75904 April 2012 PPIAF Assistance in Uzbekistan PPIAF provided support for the drafting of transaction documents for a management contract for the Bukhara Water and Wastewater Utility and the Samarkand Water and Wastewater Utility in Uzbekistan in 2000. Training in the management of an international competitive bidding process and monitoring of private operators was also provided to utility staff. In addition, study tours to Germany, Poland, and the United States were undertaken to enable government officials and utility staff to gauge experiences with private sector involvement in the water sector. Subsequently a management contract was awarded in 2004 to Uzbek Water Management GmbH & Co. KG to operate the Bukhara and Samarkand utilities over a three-year period. Technical Assistance for Uzbekistan’s Water Sector In 2000 the water supply utilities of the cities of Bukhara and Samarkand were facing enormous challenges due to the poor state of their facilities, inefficient operations, lack of financial viability, and institutional weakness. Following Uzbekistan’s independence in 1991, water supply services in the cities had deteriorated, and the reliability and safety of drinking water was declining. This was accelerated by a lack of adequate resources to maintain the water supply system, which had created a significant backlog of deferred investments. The compounded effect of crumbling infrastructure and minimal maintenance resulted in low levels of water service with negative effects on the health and well-being of the urban population, particularly the poor. It was in this context that the government of Uzbekistan requested PPIAF support to assist in the structuring of a management contract that aimed to provide reliable access to safe and affordable water in Bukhara and Samarkand. The government was committed to bringing in a private operator to manage water supply services through a competitive, transparent, and efficient selection process. It was envisioned that the upgrade of the water supply in Bukhara and Samarkand would serve as a pilot project for a new sector strategy, based on decentralization of responsibilities to the local level, cost recovery, and the introduction of private sector skills and resources for utility services. This was a pioneering transaction and the first in the Central Asia region to involve the private sector in the management, operation, and maintenance of water supply systems. The proposed management contract was a pre- condition to a larger investment program totaling $66 million, financed by the International Development Association ($24 million credit), International Bank for Reconstruction and Development ($20 million loan), the government of Switzerland ($9 million grant), and the government of Uzbekistan ($13 million) to upgrade and rehabilitate the water supply infrastructure in Bukhara and Samarkand. Thus in 2000 PPIAF provided assistance to prepare the transaction documents for the management contract based on international best practice. The transaction documents incorporated specific performance improvement targets designed to incentivize the private operator to improve water supply services in order to maximize the value of the contract, which included a fixed fee and performance-based variable fees. Legal and technical assistance was also provided during the procurement process. Study tours to Germany, Poland, and the United States were undertaken in late 2001 to introduce water sector staff and key government officials to experiences of private sector involvement in the provision of water supply services, particularly with regards to supervision, contract regulation, and other issues related to the transition from public to private sector owned water supply services. In addition, targeted workshops were held in 2001 and 2002. The first workshop provided training in best practices for the selection of a private utility operator for the proposed management contract through international competitive bidding. The training was designed to assist procurement staff in ensuring a fair, transparent, and efficient selection process. A second workshop was held to provide training and capacity building in the performance monitoring of the private operator, and management contract regulation and supervision. These workshops provided the opportunity for utility staff, government officials, and private operators to discuss a number of the issues related to utility management, operations and maintenance, 1 financial activities, tariff setting procedures, specific technical issues, protection of low-income population groups, and legal aspects of management contracts. Following PPIAF support, the government launched the bidding process for a management contract for the operation of the water supply systems in Bukhara and Samarkand. Three international utility operators submitted technical and financial proposals. The technical evaluation was completed and financial proposals were opened in February 2002. The contract was awarded to the Ondeo-Safege consortium in December 2002, only to be cancelled in March 2003 due to the withdrawal of Ondeo from the consortium, and the failure of Safege to meet pre-qualification requirements alone. Given that the second-ranked bid was substantially higher and above budget, the government opted to retender the contract. The second tender to select a private operator via a transparent international competitive bidding process was managed by Uzbek officials without the direct support of consultants. This was evidence of the benefits of the training and capacity building that had been provided by PPIAF in 2001 and 2002. In February 2004 the government signed a three-year performance-based management contract for the Bukhara and Samarkand water utilities with Uzbek Water Management GmbH & Co. KG, which began operations in July 2004. The contract covered a combined customer base of 650,000 people. Unfortunately the management contract was quickly affected by an external court order in May 2004 that required the Bukhara and Samarkand utilities to escrow 75% and 80% of cash collected, respectively, to accelerate payment of tax, energy, and other liabilities. This left the utilities and the private operator with insufficient resources for day-to-day operations including routine maintenance. Eventually Presidential Decrees in August 2006 and February 2007 unblocked the utilities’ accounts, but the situation meant that operations were deeply impaired for almost two-and-a-half out of three years of the management contract. Despite these constraints, service did improve during the three years of the contract. Water quality, the reliability of water supply, registered connections, collection rates, non-revenue water, and the financial viability of the utilities all improved during the course of the three years. However, the management contract was not extended at the end of the contract in June 2007. Results of PPIAF’s Support for Uzbekistan’s Water Sector Category Outputs Project cycle-related assistance  Draft transaction documents prepared for the tendering of the Transaction support management contract for water supply in Bukhara and Samarkand, 2001 Capacity and awareness building  Training in international competitive bidding selection of international utility operators for a proposed management contract in Uzbekistan, 2001  Study tours to Germany, Poland, and the United States to Workshops/seminars exchange experiences of private sector involvement in the provision of water supply services, 2001  Training on performance monitoring and supervision of the management contract, 2002 Category Outcomes Project cycle-related assistance  Three-year management contract for water supply in the cities Transactions facilitated of Bukhara and Samarkand awarded, 2004 2 Capacity and awareness building  Technical capacity of water sector staff enhanced on issues relating to the transition to private sector involvement in the water sector, 2001 Technical capacity enhanced  Technical capacity of procurement staff enhanced on the procurement process to select an international private operator through international competitive bidding, 2001 3