Lesotho - Water Supply Project

Document of The World Bank FOR OFFICIAtL 1'SE ONLY Report No. 2230-LSO LESOTHO WATER SUPPLY PROJECT STAFF APPRAISAL REPORT March 1, 1979 Energy & Water Supply Division Eastern Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Rand (R) US$ = Rand 0.87 1 Rand US$ 1.15 ABBREVIATIONS AND ACRONYMS AfDF = African Development Fund Binnie = Binnie and Partners, U.K. FRG = Federal Republic of Germany Government (GOL) = Government of Lesotho HMSB = Hydrological and Metereological Services Branch, Ministry of Public Works (MOW) KfW = Kreditanstalt fur Wiederaufbau MHSW = Ministry of Health and Social Welfare MGMT = Ministry of Geology, Mines and Tourism MF = Ministry of Finance, Planning and Statistics MI = Ministry of Interior MW = Ministry of Works NUL = National University of Lesotho ODM = Ministry of Overseas Development, U.K. RSA = Republic of South Africa UK = United Kingdom of Great Britain and Northern Ireland USAID = United States Agency for International Development VWS = Village Water Supply Branch, Ministry of Rural Development (MRD) WHO = World Health Organization WSB = Water & Sewerage Branch, MW WEIGHTS, LENGTH AND MEASURES 1 Acre-foot (ac. ft.) = 1233.5 cubic meters 1 Imperial Gallon (Ig) = 1.2 US gallons = 4.55 liters 1 cubic meter (m ) = 220 Ig or 264.2 US gallons 1 million Imperial 3 gallons per day (Imgd) = 4,546 m Aday I liter per second (1/sec) = 0.0864 m /day (19,005 Ig/day or 22,824 US gallons/day 1 meter (m) = 3.28 feet (39.37 inches) 1 millimeter (mm) = 0.039 inches 1 kilometer (km) 2 = 0.62 miles 1 square kilometer (km ) = 0.386 square miles (or 247 acres) FISCAL YEAR April 1 - March 31  LESOTHO FOR OFFICIAL USE ONLY WATER SUPPLY PROJECT TABLE OF CONTENTS Page No. I. THE WATER SUPPLY AND WASTE DISPOSAL SECTOR ................ 1 Country Background . * * * * ..................... .... . ...... . 1 Water Resources . .... ....................... . . . **..... 2 Sector Organization and Development .................. 2 Present Service Levels ..... .......................... 4 Service Level Goals ................................... 6 Implications of Meeting Sector Goals . ................ 7 Possible Constraints ..... ......................... 8 II. POPULATION, SECTOR SERVICES AND DEMAND IN PROJECT AREA .... 8 Location ........................................................... 8 Regional Development Prospects .... ................... 9 Sector Agencies ... ......................... .......... 9 Existing Water Supply and Waste Disposal Systems ..... 9 Population Served and Standards of Service ............ 11 Population Projections and Demands for Service ....... 12 Project Rationale ... ................................... 14 III. THE PROJECT ....................... ........................ 15 Genesis ............................................................ 15 Objectives ....... ........................ ............ 16 Technological Alternatives and Service Standards ..... 16 Description of Project Components .................... 17 Cost Estimates ....................................... 18 Project Financing .................................... 20 Implementation ....................................... 20 Water Resource Aspects ............................... 21 Environmental and Health Aspects ..................... 21 Procurement .......................................... 22 Disbursements ............. .. .............. ........... 23 IV. ECONOMIC AND SOCIAL ANALYSIS ............................. 23 Project Benefits .............. ....................... 23 Least Cost Solution ............... .. ................. 24 Rate of Return and Pricing Considerations .... ........ 24 Impact on Poverty Group ......... ..................... 25 Project Risks ...... .............. .................... 25 This report was prepared by Messrs. E. LaBahn and E. Greenwood and is based upon information obtained during a mission to Lesotho in May 1978. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Continued) Page No. V. THE BORROWER AND THE PROJECT IMPLEMENTING AGENCY .......... 25 Lending Arrangements ...... . . . .. ........ ...... .. 25 Implementing Agency ............ ..................... 25 Future Organizational Plans ...................... 26 Management and Personnel ..... *........ 26 Management Systems .. .O. ......... ...... ............... . 27 Billings and Collections ............................. 28 Audit ................ ................................... 28 Manpower Development and Training ........4 .......... 28 VI. FINANCIAL ANALYSIS ......... .. . . . .. . ............. .......... ...... 29 Past Performance and Present Financial Situation ..... 29 Revenues ...................................... ......... ....... 30 Financing Plan ................ ...... ............ . 31 Monitoring and Evaluation Criteria ................... 33 VII. AGREEKENTS REACHED AND RECOMMENDATION ..................... 34 LIST OF ANNEXES ANNEX Description 1 Population Projections 2 Future Water Demands 3 Description of Proposed Construction Components 4 Construction Cost Estimates 5 Project Implementation Schedule 6 Schedule of Disbursements from IDA Credit 7 Organization Chart of Ministry of Works 8 Income Statement Projections 9 Cash Flow Projections 10 Balance Sheet Projections 11 Notes to Financial Projections 12 Selected Documents and Data Available in Project File MAP IBRD 13825-Lesotho Water Supply Project  LESOTHO WATER SUPPLY PROJECT I. THE WATER SUPPLY AND WASTE DISPOSAL SECTOR Country Background 1.01 Lesotho, with an area of 30,344 km (11,716 sq. mi.), is situated close to the southerly extremity of Africa and is entirely surrounded by the Republic of South Africa (RSA). The country consists mainly of the highest part of the great plateau of southern Africa and nearly 75% of the country ranges from 1,800 to 3,300 m (6,000 to 11,000 ft) in ground surface elevation. Soil cover is generally shallow with little vegetative growth and severe soil erosion is widespread. Lowlands situated mainly in the west and southwest are associated with three principal southwest - trending rivers, namely the Caledon, the Makhaleng, and the Senqu (or Orange). 1.02 The climate is moderate due to Lesotho's high elevation, despite the subtropical latitude (about 30 South). Rainfall varies widely, both as to location and time. Over 75% of the land area has more than 635 mm (25 inches) of average annual rainfall with the highest totals occurring in the highlands. Mean daily temperatures are rather low, ranging from 70 C during winter to 21 C during summer in the lowlands and ranging from -120 to 15 C in the highlands. 