CONTENTS

Page EXECUTIVE SUMMARY Error! Bookmark not defined.

I. OVERVIEW 1

II. RESULTS 2

III. ACKNOWLEDGEMENTS 9

APPENDICES 1 List of Contracts Reviewed

2 Details of Implemented Recommendations

3 Details of Partially Implemented Recommendations

4 Details of Not Implemented Recommendations

Follow-Up Review of PPRR Recommendations

Loans 3078-GEO(COL), 3238-GEO(COL) and 3441-GEO: Urban Services Improvement Investment Program - Tranches 3, 4 and 6 Office of Anticorruption and Integrity July 2019 This document contains information that is subject to exceptions to disclosure set forth in ADB's Access to Information Policy. Recipients should therefore not disclose its contents to third parties, except in connection with the performance of their official duties.

ASIAN DEVELOPMENT BANK

CURRENCY EQUIVALENTS

Currency unit ̶ Georgian Lari (GEL) GEL1.00 = $0.37

$1.00 = GEL 2.702

NOTES

(i) The currency equivalents used were as at 30 April 2019, the follow-up review cut-off date.

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

ABBREVIATIONS

AACT - average annual construction turnover ADB BEC BER BoQ

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Asian Development Bank Bid Evaluation Committee bid evaluation report bill of quantities

COL - ordinary operations (concessional) loan CWRD CWUW GRM ITB MFF

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Central and West Asia Department Urban Development and Water Division, CWRD Georgia Resident Mission Instruction to Bidders Multi-tranche financing facility

MRDI - Ministry of Regional Development and Infrastructure OAI - Office of Anticorruption and Integrity PAU PPE PPRR UWSCG

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project administration unit personal protective equipment project procurement-related review United Water Supply Company of Georgia LLC

CONTENTS

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EXECUTIVE SUMMARY i I. OVERVIEW 1 II. RESULTS 2 III. ACKNOWLEDGEMENTS 9

Project Procurement-Related Reviews

Mandate: ADB’s Anticorruption Policy requires all parties, including borrowers, beneficiaries, bidders, consultants, suppliers, contractors, and ADB staff to observe the highest ethical standards when participating in ADB-related activities. The Policy supports ADB’s obligation, under Article 14 (xi) of the Agreement Establishing the Asian Development Bank, to ensure that the proceeds of ADB financing are used only for intended purposes. The Office of Anticorruption and Integrity (OAI) conducts project procurement-related reviews (PPRRs) or proactive project integrity risk reviews to help prevent and detect integrity violations (i.e., fraud, corruption, collusion, coercion, abuse, conflict of interest, and obstruction). Objective: A PPRR assesses project integrity risks through the (i) examination of processes, procedures, and documentation related to procurement, financial management, and contract implementation/management, and (ii) inspection of outputs. OAI recommends enhancements to mitigate or eliminate opportunities for integrity violations. OAI conducts follow-up reviews on selected PPRRs to (i) assess the implementation progress of the PPRR recommendations, and (ii) assist the executing/implementing agencies and ADB in implementing any remaining recommendations. A PPRR is neither an investigation of fraud and corruption nor an evaluation to assess development effectiveness of ADB-funded projects. It does not review project outcomes or development impact, which can only be assessed after the completion of a project.

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.

EXECUTIVE SUMMARY In 2016, the Office of Anticorruption and Integrity (OAI) of Asian Development Bank (ADB) carried out a project procurement-related review (PPRR) of the Urban Services Improvement Investment Program – Tranches 3 and 4.1 In 2019, OAI conducted a follow-up review to establish whether the PPRR recommendations have been implemented.2 The PPRR resulted in 18 recommendations aimed at mitigating high and moderate integrity risks in procurement and asset management. The key recommendations of the PPRR were for the United Water Supply Company of Georgia LLC (UWSCG), the implementing agency, and supervision consultants to:

(i) evaluate the bidders’ financial capacity without inclusion of non-current assets and non-current liabilities for future procurements;

(ii) replace the delivered and installed substandard pipes and closely monitor the pipe material and pressure test;

(iii) require warranty certificate from the materials suppliers; (iv) promptly provide critical review on the detailed design for civil works contracts; and (v) improve the system in storing construction materials.

