Issyk-Kul Wastewater Management Project: Report and ... · Minhong Fan, Procurement Specialist, Procurement, Portfolio and Financial Management Department Cholpon Mambetova, Integrity

Report and Recommendation of the President to the Board of Directors

Project Number: 50176-002 October 2018

Proposed Loan and Grant Kyrgyz Republic: Issyk-Kul Wastewater Management Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 8 October 2018)

Currency unit – som (Som)

Som1.00 = $0.014347 $1.00 = Som69

ABBREVIATIONS

ADB – Asian Development Bank

DDWSSD – Department of Drinking Water Supply and Sewerage Development

EMP – environmental management plan

Gosstroy – State Agency for Architecture, Construction, Housing and Public Utilities under the Government of the Kyrgyz Republic

km – kilometer

LARP – land acquisition and resettlement plan

m3 – cubic meter

MLD – million liters per day

O&M PAM

– –

operation and maintenance project administration manual

PIO – project implementation office

PMO – project management office

PRGIKO – Office of the Plenipotentiary Representative of the Government in Issyk-Kul Oblast

SPZ – sanitary protection zone

WSS – water supply and sanitation

WWTP – wastewater treatment plant

NOTE

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

Vice-President Wencai Zhang, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Director Yong Ye, Urban Development and Water Division, CWRD Team leader Ruoyu Hu, Urban Development Specialist, CWRD Team members Annalyn Almodiel, Operations Assistant, CWRD

Ainagul Amanova, Senior Project Officer, Kyrgyz Resident Mission, CWRD Ana Paula Araujo, Environment Specialist, CWRD Minhong Fan, Procurement Specialist, Procurement, Portfolio and Financial Management Department Cholpon Mambetova, Integrity Specialist, Office of Anticorruption and Integrity Maritess Marcelino, Associate Project Officer, CWRD Patricia Rhee, Senior Counsel, Office of the General Counsel Mary Alice Rosero, Social Development Specialist (Gender and Development), CWRD Lu Shen, Unit Head, Portfolio Management, CWRD Yukihiro Shibuya, Social Development Specialist (Safeguards), CWRD

Peer reviewer Jingmin Huang, Principal Urban Development Specialist, SARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1

B. Impact and Outcome 3

C. Outputs 4

D. Summary Cost Estimates and Financing Plan 4

E. Implementation Arrangements 5

III. DUE DILIGENCE 6

A. Technical 6

B. Economic and Financial 7

C. Governance 7

D. Poverty, Social, and Gender 8

E. Safeguards 8

F. Summary of Risk Assessment and Risk Management Plan 9

IV. ASSURANCES AND CONDITIONS 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 14

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 16102018113417419503 Generated Date: 29-Oct-2018 14:41:16 PM

1. Basic Data Project Number: 50176-002Project Name Issyk-Kul Wastewater Management

Project Department/Division

CWRD/CWUW

Country Kyrgyz Republic Executing Agency Department of Drinking Water Supply and Sewerage Development under the State Agency for Architecture, Construction, Housing & Public Utilities under the Government of the Kyrgyz Republic

Borrower Kyrgyz Republic

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

Urban policy, institutional and capacity development 7.67

Urban sewerage 28.85

Total 36.52

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

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

Environmentally sustainable growth (ESG)

Global and regional transboundary environmental concernsNatural resources conservationUrban environmental improvement

Climate Change impact on the Project

Medium

ADB Financing

Adaptation ($ million) 1.23

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

Institutional development

Partnerships (PAR) ImplementationPrivate Sector

Private sector development (PSD)

Public sector goods and services essential for private sector development

Effective gender mainstreaming (EGM)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

NoNoYes

Urban High

SDG Goals SDG3, SDG6, SDG11

6. Risk Categorization: Low.

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

8. Financing

Modality and Sources Amount ($ million)

ADB 36.52

Sovereign Project grant: Asian Development Fund 12.84

Sovereign Project (Concessional Loan): Ordinary capital resources 23.68

Cofinancing 0.00

None 0.00

Counterpart 5.30

Government 5.30

Total 41.82

Currency of ADB Financing: USD

ISSYK-KUL

NARYN

CHUI

Lake Issyk-Kul

Lipenka

Tyup

Novovoznesenovka

Ak-Bulak Korumdu

Kyzyl-Suu

Ak-Terek

Barskoon

TosorKaji-Say

Temir-Kanat

Bokonbayevo

Kyzyl-Tuu

Ala-Bash

Ottuk

Cholpon-Ata

Krasnyi Most

Toru-Aygyr

Tamchy

Grigorievka Ananyevo

Oital

Balykchy

Karakol

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

N

0 15 30

Kilometers

Osh

Jalal-Abad

Talas

Naryn

Batken

KarakolBISHKEK

ISSYK-KUL

NARYN

TALAS

CHUI

JALAL-ABAD

BATKEN

OSH

MAIN MAPKYRGYZ REPUBLIC

ISSYK-KUL WASTEWATER MANAGEMENT PROJECT

18-1882 17KGZ ABV

Project City

National Capital

Provincial Capital

Main Road

Railway

River

Provincial Boundary

International Boundary

Boundaries are not necessarily authoritative.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed (i) loan and (ii) grant, both to the Kyrgyz Republic for the Issyk-Kul Wastewater Management Project.1

