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Report and Recommendation of the President

to the Board of Directors

Project Number: 41548


September 2009

Proposed Loan and Asian Development Fund Grant


Kyrgyz Republic: Issyk–Kul Sustainable
Development Project
CURRENCY EQUIVALENTS
(as of 31 July 2009)

Currency Unit – som (Som)


Som1.00 = $0.023
$1.00 = Som43

ABBREVIATIONS

ADB – Asian Development Bank


ADF – Asian Development Fund
BRD – Biosphere Reserve Directorate
EA – executing agency
EIA – environmental impact assessment
EIRR – economic internal rate of return
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 – Interregional Department for Environmental Protection
IEC – information, education, and communication
MIS – management information system
NCB – national competitive bidding
PAF – project assistance facility
PIO – project implementation office
PMO – project management office
SAEPF – State Agency for Environmental Protection and Forestry
UNESCO – United Nations Educational, Scientific and Cultural Organization
WACC – weighted average cost of capital

WEIGHTS AND MEASURES

cum – cubic meter


lcpd – liters per capita per day
MT – metric ton

GLOSSARY

novostroiki – semi-informal settlements


oblast – a territorial administrative unit
rayon – district
vodokanal – water and sewerage service provider in city
enterprise
tazalyk – solid waste management service provider in city
enterprise
state ecological – approval accorded by State Agency for Environmental
expertise Protection and Forestry for compliance with Kyrgyz Republic
laws prior to proceeding with construction
NOTES

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

(ii) In this report, "$" refers to US dollars.

Vice-President X. Zhao, Operations 1


Director General J. Miranda, Central and West Asia Department (CWRD)
Director M. Westfall, Urban Services Division, CWRD

Team leader V. Padmanabhan, Urban Development Specialist, CWRD


Team member{s} H. Chen, Counsel, Office of General Counsel
M. Davila, Young Professional, CWRD
M. Kunzer, Senior Environment Specialist, CWRD
C. Mambetova, Project Implementation Officer, Kyrgyz Resident
Mission, CWRD
I. Setyawati, Social Development Specialist, CWRD

In preparing any country program or strategy, financing any project, or by making any
designation of or reference to a particular territory or geographic area in this document, the
Asian Development Bank does not intend to make any judgments as to the legal or other status
of any territory or area.
CONTENTS
Page

LOAN AND GRANT AND PROJECT SUMMARY


MAP
I. THE PROPOSAL 1
II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1
A. Performance Indicators and Analysis 1
B. Analysis of Key Problems 3
C. Development Opportunities 5
III. THE PROPOSED PROJECT 5
A. Impact and Outcome 5
B. Outputs 5
C. Special Features 8
D. Project Investment Plan 8
E. Financing Plan 9
F. Implementation Arrangements 9
IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13
A. Major Benefits and Impacts 13
B. Major Risks and Mitigation Measures 17
V. ASSURANCES AND CONDITIONS 18
A. Specific Assurances 18
B. Conditions for Loan and Grant Disbursement 19
VI. RECOMMENDATION 19

APPENDIXES
1. Design and Monitoring Framework 20
2. Urban Sector Analysis 24
3. External Assistance to the Sector 28
4. Infrastructure Improvement Component 29
5. Enterprise Resource Management Component 30
6. Detailed Cost Estimates and Financing Plan 32
7. Implementation Arrangements 33
8. Implementation Schedule 34
9. Procurement Plan 35
10. Summary Poverty Reduction and Social Strategy 42
11. Gender Action Plan 46
12. Financial Analysis 48
13. Economic Analysis 54
SUPPLEMENTARY APPENDIXES (available on request)
A. Cost Estimate Spreadsheets and Maps
B. Financial Management Assessment of the Executing Agency
C. Outline Terms of Reference for Design and Supervision Consultants
D. Outline Terms of Reference for Information, Education, and Communication Consultants
E. Outline Terms of Reference for Management Information System Consultants
F. Outline Terms of Reference for Geographical Information System Consultants
G. Institutional and Financial Sustainability
H. Financial Analysis Spreadsheets
I. Economic Analysis Spreadsheets
J. Environmental Impact Assessment
K. Land Acquisition and Resettlement Due Diligence Report
LOAN AND GRANT AND PROJECT SUMMARY

Borrower Kyrgyz Republic

Classification Targeting classification: Targeted intervention


Sector (subsectors): Water supply and other municipal infrastructure
and services (water supply and sanitation, waste management, urban
sector development)
Themes (subthemes): Environmental sustainability (urban
environmental improvement), social development (human development),
capacity development (institutional development)
Location (impact): Urban (medium)

Environment Category A: An environmental impact assessment (EIA) was


Assessment undertaken, and the summary EIA was disclosed on 1 June 2009. An
updated EIA is detailed in Supplementary Appendix J.

Project The Issyk–Kul Sustainable Development Project (the Project) is the first
Description phase in a longer-term initiative by the Asian Development Bank (ADB)
to support environmental management and to improve urban service
delivery in the Issyk–Kul Oblast. ADB and government collaboration in
Issyk–Kul will ensure that urban services interventions will increase
access to potable water and safe sanitation, including use of proven
technologies for treatment and disposal of solid and liquid waste. The
Project will (i) improve urban infrastructure, including sewerage and
sanitation, solid waste management, water supply, and community
upgrading; and (ii) improve service delivery through better enterprise
resource management.

The Project covers the cities of Balykchy, Cholpon–Ata, and Karakol. Its
outputs are:
(i) replacing a 13.4-kilometer (km) sewer network (specifically
addressing pumping mains to sewage treatment plants);
rehabilitating pumping stations in Balykchy and Karakol; extending
the sewer network by 12 km to uncovered areas in Karakol; and
supplying relevant tools, equipment, and vehicles for sewer
maintenance;
(ii) re-engineering 42.5 hectares of waste dumps into sanitary landfills,
closing existing dumps in all three project cities, providing waste
segregation and recyclable sorting equipment, and supplying
vehicles and equipment for waste collection and transport;
(iii) installing 8,550 water meters, training vodokanal enterprises in
meter reading and leak control, constructing a presedimentation
treatment tank at the Karakol water headworks, replacing a 2 km
corroded transmission main in Balykchy, and reconstructing 10
boreholes (with treatment, energy efficient pumps, storage, and
protection facilities) in Balykchy and Cholpon–Ata;
(iv) providing in the three project cities, water and sanitation facilities in
pre-schools, schools and neighborhoods, and public conveniences
in markets, public centers, health care organizations, and public
institutions; and
ii

(v) implementing an enterprise resource management component


comprising a management information system, accounting and
financial management, geographic information system, asset
inventory and management, and institutional effectiveness program
for cities, vodokanal enterprises and tazalyk enterprises.

Rationale Lake Issyk–Kul (“warm lake” in Kyrgyz) is the world’s second largest
saline lake; a Ramsar site of globally significant biodiversity; and a
United Nations Educational, Scientific and Cultural Organization
(UNESCO)-designated biosphere reserve. The lake forms a significant
part of Issyk–Kul Oblast and contributes to its economic growth by
providing tourism opportunities. Attracting approximately 1 million
tourists annually—equivalent to 70% of the country’s annual tourist of
1.4 million persons—the lake is a major economic driver in the region.

Increasing tourism has resulted in the construction of many resorts that


are now sprawled around the lake's northern shores. However, existing
water supply and sanitation infrastructure—including solid waste
management—is decrepit, dysfunctional, and poorly maintained. Current
infrastructure is unable to serve the high number of tourists, which
exceeds the resident population by a factor of four. Excessive pressure
on existing infrastructure is partially responsible for the lake's pollution.

The country development strategy, 2009–2011, emphasizes


environmental sustainability. The Project, and its focus on protecting the
lake, features under the strategy’s investment project for the
Issyk–Kul region. In February 2009, the Concept of Sustainable
Development of the Ecological and Economic System of Issyk–Kul was
passed through a presidential decree. Subsequently, the Government of
Kyrgyz Republic passed a resolution in May 2009 that prioritizes
implementation of the Project.

ADB-led investment and policy dialogue in the region will improve the
infrastructure and quality of urban services, foster tourism, and preserve
the lake's environment. Institutional, legal, and municipal finance
assessments in Issyk–Kul will provide a suitable platform for developing
ADB's urban services sector development strategy for Kyrgyz Republic.
Development of performance-based service contracts through the
Project will also improve opportunities for public–private partnerships in
the water supply and sanitation sector.

Impact and The Project is expected to improve the health of resident population in
Outcome the Issyk–Kul Oblast and to ensure environmental preservation of Lake
Issyk–Kul. The outcome of the Project is improved urban basic service
delivery (comprising sewerage, sanitation, solid waste management,
and water supply) in the cities of Balykchy, Cholpon–Ata, and Karakol.

Project The Project investment cost is estimated at $37.50 million, including


Investment Plan taxes and duties of $3.17 million.
iii

Financing Plan ($ million)


Source Amount %
A. Asian Development Bank
Asian Development Fund Loan 16.50 44.00
Asian Development Fund Grant 13.50 36.00
Subtotal (A) 30.00 80.00

B. Government of the Kyrgyz Republic


Central Government 7.50 20.00
Subtotal (B) 7.50 20.00

Total 37.50 100.00


Source: Asian Development Bank.

Loan and Grant The Asian Development Fund (ADF) loan of $16.5 million equivalent will
Amount and have a 32-year term, including a grace period of 8 years, an interest rate
Terms of 1% per year during the grace period and 1.5% thereafter, and such
terms and conditions as set forth in the draft Financing Agreement. The
ADF grant is for $13.5 million and is subject to conditions set forth in the
draft Financing Agreement.

Period of Until 30 June 2015


Utilization

Estimated 31 December 2014


Project
Completion Date

Implementation The Project will be managed and administered through a combination of


Arrangements a central-level steering committee, Ministry of Finance (Executing
Agency), a project management office (PMO) at the central level within
the Executing Agency, and a project implementation office (PIO) under
the Issyk–Kul Oblast administration (Implementing Agency).

A representative of the Prime Minister's Office will serve as the steering


committee's chairperson. A full-time project director will head the PMO,
be responsible for overall project management and administration, and
report directly to the Executing Agency. A full-time project manager will
head the PIO and be responsible for project implementation, monitoring,
and supervision.

Executing Ministry of Finance


Agency

Procurement The PMO will procure works, goods, and services in accordance with
ADB’s Procurement Guidelines (2007, as amended from time to time).
iv

Consulting Consultants will be selected and engaged in accordance with ADB’s


Services Guidelines on the Use of Consultants (2007, as amended from time to
time) using quality- and cost-based selection for firms and government
procedures acceptable to ADB for individuals.

Project Benefits A socioeconomic survey indicated that urban residents’ top priority is
and Beneficiaries improved water supply and sanitation services. Upon completion of the
Project, the water supply system will comprise improved treatment
facilities at water sources and household meters that directly benefit
about 43,000 people in the three project cities, with notable
improvements in water quality and regulated water supply. The
sewerage and sanitation investments will benefit 68,000 persons
through improved access to reticulated systems, sanitation facilities, and
latrines. About 133,500 persons will benefit from solid waste collection
and disposal services. The integrated improvement of the existing urban
infrastructure facilities and services will provide better living conditions
and enhance the surrounding environment in the project cities. The
Project's enterprise resource management component will create a
culture of prudent financial management in the cities and service
utilities, enabling them to generate revenue surpluses in the longer term
for equity investments and leveraging debt.

Risks and Potential risks associated with the Project include (i) lack of commitment
Assumptions by city administrations to undertake or implement reforms in urban and
financial management, and inability to implement the financial
improvement action plan; (ii) inability of government staff to implement
the environmental management and monitoring plan; (iii) sudden
increase in cost of construction items; (iv) insufficient incentives by the
Government to ensure vodokanal enterprises and tazalyk enterprises
staff provide efficient service delivery; and (v) lack of viability gap
funding from the Government to sustain urban services.

Early establishment of the PMO and PIO and commencement of


surveys for engineering designs and information, education, and
communication campaign to generate community awareness will
mitigate start-up delays. Efficiently functioning PMO and PIO will ensure
the project is completed on time and sudden price rise of construction
items is adequately accommodated. The Prime Minister's Office has
direct control over the Project's objectives and will monitor activities,
improving the urban management and financial performance of cities.
Appointing the Ministry of Finance as the Executing Agency cements
commitment for viability gap funding as a key line item in the national
budget as the Ministry of Finance prepares and disburses funds under
the medium-term budgetary framework.
o
71o 00'E 78 00'E

KYRGYZ REPUBLIC
ISSYK--KUL SUSTAINABLE
DEVELOPMENT PROJECT
K A ZA K H S TA N

Tyup
o Dzhergalan o
42 30'N BISHKEK Ivanovka 42 30'N
Kemin Cholpon-Ata
Shopokov Kant Karakol
Novopavlovka Tokmok -Kul
Kara Issyk
Kayingdy Balta Lake
Pokrovka CHUI Balykchy
Maimak
Talas
Kochkor ISSYK-KUL
Bakay Ata
TALAS
Suusamyr
Chaek
Toktogul Lake Song-Kul
Kanysh- NARYN Naryn
Kiya Toktogul Reservoir
Karajigach
Karakul
Tash JALAL-ABAD
Kazarman
Terek Kumyr Arslanbob Baetov At-Bashy
Sai Kok
Shamaldy Yangak
Sai
Kochkor Ata
Bazar-Korgon
Jalal-Abad Lake Chatyr-Kul N
Andizhan Reservoir
Uzgen
UZBEKISTAN Kara Su
Kara-Kulja
Torugart 0 50 100
Osh
Aravan
Gulcha Kilometers
Kyzyl Kiya Naiman OSH
TAJIKISTAN Project Province
Batken Frunze Chauvay
o National Capital
38 00'N PEOPLE'S REPUBLIC o
38 00'N
Irkeshtam OF CHINA Provincial Capital
Haidarkan
Sary Tash City/Town
Sulyukta
BATKEN Main Road
Daroot-Korgon Other Road
Railway
River
TAJIKISTAN District Boundary
Provincial Boundary
International Boundary
Boundaries are not necessarily authoritative.
09-2812 HR

o
71o 00'E 78 00'E
I. THE PROPOSAL

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

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

2. Lake Issyk–Kul (“warm lake” in Kyrgyz) is the world’s second-largest saline lake; a
Ramsar1 site of globally significant biodiversity; and a United Nations Educational, Scientific and
Cultural Organization (UNESCO)-designated biosphere reserve.2 The lake forms a significant
part of Issyk–Kul Oblast’s area, and contributes to its economic growth through tourism.
Attracting about 1 million tourists annually, equivalent to 70% of the country’s annual tourist of
1.4 million persons, the lake is a major economic driver in the region. With the country’s political
situation gradually stabilizing, there is exponential growth in tourist numbers to Kyrgyz Republic,
most of them from neighboring Kazakhstan, Russian Federation, and Uzbekistan.

3. The country’s supply response to increased tourism is notable, with active construction
and resorts sprawling around the lake's northern shores, primarily in three cities (Balykchy,
Cholpon–Ata, and Karakol). However, existing water supply and sanitation infrastructure—
including solid waste management—is decrepit, dysfunctional, and poorly maintained. It is
unable to serve the high number of tourists, which exceeds the resident population by a factor of
four. Excessive pressure on this existing infrastructure is partially responsible for the lake's
pollution.

4. Project interventions will improve the infrastructure and quality of urban services in the
region, foster tourism, and preserve the lake's environment. Feasibility and social studies were
undertaken through an Asian Development Bank (ADB) technical assistance project.3 Appendix
1 contains the Project's design and monitoring framework, which will be updated based on
Project inception baseline survey and implementation progress.

A. Performance Indicators and Analysis

1. Socioeconomic Context
5. Economy. Issyk–Kul Oblast is spread over 43,100 square kilometers (km), with
approximately 430,000 persons (around 8% of the total Kyrgyz Republic population). Karakol
has about 67,500 people; Balykchy, 42,000; and Cholpon–Ata, 12,000. The oblast’s gross
regional product grew from $358 million in 2005 to $540 million in 2007 mainly from gold mining
at the Kumtor gold deposit, one of the 10 largest gold deposits in the world. Capital investments
in the oblast have risen from $39 million (2005) to $145 million (2007) but are largely limited to
the mining industry due to additional gold deposit finds in the recent past. Urban infrastructure
investments are mainly financed by donor agencies with negligible investments made by the
oblast or central government. The oblast also produces and exports cereals, apples, pears,
potatoes, livestock, and dairy products.

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
As per the United Nations, biosphere reserves combine nature conservation and sustainable development to
protect natural and cultural landscapes. The biosphere reserve concept was developed by UNESCO and is a
distinction, but it does not confer any legally binding protection on the area.
3
ADB. 2009. Technical Assistance to Kyrgyz Republic for the Issyk–Kul Sustainable Development Project. Manila.
2

6. Tourism. Tourism constitutes about 10% of the oblast's gross regional product. The
tourist population tends to increase substantially during summers (June through August). The
tourist inflow is mainly to the city of Cholpon–Ata, but Balykchy and Karakol receive some tourist
inflows as well. Karakol has a large tourist influx during the winter due to nearby ski resorts. The
Integrated Development Plan 4 for the region focuses on the lake's northern, eastern, and
southern areas, and Government support for tourism and resort development has increased
pressure on urban services and the lake's environment.

2. Access to Services
7. A recent socioeconomic survey5 indicated that urban residents’ top priority is improved
water supply and sanitation services.
(i) Water supply. About one quarter of households indicated inadequate water
supply for household needs. Waterborne illnesses due to poor water quality were
significant, with 82% of households reporting incidences in the past 5 years.
(ii) Sanitation. About 75% of households use dry-pit latrines, and 24% use flush or
pour toilets. About 66% of households surveyed stated they would be willing to
pay for connection to a sewerage system, indicating citizens’ priority for improved
sanitation.
(iii) Solid waste management. Approximately 84% of households stated that a solid
waste collection service was unavailable on a daily basis. Waste disposal
practices included plastic bottle and packaging collection by the tazalyk
enterprise from 50% of households, waste incineration by 36% of households,
and waste disposal into the nearest landfill or waste receptacle by 8% of
households.

3. Social Issues
8. Poverty. In 2008, around 39% of the oblast’s population lived in poverty6 and 8% in
extreme poverty. The poor account for 19% of the project beneficiary population, with the
extremely poor making up 9%. Within the project area, poverty incidence ranges from 2.6% in
Cholpon–Ata to 10.4% in Karakol and to 31.9% in Balykchy. The social analysis concluded that
the poor mostly live in areas without regular water supplies, sewage, and solid waste collection
services. They often suffer from serious water supply shortages, poor water quality, sewage
pollution, and poor urban environmental sanitation.

9. Gender Analysis. Households headed by women account for 41% of project beneficiary
households and are smaller than households headed by men. Single-person households are
more often headed by women. Some 87% of households headed by women and 91% of
households headed by men receive regular cash income. A higher proportion of women-headed
households (20%) live in poverty when compared with men-headed households (18%). The
total number of sick days due to waterborne illnesses is also higher for women (151) than for
men (73). Women and girls are primarily responsible for collection of household water,
household garbage disposal, and care of the sick and elderly. These activities negatively impact
health and cause conflict and stress in communities during rush hours and given limited water
supply schedules. Despite an active role in the sector, women lack decision-making powers,
and their representation in management of water supply and sanitation services is low at 10%.

4
JICA. 2006. The Study on Integrated Development Plan of Issyk-Kul Zone in the Kyrgyz Republic. Bishkek.
5
ADB. 2009. Technical Assistance to Kyrgyz Republic for the Issyk–Kul Sustainable Development Project. Manila.
6
The National Statistics Committee established the poverty line at $22 per person per month.
3

B. Analysis of Key Problems

1. Inadequate Urban Infrastructure and Services


10. Appendix 2 summarizes the country and project cities' urban services assessment.
(i) Vodokanal enterprises, through a contractual arrangement with cities, provide
water supply and sanitation services. The water network serves approximately
85% of the population but is in poor condition. Water production capacities are
high to meet water requirement for domestic and household irrigation, which
should be rectified to address long-term water conservation goals.7 The stated
nonrevenue water ranges from 25% to 60%, but due to the lack of metering and
the poor condition of the system, the actual amount is unknown. Poor water
quality and lack of water conservation methods are key issues to address.
(ii) Extended aeration-based sewage treatment plants were constructed in all three
project cities during the Soviet period, but the plants are dilapidated and no
sewage is currently treated. Population access to the sewerage system is low at
35% and is limited to residents of apartment blocks only. Dilapidated sewer lines
result in sewage infiltration into the ground, resulting in low flows at the sewage
treatment plants. Moreover, much of the population continues to rely on pit
latrines, a serious threat to groundwater quality. Sewer rehabilitation and
methods to control sewage flows into the groundwater are of immediate priority.
(iii) Private tourist resorts, especially around Cholpon–Ata, are expected to operate
sewage treatment plants. While most resorts do maintain a plant, monitoring of
sewage treatment plant operations and the treated effluent quality is inadequate.
The exact impact of effluent discharges, if any, on the lake water quality is
unknown. Overall, the combination of partially operating central sewerage
systems, private self-provision of sanitation facilities, and lax monitoring of
sewage discharge from resorts presents a significant threat to Lake Issyk–Kul's
water quality.
(iv) Tazalyk enterprises provide solid waste management services based on
contractual arrangements with the cities.8 The region generates daily waste of
1.5 kilograms per capita but daily collection is low at 50%.9 All waste is disposed
of at existing dumps in each city, affecting groundwater, and surface water flow
into the lake. Waste management and strategies to recycle waste are critical for
these cities, in addition to developing sanitary landfills for safe waste disposal.

