Report and Recommendation of the President to the Board of Directors

Project Number: 50347-002 September 2018

Proposed Grant Republic of Tajikistan: Dushanbe Water Supply and Sanitation Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 22 August 2018)

ABBREVIATIONS ADB – Asian Development Bank DMA – district metering area DVK – State Unitary Enterprise Dushanbevodokanal EMP – environmental management plan IEE – initial environmental examination km – kilometer LARP – land acquisition and resettlement plan m3 – cubic meter NRW – nonrevenue water O&M – operation and maintenance PAM – project administration manual PIG – project implementation group SCADA – supervisory control and data acquisition SPS – Safeguard Policy Statement WSS – water supply and sanitation WTP – water treatment plant

NOTE

In this report, “$” refers to United States dollars unless otherwise stated.

Currency unit – somoni (TJS) TJS1.00 = $0.1061188106

$1.00 = TJS 9.4234

Vice-President Wencai Zhang, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Director Yong Ye, Urban Development and Water Division, CWRD Team leader Ramola Naik Singru, Senior Urban Development Specialist, CWRD Team members Ana Paula Araujo, Environment Specialist, CWRD

Lilibeth Buenavente, Senior Operations Assistant, CWRD Minhong Fan, Procurement Specialist, Procurement, Portfolio, and Financial Management Department (PPFD) Gulsun Farosatshoeva, Senior Project Assistant, CWRD Akmal Nartayev, Senior Financial Management Specialist, PPFD Douglas Perkins, Principal Counsel, Office of the General Counsel Nathan Rive, Climate Change Specialist, CWRD Mary Alice Rosero, Social Development Specialist (Gender and Development), CWRD Rosalynn Madeleine Serafica, Development Communication Officer, Department of Communications Laxmi Sharma, Urban Development Specialist, CWRD Yukihiro Shibuya, Social Development Specialist (Safeguards), CWRD Charles Felix Simbillo, Associate Project Analyst, CWRD

Peer reviewer Alan Baird, Senior Urban Development Specialist, East Asia

Department

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

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1

B. Impact and Outcome 4

C. Outputs 4

D. Summary Cost Estimates and Financing Plan 5

E. Implementation Arrangements 6

III. DUE DILIGENCE 6

A. Technical 6

B. Economic and Financial 7

C. Governance 7

D. Poverty, Social, and Gender 8

E. Safeguards 9

F. Summary of Risk Assessment and Risk Management Plan 10

IV. ASSURANCES AND CONDITIONS 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 14

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 10072018132302447896 Generated Date: 28-Aug-2018 9:43:20 AM

1. Basic Data Project Number: 50347-002Project Name Dushanbe Water Supply and Sanitation

Project Department/Division

CWRD/CWUW

Country Tajikistan Executing Agency State Executive Authority of Dushanbe CityBorrower Republic of Tajikistan

2. Sector Subsector(s) ADB Financing ($ million)Water and other urban infrastructure and services

Urban water supply 41.18

Total 41.18

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 2: Access to economic opportunities, including jobs, made more inclusive

Environmentally sustainable growth (ESG)

Eco-efficiencyGlobal and regional transboundary environmental concernsNatural resources conservationUrban environmental improvement

Climate Change impact on the Project

Medium

ADB Financing

Adaptation ($ million) 2.08

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacity development (GCD)

Civil society participationInstitutional developmentOrganizational developmentPublic financial governance

Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areasKnowledge sharing activitiesPilot-testing innovation and learning

Partnerships (PAR) Civil society organizationsImplementationInternational finance institutions (IFI)

Private sector development (PSD)

Public sector goods and services essential for private sector development

Effective gender mainstreaming (EGM)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

NoNoYes

Urban High

SDG Goals SDG3, SDG5, SDG6, SDG11, SDG13

6. Risk Categorization: Low.

7. Safeguard Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 41.18

Sovereign Project grant: Asian Development Fund 41.18

Cofinancing 0.00

None 0.00

Counterpart 4.62

Government 4.62

Total 45.80

Kafirnigan River

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rzo

b R

iver

AB-

B-

A-

A-

A-

A-

A-

A-

A-A- A- .C-

C-

C-

A-

A-A-

A-

Kafernigan-

Connection to the City Sewage Collector

River Crossing

Drop Manhole

End Point of Existing Design

Start Point Of South Sewage Collector

for Rehabilitation

BahoriReservoir

Rehabilitation New Reservoir

Riverbank Reinforcement

Rehabilitation of Wells

Reconstruction of Main Facilities

Khovaron Pumping StationRehabilitation

Wall Construction

A- ,

A- ,

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AB- ,

Total ,

Area Population CapDensity Cap /

Hectares

SizeHectares

Pilot DMAs with water supply network rehabilitation

Area Population CapDensity Cap /

Hectares

Total , ,

Overall statistics of south collector catchmentSize

Hectares

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Total ,

Overall statistics of DMAs

Area Population CapDensity Cap /

Hectares

SizeHectares

kilometer

This map was produced by the cartography unit of the Asian Development Bank.

