the condition of roads, agricultural land and other infrastructure prior to starting to transport materials and constructions; and (e) Fully reinstate pathways, other local infrastructure, and agricultural land to at least their pre-project condition upon the completion of construction. Safeguard Monitoring and Reports Borrower shall cause Azersu and SAWMC to do the following: a) Submit semi-annual Safeguard Monitoring Reports to the ADB and disclose relevant information from such reports to affected persons promptly upon submission; b) If any unanticipated environmental and/or social risks and impact arise during construction, implementation or operation of the Project that were not considered in the IEE, the EMO or the LARP, promptly inform ADB of the occurrence of such risks or impact, with detailed description of the event and proposed corrective action plan; and c) Report any actual or potential breach of compliance with the measures and requirements set forth in the EMP or the LARP promptly after becoming aware of the breach

Safeguard Monitoring and Reports

Complied. The semi-annual reports are submitted in time.

Complied. The semi-annual reports are submitted in time.

The Borrower shall cause Azersu and SAWMC to ensure that no proceeds of the Loan are used to finance any activity included in the list of prohibited investment activities provided in Appendix 5 of the SPS.

Prohibited List of Investments

Complied. Complied.

The Borrower shall cause Azersu and SAWMC to ensure that all civil works contractors: (a) comply with all applicable labor laws of the Borrower; (b) use their best efforts to employ women and local people, including disadvantaged people, living in the vicinity of the Project; (c) disseminate information at worksites on health safety for those employed during construction; (d) provide equal pay to men and women for work of equal type; (e) provide safe working conditions and separate culturally appropriate facilities for male and female workers; and (f) abstain from child labor.

Labor Standards and Health

Complied. Complied.

The Borrower shall cause Azersu and SAWMC to (a) ensure that the gender action plan prepared for the Project is implemented in a timely manner; (b) submit semiannual reports to ADB; and (c) ensure that targets in the gender action plan are achieved.

Gender and Development

Partly Complied. The GAP was prepared and partly implemented.

Partly Complied. The GAP was prepared and partly implemented.

The Borrower shall ensure that Azersu and SAWMC implement a public consultation and participation plan comprising; (a) community awareness and participation program; (b) a hygiene and sanitation program; and (c) a training program for town water users associations.

Public Consultation and Participation

Complied. Complied.

Appendix 7 33

The Borrower shall ensure that Azersu and SAWMC maintain separate records and accounts adequate to identify; (a) the Works and Consulting Services financed from the Loan proceeds; (b) financing resources received; (c) expenditures incurred on the components for the Project; and (d) the use of Government contribution. These accounts and related financial statements shall be audited annually in accordance with sound auditing standards by an independent auditor acceptable to ADB. Azersu and SAWMC shall submit annual audited reports and related financial statements to ADB within 9 months after the end of each fiscal year during implementation of the Project

Accounting and Auditing

Partially Complied. Annual submission of Audited Project Financial Statements for FYY 2012 to 2017 are submitted. APFS for 2018 was not submitted and available APFS with ADB does not match ADB LFIS with unaudited difference of $4,987,219.62. million.

Complied. Annual submission of Audited Project Financial Statements for FYY 2012 to 2017 are submitted. APFS for 2018 was not submitted and available APFS with ADB does not match ADB LFIS with unaudited difference of $5,000.

The Borrower, Azersu and SAWMC shall: (a) comply with ADB’s Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Project; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation. The Borrower, Azersu and SAWMC shall ensure that the anticorruption provisions acceptable to ADB are included in all bidding documents and contracts, including provisions specifying the right of ADB to audit and examine the record and accounts of the executing and implementing agencies and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

Governance and Anticorruption

Complied. Complied.

L2842-AZE: STATUS OF COMPLIANCE TO LOAN COVENANTS

under Project Agreement

Project Agreement Remarks/Status

(Azersu) Remarks/Status

(SAWMC) Particular Covenants

Section 2.01. (a) Azersu and SAWMC shall carry out the Project with due diligence and efficiency and in conformity with sound applicable technical, financial, business and development practices (b) In the carrying out of the Project and operation of the Project facilities, Azersu and SAWMC shall perform, all obligations set forth in the Loan Agreement to the extend they are applicable to Azersu and SAWMC

Partly complied. Significant cost overruns and time delays

Complied.

Section 2.02. Azersu and SAWMC shall make available or cause to be available promptly as needed the funds, facilities, services, land and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project.

Complied. Complied.

Section 2.03. (a) In the carrying out of the Project, Azersu and SAWMC shall employ competent and qualified consultants and contractors, acceptable to ADB, to an extend and upon term and conditions satisfactory to ADB (b) except as ADB may otherwise agree, Azersu and SAWMC shall procure all items of expenditures to be financed out of the proceeds of the Loan in accordance with the provisions of the Schedule 4to the Loan Agreement. ADB

Complied. Complied.

34 Appendix 7

Project Agreement Remarks/Status

(Azersu) Remarks/Status

(SAWMC) may refuse to finance a contract where any such items have not been procured under procedures substantially in accordance with those agreed between the Borrower and ADB or where the items and conditions of the contract are not satisfactory to ADB. Section 2.04. Azersu and SAWMC shall carry out the Project in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to ADB. Azersu and SAWMC shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request.

Complied. Complied.

Section 2.05. (a) Azersu and SAWMC shall take out and maintain with responsible insurers or make other arrangements satisfactory to ADB for insurance of the Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice. (b) Without limiting the generality of the foregoing, Azersu and SAWMC undertake to insure, or cause to be insured, the Goods to be imported for the Project and to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such Goods.

Complied. Complied.

Section 2.06. Azersu and SAWMC shall maintain, or cause to be maintained, records and accounts adequate to identify the Goods, Works, consulting services and other items of expenditure financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition.

Complied. Complied.

Section 2.07. (a) ADB and Azersu, and SAWMC shall cooperate fully to ensure that the purposes of the Loan will be accomplished. (b) Azersu and SAWMC shall promptly inform ADB of any condition which interferes with, or threatens to interfere with, the progress of the Project, the performance of its obligations under this Project Agreement, or the accomplishment of the purposes of the Loan. (c) ADB and Azersu, and SAWMC shall from time to time, at the request of either party, exchange views through their representatives with regard to any matters relating to the Project, Azersu, SAWMC and the Loan.

Complied. Complied.

Section 2.08 (a) AZERSU and SAWMA shall furnish to ADB all such reports and information as ADB shall reasonably request concerning: (i) the Loan and the expenditure of the proceeds thereof; (ii) the items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of AZERSU and SAWMA; and (v) any other matters relating to the purposes of the Loan. (b) Without limiting the generality of the foregoing, AZERSU and SAWMA shall furnish to ADB periodic reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the period under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter. (c) Promptly after physical completion of the Project, but in any event not later than 3 months thereafter or such later date as ADB may agree for this purpose, AZERSU and SAWMA shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by AZERSU and SAWMA of its obligations under the Project Agreements and the accomplishment of the purposes of the Loan.

Complied.

Complied.

Appendix 7 35

Project Agreement Remarks/Status

(Azersu) Remarks/Status

(SAWMC) Section 2.09.(a) Azersu and SAWMC shall: (i) maintain separate accounts for the Project; (ii) have such accounts and related financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and (iii) furnish to ADB, promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the Loan proceeds and compliance with the covenants of the Loan Agreement as well as on the use of the procedures for statement of expenditures), all in the English language. Azersu and SAWMC shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. (b) Azersu and SAWMC shall enable ADB, upon ADB's request, to discuss Azersu’s and SAWMC's financial statements and its financial affairs from time to time with the auditors appointed by Azersu and SAWMC pursuant to Section 2.09(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officers of Azersu and SAWMC unless Azersu and SAWMC shall otherwise agree.

Complied. Complied.

Section 2.10 Azersu and SAWMC shall enable ADB’s representative to inspect the Project, the Goods and Works and any relevant records and documents.

Complied. Complied.

Section 2.11. (a) Azersu and SAWMC shall, promptly as required, take all action within its powers to maintain its corporate existence, to carry on its operations, and to acquire, maintain and renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its operations. (b) Azersu and SAWMC shall at all times conduct its operations in accordance with sound applicable technical, financial, business, development and operational practices, and under the supervision of competent and experienced management and personnel. (c) Azersu and SAWMC shall at all times operate and maintain its plants, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound applicable technical, financial, business, development, operational and maintenance practices.

Complied. Complied.

Section 2.12. Except as ADB may otherwise agree, Azersu and SAWMC shall not sell, lease or otherwise dispose of any of its assets which shall be required for the efficient carrying on of its operations or the disposal of which may prejudice its ability to perform satisfactorily any of its obligations under this Project Agreement.

Complied. Complied.

Section 2.13 Except as ADB may otherwise agree, Azersu and SAWMC shall apply the proceeds of the Loan to the financing of expenditures on the Project in accordance with the provisions of the Loan Agreement and this Project Agreement, shall ensure that all items of the expenditures financed out of such proceeds are used exclusively in the carrion out of the Project.

Complied. Complied.

Section 2.14 Except as ADB and Borrower may otherwise agree, Azersu and SAWMC shall duly perform all its obligations under the Subsidiary Loan Agreement, and shall not take, or concur in, any action which would have the effect of assigning, amending, abrogating or waving any rights or obligations of the parties under the Subsidiary Loan Agreement.

Complied. Complied.

Section 2.15 Azersu and SAWMC shall promptly notify ADB of any proposal to amend, suspend or repeal any provision of its Charter, which, if implemented, could adversely affect the carrying out of the project or the operation of the Project facilities. Azersu and SAWMC shall afford ADB an adequate

Complied. Complied.

