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Municipal Development Fund of Georgia Board Memo

Kobuleti Municipal Water Supply Rehabilitation Project Appraisal


MCG Regional Infrastructure Development Program

TBILISI 2006, December

Municipal Development Fund of Georgia Kobuleti Municipal Water Project Appraisal

Kobuleti Municipal Water Supply Rehabilitation Project Appraisal


Municipal Development Fund of Georgia Board Memo December 21, 2006 1. Project Description Kobuleti is a popular seaside resort in the Autonomous Republic of Ajara, Georgia. It has about 20,000 permanent residents and the population swells to almost 50,000 during the peak tourist season. The project aims to improve the municipal water services in the City of Kobuleti. The project includes the following components: Rehabilitation of pumping station (3 pumps) Construction of a reservoir Rehabilitation of main pipes in vicinity of the reservoir-pumping station Repairing the shafts Installation of equipment along existing pipes Installation of measurement instruments and setting up gauging stations Repairing the existing network Extension of the network, construction of the new line for the north city Installation of water meters (5700 hh and 300 group meters) Location of Kobuleti on the map of Georgia

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Municipal Development Fund of Georgia Kobuleti Municipal Water Project Appraisal

Proposed scheme of the Water Supply System

North Line

KOBULETI
Main Line

Water Source and Shaft

Reservoir

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Municipal Development Fund of Georgia Kobuleti Municipal Water Project Appraisal

2. Objectives of the Project: Improvement of the water delivery services in Kobuleti. 3. Key Stakeholders Client: Grant Recipient: Local Representation: Sources of Funding: Implementing Agency: Kobuleti TskalKanali LLC (KTK), (local water utility) Government of Georgia represented by the Ministry of Finance Municipality of Kobuleti Millennium Challenge Georgia Fund (MCG), Municipal Development Fund of Georgia (MDF)

4. Feasibility and Technical Studies and Documents This memo is based on the Feasibility Study prepared by the Black See Investment Facility (BSIF, representing a Consortium of THALES Engineering & Consulting, SOGREAH and GKW) Kobuleti Water supply & Waste Water Treatment Project, Final Report, October 2006. This study is provided with this Memo and referred to below in the text as the Feasibility Study. The Feasibility Study has an Addendum that is referred to in the text as Addendum to Water Supply. 5. Financial Arrangements The Feasibility Study as well as the design comprises both water supply and waste water services in Kobuleti. MCG is requested to finance only the water supply rehabilitation part. To finance the waste water system rehabilitation project negotiations are underway with different donors (EBRD, Dutch ORET, WB GEF). As the negotiations may take substantial time it is more efficient to proceed with the water service rehabilitation first and to implement the waste water system rehabilitation at later stage as a separate project. The water supply rehabilitation Project cost (including VAT) is estimated at Euro 6.54 million, which is equal to USD 8,25 million according to the exchange rate prevalent as of October 25, 2006.

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Municipal Development Fund of Georgia Kobuleti Municipal Water Project Appraisal

6. Implementation Structure Millennium Challenge Compact between the Millennium Challenge Corporation and the Government of Georgia Grant Agreement for the Funding of the Kobuleti Municipal Water Project between MCG and the MDF Investment Funding Agreement between the MDF and Kobuleti Tskal Kanali LLC

7. Oversight The World Bank team assigned for RID project supervision will monitor the implementation of the Project as defined in the MCG-MDF Collaboration Agreement and Operations Manual signed on March 24, 2006. 8. Evidence of Public Consultations During the Compact preparation consultation process (1st consultation process) first consultation meeting was held on June 19, 2004 in Batumi, capital of Ajara Autonomous Republic. The proposal of the Project was submitted by Ajara authorities during the consultation meetings among central and local government representatives, MCG, and the MDF in October 2005. Following this meeting, the MDF conducted consultations with the local government and suggested the Project for MCG and EBRD financing. The MDF Supervisory Board approved this idea on December 8, 2005, Minutes No6. Since then MDF on behalf of the city of Kobuleti held number of negotiations with EBRD and reached in principle agreement on possible support. On the 4-th of March 2006 MDF, MCG and EBRD representatives met with Ajara Government and Kobuleti authorities, visited the sites and agreed on the general approach to the project implementation. On July 24, 2006 a public presentation and consultation was held in Kobuleti, where the Feasibility Study prepared with the support of EBRD by the EU Tacis Program Black Sea Investment Facility, was discussed. The presentation was attended by local government, local media, local NGOs, MDF, MCG and other donor organization representatives, as well as other interested persons. All participating parties were satisfied with the presentation. BSIF representatives answered question about various aspects of the Project. General agreement among the participants was that the Project was necessary for Kobuleti and it would positively affect environmental and socialeconomic conditions of the city. Respective articles were published in the local newspapers Kobuleti and Batumeli. The MDF and MCG posted the announcements and outcomes of the meeting on their websites. 9. Does the proposed Project meet the MCG Investment Financing Eligibility Criteria? Project meets all Investment Financing Eligibility Criteria. In particular:

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This is an Investment Project Kobuleti TskalKanali LLC is an eligible entity 100% of the Project total cost is requested for financing (Current estimated Project Cost including VAT is USD 8,25 million, MCG share being USD 6,99 million; exact project cost to be defined after the Tender Evaluation) Project falls into eligible investment type - water supply infrastructure construction/rehabilitation Project proposes the rehabilitation of water infrastructure which will contribute to lessening the hardship of the local population and decreasing the cost of maintaining drinking water supply. 10. Does the proposed Project propose to reduce poverty through economic growth? Safe water fosters economic growth. Income benefits (both for households and government) will be derived from a reduction in the costs of health treatment and gains in productivity. The project envisages the reduction of electricity costs of water supply and other inefficiencies that are currently covered from the city of Kobuleti budget subsidies. Available money can be used for social projects, e.g. direct subsidies to vulnerable populations water bills. The main driver for poverty reduction and economic growth will be the development of tourism related industries. Currently only 150 thousand people visit the Autonomous Republic of Ajara for various reasons but the region has a potential to host 1.5 million tourists a year (number of tourist before 1991 was about 0.8 million foreign tourists). The lack of adequate infrastructure is considered to be the main impediment to tourism development and safe, uninterrupted water supply is necessary for this purpose. Tourism revival in the region will increase the number of tourists and facilitate economic growth. The whole process will result in the rise of the assignments to budget. It will also contribute to the development of various economic fields and increase the employment rate among the citizens of Georgia. Final Report, page 25-26 The Project supports the achievement of the Millennium Development Goal 7, Target 15 halve by 2015 the proportion of people without sustainable access to safe drinking water. The Project also supports the fulfilment of EU Council Directive 98/83/EC on the quality of water intended for human consumption. Adopted by the Council, on 3 November 1998. 11. What has been the MDF experience with similar projects? MDF has extensive experience in implementing water and wastewater infrastructure related projects. 27 projects of this type have already been completed and 7 projects are under implementation. The total value of these projects amounts to GEL 37.3 million (about USD 20 million). These projects included the following activities: - Construction of new and rehabilitation of existing headwork; - Construction of reservoirs; - Construction of mains;
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Municipal Development Fund of Georgia Kobuleti Municipal Water Project Appraisal

- Rehabilitation of water supply and sewerage networks - Procurement and installation of meters. 12. Can this Project be completed within 5 years of the effective date of the MCC Compact? The Project will be completed within 5 years of the effective date of the MCC Compact. According to the implementation schedule produced by the Consultant works will start in the second half of 2007. The duration of the works according to the preliminary implementation schedule is about 3-4 years. Major part of water supply works is planned be completed by 2010. Only minor network extension works (worth 47,580 Euros) is planned to be completed in 2010. Detailed working plan will be elaborated within detailed design. Table 1.4, Addendum to Water Supply, page 2 13. Is the Client capable of financing the incremental operation and maintenance (recurrent) costs? Reported operating expenses of Kobuleti TskalKanali over the three year period (2003-2005 excluding depreciation) exceeded the revenues almost three times. The losses are covered by the municipal budget and to a larger extent by outstanding electricity payables (company has accumulated about 2,000,000 GEL of electricity debt). The main reason for this underperformance is an extremely low tariff collection rate. Neither households nor commercial establishments are metered. Households are levied a fixed amount based on the number of registered inhabitants and commercial institutions have bilateral agreements with TskhalKanali on how much they should pay. This results in very inequitable distribution of water supply expenses and gross over-usage. The collection problem is exacerbated by the fact that water supply is very irregular giving the residents moral ground to refuse payment. This also preempts the company to increase the tariff, which is very low even by the standards of countries with similar income levels. Because of the antiquated network water losses in the system are very high that makes the company pump more water into the network thus consuming more electricity. The current situation is not sustainable, especially in view of the upcoming privatization of electricity companies. Once these companies are privatized they will not be willing to subsidize public utilities. To improve the operational performance of KTK following measures are necessary: improve tariff collection implement a plausible tariff setting policy reduce water losses in the system