The boundaries, colors, denominations, and any other information shown on this

map do not imply, on the part of the Asian Development Bank, any judgment on the

legal status of any territory, or any endorsement or acceptance of such boundaries,

colors, denominations, or information.

N

DUSHANBE WATER SUPPLY AND SANITATION PROJECT

TAJIKISTAN

District Metering Area DMA

DMAs With Network Rehabilitation

DMAs Without Network Rehabilitation

New Transmission Mains to Shomansur District

Transmission Mains To Rudaki District

South Collector

Catchment Area for the South Collector

Boundaries are not necessarily authoritative.

Population Density Per Square Kilometer

,,

,,

Rudaki district

Sino

Fidavsi

Somoni

Shohmansur

Rudaki district

Sino

Fidavsi

Somoni

Shohmansur

DUSHANBE CITY

18-2264 ABV

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed grant to the Republic of Tajikistan for the Dushanbe Water Supply and Sanitation Project. 2. The project will support Tajikistan in (i) rehabilitating and expanding climate-resilient water supply and sanitation (WSS) infrastructure, pilot testing the establishment of district metering areas (DMAs) for nonrevenue water (NRW) management in selected districts of Dushanbe city and rehabilitation of the south sewage collector, benefitting 352,000 people;1 and (ii) developing a business model for the State Unitary Enterprise Dushanbevodokanal (DVK) to improve the sustainability of operations, including an accountability and incentive mechanism with a performance benchmarking matrix and smart management system. The project will pilot test a behavior change component for raising public awareness on water usage and conservation and the benefits of smart meters. This is the first urban sector project of the Asian Development Bank (ADB) in Tajikistan, demonstrating efficient network management with potential for scaling up citywide. It is listed in the ADB country operations business plan for Tajikistan, 2018–2020.2

II. THE PROJECT A. Rationale 3. Dushanbe, the capital city and economic center of Tajikistan, had an official population of 820,000 in 2016 but almost 1 million unofficially because of increased migration from rural areas and a significant number of returning migrants. Urban migration has added stress to the aging urban infrastructure and led to unplanned spatial expansion of the city, especially in the southeast, with low density patterns.3 This has caused environmental degradation, resulting in high coping costs, poor livability for citizens, and limited economic growth prospects.4 4. Core problem. The WSS systems in Dushanbe, built under the former Soviet Union, have deteriorated because of age, lack of continued capital investment, and inadequate operation and maintenance (O&M). Most of the population of Dushanbe has access to piped water supplied by DVK, except for the new development areas in the southeast of the city. The water system is characterized by intermittent operations (4–8 hours per day), high NRW, and low water pressure and energy efficiency. Disrupted supply conditions create daily shocks that damage the network and risks of wastewater infiltration. The expanding urban areas are not connected to the water and sewerage systems. Lack of public understanding of water conservation, combined with low tariffs, has led to uncontrolled water consumption and wastage. Water consumption is high at 330

1 About one-third of the city’s population (352,000 people) live in the 5,700-hectare catchment area of the south

sewage collector. 2 ADB. 2017. Country Operations Business Plan: Tajikistan, 2018–2020. Manila. Transaction technical assistance of

$650,000 from the ADB Technical Assistance Special Fund (TASF 6) and $550,000 from the Cities Development Initiative for Asia prepared the project.

3 ADB. 2016. Country Partnership Strategy: Tajikistan, 2016–2020. Manila. 4 Oxfam. 2016. Development Impact Bond for Ensuring Sustained Improvements to Water and Sanitation Services in

Tajikistan. Presentation by J. Parkinson. Zurich. 26 September. The average per capita economic impact of inadequate WSS service is about $35.00 per person/year, of which $25.00 per person/year is the coping cost for not improving water supply, about $3.00 per person/year is related to waterborne diseases attributable to poor water supply, $4.00 per person/year is attributable to poor sanitation, and $2.00 per person/year is related to contamination of water resources resulting from poor sanitation; and M. Fay, R.I. Block, and J. Ebinger. 2010. Adapting to Climate Change in Eastern Europe and Central Asia. Washington, DC: World Bank; and ADB. 2018. Dushanbe Urban Water Supply and Sanitation Project. Consultant’s report. Manila (TA9407-TAJ).

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liters per capita per day.5 Poor water quality and frequent water contamination have resulted in high incidences of diarrhea in children aged 6–11 months and diarrhea-related deaths among children aged 1–5 years. The incidence of ascariasis in Shohmansur district increased from 34 cases in 2015 to 53 in 2016.6 5. Inadequate and inefficient water supply and sanitation. The WSS system is described below:

(i) Infrastructure. Water in Dushanbe is supplied from four water treatment plants (WTPs) in each quadrant of the city, with a total capacity of 520,000 cubic meters per day (m3/d). Napornaya and Samotechnaya WTPs in the north (capacity of 204,000 m3/d) use surface water sourced from the River Varzob 16 kilometers (km) upstream from the city. The groundwater treatment plant in the southeast of the city (Kafernigan I) was commissioned in 1972 and the Southwest WTP was built in 1977. Both rely on groundwater abstraction. The centralized water supply system was built in 1932 and extended in the 1970s.