2. The project will improve wastewater services in two lakeshore cities on Issyk-Kul lake, in the eastern region of the Kyrgyz Republic. It will upgrade and expand the existing wastewater systems, build institutional capacity, and strengthen the sustainability of the water supply and sanitation (WSS) utilities in Balykchy and Karakol.2

II. THE PROJECT

A. Rationale

3. Issyk-Kul lake, the second-largest high-altitude lake in the world, is renowned for its clear waters; it is designated as a Ramsar site of globally significant biodiversity,3 and is a key asset of the Issyk-Kul Biosphere Reserve.4 The surrounding Issyk-Kul region is rich with environmental, archeological, and cultural resources, and supports internationally important biodiversity.5 As a consequence, the region is one of the nation’s most popular tourist destinations, with tourism now an important source of revenue, especially for lakeshore cities. The impacts of tourism growth on the environment and ecosystems of the lake and shoreline areas are of growing concern, particularly in relation to wastewater pollution, and notably in the three primary lakeshore cities of Balykchy, Cholpon-Ata, and Karakol.

4. Core problem. Balykchy (population 47,000) is located at the western extremity of the lake; Karakol (population 76,000) is located at the lake’s eastern extremity. Both cities have extended aeration-based wastewater treatment plants (WWTPs) that were constructed in the 1980s. However, only 30% of the population in Balykchy (3,400 households), and 45% of the population in Karakol (7,200 households) are currently connected to the centralized systems. The WWTPs are dilapidated and treat only about 8 million liters per day (MLD) of wastewater through sedimentation. The remaining 14 MLD of wastewater is disposed of through unsanitary pit latrines and other methods characterized by poor maintenance and lack of adequate septage collection and disposal. While most resorts maintain sewage treatment facilities, monitoring of treatment operations and effluent quality is inadequate. The combination of partially operating sewerage systems, self-provision of sanitation facilities, and inadequate monitoring of sewage discharge from resorts pose a significant threat to the lake’s water quality, leading to increased public health risks and environmental degradation. These in turn limit tourism development, which relies heavily on the lake’s environment.6

5. Vodokanal enterprises in Balykchy and Karakol are responsible for WSS services.7 Their expenditures are high due to operational inefficiencies arising from the aging system, poor operational and management capacity and lack of maintenance equipment. Staff incentives are

1 Formerly the Second Issyk-Kul Sustainable Development Project, listed in Country Operations Business Plan, 2018–

2020. Manila. 2 Asian Development Bank (ADB) 2016. Technical Assistance to the Kyrgyz Republic for Preparing the Second Issyk-

Kul Sustainable Development Project. Manila. 3 The Ramsar Convention is an international treaty relating to the sustainable use and conservation of wetlands. 4 The reserve was designated by the United Nations Educational, Scientific and Cultural Organization in 2001. 5 The Issyk-Kul region covers an area of approximately 43,100 km2 and has an estimated population of 483,000. 6 Public health and environmental risks from these practices include groundwater contamination, and diseases related

to poor sanitation such as hepatitis, typhoid, and ascariasis. 7 Vodokanal enterprises are municipal enterprises responsible for WSS services in the nation’s cities and towns.

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low, with no corporate motivation mechanisms. The vodokanals are unable to recover operating costs through their revenues and rely on budget support. To improve their cash flows, vodokanals need to develop corporate-oriented business plans and service standards, train and retain skilled staff in technical and financial management to improve the operational efficiency and provide better customer services, so that customers are willing to pay increased tariffs.

6. Sector policies and institutional arrangements. Government targets for WSS services focus on inclusive development to improve functionality, enhance service levels, and expand municipal sanitation. In terms of policy, this includes a targeted strategy for WSS development to 2026,8 and a national strategy to guide sustainable development to 2040.9 A comprehensive legislative and regulatory framework for environmental and natural resource protection has also been enacted with project responsibility recently transferred to the technically oriented Department of Drinking Water Supply and Sewerage Development (DDWSSD).10 The Asian Development Bank (ADB) has provided assistance through the Issyk-Kul Sustainable Development Project,11 which improved wastewater collection systems and provided institutional strengthening in both Balykchy and Karakol. Other development partners also provide WSS sector assistance.12

7. Priority needs. Wastewater treatment in both cities is inadequate, and the dilapidated WWTPs urgently require upgrading to meet effluent discharge standards. This is widely recognized as essential for the proper functioning of the systems and their subsequent expansion. The management of septage from private sanitation facilities needs to be improved, and sludge discharged from the Karakol WWTP to a reservoir needs to be removed. Building on the original Issyk-Kul Sustainable Development Project (footnote 11) institutional development initiatives, the vodokanals require further strengthening to increase their financial management and operation and maintenance (O&M) capabilities, and to continue their adoption of modern, best practices in utility operations.

