41548-013: Issyk-Kul Sustainable Development Project...Completion Report Project Number: 41548-013 Loan Number: 2556 Grant Number: 0163 July 2019 Kyrgyz Republic: Issyk-Kul Sustainable

Completion Report

Project Number: 41548-013 Loan Number: 2556 Grant Number: 0163 July 2019

Kyrgyz Republic: Issyk-Kul Sustainable Development Project

This document is being disclosed to the public in accordance with ADB's Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – som (Som)

At Appraisal At Project Completion 8 July 2009 31 December 2017

Som1.00 = $0.023 $0.014463 $1.00 = Som43 Som69.140000

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund BRD – Biosphere Reserve Directorate DSC – design and supervision consultant EIA – environmental impact assessment EIRR – economic internal rate of return EMMP – environmental monitoring and management plan EOCC – economic opportunity cost of capital FIRR – financial internal rate of return GAP – gender action plan GIS – geographic information system ICB – international competitive bidding IDEP – Issyk-Kul Territorial Department of Environmental Protection and

Forestry IEC – information, education, and communication MOF – Ministry of Finance NCB – national competitive bidding km – kilometer NRW – nonrevenue water O&M – operation and maintenance PIO – project implementation office PMO – project management office SAEPF – State Agency for Environmental Protection and Forestry SWM – solid waste management WACC – weighted average cost of capital WSS

WTP –

water supply and sanitation wastewater treatment plant

GLOSSARY

oblast – territorial administrative unit Vodokanal – municipal water and sewerage service provider Tazalyk – municipal solid waste management service

provider

NOTE

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

Vice-President Shixin Chen, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Country Director Candice McDeigan, Kyrgyz Republic Resident Mission (KYRM), CWRD Team leader Ainagul Amanova, Senior Project Officer, KYRM, CWRD Team members Ainura Bekbolotova, Associate Project Analyst, KYRM, CWRD

Baktygul Omurzakova, Project Analyst, KYRM, CWRD Sophana San, Project Analyst, Cambodia Resident Mission, Southeast

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

BASIC DATA i

MAP vi

I. PROJECT DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 1

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

III. EVALUATION OF PERFORMANCE 9

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

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 13

A. Issues and Lessons 13 B. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework 16

2. Project Cost at Appraisal and Actual 23

3. Project Cost by Financier 25

4. Disbursement of ADB Loan and Grant Proceeds 29

5. Contract Awards of ADB Loan and Grant Proceeds 31

6. Chronology of Main Events 33

7. Project Implementation schedule 34

8. Status of Compliance with Loan Covenants 35

9. Economic and Financial Reevaluation 43

SUPPLEMENTARY APPENDIXES (available on request) A. Contract Packages for Civil Works, Goods, and Consulting Services B. Detailed Description of Project Components C. Gender and Development Achievements of the Gender Action Plan D. Environmental Monitoring Report E. Management Information System and Accounting F. Baseline Survey Reports and Evaluation of Tourist Satisfaction G. ADB Project Completion Report (PCR) Mission’s Site Visit Reports H. Detailed breakdown of the 2018 expenditures

BASIC DATA A. Loan Identification

1. Country Kyrgyz Republic 2. Loan number and financing source

Grant number and financing source

2556-KGZ Concessional Ordinary Capital Resources Lending 0163-KGZ Asian Development Fund

3. Project title Issyk–Kul Sustainable Development Project

4. Borrower Government of the Kyrgyz Republic 5. Executing agency Ministry of Finance 6. Amount of loan

Amount of grant SDR10,566,000 ($16,500,000 equivalent) $13,500,000

7. Financing modality Sector financing (loan and grant project)

B. Loan and Grant Data

1. Appraisal – Date started – Date completed

8 July 2009 1 August 2009

2. Loan negotiations – Date started – Date completed

4 September 2009 4 September 2009

3. Date of Board approval

30 September 2009

4. Date of financing agreement

5 November 2009

5. Date of financing effectiveness – In loan agreement – Actual – Number of extensions

4 January 2010 29 January 2010 1

6. Project completion date

– Appraisal – Actual

31 December 2014 31 December 2017

7. Loan and grant closing date – In loan agreement – Actual – Number of extensions

30 June 2015 31 December 2017 2

8. Financial closing date

– Actual

2 August 2018 (Loan 2556, Grant 0163)

9. Terms of loan – Interest rate – Maturity (number of years) – Grace period (number of years)

1.0% during grace period (1.5% thereafter) 32 8

10. Terms of relending (if any)

ii

– Interest rate 1.0% per annum during grace period 1.5% per annum thereafter

– Maturity (number of years) 32 – Grace period (number of years) 8

11. Disbursements

a. Dates

Loan 2556

Initial Disbursement

3 March 2010

Final Disbursement

7 November 2017 Time Interval

92 months Effective Date

29 January 2010

Actual Closing Date

31 December 2017 Time Interval

95 months

Grant 0163

Initial Disbursement

3 March 2010

Final Disbursement

12 January 2018 Time Interval

94 months Effective Date

29 January 2010

Actual Closing Date

31 December 2017 Time Interval

95 months

b. Amount (SDR million): Loan 2556

Category

Original Allocation

(1)

Increased during

Implementation (2)

Canceled during

Implemen-tationa

(3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

1. Civil works 8.51 0.16

8.35 7.10 1.57

2. Project assistance facility

0.75 (0.16) 0.92 0.85 (0.26)

3. Financing charge 0.64 -0.00

0.64 0.19 0.45 4. Unallocated 0.66 0.00

0.66 0.00 0.66

Total 10.57 0.00

10.57 8.14 2.43b ( ) negative. a Reallocation dated 22 April 2015. b An amount of SDR2.43 million, equivalent to $3.40 million using the exchange rate on the closing date of 2 August 2018,

was canceled on the closing date. Note: Numbers may not sum precisely because of currency fluctuations and rounding.

Amount ($ million): Grant 0163

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)

1. Civil works 4.23 2.71

1.51 1.32 5.62

2. Equipment and material 2.02 (2.58)

4.61 4.24 (4.80) 3. Enterprise resource management

1.34 0.34

1.00 0.56 1.12

4. Project assistance facility

5.46 (0.92) 6.38 5.97 (0.43)

5. Unallocated 0.45 0.45 0.00 0.00 0.90

Total 13.50 0.00

13.50 12.09 1.41a

iii

( ) negative. a An amount of $1.41 million was canceled on 2 August 2018. Note: Numbers may not sum precisely because of rounding.

12. Local costs (financed)

– Amount ($ million) 7.50 – Percent of local costs 20% – Percent of total costs 100%

C. Project Data

1. Project cost ($ million)

Cost Appraisal Estimate Actual Foreign exchange cost 30.00 23.76 Local currency costa 7.50 6.30

Total 37.50 30.06 a Local cost financing is not applicable to the loan and grant. The government counterpart funds are treated as local cost financing.

2. Financing plan ($ million)

Cost Appraisal Estimate Actual

Implementation cost Borrower financed 7.50 6.30 ADB financed 29.00 23.49 Other external financing 0.00 0.00

Total implementation cost 36.50 29.79

Interest during construction costs Borrower financed ADB financed 1.00 0.27 Other external financing Total interest during construction cost 37.50 30.06

3. Cost breakdown by project component ($ million)

Component Appraisal Estimate Actual

I. Base cost Part A: infrastructure improvement 19.54 21.03 Part B: enterprise resources management 1.34 0.79 Part C: project assistance facility 5.53 7.97

Subtotal I: Base cost 26.41 29.79

II. Contingencies Physical contingencies 1.65 0.00 Price contingencies 5.27 0.00

Subtotal II: Contingencies 6.92 0.00 III. Taxes and Duties 3.17 0.00 IV. Financing Charges Interest During Implementation 1.00 0.27 Subtotal IV: Financing charges 1.00 0.27

Total: Project landed cost 37.50 30.06

4. Project schedule

iv

Item Appraisal Estimate Actual

Date of contract with first consultant for design and supervision

1 July 2010 29 December 2010

Date of contract with second consultant for design and supervision

1 July 2010 8 June 2012

Completion of engineering designs 31 December 2010 31 August 2017

Civil works contract Date of award 1 April 2011 28 October 2013 Completion of work 31 December 2013 14 November 2017

Equipment and supplies

Dates First procurement 3 January 2011 23 March 2011 Last procurement 1 July 2011 20 October 2017

Completion of equipment installation 31 December 2013 30 June 2017

Start of operations Completion of tests and commissioning 1 January 2014 31 July 2017 Beginning of start-up 1 April 2014 31 August 2017

5. Project performance report ratings

Implementation Period

Ratings

Development Objectives Implementation Progress

From 29 January 2010 to 31 December 2017 Satisfactory Less than satisfactory

Single Project Rating From 29 January 2010 to 31 December 2010 On track From 1 January 2011 to 31 December 2011 On tracka From 1 January 2012 to 31 December 2012 Potential problemb From 1 January 2013 to 31 December 2013 Potential problemc From 1 January 2014 to 31 December 2014 On track From 1 January 2015 to 31 December 2015 On track From 1 January 2016 to 31 December 2016 On track From 1 January 2017 to 31 December 2017 On track

Q = quarter. a The project was rated “on track” during Q1 and Q2 2011, and “actual problem” during Q3 and Q4 2011. b The project was rated “actual problem” during Q1 2012, “potential problem” during Q2 and Q3 2012, and “on track” during Q4 2012. c The project was rated “potential problem” during Q1 and Q2 2013, and “actual problem” during Q3 and Q4 2013. D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Membersa

Loan and grant fact-finding mission 8–31 Jul 2009 3 23 a, b, c

Loan and grant Inception mission 24–29 Jan 2010 3 6 a, c, e

Loan and grant second inception mission

19–24 May 2010 2 6 a, g

Loan and grant review mission 17–30 Nov 2010 3 14 a, c, d

Loan and grant review mission 18–24 Jan 2011 1 4 a

Loan and grant review mission 18–28 Jan 2011 1 11 d

Loan and grant review mission 7–16 Jun 2011 2 10 a, f

Loan and grant review mission 30 Jan–9 Feb 2012 1 12 a

Midterm review mission 24 Apr–3 May 2012 3 9 a, c, g

Loan and grant review mission 3–13 Sep 2012 1 11 a

v

Consultation review mission 19–21 Dec 2012 1 3 a

Loan and grant review mission 4–11 Nov 2013 2 8 a, g

Loan and grant review mission 14 Feb–24 Apr 2014 7 14 a, c, e, g, g, h, i

Loan, grant, and TA review mission 19 May–9 Jul 2014 3 4 a, e, g

Loan and grant review mission 12–27 Sep 2014 3 10 k, e, l

Loan, grant and TA review mission 13 Apr–18 May 2015 4 25 a, e, i, j,

Loan and grant review mission 10–23 Jun 2015 5 13 a, b, b, c, e

Loan and grant review mission 21 Sep–6 Oct 2015 6 15 a, b, c, c, e, k

Loan and grant review and handover mission

16–19 Mar 2016 4 4 a, b, g, e

Loan and grant review mission 1–10 Nov 2016 3 9 c, g, e

Loan and grant review mission 24 Apr–10 May 2017 3 14 c, g, e

Loan and grant review mission 13–21 Nov 2017 4 8 c, e, m, n

Project completion review 19–30 Nov 2018 5 11 c, e, l, o, p

TA = technical assistance. a a = urban development specialist and team leader, b = urban development specialist, c = senior project officer (project

implementation officer), d = urban economist, e = project analyst (associate and assistant project analyst), f = water supply and sanitation specialist, g = principal and senior portfolio management specialist, h = director, i = consultant (land acquisition and resettlement), j = social safeguards specialist (resettlement), k = senior environment specialist, l = gender consultant, m = associate procurement officer, n = environment consultant, o = project completion review consultant, p = economist consultant.

Toktogul Reservoir

Andizhan Reservoir Lake Chatyr-Kul

Lake Song-Kul

Lake Issyk-Kul

Sary-Tash

Irkeshtam

Gulcha

Kok-Yangak

Torugart

Kara-Keche

Kok-Art

Kara-Suu

Kochkor-Ata

Tash-Komur

Ivanovka

Jyrgalang

Engilchek

Bedel

SulyuktaFrunze

Chauvay

Karamyk

Kara-Kul

Ak-Kiya

Arslanbob

Kara-Jygach

Daroot-Korgon

Naiman

Aravan

At-Bashy

Baetov

Kazarman

Uzgen

Kara-Kulja

Bazar-Korgon

Terek-Say

Kerben

Kanysh-Kiya

Shamaldy-Say

Toktogul

Otmok

Maimak

Bakay-Ata

Pokrovka

Kara-Balta

Kayindy

Shopokov

Belovodskoe

Kant KeminTokmok Tyup

Barskoon

IsfanaHaidarkan

Kyzyl-Kiya

KochkorChaek

Suusamyr

Bashkugandy

AralKyzyl-Jyldyz

Epkin

Korumdu

ISSYK-KUL

NARYN

TALAS

CHUI

JALAL-ABAD

OSH

BATKEN

Osh

Jalal-Abad

Talas

BISHKEK

Naryn

Batken

Cholpon-Ata

BalykchyKarakol

National Capital

Provincial Capital

City/Town/Settlement

Village

Project City

CAREC Corridor 1

CAREC Corridor 3

CAREC Corridor 1 and Corridor 3 Connector Road

Alternative North–South Road

Main Road

Other Road

Railway

River

District Boundary

Provincial Boundary

International Boundary

Central Asia Regional Economic Cooperation

Boundaries are not necessarily authoritative.

CAREC

KYRGYZ REPUBLIC

ISSYK-KUL SUSTAINABLE DEVELOPMENT PROJECT(as completed)

0 50 100

Kilometers

N

19

-199

2 1

8K

GZ

AV

77 00'Eo

77 00'Eo

72 00'Eo

72 00'Eo

40 00'No

40 00'No

42 00'No

42 00'No

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.

I. PROJECT DESCRIPTION 1. Lake Issyk–Kul is the world’s second largest saline lake; a Ramsar site of globally significant biodiversity; and a United Nations Educational, Scientific and Cultural Organization-designated biosphere reserve.1 In 2009, the Asian Development Bank (ADB) provided a project preparatory technical assistance grant for improving urban services delivery in Issyk–Kul oblast, including sewerage and sanitation, SWM, water supply, and community sanitation through better resource management.2 The project aimed to improve living conditions and public health in the cities of Balykchy, Cholpon-Ata, and Karakol in Issyk–Kul oblast, and to preserve the lake’s environment. A loan of SDR10,566,000 ($16,500,000 equivalent) and a grant of $13.5 million for the implementation of the Issyk–Kul Sustainable Development Project was approved on 30 September 2009. The financing agreement was signed on 5 November 2009 and became effective on 29 January 2010.

II. DESIGN AND IMPLEMENTATION A. Project Design and Formulation 2. ADB’s operational strategy for the Kyrgyz Republic was set out in its country partnership strategies and country operations business plans. The country partnership strategy for the Kyrgyz Republic, 2007–2010 emphasized ADB’s assistance to provide safe and efficient WSS services for rural people. The strategic thrust of the country operations business plan for the Kyrgyz Republic, 2018–2020 continues to emphasize WSS, responding to the government’s request and its commitment to sector reform.3 3. The project was designed to improve urban basic services comprising sewerage, sanitation, SWM, and water supply in Balykchy, Cholpon-Ata, and Karakol. The project design covered services and urban infrastructure that most needed improvement; the infrastructure was dilapidated and had been left without adequate operation and maintenance (O&M) and investments for more than 18 years. The project also aimed to develop the capacity of responsible agencies at the city level to maintain the system. 4. The MOF as the executing agency made changes in project design. Some of these changes could have been foreseen at the time of appraisal if well-organized consultations with all project stakeholders had been held at the time of project formulation. The cancellation of the establishment of sanitary landfills was a significant change, while various O&M equipment and vehicles were procured to improve solid waste collection coverage. B. Project Outputs 5. The project included three outputs: (i) infrastructure improvement, (ii) enterprise resource management, and (iii) project assistance facility. The design and monitoring framework was revised during implementation because (i) the performance targets or indicators for the outputs did not logically comply with the norm, and (ii) substantial changes were made in the SWM

1 The Ramsar Convention is an international treaty for the conservation and sustainable use of wetlands, which came

into force on 21 December 1975. 2 ADB. 2009. Technical Assistance to the Kyrgyz Republic for the Issyk–Kul Sustainable Development Project. Manila. 3 ADB. 2017. Country Operations Business Plan: Kyrgyz Republic, 2018–2020. Manila. The Issyk–Kul Sustainable

Development Project supports the government’s commitment to reforms by increasing wastewater access and improving WSS service sustainability.

2

subcomponent.