(ii) Operation and maintenance. The water supply coverage in Dushanbe is 83%, but its service quality and reliability are poor. NRW is expected to be more than 60% because of high physical losses from the deteriorated infrastructure, high commercial losses, and poor operational management.7 High levels of NRW lead to low levels of business efficiency. About 187,000 customers are registered, of which only 76,500 are metered—limiting the cost recovery, user charges, and sustainability of operations.

(iii) Institutional management. DVK cannot cover its operating or capital costs because of low tariffs, inefficient operations, and high debt servicing of loans in foreign currency. Skilled technical staff are lacking in DVK for technical, procurement, financial management, and utility management because of high turnover. DVK needs adequate business planning and a competitive incentive structure to become viable.

(iv) Finance. Investment is inadequate for capital and operational expenditure because of limited municipal revenue, with nominal tariffs, limited metering, low billing and collection efficiency, and high costs caused by operating inefficiencies. Energy cost is a significant part of operational expenditure. Until October 2016, tariffs were calculated per person based on an estimated household size of four persons, not volumetric consumption, leading to excessive water consumption and wastage. The 2017 combined tariff for 1.0 m3 of water supply and wastewater is low at $0.05-$0.07 per household and $0.57 for commercial organizations.8 The implementation of the tariff adjustments and universal metering are essential for the financial sustainability of DVK.

5 ADB. 2016. Asian Water Development Outlook: Strengthening Water Security in Asia and the Pacific. Manila. 6 Ascariasis is a disease where the source of infection is from objects that have been contaminated with fecal matter

containing eggs. Transmission comes through overflow of wastewater into crop fields. ADB. 2018. Dushanbe Urban Water Supply and Sanitation Project. Consultant’s report. Manila (TA9407-TAJ).

7 ADB. 2010. The Issues and Challenges of Reducing Non-Revenue Water. Manila. NRW is the difference between the volume of water put into a water distribution system and the volume billed to customers. NRW has three components: (i) physical losses–leakage from all parts of the system and overflows at the utility’s reservoirs; (ii) commercial losses—under-registration of customer meters, data handling errors, and theft of water in various forms; and (iii) unbilled authorized consumption—water used by the utility for operational purposes, water used for firefighting, and water provided free to certain consumer groups.

8 Decree of the Department for Anti-Monopoly Policy No. 52 dated 29 June 2016.

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6. Ongoing work. The World Bank is supporting investments in the north of the city, including improvement of the Samotechnaya WTP with a design capacity of 280,000 m3/d.9 The World Bank project will introduce rapid gravity filters and re-chlorination systems to improve water quality. It has supported the installation of bulk meters and 76,500 household meters. A tariff study is ongoing. ADB will continue coordination with the World Bank. 7. Sanitation. Dushanbe has one sewerage network and wastewater treatment plant (WWTP) built in the 1970s, which has undergone upgrades with the replacement of pumping units and rehabilitation of sedimentation tanks. The sewerage system is separate, without storm water entry, and operates entirely under gravity conditions. However, it has numerous overflows to water bodies and agricultural land because of a design flaw in the south sewage collector. DVK estimates that 70% of the population is connected to the sewerage system and the remainder uses septic tanks. Wastewater undergoes only basic physical treatment through primary settlement. Although the WWTP has both physical and biological facilities, only the physical facilities are working.10 8. Climate change vulnerability. Tajikistan is the most climate-vulnerable country in Central Asia and the second least able to adapt (footnote 4). Its water security score fell from 2013 to 2016 (footnote 5), raising the need for efficient use of water. Climate change adaptation needs for the water supply sector include reducing surface water reliance by diversifying sources to improve water security, NRW reduction, and increased efficiency in O&M. 9. Alignment with country strategy. The project is aligned with the National Development Strategy 2030, which highlights improving the quality of life in urban areas through rehabilitation of WSS systems and expansion of network, water supply reforms, and strengthening institutional development toward efficient, transparent management and financial control by introducing modern information technology.11 It also complies with the legal framework for the water sector based on the Water Code (2000, amended 2012) and the draft Law on Drinking Water and Sanitation. The draft law, expected to be approved by Parliament in 2018, foresees budgetary and user tariffs as financing sources and proposes privileges and benefits for providers of drinking water and sanitation systems. The law provides guarantees on the safety and quality of water supply and the protection of water sources through the establishment of sanitary protection zones. The project advances the ADB Water Operational Plan, 2011–2020 and the concept of livable cities—an operational priority of the ADB Urban Operational Plan, 2012–2020 and Strategy 2030.12 10. Value added by ADB assistance. The following features provide ADB value addition:

(i) Project design and innovation. The ADB intervention initiated innovative design features such as (a) pilot testing a systematic DMA approach for NRW management; (b) installing supervisory control and data acquisition (SCADA) for new network management practices, including active leak detection; and

9 World Bank. 2017. Tajikistan - Second Dushanbe Water Supply Project: P118196 - Implementation Status Results

Report: Sequence 11. Washington, DC. 10 The government is discussing the rehabilitation of the WWTP with the World Bank. 11 Government of Tajikistan. 2016. National Development Strategy of the Republic of Tajikistan for the Period up to

2030. Dushanbe. 12 ADB. 2011. Water Operational Plan, 2011–2020. Manila; ADB. 2013. Urban Operational Plan, 2012–2020. Manila;

and ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila

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(c) installing flow meters for DMAs and smart meters for household service connections for optimized water consumption and improved billing and collection.