8. Proposed project. Complementing the Issyk-Kul Sustainable Development Project, the project will upgrade the WWTPs with new technology, further expand the networks, improve private facility septage management, and remove wastewater sludge from a reservoir in Karakol. It will further build the capacities of the two vodokanals through structural strengthening and targeted personnel training in utility corporate planning, O&M, and financial management. The project will support the following operational priority areas of Strategy 2030:13 (i) making cities more livable, (ii) enhancing environmental sustainability, and (iii) strengthening governance and institutional capacity. The project is consistent with ADB’s Water Operational Plan 2011–2020,

8 Government of the Kyrgyz Republic. 2016. Strategy for the Development of Drinking Water Supply and Sanitation

Systems for Human Settlements in the Kyrgyz Republic up to 2026. Bishkek. The strategy provides WSS sector development guidance to rationalize policy and regulatory frameworks, improve WSS service delivery, promote financial viability, and enhance environmental sustainability and climate resilience.

9 Government of the Kyrgyz Republic. 2017. National Strategy for Sustainable Development of the Country for 2018–2040 of the Government of the Kyrgyz Republic-Taza Koom-Jany Door. Bishkek. The strategy is currently being revised by the National Sustainable Development Council under the President’s Office.

10 A department of the State Agency for Architecture, Construction and Public Utilities (Gosstroy). Project responsibility was previously with the Ministry of Finance.

11 ADB. 2009. Issyk–Kul Sustainable Development Project. Manila. The project included wastewater collection system improvements in Balykchy and Karakol.

12 Including (i) the World Bank’s Small Towns Infrastructure and Capacity Development Project, (ii) water supply system improvements in Balykchy by the European Bank for Reconstruction and Development, and (iii) water supply investments in Karakol by the Swiss State Secretariat for Economic Affairs.

13 ADB. 2018. Strategy 2030. Manila.

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and ADB’s country operations business plan, 2018–2020 for the Kyrgyz Republic.14 It also aligns with previous and ongoing ADB-funded sector projects and contributes to the attainment of Sustainable Development Goals.15

9. Value added by ADB’s assistance. (i) Technology and innovation. ADB’s intervention will introduce modern, efficient

wastewater treatment technologies that assure stringent compliance with effluent discharge standards, while being cost efficient and within the operational capacity of vodokanals. The selected modern technology—intermittently decanted extended aeration lagoon with trickling filter tertiary treatment—has a high potential for replication in other cities throughout the nation.

(ii) Institutional development. The project will support further development of the vodokanals for modern utility management, including (a) formulating corporate business plans;16 (b) targeted training modules on corporate utility management, O&M, and utility financial management;17 (c) twinning with an international WSS knowledge-based facility;18 and (d) establishing a septage management unit in each vodokanal; and (e) providing O&M equipment.

(iii) Climate change. The project design incorporates climate adaptation solutions that will enhance the climate resilience of the cities.19 These include (a) separating drainage networks from wastewater networks,20 (b) introducing climate-resilient design standards and features, and (c) improving system sustainability through the selection of corrosion-resistant pipelines and the incorporation of WWTP technologies that better withstand climate-induced impacts.21

10. Lessons. Lessons incorporated in the project from previous ADB-financed projects include (i) strengthening project management effectiveness through deeper engagement of the executing agency, implementing agency, and steering committee; (ii) minimizing the number of procurement packages to improve efficiency; (iii) strengthening project and vodokanal staff capacity and knowledge; (iv) instituting project staff performance reviews; and (v) facilitating advance action for land acquisition, resettlement, and detailed engineering design.

B. Impact and Outcome

11. The project is aligned with the following impact: living standards, health, and economy in the Issyk-Kul Region improved (footnote 8). The project will have the following outcome: access to sustainable and reliable wastewater services in Balykchy and Karakol improved and expanded.22

14 ADB. 2017. Kyrgyz Republic: Country Operations Business Plan, 2018–2020. Manila. The project supports the

government’s commitment to reforms, increasing wastewater access, and improving WSS service sustainability. 15 Sustainable Development Goals of the United Nations Development Programme, primarily Goal 6: Clean Water and

Sanitation. 16 To establish service standards and a performance benchmarking matrix, and improve technical and investment

planning to increase operational efficiency, optimize organizational structures, and strengthen financial management. 17 Including the training and international qualification accreditation of vodokanal personnel in these areas. 18 In order to provide long-term, knowledge-based support to the vodokanals. 19 World Bank. 2010. Adapting to Climate Change in Eastern Europe and Central Asia. Washington, DC. The nation is

considered the third-most vulnerable nation to climate change in Eastern Europe and Central Asia region. 20 To prevent intense rainfall events associated with climate change from causing sewerage overflows and

environmental degradation. 21 Including variations in temperature, flow rates, influent quality, and septage sludge volumes. 22 The design and monitoring framework is in Appendix 1.

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C. Outputs

12. Output 1: Balykchy and Karakol wastewater systems improved, including (i) the upgrading of the Balykchy and Karakol WWTPs; (ii) construction of 21.6 kilometers (km) of sewerage, and 1.7 km of effluent outfall pipelines; (iii) construction of a new pump station and upgrading of a pumping main in Karakol; (iv) desludging a reservoir in Karakol by removing 100,000 cubic meters (m3) of sludge; and (v) providing seven septage vacuum trucks.