After the project implementation the population of Kobuleti will have uninterrupted water supply giving KTK legal and moral ground to enforce collection. The project entails the installation of consumer meters. This will cause people to economize water consumption and enable the company to set an optimum tariff. The rehabilitation of the network will cut the leakage to the minimum and reduce electricity expenses.

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The necessary Technical Assistance to implement the above mentioned reforms will be provided through the Waste Water and Treatment Plant project (to be financed through EBRD and other donors. EBRD Credit and Economic Departments have already approved the project and it was presented to the Operations Committee in February 2007, which will be followed by the formal approval by the BoD in May 2007 and subsequent negotiations). TA will focus on improving the management, establishing relevant structures capable of recovering the costs and developing viable policy for tariff determination. Draft Terms of Reference for TA is provided in Appendix 1. With all the above measures implemented the company will be able to fully finance its operational recurrent costs. Pro-forma Income Statements for years 2007-2020 (tables 11.18 and 11.19) show that the Client will recover all expenses and realize increasing net income and positive cash flow starting from the year of 2009. Final Report, pages 181-182 14. Does the Client possess the necessary technical equipment and skilled personnel to ensure permanently satisfactory operation and maintenance of the proposed Project? There are 24 persons assigned to the water supply system and 19 persons assigned to the waste water. There are presently 7 persons assigned to the recovery of bills at every customers residence. That makes altogether 50 persons on the companys payroll. KTK has the old and worn out vehicles for operation and maintenance and it does not have any special equipment for sewer inspection, cleaning or maintenance. Most personnel have been working in KTK for many years having knowledge of the soviet period procedures. The present situation is not only due to the lack of financial means but also to the fact that the level of competence is low. There is a tremendous need to increase the capacity of all personnel to a level which will allow them to perform their tasks in an efficient manner. A vary rough assessment of training needs was elaborated. See annex A 3. Final Report, pages 115-116, Annex A3 The Waste Water and Treatment Plant (WWTP Project) project includes a Technical Cooperation Programme for the Client. which, will include Corporate Development Support Programme (CDSP) for the Client to enhance its financial, managerial and operational performance and increase its repayment capacity. It will include the preparation of a tariff setting mechanism, public service agreement, and business planning. Assistance in improving customer relations, including stakeholder consultation processes, service improvements to improve willingness-to-pay would be included. 15. Does the Client possess the necessary technical equipment and skilled personnel to ensure compliance with the MCC and EBRD environmental requirements and Georgian environmental law? Holding the relevant knowledge and experience, the MDF will be responsible for the compliance with the MCC/WB environmental requirements and Georgian legislation during the Project implementation (construction works). The TA component of Waste Water and Treatment Plant project will include the training of the clients

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personnel in environmental issues, and after the project completion the client will be responsible for compliance with all the abovementioned environmental requirements (this will be specified in Project Funding Agreement between MDF and the Client). 16. Who are the beneficiaries of the Project (in both qualitative and quantitative terms)? The beneficiaries of the project are the following: Population of Kobuleti and Choloki settlement including tourists (around 42,464 now and projected 80.000 in future) receiving 24 hour supply of safe drinking water Local Water Supply Company Kobuleti TskalKanali benefiting from improved assets, technical assistance and reduced maintenance costs Kobuleti City Administration benefiting from freeing the 51,000 GEL in subsidies that can be used for other purposes. Final Report, pages 23 and 160 17. Has an environmental review been carried out and, if necessary, have adequate impact mitigation measures been identified and incorporated into the design of the Project? Based on the Feasibility Study, the screening exercise have been performed by MDF environmental specialists and the project has been qualified as category A (MCC/WB/EBRD criteria). The project requires full scale EIA and according to Georgian legislation it requires Environmental Permit as well. ToR for the Engineering Design includes ToRs for the EIA and request to incorporate adequate mitigation measures in the design documentation and EMPs. Currently a draft EIA has been completed, reviewed by the World Bank team assigned for the RID and all comments will be addressed in the final EIA. The EIA will be subject for public consultations. The draft EIA was discussed at first public consultation on January 31st 2007 at the MDF office; The revised EIA will be discussed at the second public consultation in Kobuleti on April 3rd 2007. ToR for Engineering Design is provided in Appendix 2. 17a. Does the proposed Project conflict with any other World Bank Safeguard Policy? According to the Screening review the proposed project does not conflict with any of the World Bank Safeguard Policies. In particular: Natural Habitats According to the draft EIA anticipated impacts are minimal (acceptable) and adequate mitigation/compensation measures are provided. Forestry No impact. Pest management No impact. Cultural property According to the draft EIA anticipated impacts are minimal (acceptable) and adequate mitigation measures are provided. Mitigation measures mainly consider monitoring during construction activities