36 Appendix 7

Project Agreement Remarks/Status

(Azersu) Remarks/Status

(SAWMC) opportunity to comment on such proposal prior to taking any affirmative action thereon.

Appendix 8 37

GENDER EQUALITY RESULTS AND ACHIEVEMENTS I. NARRATIVE

A. GENDER ISSUES & GENDER ACTION PLAN FEATURES

1. The MFF’s intended outcome was to improve coverage, continuity and quality of water supplies and wastewater disposal in the participating secondary towns and peri-urban areas surrounding Baku. Tranche 2 of the project aimed to improve access to water supply and sanitation (WSS) infrastructure in Agdash, Beylagan, Goychay, and Nakhchivan. During project preparation, attention was given to gender issues, recognizing that women are most frequently the household members most affected by lack of adequate, clean, and safe water, as they are the main collectors of water in the households. At the same time, the project noted that in most towns, women are severely underrepresented in the town councils, with only about 4.08% of females in decision-making positions in the municipal level. Thus, the RRP stressed that gender concerns will be mainstreamed in the public outreach programs, consultations, customer complaint mechanisms, and public accountability measures taken to promote transparency. The Investment Program aimed to address gender issues by: (i) strengthening the role of female representatives in sector management; (ii) developing women’s roles at the community level; (iii) collecting sex-disaggregated survey data to develop gender-sensitive social and economic indicators; and (iv) conducting monitoring and evaluation to assess gender impacts so appropriate gender planning can be addressed in subsequent tranche designs. The gender action plan (GAP) for Tranche 2 of the project provides actions to: (i) identify gender issues in project areas through gender analysis and baseline surveys; (ii) ensure maximum benefits to women and girls through targets for household connections to female headed households and separate washing facilities for girls in project schools; (iii) equal opportunities for employment through targets for female staff in project-related employment; (iv) awareness raising campaigns on customer rights and water efficiency, and establishment of grievance and redress mechanisms; and (v) collection of sex-disaggregated data and establishment of sex-disaggregated database for human resource management.

B. OVERALL ASSESSMENT OF GAP IMPLEMENTATION RESULTS & ACHIEVEMENTS 2. As of project completion, 9 (82%) out of 11 GAP activities have been implemented, and 9 (90%) out of 10 numerical targets have been achieved. Thus, despite crucial issues encountered during project implementation (discussed in part D below), the project is rated successful in terms of GAP implementation. There were difficulties encountered in collecting sex-disaggregated data required for the GAP, mainly because: (i) the Sukanals are not consistent in disaggregating the list of customers by gender; and (ii) traditionally, as long as there is a man in the house (e.g. father, husband, brother, son), it is his name that is registered. Nevertheless, at project completion, the Azersu OJSC was able to provide sex-disaggregated data based on payment certificates and the list of names provided by Sukanals. 3. The key achievements include the successful completion of surveys and social assessments from 2010-2011 to determine the water-related issues and needs in the project areas; establishment of complaint and redress mechanisms; implementation of IEC activities; and customer care hotlines with regular reporting.

38 Appendix 8

4. Most importantly, the provision of 24-hour clean water supply in the households significantly improved the lives of women and men in the communities, but specifically women whose workloads have lightened considerably. Interviews with women beneficiaries revealed the hardships they had to endure due to lack of clean water, including fetching water from different sources many times a day; boiling water to make it potable; and having to schedule cleaning and washing of clothes. The availability of continuous and clean water supply not only benefitted the women in terms of lightening their physical labor, it also gave them peace of mind knowing that they can do their work anytime.

5. The targets for female employment in Sukalanals and JSCs and development of policy on hygiene were not achieved. There are not that many women who take courses relevant to the positions, or with expertise on the field. 66. C. GENDER EQUALITY RESULTS

7. The project put a premium on involving women in consultation and outreach activities to determine their issues, needs and preferences in

relation to WSS, recognizing that poor quality of WSS services disproportionately affect women as the main collectors of water in households without individual connections. They are also the main users of water for household work, gardening, and micro and small enterprises. Social assessments and surveys were undertaken at the commencement of the project, and consultations were conducted throughout the project implementation period. Surveys in Goychay and Agdash were completed at the end of 2010; interviews were conducted with 100 women from Beylagan and 100 women from Aghjabedi in September 2011, followed by surveys of more than 200 respondents for each town. In Nackchivan, project consultations were done for every village, with average participants at about 20, out of which about 8 were women (40%). 8. A large majority of the respondents conveyed their main concern about the cleanliness, color, and taste of the water. They had to boil, filter, or use sterilization tablets and other treatments before they could drink. They spent a maximum of 50 manats for boiling; 10 manats for filtration, and 30 manats for other treatments. Most respondents also complained about the adequacy of the water, which was not enough for gardening and other purposes, and they had to collect from outside sources. The farthest distance was 5km., with some even having to go about 10-12 times and spend about 6-10 hours a day during dry weather. Typically, women were in charge of this task.

Tamara, a n employee of Goychay SuKanal ( provincial water utility), narrated their rigorous tasks before they were connected with water pipes at home. “We used to get our water from the river. During rainy season, it became silty and dirty. Even for those who ha d access to pumps, the water quality was a problem. It was turbid. For our drinking purposes, we had to set the water an d let the dirt settle, then collect the water on top. Then we boiled the water. Now, we don’t have problems. We can drink from the tap.”

Appendix 8 39

9. Gulnare, a beneficiary from Goychay, said that even if they had previous access to piped water, the quality of the water was not good. The distribution system was through steel pipe, and there was corrosion and the water was sometimes contaminated. The system was also unreliable. “We

still had to boil water before drinking. Now, the pipe

is plastic, it’s cleaner.” 10. Nazenin Guliyeva, a beneficiary from Nackchivan City, remarked: "We no longer have to boil water for drinking. Now, we drink from the taps, because the water is clean."

11. The beneficiaries also shared that it is now easier to do the housework. Gulnare, for instance, shared: “Previously, water availability was scheduled, about 2 or 3 hours a day, and we were always worried that it will be cut. We had to schedule doing our laundry. All the housework, cleaning, washing, we had to do it within those 2 hours. Now, we can wash clothes anytime we want. Everything is much easier”.

12. Sevinj Tagbiyeva, FGD participant from Nackchivan, also remarked that after the houses were connected with water pipes, people started buying washing machines. “Since water is now

continuous and it’s of good quality, people can use washing machine. Before, the quality of water

hardened fabric, we had to use chemicals to soften our laundry. This would destroy washing

machines.”

D. LESSONS LEARNT AND RECOMMENDATIONS

13. As discussed above, a key issue identified was that the water utilities do not consistently collect sex-disaggregated data. If this issue was identified and a specific action was done at the earliest possible time, the project could have better ensured that sex-disaggregated database was established, and sex-disaggregated date collection was undertaken consistently throughout the project. This problem is interconnected with two other key issues identified during project missions at the latter stage of the project (2018; and PCR mission of Tranche 2 in 2019): the lack of ownership of the GAP by the EAs, and inapplicability of some of the targets to the EA’s situation and functions. As can be gleaned from interviews with the Sukanals, they did not fully grasp the importance of establishing sex-disaggregated database for their customers. Most of the time, as long as there is male in the house, including a brother or a son, it is his name that is registered. 14. For future projects, it is recommended that preparation of the GAP should be done very closely with the EA to ensure ownership as well as to identify achievable targets vis-à-vis the capacity and key functions of the EA. To do this, a gender specialist should be on board during reconnaissance and fact-finding missions to thoroughly discuss the details of the GAP with the EAs, and agree upon the implementation arrangements. Capacity building training on gender and ADB’s gender requirements and the GAP targets should be undertaken for the EAs and Sukanals

Azizova Kamila, a beneficiary from Beylagan, shares that her housework was considerably lightened because of the availability of 24 - hour water supply. “We don’t have to schedule doing our laundry anymore, we can wash anytime. And the water quality is goo d,” she says.

40 Appendix 8

during the start of project implementation, and consistent follow-ups should be done in the different stages of the project, to ensure that they fully understand the gender targets and what they need to do to ensure successful implementation of all GAP activities.

Appendix 8 41

GAP ACHIEVEMENTS MATRIX Total no. of activities- 11 No. of activities completed (count as of 5 July): 9 (82%) (SDTC-GEN standard for successful rating: 80% of total no. of activities completed) Total no. of targets: 10 No. of targets achieved (count as of 5 July) 9 (90%) (SDTC-GEN standard for successful rating: 80% of targets achieved) 50

Rationale/ Objectives Activities

Performance Target / Indicators GAP Status

Output 1: Water Supply and Sanitation Infrastructure Development

Equal access to potable water and improved sanitation for both male and female-headed households provided Improved access to water supply and sanitation facilities in schools of Project 2 towns (Improved living standard)

Ensure construction of water supply and sewerage networks including house connections to all female headed households in all project 2 towns

TARGET 1 100% female headed households have access to 24-hour potable water supply (2017) TARGET 2 100% female headed households have access to sanitation facilities

Target Achieved. In Goychay, Agdash, and Nackchivan,100% of households, including female headed households (FHH), were connected with 24-hours continuous potable water supply networks. A total of 16,223 water connections were made in Goychay, Agdash, and Beylagan, including about 3,354 FHH. A total of 16,223 water connections were made in Goychay, Agdash, and Beylagan, including about 3,352 FHH. In Nackchivan, 25,874 households were provided with WSS facilities,

including the 5,122 female headed households. Target achieved. In areas where sanitation facilities have been completed, female headed households were connected to sanitation facilities. In Goychay, 4,400 households, including FHH, were connected to sanitation systems. In Nackchivan, all the households benefiting from water supply connections also benefitted from sanitation facilities (25,874 households including 5,122 FHH). In Agdash and Beylagan, household connections have not been undertaken

Ensure separate and adequate latrines and washing facilities for girls in 15 public schools in project 2 towns.

