Completion Report

Project Numbers: 42408-013 and 42408-043 MFF Number: 0032 Loan Number: 3079 October 2019

Azerbaijan: Water Supply and Sanitation Investment Program (Multitranche Financing Facility and Tranche 3) 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 Program Completion 14 October 2009 31 May 2018

AZN1.00 = $1.2425 $0.5877 $1.00 = AZN0.8048 AZN1.7015

ABBREVIATIONS

ADB – Asian Development Bank CPS – country partnership strategy GAP – gender action plan EIRR – economic internal rate of return FIRR – financial internal rate of return FFA – facility framework agreement IEE – initial environmental examination IPMC – international project management consultant km – kilometer 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 PSC – project steering committee SAWMC – State Amelioration and Water Management Committee TWUA – town water users association WSS – water supply and sanitation WWTP – wastewater treatment plant

NOTES

(i) The fiscal year (FY) of the Government of Azerbaijan 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 Yong Ye, Urban Development and Water Division, CWRD Team leader Lu Shen, Unit Head, Portfolio Management, CWRD Team members Sabina Jafarova, Project Officer, CWRD Afag Javadova, Project Analyst, CWRD Faraj Huseynbeyov, Senior Project Officer, CWRD Lilibeth Manalaysay-Buenavente, Associate Project Analyst, CWRD Maritess Marcelino, Project Officer, 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. PROGRAM DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 2

A. Project Design and Formulation 2 B. Project Outputs 3 C. Project Costs and Financing 5 D. Disbursements 5 E. Project Schedule 6 F. Implementation Arrangements 6 G. Consultant Recruitment and Procurement 7 H. Gender Equity 8 I. Safeguards 9 J. Monitoring and Reporting 10

III. EVALUATION OF PERFORMANCE 10

A. Relevance 10 B. Effectiveness 12 C. Efficiency 12 D. Sustainability 13 E. Development Impact 14 F. Performance of the Borrower and the Executing Agency 14 G. Performance of the Asian Development Bank 15 H. Overall Assessment 15

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 16

A. Issues and Lessons 16 B. Recommendations 17

APPENDIXES

1. Design and Monitoring Framework 18

2. Contribution to Results Framework 29

3. Project Cost at Appraisal and Actual 31

4. Project Costs by Financier and Subproject 33

5. Disbursement of ADB Loan Proceeds 34

6. Contract Awards of ADB Loan Proceeds 35

7. Chronology of Main Events 36

8. Status of Compliance with Loan Covenants 37

9. Gender Action Plan 49

10. Economic Reevaluation 60

11. Financial Analysis 72

BASIC DATA

I. Multitranche Financing Facility A. Facility Identification

1. Country Azerbaijan

2. Facility number and financing source 0032-AZE, ordinary capital resources

3. Facility title Water Supply and Sanitation Investment Program

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 facility $600.00 million

7. Financing modality Multitranche financing facility

B. Facility Data

1. Appraisal

– Date started 3 May 2009

– Date completed 20 May 2009

2. Framework financing agreement negotiations

– Date started 14 August 2009

– Date completed 15 August 2009

3. Date of Board approval 23 September 2009

4. Date of framework financing agreement

15 August 2009

5. Multitranche financing facility availability period

– In framework financing agreement 31 May 2018

– Actual 31 May 2018

– Number of extensions 0

6. Terms of loans Terms and conditions determined in the context of individual loans

– Interest rate London interbank offered rate

– Maturity (number of years) 21

– Grace period (number of years) 4

7. Disbursements

a. Dates Initial Disbursement

2 August 2010

Final Disbursement

8 November 2018

Time Interval

99.29 months

Approval Date

23 September 2009

Actual Closing Date

31 May 2018

Time Interval

104.28 months

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b. Amount ($ million)

Category

Original Allocation

(1)

Increased during

Implementation (2)

Canceled during Implementation

(3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Project 1 75.00 0.00 0.00 75.00 74.20 0.80

Project 2 300.00 0.00 0.00 300.00 299.71 0.29

Project 3 150.00 0.00 0.00 150.00 149.02 0.98

Project 4 75.00 0.00 75.00 0.00 0.00 0.00

Total 600.00 0.00 75.00 525.00 522.93 2.07

C. Program Data

1. Program cost ($ million) Item Appraisal Estimate At Approval Actual

Foreign exchange cost

Project 1 100.00 100.00 95.57

Project 2 400.00 410.00 378.21

Project 3 200.00 203.39 189.78

Project 4 100.00 100.00 0.00

Total 800.00 813.39 663.56 Note: The indicative financing plan in the RRP originally listed five tranches, however due to 1.5 years delay, Items 2 and 3 in the financing plan were combined as one tranche (Tranche 2).

2. Multitranche financing facility plan ($ million) Source Appraisal Estimate At Approval Actual

A. Asian Development Bank Loan

1. Project 1 75.00 75.00 74.20

2. Project 2 300.00 300.00 299.70

3. Project 3 150.00 150.00 149.02

4. Project 4 75.00 75.00 0.00

Subtotal (A) 600.00 600.00 522.90

B. Government

1. Project 1 25.00 25.00 21.37

2. Project 2 100.00 110.00 78.50

3. Project 3 50.00 53.39 40.79

4. Project 4 25.00 25.00 0.00

Subtotal (B) 200.00 213.39 140.66

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

Water supply and sanitation development 615.88 606.44

Program management and institutional effectiveness 27.00 27.13

Financial charges 50.40 29.99

Contingencies 106.72 0.00

Total 800.00 663.56

4. Program schedule Item Appraisal Estimate Actual

Date of contract with consultants

Azersu

31 March 2011–31 May 2018

SAMWMC

24 October 2010–31 May 2018

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Item Appraisal Estimate Actual

Goychay WSS

Completion of engineering designs 30 June 2009 9 September 2011

Date of award 30 April 2010 14 September 2012

End of construction 29 April 2012 31 December 2015

Completion of tests and commissioning 28 April 2013 3 October 2016

Start of operations 30 October 2013 3 December 2017

Agdash WSS

Completion of engineering designs 9 September 2011 9 September 2011

Date of award 20 July 2012 20 July 2012

End of construction 9 May 2014 15 December 2016

Completion of tests and commissioning 9 May 2015 3 October 2017

Start of operations 9 September 2015 3 December 2018

Agjabedi WSS

Completion of engineering designs

8 August 2015

Date of award 30 July 2014 8 June 2016

End of Construction 29 July 2016 30 May 2018

Completion of tests and commissioning 28 July 2017 3 October 2018

Start of operations 1 January 2018 3 February 2019

Beylagan WSS

Completion of engineering designs

9 September 2011

Date of award 1 November 2012 1 November 2012

End of construction 9 January 2014 31 December 2016

Completion of tests and commissioning 9 January 2015 3 October 2017

Start of operations 9 July 2015 03 December 2018

Nakhchivan WTP

Completion of engineering designs 30 June 2009 15 June 2011

Date of award 30 April 2010 21 November 2011

End of construction 29 April 2012 21 May 2013

Completion of tests and commissioning 28 April 2013 11 December 2013

Start of operations 30 October 2013 11 December 2013

Nakhchivan WSS

Completion of engineering designs 30 June 2009 22 January 2010

Date of award 30 April 2010 15 June 2010

End of construction 29 April 2012 31 January 2015

Completion of tests and commissioning 28 April 2013 13 April 2015

Start of operations 30 October 2013 13 April 2015

Nakhchivan Peri-urban WSS

Completion of engineering designs

14 May 2015

Date of award 30 July 2014 31 November 2015

End of construction 29 July 2016 30 October 2016

Completion of tests and commissioning 28 July 2017 8 November 2016

Start of operations 1 January 2018 8 November 2016

Shikhmahmud WSS

Completion of engineering designs

26 May 2015

Date of award

30 November 2015

End of construction

30 April 2017

Completion of tests and commissioning

14 June 2017

Start of operations

14 June 2017

Shakarabad WSS

Completion of engineering designs

10 September 2017

Date of award

11 December 2017

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Item Appraisal Estimate Actual

End of construction

14 May 2018

Completion of tests and commissioning

23 May 2018

Start of operations

23 May 2018

Nackchivan WWTP

Completion of engineering designs

12 August 2013

Date of award 30 June 2013 5 June 2014

End of construction 29 June 2015 30 July 2017

Completion of tests and commissioning 28 June 2016 25 September 2017

Start of operations 1 January 2017 25 September 2017

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

II. Project 3

A. Loan Identification

1. Country Azerbaijan

2. Loan number and financing source 3079-AZE, ordinary capital resources

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

4. Borrower Azerbaijan

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

6. Amount of loan $150.00 million

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

1. Appraisal

– Date started 10 April 2013 – Date completed 18 April 2013

2. Loan negotiations

– Date started 19 September 2013

– Date completed 19 September 2013 3. Date of President approval 5 December 2013

4. Date of loan agreement 28 November 2014

5. Loan effectiveness

– In loan agreement 26 February 2015 – Actual 28 May 2015

6. Project completion date

– In loan agreement 30 November 2017 – Actual 30 November 2017

7. Loan closing date

– In loan agreement 31 May 2018

– Actual 31 May 2018 – Number of extensions 0

8. Financial closing date 10 December 2018

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9. Terms of loans

– Interest rate London interbank offered rate – Maturity (number of years) 21

– Grace period (number of years) 4 10. Disbursements

a. Dates Initial Disbursement

17 December 2015

Final Disbursement

8 November 2018

Time Interval

34.75 months

Effectiveness Date

28 May 2015

Actual Closing Date

31 May 2018

Time Interval

36.13 months

b. Amount ($) Category Original

Allocation (1)

Increased /(Decreased

during Implementation

(2)

Canceled during Implementation

(3)

Last Revised Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance

(6 = 4–5)

Civil works 136,390,000 8,612,088 0 145,002,088 143,884,951 1,117,137

Consultancy 3,240,000 1,615,000 0 4,855,000 5,139,185 (284,185)

Investment program office

770,000 (627,088)

142,912 30 142,882

Unallocated 9,600,000 (9,600,000)

0 0

Total 150,000,000 0 0 150,000,000 149,024,166 975,834

C. Project Data

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

Foreign exchange cost 150.00 149.02

Local currency cost

Total 150.00 149.02

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

Implementation cost

Borrower financed 48.08 37.24

ADB financed 150.00 149.02

Total implementation cost 198.08 186.26

Interest during construction costs

Borrower financed 5.31 3.52

ADB financed

Total interest during construction cost 5.31 3.52

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

Water supply and sanitation development 170.52 179.90

Institutional effectiveness 4.92 6.36

Contingencies 22.11 0.00

Financing charges during implementation 5.31 3.52

System operation and maintenance 0.53 0.00

Total 203.39 189.78

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4. Project performance report ratings Implementation Period Ratings

From 28 May 2015 to 31 December 2015 On track

From 1 January 2016 to 31 December 2016 On track

From 1 January 2017 to 31 December 2017 On track

From 1 January 2018 to 10 December 2018 On track

D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of

Members

Consultation mission 7–11 February 2013 3 15 a, a, d

Loan review 10–18 April 2013 4 36 a, b, c, e

Loan review 10–18 June 2014 4 36 a, a, d, d

Loan review 15–19 September 2014 4 20 a, a, d, d

Reconnaissance mission 8–13 February 2015 3 18 a, a, d

Loan review 13–29 April 2015 6 102 a, a, b, c, d, d

Loan review 1–16 September 2015 5 80 a, a, c, d, d

Loan review 29 October–19 November 2015 5 110 a, a, d, d, d

Midterm review 29 February–14 March 2016 3 45 a, d, d

Loan review 1–14 September 2016 3 42 a, d, d

Loan review 1–16 November 2016

Special administration mission 11–19 May 2017 3 27 a, f, d

Midterm review 4–11 July 2017 4 32 a, c, d, d

Loan review 16–27 October 2017 7 84 a, d, d, a, d, g, e

Loan review 6–9 December 2017 3 12 a, d, d

Country safeguards review 31 January – 8 February 2018 2 18 c, g

Loan review 10–17 April 2018 4 8 a, d, d, g

Loan review 16 May – 6 June 2018 11 242 a, a, h, i, d, d, d, d, g, g, g

Loan review 24 August–4 September 2018 4 48 a, d, d, a, h, e

a = team leader, b = social development specialist, c = environment specialist, d = project officer, e = project analyst, f = counsel, g = consultant, h = procurement specialist, i = integrity specialist.

I. PROGRAM DESCRIPTION 1. After the collapse of the Soviet Union in 1991, the quality and efficiency of water service delivery 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 no access to safe water.1 Sewage infrastructure also worsened, and wastewater was discharged into ditches or the nearest watercourses. Poor sanitation and leaking sewers created serious health risks and environmental hazards, and insufficient and unreliable infrastructure and services were adding to household costs and diminishing the quality of life in secondary towns. 2. In its state programs on poverty reduction and sustainable development for 2008–2015 and socioeconomic development of regions for 2009–2013, the Government of Azerbaijan committed to improving access to basic services.2 Considering the importance of safe drinking water and sanitation, the state programs targeted improved water supply and sanitation (WSS) coverage and service quality by 2015, including 100% coverage and 24-hour water supply in Baku and 80%–85% coverage in secondary towns and villages. 3. To support Azerbaijan in tackling challenges in the WSS system, the Asian Development Bank (ADB) approved a multitranche financing facility (MFF) on 23 September 2009 for the Water Supply and Sanitation Investment Program for up to $600.00 million from ADB’s ordinary capital resources.3 The program’s objective was to improve public health and the environment by improving the quality, reliability, and sustainability of WSS services in the selected secondary towns. The program’s impact was improved public health and environment in participating towns; and the outcome was improved coverage, continuity, and quality of water supply and wastewater disposal in participating towns. The program was 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 areas other than those in the NAR. 4. Project 1 was approved on 14 October 2009 for $75.00 million with the same impact, outcome, and outputs as the program, but with a focus on Goychay and Nakhchivan towns. The project aimed to (i) improve WSS systems in Goychay and Nakhchivan, including water treatment facilities and water distribution and sewage networks; (ii) strengthen the WSS sector’s institutional effectiveness; and (iii) set up program management facilities at executing agencies. The project was completed on 30 June 2017 and the loan financially closed on 8 November 2017. 5. Project 2 was approved on 22 December 2011 for $300.00 million. 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 infrastructure outputs included new WSS infrastructure in four towns and wastewater treatment plants (WWTPs) in Goychay and Nakhchivan. The project also aimed to improve the WSS sector’s institutional

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. The program was preceded by the stand-alone Urban Water Supply and Sanitation Project, which was approved in 2004 and closed in 2011 (ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loans and Technical Assistance Grant to the Republic of Azerbaijan for the Urban Water Supply and Sanitation Project. Manila).

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effectiveness through (i) institutional improvements for WSS service delivery; (ii) capacity development for better system planning and operation and maintenance (O&M); (iii) enhanced cost recovery through metering, billing, and collection of tariffs; (iv) increased efficiency for timely processing of effective WSS projects; and (v) a twinning arrangement with an external WSS utility to support capacity development. Finally, the project provided the program management facilities. 6. Project 3 was approved on 5 December 2013 for $150.00 million. The loan became effective on 28 May 2015 and closed on 31 May 2018. The impact was improved public health and environment in Agjabedi and Nakhchivan’s peri-urban areas. The outcome was improved coverage, continuity, and quality of water supply and wastewater disposal in Agjabedi and Nakhchivan’s peri-urban areas. The project’s outputs were (i) water supply and sewerage system efficiency improved through rehabilitation and replacement, and coverage expanded; and (ii) capacity developed for better system planning and O&M. 7. Project 4 was approved on 9 August 2016 for $75.00 million but was not signed because of government measures, including limitations on external borrowing, and loan validity expired on 9 August 2017 (para. 25). The impact of Project 4 was supposed to be improved WSS services in Agdash and Beylagan. The outcome was supposed to be improved coverage, continuity, and quality of water supply and wastewater disposal in Agdash and Beylagan. The outputs were supposed to be (i) improved water supply system efficiency through rehabilitation and replacement, and expanded coverage in Agdash; and (ii) improved sewerage and sanitation system efficiency through construction and expanded coverage in Agdash and Beylagan. Overall, about 37.2 kilometers (km) of the water supply network; 5,000 cubic meters (m3) of reservoirs; 42.6 km of the sewerage network; and two WWTPs, each with a capacity of 20,000 m3/day were to be constructed.

II. DESIGN AND IMPLEMENTATION A. Project Design and Formulation 8. Infrastructure financing needs under the urban sector road map was estimated at $2.3 billion for 2009–2017.4 Given the magnitude of WSS investment requirements, the government recognized that improving WSS services in secondary towns required sequenced interventions and requested ADB to finance part of the process. 9. The program was aligned with ADB’s country strategy for Azerbaijan at appraisal, guided by an interim operations strategy and country strategy and program updates.5 It remained closely aligned with ADB’s country strategy during implementation and completion: urban infrastructure and services was a priority sector under the country partnership strategy (CPS), 2014–2018 for Azerbaijan, which included water and sanitation support for secondary towns, including less densely populated towns in the central and northern regions and the NAR.6 The program was in line with ADB’s Strategy 2020, where WSS was a core area for ADB engagement.7

4 ADB, Azersu, and SAWMC estimates. 5 ADB. 2000. Economic Report and Interim Operations Strategy for Azerbaijan. Manila; ADB. 2001. Country Strategy

and Program Update (2001–2004): Azerbaijan. Manila; ADB. 2002. Country Strategy and Program Update (2003–2005): Republic of Azerbaijan. Manila; ADB. 2003. Country Strategy and Program Update, 2004–2006: Republic of Azerbaijan. Manila; ADB. 2004. Country Strategy and Program Update, 2005–2006: Republic of Azerbaijan. Manila; and ADB. 2006. Country Strategy and Program Update: Azerbaijan (2006). Manila.

6 ADB. 2014. Country Partnership Strategy: Azerbaijan, 2014–2018. Manila ). There was no active CPS for 2007–2010.

7 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020. Manila.

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10. Overall, the program was rated relevant to government objectives and policies as well as ADB’s country strategy. The use of the MFF modality was appropriate, as it allowed flexibility in defining the scope, timing, and amount of each loan in line with government WSS development targets during implementation. The MFF program responded to government needs by adopting a midterm and integrated approach for improving institutions, capacities, systems, and service delivery. The MFF also included program management support to help with (i) gender, safeguards, governance, legal, financial, and administrative matters; (ii) design works for subsequent tranches; and (iii) general training and development. 11. The facility framework agreement (FFA) provided the undertakings that comprise the government’s commitments during the MFF period. The legal framework for all tranches under the program consisted of a loan agreement between ADB and Azerbaijan, and project agreements between ADB and each executing agency. The loan agreement specified an onlending arrangement between the borrower and the executing agencies, but the arrangement was not implemented and eventually waived at the government’s request through an amendment to the loan agreement dated 11 January 2012.8 12. Project 3. Project 3 is rated relevant, as it met the government’s objectives and policies as well as ADB’s country strategy. As with previous tranches, Project 3 followed the MFF framework and selection criteria. At completion, 291 km of water supply and 284 km of sewerage network were completed, benefiting 71,665 people.

B. Project Outputs 13. The program envisioned three main components at appraisal: physical infrastructure, institutional effectiveness, and project management. Physical infrastructure included the rehabilitation, reconstruction, and extension of WSS networks in six towns and peri-urban areas surrounding Baku. Original activities included (i) developing a water source; (ii) laying new and/or rehabilitating water transmission and distribution pipelines; (iii) constructing storage reservoirs and water treatment plants; (iv) installing bulk and individual water meters; (v) conducting water quality monitoring; (vi) undertaking sewage network improvements; and (vii) constructing and/or rehabilitating WWTPs. Institutional effectiveness included nonphysical instruments targeting (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 of tariffs; (iv) increased efficiency for timely processing of effective WSS projects; and (v) a twinning arrangement with an external WSS utility to support capacity development. 14. Overall, WSS network construction was achieved at completion, including (i) piped-water supply systems, water works, and treatment facilities rehabilitated, replaced, and expanded in program towns; (ii) a water quality monitoring system developed and implemented; (iii) sewerage networks rehabilitated, replaced, and expanded; and (iv) WWTPs constructed in Goychay and Nakhchivan. The service coverage areas increased in Agdash and Nakhchivan. In Agdash, the increase was based on the town’s expanded administrative area from 1,070 to 2,307 hectares.9 In Nakhchivan, savings from civil works under the original scope enabled expanded coverage to peri-urban areas. WWTPs in Agdash, Agjabedi, and Beylagan will be completed, but they will be functional after the completion of the program (paras. 16–20).