2. Institutional Issues
11. The oblast administration oversees the functioning of local self-governments (including
city administrations) in the region through rayon centers. The city administrations of Balykchy
and Karakol report directly to the oblast, while that of Cholpon–Ata reports to the Issyk–Kul
Rayon. Vodokanal enterprise and tazalyk enterprise report to the city administration, which is
headed by an elected mayor. To improve efficiency and effectiveness of public administration,
the Government of Kyrgyz Republic embarked on reform initiatives in 2004, and functional
decentralization to local governments was a key initiative. Major decisions included delegation
of authority and responsibility of urban basic services. However, paucity of capital investment
funds, lack of human resources, and poor cost recovery have resulted in inefficient service
delivery.

7
For example, the gross per capita production in Balykchy is 666 liters per day.
8
Tazalyk enterprises are also responsible for street lighting and park maintenance.
9
About 70%–80% of the waste generated is landfill material, 11%–20% is organic, and 8%–12% is dry recyclables.
4

12. The Government is still in the process of approving its national water supply and
sanitation policy. A national coordinating or regulatory body also does not exist for the water
supply and sanitation sector. Under the National Agency on Local Self-Government Affairs, the
Department of Rural Water Supply is responsible for rural water supply and sanitation and
currently executes donor projects in rural areas. Consequently, water supply and sanitation
services in urban centers are managed by vodokanal enterprises. The overfragmentation and
decentralization of the water sector has resulted in few economies of scale and diversity of
costs. The lack of a database and management information system for sound decision making
and an overreliance on Soviet consumption norms restrict target definition for service delivery.

3. Sustainable Financing
13. Public budget expenditure for water supply and sanitation (WSS) is negligible and
comprises less than 0.3% of central government budget expenditure, and is allocated through
state transfers to finance operating expenditure not capital expenditure. Cities also rely
extensively on state revenue transfers that constitute 18%–51% of their operating income. A
review of project cities' operating accounts in 2008 indicated a deficit in Balykchy and Cholpon–
Ata and a marginal surplus in Karakol confirming the strong dependence on state transfers.
Consequently, there is no surplus generation for capital investments. Vodokanal enterprises and
tazalyk enterprises also run into deficits or barely break even. While vodokanal enterprises
occasionally meet their annual business plan, tazalyk enterprises rely on cities for budgetary
support. Tariffs barely recover operation and maintenance costs, let alone generate surpluses
for future capital creation or for leveraging debt. It is therefore imperative to create a culture of
prudent financial management among the project cities and service utilities.

4. Environmental Management
14. The Biosphere Reserve Directorate (BRD) within the State Agency for Environmental
Protection and Forestry (SAEPF) is responsible for the lake's environmental management and
law enforcement to preserve the biosphere reserve. However, the BRD requires substantial
strengthening (e.g., financial and personnel) to perform its functions and preserve the lake's
environment. Similarly, the Issyk–Kul and Naryn Interregional Department for Environmental
Protection (IDEP) under the SAEPF plays an important role in environmental management,
monitoring of infrastructure projects, and environmental law enforcement. However, paucity of
funds severely affects its ability to perform. Building BRD and IDEP capacities is critical for long-
term environmental management in the region and to ensure that infrastructure projects comply
with relevant environmental safeguards.

5. External Assistance
15. Appendix 3 summarizes external assistance to the country's WSS sector. Donor projects
in the project area include (i) the completed World Bank Small Towns Infrastructure and
Capacity Development Project that aimed to augment the quantity of water supply in Balykchy
and Cholpon–Ata; (ii) an ongoing water supply project in Karakol ($8 million) financed by the
Swiss State Secretariat for Economic Affairs; and (iii) a proposed sewerage project in Cholpon–
Ata financed by the Japan International Cooperation Agency. As a key component of the Joint
Country Support Strategy, 2007–2010,10 the Project will ensure that benefits accrued through
donor support are synergized to improve urban basic service delivery. The Project is aligned
with the Joint Country Support Strategy strategic framework and will (i) harmonize donor

10
This Joint Country Support Strategy, approved by the Board in 2007, was prepared by ADB, Department for
International Development of the United Kingdom, Swiss Development Cooperation, United Nations agencies, and
the World Bank Group. This assistance is closely aligned with the Government's development goals.
5

developmental objectives; (ii) collaborate on resource use (i.e., the appropriate use of the
environment management and monitoring plan); (iii) capitalize on donor capacity-building
initiatives (e.g., United Nations Development Programme training of tazalyk enterprises staff);
(iv) promote good governance and transparency concepts; and (v) use information and
communication efforts to disseminate project benefits.

6. Lessons Learned from ADB-Assisted Water Supply and Sanitation Projects


16. ADB's water supply and sanitation sector experience in Kyrgyz Republic provides many
critical lessons.11 These include the need for (i) rapid commencement of project activities; (ii)
greater coordination of government executing agencies and relevant local institutions; (iii)
stronger technical, institutional, and administrative capacities at these institutions; and (iv) active
support and participation of project stakeholders and beneficiaries.

17. ADB’s review of experiences indicated that early capacity building of project executing
and implementing agencies is required to develop an efficient management system within the
Executing Agency (EA) to monitor and supervise project activities. It also emphasized the need
to train key project stakeholders on implementation arrangements, ADB policies and
procedures, WSS sector development issues, and environmental management issues. During
project design and implementation, experiences indicate the need to engage and educate
project beneficiaries and stakeholders through public consultations and participation programs.

C. Development Opportunities

18. The Kyrgyz Republic country development strategy, 2009–2011, 12 continues to


emphasize environmental sustainability and the need to protect Lake Issyk–Kul. In February
2009, the Concept of Sustainable Development of the Ecological and Economic System of
Issyk–Kul was passed through a presidential decree. Subsequently, the Government passed a
resolution in May 2009 that prioritizes project implementation.

III. THE PROPOSED PROJECT

A. Impact and Outcome

19. The Project is expected to improve the health of the resident population in the Issyk–Kul
Oblast and to ensure the environmental preservation of Lake Issyk–Kul. The outcome of the
Project is improved urban basic service delivery comprising sewerage, sanitation, solid waste
management, and water supply in the cities of Balykchy, Cholpon–Ata, and Karakol.

B. Outputs

20. The Project comprises three parts. Part A covers urban infrastructure improvement,
including the rehabilitation, improvement, and expansion of water supply and sanitation
services, and upgrading common water and sanitation facilities in schools, neighborhoods,
health care organizations, markets, public centers, and public institutions (Appendix 4
summarizes this component). Part B covers strengthening enterprise resource management to
improve service delivery and to sustain investments in the long term (Appendix 5 summarizes
this component). Part C will support project management and implementation activities at the

11
Lessons were learned from these ongoing projects: (i) ADB's supplementary grant to the Community-Based
Infrastructure Services Sector Project; and (ii) World Bank and Department for International Development-funded
Rural Water Supply and Sanitation Project II.
12
Kyrgyz Republic. 2009. Country Development Strategy (2009–2011). Bishkek.
6

project management office (PMO), project implementation office (PIO), and cities. The Project
will develop monitoring capacities of BRD and IDEP by providing relevant equipment and
training.

1. Part A: Infrastructure Improvement


a. Sewerage and Sanitation
21. This subcomponent will benefit approximately 45,000 persons in the cities of Balykchy
and Karakol, and will include (i) replacing 13.4 km of the sewer network including pumping
mains to sewage treatment plants; (ii) rehabilitating pumping stations in both cities; and (iii)
expanding 12 km of the sewer network to uncovered areas in Karakol. The subcomponent will
also support vodokanal enterprises efforts to operate and maintain the system efficiently by
providing relevant tools, equipment, and vehicles.

b. Solid Waste Management


22. This subcomponent will benefit the permanent resident and tourist population of 133,500
persons in all three project cities and will include (i) re-engineering 42.5 hectares of existing
waste dumps into sanitary landfills, and closing existing dumps in all three cities – the landfills
will include units for waste segregation and sorting of recyclables; and (ii) procuring vehicles
and equipment for waste collection and transport.

c. Water Supply
23. This subcomponent will directly benefit 43,000 persons in the three project cities through
district metering in pilot zones. The activity will determine the effect on water conservation,
willingness to pay, and long-term impact on cost recovery and tariff rationalization. About 8,550
water meters will be installed in the three cities, and vodokanal enterprises members will be
trained in meter reading and leak control. By constructing five boreholes with treatment, energy
efficient pumps, storage, and protection facilities each in Balykchy and Cholpon–Ata, the
subcomponent will improve the quality of water supplied. The subcomponent will include
construction of a new presedimentation treatment tank at the Karakol water headworks,
including upgrading of intake, overflow, and drainage structures, which are susceptible to being
washed away during floods and without which potable water supply to the city's resident
population of 67,500 persons is likely to be terminated. The subcomponent will replace a 2 km-
long corroded section of the existing transmission main in Balykchy.

d. Community Upgrading
24. This subcomponent will benefit 23,000 persons in all three project cities, and will include
constructing (i) water and sanitation facilities in pre-schools and schools; (ii) community water
and sanitation facilities for a group of households and neighborhoods in distant areas; and (iii)
public conveniences in markets, public centers, health care organizations, and public
institutions. Selection of the beneficiary institutions will be made by the district managers within
each city based on need and approved by city councils.

2. Part B: Enterprise Resource Management


a. Management Information System, Accounting, and Financial
Management
25. This subcomponent will develop the city, vodokanal enterprises, and tazalyk enterprises
management information system, install accounting software to improve cities' accounting
7

practices, and improve the city's financial management capacity focusing on revenue
enhancement measures (e.g., improved collection of taxes and user charges) and expenditure
management measures. It will also improve existing complaint redress systems. A domestic
MIS and accounting consultant firm will provide assistance under the subcomponent.

b. Geographic Information System, Asset Inventory, and Management


26. This subcomponent will procure satellite imagery for the Balykchy, Cholpon–Ata, and
Karakol and will develop city base maps. Asset (including technical and condition) information
on sewerage, solid waste management, water supply, and roads will be plotted and a database
created for future planning. Based on accurate plans of the water supply and sewerage network,
the design and supervision consultants will develop a calibrated network model to assess
system performance and plan for extensions and reinforcements. A domestic geographic
information system (GIS) consultant firm will provide assistance under the subcomponent.

c. Twinning Program and Capacity Building


27. This subcomponent will develop vodokanal enterprises capacity and (i) improve urban
infrastructure asset planning and management practices; (ii) improve human resources
management; (iii) introduce measures to reduce nonrevenue water; and (iv) ensure
environmentally compliant effluent discharge and sludge disposal. A twinning agreement will be
entered into with a water supply and sanitation utility from a developed or developing ADB
member country,13 and specific improvement targets will agree to be achieved at the end of the
twinning program. The program will span 3 years.

d. Performance-Based Service Contracts


28. This subcomponent will develop performance-based service contracts for water supply
management, sewerage management, solid waste collection and transport, and sanitary landfill
management focusing on performance efficiencies. Entering into performance-based contracts
is contingent on completion of asset inventory and construction works, and improving financial
management practices in the cities. Performance-based contracts will be concluded between
cities and service utilities for water supply and sanitation and solid waste management services.

3. Part C: Project Assistance Facility


a. Infrastructure Design and Implementation
29. Consulting services will be provided through a domestic design and supervision
consultant to help the PMO and PIO (i) strengthen their project management and
implementation capabilities; (ii) prepare detailed engineering designs for the infrastructure
improvement component of each city; (iii) assist in bid process management; (iv) support
construction supervision and quality control of civil works; and (v) contribute to benefit
monitoring and evaluation by generating baseline data, assessing project impact, and providing
feedback to the PMO to make adjustments. The DSC will be engaged to carry out works in
future phases implemented during the Project period.

b. Information, Education, and Communication Campaign


30. The PIO will promote community awareness of the Project through an information,
education, and communication (IEC) campaign, which will also communicate the Project's
long-term benefits. This will increase support from project beneficiaries and stimulate demand
13
Potential countries include Armenia and Singapore.
8

for better urban basic services. Beneficiaries will also be made aware of issues such as water
rates, user charges, and solid waste management fees. Among others, beneficiaries will be
informed on preventing environmental health-related hazards and their responsibilities for
reducing inefficient water use. Hygiene and sanitation education will form a key component of
the IEC campaign. A domestic IEC consultant firm or nongovernment organization or civil
society organization will be appointed to assist the PIO.

c. Project Management and Administration


31. Government appointed staff will manage and administer the Project with assistance from
international and domestic consultants. This subcomponent will provide project oversight,
quality control, ensure safeguard compliance, and undertake social development through the
project implementation period.

C. Special Features

32. The Project is ADB's first urban sector intervention in Kyrgyz Republic. Its special
features include (i) the enterprise resource management subcomponent addressing long-term
urban management in the region; and (ii) the assessment of institutional, legal, and municipal
finances in the urban centers of Issyk–Kul Oblast. Improved enterprise resource management
underpins ADB's urban services sector strategy for Kyrgyz Republic, and insights from this
component will facilitate ADB's urban development programs in Central Asia and the Caucasus.
Development of performance-based service contracts will also improve the opportunities for
public–private partnerships in the water supply and sanitation sector.

D. Project Investment Plan

33. The project investment cost is estimated at $37.5 million, including taxes and duties of
$3.17 million (Table 1). Appendix 6 summarizes the Project's detailed cost estimates and
financing plan, and Supplementary Appendix A provides a breakdown of cost estimates.

Table 1: Cost Estimates


($ million)
Item Component Amount %
A. Base Cost a
Part A: Infrastructure Improvement 19.54 52.10
Part B: Enterprise Resource Management 1.34 3.57
Part C: Project Assistance Facility 5.53 14.75
Subtotal (A) 26.41 70.42
B. Contingencies b
Physical Contingencies 1.65 4.41
Price Contingencies 5.27 14.05
Subtotal (B) 6.92 18.46
C. Taxes and Duties 3.17 8.45
D. Financing Charges c
Interest During Construction 1.00 2.67
Subtotal (D) 1.00 2.67

Total 37.50 100.00


a
In mid 2009 prices.
b
Physical contingencies computed at 6% for all items. Price contingencies calculated at 5% for all items.
c
Interest during construction has been computed at ADF terms and conditions.
Source: Asian Development Bank estimates.
9

E. Financing Plan

34. The Government has requested a loan of $16.5 million equivalent (Special Drawing
Rights 10,566,000) and a grant of $13.5 million from Special Funds resources (Asian
Development Fund [ADF]) to help finance the Project.14 ADB will finance a total of $30 million
equivalent, and the Government will finance $7.5 million equivalent. The ADF loan will finance
civil works under the sewerage and water supply subcomponents, project assistance facility
(PAF) components, contingencies, and financing charges. The ADF grant will finance civil works
and goods under sanitary landfills and community upgrading subcomponents, enterprise
resource management and PAF components, and contingencies. The Government will finance
100% of the taxes and duties and 63% of the contingencies. Counterpart funds will be
channeled to the PMO through regular budgetary allocations. Table 2 summarizes the proposed
financing plan. Appendix 6 provides a further breakdown of the financing plan.

Table 2: Financing Plan a


($ million)
No. Source Amount %
A. Asian Development Bank
Asian Development Fund Loan 16.50 44.00
Asian Development Fund Grant 13.50 36.00
Subtotal (A) 30.00 80.00

B. Government of the Kyrgyz Republic


Central Government 7.50 20.00
Subtotal (B) 7.50 20.00

Total 37.50 100.00


a
Discussions with Kuwait Fund are ongoing for parallel cofinancing of sewage treatment plants in Karakol and
Balykchy, water quality improvement works in three project cities and additional vehicles and equipment.
Source: Asian Development Bank estimates.

35. The Government confirmed that (i) there will be no onlending of ADF funds to the cities;
and (ii) cities are not required to provide counterpart funding under the Project. Based on the
cities’ fiscal assessments, the Government confirmed that city operating accounts barely break
even, leaving no flexibility for counterpart funding or repaying debt early in the project.

F. Implementation Arrangements

1. Project Management
36. The Project will be managed and administered through a combination of a central-level
steering committee, the Ministry of Finance (Executing Agency), a PMO at the central-level
within the EA, and a PIO under the Issyk–Kul Oblast administration (Implementing Agency).
BRD and IDEP will be responsible for implementing the environmental management and
monitoring plans and ensuring project compliance with ADB and Kyrgyz Republic environmental
safeguards. Appendix 7 summarizes the project implementation arrangements. The financial
management assessment of the EA is summarized in Supplementary Appendix B and rates its
financial management and reporting and monitoring systems capabilities as satisfactory. With

14
Kyrgyz Republic is classified as a group A developing member country based on its macroeconomic condition.
Group A is eligible for ADF funds only (ADB. 2008. Operations Manual. OM A1/BP: Classification and Graduation
of Developing Member Countries. Manila). The loan and grant mix is finalized based on a performance-based
allocation formula defined in ADB. 2008. Operations Manual. OM Section A3/BP: Performance-Based Allocation of
Asian Development Fund Resources. Manila.
10

experience on previous and ongoing externally financed projects, the Ministry of Finance as the
EA creates a low-risk environment for the Project.

a. Steering Committee
37. A central-level steering committee will be set up within 1 month of loan and grant
effectiveness, with full powers to decide on matters related to the Project. A representative of
the Prime Minister's Office will be the steering committee's chairperson. The steering committee
will oversee progress on the action plan under the President's Decree related to the Issyk–Kul
development concept (para. 18) and will be primarily responsible for guiding development in the
Issyk–Kul Oblast. The steering committee will use the project outcome to frame policies on
water supply and sanitation, and institutional effectiveness for the country's urban sector
development.

38. The steering committee will have members from relevant Ministries and other state
entities as the Government thinks necessary. The PMO will be the steering committee's
secretariat, and the EA will convene regular meetings in consultation with the chairperson,
prepare and circulate minutes of the meeting approved by the chairperson, and ensure
compliance with all steering committee decisions. The steering committee will meet at least
once every 3 months, and the tenure of the steering committee will last until project completion.

b. Executing Agency
39. The EA will be responsible for project oversight. It will hold monthly meetings with the
PMO and submit progress reports to the steering committee for decision making. It will ensure
that project component technical and ecological expertise is sought before awarding contracts
and/or commencement of construction works. The EA will obtain ADB approval for project
component financing, ensure compliance with project covenants, coordinate with ADB on
matters related to disbursements, and submit project documents (including audit reports) to
ADB on time. It will play an active role in monitoring the Project's enterprise resource
management component. Specifically related to the procurement process, the EA will monitor
and review the bid process and coordinate with ADB on all approvals.

c. Project Management Office


40. A central-level PMO will be established at the EA. The PMO will be led by a full-time
project director who will be responsible for overall project management and administration. This
project director will be supported by a fiduciary unit comprising a procurement expert, financial
manager, domestic project performance monitoring specialist, an office manager/translator, and
office support. The PMO will (i) oversee project accounting and auditing; (ii) secure technical
expertise and ecological expertise for all civil works prior to bidding; (iii) carry out project
performance monitoring system surveys; (iv) ensure city administrations comply with project
covenants; (v) with assistance of the Project consultants, invite bids, evaluate them, and
prepare bid evaluation reports for the EA and, subsequently, for ADB approval; (vi) award
contracts; and (vii) prepare quarterly progress reports.

d. Project Implementation Office


41. An oblast-level PIO, led by a full-time project manager, will be responsible for overall
project implementation and supervision, and will report directly to the project director and
governor of Issyk–Kul Oblast. The project manager will be assisted by three international
specialists (for water supply and sanitation, environmental management, and solid waste
11

management), a domestic social and gender development specialist, accountant, office


manager/translator, information technology specialist, and other support staff members.

42. The PIO will (i) manage detailed surveys, investigations, and engineering designs for all
subcomponents; (ii) update the environmental impact assessment (EIA) and environmental
management and monitoring plan; (iii) administer contracts (with support from vodokanal
enterprise and tazalyk enterprise at the city level), and ensure quality control; (iv) evaluate work
done by contractors, and certify payments; (v) implement the gender action plan; and (vi)
conduct public awareness campaigns and participation programs. Under the enterprise
resource management component, the PIO will (i) oversee development of city maps based on
satellite imagery, (ii) oversee mapping of urban infrastructure assets on city maps, (iii) roll out
the MIS and accounting software in the three project cities, and (iv) finalize draft contracts for
performance-based service contracts.

2. Implementation Period
43. The Project will be implemented over a 5-year period. Appendix 8 summarizes the
project implementation schedule.

3. Procurement
44. The PMO will procure works, goods, and services in accordance with ADB’s
Procurement Guidelines (2007, as amended to date) based on the procurement plan presented
in Appendix 9. The procurement plan is for an 18-month period and will be updated annually by
the EA. Civil works, equipment, and material will be procured through international competitive
bidding (ICB) and national competitive bidding (NCB) procedures as appropriate.
(i) Civil works includes rehabilitation of sewerage systems (two ICB contracts),
water supply improvement (two ICB contracts), construction of sanitary landfills
(ICB and NCB contracts, turnkey), and construction of community water and
sanitation facilities (three NCB contracts).
(ii) Goods include equipment and selected materials for vodokanal enterprises,
tazalyk enterprises, and the PMO (one ICB contract), environmental monitoring
equipment for IDEP and BRD (one NCB contract) and waste collection and
associated equipment (one NCB contract). ADB’s shopping procedures will apply
to off-the-shelf items and standard products costing the equivalent of $100,000 or
less.