1.03 Other than water, Lesotho has scanty natural resources, and the economy depends mainly upon tourism, subsistence agriculture, and upon remittances from migrant Basutos employed in RSA. Little industrial develop- ment has occurred to date although Government is attempting to encourage this through the introduction of industrial estates. 1.04 The population of Lesotho was estimated at 1.2 million in 1975 and increasing at a rate of 2.2% per year. The urban population of Maseru comprises about 3% (about 40,000 persons) of the total and has been growing at about 7% per year. The population of small towns has been growing at a lesser rate, generally ranging from 2 to 5% per year. 1.05 The general health of the Basuto is poor and water-related disease is a significant factor in this. Principal water-related diseases reported are: diarrhoeal disease, typhoid, hepatitis, polio and infectious skin and eye-diseases. The incidence of diarrhoeal disease and typhoid tends to peak in Lesotho during the rainy season. Recent studies in rural areas have indicated that there are no perceived differences in the prevalence, epide- miology and seasonality of water-related disease in villages with and without improved water supplies, indicating that hygiene at personal and household levels is little understood or practiced and implying a need for intensified health education.  Water Resources 1.06 Lesotho's water resources are substantial although availability is constrained significantly by location and seassn. The total annual resource has been estimated to be 4,500 million m (3.6 million ac. ft.) of which surface water represents over 99%. However, due to more extended durations of flows and generally better and more uniform water quality, springs and boreholes--particularly the former--are used widely throughout Lesotho to meet domestic water demands in rural areas. Due to steep slopes and little alluvium, runoff tends to be rapid and carryover storage fre- quently is necessary for supplies dependent upon surface sources. Natural water quality of all supplies is good relative to chemical characteristics. Supplies from boreholes and protected springs generally have good overall quality throughout the year. Due to high turbidity, suspended solids concen- trations, and fecal pollution, surface sources normally are used only for urban supplies involving relatively large quantities, and for which water treatment is provided. 1.07 Although records obtained from 68 meteorological stations and 38 stream gaging stations appear to be satisfactory, geographical coverage of the latter is only fair and additional stations need to be established. Informa- tion relative to ground water currently is limited but efforts to improve this are underway. 1.08 Little use (less than 1%) is made of the total water resource and there is little likelihood that this will change significantly due to the country's limited potential for agriculture, industry and energy consumption. With this is mind, GOL is cooperating with RSA in investigations of the feasibility of exporting a portion of Lesotho's surplus surface water supplies to RSA. 1/ In recognition of this possibility, GOL has authorized studies of internal water needs and recently passed the Water Resources Act of 1978. The Act, which recognizes domestic use as paramount, empowers the responsible Minister to prepare regulations for implementation and enforcement. Sector Organization and Development 1.09 Five different ministries are active in the sector. Two of these, the Ministry of Works (MW) and the Ministry of Rural Development (MRD), have principal roles while the remainder mainly are supportive. As part of an effort to reorganize the water supply and sewerage sector, GOL recently decided to create a new ministry 2/ in which water supply activities would be concentrated, but administrative arrangements regarding the transfer of activities to the new Ministry have yet to be worked out. 1/ This cooperation is a follow up to earlier discussions of a possible smaller-scale scheme to divert surplus water from the Malibamatso River for sale to RSA; 2/ The Ministry of Water, Power and National Resources.  - 3 - 1.10 MW participates through its Water and Sewerage Branch (WSB) and its Hydrological and Meteorological Services Branch (HMSB). WSB provides water service in nine district headquarters towns (including the capital, Maseru) and a newly developed town located in central Lesotho, in addition to sewer service in two of these towns. WSB will manage water systems in four other towns 1/ as soon as facilities are provided and, similarly, WSB intends to take over the existing water system in the town of Roma from the National University of Lesotho (NUL). WSB also operates tanker trucks to service septic tanks located in Maseru and in certain of the district headquarters towns. Additional description of WSB, which would be the executing agency under the Project, is given in Chapter V. HMSB develops and maintains hydrologic and meteorologic networks, and maintains supporting records. MRD is responsible for implementing and operating water supply schemes in rural areas of Lesotho through its Village Water Supply (VWS) section. 1.11 Ministry of Interior (MI) participation in the sector is limited to Maseru and the district headquarters towns where it is responsible for removal and disposal of night soil from bucket latrines. The Ministry of Geology, Mines and Tourism (MGMT) carries out ground water investigations and surveys Lesotho's ground water resources. The Ministry of Health and Social Welfare (MHSW) operates a public health laboratory and administers an external assistance grant to improve latrines and water supplies at 600 primary schools. Other support functions provided by MHSW include mainly health education, the maintenance of health statistics, and the monitoring of solid waste disposal. A summary of principal organizational responsibilities in the sector is shown below. Sanitation Water Water Supply Night Soil Environmental Responsible Agency Resources Urban Rural Sewers Collection Health MGMT X MHSW X MI X MRD (VWS) x MW HMSB X WSB X X 1/ Design of water facilities for these towns (Mapoteng, Maputsoe, Morija and Peka), which are presently without public water supply or wastewater systems, currently is underway. These towns are included in the ongoing six-town water supply project in which external assistance is being provided by the Federal Republic of Germany (FRG).  -4- 1.12 All new projects are processed through the Planning and Development Office of the Mlinistry of Finance, Planning and Statistics (MF). Projects are prepared by consultants and financed mainly by bilateral and multilateral assistance agencies usually on grant terms. For population centers, design of proposed projects is by consultants, construction is mainly by contract with some minor works by force account, and maintenance and operation is by WSB. Accounting and personnel administration are by staff seconded to WSB from MF and from the Administration branch of MIW (para. 5.02). 