Nicaragua - Second Managua Water Supply Project

RtS TRI CTED Report No. PU-82a Tiis report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE SECOND MANAGUA WATER SUPPLY PROJECT NICARAGUA February 9, 1972 Public Utilities Projects Department  CURRENCY EQUIVALENTS Currency Unit - Cordoba (C$) US$1.00 - C$7.00 C$1.00 - US$0.14 C$l million - US$142,900 ABBIEVIATIONS AND MEASURFS in inch a 2.54 centimeters km = kilometer a 0.621 miles M gal * million gallons - 3.785 cubic meters Mgd - million gallons per day - 0.044 cubic meters per second ABBREVIATIONS AND ACRONYMS Empresa - Empresa Aguadora de Managua IsXACAL - Departamento Nacional de Acueducto y Alcantarillado FISCAL YEAR January 1 - December 31  NICARAGUA EMPRESA AGUADORA DE MANAGUA SECOND MANAGUA WATER SUPPLY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ....... ........................ i I. INTRODUCTION ............ .............................. 1 II. THE ECONOMY ............ ............................... 2 III. THE SECTOR ........................... 2 General ........................... 2 The Empresa ........................... 3 Independent Systems .................. 5 DENACAL ........................... 5 Municipal Supplies .................. 6 IV. THE PROJECT ........................... 6 Managua's Water Supply Program .............. 6 Description of the Project ....................... 7 Cost Estimates .......................... 8 Amount of Proposed Loan .......................... 9 Procurement ........................... 9 Disbursement ..................................... 9 Project Supervision .............. ................ 10 V. JUSTIFICATION ......................................... 10 Investment Objectives and Demand Forecast ........ 10 Least-Cost Solution ...... ........................ 11 Internal Financial Rate of Return . ............... 11 Environmental Aspects . . 11 VI. THE BORROWER . . .11 Organization ...11 Staff ...12 Billing and Collecting .. .13 Accounting and Inventories . . .13 Auditing .. 13 Management Consultants ........... ... 13 VII. FINANCES.... 14 Financing Plan ...14 Tariffs ...15 Future Finances ...16 VIII. AGREEMENTS REACHED AND RECOMMENDATIONS . ..... 17 This report is based on the findings of Messrs. Arthur Bruestle and Rene Costa, who visited Nicaragua in February and May 1971.  I LI a  LIST OF ANNEXES Annex I Percentage of Urban Population Served by Water Supply and Sewerage Systems - Nicaragua and Neighboring Countries 2 Water Supply and Sewerage Sector Organization Chart 3 Water Supply Capacity, Production and Sales 4 Project Description 5 Annual Investment and Loan Disbursement Schedule 6 Cumulative Quarterly Disbursements 7 Construction Activity Schedule 8 Total Population and Population Served by Empresa Aguadora de Managua 9 Internal Financial Rate of Return 10 Empresa Aguadora de Managua Organization Chart 11 Balance Sheets 12 Income Statements 13 Cash Flow Statements 14 Comments on Past Financial Statements 15 Financial Assumptions 16 Water Tariffs Map. - Empresa Aguadora de Managua - Existing Water System and Proposed Improvements  i I S  APPRAISAL OF SECOND MANAGUA WATER SUPPLY PROJECT NICALAGUA SUMMARY AND CONCLUSIONS i. This report covers the appraisal of a second water supply proja.ct to be undertaken by the Empresa Aguadora de Managua, an autonomous entity of the Nicaraguan Government which supplies water to Managua, the capital of Nicaragua. The Project is the second stage of a long-term program, started in 1963, to expand the Empresa's water supply system. A Bank loan of US$6.9 million equivalent is proposed. The Empresa was the beneficiary of Credit 26-NI for US$3 million, which helped finance the US$6 million first stage (1963-66) of this program. That stage was complated on sched- ule and within the cost estimate, and the Empresa's overall performance under the credit was satisfactory. ii. Spurred by a population growth rate of 6%, which is almost double that of the country as a whole, Managua's water requirements are ranidly reaching the capacity of the present system. The quality of service will soon deteriorate unless the system is expanded. The Project cortaists of the least cost facilities required to meet the city's needs for water over the next decade. iii. The Project would open a new well field east of the city; increase booster pumping capacity at the present two sources of water for the system; expand transmission, distribution and storage capacity; and replace the ad- ministration building, which is inadequate, with a new one. Construction and engineering work is estimated to cost US$10 million (C$70 million) and interest during construction US$0.9 million (C$6.0 million). The proposed loan would cover the full foreign exchange cost, or 69%, of construction and engineering work. The balance of the funds required would come from the Empresa's internal cash generation. iv. All Project components