TARGET 3 Separate sanitation and hygiene facilities for boys and girls in 15 public schools constructed (2017)

Target Achieved. A total of 22 schools were supported under the project, with equal number of lavatories for girls and for boys constructed (an average of 3 - 4 separate lavatories for girls and for boys, or a total of 81 lavatories for girls, and 81 for boys).

- 10 schools were supported in Goychay, with a total 35 lavatories each for boys and girls - 8 schools supported in Agdash, with a total of 31 lavatories each for boys and girls - 4 schools supported in Beylagan, with a total of 5 lavatories each for boys and girls. -

50 The calculated percentage achievement assumes that Target 7 will be considered substantially achieved despite the fact that specific targets for women community

members and female teachers were not achieved.

42 Appendix 8

Rationale/ Objectives Activities

Performance Target / Indicators GAP Status

Output 2: Institutional Effectiveness Enhanced management capacity of Sukanals and JSCs and gender mainstreamed human resource management

Ensure equal employment opportunities for women in SuKanals and JSCs

TARGET 4 30% of SuKanal and JSC staff are women

Activity Not Implemented, Target Not Achieved Data from the Azersu OJSC and interviews with Sukanals are slightly different, but these are all consistently below the targets. Data from Azersu shows that there are only 168 women out of a total of 1,157 (14.5%) staff in Azersu JSC in Baku. Women comprise 13.8% of total employees in Goychay, Agdash, and Beylagan

(Increased empowerment) economic

Sukanals (26 out of 188). The positions include high level positions including a head of Human Resources Department (Agdash), supervisors in collection, engineer (Beylagan), human resource officer, accountant (Goychay), as well as computer specialists, clerk, dispatcher, and cleaning ladies. In Nackchivan, 15.6% of the employees in SAWMC main office are women (5 out of 32). Total employees including in the office branches are 43, with 7 women (16%), including an accountant and staff engaged in collection of fees and in external relations/press services. Out of 8 newly hired staff in the PMU, 2 are women (25%). Efforts were made to increase female staff, but there are challenges such as the limited number of women in relevant courses

ACTIVITY 1 Sex-disaggregated database in place for human resource management (2013) ACTIVITY 2

Train female staff working on management information system (MIS) and accounting system

TARGET 5 30% of customer care center staff are women

Target Achieved. Azersu has a centralized hotline 955 (for the whole country); and there are local hotlines. In Goychay, there is a local office managing customer care, 24 hours; 4 persons, 1 each for 8 hours, 2 males, 2 females (50%). In Baku, there are 2 staff working in customer care- 1 woman, 1 man (50%). In Beylagan, only one person is in charge of customer care service, an engineer (male). Activity completed. There is sex-disaggregated database for human resources. By project completion, sex-disaggregated information on the number of staff/personnel in Azersu JSC as well as in Goychay, Agdash, and Beylagan were provided by Azersu OJSC, from which was taken data for JSC and Sukanal staff above. Activity completed. Azersu periodically conducts trainings for all staff, including women. All persons working in accounting, O&M have training per year in Baku. In Beylagan, available data shows that all the 6 female staff have been trained.

Appendix 8 43

Rationale/ Objectives Activities

Performance Target / Indicators GAP Status

Output 3: Program Management Facility

Knowledge of gender specific customer behavior enhanced

ACTIVITY 3 Conduct survey and analyze knowledge gaps of households (especially women as household managers) on water, hygiene, sanitation, customer rights and efficient water use ACTIVITY 4 Sex-disaggregated customer database created to gain knowledge on gender-specific customer behavior

Activity completed. Social assessment/surveys were conducted for each of the project towns; surveys in Goychay and Agdash were completed at the end of 2010; interviews were conducted with 100 women from Beylagan and 100 women from Aghjabedi in September 2011, followed by surveys to more than 200 respondents for each town. The main concern for women were the cleanliness, color, and taste of the water. They had to boil, filter, or use sterilization tablets and other treatments before they could drink; and spent a maximum of 50 manats for boiling; 10 manats for filtration, and 30 manats for other treatments. Most respondents also complained about the adequacy of the water, which is not enough for gardening and other purposes, and they had to collect from outside sources, the farthest distance is 5km., with some even having to go about 10-12 times and spend about 6-10 hours a day during dry weather; with more women having to do this task (36 families answered only women, 20 for both family members, 14 men, and 108 respondents did not answer). Activity completed. Sex-disaggregated data of customers is available. Based on Sukanal lists and updated in a report by Azersu OJSC: in Goychay, there are 1,531 female customers and 3,578 males; in Agdash, 1,531 females and 4,874 males; in Beylagan, 65 females and 5,185 males.

Improved hygiene practices in project towns’ schools

ACTIVITY 5 Develop IEC on water, hygiene, sanitation based on survey results

Activity completed. Azersu/Sukanals provided information on customer rights as well as on efficient use of water. In Goychay, for instance, when customers apply for connection of WSS, the Sukanal staff give manuals/instruction on how to use the new facilities. They actively campaigned for the use of chlorine, as previously, they did not use chlorine, and when they were advised to, they were hesitant as they did not like the taste. With the help of the Governorate, meetings were done with community members to explain the benefit of using chlorine (2015). Every month they also go to houses to record consumption, during which they can also address customers’ issues/questions. In Beylagan, and Agdash, when customers sign the contract, they are also informed of their rights, which is also printed in the contract.

44 Appendix 8

Rationale/ Objectives

Activities

Performance Target / Indicators GAP Status

ACTIVITY 6 Train children and teachers to become effective advocates of change in their households and communities

TARGET 6 IEC material on water, hygiene and sanitation practices, customer rights is disseminated in 15 public schools in project 2 towns (2013-continuous

TARGET 7 5000 women in the community, 150 teachers (30 male and 120 female) and 2000 students (900 male and 1100 female) covered by the Public Outreach Program (POP)

In Agdash, aside from participating in the annual Water Day celebration organized by Azersu, and explaining to new users their rights, they also publish in local newspapers the benefits of effective use of water and the importance of having clean water. In Nackchivan, they have guested in TV shows to explain the water supply system, and how the wastewater treatment works, and related topics. They produced and disseminated brochures and conducted pubic outreach campaigns every time they inaugurate each facility, including inviting community leaders. Target achieved. Seventeen (17) schools in Agdash and Beylagan were among those for which IEC materials on water, hygiene, and sanitation practices were developed under the Public Outreach Program. Among the printed IEC materials that were distributed to schools were posters that were placed in the school latrines and local administration buildings, page separators that were included in children’s text books, and transparent covers for children’s notebooks and books. In addition, brochures were provided to parents and other community members. Based on interviews with Sukanals, training was provided to teachers and children when they were provided with water connections. In Goychay, for instance, every time they started connection to WSS in schools in 2014 and 2015, they provided training to the teachers and students on effective use of water, as well as in sanitation. In Agdash, aside from discussions when they start connection to schools, they also organized school trips for Grades 1-5 to the water reservoir built under the project to show the importance of water, explain what Azersu is doing, and the importance of having clean, potable water. Topics related to WSS are also discussed to students since these are included in the national textbooks approved by the Ministry of Education.

Activity completed. Target achieved. Communities Public awareness activities conducted in communities in three districts reached some 1,104 persons (764 women and 340 men). Activities such as the town hall meetings helped government officials to better understand the importance of WASH and round table discussions helped generate

Appendix 8 45

Rationale/ Objectives

Activities

Performance Target / Indicators GAP Status

Target no. of women, girls reached: 5,000 – women (community) 120 – female teachers 1,100 - girls Total: 6,220 women and girls

discussion on the subject and facilitated school administrators and teachers to take action to improve WASH practices among school children. School children The public outreach program labeled as “Clean Hands, Healthy Hands” school children-- 2,684 boys and 2,274 girls in primary grade, 3,855 boys and 3,596 girls in secondary grade learned about washing with soap after toilet use and before eating food through a series of key messages, school-based events, WASH clubs, and door-to-door visits. These resulted in 45.5% (15.6%) increase of children using soap while washing their hands after using latrine and before meal. Teachers A teacher’s guideline on WASH was developed which aimed to improve the understanding and knowledge of teachers and instructors on behavior change process for children. Forty-nine (49) teachers from Agdash comprising 48 women and 1 man and 32 teachers from Beylagan composed of 27 women and 5 men underwent training on the use of the teacher’s guideline. During the training, the teachers developed an action plan and implemented a school-based teaching-training programme on WASH dubbed as “Open Classes.” In summary, a total of 6,710 women and girls were oriented and/or trained in WASH. The children, their teachers and parents increased their knowledge, adopted better practices, and took action to improve practices on WASH in their communities. While the specific target numbers for community women and teacher participants for trainings indicated in the original GAP were not met, the project was able to cover much more than its target number of school girls for the WASH training. This is a significant achievement, as the project was able to effectively modify the behaviors and inculcate good WASH practices among the youth in the project districts who in turn, will be able to transfer, share these with the next generation.

46 Appendix 8

Rationale/ Objectives

Activities

Performance Target / Indicators GAP Status

ACTIVITY 7 Ensure that national hygiene educational policy, standards, and training modules are developed and approved

Activity not implemented. There is no national hygiene policy prepared or approved under the project. The mission was informed that it is not the responsibility of Azersu to come up with a hygiene policy, although they cooperate with local hygiene and sanitation offices. In Agdash, there is a policy on hygiene implemented by the local hygiene and epidemiology center (also known as the hygiene and disease control center). The Sukanal collaborates with the center, for instance, when they built the reservoir, they invited experts from the center to make sure the water is clean, to disinfect the areas, as part of the procedure required by the project.