13. Output 2: Vodokanal capacity strengthened and project implementation improved in Balykchy and Karakol by (i) developing business models for each vodokanal that cover technical, institutional, operational, human resource, and financial management aspects, and establish service standards and performance benchmarking; (ii) implementing training modules to strengthen vodokanal capacity in corporate utility management, O&M, and utility financial management;23 and (iii) arranging a twinning with an international WSS knowledge-based facility.

14. Output 3: Septage management services improved and sanitation and hygiene awareness increased in each city by (i) establishing a septage management unit in the vodokanal and training unit personnel; (ii) developing a septage management program to rationalize and expand septage collection services, regulate septage collection operators,24 and regularize septage tariffs and tariff collection mechanisms; and (iii) conducting a sanitation and hygiene awareness program to improve community awareness and understanding of best sanitation practices, and community support for the wastewater management.

D. Summary Cost Estimates and Financing Plan

15. The project is estimated to cost $41.82 million (Table 1). Detailed cost estimates by expenditure category and by financier are included in the project administration manual (PAM).25

Table 1: Summary Cost Estimates ($ million)

Item Amounta A. Base Costb 1. Wastewater collection and treatment systems rehabilitated and operational 30.41 2. Water supply and sanitation institutional capacity enhanced and project implementation capacity improved 5.76 3. Septage management and public awareness improved 0.91 Subtotal (A) 37.08 B. Contingenciesc 4.09 C. Interest During Constructiond 0.65 Total (A+B+C) 41.82

a Includes taxes and duties of $4.80 million. Such amount does not represent an excessive share of the project cost. The government will finance taxes and duties by cash contribution.

b In mid-2018 prices as of May 2018. c Physical contingencies computed at 10% of base cost estimates for civil works and equipment. Price contingencies

computed at an average of 1.6% on foreign exchange costs and 4.9% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

d Includes interest for the Asian Development Bank loan at 1% per year during the grace period and 1.5% per year thereafter.

Source: Asian Development Bank estimates.

23 Including modules to strengthen (i) utility corporate knowledge by establishing service standards and performance

benchmarks, improving network management, and enhancing energy efficiency; (ii) O&M capabilities, by improving asset management, leak detection and repair, and sludge and effluent management; and (iii) financial management, including budgeting, reporting, accounting, internal auditing, automation, and tariff setting and management.

24 The program will encourage private sector septage collection operators to provide services. 25 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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16. The government has requested (i) a concessional loan of $23.68 million from ADB’s ordinary capital resources, and (ii) a grant not exceeding $12.84 million from ADB’s Special Funds resources (Asian Development Fund) to help finance the project. The loan will have a 32-year term, including a grace period of 8 years; an interest rate of 1.0% per year during the grace period and 1.5% per year thereafter; and such other terms and conditions set forth in the loan agreement. The government will provide counterpart financing of about $5.30 million, including taxes and duties.

17. The summary financing plan is in Table 2. The grant will finance civil works, detailed design and supervision, consulting services, public awareness, and land acquisition and resettlement. It will also finance project implementation support, specifically (i) costs of the project management office (PMO) in the executing agency and project implementation offices (PIOs) in the implementing agency, including staff salaries and operating costs; and (ii) social charges on staff salaries. The loan will finance civil works, equipment and machinery, and interest during implementation. The government will finance 100% of taxes and duties, and 4.6% of project implementation support through in-kind contributions.

Table 2: Summary Financing Plan Source Amount

($ million) Share of Total

(%) Asian Development Bank

Ordinary capital resources (concessional loan) 23.68 56.6 Asian Development Fund grant 12.84 30.7

Government of the Kyrgyz Republic 5.30 12.7 Total 41.82 100.0

a Government contributions include taxes and duties. Source: Asian Development Bank estimates.

18. Climate finance. Climate adaptation is estimated to cost $1.23 million. ADB will finance 100% of adaptation costs. Details are in the PAM (footnote 25). Climate adaptation measures include the provision of climate-resilient wastewater pipelines and treatment facilities.

E. Implementation Arrangements

19. The DDWSSD within the State Agency for Architecture, Construction, Housing and Public Utilities under the Government of the Kyrgyz Republic (Gosstroy) will be the executing agency.26 A PMO will be established in DDWSSD and will report directly to the Director of DDWSSD. The PMO’s responsibilities include procurement, contract and financial management, project administration, and safeguards compliance and reporting. The Office of the Plenipotentiary Representative of the Government in Issyk-Kul Oblast (PRGIKO) will be the implementing agency and will be responsible for oblast-level project and safeguard compliance coordination. A PIO will be established in each vodokanal to manage day-to-day project implementation. They will report to both the PRGIKO and the PMO. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 25). The DDWSSD has requested advance contracting for the early recruitment of the project management consultant and the project design and supervision consultant.

Table 3: Implementation Arrangements Aspects Arrangements Implementation period January 2019–December 2024

26 Gosstroy delegated all its authorities in relation to the project to the DDWSSD through an internal order dated 26

June 2018.