(ii) Institutional development. ADB is introducing a holistic approach for ensuring the sustainability of the investments and operations through the business plan for DVK. The project will introduce international best practice through an incentive and accountability mechanism, with a performance benchmarking matrix. To ensure project ownership and the retention of skilled staff after the project, staff for the project implementation unit will be deployed by DVK and provided with an incentive structure.

(iii) Operational efficiency and financial sustainability. ADB is enabling integration of the customer database with the billing, collection, accounting, and reporting computerized systems. The provision of upgraded software and training will improve the billing and collection efficiency of DVK and reduce NRW, as unbilled consumption will decrease.

(iv) Behavior change and consumer orientation. The project includes a behavior change and communication plan, aimed at demand-side management, to promote the new service level and its impact on health, efficient water usage, and awareness of the benefits of metering and billing among stakeholders. The project will strengthen DVK communications and the media team’s capacity to manage customer relations, improve service standards, establish communication protocol, and expand the customer response units to bolster customer trust.

(v) Climate change resilience. The project will enhance climate change resilience through flood risk management, protection of groundwater well fields, and improved drainage. It will enable an overall decrease in the volume of water abstracted from groundwater aquifers. It will also reduce energy demand, contributing to climate mitigation and reducing the coping cost incurred by citizens.

11. Lessons learned. Based on experience from completed ADB-funded projects, lessons adopted for the project include (i) aligning the project preparation and implementation schedule with the government’s approval procedures, (ii) minimizing the number of procurement packages, and (iii) using advance action for the detailed engineering design to ensure procurement readiness. The project design incorporates these lessons with a limited number of procurement packages and adequate project implementation support. B. Impact and Outcome 12. The project is aligned with the following impacts: quality of life, health, urban resilience, and economic growth in Dushanbe improved and universal access to safe and affordable drinking water by 2030. The project will have the following outcome: inclusive and sustainable access to safe and resilient WSS services in Dushanbe city improved.13 C. Outputs 13. Output 1: Climate-resilient water supply and sanitation infrastructure rehabilitated and expanded. This output will be delivered through (i) rehabilitating 17 wells, 22 pumps and second stage pump stations, water metering, chlorination, and other facilities at Kafernigan I, including the installation of a SCADA system; (ii) reducing NRW through the rehabilitation of 17.2 km of transmission main, the establishment of 18 DMAs: with the installation of 42 bulk meters and 5,220 smart meters, and the improvement of 57.5 km of distributional network in six

13 The design and monitoring framework is in Appendix 1.

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DMAs; (iii) increasing the storage capacity to 4,500 m3; and (iv) rehabilitating the south sewage collector of 9.8 km. 14. Output 2: Sustainable business model and institutional capacity developed. This output will be delivered through prioritized institutional strengthening actions: (i) a business model for DVK developed that covers technical, operational, institutional, and organizational restructuring; and human resources management; (ii) an accountability and incentive mechanism established, with a performance benchmarking matrix; (iii) a smart management system enhanced for operational efficiency; asset management; and seamless integration of the customer database, billing, collection, accounting, and reporting; (iv) an NRW management system operationalized, with the installation of SCADA for new network management practices for the 18 DMAs equipped with flow meters and smart meters for household service connections, active leak detection, and calibration of meters; (v) institutional, technical, and financial capacity improved; and (vi) customer care service standards developed and behavior change communication on water conservation and smart metering conducted. D. Summary Cost Estimates and Financing Plan 15. The project is estimated to cost $45.8 million (Table 1). Detailed cost estimates by expenditure category and by financier are included in the project administration manual (PAM). 14

Table 1: Summary Cost Estimates ($ million)

Item Amounta

A. Base Costa 1. Rehabilitated and expanded climate-resilient water supply and sanitation facilities 35.2 2. Sustainable business model and institutional capacity developed 4.8

Subtotal (A)b 40.0 B. Contingenciesc 5.8 Total (A+B) 45.8 a Includes taxes and duties of $4.4 million. The government will finance all taxes and duties of $4.4 million through

exemption. b In mid-2018 prices as of 29 June 2018. c Physical contingencies computed at 10% for civil works, equipment, and design and supervision. Price

contingencies computed at 1.6% on foreign exchange costs and 7% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

Source: Asian Development Bank estimates.