Improved WSS services through community feedback

ACTIVITY 8 Develop and conduct awareness raising campaign on customer rights and water efficiency catering to women of all households in project towns.

TARGET 8 IEC material customer rights, complaint mechanisms disseminated to all households in project towns

Activity completed. Target achieved. Based on 2017 project mission: For all beneficiaries, when they apply for connection of WSS, they give manuals/ instruction on how they use it, what are their rights. Other IEC materials and activities include brochures, appearing on TV, conducting school field trips.

ACTIVITY 9 Establish complaint redressal mechanism and database in customer care centers and identify specific customer service requirement (targeting women’s needs)

ACTIVITY 10 Annual report on quantity and redress of complaints published (2013 – continuous) with gender analysis (women provide feedback on WSS services)

Activity completed. For complaint mechanisms, there is a national hotline where customers can bring their complaints, and there are also local hotlines and customer care staff, with referral mechanisms (i.e. those who called the national hotline can be referred to the local Sukanals for appropriate action). The customer care representatives record the complainant’s name, nature of the complaint, what actions were done, and these are reported to Azersu bi-annually and annually. In Agdash, for instance, about 95% of the complaints in the past were addressed satisfactorily. Activity not implemented. The Sukanals have a computerized record of all complaints, which is centralized – the whole of Azersu can have access on these complaints and how these were addressed. Every 6 months and annually, they report on how many complaints /grievances and how many were addressed. In Goychay, for instance, when the complainants call, the customer care staff take the address and the computer automatically shows the name of the customer. However, they do not meticulously note whether it is a man or a woman.

ACTIVITY 11 Establish a 24-hour customer care hotline and train staff of customer care centers as hygiene and

TARGET 9 Customer care hotline is established (2013) with 30% women staff;

Activity completed. Target Achieved. As discussed above, there is a 24-hour customer care hotline nationally and locally, with 50% female staff (e.g. 2 out of 4 in Goychay; 1 out of 2in Agdash,

Appendix 8 47

Rationale/ Objectives

Activities

Performance Target / Indicators GAP Status

sanitation advocates TARGET 10 100% of all staff are trained on water, hygiene, sanitation practices, customer rights and complaint mechanisms (issue resolutions

Target achieved. All the staff are provided with training, as Azersu in Baku conducts regular trainings for both males and females in the different positions. It is the President’s decree to train all personnel, especially about sanitation and hygiene.

48 Appendix 9

ECONOMIC ANALYSIS A. Introduction 1. Under Tranche 2 the investment was made in the following sectors: i.e., water supply and sewerage in Agdash, Beylagan, Nakhchivan and Goychay. At this Project Completion Report (PCR) stage, all the water supply and sewerage subprojects are completed. However, the coverage of the network development component in the Goychay water supply and sewerage sub project was reduced and the wastewater treatment plant (WWTP) not included in Tranche 1 as explained in earlier sections. These left out components were considered in Tranche 2 for Goychay. Similarly, only a part of the city water supply and wastewater network was covered under Tranche 1 for Nakhchivan. Under Tranche 2 and 3, remaining network and WWTP were implemented. Similarly, water supply and wastewater network in Agdash was completed in Tranches 2 and 3. Beylagan network was completed in Tranche 2 itself. However, wastewater treatment plants proposed in the processing stage in Agdash and Beylagan were dropped. With this background the economic analysis for the present PCR was conducted for water supply and sewer sub projects in the four Tranche 2 project towns in accordance with the ADB’s Guidelines, including Guidelines for the Economic Analysis of the Projects and Guidelines for the Economic Analysis of Water Supply Projects. B. Approach 2. Main approach of this economic analysis is to update the earlier analysis carried out during the loan processing (2011) through appropriate changes in the areas of project cost, implementation phasing, project coverage, and beneficiaries that happened during the implementation period up to this completion stage. This is to facilitate the comparison of analysis results between these stages. Project analysis period followed during the processing stage is retained for the present analysis also with base year 2011. 3. Analysis period of earlier analysis (2011) was followed for the present analysis with modification in construction period as observed from actual performance. This has resulted in the reduction of sub projects operation period from completion due to delay in project completion. 4. The economic analysis was based on updated information from the (i) updated engineering, environmental, social, financial and other details collected on project completion; and (ii) the updated economic evaluation parameters relevant to the project towns gathered from secondary sources and discussions with stakeholders. Data collected were in the following areas:

(i) Actual capital costs of improvements; (ii) Actual project implementation period including phasing; (iii) Updated forecasts of demand for/usage of infrastructure services; and (iv) Updated supply characteristics of infrastructure networks and services delivery on

completion stage. 5. The economic analysis was based on the parameters and projections used in the earlier economic analysis during the loan processing stage with suitable updates observed during the project implementation period. The analysis was based only on the measurable benefits that would arise from the project towns (followed during the processing stage) and does not attempt to include the numerous other positive but unquantifiable effects that would be generated by the project interventions.

Appendix 9 49

6. For facilitating project benefit estimation, the investments made in Tranches 1 and 3 were considered with Tranche 2 investments in economic analysis as appropriate to the sub projects. This is mainly because of the linkage between the investments under three tranches in benefit estimation. C. Economic Cost 7. The economic costs of capital works and annual operation and maintenance were calculated from the observed actual financial cost on the following basis:

(i) The standard conversion factor (SCF) arrived during the processing stage using the shadow exchange rate factor (SERF) at 1.02, the shadow wage rate factor (SWRF) of 0.8 to unskilled labour and 1.0 for skilled labour, 30% as unskilled labour component in the civil works, and removing the applicable tax components were used to convert the financial cost into economic cost;

(ii) Contingencies were not considered for completed cost; and (iii) Financial charges were not considered; (iv) Currency conversion adopted to the base year (2011): $1.00=AZN0.787; (v) All costs are valued using the domestic price numeraire, to enable an easier

comparison with the information used to measure benefits (e.g. a significant component of benefit is the savings in resources, which would be used in the without project situation).

8. Coverage for water supply and sewerage was changed for Agdash town (design population for 2034 from 35,927 to 46,733), whereas it was not changed for Beylagan and Goychay towns. Similarly, in Nakhchivan peri-urban villages were included in the water supply and wastewater network without allowing for cost overrun. Also, WWTPs proposed in Agdash and Beylagan towns in the processing stage were dropped during the implementation. These changes were captured in the present PCR analysis. As all the water supply and sewerage subprojects coverage planned during the processing stage were kept without change during the implementation, the project coverage was adopted from the earlier analysis for Beylagan, and Goychay towns. 9. Though the project implementation was planned to complete in May 2014 for water supply and wastewater network during the processing stage, it was extended to December 2016 (Goychay) and December 2017 (Agdash and Beylagan). However, Goychay WTPP was completed in December 2018, as scheduled. In Nakhchivan, the WWTP was delayed by eighteen months. Actual sub project expenditure during their implementation period collected from Project ManagementUnit (PMU) / ADB was used to update the project cost and its phasing in the analysis. Using the producer price index (PPI), the year wise actual disbursement was discounted to the Base Year (2011). Table 1 shows the updated financial cost of the sub-projects along with their discounted cost using the inflation index. Table 2 gives the arrived economic cost used for the analysis.

50 Appendix 9

Table 1: Distribution of Project Cost (Current price and 2011 Constant Price) ($ million)

Note: 1. Two Wastewater Treatment Plant (WWTP) contracts (i. MFF 42408-044-T4-ICB - 1.01 for Beylagan and ii. MFF

42408-044-T4-ICB - 1.02 for Agdash) were cancelled. 2. Periodical subproject costs were discounted to the Base Year (2011) using the producers price index (PPI). 3. Currency conversion adopted to the base year (2011): $1.00=AZN0.787. Source: Analysis based on the data provided by PMUs

Table 2: Sub project wise Economic Cost for Tranche 2 ($ million) Sl. No. Details Financial Cost Economic Cost

1 Goychay 55.25 46.86

2 Agdash 81.11 68.79

3 Beylagan 66.60 56.48

4 Nakhchivan 171.72 145.63

Grand Total 374.67 317.76

Note: 1. All costs include water supply and wastewater supply components. 2. Periodical subproject costs were discounted to the Base Year (2011) using the producers price index (PPI). 3. For Goychay, Tranche 1 cost ($55.77 million) was added to the above Tranche 2 cost in the analysis. Source: Analysis based on the data provided by PMUs.

D. Project Beneficiaries 10. Subproject beneficiaries comprised domestic and non-domestic users with existing connections and those who yet to avail of connections but previously obtain water from alternative sources. The beneficiaries also include households that will continue to depend on alternative sources as main supply source for economic and technical reasons. The total beneficiaries in the sample subprojects of four towns, at 100% of total population in Year 2017, reached about 219,000. Equal number of beneficiaries were for sewerage sub projects in the four project towns.