1.13 In rural areas VWS is responsible for planning and design. Grant funds are used for financing capital costs, while local input consists of self-help construction, maintenance and operation. Recent proposals suggest strengthening VWS to also provide construction and major maintenance while local input would be limited mainly to operation and minor maintenance. GOL would absorb recurring expense while donor funds would continue to be sought for financing capital works. 1.14 There is a need for WSB to improve its liaison with other agencies active in the sector. In order to improve daily operations and planning for future development, it is particularly important that WSB develop stronger working relationships with HMSB, MHSW and MI. Moreover, WSB effectiveness is hampered by a lack of autonomy and authority in accounting and personnel matters. GOL recognizes the need for more autonomy but, based on experience, considers it prudent to proceed slowly. In May 1978, as a first step, the Minister of Finance issued directions covering WSB's operations known as the "Water and Sewerage Service Directions". These directions would give WSB a measure of autonomy in its operations and require commercial accounts to be prepared. WSB's operations would be transferred to the new Ministry of Water, Power and Natural Resources (para. 1.09), as soon as administrative arrange- ments can be made, but its scope of operations would remain unchanged. Present Service Levels 1.15 Close to 100% of the urban population and a substantially lower percentage 1/ of the rural population reportedly had reasonable access to piped water supplies in 1975. However, the former figure reflects the central core of Maseru, which is the only town which can reasonably be classified as urban. Remaining towns, none of which has a population exceeding 6,000, can be classified as rural centers with low-density, rural- type development. In Maseru and in the eight district headquarters towns, treated water is delivered to domestic customers through inside taps, outside 1/ Accurate figures are unavailable although the Second Five Year Development Plan reports that 16% of the rural population was served in 1975 by 300 village water schemes. Another estimate is given for the same date by Feachem et al in "Water, Health and Development, An Interdisciplinary Evaluation" published in 1978 which states that "... at the most, 12% of the (rural) population have access to a protected water supply of some description ...  - 5 - taps, and public standposts. An early 1978 field survey of the Maseru peri- urban area indicated that, of population resident in about 9,900 dwelling units, virtually none had water service from inside taps; 9% were served from outside taps; 15% from public standposts; 52% depend upon springs or private boreholes and 29% purchase water from private supplies or other householders. Rural supplies, which provide little, if any, control of water quality, are available mainly at the source or from public standposts. Although a break- down of population by service level for urban areas is unavailable, the following table indicates levels of service, in terms of connections and consumption, for WSB - served areas. Connections ennual Consumption Service Level Number % of Total m x 000 % of Total For Central Maseru, 1976 Private connection 1/ 2,800 99 1,113 95 Public standpost 27 1 63 5 Total 2,827 100 1,176 100 For Eight District Headquarters Towns, 1976 Inside tap 663 42 90 35 Outside tap 795 50 53 20 Public standpost 119 8 117 45 Total 1,577 100 260 100 1/ Includes all categories of private connections for domestic, commercial, industrial and institutional usage. 1.16 In Maseru where sewer service is provided to about 50% of the population, the system currently is being modified (but not enlarged) through external assistance from the United Kingdom's Ministry of Overseas Development (ODM). The balance of the urban population generally is served by bucket latrines or pit privies although, in some instances, conservancy tanks or septic tanks are used. About 50% of the population of Maseru's peri-urban area are served through pit and bucket latrines while the balance have no sanitation facilities whatsoever.  1.17 WSB supplies generally are metered and a flat rate tariff of RI per thousand Ig (US$0.96 per thousand US gal), which covers only a portion of the total cost of service, is levied. GOL subsidizes remaining costs. Customers with private connections are charged whereas users of water obtained from public standposts are not. All payments for water service are collected at WSB's head office and district revenue offices and paid into GOL's Consoli- dated Revenue Fund. Piped water supplies in rural areas are not metered nor are charges levied. However, payment of a portion of the capital cost sometimes is made by the user to the extent that the local area contributes to the original cost of construction (para. 1.13). The remainder of costs are met by GOL. Charges are levied for sanitation services in urban areas but the charges do not recover all costs. Those customers connected to sewers are charged directly by WSB based upon the number of water-using facilities contained in the building being served. Customers receiving other forms of sanitation service are billed by MI. All payments for sewer and/or sanita- tion service are received by the Treasury. Service Level Goals 1.18 GOL's sector objectives and development strategy, as reflected by the first and second five-year development plans (1970/71 - 1974/75 and 1975/76 - 1979/80, respectively), include surveying the country's water resources and projecting future water needs. Although there is no stated objective as to levels of service or percentage of population to be served by target dates, the plans provide for the construction of water supply facili- ties to serve specific population centers and given numbers of villages during the plan periods. With respect to sewerage, except in Maseru, reticulated systems in urban areas are not considered necessary but there is provision in the development plan to improve other types of sanitary services. 