1. Output 1: Infrastructure Improvement

a. Sewerage and Sanitation 6. This subcomponent was designed to benefit approximately 45,000 persons by giving them access to sewerage networks in the cities of Balykchy and Karakol. The following interventions were completed: (i) 6.1 kilometers (km) of pressure mains to the sewage treatment plant, including the sewer network in Balykchy, were replaced; (ii) a new pumping station in Balykchy was constructed and three pumping stations in Karakol were rehabilitated; and (iii) 7 km of existing sewer mains were rehabilitated and 12 km of new sewer networks in Karakol were installed. O&M equipment and vehicles were provided to all three Vodokanal enterprises.

b. Solid Waste Management 7. This subcomponent aimed to benefit 133,500 permanent residents and tourists in the three project cities through (i) re-engineering 42.5 hectares of existing waste dumps into sanitary landfills and closing existing dumps; and (ii) procuring vehicles and equipment for waste collection and transport. 8. At the beginning of project implementation, the viability of establishing a regional landfill to cover the three cities was examined. The concept of a regional landfill was, however, not accepted by the State Agency on Environmental Protection and Forestry (SAEPF) because the proposed design failed to include leachate interception and treatment facilities. Since establishing a regional sanitary landfill would cost more than the funds originally allocated and no adequate land could be secured in time, the existing dump sites were improved. To increase the life of the dump sites and expand solid waste collection service coverage, each Tazalyk strengthened its control over the dumping of waste within the designated areas, weighing waste delivered to the site, and compacting and covering accumulated waste with soil at regular intervals. Pillars with nylon mesh fences were erected around the dump sites to intercept windblown debris. The solid waste collection services were improved by providing O&M vehicles, public waste bins, bucket trucks, mini-tractors, and landfill equipment.

c. Water Supply 9. This subcomponent was to provide 43,000 persons in the three cities with safe, reliable water by installing water meters; improving borehole pumping stations, transmission mains, and water intake; and training Vodokanal staff in meter reading and leak control. All works were completed generally as envisaged. Bulk water meters were installed, including 32 units at the distribution networks in Balykchy, 13 units at the boreholes, and 32 units at the distribution networks in Cholpon-Ata. Individual household water meters were installed, including 109 units at apartment blocks and 3,209 units at households in Balykchy, and 37 units at apartment blocks and 306 units at households in Cholpon-Ata. About 2,500 units of remaining water meters were handed over to Cholpon-Ata Vodokanal for installation.4 The project ensured that 265 poor households (95 of which were headed by women) were given free water meters. The construction of a new borehole and rehabilitation of four boreholes in Balykchy, and the construction of a new borehole and rehabilitation of two boreholes in Cholpon-Ata were completed with ultraviolet disinfection equipment. In Balykchy, 2 km of water transmission mains were replaced. In Karakol,

4 As of March 2019 Cholpon-Ata Vodokanal had installed 1,606 water meters.

3

a water intake was rehabilitated, and 4.5 km of water transmission mains and the pre-sedimentation tank were constructed. However, the pre-sedimentation tank was not put into operation, because (i) the tank did not lower the turbidity as designed, (ii) leakage was present, and (iii) the installed manual outlet valves are difficult to operate.5 ADB dispatched an expert to address the issues in late November 2018. The expert assessed the tank and recommended measures to improve its workability.6 These measures were not envisaged in the design but will make O&M easier and less costly. The executing agency plans to conduct testing of the tank in July 2019. Additional funds for tank improvement will be requested by the government under the small expenditure financing facility introduced by the ADB in 2019.

d. Community Upgrading 10. A total of 22 schools, including 1 kindergarten, were provided with new toilets and handwashing facilities. This benefits about 27,800 schoolchildren and teachers, as the toilets without handwashing facilities had been located outside the school buildings before the project.

2. Output 2: Enterprise Resource Management

a. Management Information System, Accounting, and Financial Management

11. All the activities were completed as envisaged with the provision of office equipment, the management information system, accounting software, and the equipping of the laboratory of the Issyk–Kul Territorial Department for Environmental Protection and Forestry (IDEP) in Cholpon-Ata and the laboratory of the Biosphere Reserve Directorate (BRD) in Balykchy. Training to the Vodokanals and Tazalyks was satisfactorily conducted to develop the municipal, Vodokanal, and Tazalyk management information systems; and to improve the accounting practices and financial management capacity of Vodokanals and Tazalyks, focusing on revenue enhancement (e.g., improved collection of tariffs and user charges) and expenditure management.

b. Geographic Information System, Asset Inventory, and Management 12. The geographic information system (GIS) was installed for the three cities to develop city base maps and create a database for WSS facilities for managing these facilities. Based on accurate plans of the water supply and sewerage network, a calibrated network model to assess system performance and plan for extensions and reinforcements was developed. The GIS is being operated by trained Vodokanal staff and at the Vodokanal’s own cost.

c. Twinning Program and Capacity Building 13. A twinning agreement was entered into with a WSS utility in the Philippines on (i) improving billing and collections, (ii) installing water meters and decreasing nonrevenue water (NRW), and (iii) improving operation of WSS facilities7. However, the partnership was discontinued after the first (diagnostic) visit. Within the framework of this subcomponent, representatives of the Vodokanals, Tazalyks, and mayors’ offices of the project cities visited four cities in New Zealand and learned about aspects of water, sewerage, and solid waste utility management and services. 5 The pre-sedimentation tank was designed to lower the turbidity from 500 milligrams per liter to 150 milligrams per liter

during spring and summer, when high floods occur. According to the Karakol Vodokanal, the commission test conducted in June 2018 failed to meet this design standard.

6 The measures include internal waterproof plastering, leveling the inlet and outlet channels, installing washout inlet and outlet pipes and valves, and replacing the existing manual washout valves with air-operated pinch valves

7 Signed in December 2012 with Metropolitan Cebu Water Company.

4

d. Performance-Based Service Contracts

14. The government enacted in February 2012 law “On public–private partnerships in the Kyrgyz Republic”, which allowed public enterprises to engage private partners in financing, rehabilitating, constructing, and operating and maintaining infrastructure assets 8 . Given the limited capacity of local governments and enterprises in poor technical and financial condition, the introduction of public–private partnerships and performance-based contracts among the cities was considered premature and was not attempted. The municipalities are currently developing the asset inventory and financial management systems in their cities.

3. Output 3: Project Assistance Facility

a. Infrastructure Design and Implementation 15. The national design and supervision consultant (DSC) was engaged in December 2010 to (i) prepare detailed engineering designs for the infrastructure improvement output; (ii) assist the project management office (PMO) and project implementation office (PIO) in project implementation management and monitoring, including bid process management; (iii) support construction supervision; and (iv) contribute to monitoring and evaluation of project benefits by generating baseline data and assessing project impact. However, the DSC was incapable of carrying out the services as required and was dismissed in June 2011. An international DSC in association with national consultants was engaged in June 2012 till 30 June 2017.

b. Information, Education, and Communication Campaign

16. The national consultant for information, education, and communication (IEC) was engaged in December 2011 for 2 years to assist the PIO in conducting an IEC campaign for project beneficiaries. The contract was extended until June 2017, as the campaign was programed during the design, implementation, and operation stages. The campaign covered (i) hygiene and sanitation awareness and education targeted to communities and schools, (ii) community awareness and education about urban infrastructure services, and (iii) the gender action plan (GAP). The campaign resulted in increased support from project beneficiaries and stimulated demand for better basic urban services. A total of 5,156 schoolchildren from grades 5 to 7 and 280 teachers were trained on sanitation, hygiene, and reproductive health. Within the HIV prevention program, 6 seminars in 3 project cities for Vodokanal and Tazalyk employees, and 83 construction workers on the prevention of sexually transmitted infections and HIV were organized.

c. Project Management and Administration 17. A total of seven individual consultants were engaged, consisting of four international specialists (for WSS, environmental, SWM, and network modeling), and three national specialists (for civil engineering, financial and economic, and environment) to assist the PMO and PIO in project implementation and supervision. An audit firm was engaged to assist the PIO with the annual project audit statements to be submitted to ADB. C. Project Costs and Financing 18. For the Asian Development Fund (ADF) loan component, the civil works contracts

8 Government of the Kyrgyz Republic. 2012. Law on Public-Private Partnerships in the Kyrgyz Republic. Bishkek.

5

amounted to $15.41 million at project completion, compared to $23.11 million estimated at appraisal. This cost reduction was mainly because of (i) cancellation of the sanitary landfill and (ii) a decrease in the cost for the sewage system of $4.40 million, although the cost of water supply subcomponent increased by $0.68 million or 14.08% of the estimated cost. For the community upgrading subcomponent, the total cost was $1.59 million, compared to the $1.62 million estimated at appraisal. The appraisal allowed $1.0 million of financing charges as interest during implementation, but the interest payments amounted to $0.27 million. As a result, the ADF loan amounted to just $11.67 million against the $16.50 million originally budgeted. 19. For the ADF grant, the sanitary landfill subcomponent was not pursued. Instead, O&M equipment and vehicles for the SWM subcomponent were added, totaling $3.33 million against the $1.49 million at appraisal. Equipment and materials costs were $5.64 million compared to the $2.67 million estimated at appraisal. Funds were reallocated from the category of civil works for sanitary landfill to equipment and materials. The actual cost of the enterprise resource management amounted to $0.79 million against the estimate of $1.77 million. As a result, the total expenditure from the ADF grant amounted to $12.09 million against the estimated $13.5 million. Details of the appraised and actual costs are in Appendix 2 and the allocation of loans and grants by financier is in Appendix 3. D. Disbursements 20. Because of significant delays in the initial stage of project implementation, disbursements were not significant from 2010 to 2013: only $5.6 million (about 23% of the project cost) was disbursed, with the initial disbursement taking place on 3 March 2010. The disbursement rate increased in 2014 when the contracts for major civil works were awarded. Funds were disbursed according to ADB standard payment procedures with no significant problems. The provisions for counterpart funds were sufficient and payments were generally made on time. The originally projected disbursement ratio of 38% in the first 2 years (2010-2011) followed by 54% in the next 2 years (2012-2013) was optimistic. This had a major impact on the project performance report rating during the first 3 years. Separate imprest accounts were established with the initial deposit of $102,880 for the loan and $900,000 for the grant. Use of the imprest accounts was effective, guaranteeing timely payments to consultants and contactors. The projected and actual cumulative disbursements are in Appendix 4. E. Project Schedule 21. The project was originally scheduled for implementation over 5 years from the fourth quarter of 2009 to the end of 2014. The implementation schedule was revised in January 2011 because of civil unrest in 2010, which affected the executing agency’s project activities, including procurement. As a result, preparation of detailed design was rescheduled from January to December 2011, followed by procurement and civil works from January 2012 to the end of 2014. However, the termination of the contract with the DSC in June 2011, followed by the engagement of the second DSC in June 2012, resulted in further delays. The project was substantially completed in August 2017. The implementation schedule is shown in Appendix 7. 22. Following international competitive bidding (ICB) and national competitive bidding (NCB) procedures, 18 civil works contracts were awarded with contract periods of 6–12 months; the first contract was executed on 30 September 2011, and the last on 24 May 2017. Some contracts encountered delays in awarding because of the poor quality of (i) bids received and (ii) bid evaluation reports prepared by the executing agency, which ADB found deficient and requiring improvements. Major civil works were carried out from late 2013 to late 2015. Four contracts,

6

including construction of the pre-sedimentation tank in Karakol, were completed by August 2017 with the extended contract period.9 23. A total of 48 contracts for procurement of equipment and vehicles were awarded. Procurement of vehicles for the PMO and PIO was initiated in November 2010. Most equipment and vehicles were procured by the end of 2014 as scheduled. In order to respond to a request from Tazalyks and Vodokanals to utilize savings of funds originally allocated for the SWM subcomponent, additional O&M equipment and vehicles were procured. Because of lower than estimated bid and contract prices, about $3.0 million remained as savings from the ADF grant as of July 2017. Upon request from Tazalayks and Vodokanals, procurement of additional O&M equipment was made, using shopping as the procurement method about 6 months before the grant closing date. Accordingly, 16 contracts were executed for procurement of O&M equipment, vehicles, and tools; all were delivered by the end of October 2017. F. Implementation Arrangements 24. The PMO under the MOF at the central level and the PIO under the Issyk–Kul oblast administration at the local level were established with all staff outsourced. A steering committee headed by a representative of the Prime Minister’s office was established to oversee the function and activities of the executing agency and PMO. The BRD and IDEP were responsible for implementing the environmental management and monitoring plans and supporting compliance with ADB and Kyrgyz Republic environmental safeguards. 25. The government sought ADB approval to transfer the oversight responsibility from the Ministry of Finance (MOF) to the State Agency for Architecture, Construction, Housing, and Public Utilities (SACHPU). ADB disagreed, as it was inappropriate to change the implementation arrangements at such a late stage, and the SACHPU lacked experience implementing projects financed by international organizations. While the original implementation arrangements were largely followed, difficulties were encountered with the (i) functioning of the steering committee, which met only once in the initial stage, leaving uncertainties about the final decision-making authority; and (ii) sudden death of the PMO director on 30 May 2014. G. Consultant Recruitment and Procurement 26. Political turmoil in June 2010 delayed procurement activities. Among the seven packages of consulting firm contracts, four packages of consultants, including those for the DSC, GIS, management information system, and IEC, were engaged by December 2011. However, the performance of the national DSC was deemed unsatisfactory and this DSC was dismissed in June 2011. With the revised terms of reference and the application of a ratio of 90:10 instead of 80:20 for technical and financial weight in the quality- and cost-based selection method, international consultants were invited. As a result, an international consulting firm associated with local consultants was engaged on 8 June 2012, about 30 months after loan effectiveness. The capacity of the second DSC was also limited, failing to fulfill its responsibility in a satisfactory manner. The detailed design works were completed in June 2014, more than 1 year behind schedule, resulting in delays in the engagement of civil works contractors and suppliers. The performance of the consultants for the feasibility study and design for the Second Issyk–Kul

9 Including ICB3.11 Lot 3: Rehabilitation and construction of boreholes in Cholpon-Ata; ICB3.14 Lot 2: Rehabilitation of water intake and construction of pre-sedimentation tank in Karakol; NCB3.15: Installation of water meters; and ICB3.13 Lot 3: Rehabilitation of 3 sewerage pumping stations in Karakol.

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Sustainable Development Project was also unsatisfactory10. They failed to complete the work, including the feasibility study, within the extended contract period of 17 months ending on 30 June 2015. Accordingly, the feasibility study for the Second Issyk–Kul Sustainable Development Project was prepared under ADB technical assistance. 27. Four international (WSS, environment, SWM, and network modeling) and three national (civil engineering, environment, and financial and economic) consultants were employed from November 2010 to June 2012. In addition, three international consultants were engaged in March 2016 to prepare the feasibility study for the Cholpon-Ata sewerage and sanitation improvement. The performance of each of these consultants was generally satisfactory. 28. A total of 10 civil works contracts (comprising 7 ICB and 3 NCB contracts) were originally envisaged. However, a total of 18 civil works contracts (comprising 12 ICB and 6 NCB contracts) were executed. The sewerage and sanitation subcomponent was split into seven contracts (three for Balykchy and four for Karakol), and the water supply component was split into eight contracts (two for Balykchy and Karakol, two for Balykchy, and four for Karakol). The construction of the sanitary landfill was not implemented (para. 8). The performance of the civil works contractors was generally less than satisfactory. Among the 18 civil works contracts, the performance of the contractor for the rehabilitation of the water intake and the construction of the pre-sedimentation tank was poor. The contractor entered into a 15-month contract on 29 September 2014, but completed the works on 30 June 2017, 18 months behind schedule. A significant delay was also noted for the installation of water meters and water supply mains. The delayed completion of the works by these contractors resulted in the completion of the overall civil works in September 2017. 29. For supply of equipment and vehicles, a total of 48 contract packages were executed from November 2010 to October 2017. Different procurement methods were used, including ICB, international bidding, and shopping (where appropriate and needed). The last contract for the supply of sanitary equipment for landfill operation was awarded in October 2017. O&M equipment and vehicles procured (i) for three Vodokanals comprised crane trucks, fully equipped mobile workshops, excavators, and other items; and (ii) for three Tazalyks comprised a total of 41 vehicles, including solid waste collection trucks, street cleaning vehicles, dump trucks, landfill compactors, excavators, and other vehicles. In addition, 1,200 waste collection bins and 600 garbage cans were procured, and fencing was installed to control windblown debris around the dump sites. For the IDEP and BRD laboratories in Cholpon-Ata, 33 units of laboratory equipment and furniture in the amount of $508,962 were procured. 30. The performance of the suppliers of vehicles and equipment was generally satisfactory. No serious problem was encountered with procurement, except the contracts for supply of laboratory equipment for the Cholpon-Ata IDEP laboratory. The selection of suppliers for these contracts took longer than expected. No suppliers offered IDEP laboratory equipment meeting the PMO’s standards, resulting in seven repeated invitations to international suppliers. Balykchy Tazalyk reported that some of O&M equipment was unsatisfactory and spare parts are not sufficiently available in the local market. H. Gender Equity 31. Rehabilitated toilets and washing facilities in the schools benefited 27,800 pupils, including 6,166 girls of reproductive age, in the three cities. Trainings were conducted on sanitation hygiene

10 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Asian

Development Fund Grant to the Kyrgyz Republic for the Issyk–Kul Wastewater Management Project. Manila.