Target at

Processi

ng Stage

% Disburshe

d (Current

Price)

% Disburs

hed

(2011

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2011

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2011

Price)

%

2012 39.72 59.2% 2.51 4.5% 2.59 4.7% 57.07 62.8% 11.56 14.3% 11.96 14.5% 51.42 61.3% 4.81 7.2% 4.98 7.4%

2013 18.07 26.9% 9.45 17.1% 9.56 17.4% 25.40 28.0% 14.29 17.7% 14.45 17.5% 23.08 27.5% 13.04 19.6% 13.19 19.5%

2014 3.72 5.5% 12.04 21.8% 12.56 22.8% 3.33 3.7% 13.07 16.2% 13.64 16.5% 3.72 4.4% 17.92 26.9% 18.70 27.7%

2015 4.18 6.2% 6.27 11.4% 6.49 11.8% 3.74 4.1% 23.33 28.8% 24.14 29.2% 4.18 5.0% 11.63 17.5% 12.03 17.8%

2016 1.46 2.2% 7.07 12.8% 7.00 12.7% 1.30 1.4% 15.43 19.1% 15.27 18.5% 1.46 1.7% 13.54 20.4% 13.40 19.8%

2017 0.0% 12.00 21.7% 11.49 20.9% 0 0.0% 3.19 3.9% 3.06 3.7% 0 0.0% 5.49 8.3% 5.26 7.8%

2018 0.0% 5.90 10.7% 5.37 9.8% 0 0.0% 0.05 0.1% 0.05 0.1% 0 0.0% 0.05 0.1% 0.05 0.1%

Total 67.14 100.0% 55.22 100.0% 55.06 100.0% 90.84 100.0% 80.92 100.0% 82.56 100.0% 83.85 100.0% 66.48 100.0% 67.61 100.0%

BelygonAgdashGoychayYear

Target % Disburshe

d (Current

Price)

% Disburs

hed

(2011

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2011

Price)

%

2012 103.07 65.4% 27.23 15.9% 28.17 16.2% 251.27 62.9% 46.10 12.3% 47.70 12.6%

2013 45.22 28.7% 63.88 37.3% 64.62 37.2% 111.77 28.0% 100.65 26.9% 101.82 26.9%

2014 3.72 2.4% 20.80 12.1% 21.71 12.5% 14.49 3.6% 63.82 17.1% 66.62 17.6%

2015 4.18 2.6% 15.91 9.3% 16.46 9.5% 16.27 4.1% 57.14 15.3% 59.11 15.6%

2016 1.46 0.9% 34.52 20.1% 34.16 19.7% 5.67 1.4% 70.57 18.9% 69.84 18.4%

2017 0 0.0% 9.08 5.3% 8.70 5.0% - 0.0% 29.76 8.0% 28.51 7.5%

2018 0 0.0% 0.01 0.0% 0.01 0.0% - 0.0% 6.00 1.6% 5.47 1.4%

Total 157.64 100.0% 171.43 100.0% 173.83 100.0% 399.47 100.0% 374.05 100.0% 379.07 100.0%

Nakchivan Total Project 2Year

Appendix 9 51

E. Valuing Economic Benefits 11. Water Supply Sub Projects: Methodology and the calculation model including assumptions followed in the processing stage for the estimation of water supply benefits were retained, as there is no change in the beneficiary profile and quantum. The sub projects are for the rehabilitation of existing water supply system including the water source augmentation, house service connections and district metered area-based supply network in order to achieve 100% coverage with 200 lpcd in Nakhchivan and Goychay and 180 litre percapita per day (lpcd) in Agdash and Beylagan (the existing coverage is 80% with 101 lpcd in Nakhchivan; the existing coverage is 59.6%% with 90 lpcd in Goychay; the existing coverage is 31.1% with 19 lpcd in Agdash and 35% with 13 lpcd in Beylagan). The beneficiaries will be 219,000 persons (about 49,000 households) by 2017. Present water consumption is 150 lpcd in Nakhchivan, 90 lpcd in Goychay, 100 lpcd in Agdash and 100 lpcd in Beylagan of which 13 – 101 lpcd are provided from piped water. Thus, 49 lpcd in Nakhchivan, 57 lpcd in Goychay, 81 lpcd in Agdash and 87 lpcd in Beylagan of water is presently supplemented from other sources. The resource cost spent for 49 – 87 lpcd of supplemented water from other sources in the “without project” scenario is treated as non-incremental benefits. The additional water above the present consumption up to the design water supply (200 lpcd in Nakhchivan and Goychay and 180 lpcd in Agdash and Beylagan) is treated as incremental benefits. (i) savings in water collection time cost, (ii) savings in the treatment and storage cost and (iii) savings in the purchase cost from water vendors are the benefits considered for non-incremental water supply. Average unit cost for incremental water estimated through willingness to pay (WTP) approach will be the benefit considered for incremental water.

Table 3: Unit Rates used for Estimating Water Supply Benefits

Project Town Non-incremental Water Incremental Water

$/cubic metre $/ cubic metre

Goychay 6.3 10.4

Nakhchivan 8.3 3.6

Agdash 5.1 4.5

Beylagan 4.8 6.2 Note: Using the unit rates used for different resource cost saving benefits of Processing stage, the unit rates per cubic metre is estimated for all project towns.

12. Sewerage Sub Projects: Present PCR had included the economic analysis for sewerage sub projects in the two project towns. The limited coverage of the existing system at bad conditions and the vast uncovered sewerage systems in the project towns were posing a major health risk. Rehabilitation of the existing system and the extension to the uncovered areas completed in the project towns based on contour, physical features to ensure predominant gravity conveyance under Tranche 2 benefited about 0.21 million population (48,500 households) in 2017. The benefits considered for sewerage component summarized in Table 4.

Table 4: Unit Rates used for Estimating Wastewater Benefits

Project Town

$ / Household / year

Septic tank cleaning benefits

Drainage overflow benefits

Loss of work & leisure benefits

WWTP Benefits

Goychay 104.0 8.7 130.4 180.0

Nakhchivan 104.0 8.7 130.4 180.0

Agdash 104.0 8.7 130.4 -

Beylagan 104.0 8.7 130.4 -

52 Appendix 9

Note: Using the unit rates used for different resource cost saving benefits of Processing stage, the unit rates per cubic metre is estimated for all project towns. 13. Some of the key benefits that do not lend to quantitative analysis due to lack of information include (i) long-run marginal cost savings, (ii) increase in property values, (iii) health impact, and (iv) impact on environment. F. Economic Cost-Benefit Analysis 14. This section summarizes the results of both the main economic evaluation and the sensitivity analysis. Each sub-project component completed was compared to the ‘without project’ situation, using the discounted cash flow technique and economic opportunity costs of capital (EOCC) of 12%1. Though the earlier analysis period from 2011 to 2036 allowed for 22 years operation from the first full year of benefits, the present analysis kept the same analysis period with actual project completion period between 2015 and 2017 as appropriate. The analysis was conducted at domestic prices and the discount year was taken as 2011. However, for two subprojects in Goychay and Nakhchivan that included Tranche 1 investments, the discount year was taken as 2009. All values in the following tables are expressed in 2011 prices. This is mainly to facilitate the comparison of PCR economic results with the earlier one. 15. Cost – Benefit Analysis: Main Evaluation: Table 5 presents the results of the main economic evaluation for the water supply component in the sub-projects.

Table 5: Benefit - Cost Analysis for Supply Sub Projects – Tranche 2 ($ million)

Details Water supply & wastewater sub projects

Goychay Nakhchivan Agdash Beylagan

Present Value of Benefits 1, 2 Water Supply Sub Projects Non-Incremental 26.891 76.855 30.978 17.225

Incremental 17.105 28.537 22.001 23.234

Sewerage Sub Projects

Earning loss during sick days 2.050 6.540 5.011 2.853

Annual maintenance of septic tank cost 3.511 11.201 4.000 2.277

Annual maintenance cost for drainage overflow 0.293 0.934 0.334 0.190

WWTP benefits 5.451 12.522 - -

Total Benefits 55.301 136.589 62.324 45.780

Present Value of Costs1

Construction cost 45.753 104.372 50.136 35.177

O&M 3.185 4.135 5.219 3.835

Total Costs 48.938 108.506 55.355 39.012

Benefit – Cost Ratio 1.130 1.259 1.126 1.173

Note: 1. Goychay and Nakhchivan towns include Tranche 1 investments. Accordingly, Tranche 1, 2 & 3

investments for Nakhchivan and Tranche 1 & 2 investments for Goychay were considered at 2008 price and further discounted to 2008 with 12% discount rate.

2. Agdash town include Tranche 3 investments. Accordingly, Tranche 2 & 3 investments for Agdash were considered at 2011 price and further discounted to 2008 with 12% discount rate.

1 12% discount rate as EOCC is followed in this PCR analysis as it was followed the same during the processing stage,

though the EOCC presently followed is 9% as per ADB Guidelines.

Appendix 9 53

16. Economic internal rate of return. The benefits streams from resource cost savings are

compared with the cost streams of capital and operation and maintenance (O&M) costs to determine the discounted net cash flows and the resulting EIRR for each subproject. Following ADB guidelines during the processing stage, the EOCC was set at 12%. The results show base case EIRR exceeding the EOCC for the combined investment in the four project towns (12.9% for Goychay, 15.7% for Nakhchivan, 14.6 % for Agdash and 14.9% for Beylagan). The efficiency achieved in project implementation in time and cost in Nakhchivan subproject, enabled to cover additional peri-urban town Shikhmahmud in the water supply network without incurring additional time and cost.

17. In the completion stage, the sensitivity analysis carried out for the following scenarios: (i) 20% increase in O&M cost and (ii) 20% decrease in project benefits. Results of this analysis have indicated that all four subprojects under both sensitivity scenarios are found with EIRRs more than the EOCC and this underlines the robustness of the estimates (Table 6). Estimated EIRRs are found with more sensitive to benefit reduction scenario than to the increase in O&M scenario and this underlines the risk areas. Subproject wise cost – benefit flow is provided in Table 7.