1.19 Although overall sector development objectives and planning are incomplete, reasonable progress has been made. Sector objectives of the first plan generally have been achieved. However, there was an admitted underestimation of costs and of the time required to get development projects underway, which together resulted in actual capital expenditures about 25% short of the plan target. Implementation of the second plan is still in progress but it seems there will be creditable success in meeting sector objectives. These objectives include: the continuation of studies of water resources and needs; the preparation of a long-range plan for future expansion of the l4aseru water supply system and a limited expansion of that system; the completion of studies (including those concerning tariffs) and plans for water supply facilities in about a dozen towns and the beginning of construc- tion of those facilities which would be phased over the second and third plan periods; and the construction of at least 200 village water supply schemes. GOL investment in actual construction of village water supplies under the second plan would about equal those for urban water supply facilities and this allocation seems reasonable since the value of the self-help contribu- tions in rural areas is not reflected in the development plan.  1.20 For sewerage, the second plan objectives are confined to modifica- tion of the Maseru system; improved sanitation facilities in all other urban centers; and a review of the sewer tariff structure and sewerage financing. The second plan fund allocation for sewerage is about 30% of the total for the sector. 1.21 The second plan includes a sector related program for the installa- tion of water supplies and toilet facilities at primary schools. GOL expects this to serve as a demonstration for the promotion of pit latrines in rural areas. Public health, community development and other field personnel also are supposed to expand their educational programs to encourage the installa- tion and use of pit latrines. Implications of Meeting Sector Goals 1.22 The second development plan allocated about R6.6 million to the sector including funds for studies of national water resources and needs, technical assistance, and training. Although the total sector allocation for the second plan is almost four times actual sector expenditures under the first plan, it represents only about 6% of the R 111.6 million public invest- ment proposed under the second plan for all sectors. 1.23 Capital financing for the sector has not been a constraint to date and it is not expected to be one during the next several years. Considerable assistance has been provided by various external sources of financial and tech- nical aid 1/ and this is expected to continue. In particular, Kreditanstalt fur Wiederaufbau (KfW) is to finance water supply projects in six of the 13 towns to which GOL gives priority; projects for the remaining seven towns would be financed by the proposed IDA Credit. ODM is financing the Maseru sewerage program, the African Development Fund (AfDF) is assisting in the Maseru water supply development, and the United States Agency for Interna- tional Development (USAID) is expected to assist with rural water supplies. 1.24 Sector-wide information on past operating expenditures is not available in a useable form since the figures are buried in the total re- current expenditures for social infrastructure. Government recognizes that a national water supply and sewerage pricing policy, based on economic prin- ciples, needs to be developed, but this cannot be done immediately (paras. 6.04 and 6.07). Meantime, tariffs for water supply and sewerage services provided by WSB will be raised to a level adequate to cover estimated cash operating expenses and debt service. GOL's expenditures on major maintenance of rural water supply and sanitation schemes (para 1.13) will increase as sector goals for village water supplies are met. A village water supply project recently prepared for USAID financing has a significant component for strengthening maintenance and operation in recognition of the importance of this aspect. 1/ AfDF, KfW, ODM, SIDA, UNICEF, UNDP, and USAID.  -8- 1.25 The manpower situation in Lesotho is recognized by GOL to be ex- tremely serious. Projects in GOL's overall development program have been either hindered or postponed by the lack of skilled manpower and high level staff. There are many vacancies in public service posts requiring highly qualified staff and it is necessary to rely heavily on expatriate personnel and foreign consultants. At the same time, there is a severe shortage of employment opportunities for unskilled labor. 1/ GOL's second development plan includes a frank discussion of manpower problems and a statement of intent to institute a national manpower planning and development program. 1.26 The manpower situation in the water supply and sewerage sector reflects the overall problem in the country as far as skilled staff are concerned. Unless there is an accompanying effort to resolve education and training deficiencies, the investments planned for the sector will aggravate the problem. Such efforts are proposed in conjunction with the ongoing KfW-financed six towns water supply project (para. 5.13) and are being considered for the proposed USAID-financed rural water supply project. Possible Constraints 1.27 The principal constraints which delay planned sector development or reduce the expected benefits are as follows: (a) a shortage of qualified staff to plan' and administer projects and to operate and manage the water supply and wastewater systems efficiently (paras. 1.25 and 1.26); and (b) insufficient public education on health and hygiene (para. 1.05). The Project addresses the former constraints through institutional improve- ments described in paras. 5.04 and 5.06. USAID has indicated that it would be willing to accommodate public health education requirements relating to water supply in ongoing or proposed USAID projects (para. 3.22). II. POPULATION, SECTOR SERVICES AND DEMAND IN PROJECT AREA Location 2.01 The Project would benefit seven small towns: viz., Leribe, MIafeteng, Roma and Teyateyaneng in the relatively densely populated western lowlands of Lesotho; Mohale's Hoek and Quthing located in the extreme south where trans- portation by road is relatively poor; and Mokhotlong situated in the highlands in the remote easterly Mokhotlong District (see Map IBRD 13825). 1/ To help increase domestic employment opportunities and to meet other goals, Government has set up a Labor-Intensive Construction Unit under the Bank Group's Second Highway Project (Credit 619-LSO).  -9- Regional Development Prospects 2.02 Each of the Project towns is a regional population center with importance as the site of regional institutions such as hospitals, schools, missions and, except Roma, district administration centers. Roma is the site of the National University of Lesotho (NUL). Six of the towns are in the region of the country where intensive agriculture, a prime objective of the national development program, is possible and which forms the operating center of the IDA-financed Lesotho Basic Agricultural Project (Credit 795-LSO). The seventh town, Mokhotlong, is in the scenic northeast mountains, an area which also has mineral potential. Four of the towns are located on the country's few paved highways. In all cases, population growth is expected to match or exceed the national average and there is need to expand and improve basic infrastructure such as water supply. Sector Agencies 2.03 WSB presently is responsible for water service in six of the seven towns and, at such time as NUL discontinues such service, is expected to provide service in Roma as well (para. 1.10). Sewerage in the Project towns currently is limited to Roma where a system is operated by NUL to serve mainly campus facilities. GOL has indicated that, eventually, the Roma wastewater system would be transferred to WSB. 2.04 As noted previously (para. 1.14), WSB has significant problems which limit its performance and would hamper substantial expansion of WSB operations. These, and steps proposed for improvements, are described in Chapter V. Existing Water Supply and Waste Disposal Systems 2.05 Present service provided by WSB to the six district headquarters towns generally is limited to part of the areas of the administrative re- serves. 1/ Overall it covers less than 50% of the combined reserve areas although, in Teyateyaneng, the water service area extends outside the boun- dary. Populations resident in peri-urban areas must rely on springs, private sources of supply and/or skeletal village water supplies constructed by MRD. The NUL water system in Roma presently provides service mainly to the Univer- sity and to nearby institutions. 2.06 Water systems in all of the Project towns are relatively unsophis- ticated with major dependence upon filtered surface water supplies supple- mented with production from springs and/or boreholes. The basic designs are reasonable and the systems, in general, can be readily expanded. However, due to short remaining life and unsatisfactory maintenance of appurtenant pumping equipment, the majority of boreholes are no longer active and, with few 1/ Defined area reserved for public use subject to the administrative jurisdiction of the central government, through MI, and for which a formal boundary exists.  - 10 - exceptions, 1/ are not proposed for future duty. Test drilling operations conducted by the consultants indicate that boreholes are not appropriate for future construction in the Project towns. 2.07 No public sewerage exists in the Project area and water-borne waste disposal is restricted to institutions such as hospitals, missions and schools. Septic tanks are being used with limited success in five of the towns and, due to limited soil cover and low permeabilities, there is an increasing trend to provide oxidation ponds for the larger institutions, such as hospitals, with the effluent being discharged to adjacent streams. The balance of facilities consists of conservancy tanks, bucket latrines, and pit latrines generally serving individual houses or commercial buildings and normally restricted to the reserve areas. Bucket latrines are the most frequently used type of individual disposal system. A total of about 90 public toilets of this type exist in all but two of the Project towns. 2/ Bucket latrines, both private and public, are regularly serviced by MI teams with disposal accomplished outside the reserve boundaries according to cut and cover type operations. WSB is attempting to service conservancy tanks and septic tanks located in certain of the Project towns using tanker trucks based in Maseru, but this has proven to be relatively ineffective due to the combination of long travel distances, rough roads and poor vehicle maintenance. 2.08 In general, disposal of wastes presently is unsatisfactory due to poor hygienic practices 3/ and due to the responsibilities of water supply and sanitation being shared by WSB and MI which do not maintain close and continuous communication. Abattoirs, which exist in each of the towns, have inadequate provision for waste disposal. In several instances, the effluent of oxidation ponds and septic tanks is tributary to existing or proposed water intakes. Similarly, the disposal of bucket wastes and the subsequent cleaning of buckets represent a public health hazard due to proximity of these operations to the public water supply. Perhaps the most severe poten- tial problem exists at Mafeteng where surface drainage from the entire town is tributary to a reservoir which serves as the towns's principal source of water supply. Studies by the consultants indicate that this potential problem of pollution can be lived with for the short term, but continued utilization of the reservoir as the town's principal source may require some remedial drainage works and, in any case, should be accompanied by close monitoring of raw water quality. 1/ Certain of the existing boreholes at selected Project towns, after repair and/or maintenance of appurtenant equipment, are to be retained for standby service; 2/ There are no public toilets in Mokhotlong or Roma; 3/ Probably improvable through the increased availability of safe water supplies and improved public health education at community and household levels.  - 11 - Population Served and Standards of Service 2.09 No detailed information is available relative to populations served by existing water systems in the seven towns. As of March 1976, a combined population of about 26,000 persons 1/ is estimated to have been resident in the water service areas of the seven towns of which an estimated 21,000 (80%) were provided piped water service. A summary of connections and annual water consumption estimated for piped water systems in the seven towns for 1976 is shown below. As noted, the largest block of consumption was by institutions, followed by public standposts. About 70% of the connections were metered and an estimated 20 to 30% of total water production was unaccounted for. Al- though operational difficulties of these systems sometimes are encountered due to short-term interruptions in water supply and to staff constraints, 24-hour continuous service to customers normally is maintained. Annual Water Consumption Connections Estimated for 1976 % of Aiount % of Category of Service Number Total m x 100 Total Domestic Inside tap 619 36.3 76.6 14.5 Outside tap 678 39.7 42.4 8.1 Public standpost 118 6.9 115.6 21.9 Commercial 100 5.8 57.8 11.0 Institutional 188 11.0 234.6 44.5 Industrial 3 0.2 0 0 Other 1 0.1 0 0 Total 1,707 100.0 527.0 100.0 2.10 Few related socio-economic indicators exist and none of these relate specifically to the Project towns. However, incomplete records of public health for 1975 (para. 1.05) indicate that three water-related diseases 2/ are among the ten communicable diseases most frequently reported by clinics and hospitals nationwide. No comparative statistics are available for morbidity and mortality due to water-related diseases in urban vs. rural areas. 