8 The onlending arrangement was not a precondition for the disbursement of loan proceeds, and the loan funds were

disbursed directly to the executing agencies after loan effectiveness on 17 February 2010. 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.

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15. In terms of institutional effectiveness, outputs were partially achieved, particularly billing and collection, and capacity development. Some sukanals received technical, operational, management, and financial training at completion. The customer database was updated, and Azersu and SAWMC reported that all customers connected to the WSS networks were registered and billed accordingly. Twinning programs were established for Azersu and SAWMC, although financing for Azersu’s twinning program was not through the program, but through a bilateral agreement between Azersu and Suez Environnement, a French water utility. 16. Wastewater treatment plants. A major deviation from the envisaged outputs of the MFF is WWTP construction in Agdash, Agjabedi, and Beylagan. In November 2016, Azersu proposed to change the WWTPs’ wastewater treatment technology from secondary to primary only (without biological treatment). Technical assessment initiated by ADB showed that primary treatment will not meet the effluent discharge standards as agreed in the project documents. The project team held multiple discussions with Azersu and highlighted the importance of investing in biological treatment to meet ADB environmental standards, but a consensus was not reached and WWTP construction in the three towns under ADB financing was not realized. 17. At completion, Azersu awarded contracts for WWTP construction in Agdash, Agjabedi, and Beylagan using government funds. Detailed designs for the WWTPs used for the three tenders were financed under the program and complied with ADB’s Safeguard Policy Statement (2009). Azersu noted that government financing will be given in two stages: first for the mechanical treatment component, and then for the biological treatment component. Completion of the mechanical treatment facilities is expected by end of 2019. 18. Project 3. The outputs envisioned at appraisal were (i) 204 km of the water distribution network and 197 km of sewer lines, 8,000 m3 of storage reservoirs, and a 20-million-liter-per-day (MLD) WWTP constructed in Agjabedi; (ii) 62 km of the water distribution network, 48 km of the sewerage networks, a sewage pumping station, and an accompanying force main constructed in Nakhchivan’s peri-urban areas; and (iii) water meters installed for all bulk and domestic consumers. While the Nakhchivan component was implemented as planned with some savings, the Agjabedi WWTP was not realized during project implementation. As discussed in para. 16, procurement for the Agjabedi WWTP was delayed by discussions from 2016 to 2017 on the merit of biological treatment. Since the MFF was set to close in May 2018, there will not be enough time to implement the Agjabedi WWTP, and its contract was subsequently excluded from the procurement plan during the midterm review in July 2017. 19. Nakhchivan network (Shakarabad). People in the Nakhchivan village of Shakarabad, a peri-urban area, still used bottled water for drinking because they lacked a reliable water supply system. No sewerage system existed, and houses had basic, unregulated septic tanks that posed serious health risks to residents. SAWMC proposed to use the savings from the peri-urban towns contract and the unused loan balance for the WSS network construction in Shakarabad, which was not planned for Project 3. The WSS contract financed the construction of 16 km of water distribution and 15 km of sewerage networks and household connections. 20. Agdash collector. Azersu requested the inclusion of the construction of a 9 km sewerage collector in Agdash to move the discharge point from the city center to the proposed WWTP site. As Agdash was not under the scope for Project 3, an amendment to the loan agreement was made to ensure timely completion of the additional civil works before loan closure.

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C. Project Costs and Financing 21. At appraisal, the program was estimated to cost $600.00 million over five tranches, or 75% of the total cost. The loans will cover the cost of civil works, equipment and materials, institutional development and capacity building, land and resettlement, loan financing charges, and part of the expenditures for consultancy and contingencies. The government provided counterpart financing to cover project management office (PMO) expenditures, surveys and investigation, part of the consulting service costs, local taxes and duties, and other miscellaneous costs. At completion, the program used $522.90 million in ADB financing, even though ADB approved up to $600.00 million through four tranches. 22. Project 1. At completion, the civil works contracts totaled $67.86 million, higher than the $58.08 million estimated at appraisal because of cost overruns in Goychay’s water supply and sewerage networks. Actual equipment expenditure was $0.22 million, compared with $2.05 million at appraisal, covering WSS network maintenance equipment supplied to Nakhchivan. Consulting service contracts totaled $10.61 million, compared with $7.65 million at appraisal. To cover the increased cost of civil works and consulting services, loan funds were reallocated between the categories, including the contingencies and interest during construction categories. 23. Project 2. At completion, civil works totaled $358.56 million, higher than the $323.00 million estimated at appraisal because of cost overruns in the Agdash, Beylagan, and Goychay WSS construction contracts.10 Consulting service contracts totaled $9.30 million, higher than the $4.80 million planned at appraisal because of the need to design new water intake facilities in Agdash ($4.90 million) and to increase supervision for the expanded works. 24. Project 3. At completion, civil works totaled $179.90 million, higher than the $170.52 million estimated at appraisal because of the change in scope (paras. 18 to 20), which excluded the Agjabedi WWTP but included the Shakarabad WSS and Agdash wastewater collectors. Consulting service contracts totaled $5.71 million, higher than the $4.92 million planned at appraisal because of the need for additional supervision for the expanded works. 25. Project 4. The loan agreement had remained unsigned 1 year after ADB approval, despite various follow-up efforts from the ADB division, department, and Management. A letter dated 4 August 2017 was sent to the government as a final reminder of the 12-month validity of ADB's approval, clarifying that validity will lapse on 9 August 2017 unless the government requests an extension. Following ADB’s project administration instructions, the lapse of the validity of the loan approval for Project 4 was communicated to ADB's Board of Directors on 9 August 2017. D. Disbursements 26. Disbursement of the loan proceeds for all projects under the program followed ADB’s Loan Disbursement Handbook (2017, as amended from time to time). The loan agreements specified the percentages of ADB financing for civil works, consulting services, and project management. The statement of expenditure procedure was used to reimburse eligible expenditures not exceeding $100,000 equivalent per individual payment. Disbursements totaled $522.90 million, compared with $600.00 million at appraisal. The appraisal disbursement schedule was generally

10 Cost overruns were because of (i) design changes, as Azersu decided to increase water consumption to 180 liters

per capita per day for all service areas under its coverage, and the engineering designs for the Agdash, Beylagan, and Goychay networks based on the lower consumption rate had to be modified to comply with the new parameters, resulting in a significant cost increase; and (ii) time delay, as the design change also delayed civil works implementation, with starting dates for awarded contracts delayed by 2 years on average.

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realistic. The direct payment procedure was used for payments to contractors and consultants, and the advance fund procedure was used for the PMOs at both executing agencies. 27. Project 3. Disbursements totaled $149.02 million, compared with $150.00 million at appraisal. Despite the slow start in procuring the contract for the Agjabedi WSS, a significant contract in terms of amount, disbursements picked up during the second half of 2017 and in 2018 because the contractor deployed multiple teams and completed an average of 21 km per month for the sewerage networks and 15 km per month for the water supply networks. Disbursements for the Nakchivan peri-urban WSS contract were met ahead of schedule. Despite the cancellation of the Agjabedi WWTP package, both executing agencies used 99.3% of their loan allocation as two contracts were added through a minor change in scope (para. 30). SAWMC used the advance fund procedure, which was useful in meeting small payment requirements for PMO salaries and operations. No material issue on disbursement was experienced during implementation. E. Project Schedule 28. The program implementation period at appraisal was 8 years, including preconstruction activities, and each civil works contract would be selected, prepared, and implemented in four annual batches. To expedite project implementation, ADB approved advance procurement action and retroactive financing for all tranches. Progress of the civil works was partly satisfactory because of the difference in the performance of the two executing agencies. 29. Although the loan for Project 1 was approved in 2009, civil works in Goychay did not start until 2011 because of modifications and redesigns based on changes to technical specifications. The most significant of these changes is the underlying assumption of the per capita water consumption rate, which was increased to 180 liters per capita per day. The modification meant an overhaul of the original detailed design, including water source capacity, size of network, and specifications of materials. Under Project 2, Agdash, Beylagan, and Goychay all had significant delays and changes, including (i) collapse of water wells in Agdash, (ii) land acquisition complications for the WWTP site in Beylagan, (iii) design modifications for the Goychay WWTP, (iv) delays in delivery of equipment for the Nakhchivan and Goychay WWTPs, and (v) expansion of the project coverage area because of the change in the official definition of Agdash town. 30. Project 3. Project 3 was approved on 5 December 2013, signed on 28 November 2014, became effective on 28 May 2015, and closed on 31 May 2018. Loan signing met significant delays because of the delay in obtaining concurrence from various government ministries to authorize loan agreement signatories. The tender for the Agjabedi WSS networks was also significantly delayed because the engineer’s high estimate exceeded Azersu’s loan allocation. Discussions between Azersu’s technical department and the supervision engineers ensued before the revised design and cost estimates were agreed. 31. Project 4. As validity of loan approval for Project 4 lapsed, the components for the WWTPs are delayed as full financing of the WWTPs shifted to the government (paras. 17 and 25 ). Thus, complete water and wastewater systems in Agdash, Agjabedi, and Beylagan can only be realized when the WWTPs are completed by end of 2019 . F. Implementation Arrangements 32. International project management consultants. Before loan effectiveness, detailed design of works under Project 1 were completed, and advance procurement actions were undertaken for priority packages of works and consultancy services. Due diligence for Project 2

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was also completed in parallel, and processing for Tranche 2 was planned to be completed within 6 months after program approval. Accordingly, the international project management consultants (IPMCs) under Project 1 were supposed to have four teams to carry out tasks for Projects 1, 2, and 3. Team 1 would handle contract awards and construction supervision of Project 1 activities; team 2 would carry out advance detailed design work for Project 2 activities; team 3 would conduct due diligence for Project 3 activities; and team 4 would carry out tasks for the institutional effectiveness of service providers and help the PMOs with gender, safeguards, governance, legal, financial, administrative, and general training and development matters. 33. During implementation, the proposed structure for the IPMCs at Azersu was largely lost. A separate team was assigned for detailed design, but no delineation between tranches was made. Further, insufficient support was given for gender, safeguards, governance, legal, financial, administrative, and general training and development matters. The Azersu IPMC contract under Project 1 covered the scope of work of multiple tranches over the MFF period, but it was originally signed for only 36 months. Subsequent tranches did not allocate funds for design and supervision, which meant multiple contract variations for the Azersu IPMCs, all financed under Project 1. 34. Government implementation structure. The project steering committee (PSC) envisaged in the project administration manual to provide policy direction and oversee overall implementation progress was never established. At the government’s request, the requirement to set up the PSC and the project implementation review committees was waived in early 2012.11 35. Azersu abolished its PMO in January 2015 as part of efforts to streamline implementation of all investment projects into a newly formed corporate unit for the administration of facilities under construction. This arrangement led to poor planning of civil works implementation, which caused significant changes during implementation and substantial delays. When ADB and Azersu were discussing the WWTPs and compliance with ADB’s Safeguard Policy Statement in late 2016, Azersu significantly hindered the process, which led to the eventual cancellation of Project 4 and the change in scope for Project 3 (para. 18). In addition, monitoring of and reporting on the soft components, such as the gender action plan (GAP) and institutional capacity building, were largely abandoned and ignored.

36. The PMO at SAWMC, in contrast, performed all necessary functions as envisioned at appraisal. The PMO was fully staffed and attended to all assigned responsibilities. With help from its IPMCs, the PMO carried out the tasks required during the preparation and implementation of all tranches under the program, and met reporting requirements. G. Consultant Recruitment and Procurement 37. ADB loans financed the engagement of the IPMCs for each executing agency, and they were recruited using quality- and cost-based selection following ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time). The IPMCs for SAWMC were recruited independently for each tranche. Azersu’s IPMCs supervised civil works in all tranches, which led to contract cost escalation and Project 1 remaining open despite the completion of all major works. After the PMO in Azersu was abolished, Azersu appointed its counterpart staff to project implementation. SAWMC’s PMO remained the focal unit for implementation during the MFF period.

11 ADB. 2010. Re: MFF0032-AZE: Azerbaijan Water Supply and Sanitation Investment Program – Amendment to

Framework Financing Agreement. Letter to the Ministry of Finance. 23 April. Manila; and ADB. 2012. Loan 2571-AZE: Water Supply and Sanitation Investment Program – Project 1 – Amendment to Loan Agreement. Letter to the Ministry of Finance. 11 January. Manila.

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38. Procurement of all civil works for the WSS networks and treatment plants followed ADB’s Procurement Guidelines (2007, as amended from time to time). Instead of the single-stage, two-envelope bidding procedure with prequalification proposed in the FFA, each project adopted bidding procedures that were deemed appropriate at project appraisal. International competitive bidding was used for 13 contracts in the MFF. The package for the Nakhchivan WWTP contract in Project 2 was re-tendered as none of the bidders qualified, and was eventually awarded in July 2014 for $45.67 million. The Office of Anticorruption and Integrity sanctioned one contractor in 2015 for engaging in fraudulent and collusive practices that improperly influenced and misled the procurement process and contract award. It was an unfortunate instance where the contractor misinterpreted ADB procurement rules and assumed that all tenders must have a minimum of three qualified bidders for evaluation, not understanding that exceptions can be argued in cases of limited market supply or geographical isolation. Despite the contractor’s good performance under the project, it was barred from participating in ADB-financed contracts from 2015 to 2020. 39. Project 3. SAWMC awarded the first contract of $31.49 million for WSS in Nakhchivan’s peri-urban areas, 6 months after loan effectiveness. This contract was completed within cost and ahead of schedule. In the case of Azersu, it awarded $112.37 million for the procurement of works for water intake and WSS networks in Agjabedi 1 year after loan effectiveness. The procurement delay was because of modifications to the design and cost estimates (para. 30). Because of the large scale of works and the tight construction period, the project team and Azersu closely monitored the Agjabedi WSS contract, which helped in identifying remedial actions during the last construction phase. Two contracts that were not originally envisaged were procured under the project through a minor change in scope (paras. 19 and 20). H. Gender Equity 40. The GAP developed for the overall program included the (i) conduct of gender analysis, consultations, and surveys to determine the specific needs of women and men in relation to WSS; (ii) development of tranche-specific GAPs; (iii) conduct of gender awareness workshops for the executing agencies; (iv) participation of women in town water users associations (TWUAs) to provide feedback on WSS; and (iv) participation of women in public outreach programs. The facility GAP consisted of 20 activities and 2 targets. 41. The GAP for Project 3 consisted of 10 activities and 8 targets. It included activities that aimed to promote the participation of men and women in consultations to identify their WSS-related concerns and solicit their inputs for the planning and installation of water connections and meters, and their preferences for the sewerage systems. It also provided avenues for women to give community feedback as water and sanitation users through the TWUAs. In addition, the GAP included employment targets for women in civil works, maintenance, and jobs in the utilities. Targets were set for women’s participation in consultations, household connections for WSS services, employment of women in civil and maintenance works, and participation in TWUAs. 42. Nine activities under the facility GAP were implemented, but none of the targets was achieved. Among the successfully completed activities were the conduct of consultations, which were critical for the preparation of the tranche-specific GAPs. 43. Implementation of the tranche 3 GAP enabled women to participate in consultations and articulate their concerns about water quality and sanitation. Women provided inputs in planning for water and meter connections. All households headed by women received water connections and gained access to sewerage facilities. Water connections to individual households helped

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ease women’s household work burden, such as doing the laundry. GAP implementation facilitated the employment of women in the PMO, SAWMC, and joint stock companies as accountants, external relations or press services staff, and fee collectors. 44. The first five activities (50%) in the tranche 3 GAP were completed, and three targets (38%) were achieved. Hence, the project is not considered successful when it comes to GAP implementation. The key issues contributing to the failure to achieve targets were the (i) design of the GAP itself, where some indicators were not relevant or applicable to the local context; and (ii) lack of ownership of the GAP by the executing agencies. The executing agencies did not fully grasp the project's gender requirements and did not understand many of the gender actions, such as the need to collect sex-disaggregated data. It was difficult to gather the needed information for the GAP, because there was no dedicated person in charge of overseeing GAP implementation.12 I. Safeguards 45. Environment. The program was classified category B for the environment at appraisal and remained so during project implementation. Environmental impacts were insignificant, manageable, and limited to project sites and mainly during construction. The executing agencies prepared initial environmental examination (IEE) reports, including environmental management plans, for each project site in Agdash, Agjabedi, Beylagan, Goychay, and the NAR. The contractors also prepared site-specific environmental management plans with more detailed mitigation measures and monitoring requirements. 46. Azersu and SAWMC submitted semiannual environmental reports during program implementation. PMO environmental specialists and supervision consultants monitored the implementation of the environmental management plans and the site-specific environmental management plans. Final environmental audit reports for both projects were prepared and submitted to ADB in 2018. In general, no major environmental safeguard issues occurred during the program period, and minor noncompliance issues were addressed and reported accordingly. 47. The exclusion of WWTP construction in Agdash and Beylagan from the program scope required the revision of the relevant IEE reports, which was undertaken under the supervision of environmental specialists and an ADB consultant. The government confirmed that construction of the WWTPs would be financed from the state budget. Since ADB’s Safeguard Policy Statement considers the WWTPs as associated facilities as their existence depends exclusively on the project and their goods or services are essential for successful project operations, ADB’s environmental safeguards requirements should be followed even if the construction of the WWTPs will be not be financed within the framework of the MFF. 48. Construction of the mechanical WWTPs in Agdash, Agjabedi, and Beylagan started in February 2019 using government financing and is planned for completion in December 2019. Since the MFF closed in 2018, Azersu has not submitted environmental assessments, and ADB has stopped monitoring project implementation. Therefore, it is not known if ADB environmental safeguards requirements are being followed. As a next stage, the biological treatment component will be constructed even though the timing has not been confirmed. ADB has emphasized the importance of completing the biological component to the government and had been reassured that funding will be provided.

12 The GAP implementation status is in Appendix 9.

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49. As an executing agency, Azersu is fully responsible for following ADB’s environmental safeguard requirements during WWTP construction in both towns and for submitting semiannual compliance reports to ADB. In principle, ADB should review the environmental assessments for the WWTPs, prepare a corrective action plan if there are gaps in ADB requirements, and monitor project implementation. This should remain an ongoing concern for the ADB resident mission to follow up with the government to ensure long-term compliance. 50. Land acquisition and resettlement plan. A resettlement plan was prepared for Project 3 in August 2013. No land acquisition or resettlement were needed as government-owned land was used. J. Monitoring and Reporting 51. The executing agencies complied with all FFA covenants, although they only partially complied with the covenants on (i) tariff levels and payment recovery, (ii) gender compliance, (iii) training for TWUAs, and (iv) submission of annual progress reports. The Tariff Council reviews and adjusts tariffs at the national level and thus decision-making is not within the authority of the executing agencies. WSS tariff revisions took place in 2007, 2011, and 2016 instead of the annual revisions recommended in the FFA. The GAP activities were not effectively implemented partly because of inadequate formulation of some indicators at the design stage and lack of ownership of the GAPs by the executing agencies (para. 44). Specifically, establishing TWUAs had to be suspended from lack of funding, which resulted in failure to meet TWUA-related covenants. Although the executing agencies submitted quarterly reports on overall project implementation, which suitably reported progress, they did not meet the requirement to submit to ADB annual reports on the performance monitoring indicators. As such, the executing agencies are only partially compliant with the FFA’s reporting covenant. Overall, despite the executing agencies’ partial compliance with FFA covenants, program performance during implementation remained positive. Nonetheless, tariff reviews remain an important factor to sustaining the operations of the operating entities and in maintaining the completed facilities. The executing agencies fully complied with the covenants of the project agreements, except for one covenant in the project agreement with Azersu: subprojects were implemented with substantial cost overruns and negatively impacted project efficiency.13 52. The PMOs prepared and submitted to ADB quarterly progress reports and semiannual environmental monitoring reports. After project completion, the selected project beneficiaries in Agdash, Beylagan, and Goychay expressed full satisfaction with the project outcomes.14 53. The PMOs established financial management systems with internal financial and accounting controls that met ADB’s requirements. Annual audits of the project financial statements for FY2012–FY2018 were undertaken in a format and manner acceptable to ADB. All audit reports were unqualified.