4. Consulting Services
45. Consultants will be selected and engaged in accordance with ADB’s Guidelines on the
Use of Consultants (2007, as amended to date) using quality- and cost-based selection for firms
and government procedures acceptable to ADB for individuals. Simplified technical proposals or
full technical proposals, as appropriate, will be required from firms. Outline terms of reference
for consulting firms are detailed in Supplementary Appendixes C through F. The EA will ensure
that position-based terms of reference (for each expert) will be used when it invites shortlisted
consultants. Details on consulting services are elaborated in Appendix 9.

46. Individual Specialists. The PMO will appoint six individual specialists to support the
PMO and PIO in overseeing consulting services. Three international specialists (40
person-months of water and sewerage, environmental management, and solid waste
management strategy development) will provide third-party quality assurance on engineering
designs and construction supervision, update the environmental impact assessment and
12

accordingly revise the environmental management plan, and develop a waste management
strategy to reduce waste generation and disposal. Three domestic specialists (90
person-months of project performance monitoring, social and gender development, and
procurement expertise) will assist the PIO.

5. Advance Contracting and Retroactive Financing


47. To facilitate timely implementation of the Project, ADB has approved (i) advance
contracting; and (ii) retroactive financing of eligible expenditures up to 20% of the proposed loan
and grant, incurred prior to effectiveness but not earlier than 12 months before the date of
signing of the Financing Agreement. The Government acknowledges that any approval of
advance contracting and/or retroactive financing will not constitute a commitment by ADB to
finance the related Project.

6. Anticorruption Policy
48. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed
with the Government and Ministry of Finance. Consistent with its commitment to good
governance, accountability, and transparency, ADB reserves the right to investigate, directly or
through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the
Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included
in the loan and grant regulations and the bidding documents for the Project. In particular, all
contracts financed by ADB in connection with the Project will include provisions specifying the
right of ADB to audit and examine the records and accounts of the EA and all contractors,
suppliers, consultants, and other service providers as they relate to the Project.

7. Transparency and Good Governance


49. For greater transparency and accountability, the Government will disclose to the public,
and update annually, the current status of the Project and how the proceeds of the loan and
grant are used. For each contract financed under the Project, the EA will disclose on its and the
Project's website information on (i) the list of participating bidders; (ii) the name of the winning
bidder; (iii) basic details on bidding procedures and procurement methods adopted; (iv) amount
of contract awarded; (v) the list of goods and services, including consulting services procured;
and (vi) the intended and actual use of the loan and grant proceeds.

8. Disbursement Arrangements
50. Loan and grant proceeds will be disbursed in accordance with ADB’s Loan
Disbursement Handbook (2007, as amended from time to time). An imprest account will be
established by the EA separately for the loan and grant component with a commercial bank
acceptable to ADB, to expedite project implementation through timely releases. The EA is
conversant with financial management of project funds as established through the financial
management agreement. The amount to be deposited into each imprest account will not exceed
10% of the respective loan or grant, or the estimated expenditure to be funded through each
imprest account for the next 6 months, whichever is lower. The imprest accounts will be
established, managed, and liquidated in accordance with ADB’s Loan Disbursement Handbook
and detailed arrangements agreed to by the Government and ADB. 15 ADB’s statement-of-
expenditure procedure may be used to reimburse eligible expenditure and to liquidate advances
made into the imprest accounts. Any individual payments to be liquidated or reimbursed will not
exceed the equivalent of $100,000.

15
Bank charges will be financed from the loan and grant amount.
13

9. Accounting, Auditing, and Reporting


51. Detailed consolidated annual project accounts, as maintained by the PMO, will be
audited by duly qualified and independent auditors and will be submitted to ADB within 6
months of the close of each fiscal year. The annual audit report will also include a separate
audit opinion on the use of imprest accounts and statement-of-expenditure procedure. The
Project will maintain separate records and accounts by funding source (loan and grant).

10. Project Performance Monitoring and Evaluation


52. The PMO will be responsible for ensuring that the project performance monitoring
system is established within 6 months of loan and grant effectiveness. The project performance
monitoring system will track project implementation activities, target dates, expected outcomes,
and assigned responsibilities. Some tasks will be outsourced to external contractors; others will
form part of routine PMO reporting. Monitoring indicators will be formulated, discussed, and
agreed to by the EA, oblast and city administrations, SAEPF, and ADB. Within 6 months of loan
and grant effectiveness, the PMO will conduct initial baseline physical and socioeconomic
surveys and submit a detailed implementation plan for benchmarking information and
monitoring performance. This will be subject to ADB’s review and concurrence. The PMO will
submit annual reports to ADB through the project period.

11. Project Review


53. Project performance will be reviewed first by the EA, second by the steering committee,
and third by ADB. The first-level review will be conducted every month by the EA. It will be
based on monthly performance reports for each project city, prepared by the PMO. The report
will be sent to the oblast administration, EA, steering committee, and ADB. The second-level
review will be conducted every quarter by the steering committee. The monthly reports on
project performance, major policy issues, and actions required or taken by the respective
authorities will be reviewed. The results will be circulated to ADB, EA, oblast and city
administrations, and SAEPF. The third-level review will be conducted by ADB every 6 months
throughout the project implementation period. A comprehensive midterm review will be carried
out 24 months after the date of loan and grant effectiveness to identify problems or weaknesses
in implementation arrangements and to agree on any corrective measures.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Major Benefits and Impacts

1. Institutional and Policy


54. The Project strongly hinges on institutional effectiveness and building strong local
self-governments to manage urban basic services.
(i) It will improve financial management practices in the project cities, vodokanal
enterprises, and tazalyk enterprises, and create a culture of generating revenue
surpluses for equity investments into capital assets or leverage for debt.
(ii) The database on asset inventory and conditions will help vodokanal enterprises
identify infrastructure improvements in the long term based on a well-developed
asset management and maintenance system.
(iii) Through the twinning program, vodokanal enterprises will build staff capacity to
efficiently manage services.
14

55. Lessons learned will provide the Government with (i) approaches to develop the national
water supply and sanitation policy; (ii) a basis for developing a water supply and sanitation
investment plan to upgrade and expand water supply and sanitation systems; (iii) pointers to
improve financial management in local governments across urban centers in the country; and
(iv) opportunities to develop vodokanal enterprises' staff capacity through a twinning network in
the region. Supplementary Appendix G provides insights into the institutional and financial
sustainability approach under the Project, providing a backdrop for future urban sector
development in the country.

2. Social
56. The primary beneficiaries of the Project are the residents of the three cities and tourists.
Some households will benefit manifold, as they will experience improvement in water supply,
sanitation, and solid waste management services. More specifically, they include (i) households
that are impacted when members suffer from waterborne illnesses resulting from insufficient or
poor-quality water; (ii) people using markets, hospitals, clinics, and other public institutions with
poor water supply and sanitation facilities (e.g., public toilets); (iii) schoolchildren and teachers
at schools with poor water supply and sanitation facilities; and (iv) poor households using pit
latrines and lacking community septic tanks. General and more widespread benefits are
expected from the development of sanitary landfills and improvements to solid waste
management practices, and connecting households, hotels, guesthouses, and institutions to the
rehabilitated sewerage system. Appendix 10 summarizes the Project's poverty reduction and
social strategy.

57. The poverty and social assessment indicates that women strongly support the Project
across all components. Women perceive that the Project will improve their living environments,
create employment opportunities, and reduce the incidence of waterborne illnesses and
associated costs. Implementation of the gender action plan detailed in Appendix 11 will enhance
benefits to women through a training and awareness-raising program focusing on drinking water
safety, water source protection and treatment, water and environmental sanitation and
diseases, toilet renovation, and hygiene and sanitation education.

3. Financial Analysis
58. Financial analysis and cash-flow statements were prepared for vodokanal enterprises
and tazalyk enterprises. Fiscal analysis of city finances was also conducted to determine long-
term prospects of generating revenue surpluses to provide equity for capital investments or
collateral for leveraging debt. Appendix 12 summarizes the project financial analysis, and
Supplementary Appendix H provides the spreadsheets. Results indicate the following.
(i) The Project is financially viable, and the average financial internal rate of return
in the base case is 15.90% for water supply and sanitation and 15.40% for solid
waste management, exceeding the weighted average cost of capital estimated at
15.36%. The average financial net present value in the base case is $0.27 million
for water supply and sanitation and $0.02 million for solid waste management.
Sensitivity analysis indicates that the subcomponent financial internal rates of
return are stressed under various conditions, implying a need for efficient project
implementation and rapidly achieved physical and financial targets.
(ii) The cities' financial management requires considerable improvements, especially
efforts to enhance city own-tax revenues and to reduce dependence on state
transfers in the long-term. 16 The Project will ensure cities make informed

16
State transfers account for approximately 50% of the city's annual operating revenues.
15

decisions on revenue enhancement and expenditure management measures by


implementing the MIS and accounting subcomponent.
(iii) Vodokanal enterprises and tazalyk enterprises revenue base improvement is
contingent on tariff rationalization. The analysis indicates a need to raise tariffs
substantially from the current base to meet system operating costs.17 Tariffs can
also be raised only after the system begins to show improved performance and
customers perceive benefits. The Project proposes viability gap funding to bridge
the shortfall in revenues for 2010–2015 (during implementation) and for 2016–
2029 (during operations) to meet financial internal rate of return conditions.
Implementing the enterprise resource management subcomponent in parallel will
help improve the financial performance of cities, vodokanal enterprises, and
tazalyk enterprises and reduce dependency on viability gap funding after 2029.
(iv) To achieve an operating ratio less than unity, a key determinant to assess
financial performance of vodokanal enterprises and tazalyk enterprises, the
Project will ensure (a) progressive tariff increases based on cost recovery and
consumer affordability principles; and (b) that the Government will make
available viability gap funding to ensure service sustainability.

59. To ensure project ownership, state revenue transfers will include viability gap funding to
cities. The funding will be made contingent on vodokanal enterprises and tazalyk enterprises
meeting performance standards set out in the service utilities' annual operations plan ratified by
the city councils. For all three cities, current estimates of viability gap funding required to meet
only operating expenditure shortfalls is $6.5 million during 2010–2015 and $8 million during
2016–2029. The actual viability gap funding will be established by January 2012 based on
enterprise resource management component outputs.

4. Economic Analysis
60. Economic analysis was based on the results of a socioeconomic survey and drew from
relevant statistics available at the country level, especially that available from the National
Statistics Committee. The socioeconomic survey covered 514 households, randomly sampled in
the three project cities. Focus group discussions provided further substantiation on service
perception and demand for services. Appendix 13 summarizes the economic analysis, and
Supplementary Appendix I provides the spreadsheets. Results indicate the following.
(i) The Project is economically viable, and the average economic internal rate of
return in the base case is 27.8% for water supply and sanitation and 19.5% for
solid waste management, exceeding the economic opportunity cost of capital
assumed at 12.0%. The average economic net present value in the base case
was $3.17 million for water supply and sanitation and $0.69 million for solid
waste management. A sensitivity analysis conducted to test the robustness of
economic viability indicated that in all cases, subcomponent economic internal
rates of return surpass the economic opportunity cost of capital.
(ii) The average economic benefit–cost ratio for the Project was 1.42 for water
supply and sanitation and 1.21 for solid waste management, denoting feasibility.
Economic benefits were derived based on resource cost savings (e.g., time
savings and coping costs savings), health benefits, and benefits from expanding

17
The estimated average annual operating expenditure for water and sanitation is 180% of the estimated annual
water supply and sanitation revenue. The average annual operating expenditure for solid waste management is
200% of the estimated annual revenue. The viability gap fund was estimated for the following scenarios: (i) to meet
operation and maintenance costs alone; (ii) to meet operation and maintenance costs and depreciation; and (iii) to
meet operation and maintenance costs, depreciation, and debt (as a determinant of commercially viable
operations).
16

the existing water supply. Economic capital and annual operation and
maintenance costs were derived from financial cost estimates.

5. Environmental Safeguards
61. The Project was classified as environmental category A under ADB's Environment Policy
(2002) as its subcomponents are located in the Issyk–Kul Biosphere Reserve, which includes
several protected wetlands registered under the Ramsar Convention. As part of the project
preparatory technical assistance,18 an environmental impact assessment (EIA) was carried out
for all subcomponents. Early in the environmental assessment process, relevant environment
information was disclosed to likely affected people through stakeholder consultations,
workshops, and focus group discussions. The summary EIA report in Russian was also
disclosed by city governments and reviewed by SAEPF and its regional departments. News
articles in local newspapers preceded the consultations, indicating the EIA content and its
availability with the city governments. Stakeholder comments from consultations were integrated
into the Project. In accordance with ADB's Public Communications Policy (2005), the summary
EIA was posted on the ADB website on 1 June 2009 to meet the 120-day disclosure
requirement before Board consideration of the Project. The EIA is in Supplementary Appendix J.

62. To ensure that the biosphere reserve is not affected by project activities, subcomponents
have been suitably located. Location of sanitary landfills is critical. In Balykchy and
Cholpon–Ata, the project component sites are located in areas designated for improvement, and
in Karakol, the project component site is in the transition zone.

63. An efficient, detailed engineering design will mitigate any localized and/or temporary
impacts. Relevant environmental mitigation measures specified in the ADB-approved
environmental management and monitoring plan will be updated during detailed engineering
design and be incorporated in bidding documents and civil works contracts. Impacts during
operations will be mitigated through effective implementation of the environmental management
plan. The following measures will mitigate key impacts.
(i) Location. Buffer zones within and buffer strips with restricted development
around sanitary landfill sites will mitigate moderate but permanent location
impacts.
(ii) Construction. Good construction techniques, provision of standby equipment in
case of power failures and disruptions, soil surface stabilization, and safe
disposal of contaminated water and oil will mitigate moderate to severe impacts.
The impacts are anticipated from groundwork and transport activities; exhaust,
gas, oil, and fuel spills; and soil excavation and storage causing runoffs and
soil-level alteration.
(iii) Seismic activity. Hydrogeological and geotechnical investigations will form the
basis for designs, choice of materials, and construction methods to mitigate
severe impacts through structural damage and sinking of foundations and soil.
(iv) Operations. Effective implementation of sludge management plans,
occupational and safety plans, and emergency response plans will mitigate
system operations impacts resulting from leaks, spillovers, and sludge disposal;
windblown waste; gases emitted from landfills; and improper closure of existing
dumps.

64. The state ecological expertise, complying with Kyrgyz Republic laws on environmental
clearance, will be made mandatory before bidding, and no contracts will be awarded without

18
ADB. 2009. Technical Assistance to Kyrgyz Republic for the Issyk–Kul Sustainable Development Project. Manila.
17

securing approval from the state ecological expertise. Kyrgyz Republic regulations on official
public participation through the public ecological expertise will form a core part of the Project.
The public ecological expertise involves citizens, local administrations, and public associations,
usually represented by a nongovernment organization known as the independent ecological
expertise. The independent ecological expertise will provide third-party quality assurance and
ensure effective environmental management plan implementation; it will also address public
grievances through the public ecological expertise process.

65. The environmental management and monitoring plan will be implemented by BRD and
IDEP. IDEP will be directly responsible for mitigating and monitoring impacts during project
design, construction, and operation. BRD will complement IDEP's activities through a parallel
monitoring function and ensure that project activities comply with environmental regulations
within the biosphere reserve. The Project will ensure both IDEP and BRD are adequately
equipped to perform these functions. It will ensure institutional effectiveness through on-the-job
training in inspection and monitoring techniques and fund the procurement of monitoring and
laboratory equipment for effective environmental management plan implementation. The
international environment specialist at the PIO will provide training to staff members on
monitoring and mitigation activities and ensure that the plan is updated as required.

6. Social Safeguards
66. The Project will not have any land acquisition and resettlement impact as documented in
due diligence reports prepared for each of the three project cities and included in
Supplementary Appendix K. The Project has chosen existing sites for siting bulk facilities and
made all efforts to avoid land acquisition and resettlement impacts by choosing appropriate
design options and by prioritizing rehabilitation and reconstruction of existing facilities. New
construction, to the extent feasible, will be done on unused land already owned by the
Government. The due diligence reports were prepared recognizing ADB’s Policy on Involuntary
Resettlement (1995) and applicable laws and regulations of Kyrgyz Republic. The Project is not
expected to affect indigenous people as defined under ADB's Policy on Indigenous Peoples
(1998). The project areas are fairly homogenous, with majority Kyrgyz and other ethnic
minorities comprising Kazakhs, Russians, and Uzbeks. These ethnic groups do not differ in their
needs or levels of water supply or sanitation services, and all will benefit from project activities.

B. Major Risks and Mitigation Measures

1. Risks
67. Potential risks associated with the Project include (i) lack of commitment by city
administrations to undertake or implement reforms in urban and financial management, and
inability to implement the financial improvement action plan; (ii) inability of government staff to
implement the environmental management and monitoring plan; (iii) sudden increase in cost of
construction items; (iv) insufficient incentives by the Government to ensure vodokanal
enterprises and tazalyk enterprises staff provide efficient service delivery; and (v) lack of viability
gap funding from the Government to sustain urban services.

2. Mitigation Measures
68. Early establishment of the PMO and PIO and commencement of surveys for engineering
designs and information, education, and communication campaign to generate community
awareness will mitigate start-up delays. Efficiently functioning PMO and PIO will ensure the
project is completed on time and sudden price rise of construction items is adequately
accommodated. The Prime Minister's Office has direct control over the Project's objectives and
18

will monitor activities, improving the urban management and financial performance of cities.
Appointing the Ministry of Finance as the Executing Agency cements commitment for viability
gap funding as a key line item in the national budget as the Ministry of Finance prepares and
disburses funds under the medium-term budgetary framework.

V. ASSURANCES AND CONDITIONS

A. Specific Assurances

69. In addition to the standard assurances, the Government and Ministry of Finance have
given the following assurances, which are incorporated in the legal document.
(i) The Government will establish the steering committee and hold the first meeting
no later than 3 months following loan and grant effectiveness.
(ii) The Government will ensure smooth fund flow in accordance with the agreed
mechanism. The corresponding government contribution, necessary to finance
project activities, will be made available on time throughout the project
implementation period.
(iii) The Government will ensure that (a) the Project is carried out in compliance with
ADB’s Environment Policy and relevant national environmental laws and
regulations; (b) relevant environmental mitigation measures specified in the
ADB-approved environmental management and monitoring plan updated during
detailed engineering design are incorporated in bidding documents and civil
works contracts; (c) no bidding documents will be issued before approval of the
updated/final environmental management and monitoring plan by ADB and
before securing State Ecological Expertise; (d) all mitigation measures and
monitoring requirements set out in the environmental management and
monitoring plan will be implemented and fulfilled, respectively, and supervised
throughout project implementation; and (e) project environmental performance
will be monitored, and a report describing the progress of environmental
management plan implementation including issues and recommendations will be
submitted to ADB semiannually.
(iv) The Government will ensure that any unanticipated land acquisition and
resettlement activities under the Project are implemented based on a
resettlement plan prepared in accordance with applicable local laws and
regulations, ADB’s Involuntary Resettlement Policy (1995), and ADB's Policy on
Indigenous Peoples. The Government and ADB will agree on the resettlement
plan before implementation. The EA will disclose all plans to the public and
submit them to ADB for approval. Any civil works will be commenced only after
land has been acquired and affected people are compensated at full replacement
cost. The Government will ensure all recommendations in the Project's land
acquisition and resettlement due diligence report is implemented and reported to
ADB.
(v) The Government and the EA will ensure that civil works contracts incorporate
provisions to the effect that contractors: (a) will carry out HIV/AIDS awareness
and prevention programs for labor, and disseminate information at worksites on
risks of sexually transmitted infections and HIV/AIDS as part of health and safety
measures for those employed during construction; (b) will not employ or use
children as labor; and (c) follow and implement all statutory provisions on labor
(including equal pay for equal work), health, safety, welfare, sanitation, and
working conditions.
(vi) The Government will ensure that the gender action plan as set out in Appendix
11 is implemented in a timely manner.
19

(vii) The Government will ensure that all project cities will prepare and implement a
financial improvement action plan to revise the water, sewerage, and solid waste
management fees to meet at least operation and maintenance cost of services.
The Government will ensure that this plan is prepared by January 2011.
(viii) The Government and the EA will ensure that viability gap funding is made
available to cities (and consequently to vodokanal enterprises and tazalyk
enterprises) based on annual operating plans approved by the city councils. To
ensure future sustainability of vodokanal enterprises and tazalyk enterprises, the
Government shall progressively implement tariff increases with the goal of
achieving full cost recovery, subject to consumer affordability.

B. Conditions for Loan and Grant Disbursement

70. The Government shall have appointed the project director and finance manager at the
PMO and the project manager and accountant at the PIO. It shall have established the PMO
and PIO.

VI. RECOMMENDATION

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

(i) the loan in various currencies equivalent to Special Drawing Rights 10,566,000 to
the Kyrgyz Republic for the Issyk–Kul Sustainable Development Project from
ADB’s Special Funds resources with an interest charge at the rate of 1.0% per
annum during the grace period and 1.5% per annum thereafter; 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 Financing
Agreement presented to the Board; and
(ii) the grant not exceeding $13,500,000 to the Kyrgyz Republic, from ADB’s Special
Funds resources, for the Issyk–Kul Sustainable Development Project, on terms
and conditions that are substantially in accordance with those set forth in the
draft Financing Agreement presented to the Board.