To assess the implementation3 of the PPRR recommendations, the follow-up review covered four contracts, accounting for 75% of the total value of contracts awarded between November 2017 and April 2019.4 OAI assessed certain aspects of the procurement and asset management processes, and inspected the project outputs.

UWSCG and the supervision consultants implemented 17 out of the 18 recommendations. UWSCG and the supervision consultants, with assistance from ADB’s Georgia Resident Mission (GRM), have improved its procurement process and contract oversight, as well as its asset management processes. Furthermore, UWSCG terminated the non-performing and non-complying contractor, after considering the PPRR observations in corroboration with supervision consultant’s report and analysis.

One recommendation was not implemented relating to the delay in the supervision consultant’s review of the detailed design. While this remaining recommendation was not fully implemented, it does not pose integrity risks to the project. However, if this is not addressed in timely manner, it may lead to contractual delays and cost overruns because defects in detailed design may not be timely identified and amended.

OAI requests the Central and West Asia Department and GRM’s continued support and guidance to UWSCG in implementing this remaining PPRR recommendation.

1 The Project is financed under Loans 3078-GEO(COL), 3238-GEO(COL) and 3441-GEO. 2 Loan 3441-GEO was included in the follow-up review. 3 The implementation status of the PPRR recommendations are classified to: (i) Implemented – fully implemented the

recommendations; (ii) Partially implemented – has taken substantial actions to implement the recommendations, however, execution of the recommendations was inconsistent in some instances; and (iii) Not implemented – has not implemented the recommendations in a manner that resolved the underlying issue.

4 The PPRR report was issued in October 2017 and the fieldwork sample cut-off date is 30 April 2019.

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I. OVERVIEW

1. In 2016, the Office of Anticorruption and Integrity (OAI) of the Asian Development Bank (ADB) conducted a project procurement-related review (PPRR)5 on the Urban Services Improvement Investment Program – Tranches 3 and 4 in Georgia.6 Figure 1 presents the project background.

Figure 1: Urban Services Improvement Investment Program at a glance

5 https://www.adb.org/projects/documents/geo-43405-025-pprr 6 The projects reviewed are financed under Loans 3078-GEO(COL) [Tranche 3] and 3238-GEO(COL) [Tranche 4].

Total Program Cost: $625 million ADB Financing: $500 million Counterpart Funding: Government of Georgia - $125 million

The investment program will improve the health of residents in the secondary towns of Anaklia, Kutaisi, Marneuli, Mestia, Poti, and Zugdidi.

The outcome of the investment program is improved WSS services in these secondary towns.

Executing Agency: Ministry of Regional Development and Infrastructure of Georgia

Implementing agency: United Water Supply Company of Georgia LLC

Tranche 3: Loan 3078-GEO (COL)

Tranche 4: Loan 3238-GEO(COL)

Tranche 6: Loan 3441-GEO

IMPACT

OUTCOME

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2. OAI conducted a follow-up review in May/June 2019 to: (i) assess the implementation status of the PPRR recommendations; (ii) assess the effectiveness of the actions taken by the United Water Supply Company of Georgia LLC (UWSCG) and the supervision consultants to implement the recommendations; and (iii) assist UWSCG and the supervision consultants in resolving pending issues in implementing the recommendations.7 3. To achieve the follow-up review objectives, OAI reviewed four contracts and inspected two project locations.8

II. RESULTS 4. OAI confirmed that UWSCG and the supervision consultants, assisted by ADB’s Georgia Resident Mission (GRM), fully implemented 17 out of the 18 PPRR recommendations. One recommendation was not implemented. A. Implemented Recommendations

5. To fully implement the 17 recommendations, UWSCG increased the capacity of the procurement department by engaging five procurement specialists. Also, UWSCG briefed the supervision consultants on the PPRR recommendations. Procurement 6. Of the 17 implemented recommendations, 7 relate to procurement. Implementation details are discussed in the succeeding paragraphs. 7. Excluded net non-current assets and non-current liabilities in evaluation. The 2016 PPRR noted that the BEC included the non-current assets and non-current liabilities in evaluating the bidders’ financial capacity. 8. In the follow-up review, the BEC correctly excluded the net non-current assets and non-current liabilities in assessing the bidders’ financial resources. 9. Verified construction turnover. The BEC previously used the incorrect revenue values in calculating the average annual construction turnover. OAI recommended that the BEC use construction turnover values from the financial statements.