III. EVALUATION OF PERFORMANCE A. Relevance 54. At completion, the program and Project 3 are both rated highly relevant to the overall MFF outcome of improved coverage, continuity, and quality of water supply and wastewater disposal

13 The status of compliance with the FFA and with the loan and project agreements is in Appendix 8. 14 ADB held informal interviews in all project towns on 11–14 December 2018, during its completion review mission.

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in program towns; 100% service coverage, 24-hour water supply, and collection and treatment of wastewater are consistent results across all program towns. 55. Alignment with country development strategy. The program is aligned with the government’s poverty reduction and sustainable development program for 2008–2015, where improving access to basic services was top priority. Coinciding with the Millennium Development Goals period, the state program set the goal of 100% coverage and 24-hour water supply in Baku, and 80%–85% coverage in secondary towns and villages. It supported the government’s WSS sector reform agenda by adopting an integrated approach to improving institutions, capacities, systems, and service delivery. The program financed instruments targeting (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 collecting tariffs; (iv) increased efficiency for timely processing of effective WSS projects; (v) asset management; (vi) introduction of a performance benchmarking system; and (vii) a twinning arrangement with an external WSS utility to support capacity development. The MFF also included program management support to help with (i) gender, safeguards, governance, legal, financial, and administrative matters; (ii) design works for subsequent tranches; and (iii) general training and development. 56. Donor coordination. ADB had coordinated its investments closely with other major development partners such as the World Bank, the European Bank for Reconstruction and Development, the Islamic Development Bank, KfW, and the Japan International Cooperation Agency. The World Bank supported the government with the development of the WSS Sector Review and Strategy in 2000, which development partners used as the basis for developing their investment programs. Using the same sector assessment, ADB developed the investment program for five towns to avoid duplication. 57. Alignment with ADB strategies. The program is fully aligned with ADB’s country strategy and water sector strategy. Under CPS, 2014–2018 for Azerbaijan, WSS investment directly contributes to the comprehensive approach to (i) upgrade and expand urban infrastructure and services to improve service coverage and quality, and (ii) contribute to improved environmental management. This, in turn, contributes to overall support for Azerbaijan’s transition to a diversified, knowledge-based economy and bolster sustainable, non-oil economic growth, which will help promote inclusive growth and reduce urban‒rural disparities. ADB’s Water Operational Plan, 2011–2020, emphasizes priority areas such as (i) reduction of nonrevenue water at the municipal level, (ii) increased investment in wastewater management and reuse, and (iii) improved effectiveness for ADB WSS operations.15 58. Modality. Using the MFF modality in developing the Azerbaijan WSS sector facilitated continuity and linkages between each tranche. As intended, the MFF provided flexibility to the government in deciding the amount of financing for each project, according to the readiness of the investment program. It also allowed flexibility in allocation of resources between tranches, thereby maximizing the use of MFF funding while reducing the commitment charges to be paid by the government. The investment program identified challenges and opportunities, and incorporated lessons in the design of each individual tranche. Project readiness improved from Project 1 to Project 3 as consultants were in place to advance readiness of the detailed engineering design and positively impacted delivery of procurement. Although construction of the WWTPs will be realized beyond the MFF period (paras. 16–17), the program remained relevant in terms of design and the intended program outcome.

15 ADB. 2017. Water Operational Plan, 2011–2020. Manila.

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59. Innovation. In Nakhchivan, using nanofiltration technology is a significant departure from the traditional approach to water and wastewater treatment. While traditional water and wastewater treatment technologies were contemplated at appraisal, SAWMC initiated extensive research on advanced technologies, including desalination and reverse osmosis. SAWMC’s up-front investment in understanding and determining its technology of choice—nanofiltration—enabled it to complete its projects faster than Azersu, which suffered delays in the course of systems redesign. Securing nanofiltration for the water supply and the WWTP—which is really a water reuse plant because of the high quality of water produced—became an example of sustainability and a standout in the region. 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 water even during disasters. B. Effectiveness 60. The program is rated effective as it achieved the overall intended outcome of improved coverage, continuity, and quality of water supply and wastewater disposal in program towns. All program towns receive 100% service coverage, 24-hour water supply, and collection and treatment of wastewater. Before the program, WSS systems in the program towns were more than 50 years old and in a bad state of repair; and more than 75% of households relied on wells and private water vendors, which provided inconsistent water quality. 61. The program has significantly improved the lives of the population in Agdash, Agjabedi, Beylagan, Goychay, and Nakhchivan. With the improved water source and distribution network, the population now has reliable water supply through metered connections. When the WWTPs are completed, the population will also have access to a functioning sewerage system and will not depend on septic tanks to dispose wastewater. Nonrevenue water has decreased from more than 60% at appraisal to less than 16% at completion. During implementation of the program and Project 3, due diligence on the implementation of the environmental safeguards found that the IEE reports adequately assessed the potential environmental issues, and that contractors implemented mitigation measures during construction. 62. Project 3. In line with the program, Project 3 is rated effective. Tranche 3 achieved its overall intended outcome of improved coverage, continuity, and quality of water supply and wastewater disposal in Agjabedi; and achieved 100% service coverage, 24-hour water supply, and collection of wastewater. A change in scope during implementation included the addition of sewage collectors in Agdash and the deletion of the 20 MLD WWTP in Agjabedi (paras. 16–17). As government funding is being allocated for WWTP construction in Agjabedi and the mechanical treatment will be functional by end of 2019, the project output and outcome will likely be achieved. C. Efficiency 63. During the ADB facility completion review mission, the project team conducted economic reevaluations to measure the efficiency of the program and rated the overall investment program efficient. The calculation for the economic internal rates of return (EIRRs) used a methodology similar to that at appraisal and took into account the data collected after project implementation. The analyses considered project implementation delays and compared the economic costs and benefits of with- and without-project scenarios. The recalculated EIRR was 15.3% for the whole investment program, which is lower than the 19.4% estimated at appraisal because of the much higher actual capital cost for the individual subprojects. However, the EIRR for Agjabedi under Project 3 was 24.7%, higher than the 21.5% estimated during appraisal because, compared with

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the other four towns, Agjabedi had demonstrated a higher use level for water supply services. Nevertheless, EIRRs for all projects are above the ADB-recommended social discount rate of 12%, and the investment program is considered economically viable. The EIRRs were subjected to a sensitivity analysis that confirmed the economic viability of all projects in all tested scenarios. 64. Project 3. In line with the program, Project 3 is rated efficient. The recalculated EIRR for Project 3, which includes Agjabedi, was 24.7%, compared with 21.5% at appraisal. Since the recalculated EIRRs are above the ADB-recommended social discount rate of 12%, the project is considered economically viable. The EIRRs were subjected to a sensitivity analysis, which showed that the project remains economically viable in all tested scenarios. In the case of a 20% increase in O&M costs, the EIRR for Project 3 would be 24.4%. The sensitivity test also showed that the EIRR is more sensitive to changes in benefits. Therefore, the government should focus more on socioeconomic development in the project area and implement policies to stimulate local economic conditions and increase villagers’ incomes. Appendix 10 summarizes the economic reevaluation. D. Sustainability 65. Financial sustainability. Based on the reevaluation of the financial internal rate of return (FIRR), the program and Project 3 are both rated less than likely sustainable. Overall, the project is assessed as financially unsustainable for full cost recovery. The recalculated FIRR for all five towns are negative; assessments at appraisal were 0.87% for Agjabedi, 1.84% for Agdash, 4.70% for Goychay, and 6.00% for Nakchivan. However, the assessment at appraisal assumed (i) 40% tariff increase every 2 years, and (ii) availability of viability gap funding for all project towns during the first 5–6 years of operation to maintain a positive cash flow. 66. At completion, the FIRRs were –3.8% for Agjabedi, –5.3% for Agdash, –9.1% for Goychay, and –5.2% for Nakchivan. WSS revenue was considered based on actual tariff increase during 2011–2017, without any viability gap funding considerations. Tariff adjustments are centralized nationally through the Tariff Council; the last three WSS tariffs revisions were in 2007, 2011, and 2016, with average annual increase of 12.7%. The combined WSS tariff was AZN0.17 per m3 in 2007, which was revised to AZN0.50 per m3 in 2016, and the tariff revision assumption at appraisal of 40% increase every 2 years was revised to 25% increase every 2 years in the facility completion review analysis. 67. Operational sustainability. The change in implementation arrangement from onlending to ongranting meant that capital expenditures in WSS infrastructure in the five project towns are considered as government transfers to Azersu. An analysis conducted to assess each town’s ability to sustain O&M expenses determined that Nakhchivan has been operationally sustainable since 2017. The other four towns will achieve operational sustainability by 2022 if (i) periodic tariffs are increased every 2 years, and (ii) 90% collection efficiency is maintained. Appendix 11 provides a detailed analysis. To this end, the program and Project 3 are rated likely sustainable. 68. Technical, institutional, and environmental sustainability. Technical, institutional, and environmental assessments of project outputs and outcomes rate the program and Project 3 likely sustainable. The policy and regulatory framework identified challenges for the sector, including the ability to (i) progressively increase tariffs and overcome shortfalls in O&M costs to achieve financial sustainability; (ii) develop staff capacity to plan, design, and manage the WSS system and services; and (iii) ensure infrastructure and/or asset creation. Under the program, 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)

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enhanced cost recovery through metering, billing, and collection of tariffs; (iv) increased efficiency for timely processing of effective WSS projects; (v) asset management; (vi) introduction of a performance benchmarking system; and (vii) a twinning arrangement with an external WSS utility to support capacity development. Specific achievements included (i) expanding town jurisdictions to ensure optimal WSS systems design; (ii) building the capacity of the utilities to reduce physical and commercial losses and helping them put together long-term master plans; (iii) facilitating a 5-year capacity building program with Suez to improve Azersu’s operations; and (iv) conducting a twinning program with Aguas de Portugal for operational efficiency gains at SAWMC. 69. Based on the overall circumstances for the WSS sector in Azerbaijan, the program and Project 3 are rated likely sustainable. E. Development Impact 70. Water supply and sanitation infrastructure. The program is rated satisfactory on development impact as almost all relevant targets have been achieved. The population in all five towns receives 24-hour access to safe and potable water. After the new WSS systems became operational, families no longer have 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 physical burdens. 71. Operationalization of new sewerage systems and WWTPs in the five towns will achieve the objective of eliminating negative public health and environmental impact from the discharge of wastewater into streets and nearby watercourses because of blocked and collapsed sewers. Households will realize savings from expenditures related to septic tanks, which was the conventional method for sewage disposal before program implementation. The level of nonrevenue water in all five towns has substantially decreased as prescribed during appraisal. 72. Institutional effectiveness. Skills have been transferred to Azersu and SAWMC during program implementation. Azersu now has an in-house design institute that can independently prepare projects. Both Azersu and SAWMC can also independently procure and manage major civil works. At the start of program implementation, Azersu had more than 40 consultants to support its operations, but now only has a few in Baku and at the Goychay WWTP (for the duration of the defect liability period). SAWMC has achieved operational sustainability for the WSS systems in Nakhchivan and its peri-urban areas, and it can replicate the use of high technology in water treatment throughout secondary towns in the NAR. 73. Project 3. In line with the program, Project 3 is rated satisfactory on development impact. Households in Agjabedi and Nakhchivan’s peri-urban areas, which had dilapidated systems and lacked WSS networks, now have 24-hour access to safe and potable water. Operationalization of the new sewerage systems and WWTPs in the five towns will achieve the objective of eliminating negative public health and environmental impact. F. Performance of the Borrower and the Executing Agency 74. Overall, the performance of the borrower and the executing agencies is rated satisfactory. However, more detailed assessment was conducted as the program had two executing agencies with substantive differences in performance. 75. The borrower is rated satisfactory, as it performed its functions on a timely basis, including (i) submitting periodic financing requests, (ii) providing adequate and sufficient counterpart

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financing, and (iii) facilitating loan negotiations and loan signing. As envisaged at appraisal, an organizational framework was established for efficient and timely project management. 76. SAWMC is rated satisfactory. The PMO, established by SAWMC with assistance from the consultants, administered project implementation on-site and prepared all required reports. SAWMC facilitated and supported ADB’s review missions during implementation and at completion. Project accounts and financial statements were audited by an external auditor acceptable to ADB, and the audit reports were submitted to ADB as required in the loan agreement. The PMO was headed by directors and supported by qualified staff and an externally contracted team of qualified technical, safeguards, financial, and support staff. The PMO managed project activities, including planning, progress monitoring, and reporting. 77. SAWMC established a complaint hotline mechanism where customers can bring their complaints to the attention of their respective headquarters or through customer care staff in the locality where the concerns are raised. Customer care representatives log the name, nature of the issue, and actions done. Data are compiled biannually. 78. Azersu is rated less than satisfactory. Abolishing the PMO under Azersu had a negative impact on civil works implementation, causing significant changes during implementation and substantial delays (para. 35). Azersu also failed to establish the complaint hotline mechanism as part of institutional effectiveness improvement. On the other hand, project accounts and financial statements were audited by an external auditor acceptable to ADB, and the audit reports were submitted to ADB as required. G. Performance of the Asian Development Bank 79. ADB’s performance is satisfactory. Throughout program implementation, ADB worked closely with relevant agencies to ensure timely preparation, approval, and implementation of project-related tasks. ADB initiated advance procurement for Project 1, resulting in the expedient contact award for SAWMC in Nakhchivan. Despite frequent staff turnover during the initial stage of program implementation, ADB was able to establish a close working relationship with Azersu and SAWMC, timely identifying and resolving issues through frequent project review missions. Close coordination between the Azerbaijan Resident Mission and the Urban Development and Water Division of the Central and West Asia Department ensured continuous and proactive support to and from Azersu and SAWMC. Overall, ADB conducted 13 loan review missions, midterm review missions in March 2012 and February 2016; and project completion review missions in June 2017, December 2018, and May 2019. ADB ensured timely document approval during processing and implementation, and prompt payments of withdrawal applications. H. Overall Assessment 80. Overall, the program and Project 3 are both rated successful (Table). The program was relevant to the government’s overall development objectives and ADB’s CPS 2014-2018. The project design was also relevant to the government’s strategy. The program effectively improved access to WSS services for the project towns, while eliminating negative public health and environmental impact from the discharge of wastewater into streets and nearby watercourses because of blocked and collapsed sewers. The impacts, outputs, and outcomes at appraisal have been largely achieved.

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Overall Ratings

Criteria

Rating

Project 1 Project 2 Project 3 MFF

Relevance Highly relevant Highly relevant Highly relevant Highly relevant

Effectiveness Less than effective

Effective Effective Effective

Efficiency Efficient Efficient Efficient Efficient

Sustainability Less than likely sustainable

Likely sustainable

Likely sustainable

Likely sustainable

Overall Assessment

Development impact Satisfactory Satisfactory Satisfactory Satisfactory

Borrower and executing agency Satisfactory Satisfactory Satisfactory Satisfactory

Performance of ADB Satisfactory Satisfactory Satisfactory Satisfactory ADB = Asian Development Bank, MFF = multitranche financing facility. Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 81. Accountability. Performance drastically differed between the two executing agencies. Azersu’s performance has been assessed as weak not only by ADB but also by all other development partners involved in the WSS sector. The World Bank, the Islamic Development Bank, the Japan International Cooperation Agency, and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) all faced significant delays in project implementation. In contrast, SAWMC implemented only one project with support only from ADB, yet has managed to build capacity sustainably. SAWMC completed civil works on time and on budget, and savings under its WSS contracts enabled the extension of WSS services to an additional area. 82. The main difference is in the executing agencies’ engagement and accountability. SAWMC took initiative to conduct proper due diligence and technical designs, engage in technical discussions, and closely monitor implementation through a fully staffed PMO. The commitment of the NAR government and SAWMC was unparalleled despite the absence of a PSC. Azersu was much less proactive and accountable over design, implementation, and monitoring. A dedicated PMO for the program also contributed to SAWMC’s good performance. 83. Technical and design changes. As discussed throughout the facility completion report, an overarching issue during program implementation was the delays encountered by Azersu. Despite efforts to prepare advance designs for project readiness, Azersu’s performance was hampered by constant changes in technical assumptions caused by insufficient or inaccurate assessments of local conditions, and the definition of administrative areas. The lack of a comprehensive approach to project formulation, implementation, and monitoring is a direct reflection of Azersu’s overall management and its lack of check and balance to ensure proper due diligence, technical verification, and contract management. 84. Challenging policy actions. 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 challenging policy action. Such an 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

17

Economy, Ministry of Finance, and Cabinet of Ministers’ concerned departments); and development of the public utilities’ capacity and tools on scenario-based estimation of WSS tariffs. B. Recommendations 85. Program oversight. Failure to establish the PSC meant (i) no central coordination for policy dialogue and actions, such as tariff reforms; and (ii) no oversight for any major project changes, which had impacted the use of ADB funds and the project scope. The PSC would have played a key role in raising the discussion on tariffs at the national level in the context of achieving tariff adjustments as envisioned during appraisal. It would also have been involved in more immediate discussions on issues such as biological versus mechanical treatment for the WWTPs or cost overruns during implementation. 86. Sector capacity development. Azersu’s deficiencies reflect the sector need for further capacity development and a more holistic approach to development lending. While there were incremental improvements for Azersu to design, procure, and implement projects, the overall institutional reforms needed for a more efficient water utility are fundamental to instigate long-term change toward sustainability. If there were to be another ADB intervention in the WSS sector, a sector development program approach would be recommended to focus not on infrastructure but on the institutional reforms needed to ensure continuity of services and the long-term financial sustainability of Azersu. 87. Knowledge sharing and future assistance to Nakhchivan. Just as Azersu had fallen short of achieving the envisioned project outputs, SAWMC demonstrated exceptional capacity for project development, implementation, and more importantly, replication. Shortly after the water treatment facility in Nakhchivan was completed, SAWMC developed O&M manuals, trained staff, and replicated the use of technology in other NAR secondary towns through government financing. To date, SAWMC continues to train sukanal staff in operating the multiple water treatment facilities. As an executing agency, SAWMC has demonstrated knowledge of and vision for the sector. It is recommended to (i) support SAWMC through additional investments in the sector, (ii) promote the NAR as a regional center for best practices, and (iii) share SAWMC’s experience with other countries. 88. Future monitoring. The exclusion of WWTP construction in Agdash, Agjabedi, and Beylagan from the program scope required IEE revision to avoid significant environmental and public health risks from the discharge of additional volumes of untreated wastewater through the new sewerage network. Azersu revised the IEE reports under the supervision of environmental specialists and ADB consultants. Potential impacts and required mitigation measures were described, and to prevent possible environmental and public health risk from the discharge of additional volumes of untreated water, the government will finance WWTP construction from the state budget. Since ADB’s Safeguard Policy Statement considers WWTPs as associated facilities as their existence depends exclusively on the project and their goods or services are essential for the successful operation of the subprojects, ADB’s environmental safeguard requirements should be followed even if WWTP construction will not be financed by ADB. Azersu as the executing agency is fully responsible for following ADB’s environmental safeguard requirements during WWTP construction in all three towns and must submit semiannual environmental reports.

18 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Table A1.1: Investment Program Framework

Design Summary Performance Indicators and

Targets Project Achievements Impact Improved public health and environment in participating towns.

Public satisfaction with WSS availability, quality, and quantity is increased (to be quantified when baseline is established through a social survey at Investment Program inception).

Achieved. The public were satisfied with the new water and sanitation services that were constructed under the MFF. In the towns administered by Azersu, the satisfaction rate of 10% in 2011 increased to 88% in 2017. SAWMC reported 100% satisfaction rating.

Percentage of children under age 5 years suffering from diarrhea in last 30 days is reduced to less than 10% by 2017.

Achieved. The percentage of children under age 5 years suffering from diarrhea has been reduced to less than 10% as reported by Azersu, while SAWMC reported less than 2% in Nakhchivan.

Satisfaction rate by users (disaggregated by gender) with the quality of water supply and access to sanitation increases from 20% to 100% (to be quantified when baseline is established through a social survey at program inception).

Partially achieved by Azersu. Satisfaction rate by users (including female-headed households) with the quality of water supply and access to sanitation increased from 13% in 2011 to 90%. Achieved by SAWMC. SAWMC reported water users’ satisfaction rating of 100% in Nakhchivan.