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Aspects Arrangements Estimated completion date 31 December 2024 Estimated loan closing date 30 June 2025 Management (i) Oversight body Steering Committee a

Local working committees in Balykchy and Karakolb (ii) Executing agency DDWSSD under Gosstroy, a project management office will be established to

support EA. (iii) Key implementing agency PRGIKO (iv) Project Implementation Office Balykchy Vodokanal and Karakol Vodokanal Procurement Intl. competitive bidding: Works 5 contracts $23,370,000

Intl. competitive bidding: Goods 1 contract $800,000 Consulting services Quality- and cost-based selection Intl.: 204 person-months;

Natl.: 437 person-months $5,790,000

Individual consultant selection Intl.: 24 person-months $384,000 Consultant’s qualifications

selection – audit Natl.: 1 contract $300,000

Retroactive financing and advance contracting

Retroactive financing and advance contracting are proposed for the project management consultants and project design and supervision consultant, such financing will not exceed 20% of the loan amount for expenditures incurred not more than 12 months prior to the signing of the loan and grant agreements.

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

ADB = Asian Development Bank, DDWSSD = Department of Drinking Water Supply and Sewerage Development, EA = Executing Agency, Gosstroy = State Agency for Architecture, Construction, Housing and Public Utilities under the Government of the Kyrgyz Republic, Intl. = international, Natl. = national, PRGIKO = Office of the Plenipotentiary Representative of the Government in Issyk-Kul Oblast. a The steering committee, to be established within 1 month of loan and grant effectiveness, will monitor project

progress and provide support, guidance, and oversight. The Director of Gosstroy will be the chairperson, other members will include representatives from the Prime Minister’s Office, Ministry of Finance, the Ministry of Health, the State Agency for Environmental Protection and Forestry, PRGIKO, and the city governments and the vodokanals of Balykchy and Karakol.

b The local working committees will be engaged for the duration of the project and will provide local monitoring and coordination; membership will include representatives of the territorial self-governance committees, city women’s committees, business group representatives, Aksakaldar (elders) court, condominium associations, community-based women groups, and youth committee leaders.

Source: Asian Development Bank.

III. DUE DILIGENCE

A. Technical

20. The wastewater treatment technology adopted for Karakol and Balykchy was agreed with the vodokanals in both cities through a multi-criteria analysis.27 This resulted in the selection of the intermittently decanted extended aeration lagoon technology, which is a variant of an activated sludge process with which the vodokanals are familiar. The process will meet both national and international effluent discharge standards for irrigation.28 The WWTPs will be located on the existing facility sites, and the discharge of effluent for irrigation use will ensure that effluent will not be discharged to Issyk-Kul lake. Although WWTP upgrading is the key project focus, the project also includes (i) sewer extensions as a priority because of the low wastewater collection coverage in both cities; and (ii) a septage management program to improve the quality and

27 This included analysis of capital and O&M costs, proven performance, process complexity, variable load capability,

vodokanal process familiarity, odor generation potential, and biosolids and their stability. 28 The process also includes a tertiary treatment component to satisfy the stringent Kyrgyz Republic standard for

ammonia.

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coverage of septage collection and disposal services for consumers that are not currently connected to the centralized system. During the final design and construction of the project’s components, close interaction will be maintained with other development partner-funded projects to ensure coordination and alignment.

B. Economic and Financial

21. Economic analysis. The quantified economic benefits of the project include (i) public health benefits ensuing from improved sanitation and hygiene in the project areas, and (ii) incremental tourism benefits to the local economies of Balykchy and Karakol as a result of enhancements in their wastewater collection and treatment systems. The health benefits of the project were calculated by using savings in disability adjusted life years as a proxy for the reduced incidence of waterborne diseases, particularly diarrhea and parasitic diseases. The tourism benefits were estimated based on an assessment of the incremental increase in international visitor arrivals with the project, as well as their length of stay and average daily spending. The results of the cost–benefit analysis demonstrated that the project is economically viable, with economic internal rates of return of 12.3%–13.4%, exceeding the minimum prescribed discount rate of 9%. A sensitivity analysis conducted showed that the project will be economically robust under various scenarios, including a 10% increase in investment cost and a 10% decline in benefits. 22. Financial analysis. A financial analysis was undertaken by establishing cash flows over the project life to ensure that project revenues fully cover O&M costs. For Balykchy, the combined water and wastewater tariff rates will need to be increased by 7% in real term annually starting in 2019, which is equal to the average historical tariff increases during 2001–2018. By 2025, when the project benefit period starts, this will raise the wastewater tariff from Som4.53/m3 to Som7.78/m3, with an estimated monthly billing of Som269, which would be affordable for the target beneficiaries. Similarly, the wastewater tariff in Karakol will increase from Som1.84/m3 to Som4.30/m3, with an estimated monthly billing of Som116, which is within the acceptable standards of affordability for WSS services.29 The project’s public awareness program will help build consumer acceptance of the proposed tariff increases by linking them to the public health and tourism benefits anticipated from the project.