would be subject to international com- petitive bidding. All the civil works contracts are expected to be won by Nicaraguan firms and all equipment supply contracts by foreign firms. V. The Empresa would be the Borrower. Acquired by the Government in 1932, it is a well-managed public enterp*ise under the jurisdiction of the Ministry of Public Works. It generates its own funds, prepares its budget and owns its assets. vi. The Empresa's financial position is expected to remain sound during and after the Project. Even at their ebb, in 1975, cash assets  - ii - would exceed C$7 million (US$1 million), and the rate of return would be about 5%. vii. The internal financial rate of return on the Project would be about 11%. viii. With the Agreements reached during negotiations noted in Section VIII, the Project is suitable for a Bank loan to the E-presa, guaranteed by the Republic of Nicaragua of US$6.9 million equivalent for a term of 24 years, including a 3-1/2 year grace period.  APPRAISAL OF SECOND MANAGUA WATER SUPPLY PROJECT NICARAGUA I. INTRODUCTION 1.01 The Government of Nicaragua has requested a Bank loan to help finance the second stage of the expansion program of the Empresa Aguadora de Managua, an autonomous governmental entity responsible for 3upplying water to Managua, the capital and premier city of Nicaragua. A Bank loan of US$6.9 million to the Empresa, and guaranteed by the Republic of Nicaragua, is proposed. 1.02 This would be the second Bank group project with the Empresa. IDA Credit 26-NI of 1963 for US$3 million (C$21 million), re-lent by the Government to the Empresa with repayment over 20 years at 6% interest, helped finance the US$6 million (C$41 million) first-stage water supply project (Appraisal Report No. TO-333). That project, completed success- fully in 1966, enabled the Empresa to double the number of people it served. Most of the institutional and financial objectives sought by IDA, particularly improvement of the financial condition through a tariff increase, were attained. The IDA Credit was supplemented by a capital con- tribution of C$9 million from the Government, and in 1966, the Government made a further loan of C$5.6 million for extension of the distribution system and for service reservoirs. 1.03 The Project would open a new well field, increase pumping capac- ity at the Empresa's existing sources of water supply, expand transmission, distribution and storage capacity, and construct a new administration build- ing. Its cost is estimated at C$70 million (US$10 million). All of the foreign exchange requirements, amounting to C$48.3 million (US$6.9 million), would be covered by the proposed loan. Interest during construction on the proposed loan, and the balance of other funds required for the Project, would be financed by the Empresa out of revenues. 1.04 The Project was planned by Hazen and Sawyer, the U.S. consulting firm that designed the first-stage project, in joint venture with J. Agustin Chan of Managua. This appraisal is based on the consultants' feasibility study and on the findings of a Bank mission composed of Messrs. A. Bruestle and R. Costa, who visited Nicaragua in Felruary and K.Iy 1971.  - 2 - II. THE ECONOMY 2.01 Nicaragua, with an area of about 130,000 km2, is the largest of the Central American countries. Its population of two million is grow- ing at 3.6% a year and is shifting from rural to urban areas; 45% of the people now live in towns and cities, compared with 36% in 1950. The focal point of this population movement is Managua, whose annual growth rate is 6%. Managua now has 390,000 inhabitants -- six times more than the next largest city, Leon. Adequate land, labor and public services, and good highway, rail and air transport facilities in Managua provide a suitable environment for continued expansion of its commerce and industry as well as its population. 2.02 Nicaragua's average income per capita is US$400 equivalent a year, but income distribution is very uneven. Economic growth and investment in the public sector are affected by the fluctuating market for the country's main exports -- cotton and coffee. In the past little attention was given by government to public investment planning, however a plan for 1972-76 is now under preparation. Its primary objective is to diversify the economy by encouraging the development of new activities which have good export potentials. Public investment at a rate of 6% to 7% of GDP is planned, compared with 4% in the late 1960s. III. THE SECTOR General 3.01 The Pan-American Health Organization reported that about 87% of Nicaragua's urban and 6% of its rural population were served by piped water at the end of 1969; of the urban population, 43% had house connections for water and 32% were served by sewerage. Two of the Alliance for Progress goals, as set out in the 1961 Charter of Punta del Este, are to provide potable water supply and sewage disposal for at least 70% of the urban population in Latin America; thus Nicaragua has succeeded in meeting the goal for water supply but not for sewerage (see Annex 1 for a regional comparison). 