Haruhiko Kuroda
President

9 September 2009
20 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Data Sources and/or


Performance Targets and/or Reporting
Design Summary Indicators Mechanisms Assumptions and Risks
Impact
Improved health of By the end of Project plus three Gender-disaggregated Assumptions
resident population years (2017): baseline survey The Government continues
in the Issyk–Kul (i) Average annual household conducted at project to provide support for an
Oblast and expenditure on treating inception (2010), at enabling investment
environmental waterborne illnesses project completion climate.
preservation of reduced by 25% (from (2015) and annually
Issyk–Kul Som1,500 to Som1,125) thereafter.
(ii) Public satisfaction with the
lake's recreation Surveys conducted as a
environment increased part of PPMS and by the
from xx% to yy% a/ Sanitary and
Epidemiological
Services of the Kyrgyz
Republic's Ministry of
Health

Outcome
Improved urban By end of Project (2015): Annual Assumptions
basic services (i) Population access to safe gender-disaggregated Timely provision of viability
comprising sanitation increased from socioeconomic surveys gap funding by the
sewerage and 43,000 persons in 2010 to undertaken as part of Government.
sanitation, solid 68,000 persons (45,000 PPMS to determine ,
waste persons through sewerage public satisfaction with Government provides
management, and system and 23,000 the quality of water adequate incentives to
water supply in the persons through onsite supply, sanitation, and ensure vodokanal
three project cities sanitation) waste management
a/ enterprises and tazalyk
(ii) Municipal solid waste enterprises staff provide
collection increased to National statistics for the efficient service delivery.
cover 133,500 persons lake water systems and
from 61,500 persons in water quality monitoring
2010 by the Sanitary and Risks
(iii) Improved water supply Epidemiological BRD and Interregional
ensured to already Services of the Ministry Department for
connected households of Health Environmental Protection
are unable to implement the
Statistics of the State environmental management
Agency on Environment and monitoring plan.
Protection and Forestry
A financial improvement
ADB project completion action plan is not
report implemented.

Outputs
Part A:
Infrastructure
Improvement

Sewerage: 13.43 (i) Access to sewerage Quarterly progress Assumptions


km of sewer lines network increased from reports prepared by the Ongoing donor financed
replaced in 43,000 persons in 2010 to PAF projects are efficiently
Balykchy and 45,000 persons in 2015 implemented.
Karakol, 12 km of (ii) Sewage flows increase Disbursement and
new sewer lines laid from 5,000 cum/day in reimbursement records Risks
in Karakol, and 6 2010 to 5,500 cum/day in maintained by the PMO Sudden increase in cost of
pumping stations 2015 construction items.
rehabilitated in (iii) 10 vehicles procured and PPMS reports prepared
Appendix 1 21

Data Sources and/or


Performance Targets and/or Reporting
Design Summary Indicators Mechanisms Assumptions and Risks
Balykchy and made operational by 2011 by the PAF
Karakol for sewer maintenance
(iv) Sewage pumps operating Annual work plans
on a daily basis and ADB review mission
discharging sewage to reports and back-to-
treatment plants office reports

Solid waste (i) Solid waste collection As-built drawings


management: 42.5 system expanded to cover developed by
hectares of existing 133,500 persons contractors
waste dumps (comprising 103,000
reengineered into resident and 30,500 tourist Project component
sanitary landfills in population) in 2015 from completion and
all three project 92,000 persons in 2010 commissioning
cities and waste (ii) 100 MT of solid waste certificates provided by
segregation and treated and disposed daily design and supervision
recyclable sorting (iii) 22 waste collection, consultants
units installed transportation and
landfilling vehicles
procured and made
operational for daily waste
management by 2011

Water Supply: (i) Nonrevenue water


8,550 domestic progressively reduced
water meters from 60% to 20%
installed in three (baseline to be established
project cities, 2 km at project inception)
of water (ii) Energy savings achieved
transmission through efficient pumping
pipeline replaced in systems (baseline to be
Balykchy, established at project
presedimentation inception)
treatment tank at (iii) Residual chlorine at tail
Karakol water ends of water supply
headworks system maintained
constructed, and 10 between 0.2 and 0.4 parts
boreholes with per million
treatment, energy
efficient pumps,
storage, and
protection facilities
constructed in
Balykchy and
Cholpon-Ata

Community (i) 23,000 persons in 2015


Upgrading: benefited from improved
Community water water supply and onsite
and sanitation sanitation system in
facilities neighborhoods (especially
constructed 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
22 Appendix 1

Data Sources and/or


Performance Targets and/or Reporting
Design Summary Indicators Mechanisms Assumptions and Risks
Part B: Enterprise
Resource
Management

Accounting systems (i) All cities' operating ratio Quarterly progress Assumptions
developed for all improved to 0.8 by 2015 reports prepared by the Government provides
cities, vodokanal from greater than 1 in PAF satellite images for
enterprises, and 2010, indicating improved developing the GIS and
tazalyk enterprise financial management PPMS reports prepared support to map urban
(ii) Vodokanal enterprises by the PAF infrastructure
revenue collection
efficiency improved from
70% in 2010 to 90% in Annual work plans
2015 prepared by the PMO
(iii) Gender-disaggregated
consumer database
created for vodokanal ADB review mission
enterprises and tazalyk reports and back-to-
enterprises office reports

GIS developed for (i) Satelitte images


each city and purchased and land
infrastructure cadastral maps procured
assets mapped (ii) Calibrated network models
developed for water and
sewerage networks based
on GIS maps

Management (i) Twinning program with


capacity of service utility from
vodokanal developed or developing
enterprises member country
enhanced 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
(iv) Capacity of women staff in
database and financial
management improved

Performance-based Performance-based service


service contracts for contracts approved by the
water supply and Government based on public–
sewerage awarded private partnership law, and
incentive and penalty
mechanism agreed
Appendix 1 23

Data Sources and/or


Performance Targets and/or Reporting
Design Summary Indicators Mechanisms Assumptions and Risks
Part C: Project
Assistance
Facility
IEC campaign (i) Community and Quarterly progress Assumption
effectively stakeholders aware of reports prepared by the Nongovernment
implemented, Project benefits and PAF organizations actively
materials on educated on hygiene and involved in educating
hygiene and sanitation practices PPMS reports prepared beneficiaries on project
sanitation by the PAF benefits
disseminated, and
women developed Annual work plans
as hygiene and prepared by the PMO
sanitation
advocates ADB review mission
reports and back-to-
office reports

Activities and Milestones Inputs

Project Preparatory Activities ADB


Project assistance facility operational (January 2010) ADF loan: $16.5 million
Baseline socioeconomic surveys conducted (June 2010) equivalent
ADF grant: $13.5 million
Part A: Infrastructure Improvement Government: $7.5 million
Sewerage system rehabilitated and expanded (January 2014) equivalent
Municipal waste equipment and vehicles procured (January 2011) Total: $37.5 million
Sanitary landfills constructed (January 2013) equivalent
Water distribution system rehabilitated and expanded (January 2014)
Construct presedimentation tank and replace main (December 2011)
Construction of boreholes (January 2012)
Community infrastructure constructed (January 2014)

Part B: Enterprise Resource Management


Accounting procedures and MIS developed (January 2012)
Consumer database created (January 2013)
MIS and revenue enhancement plans rolled out (January 2015)
Satellite images procured (January 2011)
GIS developed (January 2013)
Asset inventory completed (January 2013)
Twinning program partnership established (January 2013)
Twinning program implemented efficiently (January 2015)
Performance-based services contracts approved (January 2013)

Part C: Project Assistance Facility


Detailed engineering design finalized (November 2010)
Technical and environmental expertise secured (December 2010)

ADB = Asian Development Bank; ADF = Asian Development Fund; BRD = Biosphere Reserve Directorate; GIS =
geographic information system; IEC = information, education, and communications; km = kilometers; MIS =
management information system; MT = metric ton PAF = project assistance facility; PIO = project implementation
office; PMO = project management office; PPMS = project performance monitoring system.
a
Based on project preparatory technical assistance socioeconomic survey results. Survey at project inception will
reestablish baseline.
24 Appendix 2

URBAN SECTOR ANALYSIS

A. Overview

1. Kyrgyz Republic is the second smallest of the five former Soviet Central Asian republics,
with a land area of only 198,500 square kilometers. It is located east of People’s Republic of
China and south of Kazakhstan, and it also shares borders with Tajikistan and Uzbekistan. The
Tian Shan mountain range covers 80% of the country, while the remainder is valleys and
basins. Lake Issyk–Kul, in northwestern Tian Shan, is the second-largest saline lake in the
world and a major tourist attraction. The population of Kyrgyz Republic is estimated at 5.2
million (50.7% women and 49.3% men), of which 1.8 million (35%) live in urban areas. The
country's population density is 26 persons per square kilometer, which is relatively low.

2. There are 25 urban settlements in Kyrgyz Republic. Both country and urban populations
have been increasing, but at a declining rate. The urban population increased from 1.10 million
in 1970 to 1.67 million in 1990, and to 1.80 million in 2007. The growth rate, however, declined
from 3.4% in 1970 to 1.6% in 1990, and to 1.3% in 2007. Furthermore, the percent of urban
population has declined from 38% in 1990 to about 35% in 1998, and it has remained relatively
steady since then. Both the country and urban populations are expected to grow at 1% over the
next 20 years—the urban population is expected to reach 2.2 million by 2030.

3. Kyrgyz Republic is a low-income country, and the gross domestic product per capita was
$715 in 2007. In 2005, 43.1% of the population lived below the national poverty line. In urban
areas, 29.8% of population lived below the poverty line, and in rural areas, 50.8% of the
population lived below the poverty line. Also, unlike rural poverty, urban poverty has decreased
significantly from 41.2% in 2001 to 35.7% in 2003, and to 29.8% in 2005. Unemployment was
relatively low at 8.27% in 2006, but it may have increased since then due to the global economic
crisis.

4. Adult literacy is high, at 99.3% for the adult population. There is little difference in literacy
between genders, with 99.0% literacy among adult females and 99.5% literacy among adult
males. Primary school enrollment is high at 95.3% of the total population, with a completion rate
of 94.7%. Secondary enrollment is 86.4% of the total population, and tertiary enrollment is
42.8% of the total population.

5. Life expectancy at birth is 65.3 years as measured for 2000–2005. The infant mortality
rate in 2005 was 58 deaths per 1,000 live births, and the under age 5 years mortality rate was
67 per 1,000 live births. The human development index is 0.696, which ranks Kyrgyz Republic
116th out of 177 countries in the United Nations 2007/2008 Human Development Report.1 This
ranking reflects both the strengths and weaknesses of Kyrgyz Republic—it scores well in
literacy and education, but is dragged down by low incomes and short life expectancy. Kyrgyz
Republic scores 0.692 on the gender-related development index and ranks it 53 out of 156
countries in the report, and shows reasonably high gender equality in Kyrgyz Republic.

6. Urban Services in Kyrgyz Republic. Although most of the urban population lives in
Soviet-style apartment blocks, some live in novostroiki. About 56.0% of urban residents have
piped water in their homes, and another 42.3% rely on street water taps. Water quality is poor;
in 2007, about 11% of water tests failed on microbiological parameters. The water quantity is
limited, and the supply is intermittent. Most of the water supply infrastructure was built in 1960s

1
United Nations Development Programme. 2007. The Human Development Report 2007/2008. New York.
Appendix 2 25

and is in poor condition today. In addition, about 75% of the urban population has access to
sanitation services. Population access to sewerage facilities is 21%—in Bishkek, it is 78%, while
in other regions, it is about 10%. Most sewage treatment plants are not operational, or are
barely operational. Waterborne illnesses, such as typhoid and parasitic diseases, are a major
problem. Finally, solid waste collection and disposal systems are inadequate. Data on the solid
waste management are scarce, but 1997 statistics indicate that only 28.5% of the population is
served by regular municipal waste collection services. Out of 155 dumps around the country,
only one can be considered a full sanitary landfill.

B. Urban Services in Issyk–Kul

7. There were 432,556 people in Issyk–Kul Oblast in 2007, which is around 8% of the
country’s total population. In 2007, around 39% of the oblast’s population lived in poverty. There
are three major cities: Karakol (67,500 people), Balykchy (42,000 people), and Cholpon–Ata
(12,000). Lake Issyk–Kul is a major tourist area, and the oblast’s population tends to increase
during the summer thanks to tourists. Being a protected site, environmental preservation of the
lake takes high priority when considering the oblast's development.

1. Water Supply

8. Water supply services are provided by vodokanal enterprises, which are public
enterprises. Water supply systems in the three cities cover approximately 85% of the
population, were built during the Soviet period, and are in poor condition. Karakol (13,000 cubic
meter per day) and Cholpon–Ata (5,650 cum per day) use a mix of surface and groundwater
sources, while Balykchy (28,000 cum per day) only uses groundwater sources. Gross per capita
production is high the three centers at 666 liters per capita per day (lpcd) in Balykchy, 471 lpcd
in Cholpon–Ata, and 192 lpcd in Karakol. All cities also supply continuous water to the
connected population. Nonrevenue water is unknown, and vodokanal enterprises estimates
range from 25% to 60%. Net per capita supplies are high due to piped water being used for
irrigation. The water quality needs substantial improvement as it is biologically contaminated.

2. Sewerage and Sanitation

9. Vodokanal enterprises also operate the sewerage systems. Population access to


sewerage systems is low at about 35% or less in the three centers. Sewage treatment plants in
Balykchy (36,000 cum per day), Cholpon–Ata (25,000 cum per day), and Karakol (22,000 cum
per day) were constructed on extended aeration technology but now are dilapidated. Only the
sewage treatment plant in Karakol is partially operational. Much of the population continues to
rely on pit latrines, which present a serious risk to groundwater contamination and consequent
contamination of the lake. Many tourist resorts, especially around Cholpon–Ata, generate
domestic sewage and are required to have their own wastewater treatment facilities. However,
the monitoring of operation and discharge quality from these facilities has been inadequate, and
the impact on lake water quality is unknown. Overall, the combination of partially operating
central sewerage systems, private self-provision of sanitation facilities, and lax monitoring of
wastewater discharge from resorts presents a significant threat to lake quality.

3. Solid Waste Management

10. Solid waste management services are provided by communal utilities (tazalyk
enterprises), which also take care of town maintenance and services such as street lighting and
park maintenance. The region has a substantially high per capita waste generation rate at 1.5
26 Appendix 2

kilograms per person, with a total daily waste of 200 metric tons (MT) generated in the three
cities, including waste from resorts (e.g., Balykchy, 64 MT; Cholpon–Ata, 34 MT; and Karakol,
101 MT). About 70%–80% of the waste generated is landfill material, while 11%–20% is organic
and 8%–12% is dry recyclables. Domestic and commercial waste generation is at a 3:1 ratio.
About 50% of the waste generated is collected and disposed at existing open dumps in the
three cities. Safe disposal of medical waste is absent in all cities. 2 In addition, the tazalyk
enterprises in Karakol and Cholpon–Ata are unable to cover their operating costs from their
revenues, and instead rely on budgetary transfers. Balykchy’s tazalyk enterpise can cover its
operating costs but relies on budgetary transfers for investments.

C. City and Utility Finances

1. City Finances

11. In 2008, revenue surplus on operating accounts was generated in Karakol ($0.35
million), while both Balykchy (–$0.36 million) and Cholpon–Ata (–$0.01 million) generated
deficits. The operating incomes for the cities varied from $1 million in Cholpon–Ata to $2.8
million in Karakol. Central transfers constituted 18%–51% of operating incomes, while own-tax
revenues accounted for 39%–59%. Salaries constituted 34%–58% of operating expenditures,
and operating expenditures ranged from $1 million in Cholpon–Ata to $2.5 million in Karakol.
Nontax sources comprising water, sewerage, and solid waste charges were not accounted for
as they form the income base for vodokanal enterprises and tazalyk enterprises, which are
separate profit centers.

12. The operating ratio in Karakol was lower than unity for the 2004–2008 period (5 years)
indicating prudent financial management. Similar performances were witnessed in Balykchy and
Cholpon–Ata during the years 2006 and 2007. However, the surplus build-up is unable to
subsidize water, sewerage, and solid waste management services and infuse equity or leverage
debt for capital creation.

2. Vodokanal Enterprises Finances

13. The vodokanal enterprises in Karakol and Balykchy are unable to recover operating
costs from their revenues and rely on budgetary support. Cholpon–Ata’s vodokanal enterprise is
just able to cover its operating costs. None of the vodokanal enterprises are able to cover
capital expenditures. Vodokanal enterprises' operating income ranges from $0.11 million
(Karakol) to $0.25 million (Cholpon–Ata). Collections are 70% in Karakol, 90% in Cholpon–Ata,
and 90% in Balykchy. Domestic water tariffs range from $0.03 per cum in Karakol to $0.09 per
cum in Cholpon–Ata, while nondomestic water tariffs range from $0.30 per cum in Karakol to
$0.48 per cum in Cholpon–Ata. Collections from commercial consumers constitute about 40% of
the operating income and are the largest income source. Domestic sewerage tariffs range from
$0.30 per cum in Karakol to $0.09 per cum in Cholpon–Ata, and nondomestic and commercial
sewage charges range from $0.27 per cum in Karakol and Balykchy to $0.42 per cum in
Cholpon–Ata. The current tariffs do not cover operation and maintenance costs. For improved
cash inflows, vodokanal enterprises must provide better services so customers are willing to pay
an increased tariff. Investment in assets, operations and maintenance equipment, and training is
likely to result in better services.

2
Balykchy alone produces 3 kilograms of placenta daily and lacks appropriate mechanisms to dispose of it.
Appendix 2 27

14. Vodokanal enterprises expenditures are high due to operational inefficiency arising from
the aging system and lack of vehicles, tools, and equipment. The expenses of Cholpon–Ata’s
vodokanal ($0.24 million) are within its operating income, while those of Balykchy ($0.30 million)
and Karakol ($0.34 million) far exceed their operating incomes, indicating efficient management
of services by Cholpon–Ata (the tariffs there are the highest among the three cities). Staff
salaries constitute 32%–57% of total expenditure, and electricity, 10%–39%. Staffing levels are
high, between 4.5 and 7.0 staff members per 1,000 connections. Water losses are high due to
leaks and commercial losses in the network.

3. Tazalyk Enterprises Finances

15. Tazalyk enterprises' operating incomes range from $0.14 million in Cholpon–Ata and
Karakol to $0.48 million in Balykchy. Budget transfers and income from customers constitute
60% (Cholpon–Ata) to 100% (Karakol) of operating income. Domestic waste management tariffs
(for individual houses) range from $1.18 per cum in Karakol to $4.36 per cum in Cholpon–Ata;
nondomestic tariffs range form $1.09 per cum in Karakol to $6.98 per cum in Cholpon–Ata.
Karakol indicates 95% income collection, while Cholpon–Ata indicates a 35% collection
performance. Given that both stated incomes remain similar, the demand in Cholpon–Ata is
very high, and improved performance will benefit its operations.

16. Operating ratios for Balykchy and Karakol are less than unity. Balykchy has made
substantial efforts to improve tariff collection, while Karakol depends on budget transfers.
Cholpon–Ata is in debt, and its poor tariff collection is attributed to the fiscal status. Staff and
operation and maintenance costs constitute 60% (Cholpon–Ata) to 99% (Karakol) of operating
expenditure. Surpluses generated are not ploughed back into capital creation.

17. Tariffs (for water, sewerage, and solid waste) are approved by city councils, based on
submissions made by agencies. They are then assessed for appropriateness by an
antimonopoly committee in each city, and the city council passes a decree to implement the
tariffs. Current tariffs in Balykchy and Cholpon–Ata were approved in 2008, while Karakol's
tariffs have not been revised since 2005.