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and reproductive health focusing on the needs of women and girls. Twenty five gender awareness and development trainings were conducted for the Vodokanal, Tazalyk, PMU, PIU, and key municipality staff, as well as for some subcontractors. Increased awareness of the different needs of women and men as employees and beneficiaries allowed for (i) integration of gender-responsive provisions into organizational human resources policies, such as paid leave for family and childcare for Vodokanal and Tazalyk employees; (ii) improved work conditions and sanitation facilities for male and female employees of the Vodokanals and Tazalyks. 32. A customer database of Vodokanals and Tazalyks was disaggregated by sex, allowing for the analysis of debts, and for adequate measures to be taken to reduce debts. The family and community awareness on hygiene and sanitation was raised through three additional gender awareness trainings for community facilitators and health advocates. 33. Gender was mainstreamed in the project as designed in the GAP. Based on the retrospective analysis of the GAP, 11 out of 13 original gender targets were successfully implemented, the remaining 3 original gender targets became not relevant due to change of project scope. The project improved women’s living conditions, created employment opportunities, and reduced waterborne illness and associated costs. The project enhanced benefits to women through a training and awareness-raising program. As a result of the project women played an important role in educating their families and communities about sanitation and hygiene practices. I. Environmental Safeguards 34. The project was classified category A under ADB’s Environment Policy.11 As part of the project preparatory technical assistance, an EIA study was done. The EIA report in Russian was disclosed by the city governments and reviewed by the SAEPF and its regional departments. In accordance with ADB's Public Communications Policy (2005), the EIA report was posted on the ADB website on 1 June 2009 before Board consideration. An environmental monitoring and management plan (EMMP) was developed and implemented by the BRD and IDEP. The BRD complemented the IDEP's activities through parallel monitoring to ensure project activities complied with environmental regulations within the biosphere reserve. 35. For the sewerage and sanitation subcomponent, no serious impacts from groundwork, soil excavation, and transport activities occurred during construction. Impacts related to exhaust gas, oil and fuel spills, and storage causing runoffs and soil-level alteration occurred, and mitigation measures were put in place. For the SWM subcomponent, solid waste collection services were improved through provision of additional O&M vehicles and equipment, and pillars with nylon mesh fences were erected around the dump sites to intercept windblown debris. However, there is a low risk of contamination of underground water from leachate, as no leachate treatment system was provided. Effective implementation of operating and safeguard plans should be established to mitigate impacts on the surrounding environment as described in para 59 (iv). J. Social Safeguards 36. No land acquisition and resettlement occurred during the project. Existing sites were chosen to avoid land acquisition and resettlement, prioritizing rehabilitation and reconstruction of existing facilities. The due diligence reports were prepared recognizing ADB's Policy on Involuntary Resettlement (1995) and applicable laws and regulations of the Kyrgyz Republic.12

11 ADB. 2002. Environment policy of the Asian Development Bank. Manila 12 ADB. 1995. Policy on Involuntary Resettlement. Manila.

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The project did not affect indigenous people as defined in ADB's Policy on Indigenous Peoples (1998).13 The project areas are fairly homogenous with a majority of Kyrgyz and other ethnic minorities comprising Kazakhs, Russians, and Uzbeks. These ethnic groups did not differ in their needs or levels of WSS services, and all benefited from project activities. K. Monitoring and Reporting

37. Conditions and covenants. In general, all 24 conditions and covenants included in the financing agreement were complied with; three covenants were partially complied with and the others were complied with delays. Among the partially complied with covenants was one concerning the steering committee, which was created on 14 July 2011 but met only once in the initial stages of the project. The steering committee was then replaced by a coordination council on 30 March 2013, and the first meeting was held on 14 February 2014. In 2016, the PMO requested that the MOF form a new steering committee, but in vain. The absence of a steering committee had little negative impact on project implementation as most issues were resolved by the executing agency and/or the implementing agency. The status of compliance with conditions and covenants of the financing agreement is in Appendix 8.

38. Monitoring, reporting, and financial management. The executing agency submitted to ADB all the required reports in a timely manner as required in the financing agreement, including quarterly and annual progress reports with an updated design and monitoring framework, Project Performance Management System reports, baseline survey reports, and the project completion report. Audited project financial statements were prepared and submitted to ADB with the assistance of an audit specialist in a timely manner. However, the latest 2017 audited project financial statements available do not reconcile with ADB’s Loan Financial Information System record, as the expenses for $669,163.26 had not been claimed for liquidation to ADB by the time of auditing. This amount covered the expenses made under the following categories: civil works, equipment and materials, enterprise resource management, project assistance facility.14 The final liquidation of the imprest accounts was submitted and processed by ADB on 5 July 2018 (under Loan 2556) and 13 July 2018 (under Grant 0163). All these expenses were fully liquidated and accepted by ADB’s Controller’s Department as eligible.

III. EVALUATION OF PERFORMANCE A. Relevance 39. The project is rated relevant. It was consistent with the Kyrgyz Republic’s and ADB’s strategies at the time of project formulation and completion. ADB’s country partnership strategy for the Kyrgyz Republic, 2013–2017 and the National Sustainable Development Strategy for the Kyrgyz Republic, 2013–2017 shared a common goal of poverty reduction through inclusive economic growth.15 The project design and formulation were appropriate and focused on rehabilitation of major deficiencies in the water supply, sewerage networks, and landfill sites. 40. Project design. Changes to the original concept and design include (i) constructing a new sewage pump station in Balykchy, as the existing building was unsuitable for rehabilitation; (ii) rehabilitating the water reservoir and pump station within the Cholpon-Ata Vodokanal property;

13 ADB. 1998. Policy on Indigenous Peoples. Manila. 14 The detailed breakdown of the expenditures is available in the Supplementary Appendix H. 15 ADB. 2013. Country Partnership Strategy: Kyrgyz Republic. 2013-2017. Manila; Government of the Kyrgyz Republic.

2013. National Sustainable Development Strategy for the Kyrgyz Republic, 2013–2017. Bishkek.

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and (iii) canceling the re-engineering of waste dumps into sanitary landfills and the procurement of more solid waste collection vehicles and bins. While the sanitary landfills were not implemented, the project design met the immediate needs of the three cities in the context of a multi-staged development to protect the lake environment and improve people’s well-being. In general, the changes to the project scope maintained the relevance of the project at appraisal, achieving the intended outcomes. 41. Cost savings and delayed implementation. Mainly because of the reduced scope of the civil works for the SWM subcomponent, the total project cost was lower than originally envisaged. Significant delays in project completion (paras. 21, 26) were because of delays in the initial stage of project implementation, and changes to project scope. B. Effectiveness 42. The project is rated effective in achieving the outcome envisaged at appraisal. Upon completion of the project, beneficiaries’ access to safe and reliable sanitation, water supply, and solid waste collection services increased in the cities of Balykchy, Cholpon-Ata, and Karakol. As reported in the baseline survey upon completion and by the executing agency, the number of beneficiaries with access to the sewerage network and on-site sanitation increased to 108,600 in 2016, compared to 45,000 in 2015. The rehabilitated water production and supply system supported the supply of safe, reliable water to connected consumers. The solid waste collection coverage was extended to 140,000 people in 2018, compared to 133,500 people originally envisaged. The achievement of improved urban services in the three cities was attributable to the project intervention and the substantial achievement of project outputs. 43. The targets for the sewerage and water supply subcomponents were achieved as envisaged with minor changes in the quantity of works to meet the site conditions. For the SWM subcomponent, targets were partially achieved, leaving the establishment of sanitary landfills for future ADB projects. Instead, additional O&M equipment was procured in order to improve the existing solid waste collection services and the condition of the dump sites. For the sewerage and sanitation subcomponent under output 1, improved sanitation and water facilities were provided to schools, as this would benefit a greater number of individuals.

44. For environmental safeguards, the project is rated satisfactory, with most of the impacts mitigated as per impact assessment studies and environmental management plans. Post-construction issues were identified around the spill chamber, water intake, and pre-sedimentation tank under the water supply subcomponent in Karakol. Solutions have been discussed and actions for follow-up agreed upon with Vodokanal, Mayor’s Office and MOF (para. 56). C. Efficiency 45. The recalculated economic internal rate of return (EIRR) for water supply and sewerage was 14.4% for Balykchy (compared to 26.9% at appraisal), 13.4% for Cholpon-Ata (27.3% at appraisal), and 16.2% for Karakol (28.5% at appraisal). The recalculated EIRR for SWM was 19.7% for Balykchy (compared to 22.9% at appraisal), 14.7% for Cholpon-Ata (24.5% at appraisal), and 22.3% for Karakol (25.5% at appraisal). Significant delays in project completion affected the EIRR. As the reevaluated EIRRs for individual components are higher than the economic opportunity cost of capital (EOCC) of 12% recommended by ADB, the overall project is considered economically efficient. The water and sewerage EIRR was most sensitive to a decrease in benefits with the EIRRs of 10.0% for Balykchy, 9.2% for Cholpon-Ata, and 9.2% for Karakol all below the EOCC. An increase in capital cost also affected the three, resulting in an

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EIRR of 10.9% for Cholpon-Ata, 11.5% for Balykchy, and 11.7% for Karakol. The recalculated EIRRs compared with those at appraisal for the three project cities, and the sensitivity analysis is in Appendix 9, Table A9.3.

D. Sustainability 46. The project is rated less than likely sustainable. The financial internal rate of return (FIRR) was recalculated based on the assumption that tariff increases (as presented in Appendix 9, section D) would be closely monitored and followed. Government subsidies, i.e., viability gap funding, are to be provided from 2018 to 2024, with varying requirements by Vodokanal and Tazalyk (Appendix 9, Table A9.5).16 Viability gap funding is essential to maintain the scheduled tariff increases within an affordable level. The recalculated average FIRR for WSS is 3.7% on average (3.8% for Balykchy, 3.5% for Cholpon-Ata, and 4.1% for Karakol), which is generally lower than the appraised FIRR (reassessed in real terms during the project completion report mission) of 4.2% for Balykchy, 3.4% for Cholpon-Ata, and 4.2% for Karakol. The recalculated average FIRR for SWM is 3.7%, (3.8% for Balykchy, 3.6% for Cholpon-Ata, and 3.8% for Karakol), which exceed the recalculated weighted average cost of capital (WACC) of 2.3% for the water and sewerage and 2.2% for the solid waste subcomponents. 17 Therefore, the subproject Vodokanals and Tazalyks are considered financially viable. However, the long-term sustainability is subject to timely and adequate viability gap funding. 47. Affordability analysis was done to ensure that low-income households could afford the water and sewerage tariffs. Based on the generally accepted principle that water supply expenditure should not exceed 4%–5% of average household income, the projected water tariff increases were considered affordable. With the price of sewerage and solid waste services included, it is likely to be acceptable to charge consumers up to 6%–8%. The detailed calculation of the FIRRs and sensitivity analysis is in Appendix 9.

48. The project outputs are technically, institutionally, and environmentally sustainable. The Vodokanals and Tazalyks of the three cities possess adequate capacity for O&M of WSS and SWM services, and their staff were trained in the O&M of the facilities. E. Development Impact 49. The project impact will likely be achieved. There were 88 recorded instances of waterborne illness in Issyk–Kul oblast in 2017, compared to 215 in 2012 and 155 in 2014. The average annual household expenditure for treating waterborne illness was Som2,517 (8.5% of annual household income) in 2017, compared to Som3,352 (16.1%) in 2012. While people’s health largely depends on their lifestyle, the improved water and sewerage systems appear to have contributed to the improved health of the resident population. The impact of improved toilets and education for schoolchildren was noticeable, as the incidence of waterborne diseases among children of school age dropped significantly. The lake’s environment will likely be improved with the upgraded sewerage and solid waste systems. A public satisfaction survey conducted in 2017 shows that the residents have noticed the improved cleanliness of the environment after special 16 Since 2012 there is an agreement between the local government and municipal service providers to cover viability

gap funding, which is renewed annually. The funds are transferred from local government to service providers through the Central Treasury.

17 The WACC of 15.36% shown in the report and recommendation of the President was found to be based on nominal rates, and therefore recalculated in real terms. ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Asian Development Fund Grant to the Kyrgyz Republic for the Issyk–Kul Sustainable Development Project. Manila (Appendix 12).

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equipment and waste collection bins were mobilized in 30 June 2017, whereas tourist satisfaction with the cleanliness of public places, in particular public toilets, was mixed. 50. During project implementation, there were no measurable significant negative impacts on the people or the environment, except repairing activities around the spill chamber, water intake, and pre-sedimentation tank under the water supply subcomponent in Karakol. The environmental control and safeguard mitigation measures were included in detailed supplementary environmental management plans to be complied with by the contractors to reduce the environmental impact of their operations. In addition to supplementary environmental management plans, a list of required measures was proposed by the international WSS consultant under the Karakol Water Supply Project Assessment Report to be able to carry out the start-up and adjustment testing of the pre-sedimentation tank in July 2019 in Karakol Vodokanal.18 The municipal offices and traffic police were involved in communicating with the community on planned activities and possible restrictions in traffic flow by adopting one-way traffic provisions. 51. Gender impact. Because of their larger role in domestic work, family and childcare, health, and hygiene maintenance generally, women’s benefits are distinct. Caring for sick children adds to the already heavy workload of women and girls and associated monetary and nonmonetary costs. Improved WSS services had a significant impact on women’s household work and free up women’s time for more productive activities and leisure time. The positive impacts include women’s representation in municipal enterprises and local businesses, as well as better income-generating opportunities. F. Performance of the Borrower and the Executing Agency 52. The performance of the executing agency, PMO, and PIO was less than satisfactory. The financing agreement became effective 1 month behind schedule. As defined in the financing agreement, the MOF generally fulfilled its overall responsibility for project implementation. However, a lack of close communication and coordination between the MOF and the municipal authorities and the ADB at the time of project preparation and implementation left the Vodokanals and Tazalyks not fully satisfied. The changes in the project scope and time-consuming approvals, in particular on the SWM subcomponent (para. 8), aggravated delays in implementation. Delays in procurement for contract packages were partly because of the limited capacity of the PMO staff assigned for bid evaluation. As for financing and disbursement, the executing agency submitted financing documents to ADB in a timely manner. The executing agency generally made a timely release of the government contribution to the project. It played an active role in all financial matters, monitoring the resource management component efficiently. G. Performance of the Asian Development Bank 53. ADB’s performance is rated satisfactory. Significant delays and changes in project scope appeared to some extent beyond the control of ADB. ADB dispatched 34 review missions, including the inception, midterm, and completion review missions from January 2010 to November 2017 (four missions per year on average). The review missions made every effort to solve problems and agreed on changes in the project implementation schedule with the PMO. Provision of an international procurement specialist to assist the PMO in bid evaluation was effective in expediting the selection of contractors and suppliers. ADB also dispatched an international water

18 Patrick Lorin. 2018. Karakol Water Supply Project Assessment Report. ADB Consultant’s report. Manila: Asian

Development Bank.

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supply specialist to assess the performance of the completed pre-sedimentation tank and to suggest ways to rectify deficiencies claimed by the Karakol Vodokanal. 54. Project implementation was monitored by various departments within ADB, making the approval process time-consuming. For example, the executing agency’s first request for extension of the project completion date until 31 December 2016 was made on 27 June 2014, but was approved by ADB on 10 July 2015. Approval processes were expedited when missions were fielded. The transfer of project administration from ADB headquarters to the Kyrgyz Republic Resident Mission should have been made earlier than March 2016. Disbursements from the loan and grant accounts were made in a timely manner, following the submission of withdrawal applications by the executing agency. H. Overall Assessment 55. Overall, the project is rated successful, as the project outputs and outcome were basically achieved and considered physically sustainable with the capacity of the Vodokanals and Tazalyks strengthened. Significant delays in project completion adversely affected the EIRR. However, the reevaluated EIRRs for individual components are higher than the EOCC of 12% recommended by ADB. The government’s time-consuming decision-making on project implementation issues, in particular the SWM subcomponent, is the main reason its performance is rated less than satisfactory.

Overall Ratings Criteria Rating Relevance Relevant Effectiveness Effective Efficiency Efficient Sustainability Less than likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Less than satisfactory Performance of ADB Satisfactory

ADB = Asian Development Bank. Source: ADB.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 56. Based on the assessment of the project, the following lessons were learned:

(i) Project design and formulation. At the time of project formulation, discussions among all the parties concerned should have been made on the proposed project scope and design. A substantial change made in the scope of the SWM subcomponent was because of the disagreement by the State Agency on Environmental Protection and Forestry to the proposed method of sanitary landfills and unavailability of suitable land. There are areas in the design and monitoring framework where the statements in the “design summary” and “performance targets and/or indicators” columns were not specifically linked, e.g., no specific technical linkage would have existed between the designed outputs and the targeted NRW under the water supply subcomponent.

(ii) Project implementation management and capacity building. The PMO and PIO were staffed with outsourced experts. No government official from the executing and implementing agencies was included. The PMO and PIO staff lacked adequate knowledge to fulfill their responsibilities. The poor performance of the consultants and

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contractors was partly because of a lack of adequate supervision by the PMO and PIO.

(iii) Employment of consultants and procurement. Initial implementation delays were attributed to the failure to recruit a qualified DSC. The selection method and evaluation criteria for expressions of interests should be carefully established to preclude technically and financially unqualified consultants. Procurement packages were fragmented into small ones. Only a few consultants, contractors, and suppliers were interested in most of the contracts. The quality of services, works, and equipment delivered was deficient.

(iv) Cost estimates. The cost estimates were prepared based on unit rates in rubles prevailing in 1991, which were converted to som and updated by the State Agency for Architecture, Construction, Housing, and Public Utilities. The unit rates originating in the Soviet Union era should be revised, based on the prevailing costs.