C. Governance

23. The financial management risk of the DDWSSD is considered high because (i) while its staff are experienced in procurement, design, and WSS facility construction, they lack knowledge and understanding of ADB’s disbursement guidelines and procedures; (ii) their existing accounting system is adequate, but will require modification to integrate appropriate project-specific accounting, budgeting, auditing, and reporting; and (iii) they have no prior experience acting as an executing agency, with responsibility for loan and grant disbursements and advance account management. The risk rating for the Balykchy and Karakol vodokanals is moderate, because (i) they have qualified and trained staff for the PIOs, (ii) have experience in preparing realistic project budgets, and (iii) have implemented other development partner-financed projects, though limited experience in ADB project. The agreed financial management action plan for DDWSSD and the vodokanals includes (i) enabling long-term project involvement by transferring existing DDWSSD staff to the PMO; (ii) preparing a project manual, detailing ADB disbursement policies and procedures; (iii) providing training and consultant support in the key areas of ADB

29 The draft loan agreement includes an operational covenant to ensure that, within 2 years of the loan’s effective date,

the executing agency prepares and commences the implementation of a wastewater tariff road map to gradually ensure O&M expenditure recovery, while also ensuring affordable access by low-income households.

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project financial management; and (iv) upgrading their accounting systems to facilitate the preparation of project financial statements and documentation of withdrawal applications.

24. The project procurement risk assessment shows the procurement risk is high because of (i) the lack of an established procurement unit in DDWSSD, (ii) DDWSSD’s unfamiliarity with development partner-funded project procurement principles and procedures, and (iii) inconsistencies between national procurement laws and bidding documents and procurement requirements for development partner-funded projects. The following measures will mitigate the risk: (i) consultant assistance to strengthen DDWSSD and ensure economical, efficient, and transparent procurement; (ii) close government agency coordination to minimize approval delays; and (iii) actions to ensure procurement and consultant recruitment follow ADB's Procurement Guidelines (2015, as amended from time to time) and ADB's Guidelines on the Use of Consultants (2013, as amended from time to time).

25. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Ministry of Finance, Gosstroy, DDWSSD, PRGIKO, and the vodokanals. The specific policy requirements and supplementary measures are described in the PAM (footnote 25).

D. Poverty, Social, and Gender

26. The deterioration of WSS infrastructure and services affects health, productivity and welfare of the population, particularly the poor. In Balykchy and Karakol, there are an estimated 17,600 poor households, accounting for over 50% of the aggregate household population.30 Although households connected to the centralized sewerage systems in these cities encounter deficiencies,31 it is the unconnected households using unsanitary pit latrines and other basic methods of wastewater disposal that are at greatest risk. As women are often responsible for caring for household members, they are more affected by deficiencies in WSS services. This includes spending about 68% of their time on domestic work, including fetching and treating water.32 When WSS is poor, women bear the burden of caring for sick household members.33 The project is classified as effective gender mainstreaming. A gender action plan will ensure women’s participation in the project’s decision-making activities by (i) ensuring improved sanitation services for households and businesses; (ii) strengthening the capacity of the vodokanals and local government to provide adequate and efficient sanitation services; (iii) ensuring women’s participation in consultation and public awareness activities; (iv) establishing local working committees in the cities, each with 30% female members;34 and (v) establishing a customer relations mechanism that includes gender-sensitive grievance redress.

E. Safeguards

27. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows.35

28. Environment (category B). By expanding wastewater collection and improving treatment, the project will significantly reduce (i) nutrients, pathogenic elements, and contaminants released

30 The highest poverty incidence is in Balykchy, where over 70% of households are considered poor. 31 Including blocked pipes, odor, and system overflow issues. 32 National Statistics Committee of the Kyrgyz Republic. 2011. Women and Men of the Kyrgyz Republic, 2006–2010.

Bishkek. 33 Such as taking care of sick children, the elderly, and other family members. 34 To collaborate with the city governments and the vodokanals in project monitoring and implementation. 35 ADB. Safeguard Categories.

9

to the environment; (ii) the risk to Issyk-Kul lake from eutrophication; and (iii) human health threats from pathogens. No unavoidably severe or permanent negative impacts are likely to arise from project activities provided that appropriate mitigation measures are adopted. Temporary environmental impacts occurring during construction can be managed, minimized, and mitigated. Operational impacts will be contained within sanitary protection zones (SPZs) around facilities.36 The accidental leakage of untreated effluents will not discharge to Issyk-Kul lake or its core or buffer zones—by design, treated effluents will be used for irrigation—and the risk of untreated effluent discharge to the lake is, therefore, negligible. The environmental management plan (EMP) includes mitigation measures to address construction and operation impacts. Public consultations have been conducted in both Balykchy and Karakol.

29. The PMO will be responsible for EMP implementation, and for compliance with ADB’s safeguards requirements and national environmental regulations. The PMO’s safeguard staff will be assisted by an international environment specialist and the project design and supervision consultant to oversee the implementation of the EMP. The cost to implement the EMP will be financed by the project.37 A grievance redress mechanism to handle both environmental and social safeguard issues will be established in the vodokanals. The PMO will submit semiannual environmental monitoring reports to ADB and relevant government authorities. These reports will be disclosed to the public on the Gosstroy (in Russian or Kyrgyz) and ADB (in English) websites.