D. Urban Sector Issues and Challenges

18. Inadequate basic services hamper the region's economic development—and tourism in
particular. They also endanger Lake Issyk–Kul and its environment. The following principles
should govern future development.
(i) Preservation of Lake Issyk–Kul. It is important that improvements in
infrastructure (e.g., water and sanitation) are done concurrently.
(ii) User-pays cost recovery principles. Infrastructure improvements will lead to
significant increases in tourism revenues, and it is important that the cost of
services is recovered from these.
(iii) Integrated development. Economy, infrastructure, and environment are strongly
linked.
(iv) Strong focus on improving institutional effectiveness. Better financial
management, improved systems and procedures, and improved staff skills will
deliver efficient services.
28 Appendix 3

EXTERNAL ASSISTANCE TO THE SECTOR

No. Project Year Approved Donor Amount


1. Community Based Infrastructure Services Sector 2000 ADB $36,000,000
Project
2. Community Based Infrastructure Services Sector 2008 ADB $30,000,000
Project – Supplementary Grant
3. Rural Water Supply and Sanitation 2002 DFID $4,000,000
4. Rural Hygiene and Sanitation Project 2006 DFID $5,750.000
5. Second Rural Water Supply and Sanitation 2009 WB/DFID $17,250,000
6. Second On-farm Irrigation Project 2007 WB $20,550,000
7. On-farm Irrigation Project 2000 WB $29,000,000
8. Water Management Improvement Project (WMIP) 2006 WB $28,100,000
9. Rural Water Supply and Sanitation Project 2001 WB $24,560,000
10. Water Management Improvement Project 2006 WB $19,000,000
11. Small Towns Infrastructure Project 2005 WB $15,000,000
12. Irrigation Rehabilitation Project 1998 WB $46,800,000
13. Regional development of Issyk-Kul Oblast 2003 EU/TACIS €1,800,000
14. Promotion of the Biosphere Reserve Issyk-Kul 1995 GTZ $2,030,000
15. Study on Master Plan of Issyk-Kul Zone 2003 JICA $5,440,000
16. Karakol Water Supply ongoing Swiss SECO $7,750,000
17. Improvement of water products (TA) Ongoing TIKA $10,813
18. Renewable energy sources use (Installation of solar 2003 UNDP $210,000
pumps in remote regions of Issyk-kul and Naryn to
provide local population with drinking water and water
for cattle)
ADB = Asian Development Bank, DFID = Department for International Development of the United Kingdom, EU =
European Union, GTZ = Gesellschaft für Technische Zusammenarbeit, JICA = Japan International Cooperation
Agency, SECO = State Secretariat for Economic Affairs, TACIS = Technical Aide to the Commonwealth of
Independent States, TIKA = Turkish International Cooperation and Development Agency, UNDP = United Nations
Development Programme, WB = World Bank.
Source: Asian Development Bank.
Appendix 4 29

INFRASTRUCTURE IMPROVEMENT COMPONENT


Total Balykchy Cholpon-Ata Karakol
Subcomponent Unit Qty Amount ($) Qty Amount ($) Qty Amount ($) Qty Amount ($)
City Population (2015) No 128,750 44,500 12,750 71,500

A. Water Intake Facilities


- Water transmission mains m 2,000 300,000 2,000 300,000 0 0 0 0
- Rehabilitation of presedimentation tank No 1 450,000 0 0 0 0 1 450,000
- Boreholes, rehabilitation, and pump replacement No 10 1,285,000 5 642,500 5 642,500 0.00 0.00
Subtotal (A) 2,035,000 942,500 642,500 450,000

B. Water Distribution System


- Beneficiary population No 42,750 15,000 12,750 15,000
- Domestic water connections and meters No 8,550 1,624,500 3,000 570,000 2,550 484,500 3,000 570,000
Subtotal (B) 1,624,500 570,000 484,500 570,000

C. Sewerage System
- Beneficiary population No 44,200 15,000 0 29,200
- Replace pressure main (D = 400 mm/PE) km 6.00 2,250,000 6.00 2,250,000 0 0 0 0
- Replace sewer network (D = 200–500 mm) km 7.43 2,229,000 0.43 129,000 0 0 7.00 2,100,000
- New sewer network km 12.00 3,600,000 0 0 0 0 12.00 3,600,000
- Road overlay /asphalt km 19.43 777,200 0.43 17,200 0 0 19.00 760,000
- Replacement of manhole covers No 500 50,000 0 0 0 0 500 50,000
- Sewage pumping stations No 6 600,000 2 200,000 0 0 4 400,000
- Sewer connections No 1,200 120,000 0 0 0 0 1,200 120,000
- Sewer cleaning machines No 2 180,000 1 90,000 0 0 1 90,000
- Tools and equipment No 2 20,000 1 10,000 0 0 1 10,000
- Mobile repair unit No 2 60,000 1 30,000 0 0 1 30,000
- Excavators, bulldozers, cranes, etc. No 4 320,000 2 160,000 0 0 2 160,000
Subtotal (C) 10,206,200 2,886,200 0.00 7,320,000

D. Solid Waste Management


- Beneficiary population No 133,500 42,000 24,000 67,500
- Collection receptacles No 650 113,750 200 35,000 150 26,250 300 52,500
- Personnel protective equipment No 75 30,000 25 10,000 25 10,000 25 10,000
- Vehicles and equipment
Bulldozers at landfill site No 3 270,000 1 90,000 1 90,000 1 90,000
Compactor at landfill site No 3 240,000 1 80,000 1 80,000 1 80,000
Water bowser No 3 15,000 1 5,000 1 5,000 1 5,000
Grader No 2 20,000 - - 1 10,000 1 10,000
Dumper placers No 3 75,000 1 25,000 1 25,000 1 25,000
Trucks No 8 200,000 3 75,000 2 50,000 3 75,000
- Sanitary landfill
Engineering, rehabilitation, and expansion
- Surveys and investigations ha 44 22,000 23 11,500 15 7,500 6 3,000
- Capping material m3 3 450,000 1 150,000 1 150,000 1 150,000
- Groundworks m3 3 750,000 1 250,000 1 250,000 1 250,000
Fencing, security barrier, and landscaping m 21,500 1,505,000 11,000 770,000 7,500 525,000 3,000 210,000
Admin building, security quarters LS 3 30,000 1 10,000 1 10,000 1 10,000
Guardhouse No 3 21,000 1 7,000 1 7,000 1 7,000
Generator sets LS 6 15,000 2 5,000 2 5,000 2 5,000
Water supply LS 3 16,500 1 5,500 1 5,500 1 5,500
Storage shed for machines, stockpile No 3 15,000 1 5,000 1 5,000 1 5,000
Access road m 2 120,000 1 40,000 1 40,000 1 40,000
Weighbridge No 3 45,000 1 15,000 1 15,000 1 15,000
Waste sorting and segregation area No 3 15,000 1 5,000 1 5,000 1 5,000
- Miscellaneous tools and equipment No 6 30,000 2 10,000 2 10,000 2 10,000
- Windrow compost plant No 3 75,000 1 25,000 1 25,000 1 25,000
- Baler for recyclables No 6 60,000 2 20,000 2 20,000 2 20,000
Subtotal (D) 4,133,250 1,649,000 1,376,250 1,108,000

E. Community Upgrading
- Beneficiary population No 23,100 9,225 4,650 9,225
- Infrastructure
Water and sanitation in schools No 9 450,000 4 200,000 2 100,000 3 150,000
Community septic tanks No 8 24,000 3 9,000 2 6,000 3 9,000
WSS facilities in commercial area No 6 300,000 2 100,000 1 50,000 3 150,000
WSS facilities in hospitals/clinics No 6 180,000 2 60,000 1 30,000 3 90,000
WSS facilities in public institutions No 9 270,000 4 120,000 2 60,000 3 90,000
Subtotal (E) 1,224,000 489,000 246,000 489,000

Total 19,222,950 6,536,700 2,749,250 9,937,000


km = kilometer, LS = lump sum, m = meter, m3 = cubic meter, mm = millimeter, no= number, PE = polyethylene, Qty = quantity, WSS
= water supply and sanitation.
Source: Asian Development Bank estimates.
30 Appendix 5

ENTERPRISE RESOURCE MANAGEMENT COMPONENT

A. Overview

1. This component of the Issyk–Kul Sustainable Development Project (the Project) will
focus on improving the abilities of cities, vodokanal enterprises, and tazalyk eneterprises to
deliver services by (i) addressing financial management practices; (ii) undertaking a conditional
assessment of the existing water and sewerage system, creating an asset database, and
plotting the asset database on city base maps developed from satellite imagery of the three
project cities; and (iii) establishing a twinning program with a water and sewerage utility from a
developed or developing Asian Development Bank member country to focus on vodokanal
enterprises human resources management, capacity development to reduce nonrevenue water,
and management of water and treated effluent quality. The twining program will be rolled out
over a 3-year period to meet agreed objectives.

B. Management Information System, Accounting, and Financial Management

2. The subcomponent activities will comprise:


(i) reviewing accounting practices, and prepare chart of accounts;
(ii) developing accounting and billing software based on chart of accounts;
(iii) purchasing new computers and printers for accounting, database management,
and billing;
(iv) computerizing database and records;
(v) installing new accounting and billing software;
(vi) preparing statement of service delivery standards that customers can expect to
receive;
(vii) improving the complaint redress system to resolve queries and handle payments;
and
(viii) linking management information system to geographic information system-based
asset maps.

C. Geographic Information System, Asset Inventory, and Management

3. The subcomponent activities will comprise:


(i) collecting asset information;
(ii) updating water distribution network and sewerage system map;
(iii) preparing inventory of water treatment plant and reservoirs;
(iv) preparing inventory of sewage treatment plant and sewage pumping stations;
(v) confirming water supply and sewerage asset location and locate missing assets;
(vi) evaluating performance history and developing asset renewal, maintenance, and
monitoring methodology/program;
(vii) developing a plan on upgrading facilities and training personnel;
(viii) improving asset information data banking and management of customer
database;
(ix) developing a geographical information system-based plan using satellite imagery
and land cadastry;
(x) developing a standard operating procedure manual for assets, and in the
manual, incorporating brands that are acceptable based on established
standards, leak detection methodology, and safety and construction methods;
and
Appendix 5 31

(xi) formulating a 5-year (rolling) strategic or corporate plan for asset planning based
on growth and management for efficient service delivery.

D. Twinning Arrangement and Technical Capacity Development

1. Human Resources Management

4. The subcomponent activities will comprise:


(i) developing preconditions for human development;
(ii) creating a database of personnel;
(iii) determining required skills for each type of personnel;
(iv) comparing existing personnel skills with standards (i.e., job descriptions);
(v) confirming minimum period in jobs; and
(vi) educating staff members on meter reading, nonrevenue water measurement,
water network maintenance, wastewater treatment plant maintenance, and
sewerage maintenance.

2. Water Quality Management

5. The subcomponent activities will comprise:


(i) reviewing and proposing laboratory equipment,
(ii) establishing monitoring standards based on national legislations,
(iii) establishing algae control procedure,
(iv) developing better sampling and collection methodology,
(v) advising on optimal water treatment processes, and
(vi) advising on water quality and laboratory management.

3. Nonrevenue Water Reduction

6. The subcomponent activities will comprise:


(i) reviewing the work of the vodokanal enterprises on nonrevenue water reduction;
(ii) developing a plan for nonrevenue water reduction, and assess staffing for that;
(iii) developing leak detection strategies, and advising on establishing leak control
procedures;
(iv) developing standard operating procedures for nonrevenue water reduction;
(v) educating staff on nonrevenue water reduction;
(vi) implementing standard operating procedures; and
(vii) monitoring results.

4. Wastewater Management

7. The subcomponent activities will comprise:


(i) advising on sewer network maintenance,
(ii) advising on sewage pumping management, and
(iii) educating staff on wastewater treatment (i.e., effluent quality and discharge and
sludge disposal).
32
DETAILED COST ESTIMATES AND FINANCING PLAN

Appendix 6
Base Cost Price Contingency Landed Cost GoKR Financing ADB Financing
Category & Component ($) ($) ($) Cost ($) Taxes ($) Total ($) % Loan ($) % Grant ($) % Total ($)

A. Civil Works
1. Sewerage System 10,781,344 1,921,274 12,702,618 1,921,274 1,155,144 3,076,418 24 9,626,200 76 - - 9,626,200
2. Sanitary Landfill 3,365,040 599,662 3,964,702 599,662 360,540 960,202 24 - - 3,004,500 76 3,004,500
3. Water Supply System 4,098,640 730,392 4,829,032 730,392 439,140 1,169,532 24 3,659,500 76 - - 3,659,500
4. Community WSS Facilities 1,370,880 244,296 1,615,176 244,296 146,880 391,176 24 - - 1,224,000 76 1,224,000
Subtotal (A) 19,615,904 3,495,624 23,111,528 3,495,624 2,101,704 5,597,328 24 13,285,700 57 4,228,500 18 17,514,200

B. Equipment & Material


1. SWM Vehicles 918,400 163,662 1,082,062 163,662 98,400 262,062 24 - - 820,000 76 820,000
2. SWM Tools & Receptacles 161,000 28,691 189,691 28,691 17,250 45,941 24 - - 143,750 76 143,750
3. SWM Equipment 184,800 32,932 217,732 32,932 19,800 52,732 24 - - 165,000 76 165,000
4. Vodokanal Vehicle & Equipment 649,600 115,761 765,361 115,761 69,600 185,361 24 - - 580,000 76 580,000
5. BRD & IDEP Equipment 235,000 41,878 276,878 41,878 25,179 67,057 24 - - 209,821 76 209,821
6. PMO Vehicles 116,279 20,721 137,000 20,721 12,458 33,179 24 - - 103,821 76 103,821
Subtotal (B) 2,265,079 403,645 2,668,724 403,645 242,687 646,332 24 - - 2,022,392 76 2,022,392

C. Enterprise Resource Management


1. MIS & Accounting 500,000 89,102 589,102 89,102 53,571 142,673 24 - - 446,429 76 446,429
2. Twinning Program 500,000 89,102 589,102 89,102 53,571 142,673 24 - - 446,429 76 446,429
3. GIS and Asset Inventory 500,000 89,102 589,102 89,102 53,571 142,673 24 - - 446,429 76 446,429
Subtotal (C) 1,500,000 267,306 1,767,306 267,306 160,713 428,019 24 - - 1,339,287 76 1,339,287

D. Project Assistance Facility


Subtotal (D) 6,195,206 1,104,008 7,299,214 - 663,773 663,773 9 1,177,755 16 5,457,686 75 6,635,441

E. Contingencies
1. Physical Contingencies - - 1,653,228 164,548 - 164,548 10 1,036,545 63 452,135 27 1,488,680
Subtotal (E) - - 1,653,228 164,548 - 164,548 10 1,036,545 63 452,135 27 1,488,680

F Financing Charges
A Interest During Construction - 1,000,000 - - - - 1,000,000 100 - - 1,000,000
Subtotal (F) - - 1,000,000 - - - - 1,000,000 100 - - 1,000,000

Total 29,576,189 5,270,583 37,500,000 4,331,123 3,168,877 7,500,000 20 16,500,000 44 13,500,000 36 30,000,000

BRD = biosphere reserve directorate; E&M = equipment and material; ERM = enterprise resource management; GIS = geographic information system; IDEP = Interregional
Department for Environmental Protection; IEC = information, education, and communication; MIS = management information system; PAF = project assistance facility; PMO =
project management office; SWM = solid waste management.
Source: Asian Development Bank estimates.
IMPLEMENTATION ARRANGEMENTS

Appendix 7
BRD = biosphere reserve directorate, IDEP = Issyk-Kul Naryn Interregional Department for Environmental Protection, IT = information technology, PPMS = project
performance monitoring system, SAEPF= state agency for environmental protection and forestry, SWM = solid waste management, WSS = water supply and sanitation.
Source: Asian Development Bank.

33
34
IMPLEMENTATION SCHEDULE

Appendix 8
Source: Asian Development Bank.
Appendix 9 35

PROCUREMENT PLAN

Basic Data

Project Name: Issyk–Kul Sustainable Development Project


Loan Number: TBC
Grant Number: TBC
Loan Amount: $16.5 million equivalent
Grant Amount: $13.5 million
Executing Agency: Ministry of Finance
Date of Original Procurement Plan: 4 September 2009
Date of Most Recent Procurement Plan: 4 September 2009
TBC = to be confirmed

A. Process Thresholds, Review, and 18-Month Procurement Plan

1. Project Procurement Thresholds

1. Except as the Asian Development Bank (ADB) may otherwise agree, the following
process thresholds shall apply to procurement of goods and works.

Procurement of Goods and Works

Method Threshold
ICB for Works More than $1,000,000
ICB for Goods More than $500,000
NCB for Works Beneath that stated for ICB, Works
NCB for Goods Beneath that stated for ICB, Goods
Shopping for Works Below $100,000
Shopping for Goods Below $100,000
ICB = international competitive bidding, NCB = national competitive bidding.

2. ADB Prior or Post Review

2. Except as ADB may otherwise agree, the following prior or post review requirements
apply to the various procurement and consultant recruitment methods used for the Project.

Procurement Method Prior or Post Comments


ICB Works Prior ADB SBD
ICB Goods Prior ADB SBD
NCB Works Prior and Post ADB SBD (prior followed by post)
NCB Goods Prior and Post ADB SBD (prior followed by post)
Shopping for Works Post ADB SBD
Shopping for Goods Post ADB SBD
Recruitment Method
Quality- and Cost-Based Selection Prior RFP
Quality-Based Selection Prior RFP
Other Selection Methods: Consultants Prior RFP
Qualifications, Least-Cost Selection, Fixed Budget,
and Single Source
Recruitment Method
Individual Consultants Prior RFP
ADB = Asian Development Bank, ICB = international competitive bidding, NCB = national competitive bidding, RFP =
request for proposals, SBD = standard bidding documents.
36 Appendix 9

3. Goods and Works Contracts Estimated to Cost More than $1 Million

3. The following table lists goods and works contracts for which procurement activity is
either ongoing or expected to commence within the next 18 months.

Prequalification Advertisement
Contract Procurement of Bidder Date
General Description Value Method (Yes/No) (Quarter/Year) Comments
Works
Rehabilitation of $12.70 ICB Yes Q3/2010 Two packages: one
sewerage system million in Balykchy and one
in Karakol
Water supply district $2.14 ICB Yes Q3/2010 One package:
metering in pilot zones million district metering in
pilot zones in all
three cities
Water supply $2.69 ICB Yes Q3/2010 One package:
improvements million transmission main
in Balykchy,
presedimentation
tank in Karakol, and
boreholes in
Balykchy and
Cholpon–Ata
Goods
Procurement of vehicles $1.98 One ICB and No Q1/2010 Vehicles for
and equipment million two NCB vodokanal
enterprises, tazalyk
enterprises, and
PMO
ICB = international competitive bidding, NCB = national competitive bidding, PMO = project management office, Q =
quarter.

4. Consulting Services Contracts Estimated to Cost More than $100,000

4. The following table lists consulting services contracts for which procurement activity is
either ongoing or expected to commence within the next 18 months.
Appendix 9 37

Advertisement International
Contract Recruitment Date or National
General Description Value Method (Quarter/Year) Assignment Comments
Design and supervision $3.89 QCBS 80:20 Q1/2010 National 708 person-months
consultants million (FTP)
Information, education, $0.79 QCBS 80:20 Q1/2010 National 200 person-months
and communications million (STP)
consultants or NGO
Management information $0.59 QCBS 80:20 Q1/2010 National 120 person-months
systems and accounting million (STP or BTP)
Geographical information $0.59 QCBS 80:20 Q1/2010 National 150 person-months
system and asset million (STP or BTP)
inventory
Individual consultants $1.20 Government Q1/2010 International For PMO and PIO:
million procedures and national international WSS,
acceptable to environmental and
ADB solid waste
management
specialists, and
national social or
gender
development,
PPMS, and legal
specialists
ADB = Asian Development Bank, BTP = biodata technical proposal, FTP = full technical proposal, NGO =
nongovernment organization, PIO = project implementation office, PMO = project management office, PPMS =
project performance monitoring system, Q= quarter, QCBS = quality- and cost-based selection, STP = simplified
technical proposal.

5. Goods and Works Contracts Estimated to Cost Less than $1 Million and
Consulting Services Contracts Less than $100,000

5. The following table groups smaller-value goods, works, and consulting services
contracts for which procurement activity is either ongoing or expected to commence within the
next 18 months.

Procurement
Value of or
Contracts Number of Recruitment
General Description (cumulative) Contracts Method Comments
Works
Construction of sanitary landfills $3.96 million 3 ICB and NCB All three cities
Construction of community water and $1.62 million 3 NCB All three cities
sanitation facilities
Goods
Procurement of environmental $0.27 million 1 NCB One package for
monitoring equipment BRD and IDEP
equipment
Procurement of waste collection tools $0.41 million 4 NCB and Four packages,
and receptacles, wind row compost shopping separate for each
equipment, and recycling balers category
BRD = Biosphere Reserve Directorate, IDEP = Interregional Department for Environmental Protection, NCB =
national competitive bidding.
38 Appendix 9

B. Project Procurement Plan

1. Indicative List of Packages Required under the Project

6. The following table provides an indicative list of all procurement (goods, works, and
consulting services) over the life of the Project. Contracts financed by the Borrower and others
are also indicated.

Estimated Procurement or Domestic


General Estimated Value Number of Recruitment Preference or
Description (cumulative) Contracts Method Proposal Type Comments
Works
Rehabilitation of $12.70 million 2 ICB – One package each
sewerage system in Balykchy and
Karakol
Water supply $2.14 million 1 ICB – District metering in
district metering in pilot zones in all
pilot zones three cities
Water supply $ 2.69 million 1 ICB – Transmission main
improvement in Balykchy,
presedimentation
tank in Karakol, and
boreholes in
Balykchy and
Cholpon–Ata
Construction of $3.96 million 3 ICB and NCB – All three cities
sanitary landfills
Construction of $1.62 million 3 NCB – All three cities
community water
and sanitation
facilities
Goods
Procurement of $1.98 million 1 One ICB and two – Vehicles for
vehicles and NCB vodokanal
equipment enterprises, tazalyk
enterprises, and
PMO (ICB case to
case and NCB for
contracts less than
ICB threshold)
Procurement of $0.27 million 1 NCB – One package for
environmental BRD and IDEP
monitoring equipment
equipment
Procurement of $0.41 million 4 NCB and – Four packages,
waste collection shopping separate for each
tools and category
receptacles, wind
row compost
equipment, and
recycling balers
Services
Design and $3.89 million 1 QCBS FTP National
supervision consultants
consultants
Information, $0.79 million 1 QCBS STP National
education, and consultants
communications
consultants or
NGO
Appendix 9 39

Estimated Procurement or Domestic


General Estimated Value Number of Recruitment Preference or
Description (cumulative) Contracts Method Proposal Type Comments
Management $0.59 million 1 QCBS STP or BTP National
information consultants
systems and
accounting
Geographical $0.59 million 1 QCBS STP or BTP National
information consultants
system and asset
inventory
Individual $1.20 million 6 Government Biodata and For PMO and PIO,
consultants procedures curriculum vitae
three international
acceptable to ADB specialists and
three national
specialists
ADB = Asian Development Bank, BTP = biodata technical proposal, FTP = full technical proposal, ICB = international
competitive bidding, NCB = national competitive bidding, NGO = nongovernment organization, PIO = project
implementation office, PMO = project management office, QCBS = quality- and cost-based selection, STP =
simplified technical proposal.