(v) Materials. It is an ADB requirement that goods, works, and services originate from ADB member countries. For the Kyrgyz Republic, with its long dependence on the former Soviet Union, some equipment is still procured from the Russian Federation, the only source where such equipment is available. For an interim period, a waiver from the ADB should be requested for procurement from the Russian Federation.

(vi) Nonrevenue water. NRW has not been substantially reduced, partly because of the limited extent of pipeline rehabilitation work proposed during the initial project design and the unsuccessful twinning program (para. 13). NRW cannot be reduced by repairing infrastructure alone; institutional and managerial measures are required in tandem with rehabilitation works. An NRW management program with the adoption of a zoning approach or district metered areas should be established.

(vii) Land acquisition. The issues regarding land acquisition for sanitary landfills were discussed and agreed on by the central and municipal administrations at the time of appraisal and loan negotiations. However, the land was not allocated because of the rejection by the local council, which was beyond the control of the central government.19

(viii) Institutional issues. Delays in project implementation and sustainability concerns were because of (i) complicated government review process for procurement, (ii) a fragmented decision-making mechanism, (iii) reluctance to adjust tariffs because of political resistance, and (iv) poor O&M. Closer engagement of local governments and Vodokanals and Tazalyks in project management should be ensured.

B. Recommendations

1. Project Related

57. Future monitoring. Monitoring of project operations should include (i) regular maintenance of the installed equipment and facilities, (ii) financial performance of the cities’ Vodokanals and Tazalyks, and (iii) environmental monitoring of lake water quality for nutrients and pathogens. The monthly monitoring reports should be prepared by the cities and submitted to the executing agency and ADB. 58. Covenants. The status of compliance with covenants is included in Appendix 8. The covenants that should be maintained include the following: (i) mitigating and monitoring

19 The local self-government consists of executive body (municipal administration) and representative body (local

council). The land allocation for sanitary landfills are within the competence of the local council.

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environmental impacts during project operation; and (ii) implementation of a financial plan to revise water, sewerage, and solid waste service fees.20 59. Further action or follow-up.

(i) To reduce NRW from 60% to 20%, each Vodokanal should continue (a) implementing a pipe replacement program, (b) carrying out leak detection surveys and repairs, (iii) installing water meters at all household connections and collecting water tariffs based on meter readings, and (iv) making tariff adjustments to cover at least O&M costs. The distribution system should be extended to benefit the remaining population.

(ii) Sanitary landfills should be implemented as soon as possible. (iii) To avoid the spill chamber structure being undermined in Karakol, under the water

supply subcomponent, the Vodokanal should start implementing remaining repair activities as agreed in the consultant’s report (para 50).

(iv) Operational safeguard management plans are required to mitigate impacts on the surrounding environment resulting from leaks, spillovers, vermin, windblown waste, and gases emitted from the dump sites. In addition, unauthorized access of people and animals to the sites should be forbidden.

60. Additional assistance. The following additional assistance is needed: (i) support to improve water supply, sewerage and sanitation, and SWM services in the three cities; and (ii) support on technical and financial O&M of the management information system, including (a) installation of water meters, network modeling, and meter reading support to manage data collection, analysis, and leak detection; and (b) revenue collection and financial self-sufficiency. 61. Timing of the project performance evaluation report. The timing of the project performance evaluation report should have been recommended before the start of the financing agreement negotiations for the Issyk–Kul Wastewater Management Project in 2018, so that the lessons learned from the Issyk–Kul Sustainable Development Project could inform the implementation of the wastewater management project.

2. General 62. General recommendations are as follows:

(i) Project components should be extensively discussed with the client during project formulation. Failure to implement the twinning program and performance-based service contracts was because of insufficient research on local conditions. The introduction of performance-based service contracts was premature.

(ii) The executing agency’s capacity for project implementation in terms of knowledge about rules and procedures should be carefully assessed, and adequate measures for strengthening the capacity of project staff should be implemented at the early stages.

(iii) Core members of PMO and PIO staff should be government officials supported by outsourced experts, if necessary, in order to ensure a steady accumulation and transfer of knowledge and experience within the government.

(iv) At the time of project preparation, contractors and suppliers should be carefully examined. Necessary technologies, works, and goods are limited in the local markets. A combination of procurement from international and national sources should be examined. Contract packages should not be fragmented, and the scale of each contract package should be large enough to attract bids from qualified international consultants, contractors, and suppliers.

20 The Financing Agreement, schedule 5, paras 5 and 10.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and/or

Indicators Achievement

Impact

Improved health of resident population in the Issyk–Kul Oblast and environmental preservation of Issyk–Kul

By the end of Project plus three years (2017):

(i) Average annual household expenditure on treating waterborne illnesses reduced by 25% (from Som1,500 to Som1,125)

Likely to be achieved. According to information from Ministry of Health, the number of people affected by waterborne diseases, hepatitis A, dysentery and acute enteric diarrhea in the three cities has declined. Namely, the number of waterborne disease cases were recorded at 88 cases in 2017, compared to 215 and 155 cases in 2012 and 2014, respectively, as shown in Table A1.1.

Table A1.1: No. of People Affected by Waterborne Diseases

City 2012 2014 2017

Karakol 76 65 43

Balykchy 52 44 21

Cholpon-Ata 87 46 24

Total 215 155 88

The average annual household expenditure for waterborne diseases is in Table A1.2. The expenditure has reduced by 28% from 3,352 Som in 2012 to 2,417 Som in 2017.

Table A1.2: Annual HH Expenditure on Treatment of Waterborne Diseases (Som)

City 2012 2014 2017

Karakol 2,540 2,243 2,539

Balykchy 1,591 1,367 1,623

Cholpon-Ata 5,926 3,658 3,091

Average 3,352 2,422 2,417

Table A1.3 below shows the average household income and expenditure for waterborne diseases by category. The expenditures for waterborne diseases have dropped to almost half in 2017 in terms of the expenditure vs. income ratio in comparison to those in 2012 for every category.

Appendix 1 17

Design Summary Performance Targets and/or

Indicators Achievement

(ii) Public satisfaction with the lake's recreation environment increased from xx% to yy% a/

Table A1.3: Annual HH income and Expenditures on Waterborne Diseases (Som)

Cat. 2012 2014 2017

a b b/a % a b b/a% a b b/a%

Ex-

poor 14,564 868 5.9 15,230 366 2.4 15,768 465 2.9

poor 23,796 1,677 7.0 24,519 813 3.3 26,846 947 3.5

Non-

poor 26,398 4,250 16.1 28,642 4,055 14.2 36,511 3,091 8.5

a: annual household income by category;

b: expenditures for waterborne disease treatment;

c: b/a %

It was also reported that waterborne diseases dropped significantly among schoolchildren where toilet and hand-washing facilities were provided. Children’s hand-washing behavior ratio before meal, after toiles, after playing outside, etc. increased from around 30% before the project to 50-60% after the project.

(ii) Likely to be achieved. No specific target was established at project appraisal and at project inception. However, public satisfaction survey conducted in 2017 shows that the residents have noticed the improved cleaness of the envirionment after special equipment and waste collection bins were mobilized since 30 June 2017. Tourist satisfaction with cleanliness of public places in all 3 cities decreased from 76% in 2009 to 36% in 2016 in average.

Outcome

Improved urban basic services comprising sewerage and sanitation, solid waste management, and water supply in the cities of Balykchy, Cholpon-Ata and Karakol

By end of Project (2015):

(i) Population access to safe sanitation increased from 43,000 persons in 2010 to 68,000 persons (45,000 persons through sewerage system and 23,000 persons through onsite sanitation)

(ii) Municipal solid waste collection increased to cover 133,500 persons from 61,500 persons in 2010

(i) Achieved. Population access to safe sanitation increased from 43,000 in 2010 to 108,600 persons in 2016 (73,500 citizens and school pupils through sewage system, and 35,100 citizens and school pupils through onsite sanitation). This does not include the number of tourists estimated at 52,500. Then, it will be around 160,000 persons in 2016.

(ii) Close to being achieved. In 2016 municipal solid waste collection covered 122,500 people, including 70,000 people in 3 cities and 52,500 tourists. The capacity for SW collection improved by providing 20 solid waste collection vehicles, 3 mini-tractors and 1,200 waste collection bins. The provision of 12 solid waste collection vehicles and 300 waste collection bins in October-November 2017 has further increased the coverage of people up to 140,000 people.

18 Appendix 1

Design Summary Performance Targets and/or

Indicators Achievement

(iii) Improved water supply ensured to already connected households

(iii) Achieved. The rehabilitation/construction of 8 boreholes and construction of pre-sedimentation tank ensured the improved reliability of water supply to 11,150 and 8,680 households already connected in Balykchy and Cholpon-Ata, respectively. The extension of distribution networks benefits new consumers, totaling over 49,300 people in the three cities.

Outputs

Part A: Infrastructure Improvement

Sewerage: 13.43 km of sewer lines replaced in Balykchy and Karakol, 12 km of new sewer lines laid in Karakol, and 6 pumping stations rehabilitated in Balykchy and Karakol

Replacement of sewer lines, 6.43 km in Balykchy and 7 km in Karakol.

(i) Access to sewerage network increased from 43,000 persons in 2010 to 45,000 persons in 2015.

(ii) Sewage flows increase from 5,000 cum/day in 2010 to 5,500 cum/day in 2015.

(iii) 10 vehicles procured and made operational by 2011 for sewer maintenance

(iv) Sewage pumps operating on a daily basis and discharging sewage to treatment plants

6.1 ㎞ of sewer lines in Balykchy and 10 ㎞ in Karakol were replaced, and 12 km of new sewer lines laid in Karakol.

(i) Achieved. Access to sewage network increased in 2016 to 73,500 people including 50,000 residents and 23,500 school pupils. Including the number of tourists estimated at 52,500 people, the population access to sewerage network will be around 126,000 people;

(ii) Achieved. The average daily sewage flow is estimated at 13,772 cum/day in 2014: 2,500 cum/day in Balykchy, 2,200 cum/day in Cholpon-Ata, and 9,000 cum/day in Karakol;

(iii) Achieved. The number of O&M vehicles procured and made operational for 3 Vodokanals includes 18 units of special vehicles and trucks, of which 3 vehicles were delivered in October 2017, 2 off-road vehicles for Cholpon-Ata and Balykchy, and 1 Cess pool emptying truck for Cholpon-Ata.; and

(iv) 3 sewerage pumping stations (SPS) in Karakol rehabilitated in July 2017, and 1 new SPS completed in Balykchy in April 2016.

Solid waste management: Management of 42.5 hectares of existing waste dumps improved to increase environmental safety and sites operation lifetime, and solid waste collection service coverage increased in the three project cities

(i) Solid waste collection system expanded to cover 133,500 persons (comprising 103,000 resident and 30,500 tourist population) in 2015 from 92,000 persons in 2010

(ii) 100 MT of solid waste treated and disposed daily

(iii) 22 waste collection, transportation and landfilling vehicles procured and made

The establishment of sanitary landfill was not materialized, instead, the existing dump sites were improved with the provision of net fences to intercept windblown debris and O&M equipment.

(i) Achieved. In 2016, municipal solid waste collection covered 122,500 people, including 70,000 residents in 3 cities and 52,500 tourists. Provision of 1,200 waste collection bins and 8 waste collection trucks for 3 cities and addition of 12 SW collection trucks, 4 per each city further increased coverage up to 140,000 people;

(ii) Achieved. 106.1 MT of waste collected and disposed daily in 3 cities in 2013: 16.1 MT in Balykchy, 25.9 MT in Cholpon-Ata, and 64.1 MT in Karakol. Waste segregation and recyclable sorting units were not installed; and

(iii) Achieved. 41 special equipment and vehicles were procured and made operational in the 3 cities; 11 special vehicles, 4 SW collection trucks each in Karakol and Cholpon-Ata

Appendix 1 19

Design Summary Performance Targets and/or

Indicators Achievement

operational for daily waste management by 2011

and 3 mini-tractors in Balykchy. In addition, 30 more special vehicles, including 1 landfill compactors, 2 four-wheeled loader/backhoes, 2 dump trucks, 4 rear loading solid waste collection vehicles, and 1 bucket trucks were provided to each of three Tazalyk enterprises in October-November 2017 for improvement operations on existing dump sites.

Water Supply: 8,550 domestic water meters installed in three project cities, 2 km of water transmission pipeline replaced in Balykchy, pre-sedimentation treatment tank at Karakol water headwork constructed, and 10 boreholes with treatment, energy efficient pumps, storage, and protection facilities constructed in Balykchy and Cholpon-Ata

(i) Nonrevenue water (NRW) progressively reduced from 60% to 20% (baseline to be established at project inception)

Achieved. As for the works and facilities targeted under Design Summary, the following were completed under the project: 67 bulk meters at the boreholes and the networks and 6,250 domestic meters at households and apartments were installed in Balykchy and Cholpon-Ata. Replacement of dual water transmission mains (1.0 km each) completed in Balykchy in December 2015. The rehabilitation of water intake and the construction of pre-sedimentation tank completed in Karakol in July 2017, but the pre-sedimentation tank is yet to be put into operation because of its performance unacceptable to the Vodokanal. Monthly data from Department of Sanitary Epidemiology Control for 2015-2016 and 11 months of 2017 show some improvement in 2017, but the result of commissioning test conducted in June 2018 during the spring - summer season when water turbidity was high due to floods was unsatisfactory. In Balykchy, 4 boreholes were rehabilitated in 2014 and 1 new borehole constructed July 2017, and in Cholpon-Ata, 2 boreholes were rehabilitated, and 1 new borehole completed. A total of 10 boreholes were equipped with UV treatment system, energy efficient pumps, and storage facilities in Balykchy and Cholpon-Ata. In Karakol, water settlement reservoir constructed under Swiss Aid (SECO) and put into operation from 2018.

(i) Not yet achieved. Average NRW for 3 cities was estimated about 45% in 2012-2017: 44% in Balykchy, 51% in Cholpon-Ata, and 36% in Karakol. Taking into account normative technical losses and deterioration of the network, it will be around 35%. In the midterm review, it was noted the targeted NRW reduction from 60% to 20% was unrealistic. The baseline figure needs to be established through metering, and a reduction of 5-10% should be targeted. Reduction of 40% could be achieved only upon a significantly bigger investment and be targeted for Phase II project. The project carried out all the necessary preparatory work, including provision of equipment, preparation of computer models of water supply systems, breakdown of the systems into water management areas, pilot area installed with water meters in the network and at consumers with data loggers in Balykchy and Cholpon-Ata. These two Vodokanals were provided with laptops and software and 2 representatives were trained in data collection in August 2017.With experience, knowledge, special equipment, hydraulic network models and zoning acquired through the project, Vodokanals have opportunities to reduce their non-commercial losses. The installed bulk water meters on water supply sources in Balykchy and Cholpon-Ata cities in July 2017 will enable the Vodokanals to obtain reliable data for NRW. Reducing NRW should be accompanied with further increase in installation of water meters for existing consumers while new consumers are connected with water meter.

20 Appendix 1

Design Summary Performance Targets and/or

Indicators Achievement

(ii) Energy savings achieved through efficient pumping systems (baseline to be established at project inception)

(iii) Residual chlorine at tail ends of water supply system maintained between 0.2 and 0.4 parts per million

(ii) Achieved. In Balykchy, 4 boreholes were rehabilitated and 1 new borehole was built. Under the contract for the installation of water meters, pumps supplying water to the apartment buildings were replaced with more energy-efficient ones in July 2017. In Cholpon-Ata, 2 boreholes were rehabilitated, 1 new borehole was built, and 3 pumps were replaced at the headwork and connected to the water supply system reservoir in July 2017. According to the MIS data of the in Balykchy and Cholpon-Ata Vodokanals, the electricity cost for the first half of 2017 decreased by 17% and 68%, respectively.

(iii) Achieved. Residual chlorine at tail ends of the networks was maintained at 0.3 ppm in Karakol and Cholpon-Ata city networks, while not determined in Balykchy due to the lack of a Vodokanal’s laboratory.

Community Upgrading: Community water and sanitation facilities constructed

23,000 persons in 2015 benefited from improved water supply and onsite sanitation system in neighborhoods (especially female-headed households), pre-schools and schools, health care organizations, public centers and institutions. In 2010, the communities depend on pit latrines, which will be converted to septic tanks

Achieved. As required by the city councils, improved water flush toilets with hands-washing water taps were provided in 10 schools in Balykchy, 9 schools in Karakol and 2 schools and 1 kindergarten in Cholpon-Ata by the end of 2015. A total of more than 27,800 children and teachers are benefited from this approach in 21 schools and 1 kindergarten. No water supply and sanitation facilities were constructed for communities, public centers, health care organizations, and public institutions.

Part B: Enterprise Resource Management

Accounting systems developed for all cities, vodokanal enterprises, and Tazalyk enterprise

(i) All cities' operating ratio improved to 0.8 by 2015 from greater than 1 in 2010, indicating improved financial management

Achieved. Computers with software for the management information system (MIS) and accounting system were installed with one unit each of the Vodokanal and Tazalyk enterprises of the three cities and the accounting systems were developed. Proficiency enhancement training was provided to the enterprise staff to develop the capacity of the Vodokanal and Tazalyk enterprises for the use of MIS and accounting system as envisaged.