3.02 The principal entities in the sector are the Empresa Aguadora de Managua, the capital city's main supplier of potable water; the Departamento Nacional de Acueducto y Alcantarillado (DENACAL), a national agency operating water and sewerage systems throughout the country and the sewerage system in Managua; and various municipal governments. Three ministries have authority over these entities (see Annex 2): the Ministry of Public Works, with de lure authority over the Empresa; the Ministry of Health, which administers DENACAL; and the Ministry of the Interior, which has administrative authority over  -3- municipalities. The Empresa, with its financial and administrative independ- ence and high quality performance, is the exemplary institution in the sector. DENACAL plans and runs its system moderately well, and has received Inter- American Development Bank financial support for some of its programs. The water supply systems operated by municipal governments, however, are gener- ally poor, and are particularly deficient in the financial aspects of their operations. * 3.03 The prospects for continued progress in the water supply and sewerage sector in Nicaragua, under the leadership of the Empresa and DENACAL, are good. The sector has a sound institutional base, modern utility practices are understood and generally implemented, and manage- rial and technical talent is available. DENACAL plans to press &iead with further programs to acquire and operate the weak municipal 3ystems not now under its control. The Empresa 3.04 As the main supplier of water to Managua, the Empresa serves about 280,000 (72%) of the city's population with its fully metered system (34,000 connections) and provides water to 43 concessionaire-opzratzd community standpipes serving an estimated 5,000 to 10,000 people. Independent systems of governmental and private entities serve another 20,000 to 30,000 people with house connections and the balance of the population (about 80,000 peo- ple) with private wells and community standpipes. Large industrial users in Managua generally have their own groundwater sources. 3.05 The Empresa's last major expansion (financed by Credit 26-NI) was in 1963-66, when it increased its installations for pumping, transmission and distribution and more than doubled the quantity of water it could de- liver. As a result of this expansion and subsequent routine works, the number of people the Empresa served increased by 115% (about 150,000), and the percentage of Managua's population served increased from 52% in 1963 to the present 72%. The Empresa now produces 20 Mgd on average and 23 Mgd at peak. 3.06 About 95% of the Empresa's water comes from Laguna Asososca, a volcanic crater at the western edge of the city, and the remaining 5% from a well at Altamira on the Masaya highway just south of the city. The lake, which is fed mainly by underground water, has an estimated long-term dependable yield of 20 Mgd. Its water is chemically and bacteriologically excellent, and chlorination is the only treatment needed and provided. It is necessary, however, to take measures to protect the water against possi- ble contamination; this is discussed in paragraph 3.1C. The Altamira well yields 0.5 Mgd of high-quality water and is the first of a series of wells to be installed at that site; a second well is under construction. 3.07 Water is drawn from Laguna Asososca by a pumping station in the crater, which supplies water to the low-service zone and to two high- service pumping stations on the crater's rim. The extent of the service  zones is established by topography. The low-service zone serves the down- town and industrial areas, while the other zones supply primarily residen- tial areas. The total storage capacity of the distribution system is 11 Mgal; peak demand is met by this storage and by pumping from Laguna Asososca. There are eight booster pumping stations at various points in the system to serve outlying and high areas. 3.08 Operation of the Empresa's water system is good. Pressure is continuously adequate, water quality good and systematically monitored, chlorine residual maintained, and equipment adequately though not routinely maintained. Water unaccounted for has decreased from 42% in 1963 to 19%, which is a reasonable level. The Empresa recently started a preventive maintenance program for meters and will expand it to take care of other equipment. 