C. Indicative Person Months for Consulting Services

7. The following table indicates the professional staff members and person-months
required over the life of the Project.

Consulting Assignment Person-Months


A. Design and Supervision Consultants
Team Leader and Wastewater Engineer 60
Deputy Team Leader and Water Supply Engineer 42
Landfill Design Engineer 42
Electrical and Mechanical Engineer 24
Environmental Specialist 15
Social Development Expert 15
Procurement Specialist 15
Quantity Surveyor 24
Structural Engineer 15
Senior Resident Construction Supervision Engineer 36
AutoCAD (computer aided design) Draftsperson 240
Design Engineers 72
Construction Supervision Resident Engineers 108
Subtotal (A) 708
B. Information, Education, and Communication Consultants
Team Leader and Communications Expert 60
Hygiene and Health Specialist 40
Social Development Specialist 40
Publicity and Web Content Manager 60
Subtotal (B) 200
C. Management Information System Consultants
Team Leader and Chartered Accountant 36
Accountants 60
Software Professional (with knowledge of Oracle or similar software) 24
Subtotal (C) 120
D. Geographic Information System Consultants
Team Leader and Geographic Information System Expert 36
Satellite Imagery Mapping Specialists 60
Surveyors 24
Database Management Specialists 30
Subtotal (D) 150
40 Appendix 9

D. National Competitive Bidding

1. General. The procedures to be followed for national competitive bidding shall be for
tendering with unlimited participation and two-stage tendering as set forth in Law of the Kyrgyz
Republic on Public Procurement of Goods, Works, and Services (effective April 2004), with
clarifications and modifications described in the following paragraphs required for compliance
with the provisions of ADB's Procurement Guidelines (2007, as amended from time to time).

2. Eligibility. The eligibility of bidders shall be as defined under section I of ADB's


Procurement Guidelines (April 2006); accordingly, no bidder or potential bidder shall be
declared ineligible for ADB-financed contracts for other reasons than those provided by section
I. Bidders must be nationals of ADB member countries, and offered goods, works, and services
must be produced in and supplied from ADB member countries.

3. Prequalification. Normally, post-qualification shall be used unless explicitly provided for


in the loan agreement and procurement plan. Irrespective of whether post-qualification or
prequalification is used, eligible bidders (both national and foreign) shall be allowed to
participate.

4. Registration and Licensing


(i) Bidding shall not be restricted to preregistered or licensed firms.
(ii) Where registration or licensing is required, bidders (a) shall be allowed reasonable
time to complete the registration or licensing process; and (b) shall not be denied
registration or licensing for reasons unrelated to their capability and resources to
perform the contract, which shall be verified through post-qualification.
(iii) Foreign bidders shall not be precluded from bidding. If a registration or licensing
process is required, a foreign bidder declared the lowest evaluated bidder shall be
given a reasonable opportunity to register or to obtain a license.

5. Bidding Period. The minimum bidding period is 28 days prior to the deadline for the
submission of bids.

6. Bidding Documents. Procuring entities should use standard bidding documents for the
procurement of goods, works, and services acceptable to ADB.

7. Preferences. No domestic preference shall be given for domestic bidders and for
domestically manufactured goods.

8. Advertising. Invitations to bid shall be advertised in at least one widely circulated,


national daily newspaper or freely accessible, nationally known website allowing a minimum of
28 days for the preparation and submission of bids. Bidding of national competitive bidding
contracts estimated at $500,000 equivalent or more for goods and related services or $1 million
equivalent or more for civil works shall be advertised on ADB’s website via the posting of the
procurement plan.

9. Bid Security. Where required, bid security shall be in the form of a bank guarantee from
a reputable bank.
Appendix 9 41

10. Bid Opening and Bid Evaluation


(i) Bids shall be opened in public.
(ii) Evaluation of bids shall be made in strict adherence to the criteria declared in the
bidding documents, and contracts shall be awarded to the lowest bidder.
(iii) Bidders shall not be eliminated from detailed evaluation on the basis of minor,
nonsubstantial deviations.
(iv) No bidder shall be rejected on the basis of a comparison with the employer's
estimate and budget ceiling without ADB's prior concurrence.
(v) A contract shall be awarded to the technically responsive bidder that offers the
lowest evaluated price and who meets the qualifying requirements set out in the
bidding documents.
(vi) No negotiations shall be permitted.
(vii) Price verification shall not be applied.

11. Rejection of All Bids and Rebidding. Bids shall not be rejected and new bids solicited
without ADB’s prior concurrence.

12. Participation by Government-Owned Enterprises. Government-owned enterprises in


Kyrgyz Republic shall be eligible to participate as bidders only if they can establish that they are
legally and financially autonomous, operate under commercial law, and are not a dependent
agency of the contracting authority. Furthermore, they will be subject to the same bid and
performance security requirements as other bidders.

13. Right to Inspect and/or Audit. A provision shall be included in all national competitive
bidding works and goods contracts financed by ADB requiring suppliers and contractors to
permit ADB to inspect their accounts, records, and other documents relating to bid submission
and the performance of the contract, and to have them audited by auditors appointed by ADB.

14. Fraud and Corruption


(i) The Government shall reject a proposal for award if it determines that the bidder
recommended for award has, directly or through an agent, engaged in corrupt,
fraudulent, collusive, or coercive practices in competing for the contract in
question.
(ii) ADB will declare a firm or individual ineligible, either indefinitely or for a stated
period, to be awarded a contract financed by ADB, if it at any time determines
that the firm or individual has, directly or through an agent, engaged in corrupt,
fraudulent, collusive, coercive, or obstructive practices in competing for, or in
executing, an ADB-financed contract.

15. National Sanctions List. National sanctions lists may be applied only with prior
approval of ADB.
42 Appendix 10

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: Kyrgyz Republic/Issyk–Kul Sustainable Development Project

Lending/Financing Modality: Project Loan Department/Division: Central and West Asia


and Grant Department/Urban Services
Division

I. POVERTY ANALYSIS AND SOCIAL STRATEGY


A. Link to the National Poverty Reduction Strategy and Country Partnership Strategy
Lake Issyk–Kul ("warm lake" in Kyrgyz) is the world’s second largest saline lake; a Ramsar site of globally
significant biodiversity; and a United Nations Educational, Scientific and Cultural Organization
(UNESCO)-designated biosphere reserve. The lake forms a significant part of Issyk–Kul Oblast, and contributes to
economic growth by providing tourism opportunities. Attracting approximately 1 million tourists annually, equivalent
to 70% of the country’s annual tourist of 1.4 million persons, the lake is a major economic driver in the region.

Increasing tourism has resulted in the construction of many resorts that now sprawl around the lake's northern
shores. However, existing water and sanitation infrastructure (i.e., water, sewerage, solid waste, and roads) is
decrepit, dysfunctional, and poorly managed, and unable to serve the high number of tourists, which exceeds the
resident population by a factor of four. The excessive pressure placed on the existing infrastructure is partially
responsible for polluting the lake.

The country development strategy, 2009–2011a, emphasizes environmental sustainability, and its strategic
investment project for the Issyk–Kul region focuses on protecting Lake Issyk–Kul with the Project. In February 2009,
the Concept of Sustainable Development of the Ecological and Economic System of Issyk–Kul was passed through
a presidential decree. Based on this, the Government of Kyrgyz Republic passed a resolution in May 2009 that
prioritizes implementation of the Project.

The Government has adopted a poverty reduction strategy (now embedded in the country development strategy,
2009-2011) that seeks to increase opportunities to ensure that citizens have an adequate, equitable, and
comfortable life in Kyrgyz Republic. The overall goals of the framework imply a large leap in socioeconomic
development through mobilization of domestic resources, effective structural reforms and quality management
(including bringing in professional managers to foster economic development), improvement of infrastructure,
introduction of new technologies and information systems, and active involvement of civil initiatives. In other words,
sustainable stabilization and dynamic development for the well being of all citizens will guide Kyrgyz Republic to
prosperity.

Asian Development Bank (ADB)-led investment and policy dialogue will improve the quality of urban services, foster
tourist growth, and preserve the lake's environment. The assessment of institutional, legal, and municipal finance
assessments in the oblast will provide a suitable platform for developing ADB's urban services sector development
strategy for Kyrgyz Republic. Development of performance-based service contracts will also improve opportunities
for public–private partnerships in the water and sanitation sector.
b
The Project is consistent with ADB’s Water Policy , and it will help achieve the Millennium Development Goal of
environmental sustainability (goal 7) and specifically address target 10 (to halve the proportion of people without
sustainable access to safe drinking water and basic sanitation by 2015).
B. Poverty Analysis Targeting Classification: TI-M
1. Key Issues
The National Statistics Committee calculates an annual poverty line adjusted to inflation. In 2008, the poverty line
was calculated as Som963 ($22) per person per month, with the line of extreme poverty being Som640 ($15) per
person per month. Although the national poverty level has decreased from 49% in 2003 to 35% in 2008, poverty
reduction is larger for rural areas. Based on 2008 data, Issyk–Kul Oblast ranks fourth in terms of poverty incidence,
with 39%, and about 8% suffering extreme poverty. The poor account for 19% of the beneficiary population, with the
extremely poor making up 9%. Within the project area, poverty incidence ranges from 2.6% in Cholpon–Ata, to
10.4% in Karakol, and to 31.9% in Balykchy.

A socioeconomic survey indicated that urban residents' top priority is improved water supply and sanitation services.

Water supply. About one quarter of households and 19% of poor households indicated inadequate water supply for
household needs. Waterborne illnesses were significant, with 82% of households stating incidences in the past 5
years. Overall, 23% of all people suffering from waterborne illnesses were poor, and the costs of treating such
illnesses were a significant additional burden. Poor households also lost 75 potential labor days per year due to
waterborne illnesses. Therefore, improved water quality is a high priority.
Appendix 10 43
Sanitation. About 75% of households use dry-pit latrines, and 24% use flush or pour toilets. The poor generally use
pit latrines, which cannot be connected to a centralized system. About 66% of households surveyed stated that they
would be willing to pay for connection to a sewerage system, indicating citizen priority for improved sanitation.

Solid waste management. About 84% of households stated that a municipal collection service was unavailable on
a daily basis. Waste disposal practices included plastic bottle and packaging collection by tazalyk enterprises from
50% of households, waste incineration by 36% of households, and waste disposal to the nearest landfill or waste
receptacle by 8% of households. All poor households stated that they sold household waste for recycling. Increased
collection frequency was a stated requirement.

The social analysis concluded that the poor mostly live in areas without running water supplies, sewage and solid
waste collection, and treatment services. They often suffer from serious water supply shortages, poor water quality,
sewage pollution, and poor urban environmental sanitation.

2. Design Features
The Project incorporates several strategies to facilitate the ability of households and communities to realize benefits
from water supply, sanitation, and solid waste management improvements and maintenance, thus contributing to
poverty reduction in the project area, including (i) priorities for employment of local men and women for both
physical works and routine maintenance, particularly for poor households; (ii) contractor specifications for provision
of HIV/AIDS and sexually transmitted infection awareness and prevention programs for construction crews (physical
works) and surrounding communities; (iii) an information, education, and communication campaign to ensure public
consultation and a participation program linked to different aspects of project preparation and implementation
(including participation in monitoring) to be undertaken by the Executing Agency and to continue the consultation
c
commenced during the project preparatory technical assistance ; (iv) a gender action plan focusing on a training
program to deliver increased awareness and knowledge on water drinking safety, water source protection,
treatment, water and environmental sanitation and diseases, toilet renovation, health education and promotion; and
(v) community upgrading initiatives such as improvements in school water supply and sanitation; improvements to
pit latrines used by the poor through community septic tanks; and provision of public toilets in markets, hospitals,
clinics, and other public institutions.
II. SOCIAL ANALYSIS AND STRATEGY
A. Findings of Social Analysis
The population of the project area (i.e., the three urban centers of Balykchy, Cholpon–Ata, and Karakol) is about
121,500 and is expected to increase to 128,750 by 2015. The household survey indicates that two thirds of
households are Kyrgyz, 18% are Russian, 4% are Tajik, and 12% belong to other ethnic groups. Cholpon–Ata
comprises the largest proportion of Kyrgyz, with 89%. Overall, some 41% of households are headed by women.

The primary beneficiaries of the Project are the residents of the three cities and tourists. Some households will
experience improvement in water supply, sanitation, and solid waste management, including (i) households that are
impacted when members fall sick due to waterborne illnesses resulting from insufficient or poor-quality water; (ii)
those that use markets, hospitals, clinics, and other public institutions that will be provided with improved facilities
(i.e., public toilets); (iii) schoolchildren and teachers to be provided with improved water supply and sanitation
facilities; (iv) poor households using pit latrines that will be improved through provision of community septic tanks;
(v) general and more widespread benefits from the sanitary landfill and improvements to solid waste management
practices; and (vi) households, hotels, guesthouses, and institutions connected to the rehabilitated sewerage
system.

Health benefits. The Project will reduce morbidity and mortality rates from waterborne, vector-borne, and airborne
diseases and contribute to savings in associated medical costs and loss of healthy working days. The Project will (i)
prevent an increase in the incidence of waterborne illnesses arising form contaminated or insufficient water; (ii)
prevent an associated increase in medical expenses; and (iii) prevent an associated increase in time lost from work,
thereby leading to loss of income.

Employment benefits. The Project will create direct short-term employment during the construction phase and
long-term employment opportunities during the operation phase (maintenance). A target of 30% short-term
employment opportunities will be filled by the poor and women during the construction phase. Since unemployment
and redundancies within the informal sector (those most likely to be employed on the Project) are the major causes
of poverty in the project area, the poor will benefit disproportionately from this job creation.

Tourism sector benefits. A small tourism survey of operators and tourists included in the project preparatory
technical assistance was conducted, covering 30 tourists (10 in each city) and 31 tourism service operators (hotels,
inns, and guest houses). Inadequate water supply and poor sanitation in hotels and guesthouses, and inadequate
solid waste collection services (and unclean public places), were indicated as negatively impacting tourism. About
33% of tourists indicated that water supply and sanitation were poorly managed, but 55% indicated that solid waste
was efficiently collected and transported. Clearly, improvements to basic services will have benefits for the tourism
experience.
44 Appendix 10

Other economic benefits. In addition, improved health and quality of life will increase the capability of people and
will promote local economic development. The improved water quality and urban environment will promote
sustainable economic development and accelerate tourism development where the poor and women are particularly
likely to find opportunities, as they make up a large proportion of small-service operators and vendors.

B. Consultation and Participation


1. Provide a summary of the consultation and participation process during the project preparation.
A socioeconomic survey covered 514 respondents who were randomly sampled in the three cities. Stakeholder
consultation workshops, focus group discussions, and key informant interviews on urban services, tourism
development, and environmental management formed an integral part of the consultation process. Environmental
impact assessment and resettlement due diligence report preparation also involved rounds of public consultation.

2. What level of consultation and participation (C&P) is envisaged during the project implementation and
monitoring?

Information sharing Consultation Collaborative decision making Empowerment

3. Was a C&P plan prepared? Yes No


The Project includes an information, education, and communication campaign comprising (i) a public environment
and hygiene awareness program at the community level; and (ii) an HIV/AIDS and sexually transmitted infection
awareness and prevention program aimed at the construction workforce. The campaign will be implemented in
parallel with existing environment and health programs. Consultations with communities will be held during detailed
engineering designs and implementation of components. Special attention will be paid to the participation of women
and any other vulnerable group, such as the poor.

C. Gender and Development


1. Key Issues
Although Kyrgyz Republic avoided some of the more drastic collapses in social and economic indicators
experienced by countries in transition, effects have nevertheless been felt by its population, particularly women.
Significant and growing gender disparities in political leadership, employment opportunities, and wage rates have
increased rates of women’s income poverty.

Households headed by women account for 41% of beneficiary households and are smaller than households headed
by men; single-person households are more often headed by women. Some 87% of households headed by women
and 91% of households headed by men receive regular cash income. Higher proportions of households headed by
women (20%) live in poverty than households headed by men (18%). The total number of sick days due to
waterborne illnesses is higher for women (151) than for men (73). Women and girls at reproductive age are
primarily responsible for collection of household water, household garbage disposal, and care for the sick and
elderly. These tasks negatively impact health and cause conflict and stress in communities during rush hours and
limited water supply schedules. Despite an active role in the sector, women lack decision-making powers, and their
representation in management is low at 10%.

The poverty and social assessment indicated that women strongly support the Project across all components.
Women perceive that the Project will improve their living environments, create employment opportunities, and
reduce the incidence of waterborne illnesses and associated costs. Implementation of the gender action plan will
enhance the benefits to women through a training and awareness-raising program focusing on drinking water
safety, water source protection and treatment, water and environmental sanitation and diseases, toilet renovation,
and health education and promotion.

2. Key Actions
Measures included in the design to promote gender equality and women’s empowerment—access to and
use of relevant services, resources, assets, or opportunities and participation in decision-making process:
Gender plan Other actions/measures No action/measure

Gender has been mainstreamed into the design of the Project, including a range of gender-sensitive measures,
requirements for consultation, and monitoring indicators. The Implementing Agency will work with contractors and
communities to facilitate the participation of women in paid work opportunities for physical works and to ensure that
all Kyrgyz labor laws are respected (e.g., equal pay for equal work and no use of child or trafficked labor). HIV/AIDS
and sexually transmitted infection awareness and prevention programs will target women as well as men, including
programs instituted by contractors to reach the construction crew. Project assurances will prioritize women for
employment, including a 15% target for project employment opportunities for women and 15% for the poor during
the construction phase, and will be monitored by the Project. The community-based environmental and hygiene
awareness program that is at the core of the gender action plan will directly address women’s needs and health
risks.
Appendix 10 45
III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS
Issue Significant/Limited/No Strategy to Address Plan or Other Measure
Impact Issue
Involuntary resettlement Physical works associated Due diligence report Full plan
with the Project are located prepared, and Short plan
on sites that are already scavengers at sanitary Resettlement
used for the same purpose landfill will be provided framework
or use state-owned right of employment in waste No action
way alongside existing segregation activities. Due diligence report
roads. Resettlement Resettlement category C,
impacts will be avoided or i.e., no impact.
minimized.
Indigenous peoples The Project will not All ethnic groups in the Plan
adversely affect ethnic or project area will benefit. Other action
cultural minorities in the All groups will participate Indigenous peoples
project area. The Project is equally in the Project. framework
classified as category C No action
with respect to indigenous
peoples.
Labor The Project endorses the Civil works contracts will Plan
Employment opportunities principle of recruitment of stipulate priorities to (i) Other action
Labor retrenchment local people for physical employ local people, (ii) No action
Core labor standards works. ensure equal
opportunities for women
and men for work, (iii)
pay wages promptly, and
(iv) not employ child or
forced labor.
Affordability The potential negative A consumption-based Action
impact of water tariff tariff is operational. No action
increases on the poor is Tariffs will be revised
considered to be based on affordability (at
acceptable, particularly less than 5% of
given that the poor household income).
currently pay a higher-
than-average proportion of
their incomes on water.
Other Risks and/or The level of knowledge of The Project will Plan
vulnerabilities HIV risks and transmission complement ongoing Other action
HIV/AIDS and sexually is low, and key at-risk awareness programs No action
transmitted infections groups include commercial through an information,
Human trafficking sex workers who are education, and
Others (conflict, political known to be associated communication campaign
instability, etc.) with the tourism sector. covering HIV/AIDS and
There is also the small risk sexually transmitted
associated with infections for construction
construction workforce workers.
during the physical works
phase of the Project.
IV. MONITORING AND EVALUATION
Are social indicators included in the design and monitoring framework to facilitate monitoring of social
development activities and/or social impacts during project implementation?
Yes No
The long-term social monitoring study will document water and sanitation benefits for women. Gender-sensitive and
-disaggregated monitoring indicators are included in the project performance monitoring framework.

a
Kyrgyz Republic. 2009. Country Development Strategy (2009–2011). Bishkek.
b
ADB. 2003. Water for All: The Water Policy of the Asian Development Bank. Manila.
c
ADB. 2009. Technical Assistance to Kyrgyz Republic for the Issyk–Kul Sustainable Development Project. Manila.
46
GENDER ACTION PLAN

