1. WATER AND SANITATION SECTOR (WSS) IN ESTERN EUROPE AND CAUCASUS Strategic Approach of KfW Development Bank Dr. K. Gevorgyan KfW Representative in Armenia 6 th meeting of the Working Group on the EECCA component of the EUWI 15 th Nov. 2005, Yerevan

2. 2 Strategic approach of KfW Development Bank in financing WSS 1. Decentralization, 2. Programme- and competition- oriented approach, 3. Step by step programme concept, 4. Support to Project Executing Agencies (PEAs) by accompanying measures, 5. Sector advisory services, 6. Supplemental loans from KfW’s own funds, 7. Commercialisation of utility services, 8. Improving sector performance by co-financing and implementation of mandates.

3. 3 1. Decentralization Supporting: Local/regional water utilities, rather than a centralized large water company; Independence of local water utilities by creation of own capacities, both – financial and in know-how; Transfer of water utilities’ ownership to municipalities, because of their better knowledge in local needs and problems, which enables the achievement of a tailor-made approach, acceptable to the population (this proves working better in specific regions).

4. 4 2.Programme- and competition- oriented approach Design of a programme framework instead of individual investment projects as a flexible approach to incorporate small investments and to achieve a country-wide impact; Definition of prerequisites/eligibility criteria for programme participation: such as improvement of financial and institutional situation within municipalities/PEAs, thus creation and enhancement of competition between municipalities/PEAs; Project preparation can be assisted by accompanying measures for participating municipalities/PEAs, financed out of grant funds.

5. 5 3.Step by step programme concept Division of investments into two or more implementation phases: first phase comprising of the most urgent investment measures and following phases containing more comprehensive and systematic rehabilitation and extension of the system; Implementation of second and following phases only if defined criteria and/or milestones are achieved by the PEAs (coverage of at least operation and maintenance costs at the end of first phase); Each phase is designed as a sustainable and reasonable project, because the following phases might be avoided due to non- fulfillment of defined criteria.

6. 6 4.Support to PEAs by accompanying measures Accompanying measures (financed through grant funds) shall enable the PEAs to conduct financially sound operation of rehabilitated and extended facilities. Such measure can include: improvement of PEA’s staff capacities through financial, organizational and technical training (billing/accounting, job descriptions, customers data-base, leak detection, etc.); PR campaign and public awareness raising activities. In case PEA’s capacities are not sufficient, management or service contracts with international water companies can be financed.

7. 7 5.Sector advisory services KfW’s strategy incorporates sector dialog and sector advisory services; Sector advisory services on macro-level shall ensure that: there is a clear vision of further development of the sector in partner country, sector framework conditions are improved based on international standards and best practices, If appropriate, additional activities can be carried out on micro/regional level.

8. 8 6.Supplemental loans from KfW’s own funds Given the limited availability of German federal budget funds, KfW offers additional funds in form of Development or Promotional Loans (various forms of mixing budgetary and capital market funds); Main features of these loans are: competitive conditions; applicability of general financial co-operation principles; possibility for inclusion of additional grants for project preparation and training.

9. 9 7.Commercialisation of utility services Water is considered a commercial good, thus KfW seeks for ways to include principles of commercialisation if appropriate; Private sector participation can have a form of management, service, lease contracts, BOT and concession contract; Private sector participation provides the possibility to: overcome inefficiencies of public sector operation (in most cases - no direct incentives to commercialisation), enhance operational efficiency by fostering technical and managerial experience, mobilize private funds (in case of concessions). Prerequisites for success are - sufficient monitoring capacities in partner country, thorough preparation of contractual arrangements and transparent/competitive awarding procedure.

10. 10 8.Improving sector performance by co-financing and implementation of mandates Instead of selective intervention, KfW aims at improving sector performance by co-financing and implementation of mandates; Such joint financing: increases investment volumes, allowing additional synergies; provides for tailor-made financing conditions by combining available grant and market funds; reduces co-ordination efforts of PEAs; allows for aligned performance criteria within the sector.

11. Thank you for attention! Contacts of KfW Armenia Office: Tel.: + 374 10 56 32 88 Fax: + 374 10 54 27 08 E-address: k.gevorgyan@netsys.am