30. Involuntary resettlement (category B). Detailed measurement surveys carried out during project preparation identified approximately 26 affected households with a total of 99 household members, of which approximately 15 households with 67 members will experience severe impacts on their livelihood because they will be required to relocate. 38 No affected household was found to belong to a vulnerable group. A land acquisition and resettlement plan (LARP) and land acquisition and resettlement framework have been prepared to mitigate and address all associated losses in accordance with ADB’s Safeguard Policy Statement and relevant national legislation. Project information was disclosed and meaningful consultations with project stakeholders and displaced persons were undertaken during LARP preparation and will continue throughout implementation. When final SPZ boundaries are decided by the government and the project design is finalized, or additional land requirements or involuntary resettlement impacts are identified, the LARP will be updated in accordance with applicable laws and ADB’s Safeguard Policy Statement, and ADB approval obtained prior to any further implementation. All displaced people will receive compensation in accordance with the LARP provisions. The PMO will be responsible for land acquisition and resettlement implementation and for compliance with ADB’s safeguards requirements and national regulations. DDWSSD will submit semiannual safeguards monitoring reports to ADB for review and disclosure.

31. Indigenous peoples (category C). There are no indigenous peoples, as defined in ADB’s Safeguard Policy Statement, in the project area.

F. Summary of Risk Assessment and Risk Management Plan

32. Significant risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.39

36 Mostly relating to sludge disposal, odor, and noise from WWTPs and pumping stations, and from chlorination. 37 The costs of mitigation measures and environmental monitoring will be included in construction contracts. The cost

of environmental monitoring and supervision are included in the project design and supervision consultant contract. 38 These resettlement initiatives are necessary in order to comply with SPZ development restrictions that surround

WWTPs and pump stations. 39 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

10

Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures Changes in government approval procedures by oversight agencies delays project completion.

Close government agency coordination will be maintained to minimize delays in procurement and approvals.

DDWSSD personnel’s unfamiliarity with ADB procurement procedures results in procurement deficiencies and implementation delays.

PMO and DDWSSD staff will participate in ADB procurement training and be familiar with relevant guidelines.a ADB will undertake prior review of all contract procurement and closely monitor contract implementation.

Wastewater tariff increases do not meet expected levels because of political uncertainty.

The project’s public awareness program will build consumer acceptance of proposed tariff increases by linking them to the project’s anticipated public health and tourism benefits.

High financial management risk because staff lack knowledge and understanding of ADB’s disbursement guidelines and procedures.

Existing government staff will be appointed to the PMO; a project manual will be prepared, detailing ADB disbursement policies and procedures; training and consultant support will be provided; and accounting systems will be upgraded to facilitate the preparation of project financial statements and documentation of withdrawal applications.

ADB = Asian Development Bank, DDWSSD = Department of Drinking Water Supply and Sewerage Development, PMO = project management office. a ADB’s Procurement Guidelines (2015, as amended from time to time) and ADB’s Guidelines on the Use of

Consultants (2013, as amended from time to time). Source: Asian Development Bank.

IV. ASSURANCES AND CONDITIONS

33. The government, Gosstroy, and DDWSSD have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents.

34. The government has agreed with ADB on certain covenants for the project, which are set forth in the draft loan agreement and grant agreement.

V. RECOMMENDATION

35. I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve:

(i) the loan of $23,680,000 to the Kyrgyz Republic for the Issyk-Kul Wastewater Management Project, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 1.0% per year during the grace period and 1.5% per year thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board; and

(ii) the grant not exceeding $12,840,000 to the Kyrgyz Republic from ADB’s Special Funds resources (Asian Development Fund), for the Issyk-Kul Wastewater Management Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board.

Takehiko Nakao President

26 October 2018

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Impact the Project is Aligned with Living standards, health, and economy in the Issyk-Kul Region improved (Strategy for the Development of Drinking Water Supply and Sanitation Systems for Human Settlements in the Kyrgyz Republic up to 2026)a

Results Chain Performance Indicators with Targets

and Baselines

Data Sources and Reporting Mechanisms

Risks

Outcome Access to sustainable and reliable wastewater services in Balykchy and Karakol improved and expanded

By 2025: a. At least 40% of the Balykchy population and 55% of the Karakol population receive centralized wastewater services that meet environmental discharge standards (2018 baseline: 0)

b. Consumer satisfaction (sex-disaggregated) with quality of wastewater services increased to 60% (2018 baseline: 22%)

c. Collection efficiency of wastewater tariffs maintained above 95% (2018 baseline: Above 90% for households, and above 95% for institutional and commercial establishments)

a.–c. Executing agency project completion report and survey report

Wastewater tariffs not increased as expected because of political uncertainty

Outputs 1. Balykchy and Karakol wastewater systems improved

1a. At least 40% of households in Balykchy and 55% of households in Karakol connected to environmentally compliant centralized wastewater systems by 2024 (2018 baseline: 0) 1b. Wastewater treatment plant in Balykchy (4.2 MLD) and Karakol (12.0 MLD) upgraded and commissioned by 2024 (2018 baseline: 0 and not commissioned) 1c. 21.6 km of sewerage pipelines constructed by 2024 (2018 baseline: 0) 1d. 1.7 km of effluent pipelines upgraded by 2024 (2018 baseline: 1.7 km of dilapidated pipelines) 1e. One wastewater pump station constructed and 0.5 km of pumping main upgraded by 2024 (2018 baseline: 0.5 km of dilapidated pumping main)