10. As confirmed in the follow-up review, the BEC reviewed the accompanying notes to the financial statements, and where necessary and practicable, sought clarifications from bidders to reasonably establish the accuracy of average annual construction turnover. 11. Reviewed financial statements and accompanying notes. In the 2016 review, the BEC failed to consider an auditor’s qualified opinion on the winning bidder’s revenue for purposes of calculating the average annual construction turnover. OAI recommended to closely review the auditor’s reports.

7 Loan 3441-GEO (Tranche 6) was included in the follow-up review. 8 These contracts were awarded between November 2017 and April 2019.

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12. In the follow-up review, the BEC reviewed the winning bidder’s financial statements and accompanying notes, particularly relating to financial position, financial capacity, and construction turnovers, including the winning bidder having an unqualified audit report. In instances where the bidders did not initially submit audit reports and notes to financial statements, the BEC requested and considered these during bid evaluation.

13. Reviewed details in the BER. The 2016 review highlighted inaccurate evaluation and information in the BER. OAI recommended that the BEC thoroughly review the BER to ensure accuracy of information.

14. In the follow-up review, OAI noted that the BER in one of the two contracts reviewed contained minor errors and inconsistences between the main narrative and annexes.9 However, these errors would not have resulted in a different procurement outcome, and the BEC addressed these accordingly based on GRM’s comments. Nonetheless, OAI cautions the BEC to take additional care when preparing evaluation reports to ensure completeness, accuracy and consistency. 15. Included bid forms in the bidding documents. OAI recommended that UWSCG include all the standard bid forms in the issued bidding documents to ensure that bidders are able to submit the required information.

16. As confirmed in the follow-up review, the bid forms were included in the issued bidding documents. OAI also confirmed that the bidders used the appropriate bid forms in their proposals. 17. Validated information from supporting documents. There was insufficient due diligence in the past procurement exercise as noted in the 2016 review. OAI recommended that the BEC seek clarifications as necessary and validate information from source documents submitted.

18. In the follow-up review, the BEC sought clarification and additional documents from bidders in instances where submitted information was unclear, inconsistent, or questionable. The BEC considered the responses and additional documents during bid evaluation. In both civil works contracts reviewed, the BEC requested and considered additional supporting documents such as interim payment certificates, as-built drawings, bill of quantities in assessing the bidders’ construction experience. 19. Prepared a comprehensive narrative report. In the 2016 review, OAI noted that the basis for the shortlist of six firms was unclear. As a recommendation, BEC needed to prepare a comprehensive narrative report for the shortlisting. 20. As noted in the follow-up review, the BEC clearly explained the basis for the shortlist and documented a comprehensive narrative report of the reviewed consultancy contract, including the assessment of management and technical competence. Asset Management

21. Of the 17 implemented recommendations, 10 pertain to asset management. Details on the actions taken by UWSCG are presented in the following paragraphs.

9 The reviewed contracts are DDD and CCC.

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22. Terminated the contract and ensured the commitment to replace the pipes and manholes. In the 2016 PPRR, OAI noted that the contractor of the previous civil works contract of AAA installed defective pipes and used unacceptable alternative manholes. OAI recommended the following: (i) seek redress from supplier to replace the delivered substandard pipes and (ii) resolve the issue of using alternative material. 23. Shortly after the PPRR fieldwork mission in 2016, UWSCG terminated AAA contract.10 The reasons for termination include the contractor’s failure to: (i) comply with and take any corrective actions on the requests of the supervision consultant; and (ii) remediate the defects and ensure that the rejected items comply with the contract within 28 days after receiving the supervision consultant’s letter.11 24. In the follow-up review, OAI noted that in December 2017, UWSCG engaged a new contractor12 to continue the scope of work of the previous AAA contract.13 OAI confirmed that, under the new AAA contract, the installed defective pipes were removed and replaced.14 In the other contract, BBB, all the defective pipes which were delivered on site, were segregated and were not paid for by UWSCG. The contractor installed pipes that are compliant with the quality requirements as certified by the consultant. UWSCG is in ongoing discussions with the contractors for the disposal of the removed defective pipes.