Appendix 11
Project Activities Targets and Indicators Institutions Timeline
A. Infrastructure Improvement Component
Ensure that women and girls at reproductive age have access to Targets Vodokanal By
safe household-level sanitation. Water supply system rehabilitated for all poor households enterprises, January
Ensure that women and girls at reproductive age have access to headed by women, especially widows with children tazalyk 2012 and
safe community- and neighborhood-level sanitation. Bath and laundry complexes provided with separate enterprises, city thereon
bathing facilities for women and adequate lighting for safe administrations,
Ensure women have adequate access to bath and laundry facilities and oblast
(complex). and easy access
Ensure water meters are installed in poor households headed by Sanitation facilities in schools include separate toilet
women (including widows with children). facilities for girls and female staff members.
Ensure that solid waste collection frequency is increased Public conveniences in markets and commercial areas
throughout the city and specifically in areas with poor households include specific sanitation facilities for female customers
headed by women (including widows with children). and stallholders.
Ensure equal access of men and women to toilets and water supply Hospital facilities give special attention to improving water
facilities in hospitals, public institutions, and markets. and sanitation in maternal health wards, including delivery
rooms.
Ensure girls of reproductive age have access to toilets and water
supply facilities in schools.
Indicators
Ensure hospital facilities give special attention to improving water Number of women having access to proper water supply
and sanitation in maternal health wards. and safe sanitation
Number of girls at reproductive age having access to safe
sanitation
Number of water meters in poor households
Number of toilets in schools and hospitals installed (upon
request where lacking)
Total number of potential labor days lost by poor
households due to waterborne illnesses reduced from 75
to 25
B. Enterprise Resource Management Component
Include city, vodokanal enterprises, and tazalyk enterprises female Targets Vodokanal Through
staff members in governance and institutional reforms. Capacity of female staff members in vodokanal enterprises, project
Include city, vodokanal enterprises, and tazalyk enterprises female enterprises and tazalyk enterprises improved, especially tazalyk implemen-
staff in twinning program and capacity-development measures. regarding database management and financial enterprises, city tation
management administrations,
Provide gender equality briefing and/or trainings for consultants and PMO, PIO, MIS
community facilitators to improve their understanding of gender consultants,
perspectives and their capacity to implement the Project’s gender Indicators and GIS
action plan sufficiently. Number of women staff involved in twinning program and consultants
capacity development measures
Project Activities Targets and Indicators Institutions Timeline
C. Cross-Cutting across Components
Identify gender issues and include solutions in plans, frameworks, Targets PMO; PIO; Through
and development strategies. To the extent possible, 30% or more representation of design and project
Provide gender awareness and development inputs during project women at decision-making levels in project-related supervision implemen-
implementation and ADB review missions. activities consultants; tation
Project Team to the extent possible, 50% women and information,
participation (to the extent possible) established education, and
Women’s Participation communication
Ensure women’s representation at the decision-making level in GAD Focal Point (Gender Specialist at PIO) appointed consultants
project-related agencies and structures. and made responsible for IEC activities, hygiene and
sanitation education and GAP implementation
Gender Balance Effective participation, to the extent possible, 30% women
Ensure balanced representation of both genders in all consultations ensured in all consultation and socialization activities
and project activities. All gender training programs assessed on gender
Ensure gender-balanced teams in the PMO and PIO. perspective content prior to delivery
Specific gender trainings developed and provided to all
Awareness Generation through Information, Education and consultants and community facilitators
Communication Activities Gender action plan implemented and monitored
Ensure gender awareness and development training is conducted
for the PMO and PIO. Gender-disaggregated data collected in
community-level social mapping
Assist oblast and rayon managers and planners to understand
gender differences and relevance to infrastructure provision. Gender awareness and development inputs to the main
project reports and documents made, and analysis of
Ensure students (especially girls) in schools receive trainings on gender-disaggregated data included in project progress
reproductive health and hygiene and are provided necessary reports
hygiene facilities and means.
Employment opportunities for women via trainings
Provide training for community facilitators and health advocates to increased (to the extent possible 15%)
raise family and community awareness on hygiene and sanitation.
Indicators
Number of students trained on hygiene and reproductive
health (mixed groups)
Number of awareness sessions conducted for
construction workers on HIV/AIDS and sexually
transmitted infection awareness and prevention
Number of gender awareness and development trainings

Appendix 11
at all project levels
Number of gender awareness and development trainings
for community facilitators and health advocates
Number of field visits conducted by project gender
specialists to review progress in gender mainstreaming
and to supervise community facilitators

47
GIS = geographic information system, MIS = management information system, PIO = project implementation office, PMO = project management office.
Source: Asian Development Bank.
48 Appendix 12

FINANCIAL ANALYSIS

1. Methodology. The subprojects (the three project cities of Balykchy, Cholpo-Ata and
Karakol) of the Issyk–Kul Sustainable Development Project (the Project) were analyzed
following the Handbook for Economic Analysis of Water Supply Projects 1 and the Financial
Management and Analysis of Projects2 of the Asian Development Bank (ADB). The financial
analysis assesses subproject ability to meet future costs, including capital expenditure,
operation and maintenance costs, and if appropriate, debt servicing and depreciation or
reinvestment margins.

2. The analysis was conducted on a without- and with-project basis by estimating


incremental costs and revenues over 25 years. The main financial viability parameters analyzed
were (i) the financial internal rate of return (FIRR), which will be greater than the weighted
average cost of capital (WACC), with the financial net present value as proxy; (ii) operating
ratio, which will be less than or equal to unity when the Project becomes fully operational; and
(iii) tariff affordability, normally acceptable at a maximum of 5% of average household income.
Details of the analysis are presented in the Supplementary Appendix I.

3. The analysis looked closely at the operating ratio as a main indicator of sustainability,
where operation and maintenance, depreciation, and interest expenses are measured against
tariff revenues. A ratio at less than unity reflects cost recovery, thus a certain level of
sustainability; at greater than unity, it shows the lack thereof, thus the need to increase tariffs or
to obtain viability gap funding.

4. Assumptions. The key assumptions used were (i) investment cost at base June 2009
prices; (ii) physical contingencies at 10%; (iii) local inflation at 13% in 2009, 12% in 2010, 10%
in 2011 and 2012, 9% in 2013 and 2014, and 7% in 2014 and onward; (iv) foreign inflation at
2.5% annually; (v) operation and maintenance costs covering salaries, chemicals, power, repair,
and maintenance, and bad debts allowance based on historical operations and on design
technology used; (vi) asset useful life assumed at 10 years for equipment, particularly service
connection meters, and 50 years for civil works; and (vii) historical population growth rates.

5. The “floating population” of tourists and regular transients were accounted for, and was
estimated at between 15% and 40% on top of base populations in the three project cities. The
periodic population growth rates reported by the National Statistics Committee were adjusted to
reflect the situation.

6. Revenues were projected from domestic and nondomestic demand for water and
sewerage services, and tariffs programmed to increase every 2 years. As the basis for
calculating existing tariffs is difficult to verify, the required initial increase at subproject
completion by 2015 (year 5)—which would be substantial—was determined based on user
affordability and targeted cost recovery levels, including (i) operation and maintenance costs
coverage; (ii) operation and maintenance costs plus depreciation coverage; and (iii) operation
and maintenance costs plus depreciation and debt interest coverage. Tariffs were maintained
within consumer affordability limits.

7. The analysis on water supply and sewerage was based on the design demand of about
80 liters per capita per day (lpcd) for domestic connections increasing to 100 lpcd for Balykchy

1
ADB. 1999. Handbook for Economic Analysis of Water Supply Projects. Manila.
2
ADB. 2005. Financial Management and Analysis of Projects. Manila.
Appendix 12 49

and Karakol, and to 150 lpcd for Cholpon–Ata when systems become fully operational by 2015.
Nondomestic demand is between 20% and 28% of the domestic. Sewage generation is at 70%
of total water demand.

8. The demand forecast assumes all water from existing alternative sources (i.e., bottled,
collected from point source, and pumped) will be replaced with subproject water supply. This
has featured as nonincremental water in the economic analysis. System improvements
with-project will curb nonrevenue water from the current amount of about 25% in Balykchy and
Karakol to 20% upon project completion, and of about 60% in Cholpon–Ata to 55% by 2015
(year 5) and further to 20% by 2020 (year 10). The improvement in water recovery will make
billable water available to the system, thereby contributing to the cost-recovery perspective. This
has featured as incremental water, as a source of benefits in the economic analysis.

9. Capital Cost Estimates. Subproject capital investment has three major components: (i)
physical infrastructure, consisting of civil works, materials and equipment, and taxes and duties;
(ii) enterprise resource management; and (iii) project management and administration, including
incremental administration; engineering and construction supervision; and an information,
education, and communication campaign.

10. The three subprojects require an investment of $37.50 million including contingencies.
The capital costs for the three subprojects are summarized in Table A12.1.

Table A12.1: Subproject Capital Cost


($ million)
Subproject Subproject Subproject
Particulars %Total Total Balykchy Cholpon-Ata Karakol
Civil Works and Equipment 52.1 19.537 6.641 2.854 10.042
Water Supply 9.8 3.660 1.513 1.127 1.020
Sewerage 25.7 9.626 2.596 — 7.030
WSS Vehicles and Equipment 2 0.737 0.342 0.052 0.342
Solid Waste 11.4 4.290 1.701 1.429 1.160
Community Upgrading 3.3 1.224 0.489 0.246 0.489
Enterprise Resource Management 3.6 1.339 0.446 0.446 0.446
Project Assistance Facility 14.8 5.532 1.844 1.844 1.844
Total Basic Cost 70.4 26.408 8.932 5.144 12.332
Physical Contingency 4.4 1.653 0.547 0.306 0.800
Price contingency 14.1 5.271 1.781 1.012 2.478
Total Contingencies 18.5 6.924 2.328 1.318 3.278
Interest During Construction 2.7 1.000 0.344 0.193 0.463
Total Financing Charges 2.7 1.000 0.344 0.193 0.463
Taxes and Duties 8.5 3.169 1.072 0.617 1.480
Total Landed Cost 100 37.501 12.675 7.273 17.552
Source: Asian Development Bank estimates.

11. Financing Plan. The investment will be financed through a mix of ADB loans, estimated
at $17.31 million (including financing charges) or 46% of total capital investment, and a
government contribution of $7.43 million, or 20% of the total, including taxes, duties, and other
charges. ADB will also provide a grant of $12.76 million, or 34% of total. Karakol, Issyk–Kul
Oblast's capital, will receive bulk of the investment at 47% of the total. The summary financing
plan is detailed in Table A12.2.
50 Appendix 12

Table A12.2: Subproject Financing Plan


($ million)
Subproject Subproject Subproject
Particulars %Total Total Financing Cholpon-Ata Karakol
Amount to be financed:
Investment In Project 97.3 36.50 12.33 7.08 17.09
Interest During Construction 2.7 1.00 0.34 0.19 0.46
Total Capital Investment 100.0 37.50 12.68 7.27 17.55
-
Financed by: -
ADB Loan 46.2 17.31 5.85 3.36 8.10
Disbursement 43.5 16.31 5.51 3.16 7.64
IDC 2.7 1.00 0.34 0.19 0.46
Government 19.8 7.43 2.51 1.43 3.50
Equity Contribution 11.4 4.27 1.43 0.81 2.02
Charges, Taxes, Other 8.5 3.17 1.07 0.62 1.48
Grant 34.0 12.76 4.32 2.49 5.95
Total 100.0 37.50 12.68 7.27 17.55
ADB = Asian Development Bank, IDC = interest during construction.
Source: ADB estimates.

12. Weighted Average Cost of Capital. The WACC was calculated in real terms and was
used as the hurdle rate for the FIRR to measure subproject viability. Funding sources are the
ADB loan and government contribution, at about 80%–20% sharing. Inflation is estimated at
2.47% for foreign cost and at an 6.80% annual average for local costs. The rates are computed
on after-tax basis, resulting in the WACC in real terms estimated at 15.4%. The WACC
calculation for the three subprojects combined is presented in Table A12.3.

Table A12.3: Weighted Average Cost of Capital


Cost of Weighted Inflation WACC
Capital Capital Capital Rate Real
Particulars ($ million) % Total % ($ million) % %
ADB 30.07 80.2 1.5 0.45 2.5 0.00
Government 7.43 19.8 25 1.82 7.92 15.36
Total 37.50 100.0 2.27 15.36
ADB = Asian Development Bank, WACC = weighted average cost of capital.
Source: ADB estimates.

13. Operation and Maintenance Costs. Subproject operation and maintenance costs
include vodokanal enterprise and tazalyk enterprise staff salaries, power and energy, chemical
treatment, maintenance, and miscellaneous expenses, and are based on vodokanal enterprise
historical financial operations. Bad debt expense is assumed at 1% of sales. Escalation is
applied based on local inflation. Depreciation is assumed at 2% annually (50-year items) for civil
works and 6.7%–10.0% (10–15-year items) for replacement materials and equipment.
Replacement of fully depreciated assets is to be financed through internal cash.

14. Cost-Recovery Analysis. The tariff was established by dividing all cash requirements
plus margins by the combined volume of water sold and sewage and solid waste generated. It is
projected that the collection rate will improve as services improve. In the analysis, an actual
collection rate of about 60%–80% for the three project cities is expected to reach 90% by 2015
(year 5). The analysis determined the level of tariffs required to satisfy the defined cost-recovery
options. Where tariffs are insufficient to attain full cost recovery, the required shortfall has been
assessed in the form of viability gap funding.
Appendix 12 51

15. Current Tariffs. Current water tariffs differentiate between domestic and nondomestic
use. All existing tariffs are volumetric and structured to prevent waste. However, metering is
very limited at less than 3% in the three project cities. Where metering is available, wear and
disrepair have rendered the equipment unreliable. Under the Project’s capital investment
program, full metering is recommended. House and apartment connections for water supply are
presently charged on average $0.08 per cubic meter in the three cities. Nondomestic
connections are charged about five times that at $0.43 per cubic meter. For sewerage services,
domestic charges average $0.06 per cubic meter; nondomestic, $0.36. Existing domestic tariffs
for solid waste services average $2.20 per cubic meter, with nondomestic service users charged
2.3 times more, averaging $5.01.

16. Tariff Basis and Forecast. In financial projections, where costs are given in nominal
terms, the tariffs are projected to increase biennially to cope with cost inflation. In the FIRR cash
flows, the tariffs are taken in real terms. The projected increases will start after construction to
allow time for service users to assimilate to the proposed tariff reforms that will include full
metering for water consumption. For solid waste services, full costs of waste collection and
disposal will remain the basis for cost-recovery tariffs; however, a higher tariff collection rate will
be targeted and form part of financial management reforms. It is proposed to include tariff
restructuring as part of financial reforms to re-examine existing norms and their bases to ensure
more realistic design approaches for future projects in the water supply and sanitation sector.

17. Affordability Analysis. An affordability analysis was undertaken to check the level of
water expenditure against average household income. Table A12.4 presents the affordability
levels in each subproject for year 1 (2011), year 5 (2015), and year 10 (2020). The number of
persons at an average of 5.0 per household and the unit consumption at 90 lpcd in 2009 are
based on field surveys and actual operational reports. Average household incomes are based
on social surveys conducted in the subproject cities during project preparation and adjusted to
price inflation.

Table A12.4: Tariff Affordability


Subproject Balykchy Subproject Cholpon-Ata Subproject Karakol
Particulars Year 1 Year 5 Year 10 Year 1 Year 5 Year 10 Year 1 Year 5 Year 10
A. Water Supply and Sewerage
a
Persons per household 3.9 3.9 3.9 4.3 4.3 4.3 4.0 4.0 4.0
a
Consumption, lpcd 47.1 120.0 120.0 39.0 67.5 120.0 58.5 120.0 120.0
3 a
Average consumption/mo (m ) 5.6 14.2 14.2 5.0 8.7 15.5 7.1 14.5 14.5
a
Average household income/mo ($) 147.2 180.2 219.3 147.2 180.2 219.3 147.2 180.2 219.3
Average household water bill/mo ($) 0.6 1.8 3.3 0.4 0.9 2.8 0.2 0.5 0.9
Income spent for WSS 0.4% 1.0% 1.5% 0.3% 0.5% 1.3% 0.1% 0.3% 0.4%

B. Solid Waste Management


Persons per household 3.9 3.9 3.9 4.3 4.3 4.3 4.0 4.0 4.0
3 b
Waste generation (m /capita/yr) 2.0 2.0 2.0 2.0 2.0 2.0 1.5 1.5 1.5
3
Average waste generation/mo (m ) 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1
Average household income/mo ($) 147 180 219 147 180 219 147 180 219
Average household SWM bill/mo ($) 0.2 0.3 0.6 0.7 0.9 1.5 0.1 0.2 0.3
Income spent for SWM 0.2% 0.2% 0.3% 0.5% 0.5% 0.7% 0.1% 0.1% 0.1%
lpcd = liters per capita per day, mo = month, SWM = solid waste management, WSS = water supply and sanitation, yr = year.
a
Based on Social Survey conducted in June-July 2009 in Balykchy, Cholpon-Ata and Karakol.
b
Based on Tazalyk records.
Source: Asian Development Bank estimates.
52 Appendix 12

18. From the analysis, tariff increases for the three subprojects required to satisfy viability
parameters are within consumer affordability. However, viability gap funding will need to be
considered during the initial years of operation to recover costs fully, including asset
replacements. Table A12.4 indicates that the proposed monthly charge for the three cities is far
lower than the generally accepted limit of 5% of household income. Politically, exponential
increases are unacceptable, and it is proposed that viability gap funding will provide the initial
buffer to meet required operating ratios before financial reforms and progressive tariff increases
reduce dependence on such funding.

19. A break-even analysis was undertaken for all subprojects. To cover operation and
maintenance costs, tariffs are set to increase biennially at rates given in Table A12.5. Also
indicated is the cumulative viability gap funding required under each scenario to ensure
operations are sustainable within acceptable tariff increases. The accumulative viability gap
funding is determined over 2010–2015 and 2016–2029 before the Government of Kyrgyz
Republic plans an exit strategy from viability gap funding support. Project support through the
enterprise resource management component should support financial management reforms to
improve vodokanal enterprises and cities' ability to meet operation and maintenance costs.

Table A12.5: Cost Recovery Tariffs and Required Viability Gap Fund
Balykchy Cholpon-Ata Karakol
Tariff Tariff Tariff
Level Cost Recovery Increase VGF Needs Increase VGF Needs Increase VGF Needs
WSS (2010–2015)
I O&M Cost 20% 0.446 20% 0.691 20% 2.675
II O&M + Depreciation 20% 0.956 20% 0.935 20% 3.727
III O&M cost + Deprn + Debt 20% 0.956 20% 1.001 20% 3.979

WSS (2016–2029)
I O&M cost 67% 0.000 54% 0.059 93% 4.026
II O&M + Depreciation 63% 0.032 49% 0.143 87% 5.499
III O&M cost + Deprn + Debt 60% 0.091 49% 0.182 89% 6.058

SWM (2010–2015)
I O&M cost 20% 0.683 20% 0.956 20% 1.051
II O&M + Depreciation 20% 0.952 20% 0.956 20% 1.051
III O&M cost + Deprn + Debt 20% 0.952 20% 1.021 20% 1.110

SWM (2016–2029)
I O&M cost 110% 1.309 103% 1.392 131% 1.141
II O&M + Depreciation 111% 1.685 103% 1.958 129% 1.671
III O&M cost + Deprn + Debt 106% 2.503 97% 1.907 129% 2.749
deprn = depreciation, incr = increase, O&M = operation and maintenance, VGF = viability gap fund.
Source: Asian Development Bank estimates.

20. For example, to break even in water, sewerage, and solid waste services in Balykchy, by
covering only operation and maintenance costs, the Government would provide $1.13 million in
viability gap funding for the period 2010–2015 and $1.31 million in viability gap funding for the
period 2016–2029. This would be in addition to the average biennialtariff increase of 20% for the
period 2010–2015 and 67%–110% for the period 2016–2029.

21. Financial Viability Approach. The subproject is considered viable if the resulting FIRR
is greater than the WACC, and cost recovery tariffs within consumer affordability. Additionally,
the operating ratio will need to be maintained lower than unity throughout the Project’s life to
ensure sustainability. Initial spreadsheet iterations reveal that without proposed improvements,
subproject operations will not be sustainable as operation and maintenance expenses exceed
tariff revenues. To satisfy all viability and sustainability parameters, tariffs will need to be
Appendix 12 53

progressively increased, especially during the initial years after project completion. Spreadsheet
iterations were run to determine the operating ratio in the with-project situation.

22. Financial Viability and Sensitivity Analysis. Table A12.6 provides the results of
sensitivity tests and indicates that subprojects are highly sensitive to stress conditions.

Table A12.6: Subproject FIRR


Subproject Balykchy Subproject Cholpon-Ata Subproject Karakol
FNPV FNPV FNPV
Particulars FIRR ($ million) FIRR ($ million) FIRR ($ million)
Water Supply and Sewerage
Base Case 15.9% 0.266 15.7% 0.066 15.8% 0.303
Capital Cost plus 20% 14.3% (0.557) 13.8% (0.285) 14.3% (1.047)
O&M Cost plus 20% 15.3% (0.034) 14.9% (0.067) 15.1% (0.296)
Revenue less 20% 13.3% (0.909) 12.7% (0.431) 13.3% (1.706)
1-year Delay in Benefit 13.9% (0.688) 13.5% (0.319) 13.7% (1.408)
Switching Value - Capital Cost 7.0% 0.065 4.2% 0.037 4.9% 0.045
Switching Value - Revenue 4.3% 0.045 2.6% 0.026 2.9% 0.030
At WACC, Capital Cost change 5.6% 0.034 6.2% (0.043) 4.1% 0.025

Solid Waste Management


Base Case 15.4% 0.017 15.4% 0.024 15.5% 0.043
Capital Cost plus 20% 14.2% (0.370) 14.2% (0.326) 14.3% (0.272)
O&M Cost plus 20% 14.7% (0.206) 14.5% (0.233) 14.7% (0.148)
Revenue less 20% 13.1% (0.596) 12.9% (0.589) 13.2% (0.472)
1-year Delay in Benefit 13.5% (0.529) 13.4% (0.510) 13.5% (0.419)
Switching Value - Capital Cost 1.0% 0.009 1.5% 0.014 3.0% 0.027
Switching Value - Revenue 0.5% 0.006 0.8% 0.008 1.6% 0.017
At WACC, Capital Cost change 0.3% 0.011 2.0% (0.011) 1.7% 0.017
() = negative, FIRR = financial internal rate of return, FNPV = financial net present value, mill = million, O&M = operation and maintenance,
WACC = weighted average cost of capital.
Source: Asian Development Bank estimates.