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and clearance by the of the Center of Archaeological Search of the Ministry of Culture and Sport. Involuntary resettlements No long-term impact. According to the preliminary assessment in the draft EIA land parcels of only 5 local residents may be temporarily disturbed by construction activities. The mentioned land plots are not cultivated and thus no significant losses are predicted. The final EIA will include these results of the social scoping survey. Indigenous People - No impact Safety of the dams No impact. Disputed areas - No impact International waterways - No impact 18. Is the activity likely to cause a significant environmental, health or safety hazard as defined in the MCC Environmental Guidelines? The activities for the most part are limited to the rehabilitation of the existing facilities and do not impose any significant adverse impact on natural or social environment. The impact of the network extension will be limited to temporary disturbance during construction works. The abovementioned impacts are easily manageable through the application of adequate construction standards and good environmental practices. Reinstatement of the working sites is the issue to be addressed after the completion of the construction works. Landscaping may be required to minimize the visual impact where the new installations are constructed or the existing facilities rehabilitated. Water quality management (protection of the catchment and headworks; sanitation zone; chlorination; interference with the wastewater network etc.) is the main issue at the operational stage. With the benefit of thorough surveys, consultation, careful planning, responsive design and good construction practices it should be possible to avoid or substantially mitigate the disturbance from construction activities. The set of mitigation measures should be identified in EIA and integrated within the EMPs (EAPs). No new land take is planned for the project except for the network extension and new prime pipeline connecting the mainline with the North Kobuleti area. Construction of the new prime pipeline will not require permanent take of land and resettlement. Only land parcels of 5 local residents may be temporarily disturbed by construction activities The route can be optimized but alignment details are still under the consideration. This issue will be given special attention during design works . The impact will be assessed in detail within the EIA, which is conducted in parallel and in connection with the engineering design. ToR for the EIA provides the request for appropriate studies. If the impact is limited to temporary disturbance, corresponding compensation plan will be provided. If resettlement issues arise at the detailed engineering stage, the Resettlement Action Plan will be required. At this stage such a requirement is not envisioned. The overall project will have positive impact on the environment due to the improvement of waste water management. The water supply rehabilitation will have significant positive impact on social environment. Safe, uninterrupted water supply will reduce the incidence of water-born disease and it is a general requirement for maintaining healthy environment.

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Municipal Development Fund of Georgia Kobuleti Municipal Water Project Appraisal