(i) Close to be achieved.

The operating ratio is about 1.0 in average in 2016: about 1.0 in Karakol, 1.03 in Balykchy, and 0.98 in Cholpon-Ata. All three cities are no more subsidized in 2017 and after. From 2010 to 2014, the level of subsidies accounted 14% of revenue in average; 22% in Cholpon-Ata, 17% in Balykchy and 7% in Karakol. In 2015, the situation slightly improved, but the revenues from tariff covered almost half the cost of the operation. Karakol did not receive subsidies from the city, but their earnings covered O&M cost and only 25% of the amortization cost. In 2015, the level of yearly subsidies in Cholpon-Ata Vodokanal

Appendix 1 21

Design Summary Performance Targets and/or

Indicators Achievement

(ii) Vodokanal enterprises revenue collection efficiency improved from 70% in 2010 to 90% in 2015

(iii) Gender-disaggregated consumer database created for Vodokanal enterprises and tazalyk enterprises

decreased to 1.3 miln soms. Balykchy Vodokanal received more than 6 miln soms as subsidy, and had a debt for electricity for the previous period in about 50 miln soms (debt about 16 miln soms and penalty about 34 miln soms).

(ii) Close to be achieved.

The three Vodokanals revenue collection efficiency are being improved to the average rate close to 90% in 2016; 80% in Cholpon-Ata, 105% in Balykchy, and 100% in Karakol. Taking technical and commercial losses into account, the net account receivable is about 54% in average; 62% in Balykchy, 35% in Cholpon-Ata, and 64% in Karakol. An accounts receivable is higher in Karakol from residents, Cholpon-Ata from organizations, and in Balykchy from residents. According to 2017 data, the situation improved to 28% in Balykchy, while no change in the other two cities.

(iii) Achieved. Gender-disaggregated consumer database was created for all the Vodokanal and Tazalyk enterprises.

GIS developed for each city and infrastructure assets mapped

(i) Satellite images purchased and land cadastral maps procured

(ii) Calibrated network models developed for water and sewerage networks based on GIS maps

(i) Achieved. Satellite images have been purchased for three cities and cadastral maps obtained.

(ii) Achieved. GIS maps installed in all 3 Vodokanals. Network model prepared for water supply network in Balykchy and Cholpon-Ata. Calibration of the network models is implemented by trained specialists of Vodokanals, Balykchy and Cholpon-Ata cities. Additionally, provided were ultrasonic water meters, 1 set each for Balykchy and Cholpon-Ata in September 2017.

Management capacity of Vodokanal enterprises enhanced

(i) Twinning program with service utility from developed or developing member country completed by 2014.

(ii) Vodokanal enterprise staff trained on metering and leak rectification through district metering pilots

(iii) Vodokanal enterprise staff ensure safe sewage disposal and compliance with environmental legislations.

(i) Partly achieved. Twinning program initially entered with MCWC, Philippines, but cancelled after taking a first visit to the partner’s country, because of cultural mismatch with them. Vodokanal and Tazalyk management staff of the 3 cities made a study tour to New Zealand to observe and learn the O&M of water and solid waste processing plants in March 2014.

(ii) Achieved. One representative each of Balykchy and Cholpon-Ata city Vodokanals was trained in industrial water meters reading and data were uploaded to the laptop computers provided. The project provided special vehicles and equipment for rectification works. Some training also provided along with network rehabilitation works of contractor NCB-3.15 in June 2017. The calibration network models will facilitate Vodokanal specialists to locate areas with leaks and to develop some correction actions.

(iii) This target will be achievable by upgrading the sewage treatment plants through ISDP II, which is scheduled for the implementation from mid-2019.

22 Appendix 1

Design Summary Performance Targets and/or

Indicators Achievement

(iv) Capacity of women staff in database and financial management improved

(iv) Achieved. About 32 women staff trained in 3 cities for GIS and MIS program: 13 in Karakol, 9 in Cholpon-Ata and 10 in Balykchy. Additional training was conducted by PMO in November 2015, February 2016, and in May– July 2017.

Performance-based service (PBS) contracts for water supply and sewerage awarded

Performance-based service contracts approved by the Government based on public–private partnership law, and incentive and penalty mechanism agreed.

Not achieved. To recover the discrepancy with O&M cost, the viability gap fund (VGF) is provided through City budget finance to ensure sustainability of operations. Some performance-based indicators such as NRW not yet measured. Introduction of PBS or PPP should be considered along with further financial and technical improvements of water supply and sewage systems to attract private partners.

Part C: Project Assistance Facility

IEC campaign effectively implemented, materials on hygiene and sanitation disseminated, and women developed as hygiene and sanitation advocates

(i) Community and stakeholders aware of Project benefits and educated on hygiene and sanitation practices

Achieved. The IEC services provided by the consultants were renewed in 3rd quarter of 2016 and all the services under the contract completed in August 31, 2017. Nongovernment organizations actively involved in educating beneficiaries on project benefits. Community and stakeholders including school children became aware of project benefits and educated on hygiene and sanitation practices. Additionally, all relevant information is disclosed through the project website in Russian and English: www.isdp.kg

Appendix 2 23

PROJECT COST AT APPRAISAL AND ACTUAL

($'000)

Appraisal Estimate Actual

Item

Loan 2556

Grant 0163

Local Currency

Total

Cost Loan 2556

Grant 0163

Local Currency

Total Cost

A. Civil Works 1. Sewage System 9.63 - 3.08 12.7

0 6.27 2.04 8.30

2. Sanitary Landfill 3.00 0.96 3.96 3. Water Supply

System 3.66 - 1.17 4.83 3.87 0.25 1.38 5.51

4. Community WSS Facilities

1.22 0.39 1.62 1.07 0.52 1.59

Subtotal (A) 13.29 4.22 5.60 23.11

10.14 1.33 3.94 15.41

B. Equipment & Materials

1. SWM Vehicles - 0.82 0.26 1.08 0.58 0.38 0.96 2. SWM Tools &

Receptacles - 0.14 0.05 0.19 0.36 0.05 0.41

3. SWM Equipment - 0.17 0.05 0.22 1.49 0.47 1.96 4. Vodokanal Vehicle

& Equipment - 0.58 0.19 0.77 0.97 0.31 1.28

5. BRD & IDEP Equipment

- 0.21 0.07 0.28 0.68 0.15 0.83

6. PMO Vehicles - 0.10 0.03 0.14 0.16 0.03 0.19

Subtotal (b) 0.00 2.02 0.65 2.67 0.00 4.25 1.39 5.64 C. Enterprise Resource Management

1. MIS & Accounting - 0.45 0.14 0.59 0.34 0.11 0.45 2. Twinning Program - 0.45 0.14 0.59 0.02 0.00 0.02 3. GIS and Asset

Inventory - 0.45 0.14 0.59 0.20 0.06 0.26

4. Auditing Consultants

- - - - 0.01 0.04 0.01 0.05

Subtotal (C) 0.00 1.34 0.43 1.77 0.01 0.60 0.18 0.79 D. Project Assistance Facility

1. Design & Supervision Consultants

0.74 3.46 0.41 4.61

2. IEC Consultants 0.12 0.56 0.07 0.74

3. Project Management Office

0.41 1.91 0.31 2.62

Subtotal (D) 1.18 5.46 0.66 7.30 1.26 5.92 0.79 7.97 E. Contingencies

1. Physical Contingencies

1.04 0.45 0.16 1.65 - - - -

24 Appendix 2

Subtotal (E) 1.04 0.45 0.16 1.65 0.00 0.00 0.00 0.00 F. Financial Charges

1. Interest During Construction

1.00 0.27 0.27

Subtotal (F) 1.00 0.27 0.27

Total (A+B+C+D+E+F)

16.50 13.50 7.50 37.50

11.67 12.09 6.30 30.06

Abbreviations: SWM = solid waste management, WSS = water supply and sanitation, GIS = geographic information system, MIS = management information system, PIO = project implementation office, PMO = project management office.

Source: Asian Development Bank estimates.

Appendix 3 25

PROJECT COST BY FINANCIER

Table A3.1: Project Cost at Appraisal by Financier Loan 2556

Grant 0163 GoKR*

Total Costa

Amount

% of Cost

Category

Amount

% of Cost

Category

Amount

% of Cost

Category

Amount

Taxes and

Duties Item {A} {A/D} {B} {B/D} {C} {C/D} {D} {E}

A.

Civil Works

1. Sewage System 9.63 76% - - 3.08 24% 12.70 1.16 2. Sanitary Landfill - - 3.00 76% 0.96 24% 3.96 0.36 3. Water Supply System 3.66 76% - - 1.17 24% 4.83 0.44 4. Community WSS Facilities

- - 1.22 76% 0.39 24% 1.62 0.15

Subtotal (A) 13.2

9 57% 4.23 18% 5.60 24% 23.11 2.10

B.

Equipment & Materials

1.

SWM Vehicles - - 0.82 76% 0.26 24% 1.08 0.10

2.

SWM Tools & Receptacles

- - 0.14 76% 0.05 24% 0.19 0.02

3.

SWM Equipment - - 0.17 76% 0.05 24% 0.22 0.02

4.

Vodokanal Vehicle & Equipment

- - 0.58 76% 0.19 24% 0.77 0.07

5.

BRD & IDEP Equipment

- - 0.21 76% 0.07 24% 0.28 0.03

6.

PMO Vehicles - - 0.10 76% 0.03 24% 0.14 0.01

Subtotal (B) 0.00 0% 2.02 76% 0.65 24% 2.67 0.24

C.

Enterprise Resource Management

1. MIS & Accounting - - 0.45 76% 0.14 24% 0.59 0.05 2. Twinning Program - - 0.45 76% 0.14 24% 0.59 0.05 3. GIS and Asset

Inventory - - 0.45 76% 0.14 24% 0.59 0.05

Subtotal (C) - - 1.34 76% 0.43 24% 1.77 0.16 D Project Assistance

Facility 1.18 16% 5.46 75% 0.66 9% 7.30 0.66

Subtotal (D) 1.18 16% 5.46 75% 0.66 9% 7.30 0.66 E.

Contingencies

1. Physical Contingencies 1.04 63% 0.45 27% 0.16 10% 1.65 - Subtotal (E) 1.04 63% 0.45 27% 0.16 10% 1.65 - F. Financial Charges

1. Interest During Construction

1.00 100% - - - - 1.00 0.00

26 Appendix 3

Loan 2556

Grant 0163 GoKR*

Total Costa

Amount

% of Cost

Category

Amount

% of Cost

Category

Amount

% of Cost

Category

Amount

Taxes and

Duties Item {A} {A/D} {B} {B/D} {C} {C/D} {D} {E}

Subtotal (F) 1.00 100% - - - - 1.00 0.00

Total Project Cost

16.50

13.50 7.50 37.50 3.17

% Total Project Cost

44%

36%

20%

100%

* The Government of the Kyrgyz Republic Note: Total amount may not be the exact sum because of rounding Source: Asian Development Bank.

Appendix 3 27

Table A3.2: Project Cost at Completion by Financier

Loan 2556

Grant 0163 GoKR*

Total Costa

Amount

% of Cost

Category

Amount

% of Cost

Category

Amount

% of Cost

Category

Amount

Taxes and

Duties Item {A} {A/D} {B} {B/D} {C} {C/D} {D} {E}

A.

Civil Works

1. Sewage System 6.27 75.5 2.04 24.5 8.30 2. Sanitary Landfill

3. Water Supply System 3.87 70.3 0.25 4.6 1.38 25.1 5.51 4. Community WSS

Facilities 1.07 67.5 0.52 32.5 1.59

Subtotal (A): 10.14

65.8 1.33 8.6 3.94 25.6 15.41

B.

Equipment & Materials

1.

SWM Vehicles 0.58 60.2 0.38 39.8 0.96

2.

SWM Tools & Receptacles

0.36 87.8 0.05 12.2 0.41

3 SWM Equipment 1.49 76 0.47 24 1.96 4

. Vodokanal Vehicle & Equipment

0.97 76 0.31 24 1.28

5.

BRD & IDEP Equipment

0.68 81.8 0.15 18.2 0.83

6.

PMO Vehicles 0.16 84.6 0.03 15.4 0.19

Subtotal (B): 0.00 - 4.25 75.3 1.39 24.7 5.64 C.

Enterprise Resource Management

1. MIS & Accounting 0.34 76 0.11 24 0.45 2. Twinning Program 0.02 76 0.01 24 0.02 3. GIS and Asset

Inventory 0.20 76 0.06 24 0.26

3. Auditing Consultants 0.01 15.7 0.04 73.6 0.01 10.7 0.05 Subtotal (C): 0.01 1.1 0.60 75.8 0.18 23.1 0.79 D.

Project Assistance Facility

1. Design & Supervision Consultants

0.74 16 3.46 75 0.41 9 4.61

2. IEC Consultants 0.12 16 0.56 75 0.07 9 0.74 3. Project Management

Office 0.41 15.5 1.91 72.7 0.31 11.8 2.62

Subtotal (D): 1.26 15.8 5.92 74.2 0.79 9.9 7.97 E.

Contingencies

1. Physical Contingencies Subtotal (E): - - - - - - - F. Financial Charges

28 Appendix 3

Loan 2556

Grant 0163 GoKR*

Total Costa

Amount

% of Cost

Category

Amount

% of Cost

Category

Amount

% of Cost

Category

Amount

Taxes and

Duties Item {A} {A/D} {B} {B/D} {C} {C/D} {D} {E}

1. Interest During Construction

0.27 100 0.27

Subtotal (F): 0.27 100 0.27 Total Project

Cost 11.6

7 12.09 6.30 30.07

% Total Project Cost

38.8% 40.2% 21% 100%

* The Government of the Kyrgyz Republic Note: Total may not be the exact sum because of rounding. Sources: Asian Development Bank.

Appendix 4 29

DISBURSEMENT OF ADB LOAN AND GRANT PROCEEDS

Table A4.1: Annual and Cumulative Disbursement of ADB Loan and Grant Proceedsa ($ million)

Loan 2556 Grant 0163

Period Disburse-

ments Cumulative

Disbursement % Disburse-

ments Cumulative

Disbursement %

2010 0.00 0.00 0.0% 0.90 0.90 7.4%

2011 0.09 0.09 0.8% 1.22 2.12 17.5%

2012 0.17 0.27 2.3% 1.23 3.35 27.7%

2013 0.21 0.47 4.1% 1.78 5.13 42.4%

2014 3.04 3.52 30.1% 2.89 8.02 66.3%

2015 3.84 7.36 63.1% 1.67 9.69 80.1%

2016 2.53 9.89 84.8% 1.02 10.71 88.6%

2017 1.85 11.74 100.6% 1.34 12.05 99.7%

2018* (0.07) 11.67 100% 0.04 12.09 100.0%

Total 11.67 12.09

* Refund of unused balance. Source: Loan/Grant Financial Information System (LFIS/GFIS), Mainframe System. a Includes disbursements to advance accounts.

Table A4.2: Contract Awards and Disbursements Projections Changes

Projection Changes Date Reason

Version 1 (Project Effectiveness) 29-Jan-2010 Version 2 (as of Dec-31-2013) Modified Date 17-Mar-2014 Actualized (Annual) Version 3 (as of Apr-01-2014) Approval Date of Revised

Projections: 28-Mar-2014 Modified Date 30-Mar-2014

Endorsement memo OSFMD memo of 7 Mar 2014 requesting RDs to input realistic CAD projections in eOps, which will be locked by 31 Mar 2014

Version 4 (as of Dec-08-2014) Approval Date of Revised Projections: 21-Oct-2014 Modified Date 28-Nov-2014

CWRD memo of 21 Oct 2014 to OSFMD on bank-wide exercise to clean up all CAD projections and unlocking eOps for revisions

Version 5 (as of Dec-31-2014) Modified Date 18-Feb-2015 Actualized (Annual) Version 6 (as of Dec-31-2015) Modified Date 10-Feb-2016 Actualized (Annual) Version 7 (as of Aug-08-2016) Modified Date 08-Aug-2016 KYRM memo of 19 Jul 2016 to

CWRD DG requesting to change eOps CAD projections

Version 8 (as of Dec-31-2016) Modified Date 27-Feb-2017 Actualized (Annual) Version 9 (as of Dec-31-2017) Modified Date 15-Feb-2018 Actualized (Annual) Version 10 (Project Closing - Oct-19-2018)

Modified Date 19-Oct-2018 Adjusted (Project Closing)

30 Appendix 4

Figure A4.1: Projection and Cumulative Disbursement of ADB Loan and Grant Proceeds ($ million)

Year

Cumulative Projected

Disbursements

Cumulative Actual

Disbursements

2010 1.61 0.9

2011 11.13 2.21

2012 22.89 3.62

2013 26.80 5.6

2014 29.02 11.54

2015 29.02 17.05

2016 29.02 20.6

2017 29.02 23.79

2018* 29.02 23.76

* The EA had refunded $187,744.26 back to ADB, with value date of 2 August 2018.