25. Furthermore, the new contractor committed to complete the works including the removal of plastic manholes and the replacement with newly supplied concrete manholes by July 2020.15 Also, as of April 2019, the contractors and supervision consultants confirmed that there were no instances of unacceptable alternative materials being used in the sewage project in Poti and water supply and sewerage systems in Marneuli.16 26. Checked material quality with independent laboratory, conducted pressure tests and ensured warranty. In relation to the substandard pipes identified in the 2016 review, OAI recommended UWSCG to: (i) check the material quality and monitor the pressure test of pipes and (ii) ensure that construction materials, as applicable, have warranties. 27. In the follow-up review, OAI confirmed that the supervision consultants have inspected the delivered pipes and engaged experts from an independent laboratory to conduct the tests, as required in the approved quality assurance plan.17 Pressure tests have also been conducted in accordance with the supervision consultants’ approved method statements. The supervision consultants stated in the April 2019 progress report that there have been no new instances of delivery and installation of defective or substandard pipes, after these were previously identified in the AAA and BBB contracts. 10 Confirmation notice for termination from UWSCG was sent to contractor A on 23 September 2016 in accordance with

the provisions of sub-clause 15.2 of the General Conditions of Contract. 11 The supervision consultant’s findings include (i) absence of approval on the bottom preparation, backfilling,

compaction, and improper dewatering and sealing; (ii) laboratory tests for pipes not compliant with the specifications and no pressure tests conducted; (iii) improper installations of manholes and use of manholes that were not approved by the supervision consultant and UWSCG.

12 A2 is the new contractor for AAA (new) effectively on 20 December 2017 as per the contract agreement. 13 The scope of work for AAA (new) includes improvement of the sewage system of Poti by construction of 28 sewage

pumping stations, pipelaying of new sewers (112.4 km) and the rehabilitation of existing sewers (7.3 km). The only difference of the contracts is that AAA contract has 1095 completion days while AAA (new) has 900 completion days.

14 There are 31,518 out of 35,070.72 linear meter of pipes that will be removed and replaced in the project sites in Poti. 15 As of 30 April 2019, there are still 1121 units of 400-in and 600 to 1000-inch diameter of manholes that will be removed

and replaced in the project sites in Poti. 16 OAI inspected the project outputs of CCC. 17 Laboratory A provides an independent material test for pipes supplied to project sites in Poti.

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28. OAI also confirmed that the contractors have warranties for construction materials, provided by the suppliers. 29. Resolved design errors. The 2016 review recommended that the errors identified by the construction supervision consultant’s review of the detailed design should be promptly resolved.

30. In the follow-up review, the supervision consultants confirmed that the contractors incorporated the corrections and comments provided in the detailed design review report. 31. Properly stored construction materials. In the 2016 review, OAI observed that projects construction materials were not properly stored and recommended UWSCG to properly store the construction materials in a safe and appropriate location.

32. As observed in the follow-up review, the storage of materials is well-managed, with an assigned staff who is in-charge of materials delivery, inspection and inventory. The materials are appropriately covered and stacked, as shown in Figures 1 and 2.

Figure 1. Properly Stored Pipes in the Materials Storage for CCC.

Figure 2. Fully Covered Pipes in the Materials Storage for AAA (new).

33. Performed design modifications by the contractor. The 2016 PPRR noted that there was an unclear accountability for infrastructures design modification. OAI recommended to identify the accountable entity for the design modifications and promptly adjust it, as necessary. 34. As noted in the follow-up review, UWSCG assigned the contractor to perform the necessary design modifications. These modifications were carried out, which cover the reservoirs, pumping station, and water connections.18 35. Followed approved procedures on backfilling and compaction. OAI observed improper backfilling and compaction during the 2016 PPRR. It was recommended that an approved procedure be used in the backfilling and compaction activities.

18 The April 2019 progress report states that the contract is now at 61% physical completion, which covers the

implementation of the revised design.

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36. As confirmed in the follow-up review, the supervision consultant approved the contractor’s proposed procedures for backfilling and compaction prior to its implementation. The contractor used an independent laboratory to conduct the compaction test in compliance with the approved procedures and standards.19 Figure 3 shows the trench backfilling with dewatering system. 37. Enhanced oversight on construction safety. The 2016 PPRR pointed out safety hazards in the project site in Poti. OAI recommended the supervision consultant to enhance oversight to the contractors to follow and comply with the health and safety standards. 38. During the site inspection, OAI observed that the workers use appropriate safety gear and there are adequate safety signages on site. The contractors use sufficient barricades and trench support on the excavations. Figure 4 shows workers in an open trench. Also, the supervision consultants confirmed that there have been no reported incidents or accidents as of the April 2019 progress reports for AAA and CCC.