19. Is the Project in compliance with the MCC Environmental Guidelines? The project is not conflicting with the MCC environmental guidelines. Thorough assessment of impacts and required mitigation measures will be provided in the final EIA. The EIA will address environmental, as well as social issues (including resettlement requirements). According to the preliminary data (Feasibility Study and draft EIA) no significant adverse impact is expected. In the extremely unlikely event that a significant environmental hazard as defined by MCC guidelines is identified through ecological expertise, the project will be modified to avoid such hazard. Through thorough surveys, consultation, careful planning, responsive design and good construction practices it will be possible to avoid or substantially mitigate disturbance from construction activities. 20. Is the technical solution proposed adequate, represents the least-cost solution, and complies with Georgian laws and regulations? Water resources for Kobuleti water supply are plentiful. They largely exceed all possible water demand, either in the short, medium or long term. Only for river Kintrishi, the information gathered from Gocydarstveni Vodni Kadastr, Tom VI, Gryzinskaya CCP indicate the minimum river flow of 3,3 m3/s during the summer months of July and August. This represents about 285 000 m3 per day. Underground water resources are plentiful because the average rainfall in the area is tremendous. It varies from about 2 300 mm at sea level to almost 4 000 mm on the nearby mountains. Considering the maximum population of 80 000 inhabitants during summer months and the maximum water consumption of 250 l/capita/day, the maximum water demand is 80,000x0.25 = 20,000 m3 per day. All the alternative supply schemes, including the existing exceed this demand. At present, drinking water is abstracted by pumping from a groundwater catchment situated between the two main rivers Kintrishi and Kinkisha. The initial design of the existing system was to pump water into a large 10 000 m3 reservoir situated on a nearby hill and from there to supply water to the network by gravity flow. The reservoir construction was started but never completed. Considering the altitude of the reservoir (57 meters), and the water level variation of 4 to 5 m, it would have been possible to supply water with acceptable pressure to the whole city, possibly except the northern far end. But this design was never implemented due to lack of funds. water was pumped directly into the network without any reserve at a variable head depending on demand. The Feasibility Study considered three different options for supplying the city: 1. Reconstruction of already existing water catchment, increasing its debit and supplying the town by the existing plan. 2. Usage of Kintrishi river water. Main water works 20 km from the city in Kintrishi National Park at an altitude of 250 m. Supplying the city by gravity flow. 3. Usage of Kinkisha river water. Main water works 6 km from the town at an altitude of 110 m. It would be possible to supply some parts of the city by gravity.
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Preference was given to the first option because it represented the least cost solution and the water is plentiful and of good quality. The technical proposal is adequate because only the rehabilitation of the existing system and its enlargement is proposed (with the exception of previously planned water reservoir to even out supply and demand and minimize electricity usage). There is close to 70% coverage of water supply pipework in Kobuleti. Extensions to the water distribution system are necessary because new areas are being developed. Final Report, pages 17, 43 and 317-318

21. Are the preparatory studies including final design studies and other documents required for Project execution of a quality and completeness that are sufficient to evaluate the actual technical and financial feasibility of the Project and will allow its subsequent implementation or are complementary studies required? Is the technical quality of the documents consistent with standard engineering practices? With the request of the EBRD and through EU funding extensive feasibility study has been prepared according to the international standards by Black Sea Investment Facility (consortium of THALES Engineering & Consulting, together with SOGREAH and GKW), October 2006. The studies were subject to EU and EBRD quality control. The World Bank team assigned for RID has also reviewed the Feasibility study and provided specific comments. Several of the comments have been addressed in the final Feasibility Study while others, of which the Feasibility study fell short, will be addressed in the Engineering Design. The consortium of Gamma and GAUF Engineering is currently working on the engineering design. Conformity of the technical quality of the documents with the best international standards will be ensured by the supervision from WB in accordance to the Collaboration Agreement. 22. Are the cost estimates reliable and do they allow for the determination of the cost of the Project with a reasonable degree of certainty? The cost estimates are as accurate and reliable as it is possible at this stage. The cost of the Project has been estimated using current international and local market prices for goods and works. Feasibility Study was submitted in October 2006 and cost estimates are up to date. As experience shows cost estimate produced under the Feasibility Study has some degree of variation, usually +/-15-20%. The Project cost may change after the preparation of the detailed engineering design, usually +/-5-10% and then after bidding for construction works, usually +/-3-5%. To provide mitigation against possible cost increase the contingency of 15 % of the total cost is reserved. 23. Are the cost estimates for operation and maintenance (recurrent costs) reliable and do they provide evidence of or a plan for including the necessary expense in the annual budget of the Client applying for financing? The Feasibility Study includes detailed financial plan that will help the Client to include the necessary expenses in the annual budget. Major assumption in order to
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make the Kobuleti Tskalkanali financially sustainable and to enable it to meet its operational and maintenance costs as well as service the debts is the increase in tariff. According to FS and proposed assumptions 3 tariff increases are envisaged: first in 2009 by 20%, second in 2012 by 10% and third in 2013 again by 10%. Differential tariff structure for the households, commerce, administration and restaurants, hotels is presented, Tariff structure is also proposed by consumption and affordability criteria. Application of these tariff levels means that Kobuleti Tskalkanali is capable of meeting all operating commitments as they fall due. At projected tariff levels, no significant affordability issues are expected to arise with the cost of water supply services envisaged no greater than 3% of average household income. Final Report, pages 152-159 and 178-179