Appendix 5 31

CONTRACT AWARDS OF ADB LOAN AND GRANT PROCEEDS

Table A5.1: Annual and Cumulative Contract Awards of ADB Loan and Grant Proceeds

($ million) Annual Contract Awards (CA) Cumulative Contract Awards (CA)

Yeara Amount

($ million) % of Total Amount

($ million) % of Total

2010 2.64 11.1 2.64 11.2 2011 2.54 10.7 5.18 22.0 2012 2.76 11.6 7.94 33.8 2013 0.85 3.6 8.79 37.4 2014 11.62 48.9 20.41 86.8 2015 0.43 1.8 20.84 88.7 2016 1.03 4.3 21.87 93.1 2017 1.63 6.9 23.76 100.0

Total 23.76 100% Source: Loan/Grant Financial Information System (LFIS/GFIS), Mainframe System.

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

32 Appendix 5

Figure A5.1: Projection and Cumulative Contract Awards of ADB Loan and Grant

Proceeds ($ million)

Year Cumulative

Projected CA Cumulative Actual CA

2010 3.75 2.64

2011 25.24 5.18

2012 26.97 7.94

2013 28.25 8.79

2014 29.02 20.41

2015 29.02 20.84

2016 29.02 21.87

2017 29.02 23.76

Appendix 6 33

CHRONOLOGY OF MAIN EVENTS

Date Event 9 November 2009 Financing agreement signed 29 January 2010 Financing agreement became effective 3 March 2010 First loan/grant funds disbursement June 2010 Political turmoil and civil unrest happened. November 2010 Actual start of project implementation with establishment of PMO/PIO 28 December 2010 Consultant for design and supervision engaged. 30 June 2011 The contract with DSC consultant was terminated. 24 April to 3 May 2012 Midterm review conducted 8 June 2012 The contract with the 2nd DSC was executed 10 July 2012 Extension of consulting services for IEC 30 May 2014 PMO project director passed away and PIO project manager was appointed

as the PMO director concurrently. Nov 2011 – May 2017 Signing of various supply contracts Sep 2013-Sep 2014 Signing of various civil works contracts 27 June 2014 1st Extension of loan and grant closing date till 31 December 2016 October 2015 Minor change in utilization of surplus of loan funds 19 March 2016 Transfer of project administration from Central and West Asian Department

(CWRD) to Kyrgyz Resident Mission (KGZRM9 3 June 2016 2nd extension of loan and grant closing date till 31 December 2017 29 July 2016 Extension of consulting services by DSC December 2016 Minor change in the scope of work for the solid waste management

component approved by ADB. The establishment of a regional sanitary landfill was not materialized. The DMF was revised accordingly.

July 2017 Cancellation of loan savings and closing of loan account 31 August 2017 Physical completion of the Project 17 October 2017 Last award of the contract for equipment (EQ-48) 31 December 2017 Completion of the civil work for water intake and presedimentation tank in

Karakol 2 August 2018 Final disbursement November to December 2018 Project completion review by the ADB mission Source: Asian Development Bank.

34 Appendix 7

PROJECT IMPLEMENTATION SCHEDULE

Ministry of Finance of the Kyrgyz Republic

Issyk-Kul Sustainable Development ProjectPROJECT IMPLEMENTATION MONITORING Status as per:

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Planning per original Project Administration Manual

Modified plan per 01/01/2011

Actual Progress / Planned next quarter

4 Construction supervision and quality control

5 Project management and administration

2 Conduct information, education and communication campaign

3 Secure technical and environmental expertise

C Project Assistance Facility

1 Prepare detailed engineering design

Enter into PBS contracts

4 Performance Based Service (PBS) Contracts

Finalize contract documents for water, sewerage and SWM

Roll-out twinning program

3 Capacity Development

Develop twinning program and establish partnership

Conduct Asset Mapping and Condition Assessment

Develop Geographical Information Systems

2 GIS and Asset Inventory

Procure Satellite Images

Roll-out MIS and revenue enhancement plan

Create consumer database

Establish accounting procedures and develop MIS

B Enterprise Resource Management

1 Management Information Systems and Accounting

Expand access to water and sanitation

6 Community upgrading

Undertake community development activities

4 Procure Vodokanal vehicle and equipment

5 Procure BRD & IDEP Equipment

Construct boreholes in Balykchy and Cholpon-Ata

Construct pre-sedimentation tank at Karakol

Replace transmission main in Balykchy

3 Water Supply Infrastructure

Install flow meters and assess nonrevenue water

Construct sanitary landfills

2 Solid Waste Management

Procure municipal waste equipment and vehicles

Restore trenches and asphalt roads

Construct new sewer lines

Rehabilitate existing sewerage system

A Infrastructure Improvement

1 Sewerage and Sanitation

1 Identify staff and operationalize PAF

2 Select Project Consultants

2016 2017

Project Preparation

30-Sep-17

Activity2009 2010 2011 2012 2013 2014 2015

Appendix 8 35

STATUS OF COMPLIANCE WITH LOAN COVENANTS

# Covenant Status of Compliance

[FA Schedule 3A]

1 Imprest Account -- Loan [FA Schedule 3A], and Grant [FA Schedule 3B] Establishment and operations of the Loan and Grant imprest accounts.

Complied with.

2 Disbursement Procedures [FA Schedule 3A para 5]

Except as ADB may otherwise agree, the Loan and Grant proceeds for financing Goods, Works, consulting services and other items of expenditures shall be disbursed in accordance with the Loan Disbursement Handbook.

Complied with.

3 SOE Procedure [FA Schedule 3A para 6]

(a) Except as ADB may otherwise agree, the Beneficiary shall cause the EA to establish, immediately after the Effective Date, an imprest account exclusively for the utilization of the Loan proceeds at a commercial bank acceptable to ADB. Such imprest account shall be established, managed, replenished and liquidated in accordance with the Loan Disbursement Handbook and detailed arrangements agreed upon between the Beneficiary and ADB. The imprest account established hereunder shall be separate from the imprest account established for the utilization of the Grant proceeds, and the currency of such imprest account shall be Dollar. The maximum amount to be deposited by ADB into the imprest account for the Loan proceeds at any given time shall not exceed the lower of (i) the estimated six (6) month's expenditure to be paid out of such imprest account, or (ii) 10% of the Loan amount.

Complied with.

(b) The SOE procedure may be used for reimbursement of eligible expenditures and to liquidate advances provided into the imprest account for the Loan and Grant proceeds in accordance with the Loan Disbursement Handbook and detailed arrangements agreed upon between the Beneficiary and ADB. Any individual payment to be reimbursed or liquidated under the SOE procedure shall not exceed the equivalent of $100,000 per payment.

Complied.

4 Condition of Withdrawals from the Loan Account [FA Schedule 3A para 8]

Notwithstanding any other provision of this Financing Agreement, no withdrawals shall be made from the Loan and Grant accounts until the following conditions have been met:

(a) The Beneficiary shall have established the PMO and appointed the Project director and the finance manager for the PMO; and

(b) The Beneficiary shall have established the PIO and appointed the Project manager and an accountant for the PIO

Complied with.

a) PMO established on 24 Dec 2009 and PD appointed on 12 Jan 2010, Fin Manager on 24 Dec 2009. b) PIO established on 24 Dec 2009, PM appointed: 12 Jan 2010 and accountant on 24 Dec 2009. 1st withdrawal made on 10 Mar 2010

[FA Schedule 4]

1 Fielding of Consultants Complied with.

36 Appendix 8

# Covenant Status of Compliance

Both consulting firms and individual consultants were engaged as scheduled. Some other consultants were engaged as needed. The contract for DSC was signed on 29 Dec 2010, but was terminated on 30 June 2011, and another consultant was employed on 8 June 2012.

2 Procurement of Goods and Services. ¶

All Goods, Works and consulting services to be financed out of the proceeds of the Loan and the Grant shall be subject to, and governed by, the Procurement Guidelines and the Consulting Guidelines, respectively. All terms used and not otherwise defined in this Financing Agreement have the meanings provided in the Procurement Guidelines and/or the Consulting Guidelines, as applicable.

Complied with.

[FA Schedule 5]

1 [FA Schedule 5 para 1]

As the Project Executing Agency, MOF shall have the overall responsibility for the implementation of the Project. More specifically, the Beneficiary shall cause the EA to, among others:

(a) hold monthly meetings with the PMO to review the progress of the Project implementation; (b) submit progress and other reports to the SC for decision making and ensure all decisions of the SC concerning the Project are fully complied with;

(c) ensure that all technical expertise and SEE required by the law of the Beneficiary for any Works have been obtained prior to awarding relevant contract; (d) ensure relevant Project covenants are complied with; and

(e) closely coordinate with ADB on all other matters related to the Project implementation

Complied with.

a) Progress review meetings held at regular intervals;

b) QPR submitted to ADB and semiannual environmental monitoring reports

c) ensured

d) ensured

e) close coordination with ADB

2 Steering Committee (SC) [FA Schedule 5 para 2]

The Beneficiary shall cause that:

(a) within one (1) month from the Effective Date, the SC is established with the PMO acting as its secretariat;

(b) a representative from the Prime Minister's Office of the Beneficiary is designated as the chairperson of the SC, which shall also have representatives from relevant Ministries and other state entities, as the Beneficiary considers necessary, to serve as members of the SC;

(c) the SC meets at least once every three (3) months;

(d) the SC has the full power to decide on matters related to the Project throughout the Project implementation period;

(e) the SC is given the mandate to oversee progress on relevant action plans concerning the Concept of Sustainable Development of the Ecological and Economic System of Issyk-Kul, adopted by the Beneficiary through a Presidential Decree in February 2009, and to be primarily

Partly complied with. a) Partly complied. SC established on14 July 2011

b) By the Decree dated 30 March 2013 SC replaced with Coordination Council. The 1st CC meeting took place on 14 February 2014 where the following issues were discussed and approved: the results of project implementation in 2013; a new approach for combining civil work packages; a request for ADB to extend a project closing date till the end of 2016; and needs of training of civil works contractors. c) The CC meeting was called as needed. Last meeting was held on 22 June 2014 to review the landfill solution. d) Complied with.

Appendix 8 37

# Covenant Status of Compliance

responsible for guiding the development in the Issyk-Kul oblast; and

(f) the SC uses the outcome of the Project to formulate relevant policies on water supply and sanitation, and institutional effectiveness for Beneficiary's urban sector development.

e) Complied with. f) Complied with. The Department of Drinking Water Supply and Sewage Development under the GOSSTROY used project outcome to formulate policies on water supply and sanitation, and to reflect the achievements of the project in the National Sustainable Development Strategy of the Kyrgyz Republic.

3 [FA Schedule 5 para 3]

PMO - The Beneficiary shall cause that the PMO is led by a full-time Project director to oversee the day-to-day Project implementation at the central level, who will be supported by a team of professional staff comprising, among others, an office manager/translator, a procurement expert, a financial manager, and a domestic project performance monitoring specialist. The Beneficiary shall further cause the PMO to undertake, among others, the following responsibilities: (a) overseeing Project accounting and auditing;

(b) obtaining all technical expertise and SEE required by the law of the Beneficiary for any Works prior to awarding relevant contract;

(c) conducting PPMS surveys;

(d) monitoring Project covenants to ensure that they are duly complied with by the Project Cities;

(e) carrying out all Project related procurement work with the assistance of relevant consultants engaged under the Project; and

(f) compiling and submitting Project related reports.

Complied with. PMO was led by the full time-time director, supported by a team of outsourced professional staff. PIO was established in December 2009 and undertook the responsibilities as required for (a) - (f).

4 [FA Schedule 5 para 4] The Beneficiary shall cause that the PIO is led by a full time Project manager to oversee the day-to-day Project implementation at the oblast level, who will report directly to the PMO Project director and the Governor of the Issyk-Kul oblast, and will be supported by three (3) international experts specializing in water supply and sanitation, environmental management, and solid waste management respectively, a domestic social and gender development specialist, an accountant, an office manager/translator, an information technology specialist as well as other supporting staff.

Partially Complied with. The PIO led by the project manager and staff fulfilled its responsibilities. Since the project manager was appointed as Director of the PMO on 28 December 2015, no succeeding PIO manager was appointed as agreed by ADB. The PIO was supported by international experts including a water supply and sanitation engineer and local experts. International environmental specialist quit on July 20 2015, and a replacement national environmental specialist appointed on 1 March 2017.

5 [FA Schedule 5 para 5] The Beneficiary, to ensure that the EMMP is duly implemented by IDEP and BRD, shall cause that: (a) IDEP is made directly responsible for mitigating and monitoring relevant environmental impacts during Project design, construction and operations;

Complied with.

(a) IDEP (Issyk-Kul territorial Department of Environmental Protection and Forestry in Cholpon-Ata) and BRD (Biosphere Reserve Directorate in Balykchy) were assigned responsibility for monitoring the

38 Appendix 8

# Covenant Status of Compliance

b) BRD complements IDEP's aforesaid activities through a parallel monitoring function and ensures that all Project activities comply with the environmental laws and regulations of the Beneficiary within relevant biosphere reserve; and

(c) both IDEP and BRD are adequately staffed and equipped to perform the functions as required above.

impacts of the project in the EMMP.

(b) Both organizations were involved to implementing the ISDP Environmental Monitoring Plan, coordinated by the PMO. Also regional departments of the State Environmental and Technical Inspectorate provided site supervision overall project construction sites and participate in commissioning after construction completion since its creation by the Decree of the Government No.12 from December 12 2012.

(c) IDEP and BRD were provided with vehicles and necessary equipment and given extensive training in September 2013, October 2014, and June 2015. Later, part of the BRD laboratory equipment were shifted to IDEP by the State Agency for Environmental Protection and Forestry. Additional staff were provided to both the organizations, following the Government resolution No 223 dated 19 April 2017.

6 [FA Schedule 5 para 6]

Within six (6) months from the Effective Date, the Beneficiary shall cause PMO to:

(a) establish a PPMS acceptable to ADB, based upon the PPMS indicators agreed by and between the Beneficiary and ADB;

(b) conduct initial baseline physical and socioeconomic surveys relating to the Project; and

(c) submit to ABD for approval a detailed implementation plan for benchmarking Project information and monitoring related performance.

Delayed compliance.

Unstable situation in the country at the start of the project caused delays

a) PPMS established in December 2011.

b) Baseline surveys conducted for IEC component in all three cities in 2013 and in September 2017 presenting a final survey results.

c) A detailed implementation plan for benchmarking project related monitoring performance was quarterly updated and a Quarterly Progress Report submitted.

7 [FA Schedule 5 para 7] Throughout the Project implementation period, the Beneficiary shall cause that: (a) a monthly Project review is carried out by MOF based on monthly performance reports prepared and submitted by the PMO for each Project City, and copies of such monthly performance reports are sent to the Issyk-Kul oblast administration office, SC, and ADB: and

(b) a quarterly Project review is carried out by SC, during which relevant monthly reports submitted by the PMO, major policy issues, and actions required or taken by relevant authorities are examined and discussed, and the results are circulated to MOF, SAEPF, the Issyk-Kul oblast administration office, as well as the Project Cities. In addition to monthly and quarterly reviews, a semi-annual Project review shall be carried out by ADB, and

Complied with.

a) Regular meetings between MOF and PMO took place.

b) Quarterly reports regularly submitted to ADB. The reports were initially reviewed by the MOF

c) Mid-term review carried out about

Appendix 8 39

# Covenant Status of Compliance

(c) a comprehensive midterm review shall be carried out jointly by the Beneficiary and ADB twenty-four (24) months after the Effective Date to identify problems or weaknesses in Project implementation arrangements, and to agree on any corrective measures.

2.5 years after the effective date, which was considered inappropriate because of almost no progress in all the project components, including the engagement of the 2nd consultant for design and supervision.

8 Auditing and Reporting [FA Schedule 5 para 8]

Without any prejudice to the provisions of (a) Section 4.02 of the Financing Agreement, (b) the Loan Regulations, and (c) the Grant Regulations, the Beneficiary shall ensure that all entities involved in Project implementation maintain separate records and accounts for the utilization of the respective proceeds of the Loan and the Grant. In addition to the requirements set forth in Section 6.05 of the Loan Regulations and Section 6.04 of the Grant Regulations, the Beneficiary shall cause MOF to prepare, and submit to ADB (a) within twenty (20) days after each quarter, a quarterly report, and (b) within thirty (30) days after each year, an annual report, each on the implementation status and progress of the Project. Each of such reports shall be submitted in such form and in such details as ADB shall reasonably require.

Not fully complied.

With the assistance of an audit expert externally engaged under the project, project financial reports and auditing reports were prepared and submitted to ADB in a timely manner. The APFS FY2018 was not submitted as unexpected delay caused in financial closure of the project. The final liquidation of the imprest accounts was submitted and processed by ADB on 5 July 2018 (under Loan 2556) and 13 July 2018 (under Grant 0163). Despite having no audit report prepared for fiscal year 2018, all the expenses for $669,163.26 were fully liquidated and accepted by ADB’s Controller’s Department as eligible.

The EA prepared and submitted to ADB the quarterly reports and annual reports generally in a timely and satisfactory manner.

9 Fund Flow and Counterpart Funding [FA Schedule 5 para 9]

The Beneficiary shall cause and ensure smooth Project fund flow in accordance with the mechanism agreed with ADB.

The Beneficiary shall further cause and ensure that all funds and other resources required for implementing the Project are provided on a timely basis in accordance with the financing plan agreed for the Project.

Complied with.

The KGZ share of the project funding is allocated from the general budget. Budget constraints caused occasionally delays of funds flow by about one month.