23. Conclusion. Subproject vodokanal enterprises and tazalyk enterprises are financially
viable when (i) tariff increases are required at least every 2 years and should be based on cost
recovery and consumer affordability principles, and (ii) the Government should make available
viability gap funding to ensure service sustainability. These conditions have been incorporated
in the financial improvement action plan. These reform plans and related issues have been
discussed and agreed with the Executing Agency with the aim of achieving financial
sustainability of the overall investment. Income affordability is a major factor in rationalizing
tariffs; thus, the household income base needs to be reviewed periodically. The sensitivity
analysis indicates that subcomponent FIRRs are stressed under various conditions, implying a
need for efficient project implementation to rapidly achieve physical and financial targets.
54 Appendix 13

ECONOMIC ANALYSIS

1. Methodology. The economic analysis for the Issyk–Kul Sustainable Development


Project (the Project) followed Asian Development Bank (ADB) guidelines, including Guidelines
for the Economic Analysis of Projects 1 and Handbook for the Economic Analysis of Water
Supply Projects.2 The analysis describes the economic rationale and target beneficiaries, and
undertakes a viability analysis of the three subprojects (the three project cities of Balykchy,
Cholpo-Ata and Karakol). A sensitivity analysis was conducted to determine the effects of
certain adverse conditions on system capital investment and operation and maintenance costs,
revenue generation, and overall subproject viability. The analysis used the domestic price
numeraire, as benefits are nontradable in nature. The analysis was undertaken at a constant
mid-2009 price level and assesses project effects over 25 years (2011–2035).

2. Economic Rationale and Goals. The project economic rationale was based on the
following.
(i) Improving urban services and Lake Issyk–Kul's environment. Urban
services in the three project cities have deteriorated since the collapse of the
Soviet Union. Lack of capital investments for infrastructure improvement and
insufficient revenues to meet operating expenditures have affected the quality of
the services. Consequently, due to poor access to sanitation and solid waste
treatment and disposal, surface water runoff and contaminated groundwater
have impacted the lake's environment. Project interventions will help improve the
quality of infrastructure and terminate any future contamination of the lake.
(ii) Fostering tourism growth. Improving the lake's environment and quality of
services in the three project cities will foster tourism growth. Tourists visiting Lake
Issyk–Kul account for 70% of the country's tourists, or about 1 million visiting the
region each June to August (translated as four times the resident population in
project cities). Dilapidated urban infrastructure is under excess pressure during
the peak tourist season, and tourist perception and continued patronization of the
region are contingent on efficient urban services. Improvements through the
Project will ensure growth in tourist numbers, increased gross regional product,
and accrued benefits to the oblast and country.
(iii) Improving local government and service utility performance. To sustain
efficient services, the Project will improve the institutional effectiveness of local
governments and service utilities (i.e., vodokanal enterprises and tazalyk
enterprises). Through the enterprise resource management component, the
Project will (a) improve financial management practices in the project cities,
vodokanal enterprises, and tazalyk enterprises, and create a culture of
generating revenue surpluses to reinvest into capital assets or to leverage for
debt; (b) create a database of water and sewerage assets and conditions to help
vodokanal enterprises identify infrastructure improvements in the long term
based on a well-developed asset management and maintenance system; and (c)
build vodokanal enterprises staff capacity to manage services through a twinning
program.
(iv) Enabling public–private partnerships. Current arrangements between cities
and service utilities 3 are loosely based on service agreements that require
improvement in performance standards. The Project will improve service quality

1
ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila.
2
ADB. 1999. Handbook for the Economic Analysis of Water Supply Project. Manila.
3
Vodokanal enterprises and tazalyk enterprises are quasi-private entities, as their relationships with cities are based
on service agreements, and payments are based on city council-approved business plans.
Appendix 13 55

by concluding performance-based service contracts between cities and service


utilities.

3. Selection Approach. The subprojects were selected based on (i) consistency with
demand, based on community willingness to participate and contribute; (ii) the least-cost
approach of meeting effective demand in terms of location, scale, scope, and appropriate
technology, based on prudent engineering decisions; and (iii) that economic benefits are likely
to exceed economic costs. The three project cities were prioritized due to the growing tourism
industry that can easily be threatened with water- and sanitation-related health and
environmental problems, which project interventions will help mitigate.

4. Project Alternatives. The Project will (i) improve urban infrastructure, including
sewerage and sanitation, solid waste management, water supply, and community upgrading,
and (ii) improve service delivery through better enterprise resource management. Component
choice was based on the following decisions.
(i) Replacing sewer lines and rehabilitating pumping stations. The Project will
replace aging sewer networks, replace sewage pumps, and rehabilitate pumping
stations (over 25 years old). This option is the least-cost, as continuing to use the
existing system will result in (a) groundwater contamination through sewage
infiltration from system leaks, and (b) high electricity charges due to poorly
functioning sewage pumps.
(ii) Expanding the sewer network and providing onsite sanitation systems. The
Project will expand the sewer network in Karakol to increase access to
approximately 30,000 persons. It will also ensure access to onsite sanitation
(septic tanks) facilities to 25,000 persons. Sewer network expansion covers
areas that are densely populated and have sufficient population density to
generate sewage flushing velocity. Onsite sanitation facilities target areas that
are sparsely populated with insufficient sewage flushing velocities. Not providing
focused options would increase the incidence of waterborne diseases.
(iii) Constructing sanitary landfills and closing existing dumps. The Project will
ensure that indiscriminate waste dumping is discontinued, and new sanitary
landfills are constructed. Alternative options of treating waste are to compost it or
to adopt waste-to-energy technologies. Sanitary landfills are the preferred option
as the organic portion of waste generated is approximately 10%, making
composting unviable, and 70% of the waste is inert material, making waste-to-
energy processing unviable. The sanitary landfills are located at existing dumps
on state-owned land, thereby negating any land acquisition costs.
(iv) Providing vehicles, tools, and equipment. Poor system operation and
maintenance will be overcome through adequate supply of appropriate vehicles,
tools, and equipment. Without provision, new systems constructed will enter into
a state of disrepair within a short period.
(v) Piloting district water metering, replacing water transmission mains, and
rehabilitating water boreholes. The Project will (i) install water meters in pilot
zones in three cities, monitor water supply, and identify system leaks to develop
a leak rectification program; (ii) replace a 2-kilometer water transmission main to
conserve water; and (iii) rehabilitate water boreholes by providing disinfection
measures to improve water quality. The identified options will ensure savings in
operational expenditure resulting from water losses, resource savings in terms of
conserving treated water transmission, and improved health conditions through
disinfection of groundwater supplies.
56 Appendix 13

(vi) Enterprise resource management. The subcomponents identified are based on


meeting the Project's economic rationale on improving local government and
service utility performance.

5. Service Delivery and Socioeconomic Analysis. City-level data provided by vodokanal


enterprises and tazalyk enterprises (presented in Appendix 2) were verified through a
socioeconomic survey and focus group discussions. The survey covered 514 respondents 4
randomly sampled in the three project cities. Results are indicated in the Summary Poverty
Reduction and Social Strategy, Appendix 11.
(i) Sanitation. About 75% households use dry-pit latrines, and 24% use flush or
pour toilets. Predominantly, apartment blocks in all cities are connected to the
sewerage system.
(a) About 31% households in the highest-income quintile, compared with
22% of households in the lowest-income quintile, have access to a flush
or pour toilet. The poor generally use pit latrines, which cannot be
connected to the centralized system.
(b) About 66% of households surveyed (57% of the households in the lowest-
income quintile compared with 60% of households in the highest-income
quintile) stated that they would be willing to pay for a sewerage
connection, indicating citizen priority for improved sanitation.
(ii) Solid waste management. Approximately 84% of households (and 86% in the
lowest-income quintile) stated that a municipal collection service was unavailable
on a daily basis. Increased collection frequency was a stated requirement. The
perception was corroborated through assessment of city-level data.
(a) Waste disposal practices included plastic bottle and packaging collection
by the tazalyk enterprises from 50% of households, waste incineration by
36% of households, and waste disposal into the nearest landfill or waste
receptacle by 8% of households. All poor households stated that they
sold household waste for recycling.
(b) About 83% of households indicated that household waste earned an
average of Som43 ($1) per month. Waste sold by poor households
earned them an average of Som27 ($0.62) per month, equivalent to 10%
of the amount earned through waste sold by non-poor households.
(iii) Water supply. Existing water systems in the three project cities have undergone
improvement due to recent investments to increase coverage to about 80% of
the population. However, low-quality supplies still impact served and unserved
populations.
(a) The survey indicated that 25% of households and 19% of poor
households had an inadequate water supply for household needs.
(b) Improved water quality was a high priority, and only 39% of households
(44% of households in the lowest-income quintile and 40% of households
in the highest-income quintile) stated that they would drink the water
without some form of treatment. Households in the lowest-income quintile
on average pay nearly three times more (Som90 or $2 per month) than
households in the highest income quintile (Som35 or $0.8 per month) for
water treatment.
(c) Waterborne illnesses were significant, with 82% of households (17% in
the lowest-income quintile and 22% in the second-to-lowest-income
quintile) stating incidences in the past 5 years. Overall, 23% of all people
suffering from these illnesses were poor, and they lost 75 potential labor

4
175 households in Balykchy, 55 households in Cholpon–Ata, and 284 households in Karakol.
Appendix 13 57

days per year due to waterborne illnesses. The average annual


expenditure on treating waterborne illnesses was Som1,472 ($34), with
29% households spending Som251 ($6)–Som700 ($16)per year and 26%
of households spending Som701($16)–Som2,500 ($58) per year.

6. Subproject Beneficiaries and Projected Demand. Demand assumptions include the


following.
(i) Sewerage and sanitation. Project beneficiaries will include households
presently connected to the existing sewerage systems that will gain from system
rehabilitation, and households getting new connections through proposed sewer
lines. Both types of households will benefit from improved environmental
sanitation conditions that a properly functioning sewerage system provides.
System coverage will increase to benefit about 50% of the population from the
current 35%.
(ii) Solid waste management. Project beneficiaries will comprise households
across the three project cities that will gain from improved environmental
sanitation, living conditions, and amenities that a properly functioning solid waste
collection and disposal system will provide. Those households that currently
spend time disposing of their solid waste will receive additional benefits from
receiving primary waste collection. About 80% of project households will be
covered by the improved waste management system.
(iii) Water supply. Prior to and without the Project, households in the three project
cities rely on alternative water collected from point source, bottled water,
groundwater pumped from household boreholes, and standpipes. With the
Project, piped water will replace alternative supplies. Connected households
consume 80–100 liters per capita per day (lpcd), and unconnected households
consume 35–l0 lpcd. With the Project, the demand will rise to 100–150 lpcd. The
supply situation is projected to rise with the population growth rate and increase
annually to reach a design target population of 90% on project completion.

7. Economic Benefits of Sewerage. The economic benefits for sewerage include (i) cost
savings for residential and nonresidential sewage generators, which are no longer required to
operate onsite disposal systems; and (ii) health benefits through avoided household medical
costs5 and avoided income loss by wage-earners absent from work due to waterborne illnesses.
The former was not considered directly as new customers currently use pit latrines that do not
entail any operation and maintenance costs. Health benefits were calculated using morbidity
rates obtained from the Ministry of Health and the National Statistics Committee, and from
interviews with city epidemiological centers. Data from the National Statistics Committee on
incidences of illnesses for population were also used.

8. Economic Benefits of Solid Waste Management. Valuation of economic benefits for


solid waste management was based on economic value of savings in waste disposal time and
health benefits.6 The former was derived from socioeconomic surveys, and the latter was not
considered for the current analysis due to inability to derive health benefits from available data.

5
Medical treatment expense averages Som1,500 ($35) per year.
6
Includes (i) avoided medical costs to treat diseases mostly from rat infestations, and (ii) avoided costs due to
absences from work.
58 Appendix 13

9. Economic Benefits of Water Supply. Valuation of economic benefits comprises the


following.
(i) Expanding supply of existing water. In supplying the existing volume of piped
water more efficiently, measured in terms of the average cost of supply in with-
and without- project scenarios, the following two major components are
considered.
(a) Nonincremental water supply. This component considers the increase
in water sold from the public system due to the Project but resulting in no
effect on total water consumption because (1) the nonincremental water
supply replaces water purchased and consumed from alternative sources
(bottled water sources in case of the Project), and (2) the nonincremental
water supply due to reduction in nontechnical loss thanks to the Project.
Only nonincremental benefits from a consumer shift from bottled water
were considered. 1 There are no benefits assumed from nontechnical
losses, such as pilferage, meter tampering, and illegal connections, as
these occurrences are atypical in the three project cities. The benefit is
evaluated by using the supply cost of replaced water sources.
(b) Incremental water supply. This component has a positive effect on the
total consumption due to the Project. Incremental water in the analysis
comprises water arising from (1) additional system demand from the
(previously) nonconnected population, and (2) additional supply from
system improvements geared to recover nonrevenue water or system
loss. The latter will induce higher demand from the existing and newly
connected population given the lower price of project water relative to
alternative supplies. This component of benefit is evaluated by using the
supply price to be decided by the city periodically and based on
affordability.
(ii) Health benefits. Health benefits from improved water quality and supply are
considered under the health benefits for sewerage, as it is assumed that
improvements in both systems will reduce waterborne illnesses.
(iii) Resource cost savings. Other benefits include resource cost savings arising
from (a) overcoming time lost in collecting water from alternative sources, (b)
overcoming storage or container acquisition and maintenance costs, and (c)
reducing water treatment costs (e.g., boiling or filtering).

10. Economic Costs. The economic capital investment and annual operation and
maintenance costs were based on financial cost estimates detailed in Appendix 12.
(i) Taxes and duties are excluded from the financial costs as they represent transfer
payments. Price inflation and market distortions are also excluded.
(ii) The subproject capital and operation and maintenance costs are distributed into
traded and nontraded components and labor. For traded and nontraded
components, the shadow exchange rate factor is assumed at 1 based on
previous and ongoing projects by ADB and World Bank in Kyrgyz Republic.
(iii) Unskilled labor is available in urban centers, which means the opportunity cost is
lower than the wage rate. The shadow wage rate is assumed at 0.7 for unskilled
labor, following estimates made for agricultural and highway projects in the
region.
1
The volume of bottled water use relative to total water consumption in households is small, but expenditure-wise,
the cost to the household is high. In the three project cities, a liter of bottled water is about $0.40–$0.50. In
comparison, a cubic meter of system water ranges between $0.03–$0.11. Bottled water cost through the system is
derived using existing tariffs.
Appendix 13 59

(iv) The economic costs are given in real terms and phased over the project life of 25
years. For annual economic operation and maintenance costs, labor was
assumed at 30% unskilled and the remaining as skilled. Unskilled labor is subject
to the shadow wage rate at 0.7. For skilled labor and the other cost components,
the shadow exchange rate factor at 1.0 is applied.

11. Benefit–Cost Assessment. The economic benefit–cost ratio was used in the analysis
to assess whether project benefits outweigh costs, thus making the subproject economically
feasible. The annual cost streams were set against the annual benefit streams and discounted
using the economic opportunity cost of capital (EOCC) at 12% as the hurdle rate. The resulting
present value of benefits was divided by the present value of costs, and if the resulting ratio is
greater than or equal to 1.0, the subproject is deemed acceptable. Table A13.1 summarizes the
results for the three subprojects, and indicates that the benefit–cost ratio averages 1.42 for the
water supply and sewerage components, and 1.21 for solid waste.

Table A13.1: Benefit-Cost Analysis


($ million)

Subproject
Subproject Cholpon- Subproject
Particulars Average Balykchy Ata Karakol
Water Supply and Sewerage
Present value of benefits
Non-incremental 6.49 5.43 3.28 10.76
a
Alternative source (bottled water, etc.) 6.49 5.43 3.28 10.76
b
Non-technical water loss 0 0 0 0
c
Incremental 2.64 3.28 1.49 3.15
Additional demand from previously non-connected population 0.33 0.45 0.23 0.30
Additional supply from recovered NRW 2.31 2.82 1.26 2.85
Health 0.23 0.14 0.05 0.49
d
Avoided lost wages due to illness 0.11 0.07 0.02 0.24
e
Avoided cost of medical treatment 0.12 0.07 0.03 0.25
Resource savings 1.73 1.93 0.50 2.78
f
Time saved from collecting water 0.66 0.61 0.20 1.15
g
Cost saved from purchase of storage reservoir 0.56 0.69 0.15 0.86
h
Cost saved from water treatment and storage maintenance 0.51 0.62 0.14 0.78
Total benefits 11.09 10.77 5.32 17.18
Present value of costs
Capital investment + replacements 4.10 4.02 1.82 6.48
O&M 3.82 3.44 1.79 6.23
Total costs 7.92 7.46 3.61 12.70
Benefit-cost ratio 1.42 1.44 1.47 1.35
a
Population using bottled water x SP. SP is calculated at $0.42/m3 for Balykchy, $0.38/m3 for Cholpon-Ata and $0.11/m3 for Karakol.
b
NTL is atypical in the 3 cities, thus valued at 'zero'.
c
Priced at the average of the existing tariff and the 'with-project' tariff (or the AIEC of water).
For Balykchy, $0.45/m3; Cholpon-ata, $0.44/m3; Karakol, $0.29/m3 of incremental water
d
Economically active population x morbidity rate x Minimum daily wage rate x Days indisposed. (from survey).
e
Economically active population x morbidity rate x Medical treatment cost. (from survey).
f
Annual average time daily collecting water from source converted to 8-hour work-day x minimum hourly wage rate. (from survey).
g
Financing cost of storage reservoir (Som1,000–Som1,500) + 20% of cost for maintenance.
h
0% of storage cost for treatment + 20% of storage cost and treatment for maintenance.
60 Appendix 13

Subproject
Subproject Cholpon- Subproject
Particulars Average Balykchy Ata Karakol
Solid Waste Management
Present Value of Benefits
i
Time Savings for Disposal 3.90 3.99 4.43 3.28
j
Health 0 0 0 0
Total Benefits 3.90 3.99 4.43 3.28
Present Value of Costs
Capital Investment + Replacements 1.81 1.98 1.81 1.64
O&M 1.40 1.42 1.62 1.16
Total Costs 3.21 3.40 3.43 2.80
Benefit-Cost Ratio 1.21 1.17 1.29 1.17
i
Annual average time daily disposing waste to appointed waste collection areas, converted to 8-hour work-day x minimum
hourly wage rate. (from survey).
j
Not quantified.
AIEC = average incremental economic cost, NRW = nonrevenue water, NTL = non-technical water loss, SP = supply price.
Source: Asian Development Bank estimates.

12. Economic and Sensitivity Analysis. The economic internal rate of return (EIRR) and
discounted net cash flows were determined by comparing benefit streams with cost streams.
Following ADB guidelines, the EOCC was set at 12%, and the results show base case EIRR
exceeding the EOCC. The EIRRs for water and sewerage and solid waste management were
tested for sensitivity, and Table A13.2 indicates that EIRRs at base and adverse economic
conditions are robust. Supplementary Appendix I provides economic analysis spreadsheets.

Table A13.2: Economic Analysis – Summary Results


Subproject Balykchy Subproject Cholpon- Subproject Karakol
Average Average ENPV ENPV ENPV
Particulars EIRR ENPV EIRR ($ million) EIRR ($ million) EIRR ($ million)
Water Supply and Sewerage
Base Case 27.8% 3.17 27.5% 3.311 27.4% 1.707 28.4% 4.478
Capital Cost plus 20% 21.2% 2.34 21.2% 2.506 21.7% 1.344 20.7% 3.182
O&M Cost plus 20% 23.5% 2.40 23.8% 2.623 23.3% 1.349 23.2% 3.232
Benefits less 20% 16.5% 0.95 17.0% 1.157 17.3% 0.644 15.3% 1.041
1-year Delay in Benefit 18.5% 1.88 18.8% 2.059 19.0% 1.086 17.9% 2.495
Switching Value - Capital Cost 48.6% 0.82 49.4% 0.823 53.9% 0.941 42.6% 0.691
Switching Value - Revenue 28.3% 0.30 29.4% 0.307 30.4% 0.321 25.0% 0.261
At EOCC, Capital Cost change 81.6% 0.00 82.4% (0.005) 93.1% 0.017 69.3% (0.012)

Solid Waste Management


Base Case 19.5% 0.69 17.4% 0.587 22.6% 1.006 18.4% 0.474
Capital Cost plus 10% 16.9% 0.51 15.2% 0.389 19.7% 0.825 15.7% 0.310
O&M Cost plus 10% 17.9% 0.55 16.1% 0.445 20.8% 0.845 16.7% 0.358
Benefits less 10% 15.1% 0.30 13.7% 0.188 17.7% 0.563 13.9% 0.146
1-year Delay in Benefit 13.9% 0.24 12.9% 0.124 15.8% 0.492 13.0% 0.098
Switching Value - Capital Cost 28.2% 0.38 24.7% 0.296 36.5% 0.555 23.4% 0.289
Switching Value - Benefit 16.8% 0.17 14.6% 0.147 21.6% 0.227 14.1% 0.145
At EOCC, Capital Cost change 50.5% (0.22) 43.8% (0.281) 58.3% (0.50) 49.3% (0.335)
() = negative, EIRR = economic internal rate of return, ENPV = economic net present value, EOCC = economic opportunity cost of capital.
Source: Asian Development Bank estimates.

13. Conclusion. Selected subprojects are economically viable with EIRR values exceeding
the EOCC at base case, with an average of 27.8% for water supply and sewerage and 19.5%
for solid waste. The sensitivity analysis for the three subprojects demonstrates that the results
are acceptable even when tested under stress conditions. The resulting average economic
benefit–cost ratio for water supply and sanitation is 1.42. For solid waste management, it is
1.21.