24. Are the implementation time estimates realistic? Project implementation is planned to last three years and is realistic. According to the Schedule of Expenditures major part of water supply works is planned be completed by 2010. Only minor network extension works (worth 47,580 Euros) is planned to be completed in 2010. More precise implementation plan will be established by the Engineering Design. Table 1.4, Addendum to Water Supply, page 2

25. What are the tangible and intangible benefits of the Project? Have they been adequately determined and evaluated? The project will have the following tangible and intangible benefits. Value estimates of the tangible benefits are provided in the Detailed Table of Benefits Water Supply Project on page 16 of this report. Tangible Additional Availability of Water Currently a major part of the Kobuleti population is not receiving water from the distribution system and many households use electrically operated private wells as a source of drinking water . Following the implementation of the Project water will be available throughout the day. The need to use wells as a main source of water will be disappear. Economic savings arise from variable operating costs of obtaining water from the well as well as from the actual maintenance of the well. Reduction in System Maintenance Costs The proposed Project will replace the existing wells and pumping stations. Following the implementation of the project, these facilities will become redundant. Savings in maintenance costs of these facilities can be considered as benefits in the economic evaluation of the proposed project, though the saving will not be very high.

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Municipal Development Fund of Georgia Kobuleti Municipal Water Project Appraisal

Energy Efficiency Savings As a result of the implementation of the project energy consumption in the abstraction and distribution of water will be reduced because of the reduction in the need for individual households to fill overhead water storage tanks. In the context of Georgia where energy shortages are prevalent, any reduction in energy consumption can be regarded as significant economic benefit. It would therefore be expected that there would be alternative uses for the energy. The economic value of electricity saved as a result of the project should therefore be valued in terms of its alternative use. Benefits derived from tourism development The benefits deriving from the development of the tourism result from the prevention of tourism loss due to a lack of development in the water services. Two benefits are considered: benefits deriving from the tourists outlays, benefits due to the development of activities induced by the tourism development. Each tourist visiting Kobuleti will spend money. This money enters the local economy and supports the development of the economy. Furthermore, as the spending of the tourists corresponds to the money that would not have accrued to the community without the development of the tourism, application of the multiplier effect is fully justified Intangible Environmental benefits The more efficient use of electricity has an environment benefit in reducing the level of discharges arising from electricity generation using fossil fuels. Discharges can comprise CO2, NOX and SOX. Reduced incidence of water borne disease The gravity flow eliminates the risk of the cross-contamination of the drinking water from the sewerage, because in the gravity flow systems the water pressure will be always positive and eliminating the risk of cross-contamination. Bellow is socio-economic benefit structure prepared by consultant:

Socio-Economic Benefits of the Project


Item Details Socio Economic Benefit Comments

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Health: WS: diseases related drinking water WW: contagion & contamination by faecal matter Property: houses, and land values Household budget: Cost of provision of alternative services

Dysentery, diarrhoea, cholera etc

Diminution of private health & public health expenditures Risks of epidemiological diseases.

Difficult to assess, but extremely important in the mind of people in evaluating the pros and cons of a site.

Values are affected by the lack of water services Cost of well plus tank and network necessity of purchasing large quantities of bottled water

The cost of land and properties shall increase Reallocation of household budgetary resources Decrease of house hold budget for water, or avoidance of spending

This is a sure benefits that even incorporates all others, but difficult to foresee. These benefits have been taken into account. To be noted, the need to buy bottled water is not necessarily additional to the need for the boring of a private well. Septic tank seems to be not compulsory in Georgia. Once again, difficult benefit to estimate This is a very important benefit for Adjara/Georgia. Furthermore, as the spending of the tourists correspond to money that would not have accrued to the community without the development of the tourism, application of the multiplier effect is fully justified

Allocation of time to address water related needs Tourism : Runoffs on Cleanliness and beaches attractiveness of city Bad odours, and and beaches Turbidity of water Community: Loss of time

Improvement of presence at work as well as leisure activities Economic valuation of visitors on local commerce and business Impact on local low income peoples

Final Report, pages 135-138 26. Was economic evaluation methodology that has been used appropriate? How have the costs and benefits been calculated? Do the results allow making a valid judgment as to the economic justification of the Project? Economic evaluation methodology is in correspondence with the MCC Guidelines for Economic Analysis. Benefits from implementing the project exceed costs and provide a firm economic justification for its implementation. The proposed project will ensure the improvement and more efficient operation of water services in the long term. In the absence of the project, Kobuleti TskalKanali would continue to be exposed to rely on aged infrastructure that has a high operating cost and is prone to frequent disruptions from electricity supply outages. Economic Internal Rate of Return for the proposed project was calculated by consultant (Feasibility study-addendum to water supply) and is fixed at 66.4 %.