Outcome Improved coverage, and the continuity and quality of water supplies and wastewater disposal in participating towns.

Water supply and sewerage services coverage in participating towns increased from existing 80% to 100% in 2021.

Partially achieved by Azersu. At project closure, Azersu reported that WSS service coverage in participating towns increased to 88%. Out of four target towns, only Goychay has a complete WSS services (100% coverage), while the WWTPs in Agdash, Aghjabedi and Beylagan are still being constructed using funds from State budget and will be completed by end of 2019. After the WWTPs in the three towns are completed, houses will be connected to the sewerage

Appendix 1 19

Design Summary Performance Indicators and

Targets Project Achievements networks that were constructed under the MFF. Achieved by SAWMC. Nakhchivan has a complete system and 100% of the population have access to water supply system for 24 hours and piped sewerage system.

Residents of participating towns served by fully pressurized 24-hour supply with water loss reduced from more than 60% in 2009 to less than 25% by 2021.

Achieved. Residents of participating towns served by fully pressurized 24-hour supply, with water loss reduced to 16% as reported by Azersu. SAWMC reported water loss of less than 5%.

Percentage of wastewater collected and treated increased from less than 5% in 2009 to 100% by 2021.

Partially achieved by Azersu. As of 2018, Azersu reported that the percentage of wastewater collected and treated is increased from less than 5% in 2009 to 95% only in Goychay town. As mentioned above, the WWTPs in Agdash, Aghjabedi and Beylagan will be completed in December 2019. Thereafter, houses will be connected to the sewerage network for wastewater collection. Therefore, this target can only be fully met after completion of the construction of the WWTPs. Achieved by SAWMC. Percentage of wastewater treated in Nakhchivan increased up to 100%.

Outputs 1. WSS Infrastructure Development (i) Rehabilitated, replaced, and expanded piped-water supply systems, water works, and treatment facilities in participating towns.

100% population in program towns have access to safe water supply for 24 hours per day by 2017, with at least 80% of households connected to underground sewage systems.

Partially achieved by Azersu. 100% population in program towns have access to safe water supply for 24 hours per day by 2017, with at least 80% of households connected to underground sewage systems.

20 Appendix 1

Design Summary Performance Indicators and

Targets Project Achievements (ii) Water quality monitoring system developed and implemented. (iii) Sewerage networks rehabilitated, replaced, and expanded. (iv) New wastewater treatment plants constructed in program towns.

Systems leaks are reduced, and unaccounted-for water is reduced from more than 60% to less than 25% by 2017. Water meters are installed to all bulk and domestic consumers in program towns.

Nonrevenue water is reduced from more than 60% in 2009 to less than25% by 2017 in all towns. Percentage of wastewater treated in program towns increases from less than 5% in 2009 to 100% by 2017.

Achieved by SAWMC. 100% population have access to water supply for 24 hours and piped sewerage system. Achieved. Azersu: Systems leaks are reduced, and unaccounted-for water is reduced to less than 16% and 5% as reported by Azersu and SAWMC, respectively. Achieved. Water meters are installed to all bulk and domestic consumers in program towns. Azersu: Aghjabedi 7 900 meters Agdash 6 630 meters Goychay 9 600 meters Beylagan 5 846 meters SAWMC: 28 579 meters Achieved. Azersu: Nonrevenue water is reduced to less than 16% and 5% as reported by Azersu and SAWMC, respectively. Partially achieved by Azersu. At project completion, percentage of wastewater treated in Goychay increased from less than 5% in 2009 to 95%. Since WWTPs in Beylagan, Agdash and Aghjabedi are still being constructed, this indicator will not be met for these towns until the WWTPs are operational. Achieved by SAWMC. Percentage of wastewater treated in program towns increased up to 100%.

Appendix 1 21

Design Summary Performance Indicators and

Targets Project Achievements

Tariff collection efficiency is improved from 40% in 2009 to 90% in 2017. Water quality is monitored, and corrective actions are taken on at least 6-month intervals.

Technical, operational, management, and financial training is provided to all service providers in each program town.

Achieved. Tariff collection by in program towns improved from 40% in 2009 to 90% at project completion, while SAWMC reported tariff collection efficiency at 95%. Achieved. For program towns managed by Azersu, water quality is monitored by Water Resources, Processing and Facilities Management Department. In Nakhchivan (SAWMC), water quality is monitored by the laboratory in WTP and if necessary corrective actions are undertaken. Achieved. Azersu: 1) Relevant agreements on holding the trainings have been signed between the companies involved in the construction of water supply and sewerage systems and "Sukanal" Scientific-Research and Design Institute of “Azersu” OJSC and the trainings were successfully implemented. 2) 82 employees of "Azersu" OJSC have been involved in the training on January 15-30 2019 at Headquarters. The participants gained knowledge about personnel records and explanation of legislative acts through the 1C software. More than 123 experts joined the training. 3) Regional training has been held in regions within the framework of “Regional training and development program-4” of “Azersu” OJSC. 159 employees from Shamakhi, Sabirabad, Mingechevir, Beylegan, Guba, Zagatala, and Gobustan Sukanal Offices of “United Sukanal” LLC involved in the training. The training program allows employees to increase their knowledge and experience on different positions and

22 Appendix 1

Design Summary Performance Indicators and

Targets Project Achievements

professions. The trainings are conducted by specialists. During the trainings special attention is given to the participants to spend their leisure time usefully. 4) To improve the staff’s knowledge and skills, trainings held at the Central Laboratory were conducted. About 30 specialists recruited in the laboratories of “Azersu” OJSC’s institutions and structural units attended the theoretical and practical trainings on “Organization of laboratory work and conducting chemical and biological analysis”. Trainees were provided with the information about the activities and principles of the Central Laboratory, and explained all stages of the analysis procedure within the training. The experts thoroughly studied the process of sampling, preserving by increasing their knowledge on drinking water and wastewater standards and quality parameters. Particular attention was paid to the study of physical, chemical and organoleptic parameters of drinking water and wastewater during the training. At the same time, the participants gained theoretical and practical knowledge on microbiological parameters and analysis, quality control measures. SAWMC Trainings were done by the Supervision Consultants and site visits were organized under Twinning Partnership Program between SAWMC and Aguas de Portugal.

Appendix 1 23

Design Summary Performance Indicators and

Targets Project Achievements 2. Improved WSS management and planning (i) Institutions improved for WSS service delivery. (ii) Capacity developed for better system planning, operation, and maintenance. (iii) Cost recovery enhanced through metering, billing, and collecting tariffs. (iv) Efficiency increased for timely processing of effective WSS projects. (v) Twinning arrangement finalized with an external WSS utility to support capacity development. (vi) Consumers mainstreamed on program implementation 3. Program Management Facility established

Customer database is updated, and 100% of customers are registered and billed by 2017 in all program towns. Accounting, budgeting, and billing are computerized, and bill collection efficiency is improved over 85%. Tariff plans are developed and revised annually. Asset management is implemented and updated annually.

Digitized WSS network maps are publicly available. Sustainable operation and maintenance with revenues more than expenditures achieved in all JSCs within 2 years after completion of subprojects.

Achieved. 100% of customers in all program towns are registered and billed by program completion. Achieved. Accounting, budgeting, and billing were computerized, and bill collection efficiency is improved over 85% at Azersu while SAWMC achieved 100% collection efficiency. Partially achieved. Tariff was not adjusted annually, although the last three revisions for WSS tariff took place in 2007, 2011 and 2016, with average annual growth of 12.7%. The combined WSS tariff was AZN0.17 per m3 (2007) and this was revised to AZN0.5 per m3 (2016). It should be noted that tariff adjustments are conducted through the Tariff Committee and is centralized at national level. Achieved. Asset management is implemented in both Azersu and SAWMC and monitored on annual basis. Not achieved. Complied. An analysis was conducted to assess the ability for each town to sustain operations and maintenance expenses and it was determined that Nakhchivan has already achieved operational sustainability since 2017, whereas the other four towns will achieve operational sustainability by 2022, if (i) periodic tariff increases (herein assumed every two years); and (ii) 90% collection efficiency can be maintained.

24 Appendix 1

Design Summary Performance Indicators and

Targets Project Achievements

An operation and maintenance manual is developed for each program town. Customer care units and customer representative groups are established in each program town. A simple performance benchmarking system is developed and implemented, and all SuKanals and JSCs attend performance benchmarking workshops. TWUAs, one third of their members comprising women, and women neighborhood groups are established and trained for each zone of the towns, and public awareness is provided on program implementation, operation and maintenance tariffs, and hygiene education. Gender analysis is undertaken, and gender action plans are developed for each tranche within 6 months after approval. A communication strategy is developed as part of public outreach program, for information sharing and dissemination with also women participation and their skills training Gender awareness workshops

Achieved. As part of the contractors’ contracts, operation and maintenance manuals were developed for each subproject. Not achieved by Azersu. Achieved by SAWMC. Eight staff were recruited for the customer care unit. Not achieved by Azersu. Achieved by SAWMC. NakhchivanSuKanalizasiya developed a benchmark performance system for the program. Not implemented. Town water users’ associations and women’s neighborhood groups have been initially formed in Agdash and Goychay. However due to the fact that this work (participating in TWUAs) was not paid by ADB or Government the function of these groups was suspended. Achieved. Gender analysis and gender action plans were developed for the three tranches of the MFF. Partly achieved. A communication strategy, per se, was not developed although public outreach activities were undertaken by Azersu and SAWMC to inform the public of the benefits of treated water and sanitation practices. Flyers and small brochures were produced and disseminated to the public. UNICEF was engaged in Project 2 for public outreach program on sanitation practices and hygiene education among school children in the town schools of Agdash, Beylagan and Aghjabedi.

Appendix 1 25

Design Summary Performance Indicators and

Targets Project Achievements conducted at SuKanals and JSCs. A twinning arrangement with an external WSS company is finalized by December 2010

All subprojects are developed in advance of the next tranche, and are implemented within the program duration.

Partially achieved. Workshops were not conducted by Azersu. SAWMC’s project management consultants conducted gender awareness workshops. Achieved. A twinning arrangement program was implemented between SAWMC and Aguas de Portugal. Azersu engaged Suez Environnement outside of the MFF although this complements the institutional improvements objective of the MFF. A strategic roadmap for company’s training and competencies development was developed and implemented in 2014-2019. Achieved: The process was strictly followed by Azersu and SAWMC, and resulted in the selection of high impact subprojects. ADB also undertook periodic review of selected subprojects to ensure that approval process is followed as stipulated in the loan agreement and project administration manual. All subprojects fully complied with the subproject selection criteria.

ADB = Asian Development Bank, MFF = multitranche financing facility, SAWMC= State Amelioration and Water Management Committee, TWUA= town water user associations, WSS = water supply and sanitation, WWTP = wastewater treatment plant. Source: Asian Development Bank.

26 Appendix 1

Table A1.2: Project 3 Framework

Design Summary Performance Indicators and

Targets Project Achievements Impact Improved public health and environment in participating towns of Aghjabedi and the peri-urban towns of Nakhchivan City (Qarahanbeyli, Qaracuq, Tumbul, Bulgan and Hacniyyet towns)

Outcome Improved coverage, and the continuity and quality of water supply and wastewater disposal in Aghjabedi and the peri-urban towns of Nakhchivan City

By 2021: a. Residents of participating towns served with access to 24-hour potable water supply increased from 46% in 2012 to 90% in Aghjabedi and from 10% in 2012 to 100% in Nakhchivan peri-urban towns b. Residents’ access to the sanitation facilities increased from 32% in 2012 to 90% in Aghjabedi; and 0% in 2012 to 100% in Nakhchivan peri-urban towns

Reduced system leakage/unaccounted for water from >60% in 2012 to < 25%

Achieved. 100% coverage of access to potable water supply attained for both Aghjabedi and Nakhchivan peri-urban towns. Partially achieved by Azersu. Construction of sewerage network was included in the contract for Aghjabedi. However, as construction of WWTP in Aghjabedi was cancelled and is now funded by State budget, meeting this indicator through a complete system will not be met until the WWTP in Aghjabedi is operational. Achieved by SAWMC. 100% coverage or 2,166 house connections to the sewerage network were completed in Nakhchivan peri-urban. Achieved. Azersu reported less than 20% water loss while water loss in SAWMC was reduced to less than 5%.

Outputs A: WSS Infrastructure Rehabilitated and Improved Water supply and sewerage system efficiency improved through rehabilitation and replacement, and coverage expanded

100% population in program towns have access to safe drinking water supply for 24 hours per day by 2021, with at least 80% of households connected to sewerage systems

Achieved. At project completion, 100% population have access to safe drinking water for 24 hours per day. Sewer lines were completed in the program towns.

Appendix 1 27

Design Summary Performance Indicators and

Targets Project Achievements B. Institutional Effectiveness Capacity developed for better system planning, operations and maintenance

Aghjabedi 204 km of water distribution network and 197 km of sewer lines constructed 800 cum storage reservoirs constructed (4 x 2000 m3) 20 mld sewage treatment plant constructed Nakhchivan peri-urban towns 62 km of water distribution network and 48 km of sewer lines constructed A sewage pumping station and accompanying force main constructed Water meters installed at all bulk and domestic consumers Sex-disaggregated human resource database maintained by SAWMC and Azersu for human resource management 50% of JSC staff of the Finance and Accounting Department completed training in financial management and accounting Women comprise 15% of the recruited staff

Aghjabedi Achieved. 210 km of water distribution network and 200 km of sewer lines were constructed. Partially achieved. 700 cum storage reservoirs were constructed according to designs. Not achieved. Construction of Aghjabedi WWTP was cancelled from Project 3 and is now funded by State budget, and will be completed by December 2019. Nakhchivan peri-urban towns Achieved. 65 km of water distribution network was constructed. In addition, the unused funds allocated to SAWMC were used to fund a WSS network in Shakarabad and completed an additional 16 km of water line. 49 km of sewer lines were constructed and additional 15 km of sewer line in Shakarabad. Achieved. Lift station and force main works were included in the contract and completed accordingly. Achieved. Aghjabedi – 7,900 meters installed Nakhchivan peri-urban – 316 meters installed Achieved. Sex-disaggregated human resource database maintained by both EAs. Achieved. Financial management and accounting trainings were provided to JSC staff. Not achieved.

28 Appendix 1

Design Summary Performance Indicators and

Targets Project Achievements 50% of Azersu technical staff trained in operations and technical aspects through a Twinning Program SAWMC developed asset database, financial management and O&M plans for WSS delivery

Not implemented/Partially achieved. A Twinning Program was no longer pursued for Azersu since a 5-year (2014-2019) training program was already agreed between Azersu and Suez Environnement to build capacity of Azersu technical staff. Achieved. Asset database, financial management system with internal financial and accounting controls, and O&M plans were developed by SAWMC.

IA = implementing agency, km = kilometer, mld = million liters per day, O&M = operations and maintenance, SAWMC= State Amelioration and Water Management Committee, WSS = water supply and sanitation, WWTP = wastewater treatment plant. Source: Asian Development Bank.

Appendix 2 29

CONTRIBUTION TO RESULTS FRAMEWORK

TABLE A2.1-Contribution to Results Framework Level 2 - ADB Contributions to Development Results

Households with new or improved water supply

(number) Households with new or improved sanitation

(number)

Project 1 Project 2 Project 3 Aggregate

Total Project 1 Project 2 Project 3 Aggregate

Total

Azersu

Goychay 4,469 5,109

9,578 4,469 4,400

8,869

Agdash 8,928

8,928 5,876 3,052 8,928

Beylagan 5,038

5,038 5,250

5,250

Aghjabedi

9,588 9,588

9,588 9,588

Subtotal (A) 4,469 19,075 9,588 33,132 4,469 15,526 12,640

32,635

SAWMC

Nakhchivan City 2,810 18,017

20,827 2,810 18,017

20,827

Shikhmahmud 1,103

1,103 1,103

1,103

Peri-urban of Nakchivan

2,363 2,363

2,363 2,363

Shakarabad

576 576

576 576

Subtotal (B) 2,810 19,120 2,939 24,869 2,810 19,120 2,939 24,869

TOTAL, Actual (A+B) 7,279 38,195 12,527 58,001 7,279 34,646 15,579

57,504

30 Appendix 2

Level 2 - ADB Contributions to Development Results

Water supply pipes installed or upgraded (length of network in kilometer) Pipe network of sewerage system (km)

Project 1 Project 2 Project 3 Aggregate

Total Project 1 Project 2 Project 3 Aggregate

Total

Azersu

Goychay 78 61

139 71 50

121

Agdash 143

143 124 20 144

Beylagan 92

92 89

89

Aghjabedi

210 210

200 200

Subtotal (A) 78 296 210 584 71 263 220 554

SAWMC

Nakhchivan City 29 205

234 18 195

214

Shikhmahmud 37

37 35

35

Peri-urban of Nakchivan

65 65

49 49

Shakarabad

16 16

15 15

Subtotal (B) 29 242 81 352 18 230 64 312

TOTAL, Actual (A+B) 107 538 291 936 89 493 284 866

DMF Output indicators 140 460 266 866 122 424 245 791

Source: Asian Development Bank

Appendix 3 31

PROJECT COST AT APPRAISAL AND ACTUAL

Table A3.1: Investment Program Costs at Appraisal and Preparations

($ million)

Item At MFF

Appraisal

At Project Preparation

Project Project Project Project Total

1 2 3 4/a

Water Supply and Sanitation Services Development 615.88 60.13 323.33 171.05 84.00 638.51

Project Management and Institutional Effectiveness 27.00 12.95 7.66 4.92 2.06 27.59

Financial Charges 50.40 19.22 24.01 5.31 2.07 50.61

Contingencies 106.72 7.70 55.00 22.11 11.87 96.68

Total 800.00 100.00 410.00 203.39 100.00 813.39 a/ Project 4 was approved by the ADB Board of Directors on 9 August 2016 but the Loan Agreement remained unsigned and the validity of loan approval lapsed. The lapse of validity of loan approval for Project 4 was communicated to ADB's Board of Directors on 9 August 2017 (para. 25). ADB= Asian Development Bank, MFF= multitranche financing facility. Source: Asian Development Bank estimates.

Table A3.2: Actual Investment Program Costs by Project

($ million)

Item Project Project Project Project MFF Total

1 2 3 4

Water Supply and Sanitation Development 67.98 358.56 179.90 0.00 606.44

Program Management and Institutional Effectiveness

11.47 9.30 6.36 0.00 27.13

Contingencies 0.00 0.00 0.00 0.00 0.00

Financial Charges 16.12 10.35 3.52 0.00 29.99

Total 95.57 378.21 189.78 0.00 663.56

Source: Asian Development Bank estimates.

32 Appendix 3

Table A3.3: Investment Program Financing

($ million)

Source

At Appraisal At Project Preparation Actual

Total Cost % of Cost Total Cost % of Cost

Total Cost

% of Cost

ADB 600.00 75% 600.00 74% 523.00 79%

Government 200.00 25% 213.39 26% 140.56 21%

Total 800.00 100% 813.39 100% 663.56 100% Source: Asian Development Bank

TableA3.4: Project 3 Costs by Subproject

($ million)

Item

Actual, at Completion

Cost

At Appraisal Difference Variance

(1) (2) (3=1-2) (%)

Water Supply and Sanitation

Aghjabedi WSS 117.00 126.00 (9.00) -8%

Aghjabedi WWTP 23.20 0.00 na

Nakhchivan Peri-urban WSS 30.85 31.49 (0.64) -2%

Agdash Wastewater Collectors 0.00 17.33 na

Shakarabad WSS 0.00 5.58 na

Consulting Services

Azersu 2.51 3.36 (0.85) -34%

SAWMC 2.42 2.50 (0.08) -3%

Financial Charges 5.31 9.29 (3.98) -75%

Contingencies 22.11

Total 203.39 195.55 7.84 4%

Source: Asian Development Bank

Appendix 4 33

PROJECT COSTS BY FINANCIER AND SUBPROJECT

Table A4.1: Project Costs by Financier

($ million)

At Appraisal Actual

Total % of Total % of

Source Cost Cost Cost Cost

ADB 150,000,000 74% 149,024,166 79%

Government 53,390,000 26% 40,756,347 21%

Total 203,390,000 100% 189,780,513 100%

Source: Asian Development Bank

Table A4.2: Project 3 Costs by Subproject

($ million)

Item

Actual, at Completion

Cost

At Appraisal Difference Variance

(1) (2) (3=1-2) (%)

Water Supply and Sanitation

Aghjabedi WSS 117.00 126.00 (9.00) -8%

Aghjabedi WWTP 23.20 0.00 na

Nakhchivan Peri-urban WSS 30.85 31.49 (0.64) -2%

Agdash Wastewater Collectors 0.00 17.33 na

Shakarabad WSS 0.00 5.58 na

Consulting Services

Azersu 2.51 3.36 (0.85) -34%

SAWMC 2.42 2.50 (0.08) -3%

Financial Charges 5.31 9.29 (3.98) -75%

Contingencies 22.11

Total 203.39 195.55 7.84 4%

Source: Asian Development Bank

34 Appendix 5

DISBURSEMENT OF ADB LOAN PROCEEDS a

Table A5.1: Annual and Cumulative Disbursement of ADB Loan Proceeds (Project 3)

($ million)

Year Annual Disbursement Cumulative Disbursement

Amount % of Total Amount % of Total

2015 2.52 2% 2.52 2%

2016 32.28 22% 34.80 23%

2017 45.91 31% 80.70 54%

2018 68.32 46% 149.02 100%

Total 149.02 100% 149.02 100%

ADB = Asian Development Bank. a Includes disbursements to advance accounts. Source: Asian Development Bank.