10 Financial Improvement Action Plans [FA Schedule 5 para 10]

The Beneficiary shall cause and ensure that:

(a) by January 2011, each of the Project Cities prepares a financial improvement action plan to revise the water, sewerage and solid waste management fees in order to meet at least the operations and maintenance cost for relevant services provided: and

(b) each of the aforesaid action plans is properly implemented.

Complied with.

All 6 municipal enterprises have set up new tariffs for the water, sewerage and solid waste management in order to meet operations and maintenance cost. In Karakol, tariffs for water supply and sewerage services increased two times and by 49% for sewerage in 2013; in Cholpon-Ata for 25% for water and sewerage in 2016; in Balykchy for 60% in 2017. For solid waste management services, in Karakol tariff increased by 82% for apartment buildings in 2017; in Cholpon-Ata by 50% in 2016; in Balykchy by 18% in 2013.

MIS and accounting system installed in

40 Appendix 8

# Covenant Status of Compliance

2013 in the three municipal enterprises. Additional trainings were provided during November 2015 and March 2016. Vodokanal enterprises implemented upgrading platform 1C for incorporating Sales Tax, reporting to the State Tax Inspection and to Social Fund in 2016. Cholpon-Ata Vodokanal requested changes in payment calculation to include penalties for accounts overdue. This was completed in August 2017.

11 Availability of Viability Gap Fund [FA Schedule 5 para 11]

The Beneficiary shall cause and ensure that relevant viability gap funding to be provided by the Beneficiary for the purposes of this Project is timely made available to each of Vodokanal enterprises and Tazalyk enterprises in the Project Cities to bridge the revenue shortfall in their respective operations; provided, however, that the relevant Vodokanal enterprises or Tazalyk enterprises concerned, before being given any relevant viability gap funding, shall have met the relevant performance standards set out in its annual operating plan approved by the council of the Project City in question. To ensure future sustainability of Vodokanal enterprises and Tazalyk enterprises, the Beneficiary shall progressively implement tariff increases with the goal of achieving full cost recovery, subject to the affordability of consumers in the territory of the Beneficiary.

Complied with.

Gap funding to the cities’ enterprises was routed through the funding from the central government to the city budgets as the cities make up the shortfall in operational revenues.

12 Anti-corruption [FA Schedule 5 para 12]

The Beneficiary shall comply with, and shall cause MOF, any and all other government offices, organizations and entities involved in implementing the Project to comply with, ADB's Anticorruption Policy (1998, as amended to date) and ADB's policy relating to Enhancing the Asian Development Bank's Role in Combating Money Laundering and the Financing of Terrorism (2003)

Without limiting the generality of the preceding paragraph, the Beneficiary shall cause MOF to ensure that all contracts financed by ADB in connection with the Project include provisions specifying the right of ADB to audit and examine the records and accounts of all contractors, suppliers, consultants and other service providers as they relate to the Project.

Complied with.

14 [FA Schedule 5 para 14]

For each contract financed under the Project, the Beneficiary shall also cause MOF to disclose on its website information concerning, among others:

(a) the list of participating bidders;

(b) name of the winning bidder;

(c) basic details on bidding procedures and procurement methods adopted;

(d) the amount of contract awarded;

(e) the list of Goods/services, including consulting services,

Complied with.

Information on detailed project activities and advertisements were published in English and Russian on Project website http:// www.isdp.kg. MOF prepared special website in Russian “Golos naroda” where all projects displayed for general public,

http://projects.minfin.gov.kg/

Appendix 8 41

# Covenant Status of Compliance

procured; and

(f) the intended and actual utilization of the proceeds of the Loan and/or the Grant, as the case may be, under each contract.

15 [FA Schedule 5 para 15] The Beneficiary shall ensure that:

(a) the Project is designed and implemented in compliance with the Beneficiary's relevant laws and regulations, and the requirements of ADB's Environment Policy (2002)

(b) relevant environmental mitigation measures specified in the EMMP as updated during detailed engineering design are incorporated into relevant bidding documents and Works contracts

(c) prior to issuing the bidding documents for any Works, the EMMP including its updates if any as required has been approved by ADB and all technical expertise as well as SEE required by the law of the Beneficiary for such Works have been obtained;

(d) all mitigation measures and monitoring requirements set forth in the EMMP are fully carried out throughout the Project implementation; and

(e) the environmental performance concerning the Project is rigorously monitored, and a report describing the progress of EMMP implementation including related issues and recommendations is submitted to ADB on a semi-annually basis.

Partial Complied with.

Project EMMP approved by the State Agency of Environmental Protection and Forestry on 15 July 2013, and by ADB on 19 July 2013. Site-specific supplementary EMPs prepared by the PMO and incorporated in all bidding documents.

Final designs for all construction tenders, including ICB-3.11, 3.12, 3.13, 3.14, NCB-3.15 completed; and SEMPs were granted approval of the State Environmental Expertise under the SAEPF.

Environmental supervision and monitoring of construction works started in October 2013. Implementations of SEMP mitigation requirements were poor from the beginning of construction stage. However, the contractors performed satisfactorily with regard to their environmental responsibilities. For all completed sub-projects the final environmental audit was carried out and the results were reflected in the semi-annual environmental reports.

First semi-annual environmental monitoring report was issued on June 17, 2014. The semi-annual environmental reports were submitted to ADB in February 2015, August 2015, February 2016, September 2016, February 2017, and August 2017. The final report completed in December 15, 2017.

16 [FA Schedule 5 para 16] Land acquisition and resettlement related activities are not envisioned by the Beneficiary under the Project. However, where a need for land acquisition and resettlement occurs during the implementation of the Project, the Beneficiary prior to commencing relevant Project activities shall: (a) promptly inform ADB of such a need; (b) prepare relevant safeguard documents in accordance with all applicable laws and regulations of the Beneficiary, and ADB's Policy on Involuntary Resettlement (1995) for the approval of ADB;

(c) cause and ensure that all relevant Works commence and contractors are mobilized only after that the related land acquisition and resettlement plan as approved by ADB

No land acquisition and resettlement was encountered.

42 Appendix 8

# Covenant Status of Compliance

has been disclosed to the affected people and properly carried out; (d) cause and ensure that all land and rights-of-way required for carrying out the relevant Project activities are made available by the Beneficiary in a timely manner; and (e) cause and ensure that the activities of all relevant contractors are in compliance with the requirements of the related land acquisition and resettlement plan approved by ADB. If there is any discrepancy between the Beneficiary's relevant laws and regulations, and the requirements of ADB's Policy on Involuntary Resettlement (1995), ADB's policy shall apply.

17 [FA Schedule 5 para 17] The Beneficiary shall ensure that all recommendations in the land acquisition and resettlement due diligence report prepared for the Project are fully implemented and the relevant results are reported to ADB.

No issues were encountered

18 [FA Schedule 5 para 18] Indigenous Peoples:

Indigenous peoples are not envisioned by the Beneficiary to be negatively affected under the Project. If a negative impact occurs during the implementation of the Project, the Beneficiary shall cause MOF to ensure that the Project is carried out in accordance with the requirements of ADB's Policy on Indigenous Peoples (1998).

No negative impacts were identified.

19 [FA Schedule 5 para 19] Labor: The Beneficiary shall ensure that each of the Works contractors of the Project complies with all applicable labor, health, and safety laws and regulations of the Beneficiary. In particular, the Beneficiary shall cause MOF to ensure that each of the Works contracts financed under the Project: (a) contains provisions prohibiting use of child labor and differentiation in wages between male and female workers for work of equal value; (b) includes mandatory provisions requiring contractors and consultants to provide healthy, safe and secure working conditions as well as adequate medical, life and disability insurance for employees; and

(c) has a requirement to carry out periodic HIVIAIDs awareness and prevention programs for labor, and disseminates information concerning the risks of sexually transmitted diseases and HIV/AIDs as part of health and safety measures for employees.

Complied with.

PMO and DSC consultant monitored that each of the contracts: (a) contained SEMP requiring the contractor to prepare Health and Safety Plans describing the risks associated with the construction work and precautions they will take. and (b) had requirements for HIV/AIDs awareness and prevention programs for labor, and dissemination of information concerning the risks of sexually transmitted diseases. HIV/AIDs awareness and prevention programs conducted by IEC Consultant for all contractors. Seminars were held at regular intervals. The contractors complied with local protocols concerning acceptable behavior towards local population. No accidents or incidents were recorded during construction period,

Appendix 9 43

ECONOMIC AND FINANCIAL REEVALUATION

A. Introduction

1. Post-project economic and financial analyses were undertaken to reevaluate the expected economic and financial returns based on actual costs expended, and, where appropriate, to compare these returns with those projected during appraisal. Reevaluation based on the methodology accepted during appraisal allows for a comparison of projected indicators with the indicators after project completion. Vodokanals, as services providers, showed potential for cost recovery, with their financial viability and sustainability measured using standard FIRR and EIRR estimation, while profit and loss statements are built up as the basis for tariff projections. At appraisal and at reevaluation, financial and economic analyses were undertaken for Balykchy, Cholpon-Ata and Karakol towns. Post project findings based on samples reviewed for economic analysis reveal that subprojects remain heavily subsidized by the local government of the three towns. Vodokanals and Tazalyks already operational since 2009 maintain tariffs that are generally insufficient to even cover direct expenses.

B. Methodology

2. Economic and financial reevaluation are carried out in accordance with ADB Guidelines.1 The economic internal rate of return (EIRR) is calculated based on actual investment costs, and actual and projected operating and maintenance (O&M) expenses. To calculate the EIRR, benefit and cost streams are discounted in the economic analysis, taking into account the economic cost of capital (EOCC) at 12%. A subproject is declared economically beneficial when the estimated EIRR is greater than the EOCC. The financial internal rate of return (FIRR) is calculated taking into account costs and revenue flows and measured against the weighted average cost of capital (WACC), which is 1.26% at appraisal and 0.42% at reevaluation. A subproject is considered sustainable when the FIRR exceeds the WACC. Economic net present value (ENPV) and financial net present value (FNPV) used as proxies to the IRRs are likewise calculated.

C. Economic Analysis

3. Economic Costs. Economic capital investment and O&M costs were reevaluated based on actual financial expenditures converted using standard conversion factors (SCF) valued at world price numeraire. Economic costs exclude taxes and duties, and financial prices are converted to economic prices using reevaluated conversion factors. The conversion factor for skilled and unskilled labor, is assumed at 1.0 and 0.7, the shadow wage rate factor (SWRF), respectively.2 SCF for traded components is 1.0; for non-traded components, 1.0. The economic life of the project is assumed to be 25 years after project completion in 2017/2018. At reevaluation, capital and recurring costs are converted at between 0.84 and 0.89, averaging 0.86, for water supply and sewerage (WSS) components (from appraisal at 0.83-0.9), and between 0.91 and 0.92, averaging 0.91, for the solid waste management (SWM) (from appraisal at 0.89-0.91).3

1 Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian

Development Bank (ADB), the Framework for the Economic and Financial Appraisal of Urban Development Sector Projects of ADB, and the Handbook for the Economic Analysis of Water Supply Projects.

2 Based on assessment of current labor situation in coverage areas. Skilled labor is scare and thus, market price is assumed; and conversion factor used is 1.0. SWRF for unskilled labor, which is not scarce in the area, is 0.7, the estimated opportunity cost of unskilled labor.

3 The different WSS and SWM subproject unit costs and volumes contribute to the variation in average conversion factors between the two components.

44 Appendix 9

Appraisal and reevaluated economic capital and operating and maintenance costs are used in the cost-benefit analysis. Table A9.1 presents the effective conversion rate of capital investment from financial to economic cost.

Table A9.1: Conversion of Capital Investment from Financial to Economic Cost Financial Costa Economic Cost Conversion

Item $ million $ million Rate

Water Supply and Sewerage 24.578 21.038 0.86

Balykchy 8.665 7.388 0.85

Cholpon Ata 5.753 5.116 0.89

Karakol 10.160 8.534 0.84

Solid Waste Management 5.700 5.204 0.91

Balykchy 1.775 1.625 0.92

Cholpon Ata 1.967 1.797 0.91

Karakol 1.957 1.782 0.91 a Excludes financing charges.

4. Economic Benefits. Economic and financial assumptions applied at reevaluation are updated from appraisal estimates and also from actual post-construction operations data, including water and sewerage and solid waste demand, tariffs and charges, and O&M costs, and statistical data, including subproject served population, population growth rates, staff salaries and average household income. Water supply and sewerage components are operated by Vodokanals, while solid waste management services are provided by Tazalyks. Both O&M entities are revenue-earning.

5. Economic Benefits of Water Supply and Sanitation Component. At appraisal, quantifiable benefits relate to resource cost savings from incremental and non-incremental water and health cost savings. At reevaluation, the same benefits are assessed including updated assumptions that determine cost savings in collection time, alternative supply or putting up own source, water storage facility maintenance, water treatment, and lost labor days and wages due to water-borne disease. Economic evaluation includes both direct and indirect benefits. The higher standard of public hygiene leads to a decrease in waterborne diseases, less time being spent on collecting water, and decrease in or the elimination of household water treatment and maintenance costs.

6. The water supply facilities with the project in place reduces the economic cost of obtaining water for each household. There are cost savings resulting from time saved collecting water from alternative and supplementary sources, from maintaining private water reservoir or containers, and traditional treatment by boiling. Collection time averages1.5 hours daily, slightly higher than findings at appraisal at 1 hour, depending on distance travelled to the alternative source with the activity involving at least 2 household members. Hourly minimum wage rate at $ 200 per day ($5 per hour) is used to monetize time saved and shadow-priced at the SWRF of 0.7. Water supplied by the project replaces private water supplies used by the existing households (non-incremental demand) and enables households to increase consumption (incremental demand). Resource cost savings also arise from elimination of purchasing and maintaining containers to store collected water in at the cost of $35-$50. The value of non-incremental water is obtained by multiplying the supply price of non-incremental water by the annual non-incremental water consumption.4 The value of incremental water is calculated by multiplying the incremental water consumption by the willingness-to-pay price of incremental water. As parts of the project areas are now sufficiently

4 Calculated by dividing the total resource cost savings by the current average non-incremental consumption.

Appendix 9 45

served, the cost savings benefit 80% of the service area in Balykchy (from 76% at appraisal), 83% in Cholpon-Ata (no significant change since appraisal), and 90% in Karakol (from 85% at appraisal).

7. With project completion, the non-revenue water (NRW) situation in the 3 cities improved from 60% at appraisal to about 45% from midterm until 2017. After 2018, NRW is expected to decrease to 35% until 2020, then further to 30% by 2021 and 25% by 2025.

8. Health benefits derive from savings due to absence from work resulting from water-borne and sanitation related diseases. During disease episodes, a household income-earner absent from work an average of 3.5 days each year (from 4 days estimated at appraisal). Labor savings are calculated based on the daily minimum wage rate of $200 per day ($5 per hour), shadow-priced at SWRF, and multiplied by the estimated 4-5 days lost in a year, the morbidity rate and the economically active population rate (65.1%).5 The avoided annual medical cost per household, including medication, transport and checkup (excluding doctors and medical staff wages) is estimated at $50.

9. Economic Benefits of Solid Waste Component. Economic benefits arising from the solid waste management component are based on value of savings in waste disposal time and health benefits from avoided illness and medical expenditure. As at appraisal, increase in property values is not considered in the analysis due to the lack of information on property prices, tax assessments and mapping in the region.

10. The assumptions for the time resource cost savings are derived from the socioeconomic survey at appraisal complemented by actual time savings from household disposal activities as observed practices and spot check interviews with households at site. The benefit is calculated on the assumption that a household spends 30-120 minutes, with at least two members interchangeably taking out garbage twice daily from the house to the dustbin or waste collection area located approximately 150-200 meters of each building. The cost saved from the activity is derived by estimating the time utilized by a household income-earner for the activity at 1.5-3.5 hours per month, valued using the hourly minimum wage rate at $5 per hour, shadow-priced at SWRF.

11. Health benefits deriving from the improved solid waste management services include avoided medical cost to treat diseases mostly from rat infestation and other vectored diseases and avoided cost due to absence from work of wage-earners who fall ill due to unhygienic environment resulting from unsanitary waste disposal practices and insufficient waste collection and disposal services. The benefits are estimated applying 2-3 days workers fall ill after exposure to disease specific to poor sanitation and unhealthy surroundings, multiplied by morbidity rate (Footnote 5), economically active population rate at 65.1%, and medication expense.

12. EIRR and Sensitivity Analysis. For the project to be economically viable, the EIRR must exceed the economic opportunity cost of capital (EOCC) which was set at 12% at the time of appraisal. EIRRs at appraisal and at reevaluation reflect differences mainly from delayed implementation and completion. At appraisal, project implementation is planned for 2009/2010, and completion by 2015. Actual implementation started in 2010/2011, with completion after 8 years in 2017/2018 due to significant changes in project scope and limited capacity of PMO staff assigned to bidding and evaluation resulting in delays in procurement of major contract packages

5 Morbidity rates (per 100,000 population) applied are 0.53% in Balykchy, 0.44% in Cholpon-ata, and 1.1% in Karakol.

46 Appendix 9

(including DSC and works and goods) and actual construction.6 These set back expected project benefits by the same number of years while costs increased. Base case analysis EIRR at appraisal averaged 27.6% for water supply and sewerage component, and ENPV averaging $3.13 million. Appraisal EIRR for solid waste component averaged 24.3%, with ENPV at $ 1.13 million. Table A9.2 presents the EIRRs at appraisal stage.

