OREANDA-NEWS. December 18, 2007. Ufa is a thriving Russian city of just over one million inhabitants in the south-western Urals, with low unemployment, a well developed oil and petrochemicals industry and income levels 20 per cent higher than the Russian average, reported the press-centre of EBRD.

But the capital of Bashkortostan also has a problem: outdated and incomplete wastewater treatment facilities. As a result, some 15 per cent of the city’s sewage is discharged without proper disinfection into the Belaya River, whose waters flow into the Kama River, a tributary of the mighty Volga.

Ufa’s wastewater facilities were designed in the late 1960s and intended to be constructed in three stages. The first stage was completed in 1974, but the second only became operational in 1987 and the economic difficulties of the 1990s meant the final stage was not completed at all. Now, however, municipally-owned water utility UfaVodocanal is seeking to finish the work while at the same time reducing the environmental impact of the wastewater treatment process.

With this goal in mind, the EBRD has agreed to lend the utility 500 million roubles (around ?15 million) over the next 13 years so that it can invest in cleaner and more energy efficient technology. The loan will enable UfaVodocanal to treat sewage with ultraviolet disinfection technology and purchase methane tanks. These tanks will capture biological gas from the sewage and the gas will be burned off to produce heat for UfaVodocanal's own use.

“The ultraviolet technology will enable the utility to significantly reduce the levels of untreated sewage discharged into the Belaya River,” says the Director of UfaVodocanal, Viacheslav Semenovich Gordienko.

"This project will give a boost to the economy of the city and is key in improving environmental standards," said Pavel Rurikovich Kachkaev, the Mayor of Ufa.

“What makes this project special is its strong focus on the environment. This is about more than just economic benefits and reducing costs and it shows how forward-looking the utility’s management team and the local community are,” explains the EBRD's Oxana Selska, who works as a senior banker in the Municipal and Environmental Infrastructure team.

“Most of the water and wastewater utilities that the EBRD deals with in Russia are starting from a low point in terms of compliance with EU environmental standards," says Ms Selska. "The fact that the utility can’t meet EU standards today shouldn’t prevent the EBRD from investing: we can make an important start and get the process underway. We must not forget that cities in EU countries had a long time to adjust to these standards and were often helped by big investment grants from the European Union.”

As well as improving the sewage treatment process, the project is aimed at helping UfaVodocanal modernise its business practices and operate on a more sound commercial footing. This will involve reforming the utility’s tariff structure and removing the cross subsidy whereby businesses and public organisations are charged much higher tariffs in order to ease the burden on domestic customers.

“We want UfaVodocanal to operate on commercial terms as much as possible, even if it remains municipally owned,” Ms Selska says. “Financial independence from city subsidies is key in the decision-making process."

“Although householders will see their tariffs increase as a result of the reforms, issues of affordability for low-income groups are taken into account and the price adjustments will be made gradually,” she adds.

Technical cooperation funds provided by the European Union and the governments of Japan and Finland and worth ?810,000 in total are going towards various sub-projects that underpin the EBRD loan. These include a feasibility study, project engineering support, an International Financial Reporting Standards audit and the creation of a Corporate Development Support Partner to help the utility improve billing routines and revenue collection.

The city of Ufa is acting as guarantor for the EBRD's investment, which is the second loan the Bank has made to the municipality. In early 2006, the EBRD agreed to provide 360 million roubles to help improve the city’s district heating system. That loan is currently being disbursed and heating substations are being installed.

Thomas Maier, the EBRD's Business Group Director for Infrastructure, has been visiting Ufa regularly since 2004 and is pleased with the high levels of professionalism and the commitment of the utilities, the city and the regional authorities.

“We formalised our relationship with Ufa through a loan for investments in the district heating sector two years ago,” says Mr Maier. “And now, after some starting difficulties, that project is making headway. The loan to the water utility is a logical progression and we are now assessing the possibility of extending a facility for the second phase of the district heating project."

"We can bring the know-how to far-flung cities in Russia," explains Mr Maier, "and the EBRD’s municipal and environmental infrastructure programme in Russia is doing exactly that by focusing on local investments, working with local authorities and their utility companies to enhance their creditworthiness by improving budgeting, debt management and investment planning."