Figure A5.2: Projection and Cumulative Disbursement of ADB Loan Proceeds (Project 3)

Year Disbursement Projection Actual Cumulative Disbursement

Amount % of Total Amount % of Total

2015 13.81 10% 2.52 2%

2016 48.94 35% 34.80 23%

2017 124.34 89% 80.73 54%

2018 140.40 100% 149.02 100%

Total 140.40 100% 149.02 100%

Note: Disbursement projection excluded contingency.

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

2015 2016 2017 2018

Projected and Actual Disbursement under Project 3

Projected Disbursement

Actual Disbursement

Appendix 6 35

CONTRACT AWARDS OF ADB LOAN PROCEEDSa

Table A6.1: Annual and Cumulative Contract Awards of ADB Loan Proceeds (Project 3)

($ million)

Year Annual Contract Awards Cumulative Contract Awards

Amount % of Total Amount % of Total

2015 25.19 17% 25.19 17%

2016 102.56 69% 127.75 86%

2017 7.55 5% 135.30 91%

2018 13.72 9% 149.02 100%

Total 149.02 100% 149.02 100%

ADB = Asian Development Bank. a Classified by contract signing dates. Source: Asian Development Bank.

Figure A6.2: Projection and Cumulative Contract Awards of ADB Loan Proceeds (Project

3) ($ million)

Year Contract Awards Projection Actual Cumulative Contract Awards

Amount % of Total Amount % of Total

2015 121.03 86% 25.19 17%

2016 140.40 100% 127.75 86%

2017 140.40 100% 135.30 91%

2018 140.40 100% 149.02 100%

Total 140.40 100% 149.02 100%

Note: Contract award projection excluded contingency.

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

2015 2016 2017 2018

Projected and Actual Contract Awards under Project 3

Actual Contract Awards

Contract Awards Projection

36 Appendix 7

CHRONOLOGY OF MAIN EVENTS

DESCRIPTION DATE

1 Azersu proposed to change the wastewater technology from secondary to primary treatment

Nov 2016

2 ADB approved to exclude Aghjabedi wastewater treatment plant (WWTP) from the project procurement plan; relevant Initial Environment Examinations were changed accordingly.

Oct 2017

3 Mid-term review Jul 2017

4 Government of Azersu instructed the Ministry of Finance to allocate budget for construction of WWTPs in Agdash, Beylagan and Agjabedi.

Sept 2017

5 Contracts for WWTPs in Agdash, Beylagan and Agjabedi signed Oct-Nov 2018

6 Construction of WWTPs in Agdash, Beylagan and Agjabedi started; completion by Dec 2019.

Feb 2019

7 Facility Completion Report May 2019

Source: Asian Development Bank.

Appendix 8 37

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Table A8.1: Status of Compliance with Facility Framework Agreement (FFA) Covenants

Particulars Reference in Agreement

Status

Facility Terms and Conditions ADB will provide loans to finance projects under the Investment Program, as and when the projects are ready for financing, provided that Azerbaijan is in compliance with the understandings hereunder and the projects are in line with those same understandings. Each loan will constitute a tranche. Each tranche may be financed under terms different from the financing terms of previous or subsequent tranches. The choice of financing terms will depend on the project, capital market conditions and ADB’s financing policies, all prevailing on the date of signing of the loan agreement for such tranche. The loan will cover cost of civil works, equipment and material, institutional development and capacity building, land and resettlement, physical contingencies, loan financing charges, and part of the consultants costs. It will be provided in individual tranches from ADB’s ordinary capital resources.

FFA Complied. Three individual loans were approved and implemented under the MFF. Each loan covered cost of civil works, equipment and material, institutional development and capacity building, land and resettlement, physical contingencies, loan financing charges, and part of the consultants’ costs.

Execution AzerSu Joint Stock Company (AzerSu) will be the Executing Agency (EA) for the activities under the Investment Program for all projects except those in Nakhchivan Autonomous Republic (Nakhchivan). State Amelioration and Water Management Agency (SAWMA) of Nakhchivan will be the EA for activities in Nakhchivan. The Executing Agencies will implement the Investment Program in accordance with the principles set forth in Schedule 1 to this FFA, as supplemented with more details in the legal agreements for each tranche.

FFA Complied. Azersu and SAWMA were the executing agencies and implemented the tranches following the principles in Schedule 1 of the FFA and individual loan agreements.

Periodic Financing Requests Azerbaijan may request, and ADB may agree, to provide loans under the Facility to finance the Investment Program and its related projects upon the submission of a Periodic Financing Request (PFR). Each PFR should be submitted by Azerbaijan. Azerbaijan will make available to AzerSu and SAWMA, the proceeds of the tranche in accordance with the related PFR and the legal agreements for the tranche. ADB will review the PFRs and if found satisfactory, will prepare the related legal agreements.

FFA Complied. Individual PFRs were submitted by the government to ADB. The proceeds of each loan were made available by the government to Azersu and SAWMA on grant basis. Both Azersu and SAWMA remained to be the authorized representatives for executing the PFRs during the MFF implementation. The proceeds of each loan were used exclusively for upgrading

38 Appendix 8

Particulars Reference in Agreement

Status

The projects for which financing is requested under the PFR will be subject to the selection criteria set out in Schedule 4 hereto, satisfactory due diligence, and preparation of relevant safeguards and fiduciary frameworks and other documents. ADB and Azerbaijan will agree on a Facility Administration Manual and a schedule to initiate these activities, as soon as possible after the date of this Agreement, but prior to the effective date of the legal agreements for the first tranche. Until notice is otherwise given by Azerbaijan, the AzerSu and SAWMA will be Azerbaijan's authorized representative for purposes of executing PFRs in their respective project areas.

and rehabilitating WSS facilities in the program towns. Each subproject was assessed against approved feasibility assessment meeting the engineering, economic, financial, and safeguards requirements.

Safeguards Attached at Schedule 5 hereto are references to the safeguards frameworks that will be complied with during the implementation of the Investment Program. ADB's safeguard policies in effect as of the date of signing of the legal agreements for a tranche will be applied with respect to the projects financed under such tranche.

FFA Complied. The Environmental Assessment and Review Framework (July 2009) and Land Acquisition and Resettlement Plan (May 2009) were developed for the MFF. During implementation of each tranche, Initial Environmental Examinations (IEE), Environment Management Plans, and Land Acquisition and Resettlement Plans were prepared for individual subprojects. The final IEEs were approved by the Ministry of Ecology and Natural Resources. Both Azersu and SAWMA complied in submission of safeguards monitoring reports during the MFF implementation.

Procurement All goods and services to be financed under the Facility will be procured in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time).

FFA Complied. Civil works packages and consulting services were procured in accordance with ADB’s Procurement Guidelines.

Consulting Services All consulting services to be financed under the Facility will be procured in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time).

FFA Complied. Consulting services were procured in accordance with ADB’s Guidelines on the Use of Consultants

Advance contracting; Retroactive financing

Under each tranche, ADB may, subject to its policies and procedures, allow on request: (a) advance contracting; and (b) retroactive financing of eligible expenditures up to 20% of proposed

FFA Complied. Advance actions were undertaken where procurement readiness is high.

Appendix 8 39

Particulars Reference in Agreement

Status

individual loan, incurred prior to loan effectiveness but not earlier than 12 months before the date of signing of the related legal agreement. Azerbaijan acknowledges that any approval of advance contracting and/or retroactive financing will not constitute a commitment by ADB to finance the related project.

Retroactive financing was not utilized.

Disbursement Disbursements will be made in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time).

FFA Complied. Direct payment and Imprest procedures were used in accordance with ADB’s Loan Disbursement Handbook.

Monitoring, Evaluation, and Reporting Arrangements

AzerSu and SAWMA will each establish (through their Project Management Offices (PMOs)) a Program Performance Monitoring System (PPMS) acceptable to ADB within 3 months of the effectiveness of the first loan under the Facility. The PPMSs will help monitor and evaluate the performance of the Investment Program and the projects under each loan of the MFF. They will incorporate a set of performance monitoring indicators relating to outputs and outcomes in the Design and Monitoring Framework (DMF), including service delivery performance, physical implementation, institutional effectiveness milestones. The PMOs will develop baseline data for each of the selected indicators, conduct annual surveys and update ADB on the progress against each indicator. AzerSu and SAWMA will prepare (through their PMOs) annual reports on the progress against the above performance monitoring indicators, to be submitted to ADB within 30 days after the review period. These reports will incorporate the information provided by relevant SuKanals/JSCs. These reports will also discuss progress made during the period of review, changes if any on implementation schedule, problems or difficulties encountered and remedial actions taken, and work to be undertaken in the coming quarter.

FFA Partially complied. PMOs and PPMSs were established at each executing agency. Baseline data relating to the outcomes and outputs in each DMF were also developed at project preparation. However, the PMOs did not meet the requirement on submission of annual reports to ADB on the performance monitoring indicators, although quarterly progress report on overall project implementation were submitted by the PMOs.

Undertakings The Republic of Azerbaijan will, and will cause AzerSu and SAWMA to: (i) ensure timely implementation of the Investment Program, including: (a) executing the implementing arrangements set out in Schedule 3 to this FFA; (b) making available, promptly as needed, the funds, counterpart staff, facilities and services that are required, in addition to the proceeds of the loans

FFA Schedule 6

Complied. Implementation of individual loans were observed against the implementation framework of the FFA. Counterpart funds were provided by the government based on annual budget allocation.

40 Appendix 8

Particulars Reference in Agreement

Status

under the MFF; and (c) monitoring and evaluating implementation based on the Design and Monitoring Framework set out in Schedule 2 to this FFA; (ii) ensure that all projects financed under the MFF are selected and approved in accordance with the criteria and procedure set out in Schedule 4 to this FFA;

FFA Schedule 6

Complied. Each WSS subproject were assessed against approved feasibility assessment meeting the engineering, economic, financial, and safeguards requirements.

(iii) ensure that all projects financed under the MFF are developed, implemented and maintained in accordance with the safeguards requirements set out in Schedule 5 to this FFA;

FFA Schedule 6

Complied. During implementation of each tranche, Initial Environmental Examinations (IEE), Environment Management Plans, Site Specific Environment Management Plans, and Land Acquisition and Resettlement Plans were prepared for individual subprojects. The final IEEs were approved by the Ministry of Ecology and Natural Resources. Both Azersu and SAWMA complied in submission of safeguards monitoring reports during the MFF implementation.

(iv) ensure that ADB is kept informed on policies and programs related to water supply and sanitation (WSS) services and other policies and programs that will materially affect the financial viability of the projects under the Investment Program;

FFA Schedule 6

Complied. Both Azersu and SAWMA kept ADB staff informed of any updates on policies and programs related to WSS.

(v) In the event that there is: (a) any change in ownership of the projects or facilities all projects financed under the MFF; (b) any sale, transfer or assignment of control or interest in the projects or facilities, or (c) any change in the authority or function of AzerSu or SAWMA over the projects or facilities, ensure that ADB’s consent is obtained at least six months prior to the implementation of the change and that any such change will be carried out in a legal and transparent manner.

FFA Schedule 6

Not applicable. No event as described in the paragraph occurred during the MFF implementation.

(vi) ensure that necessary and qualified staff for AzerSu, SAWMA, the JSCs and SuKanals are engaged for and beyond the duration of the Investment Program;

FFA Schedule 6

Complied. Qualified PMO and counterpart staff in each executing agency were put in place during the MFF implementation. In 2015, Azersu PMO was abolished and counterpart staff within Azersu were appointed. The counterpart staff were supported by the investment program management consultants.

Appendix 8 41

Particulars Reference in Agreement

Status

(vii) provide the necessary resources to ensure that the facilities established under the Investment Program: (a) are effective and sustainable facilities for the delivery of WSS services; and (b) will continue to be in good condition for and beyond the duration of the Investment Program;

FFA Schedule 6

Based on analysis at completion, the program is rated Effective and Likely Sustainable. Nakchivan has already attained operational sustainability since 2017 while the other four towns are projected to become operationally sustainable by 2020 provided increases in tariff every two years and 90% collection rate is retained.

(viii) ensure that poverty and social analyses are prepared for all tranches under the MFF and that adequate resources are provided for their implementation;

FFA Schedule 6

Complied. Poverty and social analyses were prepared during processing of each tranche.

(ix) implement public consultation and participation plan comprising: (a) a community awareness and participation program; (b) a hygiene and sanitation program; and (c) a training program for town water users associations.

FFA Schedule 6

Partially Complied. Public awareness campaign about the program was conducted during the early phase of the program. UNICEF was engaged and conducted hygiene and sanitation practices among school children in Agdash, Beylagan and Aghjabedi. Town water users associations and women neighborhood groups were initially formed in Agdash and Goychay but were not sustained due to lack of group funding.

(x) implement the gender action plan prepared under the Investment Program to encourage gender-balanced consultation and participation in the planning and implementation of the Investment Program

FFA Schedule 6

Partially Complied. Surveys and consultations activities were undertaken under the program, however, only 47% of the activities were successfully implemented, mainly because six of the indicators pertain to town water user associations and women’s neighborhood groups, which never became functional.

(xi) ensure that: (a) there is no differential payment for wages between men and women for work of equal value; and (b) civil works contractors do not employ child labor in the construction and maintenance activities in accordance with applicable laws and regulations in Azerbaijan;

FFA Schedule 6

Complied. Prohibition of child labor is cited in the contractors’ contracts.

(xii) ensure that following the completion of civil works under each tranche and implementation of tariff measures, funds will be set aside on an annual

FFA Schedule 6

Partially complied. Since 2017, Nakhchivan has demonstrated that operations and maintenance expenditures (O&M) can be

42 Appendix 8

Particulars Reference in Agreement

Status

basis in a special account for O&M expenditures (to achieve financial sustainability for such expenditures);

covered from revenue, whereas the other four towns under Azersu will achieve operational sustainability by 2022. At completion, 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.

(xiii) ensure that SuKanals will be converted to JSCs within 12 months after the completion of civil works under each tranche.

FFA Schedule 6

Complied. Azersu established the Joint Stock Companies (JSCs) in Agdash and Goychay in 2007. SAWMC established a JSC in Nakhchivan in the same year. This was done under the UWSSP. There was no requirement to establish JSC in Beylagan and Aghjabedi as it formed an integral part of the Azersu’s United Su-Kanal division.

Table A8.2: Status of Compliance with Major Project 3 Covenants Particulars Reference in

Agreement Status of Compliance

Particular Covenants (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.

Loan Agreement, Article IV,

Section 4.01.

(a) Complied. Azersu and SAWMC carried out implementation of the project 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.

(b) Complied. Implementation of the Project and operation of Project facilities was carried out in compliance with the provisions of the loan agreement.

The Borrower shall make available, or cause to be made available, promptly as needed, the funds, facilities, services, land and other resources, as required, in addition to the

Loan Agreement, Article IV,

Section 4.02.

Complied. The government allocated funds for the project on annual basis. At completion, total government contribution to the project is $140.56 million.

Appendix 8 43

Particulars Reference in Agreement

Status of Compliance

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.

Loan Agreement, Article IV,

Section 4.03.

Complied. Azersu and SAWMC supported ADB during missions when the subproject sites are inspected.

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.

Loan Agreement, Article IV,

Section 4.04.

Complied. Azersu and SAWMC remained as authorized representatives for execution of the Project and implemented the Project in accordance with provisions of the Project Agreement.

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.

Project Agreement,

Article II, Section 2.01.

Partially Complied. SAWMC carried out Project implementation in conformity with sound applicable technical, financial, business, and development practices, and in accordance with the provisions of the Loan and Project Agreements. However, subprojects implemented by Azersu were less efficient, with substantial cost overruns.

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

Project Agreement,

Article II, Section 2.02.

Complied. PMO office facilities and counterpart staff were made available during implementation of the MFF.

(a) In the carrying out of the Project, Azersu and SAWMC shall employ competent and qualified consultants and contractors, acceptable to ADB, to an extent and upon terms and conditions satisfactory to ADB.

Project Agreement,

Article II, Section 2.03.

(a) Complied. Selection of contractors and consultants were carried out in an open competitive manner following ADB guidelines and procedures. Qualification and selection criteria were set during the bidding and selection stage.

(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 Schedule 4 to the Loan Agreement. ADB may refuse to finance a contract where any such item has not been procured under procedures substantially in accordance with those agreed between the Borrower and ADB or where the terms and conditions of the contract are not satisfactory to ADB.

(b) Complied. Procurements were carried out in accordance with provisions of Schedule 4 to the Loan Agreement (Procurement of Works and Consulting Services).

44 Appendix 8

Particulars Reference in Agreement

Status of Compliance

Azersu and SAWMC shall carry out the Project in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to ADB and taking into consideration regional development plans and/or master plans of the area. 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. The Project will include specified WSS networks in the city development cadastre in accordance with Presidential Decree, sub-para 1.7.4, dated 4 September 2012, No. 695 on application of Law on Approval, Entry into Force and Relevant Juridical Regulation of City Development and Construction Code of the Republic of Azerbaijan.

Project Agreement,

Article II, Section 2.04.

Complied. Detailed engineering designs took into consideration the regional development plans / master plans of the area. WSS networks and facilities were constructed in the program towns of Agdash, Aghjabedi, Beylagan, Goychay, and Nakhchivan including peri-urban.

(a) Azersu and SAWMC shall take out and maintain with responsible insurers, or make other arrangements satisfactory to ADB for, insurance of Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice.

Project Agreement,

Article II, Section 2.05.

(a) (b) Complied. Provision of all goods and Project facilities were provided as needed by the government.

(b) Without limiting the generality of the foregoing, Azersu and SAWMC undertakes to insure, or cause to be insured, the Goods to be imported for the Project 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.

Azersu and SAWMC shall maintain, or cause to be maintained, records and accounts adequate to identify the 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.

Project Agreement,

Article II, Section 2.06.

Complied. Separate financial records were maintained by the executing agencies identifying ADB and government contributions. Accordingly, such records are reflected in the annual audited project financial statements.

(a) ADB and Azersu/SAWMC shall cooperate fully to ensure that the purposes of the Loan will be accomplished.

Project Agreement,

(a) Complied. Loan proceeds were used only for the purposes originally intended.

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Particulars Reference in Agreement

Status of Compliance

Article II, Section 2.07.

(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.

(b) Complied. Azersu and SAWMC kept ADB informed of conditions relevant to the Project.

(c) ADB and Azersu/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 and the Loan.

(c) Complied. There was active collaboration between ADB and executing agencies during Project implementation.

(a) Azersu and SAWMC 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 (v) any other matters relating to the purposes of the Loan.

Project Agreement,

Article II, Section 2.08.

(a) Complied. Annual audited project financial statements were submitted by Azersu and SAWMC for Fiscal Years 2015 to 2018. In addition, Azersu’s audited financial statements were also submitted to ADB on annual basis.

(b) Without limiting the generality of the foregoing, Azersu 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 period.

(b) Complied. Progress reports were submitted by Azersu and SAWMC on quarterly basis.