19 Laboratory B, an independent entity, conducted the compaction tests in the project site in Poti.

Figure 3. Open Trench with Ongoing Backfilling.

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39. Implemented environmental plan. In the 2016 review, OAI observed an environmental problem such as fuel tank leakage in the storage area. OAI recommended that the contractor complies with environmental standards. 40. In the follow-up review, OAI noted that UWSCG highlighted the Protection of the Environment (GCC clause 4.18) in the PCC which requires the contractors to comply with all applicable national, provincial, and local environmental laws and regulations.20 41. Also, OAI confirmed that an environmental management plan is being implemented and that the supervision consultant monitors compliance with the environmental standards. The risk of fuel leakages from storage tanks was significantly reduced since fuel and/or lubricant were delivered on-site only when needed. B. Recommendation that is Not Implemented

42. UWSCG and the supervision consultant have not implemented 1 out of the 18 recommendations. 43. In the 2016 PPRR, OAI highlighted the delay in construction supervision consultant’s review of the detailed design.21 As a recommendation, the supervision consultant should carry out a detailed design review to identify defects or omissions that could compromise the quality of construction and completion date.

44. OAI sampled one contract in the follow-up review to assess the implementation of the recommendation. OAI confirmed that the supervision consultant did not provide the detailed design review report promptly due to the late mobilization of the supervision consultant’s staff who is in

20 AAA (new contract) and CCC. 21 The consultancy contract requires the supervision consultant to provide a critical review of the detailed design of the

civil works, four weeks after the commencement of the consultant services, and prior to the finalization of the employer’s requirements to ensure a high quality and up-to-date bidding document.

Figure 4. Workers with Safety Gear in a Well-supported Trench.

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charge of the detailed design review. The report was provided to UWSCG in May 2019, which is more than five months after the commencement of the consultant services.22 45. Although the observation does not pose an integrity risk to the project, the defects in the detailed design if not promptly addressed, may lead to construction delays and cost overruns. OAI further recommends the supervision consultant to closely monitor the contract implementation to ensure that design deficiency is timely identified and corrected. 46. UWSCG acknowledged the observation and indicated that the recommendation will be implemented in future contracts. C. Other Matters 47. In the 2016 PPRR, OAI noted an inclusion of provisional sums in determining lowest evaluated bidder. However, inclusion or exclusion of provisional sums and/or contingencies, if consistently applied on all bidders and in the absence of mathematical errors, would not change the evaluation outcome if contract award is based on the lowest evaluated substantially responsive bid.  48. During the follow-up review, OAI advised UWSCG to ensure that bidding documents correctly differentiate between provisional sums and contingencies. A provisional sum is a nominal and non-competitive cost item to cover works to be completed, goods to be supplied, and services to be provided, for which the exact costs cannot yet be determined. Provisional sums may be subject to a charge by the main contractor to cover overhead and profit (in line with the appropriate clauses in the contract’s general and particular conditions). Contingency, or a provision for contingencies, is a percentage of the contract value to cover physical and cost uncertainties, including inflation and foreign exchange fluctuations. Contingencies are added to the base price as a competitive cost item. 49. Nevertheless, UWSCG is advised to ensure that in determining the lowest evaluated bidder, provisional sums are excluded in the evaluation to comply with para. 34.2(a) of the Instruction to Bidders and ADB’s Guide on Bid Evaluation. 50. If UWSCG considers value for money in future bids, where life-cycle costs such as operating expenses are evaluated in addition to the bidders’ qualifications, past performance, and technical conformance, the determination of the winning bid should include an assessment of the balance between the bid’s cost and quality. In this case, contingencies should be included, and provisional sums should be excluded in the financial evaluation.

51. UWSCG acknowledged the observation and indicated that they would be mindful of this are in future contracts.

22 Item 13 of Section E of contract EEE requires the supervision consultant to provide critical review of the detailed

design for CCC.

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III. ACKNOWLEDGEMENTS 52. OAI acknowledges that UWSCG and GRM have implemented most of the PPRR recommendations and are working towards full implementation of all recommendations. OAI values the cooperation and responsiveness of UWSCG, the supervision consultants and GRM throughout the follow-up review. OAI remains available for consultation on any matter in this report.