16. The government has requested a grant not exceeding $41.18 million from ADB’s Special Funds resources (Asian Development Fund) to help finance the project. 17. The summary financing plan is in Table 2. ADB will finance the expenditures in relation to civil works, equipment, consulting services, and part of the incremental administrative expenses. The government will provide counterpart funding of $4.62 million equivalent to cover taxes and duties; land acquisition and resettlement costs; part of the incremental administrative expenses, including the staff salaries for the project implementation group (PIG) and provision of office space; and other miscellaneous costs. ADB will not finance taxes and duties.

14 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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Table 2: Summary Financing Plan

Source Amount

($ million) Share of Total

(%) Asian Development Bank 41.18 90

Special Funds resources (Asian Development Fund grant) 41.18 90

Government 4.62 10 Total 45.80 100

Source: Asian Development Bank estimates.

18. Climate adaptation is estimated to cost $2.08 million. ADB will finance 100% of adaptation costs. Details are in the PAM (footnote 14).

E. Implementation Arrangements 19. The project will be under Ministry of Finance oversight. The executing agency will be the State Executive Authority of Dushanbe City, and the implementing agency will be DVK, under which a project implementation unit (PIG) was established on 19 July 2018 through decree No. 452. The implementing agency, supported by PIG will be responsible for overall project coordination and management. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 14).

Table 3: Implementation Arrangements Aspects Arrangements Implementation period November 2018 ̶September 2024 Estimated completion date 30 September 2024 Estimated grant closing date 31 March 2025 Management

(i) Oversight body Ministry of Finance (ii) Executing agency State Executive Authority of Dushanbe City (iii) Key implementing agency State Unitary Enterprise Dushanbevodokanal (iv) Implementation unit Project implementation group, 9 staff

Procurement Open competitive bidding 4 contracts $38.0 million Request for quotations 4 contracts $0.2 million

Consulting services Quality- and cost-based selection (international)

106 person-months (international) 246 person-months (national)

$3.6 million

Direct contracting (national) 116 person-months $292,000 Individual consultant selection 9 person-months $100,000

Retroactive financing and/or advance contracting

Advance contracting will be allowed for procurement of civil works and recruitment of consultants. Retroactive financing will apply to up to 20% of the grant amount for consulting services, and the establishment and operation of the PIG incurred before effectiveness of the grant agreement but not earlier than 12 months before the signing of the grant agreement.

Disbursement The grant proceeds will be disbursed following ADB’s Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB.

ADB = Asian Development Bank, PIG = project implementation group. Source: Asian Development Bank.

III. DUE DILIGENCE

A. Technical 20. The project outputs are aligned with the priorities accorded by the executing and implementing agencies and the stakeholders. Some 100,000 people will benefit from the

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improved water supply and 350,000 people will benefit from the sanitation investment. Shohmansur district was selected for establishing DMAs through the application of criteria such as population density, incidence of waterborne diseases, typology of housing, social equity, and climate resilience. The civil works packages under output 1 are technically feasible; they use optimum design solutions and technology for undertaking the civil works and O&M, including SCADA and smart meters, which DVK can manage. The design standards reflect the environmental objectives, meet government climate resilience criteria, and will not result in overdesign. Output 2 will ensure the long-term sustainability of the project outputs through institutional strengthening and establishing the DVK business model. B. Economic and Financial 21. Economic viability. An economic analysis was conducted in accordance with relevant ADB guidelines for WSS projects.15 Project benefits were estimated from (i) incremental water consumption calculated using the willingness to pay of the targeted residential and business consumers; (ii) the cost savings from non-incremental water consumption with the switch to piped water from alternative water sources; and (iii) public health benefits from the potential reduction in the incidence of waterborne diseases in the project areas. The resulting base-case economic internal rate of return is 12.6%, which exceeds the ADB minimum discount rate of 9.0% and confirms the economic viability of the project. A sensitivity analysis confirmed that the project will remain economically robust under the following scenarios: (i) a 10% increase in investment cost; (ii) a 10% increase in operation and maintenance costs; (iii) a 10% decline in benefits; (iv) a combination of scenarios (i), (ii), and (iii); and (v) a delay in subproject benefits by 1 year. 22. A financial analysis was undertaken by estimating cash flows over the project life to ensure the project will generate sufficient revenues to cover the full O&M cost.16 The analysis concluded that DVK has insufficient financial capacity for capital investments for improved water and sanitation infrastructure. DVK’s financial position has deteriorated by more than 60% from 2008 to 2018 because of the devaluation of the local currency. Its foreign currency denominated debts from previous loans have become a significant burden for DVK as well as a source of further currency risk. The Ministry of Finance will transfer the project grant funds to DVK’s balance sheet as equity. Increased billing and tariff collection efficiency has been identified as a priority for generating the required revenues to improve DVK’s financial position. To achieve financial sustainability, DVK needs to (i) increase tariffs by 16.2% per year for the next 3 years and at the rate of inflation thereafter; and (ii) reduce NRW from the 64% in 2017 to 48% by 2025 for the entire city, through a reduction in unbilled authorized consumption and other losses. The expected tariff growth based on the ongoing tariff study by the World Bank is within the limits found by the Dushanbe residents willingness-to-pay study. A cash-flow model confirms that, with the proposed tariff adjustments (reviewed annually) and improved operational efficiency, DVK would have the financial capacity to meet full O&M costs to sustain infrastructure and service delivery.17 Grant covenants to ensure financial sustainability have been agreed with the government. C. Governance