(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 SAWMC 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 SAWMC of its obligations under this Project Agreement and the accomplishment of the purposes of the Loan.

(c) Complied. Project completion reports were submitted by Azersu and SAWMC after the loan closure.

46 Appendix 8

Particulars Reference in Agreement

Status of Compliance

(a) Azersu and SAWMC shall: (i) maintain separate accounts and records for the Project; (ii) prepare annual financial statements for the Project in accordance with accounting principles acceptable to ADB; (iii) have such financial statements for the Project audited annually by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB, in accordance with international standards for auditing or the national equivalent acceptable to ADB; (iv) as part of each audit, have the auditors prepare a report (which includes the auditors' opinion on the financial statements, use of the Loan proceeds and compliance with the financial covenants of the Loan Agreement and the Project Agreement as well as on the use of the procedures for statement of expenditures), and a management letter (which sets out the deficiencies in the internal control of the Project that were identified in the course of the audit, if any); and (v) furnish to ADB, no later than 6 months after the close of the fiscal year to which they relate, copies of such audited financial statements, audit report and management letter, all in the English language, and such further information concerning these documents and the audit thereof as ADB shall from time to time reasonably request.

Project Agreement,

Article II, Section 2.09.

(a) Complied. Annual audited project financial statements were submitted by Azersu and SAWMC covering Fiscal Years 2015 to 2018.

(b) ADB shall disclose the annual audited financial statements for the Project and the opinion of the auditors on the financial statements within 30 days of the date of their receipt by posting them on ADB’s website.

(b) Complied. Audited project financial statements were disclosed on ADB’s website after these were reviewed and endorsed by CWRD’s Financial Management Specialist.

(c) In addition to annual audited financial statements referred to in subsection (a) hereinabove, Azersu shall: (i) provide annual financial statements prepared in accordance with national accrual-based financing reporting standards acceptable to ADB; (ii) have its financial statements audited annually by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB, in accordance with international standards for auditing or the national equivalent acceptable to ADB; and (iii) furnish to ADB 4

(c) Complied. Azersu submitted its audited financial statements annually.

Appendix 8 47

Particulars Reference in Agreement

Status of Compliance

no later than 1 month after approval by the relevant authority, copies of such audited financial statements in the English language and such other information concerning these documents and the audit thereof as ADB shall from time to time reasonably request. (d) In addition Azersu and SAWMC shall enable ADB, upon ADB's request, to discuss the financial statements for the Project and Azersu and its financial affairs where they relate to the Project with the auditors appointed by Azersu/SAWMC pursuant to subsections (a)(iii) and (c) hereinabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB. This is provided that such discussions shall be conducted only in the presence of an authorized officer of Azersu/SAWMC unless Azersu/SAWMC shall otherwise agree.

(d) Complied. Discussions on the project financial statements and its financial affairs were carried out, as needed, during implementation of the project.

Azersu and SAWMC shall enable ADB's representatives to inspect the Project, the Goods and Works and any relevant records and documents.

Project Agreement,

Article II, Section 2.10.

Complied. Project sites were inspected by ADB during review missions, and any information or documentation were provided by Azersu and SAWMC when requested.

(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.

Project Agreement,

Article II, Section 2.11.

Complied. Azersu and SAWMC 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. Sound technical, business, development, operational and maintenance practices were implemented.

(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.

48 Appendix 8

Particulars Reference in Agreement

Status of Compliance

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.

Project Agreement,

Article II, Section 2.12.

Complied. The executing agencies’ assets were continuously used for their operations.

Except as ADB may otherwise agree, Azersu 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, and shall ensure that all items of expenditures financed out of such proceeds are used exclusively in the carrying out of the Project.

Project Agreement,

Article II, Section 2.13.

Complied. Loan proceeds were used only for their intended purposes.

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 waiving any rights or obligations of the parties under the Subsidiary Loan Agreement.

Project Agreement,

Article II, Section 2.14.

Complied.

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 SAMWC shall afford ADB an adequate opportunity to comment on such proposal prior to taking any affirmative action thereon.

Project Agreement,

Article II, Section 2.15.

Complied. There were no amendments to Azersu and SAWMC’s Charter that adversely affected the Project.

Appendix 9 49

GENDER ACTION PLAN GENDER EQUALITY RESULTS AND ACHIEVEMENTS

A. GENDER ISSUES and GENDER ACTION PLAN FEATURES I. Facility GAP 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. 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. 2. A gender action plan (GAP) was developed for the overall project which included, among others : (i) conduct of gender analysis, consultations, and surveys to determine the specific needs of women and men in relation to WSS, (ii) development of tranche-specific GAPs, (iii) conduct of gender awareness workshops for EAs, (iv) participation of women in Town Water Users Associations (TWUAs) to provide feedback on water supply and sanitation, and (iv) participation of women in public outreach programs. The GAP consisted of 20 activities and 2 targets. II. Tranche 3 GAP 3. The GAP for Tranche 3 consisted of 10 activities and 8 targets. The GAP included activities that aimed to promote the participation of men and women in consultations to identify their concerns related to water supply and sanitation and solicit their inputs for the planning and installation of water connections, meters, and preferences for sewerage systems. The GAP also provided avenues for women to take part in giving community feedback as water and sanitation users through the Town Water Users Associations (TWUAs). In addition, the GAP included employment targets for women in civil works, maintenance, and jobs in the utilities. Targets were set for women’s participation in consultations, household connections for water supply and sanitation services (WSS), employment of women in civil and maintenance works, and participation in TWUAs. B. OVERALL ASSESSMENT OF GAP IMPLEMENTATION RESULTS & ACHIEVEMENTS I. Facility GAP 4. The Facilty GAP was able to implement nine (9) activities and was not able to achieve the two (2) targets. Among the successfully completed activities were the conduct of consultations which were critical for the preparation of the tranche-specific GAPs. The implementation of the Facility GAP was significantly affected by the non-implementation of the activities (5 activities) related to organization and operations of the TWUAs. While these groups were initially formed (e.g. one TWUA in Goychay with 5 members, including 1 woman), they did not become functional due to lack of dedicated funding for their operation. The activities on the conduct of gender awareness for EAs, and representation of women in the board of directors of JSCs, were also not achieved.

50 Appendix 9

II. Tranche 3 GAP 5. Through the implementation of the GAP, women were able to participate in consultations and articulate their concerns related to water quality and sanitation. They were also able to provide inputs in planning for water and meter connections. All households headed by women were provided with water connections and sewerage facilities. The water connection to individual households helped ease women’s burden of doing heavy household work such as laundry. The implementation of the GAP facilitated the employment of women in the offices of PMU, SAWMC, and SJSC. They were employed as accountants, external relations/ press services staff, fee collectors. 6. Of the 10 activities indicated in the GAP, 5 activities (activities 1-5) were completed and 3 out of the 8 targets were achieved (targets 1, 3, and 4). It was unfortunate that the other 5 activities (activities 6-10) and the 3 targets (targets 6-8) all under Component B and which were all indicated on the second page of the GAP were not reported on. In the course of the exchanges between the EA/IA and ADB on monitoring of the implementation, these activities and targets were inadvertently left out. The activities that were not implemented and targets not achieved related to the participation of women in the TWUAs, public outreach programs, sex-disaggregation and gender analysis of customer feedback that should have been used for planning, and development and dissemination of IEC materials on water, sanitation, and customer rights. Hence, the project may not be considered successful insofar as implementation of GAP is concerned.

C. ISSUES AND CHALLENGES 7. The implementation, monitoring of the GAP activities and achievement of targets were significantly affected by the lack of ownership of the GAP by the EA. There was also no dedicated person in charge of overseeing GAP implementation. Monitoring and reporting on the progress and results of the GAP activities were also big challenges as the EAs did not fully grasp the project's gender requirements and did not understand many of the GAP targets. During project missions, it was very difficult to gather the needed information for the GAP, because the water utilities did not fully understand the importance of establishing sex-disaggregated database for their customers because 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. Commitment and action from the EA could have been secured if (i) the GAP was prepared very closely with the EA at the early stages of project

Women’s Testimonials

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." 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.”

Appendix 9 51

development, (ii) the targets were set based on the capacity and key functions of the EA, (iii) capacity building on gender was done at different stages of the project, and (iv) remedial actions were taken to address the problems. D. RECOMMENDATIONS 8. Future projects should ensure that a gender specialist 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. This will ensure EA’s ownership of the GAP and that the targets identified will be relevant and fully aligned with the capacity and key functions of the EA, thus facilitating a more effective GAP implementation. 9. Capacity building training on gender and the GAP targets should be undertaken for the EAs 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 actions they need to take to ensure successful implementation of all GAP activities.

52 Appendix 9

Table 9A.3: Gap Implementation Update

Water Supply and Sanitation Investment Program – Tranche 3

Total no. of GAP activities (original GAP in PAM T3): 10 Activities completed: 5 (50%) (SDTC-GEN standard for successful rating: 80% of total no. of activities completed)

Total no. of targets (original GAP in PAM T3): 8 Targets achieved: 3 (38%) (SDTC-GEN standard for successful rating: 80% of total no. of targets achieved)

Rationale/ Objectives Activities Performance Target /

Indicators GAP Status

Component A: Water Supply and Sanitation Infrastructure Development Ensure that maximum households headed by women, widows, and the elderly are covered with access to safe WSS services, and their concerns are adequately addressed to benefit women population of over 50 % of 50,573 resident

ACTIVITY 1 Carry out gender analysis on needs and problems of men and women in relation to WSS

TARGET 1 50% of surveyed are women in Nakhchivan and Aghjabedi (2013-2014, Q1)

Activity completed. Target Achieved. Gender analysis and surveys were conducted before the project. In Aghjabedi, 100 people (all women, or 100%) were interviewed in September 2011 purposely to identify their needs in relation to WSS. In addition, a socio-economic survey was conducted, with women comprising 33% of the 250 respondents (83 women). In Nackchivan, project consultations were done for every village, with average participants at about 20, out of which about 11 were women (55%). The project conducted interviews not only among households but in schools and hospitals, since these were also connected with WSS, and about 90% of employees in these institutions are women.

Appendix 9 53

Rationale/ Objectives Activities Performance Target / Indicators

GAP Status

ACTIVITY 2 Consult both men and women during planning and implementation of WSS systems

TARGET 2 50% of consulted in Nakhchivan and Aghjabedi are women (2013-2014 Q1)

Activity completed Project consultations were done for both women and men during project planning and implementation. The issues that women frequently raised were: (i) quality of water that the project can provide, specifically, whether they will no longer need to use softening chemicals since previously, the water had an effect of hardening fabric; (ii) if the water is clean and potable and they will no longer need to boil it for drinking; (iii) installing water meters inside the house so they will no longer need to have additional expenses to have it connected inside their houses. These were addressed by the project. Target Not achieved. The exact figures on the number of women and men consulted were not recorded, although interviews during project missions indicate that women comprised less than a half of those consulted. For instance, in Nackchivan, the average participants during consultations in each village were 20, with about 8 women (40%).

54 Appendix 9

Rationale/ Objectives Activities Performance Target / Indicators

GAP Status

ACTIVITY 3 Based on relevant available database on the families, the design of the system to include maximum households headed by women, widows, and the elderly are covered within the design limitation.

TARGET 3 Maximum percentage of households in this category are provided with access to safe WSS services (2013-2017)

Activity completed. Target Achieved. In Nackchivan, 100% of the female headed households (about 5,122) are connected with WSS facilities and services. A total of 7,900 households in Aghjabedi including the 376 FHH were provided with water connections.

Component B: Institutional Effectiveness Integrate a gender perspective in project design, and empower women by giving them opportunities to participate in the project design phase.

ACTIVITY 4 In surveys, use female enumerators for collecting gender‐sensitive indicators.

Survey (throughout the project).

Activity completed. Females (3 gender specialists) were involved in the Aghjabedi survey.

ACTIVITY 5 Contract women in civil works, maintenance and recruitment in utilities (e.g. customer services, women meter readers, female engineers, etc.)

TARGET 4 15% of recruited are women (2013-2018)

Activity completed. Target achieved. In Nackchivan, out of 8 newly hired staff in the PMU, 2 are women (25%). Of the total 32 staff in SAWMC main office 5 are women (15.6%); and 7 out of 43 (16%) total employees including in the office branches are women, including an accountant, external relations/press services staff, and one engaged in collection of fees. In Aghjabedi, 12 out of the 65 overall SJSC staff are women (18%). There are no women workers in construction/civil works.

Appendix 9 55

Rationale/ Objectives Activities Performance Target / Indicators

GAP Status

TARGET 5 All jobs are publicly advertised and the advertisement includes a sentence on “applications by women encouraged” (2013-2018)

Target Not achieved. This was not done/monitored. When the contractors were mobilized, there was no specific agreement regarding public announcement and the inclusion of the phrase “applications by women encouraged”.

Empower women by giving them opportunities to participate in providing community feedback as water and sanitation users.

ACTIVITY 6 Promote women to be in TWUA

TARGET 6 At least one third of TWUA in Nakhchivan and Aghjabedi are women (2013-cont)

ACTIVITY 7 Establish links between EAs, TWUAs, and NGOs to ensure community feedback provided by women will be delivered to EAs for improved services.

TARGET 7 At least 2 meetings held between TWUAs and NGOs (2014-cont)

ACTIVITY 8 Conduct a public outreach program to create local awareness on environmental and financial sustainability of services and informed of project implementation schedule.

TARGET 8 2 Public outreach programs conducted- on per town/project (Nakhchivan and Aghjabedi) – through the project implementation period (2014-cont)

ACTIVITY 9 Disaggregate customer feedback by gender for analysis and future planning

Customer feedback analysis annual report (annual report starting 2014)

ACTIVITY 10 Increase outreach to customers through developing and disseminating IEC material on water, hygiene, sanitation, customer rights, and water usage efficiency

Public outreach to customers conducted (2014-annually)

56 Appendix 9

Table 9A.4: GAP IMPLEMENTATION UPDATE MFF Water Supply and Sanitation Investment Program

Total no. of GAP activities in GAP of approved project: 20 Total no. of GAP activities in GAP Achievements Matrix: 19 less: no. of activities not applicable: 1 (resettlement); Total no. of activities included in count: 18 No. of completed GAP activities: 9 (50%) (SDTC-GEN standard for successful rating: 80% of total no. of activities completed) Total no. of targets: 2 No. of targets achieved: 0 (SDTC-GEN standard for successful rating: 80% of total no. of targets achieved)

Investment Program Component

Project Phase and Objective Activity and Task GAP Status

Component A: Water Supply and Sanitation Infrastructure Development

1. Piped-water supply systems, water works, and treatment facilities rehabilitated, replaced, and expanded in participating towns. 2. Water quality monitoring system developed and implemented. 3. Sewerage networks rehabilitated, replaced, and expanded. 4. New wastewater treatment plants constructed in participating towns.

Design Ensure that households headed by women, widows, the elderly, and single women are provided with access to safe WSS services, and their concerns are adequately addressed in resettlement plans. Integrate a gender perspective in project design, and empower women by giving them opportunities to participate in the project design phase.

Activity 1 Carry out gender analysis on needs and problems of men and women in relation to WSS, and collect gender-disaggregated data through infrastructure baseline and resettlement surveys.

Activity completed. Social assessment/surveys were conducted for each of the project towns to assess their needs, concerns, & preferences in relation to WSS. 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 about the cleanliness, color, and taste of the water, which 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 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).

Appendix 9 57

Investment Program Component

Project Phase and Objective Activity and Task GAP Status

Activity 2 Consult both men and women during planning and implementation of WSS systems, including that of wastewater treatment plants.

Activity completed. Project consultations were done for both women and men and the project team explained how the WSS system will be utilized after the project. The issues that women frequently raised were: (i) quality of water that the project can provide, specifically, whether they will no longer need to use softening chemicals since previously, the water had an effect of hardening fabric; (ii) if the water is clean and potable and they will no longer need to boil it for drinking; (iii) installing water meters inside the house so they will no longer need to have additional expenses to have it connected inside their houses. These were addressed by the project. The participants were also asked how they want to see the new system, where to mount new water meters, and their preferences for sewerage connections and manholes.

Activity 3 In surveys, use female enumerators for collecting gender-sensitive indicators, and provide them with adequate training.

Activity completed. Female enumerators have been involved in the surveys (3 gender specialists in Aghjabedi)

Activity 4 Prepare a tranche-specific gender action plan, which includes sex disaggregated targets and/or indicators (e.g., health benefits, reduced burden on women, and employment opportunities).

Activity completed. Tranche specific GAPs were prepared for both tranches 2 & 3, with sex-disaggregated targets on beneficiaries and participants in project activities

Activity 5 For projects where land acquisition and resettlement are involved, ensure women's involvement in grievance mechanisms and resettlement planning.

Not Applicable There were no land acquisition and resettlement under the project.

Activity 6 Where project-related employment opportunities are offered, advertise a statement that women are encouraged to apply.

Not implemented. There were no specific statements encouraging women to apply. When the contractors were mobilized, there was no specific agreement regarding public announcement and the inclusion of the phrase “applications by women encouraged”.

58 Appendix 9

Investment Program Component

Project Phase and Objective Activity and Task GAP Status

Implementation Mainstream gender perspective in project implementation.

Activity 7 Conduct gender awareness workshops for executing agencies.

Not implemented. There were no gender awareness workshops conducted for executing agencies.

Ensure women's full awareness and involvement in project implementation and benefits.

Activity 8 Implement a tranche-specific gender action plan.

Activity completed. GAPs for Tranches 2 &3 have been implemented and updated

Monitoring Ensure that project benefits positively impact women and that benefits are equitable.

Activity 9 PMF to monitor implementation of tranche-specific gender action plan and to provide regular reporting with inputs from SuKanals, JSCs and TWUAs.

Activity completed. GAPs were monitored and updated.

Component B: Institutional Effectiveness 1. Institutions improved for WSS service delivery. 2. Capacity developed for better system planning, operation, and maintenance. 3. Cost recovery enhanced through metering, billing, and collecting tariffs. 4. Efficiency increased for timely processing of effective WSS projects. 5. Consumers mainstreamed on project implementation.

Design Integrate gender perspective in technical and financial management. Empower women by giving them opportunities to participate in providing community feedback as water and sanitation users.

Activity 10 Social development consultant assists preparation and implementation of tranche-specific gender action plan.

Activity completed. Tranche-specific GAPs have been prepared with assistance from gender/social development consultants

Activity 11. Target 1 Promote women to be in TWUAs—at least one third of the representatives will be women.

Not Implemented. Target not achieved. Town water users’ associations were initially formed (in Agdash and Goychay). However, because participation in TWUAs was not paid either by ADB or the Government, the TWUAs did not become fully functional.

Activity 12 Integrate this one-third target into the tranche-specific gender action plan.

Not implemented. There were no targets for TWUAs in the tranche-specific GAPs

Activity 13 Establish women neighborhood groups to take responsibility for providing consumer feedback on quality of WSS services.

Not implemented. Women’s neighborhood groups have been initially formed but did not become fully functional. However due to the fact that participation in TWUAs was not paid by either ADB or the Government, the functioning of these groups has been suspended.

Activity 14 Establish links between women neighborhood groups, PMFs, TWUAs, and NGOs to ensure community feedback provided by women will be delivered to PMF for improved services.

Not implemented. There were no women’s neighborhood groups that were operational

Activity 15 Include various training targets for women in the tranche-specific gender

Activity completed. Targets for training of teachers and school children on water, sanitation and hygiene (WASH) under the public

Appendix 9 59

Investment Program Component

Project Phase and Objective Activity and Task GAP Status

action plan. outreach program were included in Tranche 2 GAP. The target for training of schoolgirls was not only achieved but was also exceeded. There was a significant increase (45%) in the number of schoolgirls with improved WASH practices/ behavior as a result of the training.

Activity (in GAP of approved project) Make a rule so that no training will proceed without women’s participation

Implementation Mainstream gender perspective in project implementation. Ensure women's full awareness and involvement in project implementation and benefits.

Activity 16 Contract women neighborhood groups to improve the billing and collection of water and sewage tariffs, thereby improving the financial status of SuKanals and JSCs.

Not implemented. There were no functioning women’s neighborhood groups

Activity 17 Conduct a public outreach program where women neighborhood groups are mobilized to create local awareness on environmental and financial sustainability of services and informed of project implementation schedule

Not implemented. There were no functioning women’s neighborhood groups

Activity 18. Target 2 Promote women to be on the boards of directors of JSCs (at least one-third).