1a.–1g. Quarterly vodokanal project progress reports, executing agency project completion report

Changes in government approval procedures by oversight agencies delays project completion High financial management risk because staff lack knowledge and understanding of ADB’s disbursement guidelines and procedures

12 Appendix 1

Results Chain Performance Indicators with Targets

and Baselines

Data Sources and Reporting Mechanisms

Risks

1f. One reservoir desludged by 100,000 m3 of sludge by 2024 (2018 baseline: 0) 1g. Seven septage vacuum trucks commissioned by 2023 (2018 baseline: 0)

Department of Drinking Water Supply and Sewerage Development personnel’s unfamiliarity with ADB procurement procedures results in procurement deficiencies and implementation delays

2. Vodokanal capacity strengthened

2a. One corporate business plan with service standards and performance benchmarking established by each vodokanal by 2020 (2018 Baseline: 0) 2b. Training completed in corporate utility management, operation and maintenance, and utility financial management in each vodokanal by 2023 (2018 baseline: 0) 2c. At least six personnel (of which three personnel are women) in each vodokanal with improved skills in corporate utility management, operation and maintenance, and utility financial management by 2023 (2018 baseline: 0) 2d. Gender-inclusive consumer grievance redress mechanism commissioned by 2019 (2018 baseline: 0) 2e. One agreement on twinning arrangements with an international water supply and sanitation knowledge-based facility reached by 2020 (2018 baseline: 0)

2a.–2e. Quarterly vodokanal project progress reports, biannual project monitoring reports, executing agency project completion report

3. Septage management services improved and sanitation and hygiene awareness increased

3a. One septage management unit established in each vodokanal by 2019 (2018 baseline: Not established)

3b. Septage management program developed in each vodokanal by 2020 (2018 baseline: 0) 3c. At least 50% of project community stakeholders and institutional and commercial facilities staff (including at least 50% women) have increased awareness on sanitation and hygiene by 2021 (2018 baseline: 0)

3d. At least 2,000 households and institutional and commercial

3a.–3e. Quarterly vodokanal project progress reports, biannual project monitoring reports, participant feedback surveys, executing agency project completion report

Appendix 1 13

Results Chain Performance Indicators with Targets

and Baselines

Data Sources and Reporting Mechanisms

Risks

establishments not connected to the centralized wastewater system receive improved septage collection services in Balykchy by 2024 (2018 baseline: 0)

3e. At least 2,800 households and institutional and commercial establishments not connected to the centralized wastewater system received improved septage collection services in Karakol by 2024 (2018 baseline: 0)

Key Activities with Milestones 1. Balykchy and Karakol wastewater systems improved 1.1. Issue request for proposal for project management consultant through advance contracting by Q4

2018. 1.2. Mobilize project management consultant by Q1 2019. 1.3. Mobilize project design and supervision consultants by Q1 2020. 1.4. Commence design-build contract procurement by Q2 2019. 1.5. Award design-build contract by Q1 2020. 1.6. Commence civil works contract procurement by Q2 2020. 1.7. Award civil works contract(s) by Q4 2020. 1.8. Complete equipment procurement by Q2 2021. 1.9. Complete civil works contract(s) by Q2 2024. 2. Vodokanal capacity strengthened 2.1. Mobilize consultants by Q4 2019. 2.2. Formulate corporate business plans by Q2 2020. 2.3. Design and prepare training modules by Q2 2020. 2.4. Organize international twinning arrangement by Q4 2020. 2.5. Deliver trainings between Q3 2020 and Q3 2023. 2.6. Submit final reports by Q1 2024. 3. Septage management improved and sanitation and hygiene awareness increased 3.1. Conduct first sanitation and hygiene awareness campaign by Q3 2019. 3.2. Develop septage management programs by Q4 2020. Project Management Activities Strengthen project implementation capabilities in the two vodokanals. Convene regular steering committee and local working committee meetings. Prepare and submit project progress reports. Inputs ADB: $12.84 million (ADF grant) $23.68 million (concessional OCR loan) Government of the Kyrgyz Republic: $5.30 million Assumptions for Partner Financing Not applicable ADB = Asian Development Bank, ADF = Asian Development Fund, km = kilometer, m3 = cubic meter, MLD = million liters per day, OCR = ordinary capital resources, Q = quarter. a Government of the Kyrgyz Republic. 2016. Strategy for the Development of Drinking Water Supply and Sanitation Systems

for Human Settlements in the Kyrgyz Republic up to 2026. Bishkek. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=50176-002-3

1. Loan Agreement 2. Grant Agreement 3. Sector Assessment (Summary): Water Supply and Other Municipal Infrastructure and

Services 4. Project Administration Manual 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Financial Analysis 8. Economic Analysis 9. Country Economic Indicators 10. Summary Poverty Reduction and Social Strategy 11. Risk Assessment and Risk Management Plan 12. Climate Change Assessment 13. Gender Action Plan 14. Initial Environmental Examination 15. Land Acquisition and Resettlement Plan 16. Land Acquisition and Resettlement Framework Supplementary Documents 17. Project Technical Analysis 18. Detailed Financial Analysis 19. Detailed Economic Analysis 20. Financial Management Assessment 21. Project Procurement Risk Assessment Report