1/ Excluding an institutional population of about 5000. 2/ Gastro-enteritis, dysentery and typhoid;  - 12 2.11 Although information is available concerning waste disposal practices in the Project towns (para. 2.07), the extent of service cannot be quantified. Probably less than 10% of the total resident populations, including institu- tions, are served by water-borne waste disposal systems0 In 1975, UNDP- financed studies recommended that public sewerage be provided to each Project town. However, GOL has deferred taking action on the recommendations until the proposed first phase program of water supply improvements is largely com- plete. This is a reasonable approach since the large-scale introduction of sanitary sewers to the area would not be appropriate at this time and since other alternative measures are planned (para. 1.18)s 2.12 Lesotho is one of the world's poorer countries with a GNP per capita of US$230 based, to a large extent, upon remittances from migrant workers. Based upon a recent update of poverty income level information, Bank staff have estimated that approximately 26% of Lesotho's population were below the poverty line of about R 197 (US$226) per household in 1977. Except for Maseru, which reflects relatively high pay levels of senior civil servants and expa- triates, income equality is rather pronounced and extends throughout all regions, including the Project towns. Based upon this, more than 26% of the populations of the Project towns are estimated to have incomes below the poverty line. Part of this low-income population presently is served from public standposts attached to the existing water systems while the balance is located in peri-urban areas which do not receive piped water service. Population Projections and Demands for Service 2.13 Past service in the Project towns has been limited mainly to hos- pitals, missions, schools, minor local commerce and trade and, with the exception of Roma, the local offices of GOL. Only minor residential popula- tions in village-type clusters are served. Although recent legislation 1/ tends to favor increased development of urban communities, the heavy depen- dence upon subsistence agriculture in and adjacent to the towns, coupled with the lack of industry and the limited opportunity for trade and commerce, precludes significant near future change from past growth trends. Except for planning associated with industrial estates proposed for Mafeteng and Teyateyaneng, no land use plans exist for the Project towns. 2.14 Water master plans were developed for each of the seven towns based upon projections of population and water demand covering the 20-year period, 1976-96. Past population trends were determined mainly from national census data for the years 1966 and 1976 although census data for prior years also were reviewed. Only those built-up areas currently served or which are clearly suitable for immediate service by the existing system, after exten- sion, have been counted as forming part of each town's population. Certain other adjacent areas have been included at differing future dates, depending upon the alternative demand projections under consideration for each town. 1/ As evidenced by: a) the Land Bill of 1978 and, b) the Urban Government Bill, 1978.  - 13 - The historic (1966-76) rate of growth for each of the town's current supply area ranges from 2.2% (for Teyateyaneng) to 5.3% (for Roma) compared with a compound growth rate of about 2.2% per year for Lesotho as a whole. The consultants have assumed that the most probable future rate of population growth at each town initially would follow a medium rate of growth equal to the average annual rate of town population growth determined from the national censuses of 1966 and 1976. This is reasonable. Further details concerning population projections are included in Annex 1. 2.15 Although water systems in the seven towns have been operating since prior to 1966, there is little in the way of records of past water use patterns to establish long-range trends of future water demand. Demand forecasts, consequently, are largely based upon an analysis of incomplete WSB monthly water consumption records for all customers for the fiscal year 1975-76. Representative average annual water consumption rates for 1976 were derived or estimated for all categories 1/ and flow factors for short-term periods of demand estimated. Domestic per capita consumption consisted of 35 lpcd and 20 lpcd for outside tap and public standpost, respectively, which were common to all towns. Values developed for remaining categories, including inside taps 2/, were specific to each town. 2.16 Projections of future domestic consumption were developed as a function of four variables: a) population rate of growth; b) level of service (i.e., inside tap, outside tap or public standpost); c) rate of expansion of service area; and d) per capita demand (within specific categories of service). The population rate of growth has already been mentioned (para. 2.14). The consultants considered three alternative projections for each of the remain- ing variables which were used in developing three alternative rates of growth in domestic water demand. In each instance, the consultants selected the medium projection as being appropriate. This is acceptable. 2.17 Institutional consumption represents a large (about 44%) proportion of current consumption and is expected to remain relatively large in the future. With the exception of schools, hospitals and prisons, current consumption figures are assumed also to apply in the future. Consumption at schools, hospitals and prisons is based upon numbers of occupants and 1976 per capita consumption was based upon experience elsewhere and not on locally-observed values, which are judged to be unrealistically low. 3/ Again, three alterna- tive projections were developed ranging from no increase to a substantial * increase in unit consumption over the period 1976-96. A medium projection was established by the consultants, which is acceptable, that consists of the following in lpd per unit of occupancy: 1/ Categories of consumption consisted of: a) domestic, b) commercial, c) institutional, and d) industrial; 2/ See Annex 2 for range of estimated 1976 values. 3/ Past consumption reflects limitations in existing supply capacity rather than characteristics of demand.  