Not implemented. Target not achieved.

Monitoring Ensure that project benefits positively impact women and that benefits are equitable.

Activity 19 PMOs to monitor implementation of tranche-specific gender action plan and to provide regular reporting, with inputs from PMF consultants, SuKanals, JSCs, and TWUAs

Activity completed. Tranche-specific GAPs were monitored and updated

1. Town water users’ associations and women’s neighborhood groups have been initially formed in Agdash and Goychay. However due to the fact that this work (participating in TWUAs) was not paid by the ADB or Government the functioning of these groups has been suspended.

2. Grievance mechanisms were not established on places in scheduled manner. As per local practices citizens have been sent their grievances/proposals directly to towns authorities - Cities executives. After obtaining above mentioned appeals from complainant, the City executive usually sent its formal requests to the EA. EA did its fast responds on pending issues and informed stakeholders on resolving (final decisions making) of raised issues. That is why women were involved in grievance mechanisms and resettlement planning and number of participants depends on number of raised issues done.

3. No workshops had been conducted especially for women.

60 Appendix 10

ECONOMIC REEVALUATION A. Introduction 1. Under the Water Supply and Sanitation Investment Program (WSSIP) in Azerbaijan, the investment was made in water supply and sewerage sectors in five secondary towns (Agdash, Beylagan, Nakchivan, Aghjabedi and Goychay). The program was structured under multi-tranche financing facility (MFF) in four tranches. At this Facility Completion Report (FCR) stage, all the water supply and sewerage subprojects are completed. However, (i) 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 and these left out components were completed in Tranche 2; (ii) only a part of the city water supply and wastewater network was covered under Tranche 1 for Nakchivan and under Tranche 2 and 3, remaining network including two peri-urban towns (Shikhmahmud and Shakarabad) and WWTP were implemented; (iii) water supply and wastewater network in Agdash was completed in Tranches 2 and 3, except the WWTP; (iv) Beylagan network was completed in Tranche 2 itself, except the WWTP; and (v) except WWTP, all the water supply and wastewater network were completed in Aghjabedi in the Tranche 3 itself. Two dropped WWTPs for Agdash and Beylagan were considered under Tranche 4. But Tranche 4 was not availed by the Azerbaijan government due to its national issues. However, the government of Azerbaijan has started implementing two dropped WWTPs in Agdash and Beylegan and cancelled WWTP in Aghijabedi from its national sources, after the loan closure. With this background economic analysis for the present FCR was conducted for water supply and sewer subprojects in the five 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. Performance 2. Project 1. Project 1 aimed to improve water supply and sewerage services in two secondary towns, Goychay and Nakhchivan. Key civil works include (i) water distribution and sewage system reconstruction and extension in Goychay; and (ii) new water intake, transmission mains and treatment facilities, and trunk sewers in Nakhchivan. However, the coverage of the network development component in the Goychay water supply and sewerage network was reduced. About 22 kilometers (km) of water network, 18 km of sewer network, and a water treatment plant with a capacity of 40,000 cubic meters/day (m3/day) were completed in Nakhchivan. In Goychay, about 60 km of water supply and 53 km of sewer network were completed. 3. Project 2. Project 2 aimed to complement the works under Project 1 through the provision of water supply services in the remaining parts of Goychay and Nakhchivan, as well as for two additional secondary towns—Agdash and Beylagan. Key civil works include (i) water distribution and sewage system reconstruction and extension in Agdash, Beylagan, and Goychay, and (ii) construction of WWTP in each town. All civil works in Nakhchivan and Goychay towns were completed. Water supply and sanitation (WSS) works in Agdash and Beylagan were completed. Due to cost overruns in the Azersu subprojects, the WWTPs in Agdash and Beylagan, as well as some remaining WSS network extensions were dropped from Project 2 and included under Project 4. 4. Project 3. Project 3 aimed to improve the water supply and sewerage network in Aghjabedi town and peri-urban towns of Nakhchivan. Under the Aghjabedi subproject, approximately 266 km of water supply network, 8,000 m3 of storage reservoirs, and 245 km of sewer network, were constructed. Under the Nakhchivan subproject, 64.80 km of water supply network and 51.67 km of sewer network were constructed for peri urban Nakhchivan. The water treatment plant and the WWTP for Nakhchivan are being completed under Project 1

Appendix 10 61

and Project 2 respectively and would also serve the peri-urban towns. But the construction of WWTP for Aghjabedi with 20,000 m3/day capacity was cancelled due to procurement and design issues. 5. Project 4. Project 4 aimed to complete the two dropped WWTPs in Project 2 for Agdash and Beylagan along with construction of additional 37.2 km water supply network and storage facilities in Agdash and 42.6 km of additional sewer lines constructed in Agdash and Beylagan. In the backdrop of the oil crisis and currency devaluation related economic crisis in 2015, the government of Azerbaijan did not avail the Project 4, even after it was approved by ADB. However, the government of Azerbaijan has started implementing these three dropped WWTPs from its national sources from 2019, after the loan closure. C. Approach 6. Main approach of this economic analysis is to update the earlier analysis carried out during the loan processing period (2009 for Tranche 1, 2011 for Tranche 2 and 2013 for Tranche 3) 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 the respective base years (2009, 2011, and 2013). 7. Analysis period of earlier analysis were followed for the present analysis with modification in construction period as observed from actual performance. This has resulted in the reduction of subprojects operation period from completion due to delay in project completion. 8. 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.

9. 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. 10. For facilitating project benefit estimation, the investments made in all tranches (1, 2 and 3) were considered in economic analysis as appropriate to the subprojects/project towns. This is mainly because of the linkage between the investments under three tranches in benefit estimation.

62 Appendix 10

D. Economic Cost 11. 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 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 labor and 1.0 for skilled labor, 30% as unskilled labor component in the civil works16, and removing the applicable tax components were used to convert the financial cost into economic cost;

(ii) Contingencies were not considered for completed cost; (iii) Currency conversion adopted to the respective base years include: Goychay

$1= AZN0.787 (2009); Agdash and Beylegan $1=AZN0.787 (2011); Nakchivan and Aghijabedi $1= AZN0.783 (2013); and

(iv) Financial charges were not considered.

12. 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).

13. 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 Beylegan and Goychay towns. Similarly, in Nakchivan peri-urban villages were included in the water supply and wastewater network without allowing for cost overrun. Also, WWTPs in Agdash, Aghjabedi, and Beylagan towns dropped during the loan implementation stage were considered for implementation with national sources, after the loan closure. These changes were captured in the present FCR analysis. 14. 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 Beylegan). However, Goychay WTPP was completed in December 2018, as scheduled. In Nakchivan, the WWTP was delayed by nineteen months. Actual subproject expenditure during their implementation period collected from the project management office and ADB was used to update the project cost and its phasing in the analysis. Using the producer price index, the year wise actual disbursement was discounted to the Base Year (2009/2011/2013). Table A10.1 shows the updated financial cost of the sub-projects along with their discounted cost using the inflation index. Table A10.2 gives the arrived economic cost used for the analysis.

16 SERF (1.02), SWRF for unskilled labour (0.8), SWRF for skilled labour (1.0) and 30% of the civil works for

unskilled workers were estimated and used in processing stage analyses in Tranche 1 (2009), Tranche 2 (2011) and Tranche 3 (2013). In line with the analysis approach followed for FCR, all these values were retained for the present FCR analysis. (Source: i. ADB, 2009. ‘Appendix 13 Economic Analysis’ Tranche 1; ii. ADB, 2013, ‘Finance and Economic Analysis for Tranche 3 for Aghjabedi Town’)

Appendix 10 63

Table A10.1: Distribution of Project Cost (US$ Million)

Target at

Processing

Stage

%

Disbursed

(Current

Price)

% Disbursed

(2009

Price)

% Target % Disbursed

(Current

Price)

% Disbursed

(2011

Price)

% Target % Disbursed

(Current

Price)

% Disbursed

(2011

Price)

%

2009 10.1 0.1% 0.0 7.8% 0.0 0.0%

2010 32.0 0.2% 0.1 24.8% 0.1 0.1%

2011 19.9 0.2% 9.0 15.4% 9.2 7.9%

2012 39.7 30.8% 14.3 30.8% 15.2 13.0% 57.1 62.8% 11.6 11.3% 12.0 11.6% 51.4 61.3% 4.8 7.2% 5.0 7.3%

2013 18.1 14.0% 27.8 14.0% 28.8 24.8% 25.4 28.0% 14.3 13.9% 14.5 14.0% 23.1 27.5% 13.0 19.6% 13.2 19.3%

2014 3.7 2.9% 28.9 2.9% 30.9 26.6% 3.3 3.7% 13.1 12.7% 13.6 13.2% 3.7 4.4% 17.9 26.9% 18.7 27.4%

2015 4.2 3.2% 11.5 3.2% 12.2 10.5% 3.7 4.1% 23.3 22.7% 24.1 23.4% 4.2 5.0% 11.6 17.5% 12.0 17.6%

2016 1.5 1.1% 8.1 1.1% 8.2 7.1% 1.3 1.4% 17.9 17.5% 17.7 17.2% 1.5 1.7% 13.5 20.4% 13.4 19.6%

2017 0.0% 12.0 0.0% 11.8 10.1% 0.0% 16.3 15.9% 15.6 15.1% 0.0% 5.5 8.3% 5.3 7.7%

2018 0.0% 0.0% 0.0 0.0% 0.0% 1.8 1.7% 1.6 1.6% 0.0% 0.1 0.1% 0.0 0.1%

2019 3.6 3.6% 3.3 3.2% 0.6 0.9%

2020 0.6 0.6% 0.6 0.6% 0.1 0.2%

Total 129.2 52.5% 111.7 100.0% 116.4 100.1% 90.8 100.0% 102.5 99.9% 103.0 99.9% 83.9 99.9% 66.4 100.0% 68.3 100.1%

Year Goychay Agdash Beylagan

64 Appendix 10

Note: 1. Two Wastewater 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. Also, WWTP in Aghijabedi in Tranche 3 also cancelled. These three WTPs are being implemented with national budget source during 2019-2020, after the loan closure.

2. Currency conversion adopted to the respective base years include: Goychay $1=AZN0.787 (2009); Agdash and Beylegan $1=AZN0.787 (2011); Nakchivan and Aghijabedi $1=AZN0.783 (2013).

3. Periodical subproject costs were discounted to the Base Year (2009 for Goychay, 2011 for Agdash and Beylegan; and 2013 for Nakchivan and Aghijabedi) using the producers price index).

Source: Analysis based on the data provided by project management office.

Target % Disbursed

(Current

Price)

% Disbursed

(Current

Price)

% Target % Disbursed

(Current

Price)

% Disbursed

(Current

Price)

% Target % Disbursed

(Current

Price)

% Disbursed

(2009/2011/

2013 Price)

%

2009 0.0 0.0% 0.000 0.0% 10.1 1.7% 0.0 0.0% 0.0 0.0%

2010 4.5 1.8% 4.465 1.8% 32.0 5.4% 4.6 0.7% 4.6 0.7%

2011 16.8 6.8% 16.573 6.7% 19.9 3.4% 25.8 3.9% 25.8 3.9%

2012 103.1 65.4% 38.0 15.4% 38.8 15.7% 12.6% 251.3 42.4% 68.7 10.4% 70.9 10.8%

2013 45.2 28.7% 66.2 26.8% 66.2 26.9% 26.9% 111.8 18.9% 121.4 18.3% 122.6 18.7%

2014 3.7 2.4% 22.3 9.0% 23.0 9.3% 39.4 30.0% 17.6% 53.9 9.1% 82.2 12.4% 86.3 13.2%

2015 4.2 2.6% 19.3 7.8% 19.7 8.0% 91.9 70.0% 15.6% 108.2 18.2% 65.7 9.9% 68.1 10.4%

2016 1.5 0.9% 63.8 25.8% 62.4 25.3% 11.3 8.4% 10.8 18.4% 5.7 1.0% 114.6 17.3% 112.5 17.2%

2017 0.0 0.0% 11.0 4.4% 10.4 4.2% 55.8 41.8% 51.7 7.5% 0.0 0.0% 100.6 15.2% 94.7 14.5%

2018 0.0 0.0% 5.5 2.2% 4.9 2.0% 62.7 46.9% 55.2 1.4% 0.0 0.0% 70.0 10.6% 61.8 9.4%

2019 3.3 2.5% 3.0 0.0 0.0% 7.0 1.1% 6.9 1.1%

2020 0.6 0.4% 0.5 0.0 0.0% 1.2 0.2% 1.2 0.2%

Total 157.7 100.0% 247.4 100.0% 246.4 99.9% 131.3 100.0% 133.7 100.0% 121.2 100.0% 592.9 100.1% 661.8 100.0% 655.4 100.1%

Nakchivan Aghjabedi TotalYear

Appendix 10 65

Table A10.2: Economic Cost Per Subproject (US$ Million)

Sl. No. Details Completed Financial

Cost Economic Cost

1 Goychay 116.3 104.4

2 Agdash 103.1 87.7

3 Beylagan 68.3 58.0

4 Nakchivan 246.6 221.3

5 Aghjabedi 121.1 102.6 Grand Total 655.4 574.0

Note: 1. All costs include water supply and wastewater supply components. 2. Periodical subproject costs were discounted to the Base Year (2011/2013) using the producers price index. Source: Analysis based on the data provided by project management office

E. Project Beneficiaries 15. 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 total beneficiaries in the subprojects of five towns, at 100% of total population in Year 2018, reached 265,314 for water supply and 96% (255,116) for sewerage subprojects (Table A10.3).

Table A10.3: Project Beneficiaries

Project Town

2011 2018

Total Population

Population covered by

Water supply

Population

covered by Sewerage

Total Population

Population

covered by Water supply

Population

covered by Sewerage

Beylagan 15,700 5,495 1,570 22,166 22,166 22,166 % of coverage

35% 10%

100% 100%

Agdash 31,155 9,689 6,013 40,177 40,177 40,177

% of coverage

31% 19%

100% 100%

Aghjabedi 41,034 13,131 2,872 44,105 44,105 39,695

% of coverage

32% 7%

100% 90%

Goychay 40,742 24,088 5,715 43,099 43,099 43,099

% of coverage

59% 14%

100% 100%

Nakchivan 1,08,533 86,826 27,133 1,15,767 1,15,767 1,09,979

% of coverage

80% 25%

100% 95%

Total 2,37,164 1,39,229 43,303 2,65,314 2,65,314 2,55,116 % of coverage

59% 18%

100% 96%

F. Valuing Economic Benefits 16. Water Supply Subprojects: 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 subprojects 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 liter per capita per day (lpcd) in Nakchivan and Goychay, 180 lpcd in Agdash and Beylegan and 150 lpcd in Aghjabedi (the existing coverage is 80% with 101 lpcd in Nakchivan; the existing coverage is 59.6%% with 90 lpcd in Goychay; the existing coverage is 31.1% with 19 lpcd in Agdash 35% coverage with 13 lpcd in Beylegan and 32% coverage with 16 lpcd in Aghjabedi). The beneficiaries will be 265,314 persons (about 57,000 households) by 2018. Present water consumption is 150 lpcd in Nakchivan, 90 lpcd in Goychay, 100 lpcd in Agdash. 100 lpcd in Beylagan and 60 lpcd in Aghjabedi of which 13 – 101 lpcd are provided from piped water. Thus, 49 lpcd in Nakchivan, 57 lpcd in Goychay, 81

66 Appendix 10

lpcd in Agdash, 87 lpcd in Beylagan and 44 lpcd in Aghjabedi of water is presently supplemented from other sources. The resource cost spent for 44 to 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 Nakchivan and Goychay, 180 lpcd in Agdash and Beylagan and 150 lpcd in Aghjabedi) 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 approach will be the benefit considered for incremental water.

Table A10.4: Unit Rates used for Estimating Water Supply Benefits

Project Town Non-incremental Water Incremental Water

US$/cubic metre US$/ cubic metre Goychay 6.3 10.4 Nakchivan 8.3 3.6 Agdash 5.1 4.5 Beylagan 4.8 6.2 Aghjabedi 5.8 10.9 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.

17. Sewerage Subprojects: Present FCR had included the economic analysis for sewerage subprojects in all five 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 the program benefited about 0.25 million population (57,000 households) in 2018. The benefits considered for sewerage component summarized in Table 10.5.

Table A10.5: Unit Rates used for Estimating Wastewater Benefits

Project Town

US$ / 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 Nakchivan 104.0 8.7 130.4 188.0 Agdash 104.0 8.7 130.4 180.0 Beylagan 104.0 8.7 130.4 176.0 Aghjabedi 104.0 8.7 130.4 184.0

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. 18. 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. G. Economic Cost-Benefit Analysis 19. 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

Appendix 10 67

of capital (EOCC) of 12 percent.17 The analysis was conducted at domestic prices and the discount year was taken as 2009/2011/2013 as appropriate. 20. Cost – Benefit Analysis - Main Evaluation: Table A10.6 presents the results of the main economic evaluation for the water supply and sewerage component in the project towns.

Table A10.6: Benefit - Cost Analysis ($ Million)

Note:

1. Periodical subproject costs were discounted to the Base Year (2009 for Goychay, 2011 for Agdash and Beylagan; and 2013 for Nakchivan and Aghjabedi) using the producers price index (PPI).

2. 12% discount rate is used to arrive ENPV to the base year.

21. Economic Internal Rate of Return (EIRR). The benefits streams from resource cost savings are compared with the cost streams of capital and operations and maintenance 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 EIRRs exceeding the EOCC for the combined investment in the five project towns (12.9% for Goychay, 15.7% for Nakchivan, 14.6 % for Agdash, 14.9% for Beylegan and 24.7% for Aghijabedi), Table A10.7 indicates EIRRs at base and under adverse economic conditions. Economic returns in the sensitivity analysis are robust for increase in O&M cost scenario, whereas more sensitive to reduction in benefits scenarios. Subproject wise cost – benefit flow is provided in Table A10.9.

Table A10.7: EIRR and Sensitivity Analysis ($ million) Particulars Goychay WS + Wastewater Nakchivan 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 Beylegon 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%

17 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.

Goychy Agdash Beylegan Aghjabedi Sub Total

(Azersu)

Nakchivan

(SAWMC)

Total

Present Value of Benefits 1, 2

Water Supply Sub Projects

Non-Incremental 26.9 31.0 17.1 23.9 98.9 77.7 176.5

Incremental 17.4 22.2 23.0 81.9 144.5 28.6 173.1

Sewerage Sub Projects

Earning loss during sick days 2.1 5.0 2.8 0.2 10.1 2.6 12.7

Annual maintenance of septic tank cost 3.5 4.0 2.3 5.5 15.3 11.2 26.5

Annual maintenance cost for drainage overflow0.3 0.3 0.2 0.3 1.1 0.4 1.5

WWTP benefits 5.5 3.9 2.1 9.9 21.4 12.5 33.9

Total Benefits 55.6 66.4 47.5 121.8 291.3 133.1 424.4

Present Value of Costs1

Construction cost 49.1 51.3 35.4 56.1 191.9 103.2 295.1

O&M 3.2 5.2 3.8 6.7 18.9 3.6 22.5

Total Costs 52.3 56.5 39.2 62.8 210.9 106.8 317.6

Benefit – Cost Ratio 1.1 1.2 1.2 1.9 1.4 1.2 1.3

DetailsWater supply & waste water sub projects

Note: Azersu Joint Stock Company (Azersu) is the Executing Agency (EA) for Goychay, Agdash, Beylagan and Aghjabedi and

the State Amelioration and Water Management Committee (SAWMC) is the EA for Nakchivan.

68 Appendix 10

Particulars Aghjabedi WS + Wastewater

EIRR ENPV SV

Base Case 24.7% 49.312

O&M Cost (+20%) 24.4% 47.971 754%

Benefit (- 20%) 19.1% 26.893 45%

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 subprojects were completed. ( ) = Negative; EIRR = Economic internal rate of return; ENPV = Economic net present value; SV = Switching value; WS = Water supply

22. Overall EIRR for the full program across three projects (Tranches 1 to 3) consisting of five towns is found to 15.3%. Among this, the combined EIRR for four towns managed by Azersu as EA was 15.1% and the EIRR for State Amelioration and Water Management Committee (SAWMC) managed Nakchivan was 15.7% (Table A10.8).