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Detailed Table of Benefits Water Supply Project


Kobuleti Water Project: Benefits in Euros Costs of the existing system Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Energy Costs 0 0 130,000 126,490 123,400 114,200 111,910 109,880 108,140 106,650 105,300 104,220 99,010 94,060 89,360 84,890 80,650 76,620 72,800 69,160 65,700 62,420 59,290 56,330 53,520 50,840 Labour Costs 0 0 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 20,720 Others Costs 0 0 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 7,530 Drinking Water 0 0 0 0 0 24,960 48,690 72,020 94,520 116,210 137,490 157,950 178,000 197,640 216,870 235,290 253,290 270,890 288,070 304,440 320,810 336,770 352,320 367,860 382,600 397,330 Benefits from the new system New wells avoided 0 0 0 0 0 244,000 232,000 226,000 220,000 214,000 208,000 202,000 196,000 190,000 186,000 182,000 176,000 170,000 168,000 164,000 160,000 156,000 152,000 148,000 146,000 144,000 Loss of Tourists avoided 0 0 1,167,700 2,563,400 3,942,400 5,313,100 6,188,900 7,053,600 7,912,700 8,771,800 9,247,200 9,059,500 8,884,300 8,552,100 8,253,200 7,983,500 7,741,700 7,523,400 7,327,400 7,150,800 6,991,000 6,849,200 6,719,900 6,603,100 6,498,900 6,405,700 Low Income Benefits 0 0 542,100 542,100 542,100 542,100 507,320 482,810 464,050 448,940 435,740 423,280 412,590 400,960 390,620 381,400 375,000 367,780 361,450 355,920 351,070 348,510 344,920 341,860 340,800 338,760 0 0 1,868,050 3,260,240 4,636,150 6,266,610 7,117,070 7,972,560 8,827,660 9,685,850 10,161,980 9,975,200 9,798,150 9,463,010 9,164,300 8,895,330 8,654,890 8,436,940 8,245,970 8,072,570 7,916,830 7,781,150 7,656,680 7,545,400 7,450,070 7,364,880 Total Benefits

Addendum to Water Supply, pages 15-16

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EIRR Summary Table Water Supply

Water Supply Project Costs in Euros Investment Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Water Supply 1,116,765.00 2,915,685.00 955,070.00 47,580.00 167,510.00 437,350.00 143,260.00 7,140.00 554,522 Total O&M Costs 162,090.00 272,070.00 279,240.00 286,870.00 295,270.00 304,380.00 313,970.00 324,060.00 333,780.00 341,970.00 350,660.00 359,650.00 368,990.00 378,580.00 388,870.00 399,460.00 410,450.00 422,080.00 434,030.00 446,560.00 459,650.00 473,340.00 487,630.00 502,520.00 Total Costs Total Benefits

Net Benefits in

1,116,765.00 2,915,685.00 1,117,160.00 319,650.00 279,240.00 286,870.00 295,270.00 304,380.00 313,970.00 324,060.00 333,780.00 341,970.00 350,660.00 359,650.00 536,500.00 815,930.00 532,130.00 406,600.00 410,450.00 422,080.00 434,030.00 446,560.00 459,650.00 473,340.00 487,630.00 (52,002.00)

0 0 1,868,050 3,260,240 4,636,150 6,266,610 7,117,070 7,972,560 8,827,660 9,685,850 10,161,980 9,975,200 9,798,150 9,463,010 9,164,300 8,895,330 8,654,890 8,436,940 8,245,970 8,072,570 7,916,830 7,781,150 7,656,680 7,545,400 7,450,070 7,364,880 EIRR