Table A9.2. EIRR at Appraisal Particulars Average Average Balykchy Cholpon-Ata Karakol

EIRR ENPV, $ million EIRR

ENPV, $ million EIRR

ENPV, $ million EIRR

ENPV, $ million

Base case - WSS 27.6% 3.126 26.9% 3.199 27.3% 1.703 28.5% 4.475 Base case - SWM 24.3% 1.128 22.9% 1.226 24.5% 1.269 25.5% 0.891

EIRR = economic internal rate of return; ENPV = economic net present value

13. At appraisal, for the WSS component, EIRR is most sensitive to a decrease in benefit, resulting in EIRR below minimum in this parameter. This is likewise the case at reevaluation as all three subprojects display EIRR below the minimum. Cholpon Ata also reflects lower than minimum EIRR when capital costs increase by 20%. The EIRRs remain robust under the other sensitivity scenarios.

14. For the SWM component, all base case EIRRs exceed the EOCC. A 20% increase in capital cost affects Cholpon-Ata, although still viable at 12.5%. All three subprojects are most sensitive to a 20% decrease in benefits, resulting in an EIRR below the threshold. Table 3 presents the EIRR sensitivity results at reevaluation. Detailed cash flow analysis for water supply and sewerage and for solid waste components are in Attachments 1 and 2.

Table A9.3. EIRR and Sensitivity Analysis at Reevaluation

Particulars

Average Average Balykchy Cholpon-Ata Karakol

EIRR ENPV, $ million EIRR

ENPV, $ million EIRR

ENPV, $ million EIRR

ENPV, $ million

Water Supply and Sewerage

Base Case 14.7% 0.562 14.4% 0.622 13.4% 0.277 16.2% 0.786 Capital Cost plus 20% 11.4% -0.151 11.5% -0.146 10.9% -0.242 11.7% -0.067 O&M Cost plus 20% 13.4% 0.309 13.5% 0.394 12.4% 0.071 14.5% 0.460 Benefits less 20% 9.5% -0.517 10.0% -0.498 9.2% -0.503 9.2% -0.549

EIRR = economic internal rate of return; ENPV = economic net present value

Solid Waste Management

Base Case 18.9% 0.592 19.7% 0.670 14.6% 0.196 22.2% 0.907 Capital Cost plus 20% 16.1% 0.410 17.0% 0.496 12.2% 0.018 19.1% 0.714

6 Refer to E. Project Schedule, section II. Design and Implementation.

Appendix 9 47

Particulars

Average Average Balykchy Cholpon-Ata Karakol

EIRR ENPV, $ million EIRR

ENPV, $ million EIRR

ENPV, $ million EIRR

ENPV, $ million

O&M Cost plus 20% 17.6% 0.473 19.0% 0.592 13.0% 0.075 20.7% 0.752 Benefits less 20% 14.1% 0.173 15.6% 0.284 9.9% -0.142 16.7% 0.377

EIRR = economic internal rate of return; ENPV = economic net present value

D. Financial Analysis

15. Financial analysis assesses the capacity of subprojects to cover future costs including capital investments and O&M costs and necessary replacements. The analysis is done on “without-project” and “with-project” scenarios, assessing increasing costs and revenues over 25 years. As with the appraisal methodology, the main financial parameters of sustainability at reevaluation are the FIRR, which should be higher than the weighted average cost of capital (WACC), and water and sewerage tariff affordability, generally acceptable at 4-5% for water component and up to 7-8% of household income when including sanitation (sewerage and solid waste management) component.

16. Subproject Costs. Capital cost includes all infrastructure investments including provisions for enterprise resource management support and project assistance facility. Total base cost assessed for the three subprojects at appraisal amounts to $26.41 million (SUM 1,136 million). At reevaluation, total assessed for financial analysis amounts to $24.58 million (SUM 1,057 million). O&M costs include staff wages, and administration, water treatment, power and fuel, and maintenance costs. The annual depreciation expense is calculated at 2.5% (40-year useful life) for civil works, and 6.7% (15-year useful life) for equipment. At appraisal, total annual direct O&M cost for all components amounts to $3.37 million (Year 2010). During reevaluation, total annual O&M cost is slightly lower at $2.92 million (Year 2018) based on reported data at Vodokanals and Tazalyks. The discrepancy mainly lies in price inflation applied in the projections at the time of project preparation.

17. Subproject Revenues. Revenues are calculated based on actual domestic and non-domestic demand as reported by Vodokanal. Subproject forecast assumes water supply from existing alternative sources will eventually be replaced by supply from the project. Sales revenues are based on tariffs designed for full O&M cost recovery, but in accordance with tariff reforms that ensure affordability and social acceptability. Projected annual revenue at appraisal (Year 2010) for all components amounts to $2.25 million. At reevaluation (Year 2018), annual revenue remains at $2.25 million, lower than O&M cost. To recover the discrepancy with O&M cost, the viability gap fund (VGF) is provided through City budget finance to ensure sustainability of operations during the period 2010-2017/2018. As agreed at project appraisal stage, the three City governments at Balykchy, Cholpon-Ata and Karakol continue to provide the VGF.

18. Cost Recovery and Viability Gap Fund. Current subproject tariffs for both components charged to domestic households and non-domestic connections are used in the analysis. Future tariffs are determined to satisfy full O&M cost recovery.7 It is assumed tariff collection rates would improve as services improve. At appraisal, for both components, the actual collection rate is about

7 At appraisal, cost recovery options included estimates for tariff coverage of depreciation and loan interest, referred to

as Level II and Level III, respectively. Level I refers to O&M cost recovery. In the reevaluation, only full O&M cost recovery, or Level I, is considered, as this provides the basis for tariff setting in the future. Government pays for the financing needs of the project and these costs do not bear on tariff setting.

48 Appendix 9

60%, and is assumed to increase gradually to 70-80% after completion and to 90% at full operation. The delay in implementation impacted the actual collection rate so that the projected improvement in collection is not achieved, but not by much because the subproject Vodokanals and Tazalyks made strides to raise revenue and reduce dependency on VGF. In the reevaluation, projected tariff collection is assumed to further improve to 80-90% after 2018/2019 and maintain the same level as minimum target. Table A9.4 presents the VGF required in Year 2010 at appraisal.

Table A9.4. VGF Requirement for 2010 - Appraisal

($ million)

Items Total Balykchy Cholpon-Ata Karakol

O&M cost WSS 0.97 0.28 0.18 0.52

O&M cost SWM 2.06 0.50 0.79 0.77

Total O&M Cost 3.03 0.78 0.97 1.28

Sales WSS 0.64 0.27 0.10 0.27

Sales SWM 0.24 0.08 0.10 0.06

Total Sales 0.88 0.35 0.20 0.33

VGF WSS 0.45 0.05 0.11 0.30

VGF SWM 2.07 0.48 0.78 0.80

Total Estimated VGF 2.52 0.53 0.89 1.09

19. VGF is projected at appraisal up to year 2030. For the WSS component, the estimated VGF required is $8.19 million. For the SWM, the requirement reached over $70 million to resolve issues on affordability of the proposed future SWM service charges at appraisal. During reevaluation, the VGF requirement is estimated based on updated revenue and costs. Table A9.5 presents the estimated VGF provided during the period 2010-2017/2018, and the current year up to 2030. However, the long-term sustainability is subject to on-time and adequate viability gap funding which was not sufficient in the past.

Table A9.5. VGF Requirement for 2010-2030 - Reevaluation ($ million)

Period Total Balykchy Cholpon-Ata Karakol

Water Supply and Sewerage (WSS) 2010-2018 5.26 1.29 3.43 0.55

2019-2030 2.08 - 1.76 0.32

2020-2030 7.34 1.29 5.19 0.87

Solid Waste Management (SWM) 2010-2018 3.30 0.78 0.94 1.59

2019-2030 4.13 0.93 0.99 2.21

2020-2030 7.44 1.71 1.93 3.80

Total WSS and SWM 14.78 2.99 7.12 4.67

20. Tariffs. In the analysis, tariffs are established to account for inflation as the costs are expressed nominally. In the discounted cash flows, tariffs are reflected in real terms. As a sustainability measure, initial tariff increases start 2 years after subproject completion to give users time to adapt to tariff reforms, including tariffs adjusted biennially, and that are in line with user willingness-to-pay. At appraisal, actual financial performance data towards targeted project completion in 2015 and during initial operation in 2015-2016 reveal sufficient O&M cost recovery.

Appendix 9 49

But as the target completion and start of operation are not attained, adjustments are made during reevaluation to estimate tariffs that would be viable and affordable. The tariffs and VGF are used as tools to ensure sustainable operations amidst difficulties in imposing tariff reforms despite the implementation delays. The tariff adjustments are tied to the VGF to keep the tariffs within household affordability and acceptability. The VGF is necessary to ensure sustainability and is tied to estimating the financial internal rate of return (FIRR) that measures financial viability. Without the VGF, the tariffs would likely be unaffordable to households. Tables A9.6 and A9.7 present the percentage tariff increases projected at appraisal and updated during the reevaluation stage.

Table A9.6. Projected Tariff Increases - Appraisal

Subproject 2015 2017 2019 2021 2023

WSS Balykchy 20% 20% 50% 50% 75%

WSS Cholpon-Ata 20% 20% 40% 40% 60%

WSS Karakol 20% 20% 60% 60% 100%

SWM Balykchy 20% 20% 60% 60% 120%

SWM Cholpon-Ata 20% 20% 50% 50% 120%

SWM Karakol 20% 40% 80% 100% 120%

Table A9.7. Projected Tariff Increases - Reevaluation

Subproject 2015 2017 2019 2021 2023 2025 2027

WSS Balykchy 30% 30% 35% 35% 35% 35% 35%

WSS Cholpon-Ata 40% 40% 40% 40% 60% 60% 80%

WSS Karakol 30% 30% 35% 35% 45% 45% 70%

SWM Balykchy 50% 50% 50% 50% 60% 60% 80%

SWM Cholpon-Ata 50% 50% 50% 50% 70% 70% 70%

SWM Karakol 55% 55% 55% 55% 90% 90% 110%

21. The required increases are relatively lower at reevaluation compared to appraisal as the actual O&M expenses reported for the period 2013-2017/2018 are lower than projected at appraisal for the same period. Reevaluation estimates are adjusted based on this.

22. Affordability analysis. Affordability analysis is undertaken to ensure households, particularly those in the low-income group, can afford the water and sewerage tariffs. Based on generally accepted principle that water supply expenditure should not exceed 4–5% of average household income, the projected water tariffs are considered affordable. With price of sewerage service included, it is likely acceptable to charge consumers up to 5-6%, and including solid waste, the proportion to household income is allowable at 7-8%. Table A9.8 shows the affordability analysis results reflecting tariffs for WSS and SWM components are within allowable maximum rates.

Table A9.8. Tariff Affordability Analysis

Subproject Balykchy Subproject Cholpon-Ata Subproject Karakol

Particulars Year 10 Year 15 Year 25 Year 10 Year 15 Year 25 Year 10 Year 15 Year 25 Income Spent for WSS 0.6% 1.1% 0.7% 0.6% 1.5% 1.8% 0.3% 0.5% 0.5% Income Spent for SWM 0.1% 0.4% 0.9% 0.5% 1.6% 2.9% 0.0% 0.2% 0.6% Combined WSS & SWM 0.8% 1.5% 1.6% 1.1% 3.1% 4.7% 0.4% 0.7% 1.1%

50 Appendix 9

23. Weighted Average Cost of Capital. The WACC is calculated in real terms and used as a basis for measuring subproject financial viability. Funding sources are the ADB loan and capital contributions from the government, with weights at 89% and 11%, respectively. Inflation is estimated at an annual average of 1.5% for foreign costs and 2.24% for local costs. The rates are computed on after-tax basis, resulting in the WACC in real terms estimated at 2.3% for water supply and sewerage component at reevaluation, and 2.2% for solid waste component. At appraisal, the applied WACC is based on nominal rate. This is recalculated in real terms using appraisal capital cost estimates and financing mix. The average WACC for both components is at 4.6%. At reevaluation, the recalculated WACC averages 2.2%. The WACC at reevaluation is in Table A9.9 for water supply and sewerage, and Table A9.10 for solid waste component.

Table A9.9. WACC for WSS – Reevaluation ($ million)

Total ADB GoKR

Particulars Cost Loan Equity

Amount 28.001 25.052 2.949

Weighting 100% 89% 11%

Tax-Adjusted Nominal Cost 1.5% 25.0%

Inflation Rate 2.5% 2.24%

Real Cost 20.3% -0.98% 22.26%

Weighted Component of WACC 2.3% 0.0% 2.3%

Table A9.10. WACC for SWM – Reevaluation

($ million) Total ADB GoKR

Particulars Cost Loan Equity

Amount 6.493 5.809 0.684

Weighting 100% 89% 11%

Tax-Adjusted Nominal Cost 1.5% 25.0%

Inflation Rate 2.5% 3.79%

Real Cost 18.5% -0.98% 20.43%

Weighted Component of WACC 2.2% 0.0% 2.2%

24. FIRR and Sensitivity Analysis. For the project to be financially viable, FIRR must exceed the WACC. FIRRs at appraisal and at reevaluation reflect differences mainly arising from delayed project implementation and completion. Base case analysis FIRR at appraisal averages 3.9% for water supply and sewerage component, and FNPV averaging $1.82 million. Appraisal FIRR for the solid waste component averages 15.5%, with a FNPV at $0.03 million. The FIRR for SWM is not adjusted to WACC in real terms during the reevaluation stage. Table A9.11 presents the FIRRs at appraisal stage.

Table A9.11. FIRR at Appraisal Particulars Average Balykchy Cholpon-Ata Karakol

FIRR FNPV, $ million FIRR

FNPV, $ million FIRR

FNPV, $ million FIRR

FNPV, $ million

Base Case - WSS 3.9%

1.82 4.2% 1.977 3.4% 1.018 4.2% 2.462

Base Case - SWM 15.5%

0.03 15.4% 0.017 15.4% 0.024 15.5% 0.043

FIRR = financial internal rate of return; FNPV = financial net present value

Appendix 9 51

25. At appraisal, for the WSS component, the FIRR is most sensitive to a decrease in revenue, which would result in an FIRR below the WACC in all three subprojects. Cholpon-Ata is also sensitive to increase in capital cost. For SWM, all 3 subprojects satisfy the WACC (in nominal terms).

26. At reevaluation, the FIRR of the WSS component exceed the WACC except when revenue is reduced by 20%, and for Balykchy and Cholpon-Ata, when capital cost is increased by 20%. For SWM component, the FIRR exceeds the WACC at base case and when costs increase by 20%, except for Cholpon Ata in the latter scenario. In all 3 subprojects, FIRR is below threshold when revenue is reduced by 20%. Table A9.12 presents the FIRR and sensitivity analysis at reevaluation.

Table A9.12. FIRR and Sensitivity Analysis at Reevaluation

E. Conclusions

27. The reevaluation shows that Subprojects Balykchy, Cholpon-Ata and Karakol are economically and financially viable. The three subprojects are likewise sustainable as the recalculated tariffs are well within the affordability levels of households and other beneficiaries. It is recommended that the subproject Vodokanals and Tazalyks monitor future tariff requirements and to keep the proposed schedule of adjustments. The subprojects are shown to be most sensitive to reductions in revenue. Monitoring O&M expenditure and keeping cost effective measures will help attain revenue targets.

28. The VGF supports financial viability. Projections show the need for continuity in this aspect. Without VGF, tariff levels for both components will exceed the projected schedule of adjustments and would likely be unaffordable to households. Again, with cost effective and control measures, the level of VGF requirement could decrease, lowering the impact upon City fiscal budgeting. Likewise, the level of tariff adjustments could be reduced with effective management of costs and resources. However, the long-term sustainability is subject to on-time and adequate viability gap funding which was not sufficient in the past.

Particulars

Averag

e Average Balykchy Cholpon-Ata Karakol

FIRR ENPV, $

mln FIRR FNPV, $

mln FIRR FNPV, $ mln FIRR FNPV, $ mln

Water Supply & Sewerage Base Case 3.8% 1.587 3.7% 1.376 3.5% 1.166 4.1% 2.219 Capital Cost plus 20% 2.3% -0.002 2.2% -0.247 2.1% -0.123 2.7% 0.363 O&M Cost plus 20% 3.1% 0.795 3.1% 0.798 2.7% 0.416 3.3% 1.171

Revenue less 20% 1.2% -1.112 1.2% -1.100 0.8% -1.107 1.5% -1.128

Solid Waste Management Base Case 3.7% 0.586 3.8% 0.607 3.6% 0.479 3.8% 0.673 Capital Cost plus 20% 2.1% -0.035 2.2% 0.038 1.8% -0.165 2.2% 0.023 O&M Cost plus 20% 2.3% 0.069 2.8% 0.239 2.0% -0.069 2.2% 0.037

Revenue less 20% -0.0% -0.670 0.6% -0.451 -0.5% -0.809 -0.1% -0.749 FIRR = financial internal rate of return; FNPV = financial net present value