3.09 The community standpipes that are supplied with the Empresa's water serve about 2% of Managua's population in illegally-settled areas and other sections of Managua where the residents, usually for economic reasons, do not connect to the water system. The standpipes, which serve about 200 capita each, are the property of 34 concessionaires, and are usually located adjacent to the concessionaire's domicile. The conces- sionaire purchases water from the Empresa at C$2.00 per 1,000 gallons and sells it for C$5.00. The Empresa has found that this arrangement is cheaper and administratively better than if it were to operate the standpipes itself. Although the standpipe consumer pays a higher price per unit of water than the connected customer, his total monthly payments are lower because he con- sumes less and avoids the minimum and connection charges. At the time of ap- praisal the sanitary quality of the standpipes was found to be poor and the water dispensed from them subject to contamination. The Empresa advised the Bank that it would upgrade the standpipes in accordance with a standard de- sign which would reduce the chances of contamination. 3.10 Some industries between Laguna Asososca and Lake Managua discharge their wastes, after partial treatment, into ditches that flow into Lake Ma- nagua; these discharges seep into the soil en route and under certain con- ditions could contaminate Laguna Asososca. The consultants have recommended that a sewer be built to carry the discharges to Lake Managua, which could receive them without adverse effect. The Government and the Empresa agreed during negotiations that the consultants' recommendations, or some other suitable action to safeguard Laguna AsososCa from contamination, would be implemented and made effective by March 31, 1972 or such other date as may be agreed with the Bank. 3.11 The quality of the Empresa's water sources could also be compro- mised by the infiltration of brackish water from Lake Managua if the water table were excessively lowered. Systematic monitoring from observation wells between Lake Managua and the Empresa' s sources of groundwater would give forewarning of any over-pumping, and the Empresa agreed during nego- tiations to adopt a satisfactory groundwater monitoring program.  -5- Independent Systems 3.12 About 6% of Managua's population is served by independent water systems owned and operated by private and civil entities, DENACAL and the Government Housing Bank. All of these systems have groundwater supplies which vary from good to poor quality: the physical facilities likewise vary widely in quality. Tariffs are generally lower than those of the Empresa because they are designed to cover operating expenses only. As its own system expands the Empresa will acquire these systems and serve them with its water. Acquisition would be without cost to the Empresa in accordance with established practice. All but two of the system's water sources would be abandoned, for reason of efficiency of operations. The Empresa does not expect difficulty in raising tariffs to its own levels since the quality of service would be improved. DENACAL 3.13 DENACAL is responsible for supplying water and aewerage to urban and rural communities containing about half of the country's population; it does this through local semi-autonomous entities that it owns and oper- ates. Its water systems serve 120 communities with & population totaling half a million; there are 33,000 connections, 65% of them metered. DENACAL also administers Managua's sewerage, which serves 250,000 people, or 65% of the city's population. Sewers are mainly in the central part of the city, and discharge untreated wastes by gravity into Lake Managua via many short outfalls. Where there are no sewers, septic tanks or natural land drainage serve in their place. 3.14 DENACAL has 30 engineers and 420 other employees, a reasonable number considering its wide-spread operation. Improvements recommended in a management study, sponsored by the Pan-American Health Organization, have recently been introduced by DENACAL with good results; the organiza- tion has been restructured and some management systems have been computer- ized. DENACAL's financial position is fairly good; at the end of 1970, its total fixed assets were valued at C$65 million, its cash holdings were C$0.7 million, and its current ratio was 2.4. DENACAL's tariffs vary by community, and are generally set to cover operating expenses and debt obli- gations or depreciation. 