1,116,765 2,915,685 750,890 2,940,590 4,356,910 5,979,740 6,821,800 7,668,180 8,513,690 9,361,790 9,828,200 9,633,230 9,447,490 9,103,360 8,627,800 8,079,400 8,122,760 8,030,340 7,835,520 7,650,490 7,482,800 7,334,590 7,197,030 7,072,060 6,962,440 7,416,882 66.4%

Addendum to Water Supply, page 17 Note: The Investment in the table above (without VAT 18%) is economic cost Euro 5.04 million i.e. Estimated Investment Euro 5.5 million adjusted using conversion factors of 0.9 for local equipment and 0.85 for local labour. Final Report, pages 124-125. If Estimated Cost is applied, the EIRR insignificantly drops to 62.6%

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Municipal Development Fund of Georgia Kobuleti Municipal Water Project Appraisal

Sensitivity analysis Water Supply


SENSITIVITY TO COSTS Discount Rate 0.0% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00% 55.00% 60.00% 65.00% 70.00% 75.00% 80.00% 85.00% 90.00% 95.00% 100.00% EIRR for 54.2% Total Investment & Unit cost of Electricity Labour Costs 4298.9% 4491.7% 4513.6% 4356.9% 4059.6% 3673.0% 3239.2% 2785.6% 2327.5% 1872.6% 1424.2% 983.2% 549.1% 121.1% 498.6% 1174.4% 1830.1% 2470.3% 3098.9% 3718.8% 4332.3% New system kWh
consumption

SENSITIVITY TO BENEFITS Total O&M Costs 1957.5% 1965.0% 1908.8% 1797.6% 1649.2% 1479.9% 1301.2% 1119.5% 937.8% 757.6% 579.0% 401.8% 225.7% 50.1% Existing System Total Costs kWh Sum of consumption O&M costs New System 1227.1% 928.4% 678.2% 490.8% 356.7% 261.1% 192.0% 141.1% 102.6% 73.0% 49.6% 30.9% 15.7% 3.2% -95% -77.7% -7.3% 235% 191.9% -16.2% 558% 454.8% -23.7% 874% 712.7% -30.2% 1185% 966.7% -35.9% 1492% 1218.0% -40.8% 1797% 1467.2% -45.2% 2100% 1715.2% Drinking Water Benefits from New wells avoided Tourist loss avoided Low Income Benefits -92.5% -90.3% -87.2% -83.1% -78.1% -72.3% -65.8% -58.5% -50.7% -42.2% -33.2% -23.6% -13.6% -3.1% 7.9% 19.3% 31.1% 43.3% 56.0% 69.0% 82.4% Total Benefits Total Benefits less Low Income

Investment Maintenance Costs Costs 3288.6% 2184.9% 1759.8% 1378.9% 1052.0% 897.1% 675.2% 603.7% 455.1% 418.8% 317.0% 297.2% 225.3% 213.9% 161.4% 154.7% 115.3% 111.2% 80.8% 78.3% 54.3% 52.9% 33.5% 32.8% 16.9% 16.6% 3.4% 3.3% -7.8% -7.6% -17.1% -16.8% -25.0% -24.6% -31.7% -31.3% -37.5% -37.1% -42.5% -42.1% -46.9% -46.5% MAX cost 37.0%

9142.8% 8803.4% 8233.3% 7507.9% 6707.2% 5888.2% 5082.2% 4302.9% 3554.1% 2834.6% 2141.2% 1470.0% 817.3% 179.6%

2495.3% 6712.7% 11865.0% 18056.4% 25397.4% 34005.7% 44005.6%

620.3% 1603.3% 2732.9% 4023.1% 5488.8% 7145.7% 9009.9%

-99.4% -95.4% -90.4% -84.5% -77.5% -69.5% -60.7% -51.0% -40.4% -29.0% -16.8% -3.8% 9.9% 24.3% 39.4% 55.2% 71.7% 88.8% 106.5% EIRR for 60.1%

-22.2% 54.8% 129.9% 203.7% 276.5% 348.5% 420.1% 491.4% No Low Inc. -100.0%

-15.8% 39.2% 93.7% 147.9% 201.8% 255.6% 309.5% 363.4%

The analysis shows very robust EIRR, for example if the Investment costs increased by about 115%, or the total benefits reduced by 58%, the EIRR reduced to 40%, which is still an excellent result. Final Report, pages 148-154 Addendum to Water Supply Appendix 3b, pages 18-22

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