Table 6: EIRR and Sensitivity Analysis ($ million) Particulars Goychay WS + Wastewater Nakhchivan WS + Wastewater

EIRR ENPV SV EIRR ENPV SV

Base Case 12.9% 3.672 15.7% 29.472

O&M Cost (+20%)

12.7% 2.958 134% 15.6% 28.671 202%

Benefit (- 20%)

9.8% (8.780) 7% 12.0% (0.335) 5%

Particulars Agdash WS + Wastewater Beylagan WS + Wastewater

EIRR ENPV SV EIRR ENPV SV

Base Case 14.6% 9.905 14.9% 8.241

O&M Cost (+20%)

14.3% 8.861 188% 14.7% 7.474 214%

Benefit (- 20%)

11. 1% (3.383) 14% 11.5% (1.254) 17%

Note: For PCR analysis, the sensitivity scenarios of (i) 20% increase in construction cost and (ii) one-year delay in construction were not considered, as the construction of the sub projects were completed. ( ) = Negative; EIRR = Economic internal rate of return; ENPV = Economic net present value; SV = Switching value; WS = Water supply

54 Appendix 9

Table 7: Sub Project wise Cost - Benefit Analysis ($ million)

( ) = Negative; EIRR = Economic internal rate of return; NPV = Net present value; WS = Water supply; WW=Waste water Note: For analysis, cost across all the three tranches were considered appropriately at 2011 price.

G. Conclusion 18. The main evaluation has shown that all water supply and water sub projects in four project towns are found to be economically viable, with the calculated EIRR values exceeding the EOCC. The sensitivity analysis has demonstrated the robustness of these results, with all sub-projects economically viable under the base case and increase in O&M cost scenario. However, for decrease in project benefit scenario all three subprojects, except Nakchivan subproject, are found with EIRRs less than the EOCC of 12%. 19. In comparison to the economic analysis results for the combined water supply and wastewater sub projects during the loan processing stage (2009/2011), EIRRs have reduced at this PCR stage for all four project towns. This reduction in viability results can be assigned to the following reasons, as indicated in Table 8.

(v) Considerable reduction in project scope in wastewater components (wastewater treatment plants were dropped in Agdash and Beylagan) resulting in reduction of project benefits;

Constr

uction

Cost

O&M

Cost

Total

benefit

s (WS

+WW)

Net

Benfits

Constr

uction

Cost

O&M

Cost

Total

benefit

s (WS

+WW)

Net

Benfits

Constr

uction

Cost

O&M

Cost

Total

benefit

s (WS

+WW)

Net

Benfits

Constr

uction

Cost

O&M

Cost

Total

benefit

s (WS

+WW)

Net

Benfits

2009 - - - - - - - -

2010 0.1 - - -0.1 4.0 - - -4.0

2011 8.3 - - -8.3 14.9 - - -14.9 - - - - - 0.1 - -0.1

2012 13.6 - - -13.6 34.9 - - -34.9 10.1 - - -10.1 4.2 0.1 - -4.3

2013 25.8 - - -25.8 59.4 0.7 19.3 -40.8 12.3 0.3 1.7 -10.8 11.2 0.1 0.9 -10.4

2014 27.7 - - -27.7 20.7 0.7 19.5 -1.8 11.6 0.5 2.9 -9.1 15.9 0.4 1.6 -14.7

2015 10.9 0.8 8.9 -2.8 17.7 0.7 19.8 1.5 20.5 0.9 4.3 -17.1 10.2 0.4 2.4 -8.3

2016 7.4 0.8 16.2 8.1 56.0 0.8 20.0 -36.8 15.0 0.9 5.1 -10.9 11.4 0.4 2.9 -8.9

2017 10.6 0.8 16.4 5.0 9.3 0.8 34.8 24.7 13.2 0.9 12.4 -1.8 4.5 0.7 9.4 4.2

2018 - 0.9 16.5 15.6 4.4 0.8 35.1 29.9 1.4 0.9 13.9 11.5 0.0 0.7 10.5 9.7

2019 - 0.9 16.6 15.7 - 0.8 35.5 34.6 2.8 1.0 14.0 10.2 0.5 0.7 10.6 9.3

2020 - 1.0 16.8 15.8 - 0.8 35.8 34.9 0.5 1.0 14.1 12.7 0.1 0.8 10.7 9.8

2021 - 1.0 16.9 15.9 - 0.9 36.1 35.3 - 1.0 15.9 15.0 - 0.8 11.7 10.9

2022 - 1.0 17.0 16.1 - 0.9 36.4 35.6 - 1.0 16.1 15.1 - 0.8 11.8 11.0

2023 - 1.0 17.2 16.2 - 0.9 36.8 35.9 - 1.0 16.2 15.2 - 0.8 11.8 11.1

2024 - 1.0 17.3 16.3 - 0.9 37.1 36.2 - 1.0 16.4 15.4 - 0.8 11.9 11.2

2025 - 1.0 17.5 16.5 - 0.9 37.5 36.6 - 1.0 16.5 15.5 - 0.8 12.0 11.3

2026 - 1.0 17.6 16.6 - 0.9 37.8 36.9 - 1.0 16.7 15.7 - 0.8 12.1 11.3

2027 - 1.0 17.7 16.7 - 0.9 38.2 37.2 - 1.0 16.8 15.8 - 0.8 12.2 11.4

2028 - 1.0 17.9 16.9 - 0.9 38.5 37.6 1.4 1.0 17.0 14.6 1.4 0.8 12.3 10.1

2029 - 1.0 18.0 17.0 - 1.0 38.9 37.9 - 1.0 17.2 16.1 - 0.8 12.4 11.6

2030 - 1.0 18.1 17.0 - 1.0 39.2 38.3 - 1.0 17.3 16.3 - 0.8 12.5 11.7

2031 - 1.0 18.1 17.0 - 1.0 39.6 38.6 - 1.0 17.5 16.5 - 0.8 12.6 11.8

2032 - 1.0 18.1 17.1 - 1.0 40.0 39.0 - 1.0 17.7 16.6 - 0.8 12.7 11.9

2033 - 1.0 18.1 17.1 - 1.0 40.3 39.3 - 1.0 17.8 16.7 - 0.8 12.7 11.9

2034 - 1.1 18.2 17.1 - 1.0 40.7 39.7 - 1.0 17.9 16.8 - 0.8 12.8 12.0

2035 - 1.1 18.2 17.2 - 1.0 41.1 40.1 - 1.0 18.0 16.9 - 0.8 12.9 12.1

2036 - 1.1 18.2 17.2 - 1.0 41.5 40.4 - 1.0 18.1 17.0 - 0.8 13.0 12.2

2037

2038

Total 104.4 21.5 375.5 249.6 221.3 21.3 839.6 597.0 88.9 22.7 341.4 229.8 59.4 17.1 246.4 169.9

NPV 55.0 3.6 62.3 3.7 115.6 4.0 149.0 29.5 51.3 5.2 66.4 9.9 35.4 3.8 47.5 8.2

EIRR % 12.9% 15.7% 14.6% 14.9%

BeyleganGoychayYear Nakchivan Agdash

Appendix 9 55

(vi) Increase in project coverage during the implementation stage; (vii) PCR stage analysis for all sub projects in four towns have considered the full

investment across three tranches as appropriate in order to correspond with the project benefit estimation; and

(viii) Time overrun ranging 19 to 32 months. 20. Against the target cost at processing periods of $399.5 million, the expenditure during implementation was found to be at $374.1 million at current prices, witnessing about (-) 6.4% cost overrun and this was reduced to (-) 5.1% when discounted to program start year. However, this estimation of cost overrun is an under- estimated value, as the major devaluation of Azerbaijan currency in 2015 against $2 and conversion of local currency to $ for analysis purpose together had reduced the impact of cost overrun.

Table 8: Comparison of Water Supply & Wastewater Sub Projects Performance during Implementation Stage6

Town Sub projects under Tranche 2

% of beneficiaries coverage

Actual project cost

disbursement (2011 price) - $

million2

Time overrun

at complet

ion stage

(Months)

EIRR % (Completion

stage)4.5

At Appraisal stage

Dropped at completion 1

At Appraisal (2011)

At Completion (2018)

At appraisal stage price

At Completion year price3

Processing Stage

Completion Stage

Agdash

WS 31% 100%

108.10 99.20 32 15.1% 14.6% Sewerage

WWTP Droped

19% 100%

Beylagan

WS 35% 100%

83.60 67.60 32 15.5% 14.9% Sewerage

WWTP Droped

10% 100%

Nakshivan

WS 80% 100%

248.00 249.40 0 16.4% 15.7% Sewerage

25% 95%

Goychay

WS 59% 100%

131.30 120.30 19 17.8% 12.9% Sewerage

14% 100%

Notes: 1. `Two Waste Water Treatment Plant (WWTP) contracts (i. MFF 42408-044-T4-ICB - 1.01 for Beylegan and ii. MFF

42408-044-T4-ICB - 1.02 for Agdash) were cancelled in Tranche 2. These two WTPs are being implemented with national budget source during 2019-2020, after the loan closure. Accordingly, this was considered in the analysis.

2. Though different base years were considered for analysis at processing stage / completion stage (2009 for Goychay, 2011 for Agdash and Beylegan; and 2013 for Nakchivan), all these costs were converted to 2011 price, using the producers price index (PPI).