23. Financial management. The financial management risk is substantial because of DVK’s existing financing structure with (i) foreign exchange risk from repaying USD denominated loans;

15 Economic Analysis (accessible from the list of linked documents in Appendix 2); ADB. 2017. Guidelines for the

Economic Analysis of Projects. Manila. 16 Financial Analysis (accessible from the list of linked documents in Appendix 2). 17 Cash Flow Model (accessible from the list of supplementary documents in Appendix 2).

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(ii) negative equity, and (iii) insufficient knowledge and understanding of DVK staff on ADB grant disbursement guidelines and procedures. While DVK has an adequate financial management system and policies in place, it will require some adjustments to incorporate project-specific accounting, budgeting, auditing, and reporting. ADB rating is consistent with the World Bank rating.18 The auditors of DVK identified DVK’s ability to service its debt as a concern, The substantial financial management risk will be mitigated through a financial management action plan that includes (i) transferring the project grant funds to DVK’s balance sheet as equity to achieve positive equity in the first year of grant effectiveness and a sustainable debt–equity ratio of 0.55 by 2024;19 (ii) establishing target debt service coverage and debtors’ days ratios as financial covenants for DVK; 20 (iii) providing training and consultant support to DVK; and (iv) providing upgraded software to enable seamless integration of its accounting system with the customer database and to increase revenues by reducing unbilled consumption, which is a significant part of the high NRW. DVK has been implementing World Bank-funded projects, which use grant disbursement procedures similar to ADB procedures. 24. Procurement. The procurement capacity risk is substantial because of IA’s limited capacity to manage procurement functions efficiently. There is significant procurement lead time and implementation delays. A procurement risk assessment and management plan has been prepared. All the procurement (including consulting services and advance actions) will be undertaken in full conformity with the ADB Procurement Policy (2017, as amended from time to time) and Procurement Regulations for ADB Borrowers (2017, as amended from time to time). All procurement should be in accordance with the procurement plan, which covers all procurement activity for the project, including threshold and review procedures, goods, works, and consulting service contract packages, as indicated in the PAM (footnote 14). 25. ADB’s Anticorruption Policy (1998, as amended to date) was discussed with the government, the State Executive Authority of Dushanbe City, and DVK. The specific policy requirements and supplementary measures are described in the PAM (footnote 14). D. Poverty, Social, and Gender 26. The overall project social impacts are expected to be positive and will contribute to better living conditions, overall welfare, and health of the target beneficiaries. The south sewage collector covers 5,700 hectares catchment, benefitting about 352,000 people. The project will directly benefit 100,000 residents in Shohmanshur and Rudaki districts by improving access to safe water supply, and 38,000 of these residents in six DMAs will have 24/7 water supply. The project will create temporary employment opportunities during implementation for local people, especially the poor and vulnerable groups. It will benefit women, as it will reduce the time they spend fetching, storing, and treating water; and managing the consequences of poor quality water, such as illness in the family. ADB will allocate resources for professional trainings and the recruitment of social and gender specialists to ensure that poverty, gender, and other social issues receive priority; and that women, the poor, and socially excluded groups are engaged in all project stages. A summary poverty reduction and social strategy has been prepared, with measures to address the social impacts and enhance the distribution of project benefits.21

18 World Bank. 2018. Second Dushanbe Water Supply Project: Implementation Status and Results Report.

Washington, DC. 19 The project grant amount to be injected as equity is assumed to be equivalent to TJS400 million at the exchange

rate of $1 = TJS9.42 as on 1 September 2018. 20 The debt service coverage ratio measures DVK’s ability to be financially sustainable and pay off its debt obligations.

The debtors’ days ratio measures collection efficiency. 21 Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2).