3.15 DENACAL has just completed a major program (for rural water sup- plies) and has two in progress, each financed in part by the Inter-American Development Bank (IDB): (i) a C$23 million rural water supply improvement project for 79 small communities with populations of 300 to 3,000; (ii) a C$95 million country-wide water supply and sewerage project for 64 communities and 10 cities, to supply piped water to an additional 350,000 people, which is programmed for 1972-76; and  - 6 - (iii) a C$55 million expansion of Managua's sewerage system, started in early 1972, to relieve insanitary conditions in residential areas; the project includes collectors, interceptors, three pumping stations and sewerage treat- ment. The mode of treatment is under study; a previous study concluded that a 1,000-meter outfall in Lake Mana- gua could discharge screened sewage without adverse ef- fects. The sewerage system proposed is in balance with the existing and proposed water system, and is scheduled to be substantially completed by end 1974. _Mnicipal Supplies 3.16 Approximately a third of Nicaragua's two million people live in municipalities which are responsible, under the authority of the Ministry of Interior, for their own water supply. The important cities of Granada, Jinotega, Esteli and Rivas have such supplies. The services provided by the municipalities are generally poor and there is need to improve and expand them. The Government has expectations that DENACAL will take over and improve them in the future, but there is no program to do so other than the second project mentioned in paragraph 3.15. IV. THE PROJECT Managua's Water Supply Program 4.01 The Project is the second stage of a lona-range program, started in 1963, to augment and improve the Empresa's water supply system. It would be carried out during 1972-74, and have the purpose of (a) increasing the quantity of water available from an average of 21 Mgd to 35 Mgd, (b) approx- imately doubling the capacity of the transmission network and improving its operational characteristics by installing additional pumping capacity and service reservoirs, and (c) expanding the distribution network by about 11% to enlarge the area served. The additional water would come mainly from a new well field at Las Mercedes to the east of Managua, where more wells could be added in the late 1970s when the need arose. The third stage of the long-range program - a new well field 27 km east of the city - is plan- ned for the early 1980s. Annex 3 is a graph showing the Empresa's output and sales of water, past and forecast. 4.02 Managua's groundwater potential was evaluated in 1964 under the first-stage project. It was re-evaluated in 1970-71, employing pumping and water-level data for Laguna Asososca collected since 1964, and data from well tests conducted at Las Mercedes and Altamira. This latest study concluded that well fields at Las Mercedes and Altamira could yield 26 and 5 Mgd, re- spectively. It also concluded that Laguna Asososca could be depended upon to yeild only 20 Mgd, instead of the 32 Mgd previously estimated; hence, Lake Asososca is now almost fully exploited, and the 1964 schedule for using other sources of groundwater has had to be advanced by several years.  -7- Description of the Project 4.03 The Project would: (i) Open a new 15 Mgd well field at Las Mercedes, about 7 km east of the city's center; including the construction of 6 wells, and low and high-service booster pumping stations of 28 Mgd and 12 Mgd capacity, respectively. (ii) Increase the capacity of the Laguna Asososca low service pumping station from 40 to 48 Mgd. (iii) Increase the capacities of the 10.5 Mgd high and the 4.0 Mgd upper-high booster pumping stations at Laguna Asososca to 15.5 and 6.6 Mgd, respectively. (iv) Construct an additional well at the recently opened Altamira well field (see paragraph 3.06), and a well at the San Cristobal low service reservoirs. (v) Construct 58 km of transmission main (12 to 36 in) and 42 km of distribution pipelines (2 to 8 in). (vi) Construct two reinforced concrete service reservoirs (each 0.5 M gal). (vii) Install 9,400 service connections. (viii) Construct a new administration building to replace the present inadequate facilities. (ix) Purchase mobile construction equipment for use in routine water system maintenance and expansion. (x) Provide the services of engineering consultants for the final design and construction supervision of the Project and management consultants for the improvement of manage- ment systems. Annex 4 gives a detailed description of the Project and cost estimates. 4.04 All the water delivered has to be pumped to the three pressure zones of the distribution system, known as the low-service, high-service and upper-high-service zones. The high- end upper-high-service zone pump- ing stations have been designed to meet the demands of peak days and would operate at full design output with one pump on standby. Peak hourly demands and fire flows would be met by drawing down the service reservoirs. Since Laguna Asososca is a convenient reservoir for short-term demands as well as a source of water, the low-service pumping station which draws water from the lake is designed for maximum hourly demand plus fire flows, and has  - 8 - two standby pumps. Chlorination, the only treatment required, would be provided at each of the four sources. Cost Estimates 4.05 The estimated costs of the Project are detailed in Annex 4 and summarized below. The investment schedule is shown in Annex 5. Local Foreign Total Local Foreign Total - C$ Million-- --