Table A10.8: Combined EIRR and Sensitivity Analysis - WS + Wastewater ($ million)

Particulars Azersu Towns SAWMC Town Five Program

Towns Combined EIRR ENPV EIRR ENPV EIRR ENPV

Base Case 15.1% 40.7 15.7% 29.5 15.3% 68.8

O&M Cost (+20%) 14.9% 37.7 15.6% 28.7 15.1% 65.0

Benefit (- 20%) 11.7% (4.2) 12.0% (0.3) 11.7% (5.8)

Note: 1.For combined analysis, all cost and benefit flow for all five program towns were converted to 2011 base price. 2.Azersu as EA covered four towns (Beylagan, Agdash, Aghjabedi and Goychay); and SAWMC covered Nakchivan

as EA. ( ) = Negative; EIRR = economic internal rate of return; ENPV = economic net present value; SV = Switching value; WS = water supply

Appendix 10 69

Table A10.9: Sub Project wise Cost - Benefit Analysis ($ Million)

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

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

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 9.1 - - -9.1

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 43.8 - - -43.8

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 46.8 1.5 23.3 -25.0

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 2.5 1.5 23.5 19.5

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 0.4 1.5 23.8 21.8

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 - 1.5 25.8 24.3

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 - 1.5 26.1 24.6

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 - 1.5 26.4 24.8

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 - 1.6 26.6 25.1

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 - 1.6 26.9 25.3

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 - 1.6 27.2 25.6

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 - 1.6 27.5 25.8

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 2.6 1.6 27.7 23.5

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 - 1.6 28.0 26.4

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 - 1.7 28.3 26.6

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 - 1.7 28.6 26.9

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 - 1.7 28.8 27.2

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 - 1.7 29.1 27.4

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 - 1.7 29.3 27.6

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 - 1.7 29.5 27.8

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 - 1.7 29.8 28.1

2037 - 1.7 30.0 28.3

2038 - 1.7 30.2 28.5

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 17.1 246.4 169.9 105.2 30.5 516.2 380.5

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 56.1 6.7 112.1 49.3

EIRR % 12.9% 15.7% 14.6% 14.9% 24.7%

Beylegan AhijabediGoychayYear Nakchivan Agdash

70 Appendix 10

H. Conclusion

23. The main evaluation has shown that all water supply and wastewater subprojects in five program towns were 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 subprojects economically viable under the base case and the O&M increase scenarios. However, for decrease in project benefit scenario, all four subprojects except Ahijabedi, are found with EIRRs less than the EOCC of 12%.

24. In comparison to the economic analysis results for the combined water supply and wastewater subprojects during the loan processing stage (2009/2011/2013), the EIRR have reduced at this PCR stage for four project towns, except Aghijabedi. This reduction in viability results can be assigned to the following reasons, as indicated in Table A10.10. Major devaluation of the local currency in 2015 and its conversion to US$ will not reflect the cost overrun impact correctly and hence not appropriate to consider cost overrun in the efficiency analysis. Among the towns, the performance of SAWMC managed Nakchivan town was found to be better in terms of higher EIRR and without time overrun for network contracts.

(i) Cancellation of three wastewater treatment plants in Agdash, Aghjabedi, and Beylagan during the loan implementation period and subsequently implementing the same after the loan closure, resulting in reduction of project benefits;

(ii) Changes in project coverage during the implementation stage; (iii) FCR stage analysis for all subprojects in five towns have considered the full

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

(iv) Time overrun ranging 19 to 33 months, except for Nakchivan for water supply and sewer network; and 9 to 19 months for WWTPs.

Table A10.10: Comparison of Water Supply & Wastewater Subprojects Performance

during Implementation Stage

Project Town

Sub projects under 3 Tranches

% of beneficiaries’

coverage

Actual project cost disbursement

(2011 price) - $ Million2

Time overrun

at completion stage (Months)

ENPV at 12%

discount (Comple

tion stage)

EIRR % 4.5

At Appraisal

stage

Dropped at

completion1

At Apprai

sal (2011)

At Comple

tion (2018)

At appraisal

stage

price

At Completion year price3

Processing stage

Completion stage

Agdash

WS 31% 100%

108.1 99.2 32 9.9 15.1% 14.6% Sewerage

WWTP Dropped

19% 100%

Beylagan

WS 35% 100%

83.6 67.6 32 8.2 15.5% 14.9% Sewerage

WWTP dropped

10% 100%

Nakchivan WS 80% 100%

248.0 249.4 0 29.5 16.4% 15.7% Sewerage 25% 95%

Aghjabedi

WS 32% 100%

131.3 120.3 33 49.3 21.5% 24.7% Sewerage

WWTP Dropped

7% 90%

Goychay WS 59% 100%

129.1 110.8 19 3.7 17.8% 12.9% Sewerage 14% 100%

Appendix 10 71

Notes: 1. `Two Wastewater 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. Also, WWTP in Aghijabedi in Tranche 3 also cancelled. These three 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 and Aghijabedi), all these costs were converted to 2011 price, using the producers price index (PPI).

3. 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 US$ for analysis had underestimated 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 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 disbursement, implementation period, changes in project beneficiaries etc. were incorporated in the analysis.

5. Spill over expenditures across for different tranches for the five sub projects were considered together in a comprehensive manner. Accordingly, all the five subprojects had considered the investments across three tranches as applicable along with full economic benefits.

I. Distribution of Project Effects and Poverty Reduction Impact 25. Distribution 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 five project towns together is presented below. 26. The analysis shows that the poverty impact ratio (PIR) for the sub-projects in five towns ranged from 9.5% (Aghijabedi) to 11.8% (Nakchivan), 12.2% (Beylegan) and 12.4% (Agdash) and 13.0% (Goychay). Considering the present below poverty line (BPL) for Azerbaijan population at 5.9%, the program contributed to the poor considerably.

72 Appendix 11

FINANCIAL ANALYSIS A. Introduction 1. Under the Water Supply and Sanitation Investment Program in Azerbaijan the investment was made in water supply and sewerage sectors in five secondary towns (Agdash, Beylagan, Nakchivan, Aghjabedi and Goychay). The program was structured under a multitranche financing facility (MFF) in four tranches. At this Facility Completion Report (FCR) stage, all the water supply and sewerage subprojects are completed. However, (i) the coverage of the network development component in the Goychay water supply and sewerage subproject was reduced and the wastewater treatment plant (WWTP) not included in Tranche 1 and these left out components were completed in Tranche 2; (ii) only a part of the city water supply and wastewater network was covered under Tranche 1 for Nakchivan and under Tranche 2 and 3, remaining network including two peri-urban towns (Shikhmahmud and Shakarabad) and WWTP were implemented; (iii) water supply and wastewater network in Agdash was completed in Tranches 2 and 3, except the WWTP; (iv) Beylagan network was completed in Tranche 2 itself, except the WWTP; and (v) except WWTP, all the water supply and wastewater network were completed in Aghjabedi in the Tranche 3 itself. Two dropped WWTPs for Agdash and Beylagan were considered under Tranche 4. But Tranche 4 was not availed by the Azerbaijan government due to its national issues. However, the government of Azerbaijan has started implementing the two dropped WWTPs in Agdash and Beylagan and the cancelled WWTP in Aghijabedi from its national sources, after the loan closure. With this background, the financial analysis for the present FCR was conducted for water supply and sewer subprojects in the five project towns in accordance with the ADB’s Guidelines ‘Financial Management and Analysis of Projects (2005)’. B. Analysis at Appraisal 2. The financial analysis prepared at the appraisal stages (2009 for Tranche 1, 2011 for Tranche 2 and 2013 for Tranche 3) 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. 3. Financial projections were made for incremental revenues and expenditures over 25 years of analysis period from base years with 22 years of operation for revenue earning subprojects such as water supply and sewerage. The financial projection tariff revision assumed an increase of 25% to 55% every 2 years (25% for Aghijabedi, Agdash, and Beylagan, 40% for Nakchivan 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 for all the sub projects (0.87% FIRR against the weighted average cost of capital [WACC] of 0.81% for Aghijabedi, 1.84% FIRR against the WACC of 1.2% for Agdash, 4.7% FIRR for Goychay and 6% FIRR for Nakchivan against the WACC of 2.47%). However, this assessment was based on the assumption of viability gap funding availability for all project towns during the initial operation period of about 5–6 years to maintain the cash-flow in positive. The major assumptions include: (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; and (ii) foreign inflation at 2.5% annually. The financial plan considered 80% from ADB loan and 20% as government contribution. 4. Analysis indicate that the subprojects in the project towns were financially viable on two conditions: (i) required periodic tariff increases (herein assumed every 2 years); and (ii) tariff subsidization based on cost recovery such as consumer affordability. For these conditions to be

Appendix 11 73

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 (executing agency (EA) for Beylagan, Agdash, Goychay, and Aghjabedi), State Amelioration and Water Management Agency (SAWMAC), the EA for Nakchivan and the government of Azerbaijan (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. 5. Based on the affordability analysis, proposed tariff increases for subprojects in Goychay, Agdash, and Beylagan required to satisfy viability parameters would eventually exceed consumer affordability, specifically during the first 5–7 years of debt payments. During such period, subsidies (i.e., viability gap funding) was 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 for the difference was the larger customer base in Nakchivan relative to the system type, which is also cheaper to operate. C. Analysis at Completion 6. Reassessment of the financial analysis has been conducted at facility completion for the water supply and sewer subprojects under all three tranches. 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. 7. The financial costs included base costs, consultancy, project implementation, project monitoring, financing charges, taxes & duties, and excluded price contingency. Physical contingency is not considered as the project cost is completed actual cost. Using the consumer price index (WPI) for non-food commodities group, the year-wise actual disbursement was discounted to the base years. Refer Table A11.1 for actual cost and discounted cost details. 8. Against the target cost at processing periods of $592.8 million, the expenditure during implementation was found to be at $661.4 million at current prices, witnessing about a 12% cost overrun and this was reduced to 11% 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 the US dollar and conversion of local currency to US dollar for analysis purpose together had reduced the impact of cost overrun.

74 Appendix 11

Table A11.1: Distribution of Project Cost ($ Million)

Note: 4. Two Wastewater 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. Also, WWTP in Aghijabedi in Tranche 3 also cancelled. These three WTPs are being implemented with national budget source during 2019-2020, after the loan closure.

5. Periodical subproject costs were discounted to the Base Year (2009 for Goychay, 2011 for Agdash and Beylegan; and 2013 for Nakchivan and Aghijabedi) using the producers price index (PPI).

Source: Analysis based on the data provided by PMUs

9. 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 12.7%. 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 2 years at processing stage was revised to 25% increase in every 2 years in FCR analysis. This tariff revision had confirmed the affordability of water and sewer tariff during the analysis period for all project towns (Table A11.2). The tariff was applied on the number of connections for assessing the incremental revenue. WACC was assessed at 2.1% considering the share of ADB loan 75% at 5.03% rate and Government of Azerbaijan (GoA) with 25% at 6.5% interest. Local inflation considered for WACC determination is 5.5% and the international inflation at 2.5% (Table A11.3). However, estimating the O&M expenditure, the actual local inflation growth observed up to 2018 and 3%

Target

at

Processi

ng

Stage

% Disburs

hed

(Current

Price)

% Disburs

hed

(2009

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2011

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2011

Price)

%

2009 10.1 0.1 0.0 7.8% 0.0 0.0%

2010 32.0 0.2 0.1 24.8% 0.1 0.1%

2011 19.9 0.2 9.0 15.4% 9.2 7.9%

2012 39.7 30.8% 14.3 30.8% 15.2 13.0% 57.1 62.8% 11.6 11.3% 12.0 11.6% 51.4 61.3% 4.8 7.2% 5.0 7.3%

2013 18.1 14.0% 27.8 14.0% 28.8 24.8% 25.4 28.0% 14.3 13.9% 14.5 14.0% 23.1 27.5% 13.0 19.6% 13.2 19.3%

2014 3.7 2.9% 28.9 2.9% 30.9 26.6% 3.3 3.7% 13.1 12.7% 13.6 13.2% 3.7 4.4% 17.9 26.9% 18.7 27.4%

2015 4.2 3.2% 11.5 3.2% 12.2 10.5% 3.7 4.1% 23.3 22.7% 24.1 23.4% 4.2 5.0% 11.6 17.5% 12.0 17.6%

2016 1.5 1.1% 8.1 1.1% 8.2 7.1% 1.3 1.4% 17.9 17.5% 17.7 17.2% 1.5 1.7% 13.5 20.4% 13.4 19.6%

2017 - 0.0% 12.0 0.0% 11.8 10.1% - 0.0% 16.3 15.9% 15.6 15.1% - 0.0% 5.5 8.3% 5.3 7.7%

2018 - 0.0% 0.0% 0.0 0.0% - 0.0% 1.8 1.7% 1.6 1.6% - 0.0% 0.1 0.1% 0.0 0.1%

2019 3.6 3.6% 3.3 3.2% 0.6 0.9%

2020 0.6 0.6% 0.6 0.6% 0.1 0.2%

Total 129.1 100.0% 111.8 100.0% 116.3 100.0% 90.8 100.0% 102.5 100% 103.1 100% 83.9 100.0% 66.5 100.0% 68.3 100.0%

Year Goychay Agdash Belygon

Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2013

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2013

Price)

% Target % Disburs

hed

(Current

Price)

% Disburs

hed

(2009 /

2011/20

13

Price)

%

2009 0.0 0.0% 0.000 0.0% 10.1 1.7% - 0.0% - 0.0%

2010 4.5 1.8% 4.465 1.8% 32.0 5.4% 4.6 0.7% 4.6 0.7%

2011 16.8 6.8% 16.573 6.7% 19.9 3.4% 25.8 3.9% 25.8 3.9%

2012 103.1 65.4% 38.0 15.4% 38.8 15.7% 12.6% 251.3 42.4% 68.7 10.4% 70.9 10.8%

2013 45.2 28.7% 66.2 26.8% 66.2 26.9% 26.9% 111.8 18.9% 121.4 18.3% 122.6 18.7%

2014 3.7 2.4% 22.3 9.0% 23.0 9.3% 39.4 30.0% 17.6% 53.9 9.1% 82.2 12.4% 86.3 13.2%

2015 4.2 2.6% 19.3 7.8% 19.7 8.0% 91.9 70.0% - - 15.6% 108.2 18.2% 65.7 9.9% 68.1 10.4%

2016 1.5 0.9% 63.8 25.8% 62.4 25.3% 11.3 8.4% 10.8 18.4% 5.7 1.0% 114.6 17.3% 112.5 17.2%

2017 - 0.0% 11.0 4.4% 10.4 4.2% - 55.8 41.8% 51.7 7.5% - 0.0% 100.6 15.2% 94.7 14.5%

2018 - 0.0% 5.5 2.2% 4.9 2.0% - 62.7 46.9% 55.2 1.4% - 0.0% 70.0 10.6% 61.8 9.4%

2019 3.3 2.5% 3.0 - 0.0% 7.0 1.1% 6.9 1.1%

2020 0.6 0.4% 0.5 - 0.0% 1.2 0.2% 1.2 0.2%

Total 157.6 100.0% 247.3 100% 246.6 100% 131.3 100.0% 133.7 100.0% 121.1 100.0% 592.8 100.0% 661.8 100.0% 655.4 100.0%

Total Year AghjabediNakchivan

Appendix 11 75

annual growth beyond that and 2.5% annual growth for foreign inflation were considered in the completion analysis. 10. One of the major changes during the implementation period was the devaluation of Azerbaijan Manat (AZN). From the strong position of AZN0.80 to $1 in 2011 to AZN1.689 to $1 in 2017. This had affected the analysis which was based on $ unit.

Table A11.2: Tariff Affordability

Particulars

Agdash Beylagan Goychay Nakchivan Aghjabedi

2011 2017 2011 2017 2011 2017 2011 2017 2013 2017

Persons per Household

4.5 4.5 4.4 4.4 5.1 5.1 4.7 4.7 4.6 4.6

Consumption, lpcd 140.0 163.0 50.0 200.0 150.0 200.0 150.0 200.0 90.0 150.0

Average consumption /month, m3

18.9 22.0 6.6 26.4 23.0 30.6 21.2 28.2 12.4 20.7

Average household income/month, AZN

1659.0 3676.7 1622.1 3595.0 1880.2 4167.0 1732.7 3840.2 1864.0 3758.4

Tariff (water + sewer)/m3, AZN

0.4 0.5 0.4 0.5 0.4 0.5 0.4 0.5 0.4 0.5

Average HH Bill for water & sewer, AZN

6.8 11.1 2.4 13.4 8.3 15.5 7.6 14.3 4.5 10.5

Income spent for water & sewer (%)

0.4% 0.3% 0.1% 0.4% 0.4% 0.4% 0.4% 0.4% 0.2% 0.3%

AZN = Azerbaijan manat, HH = household, lpcd = liters per capita per day, , m3 = cubic meter. 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 12.7%.

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 A11.3: Weighted Average Cost of Capital

$ Million

Capital % Cost of Weighted Inflation WACC

Particulars Total Capital Capital Rate Real

ADB 300.0 73.2% 5.0% 3.7% 2.5% 2.5%

Government 110.0 26.8% 6.5% 1.7% 5.5% 1.0%

Total 410.0 100% 5.4% 2.1%

WACC = weighted average cost of capital Source: Asian Development Bank Estimates

D. Revaluation at Completion 11. In 2012 it was agreed that all loan proceeds and counterpart funding by Government of Azerbaijan will be transferred to AZERSU and SAWMC, the two EAs, as grants and hence no debt repayment obligations for EAs. But, even without the debt obligation requirements, FIRRs at completion stage was found to be negative for all five project towns with negative net present values assessed at WACC. However, the incremental revenue was projected to cover the incremental operation and maintenance costs in respect of Nakchivan. In case of other towns, the incremental revenues were not enough to meet the operation and maintenance cost for a

76 Appendix 11

short period during the initial years of operation (2017–2021). The currency devaluation and the conversion of tariff into US dollar, had resulted in lesser sales revenue in US dollar 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). 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 A11.4). 12. Hence, against the results at appraisal stage (0.87% FIRR for Aghijabedi against the WACC of 0.81%, 1.84% FIRR for Agdash against the WACC of 1.2%, 4.7% FIRR for Goychay and 6% FIRR for Nakchivan against the WACC of 2.47%), the FIRRs at completion stage were negative for all five program towns. This is mainly because viability gap funding was considered for all subprojects at the appraisal stage to make the annual net cash flow always positive and this was not considered in the present FCR analysis. Also, there are changes in tariff rates and their growth rates used for projection. These together have resulted in the FIRRs during the appraisal and completion stage. Also, the major currency devaluation for local currency in 2015 and 2016 and the conversion of local currency to US dollar for analysis had underestimated 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.

Table A11.4: Sub Projects FIRR

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

E. Sustainability 13. 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 other expenditures, this tariff revision requirement to enhance the revenue will be 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. The O&M cost recovery analysis results presented in Table A11.5 indicates that all project towns, except Nakchivan, will face full O&M recovery issues during the initial operation period. However, as discussed earlier, this problem will likely due to the local currency devaluation and its conversion to US$ unit for analysis purpose and may not be a real

FIRR FNPV SV FIRR FNPV SV FIRR FNPV SV FIRR FNPV SV FIRR FNPV SV

Base Case -9.1% (88) -5.2% (152) -5.3% (32) -15.4% (60) -3.8% (61)

O&M Cost +20% -10.2% (94) 203% -5.5% (158) 420% -6.8% (36) 99% NR (63) NR -4.5% (66) 176%

Revenue (-) 20% -11.5% (95) 97% -6.8% (171) 89% -7.8% (37) 59% NR (64) NR -6.1% (76) 53%

Goychy Nakchivan Agdash Belegan AghjabediDetails

Appendix 11 77

recovery issue for the initial operation years. Thus, it can be concluded that the proposed tariff structure can cover the incremental O&M cost during the analysis period.

Table A11.5: 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

Nakchivan 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

Aghiabedi 34% 48% 247% 215% 3.0 2.1 0.4 0.5 Note: Azerbaijan manat devaluation against US dollar and the conversion of tariff rates in US dollar, had resulted lesser sales revenue. That was the main reason for the negative O&M recovery during the initial period (2011–2017). Source: Asian Development Bank estimates. F. Conclusion 14. 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 2 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 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.