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27. The project is categorized effective gender mainstreaming and a gender action plan has been prepared. The gender analysis indicated that women in the project areas are generally more disadvantaged than men. The project has ensured that women participate and benefit equally from the interventions through (i) participating in decision making; (ii) increased economic empowerment; (iii) enhancing their participation in technical training and access to information; (iv) improved gender mainstreaming capacity of the executing and implementing agencies in project management; and (v) including sex-disaggregated data in the project performance management system, monitoring and evaluation indicators, and regular project reporting. E. Safeguards 28. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows.22 29. Environment (category B). An initial environmental examination (IEE) and associated environmental management plan (EMP) have been prepared for the project, in accordance with the ADB Safeguard Policy Statement (SPS, 2009).23 The IEE established that the project is not anticipated to cause significant irreversible adverse environment impacts but is expected to have short-term localized construction-related potential impacts, including noise, dust, and exhaust emissions from equipment and construction vehicles; waste management; occupational health and safety; community health and safety; and construction traffic. During operations, potential impacts are related to the limited local capacity to maintain the functionality of the components, with positive impacts expected from the rehabilitation works. The EMP provides appropriate mitigation measures to be incorporated in each contract. The implementing agency will ensure the project complies with the environmental covenants. The implementing agency will recruit a full-time environmental specialist in the PIG, to monitor the implementation of the EMP and site-specific management plans. On-the-job training for institutional strengthening and environmental safeguards compliance will be conducted by the project management, design and supervision consultants. 30. Involuntary resettlement (category B). The census carried out during project preparation identified about 44 affected households with 288 household members. Out of the 44 affected households, 17 households with 98 members will experience a severe impact on their livelihood, and no household was found to belong to vulnerable groups. The project will affect two businesses and 12 business renters. No relocation is expected as a result of this project. A land acquisition and resettlement plans (LARP) has been prepared to mitigate the associated impacts and losses, with an entitlement matrix. In addition, a land acquisition and resettlement framework has been prepared in accordance with the SPS and relevant national legislation to guide the implementing agency in preparing and updating LARPs in case unanticipated impacts are identified during detailed design and project implementation. 31. Indigenous peoples (category C). No indigenous peoples, as defined in the SPS, are in the project area. 32. Stakeholder consultations were conducted through formal and informal focus group discussions, wide consultations with communities, targeted workshop consultations, individual consultations with displaced persons during the census, and a detailed measurement survey from

22 ADB. Safeguard Categories. https://www.adb.org/site/safeguards/safeguard-categories. 23 ADB. 2010. Safeguard Policy Statement. Operations Manual. OM F1. Manila.

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April to June 2018. A project information booklet was distributed to the communities. A grievance redress mechanism is in place to assist affected persons in resolving grievances and complaints. The land acquisition and resettlement framework, LARP, IEE, and EMP were approved by the implementing agency and publicly disclosed on the DVK and ADB websites in July 2018. F. Summary of Risk Assessment and Risk Management Plan 33. Significant risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.24

Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures Extreme weather events and climate change adversely affect infrastructure and services.

Climate change adaptation measures undertaken for known impacts.

DVK’s negative equity, operating ratio less than 1, and devaluation of local currency affect its ability to repay its principal loan.

Government to provide ADB grant to DVK as equity. Tariff increase and improved collection efficiency will address operational sustainability.

Staff assigned to the project by government are frequently rotated.

Implementation of accountability and incentive mechanism under business plan to retain skilled staff.

ADB = Asian Development Bank, DVK = State Unitary Enterprise Dushanbevodokanal. Source: Asian Development Bank.

IV. ASSURANCES AND CONDITIONS

34.          The government and DVK have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and grant documents. 35.          The government and DVK have agreed with ADB on certain covenants for the project, which are set forth in the grant agreement and project agreement. 36.          Disbursement of the ADB grant proceeds will be conditional upon (i) in the case of any item of expenditure, the PIG being established and fully staffed with professional personnel and the project being exempted from taxes and duties; and (ii) in the case of works, the government’s allocation of adequate funds for implementation of the resettlement plan.

V. RECOMMENDATION 37. I am satisfied that proposed grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the grant not exceeding $41,180,000 to the Republic of Tajikistan from ADB’s Special Funds resources (Asian Development Fund) for the Dushanbe Water Supply and Sanitation Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant and project agreements presented to the Board.

Takehiko Nakao President

3 September 2018

24 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Impacts the Project is Aligned with Quality of life, health, urban resilience, and economic growth in Dushanbe improved (Tajikistan National Development Strategy, 2030)a Universal access to safe and affordable drinking water improved (2030 Agenda for Sustainable Development Goal 6)b

Results Chain Performance Indicators with

Targets and Baselines Data Sources and

Reporting Risks

Outcome By 2025

Inclusive and sustainable access to safe and resilient water supply and sanitation services in Dushanbe city improved

a. 38,000 people received 24/7 piped water supply (2018 baseline: 0 people)

b. Public satisfaction with quality of water supply in project area increased to 80% (2018 baseline: 28% of women and 34% of men)

c. Nonrevenue water reduced to 15% in the 6 DMAs in Shohmansur district (2018 baseline: 64%)

d. Billing and tariff collection for water supply is above 90% in 6 DMAs (2018 baseline: billing 40% and tariff collection 45%)

e. 50% reduction in incidence of ascariasisc in Shohmansur district (2018 baseline: 53 children)

a–d. Executing agency project completion report, implementing agency annual report, annual customer satisfaction surveys

c. Socioeconomic survey sample of 105 households, social safeguards monitoring reports

e. Implementing agency annual reports, Committee for Environmental Protection reports

Extreme weather events and climate change adversely affect the infrastructure and service delivery.