3. Institute for War & Peace Reporting, 2016, ‘Azerbaijanis Struggle After Currency Devaluation’, London. The major currency devaluation for local currency in 2015 and the conversion of annual disbursements of project cost in local currency to $ for analysis had under estimated the cost overrun happened during the implementation period. ‘Azerbaijan’s Central Bank switched to a floating rate for the national currency on December 21, 2015, causing the

2 Institute for War & Peace Reporting, 2016, ‘Azerbaijanis Struggle After Currency Devaluation’, London.

‘Azerbaijan’s Central Bank switched to a floating rate for the national currency on 21 December 2015, causing the manat to lose half its value to the dollar. This was the country’s second devaluation last year; in February 2015, the manat fell by one-third after the first devaluation’ (Source:https://iwpr.net/global-voices/azerbaijanis-struggle-after-currency)

56 Appendix 9

manat to lose half its value to the dollar. This was the country’s second devaluation last year; in February 2015, the manat fell by one-third after the first devaluation’ (Source:https://iwpr.net/global-voices/azerbaijanis-struggle-after-currency)

4. All the assumptions followed during the processing stage including analysis period, types and assumptions followed for benefit estimation, currency conversion factor and EOCC were retained for completion analysis. However, the actual changes happened during the implementation including changes in project components, shifting of project components after loan closing, project cost disbursements, implementation period, changes in project beneficiaries etc were incorporated in the analysis.

5. Spill over expenditures across for different tranches for the four sub projects were considered together in a comprehensive manner. Accordingly, for economic analysis, subproject in Goychay has included investments in Tranches 1 and 2; Nakhchivan included Tranches 1, 2 & 3, Beylagan only Tranche 2 and Agdash included Tranches 2 & 3.

6. Details of Processing Stage data was from PMC Sub Project Summary Reports, Tranche 2 DMF and Supplementary Appendix. Completion Stage details are from the present PCR Stage analysis. For PCR stage project beneficiary coverage, discussion with the IA and Supervision consultant and PCRs by EAs are used.

H. Distribution of Project Effects and Poverty Reduction Impact 21. Distributional analysis, which leads into calculation of the poverty impact ratio (PIR) i.e., the proportion of project net benefits accruing to the poor for the three project towns together are presented in the following sections. 22. The analysis shows that the poverty impact ratio (PIR) for the sub-projects in four towns ranged from 11.8% (Nakhchivan) to 13.1% (Goychay), 12.4% (Beylagan) and 12.7% (Agdash). Considering the present below poverty line (BPL) for Azerbaijan population at 5.9%, Tranche 2 contributed to the poor considerably.

Appendix 10 57

FINANCIAL ANALYSIS A. Analysis at Appraisal 1. At this Project Completion Report (PCR) stage, all the water supply and sewerage subprojects are completed. However, the coverage of the network development component in the Goychay water supply and sewerage sub project was reduced and the wastewater treatment plant (WWTP) not included in Tranche 1 as explained in earlier sections. These left out components were considered in Tranche 2 for Goychay. Similarly, only a part of the city water supply and wastewater network was covered under Tranche 1 for Nakhchivan. Under Tranche 2 and 3, remaining network and WWTP were implemented. Similarly, water supply and wastewater network in Agdash was completed in Tranches 2 and 3. Beylagan network was completed in Tranche 2 itself. However, wastewater treatment plants proposed in the processing stage in Agdash and Beylagan were dropped. With this background financial analysis for the present PCR was conducted for water supply and sewer sub projects in the four Tranche 2 project towns in accordance with the ADB’s Guidelines ‘Financial Management and Analysis of Projects (2005)’. The financial analysis prepared at the appraisal stage (2011) assessed the ability of the subprojects to meet future costs including capital expenditure, operation and maintenance (O&M) cost, and if appropriate, debt servicing and depreciation or re-investment margins. 2. Financial projections were made for incremental revenues and expenditures over 25 years of analysis period from 2012 with 22 years of operation from 2015 for revenue earning subprojects viz., water supply and sewerage. The financial projection tariff revision assumed an increase of 25% to 55% every two years (25% for Agdash and Beylagan, 40% for Nakhchivan and 55% for Goychay) and the original rate was AZN0.36 per m3 in FY2011, comprising of AZN0.30 per m3 for water supply and AZN0.06 per m3 for wastewater. Financial Internal Rate of Return (FIRR) was assessed as positive (1.84% FIRR against the WACC of 1.2% for Agdash, 4.7% FIRR for Goychay and 6% FIRR for Nakhchivan against the WACC of 2.47%). for all the sub projects, against the estimated WACC of 1.20%. However, this assessment was based on the assumption of viability gap funding availability for all project towns during the initial operation period of 2012-2027 to maintain the cash-flow in positive. Also, the major assumptions include of (i) local inflation at 7.5% in 2011, 7% in 2012, 6.5% in 2013, 6.0% in 2014, 5.5% in 2015 and 3% in 2020 and onward; (ii) foreign inflation at 2.5% annually. The financial plan had considered 80% from ADB loan and 20% as government contribution. 3. Analysis findings indicate that the subproject in the project towns were financially viable on two conditions: (i) required periodic tariff increases (herein assumed every two years); and (ii) tariff subsidization based on cost recovery viz. consumer affordability. For these conditions to be relevant to the succeeding subprojects under the MFF, these would have to be incorporated when preparing the financial reform operational plans. These reform plans and related issues were discussed and agreed with the Azersu, State Amelioration and water Management Agency (SAWMC) and other pertinent GoA with the aim of achieving financial sustainability of the overall investment. Issues pertaining to subsidization, the manner of implementation and funds sourcing, were specifically relevant. Income affordability is a major factor in determining subsidy requirement, and thus household income base would need to be reviewed periodically. 4. Based on the affordability analysis, proposed tariff increases for Subproject Goychay, Agdash and Beylagan required to satisfy viability parameters will eventually exceed consumer affordability, specifically during the first 5-7 years of debt payments. During such period, subsidies (i.e., VGF) will need to be considered. This was projected not likely to happen in Nakhchivan, where income spent for water was below the limit all throughout the study period. The main factor

58 Appendix 10

for the difference was the larger customer base in Nakhchivan relative to the system type, which is also cheaper to operate. B. Analysis at Completion 5. Reassessment of the financial analysis has been conducted at project completion for the water supply and sewer sub-projects under Tranche 2. The main approach of this financial analysis was to update the earlier analysis carried out during the appraisal stage through appropriate changes in the areas of project cost, project coverage, revenues, implementation period etc. that had happened during the implementation up to the project completion stage. This was done to facilitate the comparison of analysis results between appraisal and completion stages. Project analysis period including the ‘Base Year’ followed during the appraisal stage were retained for the present analysis. 6. The financial costs included base costs, consultancy, project implementation, project monitoring, financing charges, taxes & duties, and excluded price contingency. Also, physical contingency is not considered as the project cost as it is a part of the actual cost. Using the consumer price index (WPI) for non-food commodities group, the year-wise actual disbursement was discounted to the Base Year. Refer Table 1 for actual cost and discounted cost details. 67. 7. Against the target cost at processing periods of $399.5 million, the expenditure during implementation was found to be at $374.1 million at current prices, witnessing about (-) 6.4% cost overrun and this was reduced to (-) 5.1% when discounted to program start year. However, this estimation of cost overrun is an under-estimated value, as the major devaluation of Azerbaijan currency in 2015/16 against $ and conversion of local currency to $ for analysis purpose together had reduced the impact of cost overrun.

Table 1: Distribution of Project Cost (Current price and 2011 Constant Price) ($ million)

Note: 1. Two Wastewater Treatment Plant (WWTP) contracts (i. MFF 42408-044-T4-ICB - 1.01 for Beylagan and ii. MFF

42408-044-T4-ICB - 1.02 for Agdash) were cancelled. 2. Periodical subproject costs were discounted to the Base Year (2011) using the producers price index (PPI). 3. Currency conversion adopted to the base year (2011): $1.00=AZN0.787.

Target at

Processi

ng Stage

% Disburshe

d (Current

Price)

% Disburs

hed

(2011

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2011

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2011

Price)

%

2012 39.72 59.2% 2.51 4.5% 2.59 4.7% 57.07 62.8% 11.56 14.3% 11.96 14.5% 51.42 61.3% 4.81 7.2% 4.98 7.4%

2013 18.07 26.9% 9.45 17.1% 9.56 17.4% 25.40 28.0% 14.29 17.7% 14.45 17.5% 23.08 27.5% 13.04 19.6% 13.19 19.5%

2014 3.72 5.5% 12.04 21.8% 12.56 22.8% 3.33 3.7% 13.07 16.2% 13.64 16.5% 3.72 4.4% 17.92 26.9% 18.70 27.7%

2015 4.18 6.2% 6.27 11.4% 6.49 11.8% 3.74 4.1% 23.33 28.8% 24.14 29.2% 4.18 5.0% 11.63 17.5% 12.03 17.8%

2016 1.46 2.2% 7.07 12.8% 7.00 12.7% 1.30 1.4% 15.43 19.1% 15.27 18.5% 1.46 1.7% 13.54 20.4% 13.40 19.8%

2017 0.0% 12.00 21.7% 11.49 20.9% 0 0.0% 3.19 3.9% 3.06 3.7% 0 0.0% 5.49 8.3% 5.26 7.8%

2018 0.0% 5.90 10.7% 5.37 9.8% 0 0.0% 0.05 0.1% 0.05 0.1% 0 0.0% 0.05 0.1% 0.05 0.1%

Total 67.14 100.0% 55.22 100.0% 55.06 100.0% 90.84 100.0% 80.92 100.0% 82.56 100.0% 83.85 100.0% 66.48 100.0% 67.61 100.0%

BelygonAgdashGoychayYear

Target % Disburshe

d (Current

Price)

% Disburs

hed

(2011

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2011

Price)