Devaluation of local currency affects DVK’s ability to manage operation and maintenance of the existing and new facilities sustainably.

Outputs

By 2024

1. Climate-resilient water supply and sanitation infrastructure rehabilitated and expanded

1a. 17 groundwater wells rehabilitated with capacity of 64,800 m3/day, meeting national water quality standards (2018 baseline: 0)

1b. 2 pumping stations rehabilitated (2018 baseline: 0)

1c. 17.2 km of transmission mains constructed (2018 baseline: 0)

1d. 57.5 km of distribution network constructed and rehabilitated (2018 baseline: 0)

1e. 1 reservoir rehabilitated and 2 reservoirs constructed to increase storage capacity to 4,500 m3 (2018 baseline: 500 m3)

1f. 18 DMAs established and connected to the SCADA with 42 bulk meters and 5,220 smart meters, of which 6 DMAs with rehabilitated distribution networks (2018 baseline: 0)

1g. 2,000 new water supply connections provided in

1a–h. Quarterly project progress reports from implementing agency, executing agency project completion report, gender action plan progress reports

12 Appendix 1

Results Chain Performance Indicators with

Targets and Baselines Data Sources and

Reporting Risks Shomansur district (2018 baseline: 0)

1h. 9.8 km of sewage collector rehabilitated, benefitting 352,000 people, of which 170,000 are women (2018 baseline: 0)

2. Sustainable business model and institutional capacity developed

2a. A smart management system to link customer database with billing, accounting, and financial management system approved by DVK (2018 baseline: 0)

2b. Business plan with performance benchmarking matrix and service standards established (2018 baseline: 0)

2c. 2 water loss reduction teams established in DVK and trained in nonrevenue water techniques, including operation of DMAs (2018 baseline: 0)

2d. 95% installation of smart meters for household connections in 6 district metering areas (2018 baseline: 0%)

2e. 70% of trained DVK technical staff (of which at least 30% are women) report enhanced skills and knowledge in project planning, climate resilience, operation and maintenance systems, SCADA, accounting, and billing and collection systems (2018 baseline: 0)

2f. One project implementation group established with assigned DVK staff and new staff recruited (of which at least 20% are women) (2018 baseline: 0)

2a–f. Utility organizational development annual progress reports, project progress reports, executing agency project completion report, annual customer satisfaction surveys

Training workshop course evaluation survey reports

2e–f. Semiannual progress reports on the gender action plan implementation, training evaluation reports

Staff assigned to project by government are frequently rotated

Key Activities with Milestones

1. Climate-resilient water supply and sanitation infrastructure rehabilitated and expanded 1.1. Issue first request for proposal by Q3 2018 1.2. Mobilize design institute for design of south sewerage collector by Q4 2018 1.3. Mobilize PMDSC consultants by Q1 2019 1.4. Issue invitation for bids for first civil works by Q1 2019 1.5. Award first civil works contract by Q2 2019 1.6. Award all civil works contract(s) by Q4 2020 1.7. Complete civil works contract(s) by Q4 2023 1.8. Commission DMAs by Q2 2024 2. Sustainable business model and institutional capacity developed 2.1 Recruit additional project implementation group staff by Q4 2018 2.2 Recruit institutional consultant by Q4 2019 2.3 Install SCADA and metering system by Q4 2023 2.4 Develop and implement capacity building programs, including communication plan, by Q2 2024

Appendix 1 13

Inputs

ADB: $41.18 million (ADF grant)

Government: $4.62 million

Assumptions for Partner Financing

Not applicable

ADB = Asian Development Bank, ADF = Asian Development Fund, DMA = district metering area, DVK = State Unitary Enterprise Dushanbe Vodokanal, km = kilometer, m3 = cubic meter, PMDSC = project management, design and supervision consultants, Q = quarter, SCADA = supervisory control and data acquisition. a Government of Tajikistan. 2016. National Development Strategy of the Republic of Tajikistan for the Period up to

2030. Dushanbe; and ADB. 2016. Country Partnership Strategy: Tajikistan, 2016–2020. Manila. b United Nations. 2015. Transforming Our World: The 2030 Agenda for Sustainable Development. New York. c Ascariasis is a disease where the source of infection is from objects that have been contaminated with fecal matter containing eggs. Transmission comes through overflow of wastewater into crop fields. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=50347-002-2

1. Grant Agreement

2. Project Agreement

3. Sector Assessment (Summary): Water and Other Urban Infrastructure and Services

4. Project Administration Manual

5. Contribution to the ADB Results Framework

6. Financial Analysis

7. Economic Analysis

8. Country Economic Indicators

9. Summary Poverty Reduction and Social Strategy

10. Risk Assessment and Risk Management Plan

11. Climate Change Assessment

12. Gender Action Plan

13. Initial Environmental Examination

Supplementary Documents

14. Land Acquisition and Resettlement Plan

15. Land Acquisition and Resettlement Framework

16. Project Procurement Risk Assessment Report

17. Financial Management Assessment

18. Cash Flow Model