%

2012 103.07 65.4% 27.23 15.9% 28.17 16.2% 251.27 62.9% 46.10 12.3% 47.70 12.6%

2013 45.22 28.7% 63.88 37.3% 64.62 37.2% 111.77 28.0% 100.65 26.9% 101.82 26.9%

2014 3.72 2.4% 20.80 12.1% 21.71 12.5% 14.49 3.6% 63.82 17.1% 66.62 17.6%

2015 4.18 2.6% 15.91 9.3% 16.46 9.5% 16.27 4.1% 57.14 15.3% 59.11 15.6%

2016 1.46 0.9% 34.52 20.1% 34.16 19.7% 5.67 1.4% 70.57 18.9% 69.84 18.4%

2017 0 0.0% 9.08 5.3% 8.70 5.0% - 0.0% 29.76 8.0% 28.51 7.5%

2018 0 0.0% 0.01 0.0% 0.01 0.0% - 0.0% 6.00 1.6% 5.47 1.4%

Total 157.64 100.0% 171.43 100.0% 173.83 100.0% 399.47 100.0% 374.05 100.0% 379.07 100.0%

Nakchivan Total Project 2Year

Appendix 10 59

Source: Analysis based on the data provided by PMUs

8. Revenue from water and wastewater was considered as per the actual increase due to tariff revision during the period 2011-2017. Tariff revision is centralized at national level and will be common for all project towns. Last three revisions for water and sewer tariff happened in 2007, 2011 and 2016, with average annual growth of 11.4%. The combined tariff for water and wastewater was AZN0.17 per m3 (2007) and this was revised to AZN0.5 per m3 (2016). With this background, the earlier tariff revision assumption of 40% at every two years at processing stage was revised to 25% increase in every two years in PCR analysis. This tariff revision had confirmed the affordability of water and sewer tariff during the analysis period (Table 2). The tariff was applied on the number of connections for assessing the incremental revenue. Weighted average cost of capital (WACC) was assessed at 2.1% considering the share of ADB loan 75% @ 5.03% rate and Government of Azerbaijan (GoA) with 25% @ 6.5% interest. Local inflation considered for WACC determination is 5.5% and the international inflation at 2.5% (Table 3). However, estimating the O&M expenditure, the actual local inflation growth observed upto 2018 and 3% annual growth beyond that and 2.5% annual growth for foreign inflation were considered in the completion analysis. 9. One of the major changes occurred during the implementation period was the devaluation of Azerbaijan Manat (AZN). From the strong position of AZN0.80 to $1.00 in 2011 had fell down to AZN1.689 to $1.00 in 2017. This had affected the analysis which was based on $ unit.

Table 2: Tariff Affordability

Particulars Agdash Beylagan Goychay Nakhchivan

2011 2017 2011 2017 2011 2017 2011 2017

Persons per Household 4.5 4.5 4.4 4.4 5.1 5.1 4.7 4.7

Consumption, lpcd 140.0 163.0 50.0 200.0 150.0 200.0 150.0 200.0

Average consumption /month, m3 18.9 22.0 6.6 26.4 23.0 30.6 21.2 28.2

Average household income/month, AZN 1659.00 3676.70 1622.10 3595.00 1880.20 4167.00 1732.70 3840.20

Tariff (water + sewer)/m3, AZN 0.40 0.50 0.40 0.50 0.40 0.50 0.40 0.50

Average HH Bill for water & sewer, AZN 6.80 11.10 2.40 13.40 8.30 15.50 7.60 14.30

Income spent for water & sewer (%) 0.4% 0.3% 0.1% 0.4% 0.4% 0.4% 0.4% 0.4%

lpcd = per capita liter per day, AZN = Azerbaijan Manat, m3 = Cubic metre Note: 1. Water bill was revised from AZN0.14 / m3(2007) to AZN0.3/m3 in 2011 and further to AZN0.35 /m3 in 2016 and also tariff for

wastewater to AZN0.03/m3 (2007), AZN0.06/m3 (2011) and AZN0.15/m3(2016) respectively. This worked out an average annual tariff increase of about 9%.

2. With this background, the earlier assumption of 40% tariff increase in every two years was revised to 25% tariff increase in every two years.

3. Data on GDO and per capita GDP from the Ministry of Economy, Govt. of Azerbaijan for the period (2009-2017) was considered for household monthly income.

4. Tariffs are deemed affordable at about 5% of average household income. Source: Asian Development Bank Estimates

Table 3: Weighted Average Cost of Capital (WACC) $ million

Capital % Cost of Weigt'd Inflation WACC

Particulars Total Capital Capital rate Real

ADB 300.00 73.2% 5.0% 3.7% 2.5% 2.5%

Government 110.00 26.8% 6.5% 1.7% 5.5% 1.0%

Total 410.00 100% 5.4% 2.1% Source: Asian Development Bank Estimates

60 Appendix 10

C. Revaluation at Completion 10. Against the results at appraisal stage (1.84% FIRR for Agdash against the WACC of 1.2%, 4.7% FIRR for Goychay and 6% FIRR for Nakhchivan against the WACC of 2.47%), FIRR at completion stage was found to be negative for all sub projects in two project towns with negative net present values (NPVs) assessed at WACC. However, the incremental revenue was projected to cover the incremental operation and maintenance costs in respect of Nakhchivan. In case of Goychay, the incremental revenues were not enough to meet the operation and maintenance cost for a short period (2017-2021). The currency devaluation and the conversion of tariff into $, had resulted in lesser sales revenue in $ terms. In case of the local currency consideration for both tariff and incremental O&M, this deficiency will not come for the short period indicated earlier (2017-2021) for Goychay sub projects. Thus, it can be concluded that the proposed tariff structure can cover the incremental O&M cost during the analysis period. Tariff increase in 2018 and the subsequent periodical revision of 25% once in two years, when converted to real terms, was not adequate to generate a positive FIRR equivalent or more than WACC (Table 4). Also, the major currency devaluation for local currency in 20151 and the conversion of local currency to $ for analysis had under-estimated the cost overrun happened during the implementation period. With this background, it will not be appropriate to compare the completion stage FIRRs with processing stage FIRRs. 11. Hence, against the results at appraisal stage, the FIRRs at completion stage were negative for all four project towns.

Table 4: Sub Projects FIRR

Details

Goychay Nakhchivan Agdash Belegan

FIRR FNPV SV FIRR

FNPV SV FIRR

FNPV

SV FIRR FNPV SV

Base Case (9%) (83.3) (5%) (153.5) (5%) (28.7) (15%) (59.9)

O&M Cost plus 20%

(10%) (88.6) 197% (6%) (159.4) 436% (6%) (32.4) 93% NR (62.6) NR

Revenue less 20%

(11%) (89.5) 94% (7%) (172.7) 90% (7%) (33.9) 56% NR (63.1) NR

FIRR = Financial Internal Rate of Return; FNPV = Financial Net Present Value discounted @ WACC in $ million; SV = Switching Value, (-) = Negative Value, NR = No result Source: Asian Development Bank Estimates

D. Sustainability 12. The subprojects are considered viable if the resulting FIRRs are greater than the WACC, and cost recovery tariffs within consumer affordability. Additionally, operating ratio will need to be maintained lower than ‘unity’ throughout the project period to ensure sustainability. Initial spreadsheet iterations reveal that without the proposed project improvements, subproject operations will not be sustainable with O&M expenditures exceeding tariff revenues. To satisfy all viability and sustainability parameters, tariffs in the project towns will need to be revised and / or subsidized until the end of the project. Under the full sustainability of recovering the O&M, depreciation and debt services, this tariff revision requirement to enhance the revenue will be

1 Institute for War & Peace Reporting, 2016, ‘Azerbaijanis Struggle After Currency Devaluation’, London.

‘Azerbaijan’s Central Bank switched to a floating rate for the national currency on 21 December 2015, causing the manat to lose half its value to the dollar. This was the country’s second devaluation last year; in February 2015,

the manat fell by one-third after the first devaluation’ (Source:https://iwpr.net/global-voices/azerbaijanis-struggle-after-currency)

Appendix 10 61

much more. Also, such a steep tariff increase may face resistance from the beneficiaries. However, under the present arrangements the capital cost of ADB loan and government contribution being passed on ‘grant’ basis to operating entities in the project towns, the burden of loan repayment will be removed. With this background, the sustainability level can be diluted to the level of recovering O&M along with possible partial capital cost recovery to meet the periodical replacement requirements. With this approach, the sub projects in all four project towns can be sustainable for O&M recovery (Table 5).

Table 5: Details of Cost Recovery

Project Town

O&M Cost recovery Operating Ratio

2011 2017 2027 2033 2011 2017 2027 2033

Goychay 5% 69% 146% 240% 18.2 1.4 0.6 0.4

Nakhchivan 127% 127% 157% 138% 0.8 0.8 0.6 0.7

Agdash 50% 93% 240% 212% 2.0 1.1 0.4 0.5

Beylagan 37% 81% 213% 187% 2.7 1.2 0.5 0.5 Note: Azerbaijan Manat devaluation against $ and the conversion of tariff rates in $, had resulted lesser sales revenue. That was the main reason for the negative O&M recovery in during the initial period (2011-2017). Source: Asian Development Bank Estimates E. Conclusion 13. Analysis findings indicate that the subprojects are financially viable for full O&M recovery along with the partial capital cost recovery on two conditions: (i) required periodic tariff increases (herein assumed every two years); and (ii) 90% collection efficiency. This assumes no viability gap funding requirement for the operating entities. However, the project is rated financially not sustainable for full cost recovery. Also, under the existing implementation arrangement of all capital cost will be transferred to operating entities as grant by the national government, the question of recovering the depreciation and interest will not be required for the operating entities. Hence, the estimated financial sustainability with full O&M recovery along with the partial capital cost recovery for the periodical asset replacement will be sufficient. Proposed tariff revision for both project towns complies the affordability criteria for the beneficiaries. The national government and the operating entities need to ensure the periodic tariff revision and improving the collection efficiency.