Calendar Year Facility 1981 1986 1991 1996 Day school 60 60 65 65 Boarding school 170 180 190 200 Prison 50 60 70 80 Hospital 300 350 400 450 2.18 Little commercial consumption and no industrial consumption pre- sently occur. Future commercial consumption was estimated based upon 1976 consumption increased in proportion to three alternative rates of population increase for the town and surrounding rural areas. Again, a medium projection was adopted by the consultants, and it is acceptable. As mentioned earlier (see para. 2.13), plans have been prepared to develop LNDC industrial estates at Mafeteng and Teyateyaneng and the possibility of limited development of this type also exists for Leribe and Mohale's Hoek. Allowances for such developments mainly are reflected in projections for the period after 1986. A consumption rate of 5000 lpd per hectare, which is acceptable, has been allowed for all industrial estates. 2.19 Although undoubtedly substantial leakage and waste of water currently occurs, insufficient records are available to determine the extent of this. The consultants have estimated that current unaccounted-for water averages about 25% of production for all towns which they predict as declining to about 17% by 1996. These estimates are acceptable. 2.20 Further details concerning water consumption are shown in Annex 2. Projections of future consumption and production also are shown separately in Annex 2 for each of the seven Project towns together with a summary of the combined demands. Project Rationale 2.21 Recognizing the need for accelerated development of the water supply sector, GOL has requested technical and financial assistance from a number of external bilateral and multilateral agencies. However, the assistance avail- able is not sufficient to include projects in seven towns which GOL considers to have priority and for which feasibility studies already have been completed. Therefore, GOL requested Bank Group assistance on these projects and, in so doing, to: (a) assist in the development of Lesotho's water resources; (b) strengthen sector institutions; (c) upgrade domestic water supplies and waste disposal; and (d) enhance the quality of life of the poverty group through reduction of the incidence of water-related disease.  - 15 - Of the foregoing, only waste disposal and public health aspects 1/ would remain largely unchanged by the Project. An additional reason for Bank Group participation is that the Project would strengthen infrastructure in Lesotho's western lowlands and thereby supplement development efforts of the ongoing, IDA-financed Lesotho Basic Agricultural Service Project (para. 2.02). The Project also would be closely coordinated with other sector development efforts and, since the latter already are underway, could be designed to profit by their experience. III. THE PROJECT Genesis 3.01 The Project was made possible by various preliminary studies in some of which the Bank had close association. These included surveys and outline plans of extension of water supplies for 11 towns in 1971. These studies were financed by UNDP with the Bank acting as executing agency. The results of the studies indicated that each of the towns required extensive additions to existing water supplies. The studies, being only preliminary in nature, were not in sufficient detail for appraisal nor were institutional needs investigated. In 1974 FRG agreed to finance pre-investment studies which included: (a) the preparation of long-range (15 to 20 years) plans for water system development, and (b) engineering and feasibility studies considering first phase (5 to 10 years) developments for each of 12 2/ towns. Operational, financial, accounting, managerial and other institutional matters also were to be investigated. Upon the request of GOL, a 13th town, Roma, was added to the studies although the cost of this additional work was to be absorbed by GOL. Binnie Shand Lesotho, a joint venture consulting group, was retained in association with Peat Marwick Mitchell and Company, to perform the studies. The consultants' work was completed in 1977 and KfW appraised a project in November 1977 that, due to limitations in loan funds, included only six 3/ of the 13 towns. Early in 1978, GOL requested the Bank's assis- tance in financing improvements in the remaining seven towns. 1/ Government has proposed that public health education inputs be provided through ongoing or proposed USAID-financed projects (paras. 1.27 and 3.22); 2/ These consisted of the eight district headquarters towns of Butha- Buthe, Leribe, Mafeteng, Mohale's Hoek, Mokhotlong, Qacha's Nek, Quthing, and Teyateyaneng, and the four additional towns of Mapoteng, Maputsoe, Morija and Peka. 3/ Butha-Buthe, Mapoteng, Maputsoe, Morija, Peka and Qacha's Nek.  - 16 Objectives 3.02 The Project would provide water supplies to about 20,000 new WSB consumers in the seven towns by 1986 and would improve service to 21,000 current consumers 1/ through better control of water quality and enhanced access through provision for additional public standposts. The Project would strengthen WSB, the Project entity, and would further develop Lesotho's water resources and assist in the creation of an improved environment for increased employment in population centers outside Maseru. An estimate of the numbers of additional persons to be served through the Project by 1986 in each of the towns is shown below. Most new consumers will be among the poorer segment of each town's population. Town Number of New Customers Leribe 4,200 Mafeteng 1,300 Mohale's Hoek 2,400 Mokhotlong 1,000 Quthing 3,200 Roma 5,500 Teyateyaneng 2,300 Total: 19,900 Technological Alternatives and Service Standards 3.03 Each of the proposed schemes included in the Project has been compared by the consultants to alternative schemes providing identical levels of service. In all towns excepting Mokhotlong 2/, supplies are available from three alternative sources: viz., springs, boreholes and surface supplies. Although springs and existing boreholes would be retained for future use, studies have indicated that surface supplies represent the most practical means of meeting most of the future water demands of the seven towns. Only in Mokhotlong can the current utilization of spring sources be significantly increased, but even increased spring output there ultimately must be augmented by production from surface supplies. 3.04 With major dependence upon surface sources whose yields and water quality range widely depending upon season, the consultants carefully con- sidered abstraction procedures, the need for carryover storage and the identi- fication of an effective process for water treatment. Sub-surface intakes have been tried previously in Lesotho with generally poor results due to the limited extent of permeable stream bed. Surface intakes also have problems 1/ Excluding about 5,000 institutional consumers; 2/ Potential sources in Mokhotlong are limited to springs and surface supplies.  - 17 - due to widely-varying flows and high suspended solids content. The Project includes a pre-design component to review past experience and practice else- where in order to develop improved design standards that would be applicable to Lesotho conditions. Due to the adverse physical quality characteristics mentioned above, the addition of chemicals (for coagulation and flocculation), sedimentation, filtration and chlorination are required for treatment of all surface supplies. Recent experience has shown that slow sand filters, due to their simplicity and little demand upon operator attention and skill, are highly appropriate to Lesotho conditions. The consultants have properly identified the need for upgrading present pre-treatment procedures through the use of chemical coagulants. 3.05 The potential use of labor-intensive construction methods in the Project is limited because of the high prevalence of rock and thin soil mantle. However, the possibility of using labor-intensive techniques in the construction and/or rehabilitation of earth dams and embankments included in the Project will be carefully considered by the consultants prior to final design and the preparation of tender documents. Three towns, viz., Mafeteng, Mohale's Hoek and Roma, include such facilities. 3.06 The level of service to be provided to domestic water users is an important consideration in the design of the proposed Project. Currently, many existing houses within the proposed service areas are not suitable for internal plumbing and it is highly unlikely that more than 20% to 30% of households would have inside taps by the year 1996, the end of the 20-year long planning period investigated by the consultants. By 1.986, the design year, such service is even less likely. Detailed information regarding existing and projected future levels of service is described in paras. 2.15 through 2.20 and in Annex 2. Description of Project Components 3.07 A full description of physical components of the Project is included in Annex 3. Locations of the Project towns are shown on Map IBRD 13825. A summary description of the Project follows: Part A - Water Supply Construction 3.08 Components described below are generally common to each of the water system extensions proposed at the seven towns. (a) Civil works consisting of: (i) source of supply facilities; (ii) treatment works; (iii) pumping plant structures; (iv) transmission mains; (v) service reservoirs; (vi) distribution systems; and (vii) ancillary structures; (b) Equipment including: (i) pumping plant; (ii) treatment plant; (iii) water meters; (iv) vehicles; and (v) tools and miscellaneous equipment; and  - 18 - (c) Consulting engineering services for: (i) design, and (ii) supervision of construction. Part B - Institutional Development Accounting 3.09 Consulting services for the design and implementation of a commer- cial accounting system, and for staff training in the use of such a system (para. 5.06). Tariff Studies 3.10 Consulting services for a tariff study to recommend a water supply and sewerage pricing policy and make proposals for a phased introduction of tariff changes (para. 6.04); Part C - Preparation of Phase II Project 3.11 This consists of engineering consultancy services for pre-invest- ment studies of a phase II project for the extension of water systems in each of the seven towns. The preparation would be scheduled late in the Project period but in sufficient time to permit the commissioning of the phase II project by 1986. Cost Estimates 3.12 The estimated total cost of the Project is R 6.1 million (US$7.0 million equivalent) net of duties. No duties and taxes would be payable on any goods and services imported directly into the Rand Customs Union for the Project nor would any goods and services purchased within the Rand Customs Union be subject to duties and taxes at the stage when such goods and services are acquired directly for the Project. It would not be possible to identify taxes paid by suppliers and contractors at an earlier stage but, in any case, these would not be significant. Foreign exchange costs, which include Rand expenditures outside Lesotho, would amount to US$4.8 million or 69% of total expenditures. A summary of the total Project costs is shown below and a more detailed breakdown of the construction cost estimates is included as Annex 4.  - 19 - Foreign Rands (thousands) US$ (thousands) Exchange Local Foreign Total Local Foreign Total Component Part A - Water Supply Construction Basic Construction Leribe 133 336 469 153 386 539 Mafeteng 160 434 594 184 499 683 Mohale's Hoek 248 465 713 285 535 820 Mokhotlong 110 281 391 127 323 450 Quthing 147 372 519 169 428 597 Roma 411 552 963 472 635 1,107 Teyateyaneng 99 273 372 114 314 428 Subtotal 1,308 2,713 4,021 1,504 3,120 4,624 67 Engineering 83 333 416 95 383 478 Subtotal, Part A 1,391 3,046 4,437 1,599 3,503 5,102 69 Part B - Institutional Development Accounting 16 80 96 18 92 110 Tariff Studies 4 14 18 5 16 21 Subtotal, Part B 20 94 114 23 108 131 82 Part C - Preparation of Phase II Water Supply Project Consulting Services 16 62 78 19 71 90 79 Contingencies Physical 185 357 542 213 411 624 Price 272 608 880 313 699 1,012 TOTAL PROJECT COSTS 1,884 4,167 6,051 2,167 4,792 6,959 69  - 20 3.13 The consultants' original estimates of Project costs, which were at March 31, 1976 price levels, were projected by the mission to baseline (March 31, 1979) cost levels using inflation factors developed by the con- sultants based upon historical construction cost indices for the Southern Africa Customs Union area. These inflation factors were 14%, 12% and 10%, respectively, for the years 1976, 1977 and 1978. An allowance of either 10% or 20% was added to baseline costs for physical contingencies. The 20% allowance was applied to site investigations in advance of design of the Qhobosheaneng dam and reservoir proposed at Roma, and to all civil works components involving surface water intakes and/or raw water storage at each of the towns. A 10% allowance was assumed for all other components. Annual price contingency factors, which reflect the recent trend in southern Africa, were developed for the Project and applied to baseline costs and to physical contingencies. In developing these factors, which are 9% for 1979 and 8% for each of the succeeding years, no distinction was made between local and foreign cost components nor between civil works and equipment since cost information developed for the Project has not reflected such distinctions in the past. The overall cost of engineering is expected to average US$4,200 per man-month. Project Financing 3.14 The proposed IDA Credit of US$6.0 million would be used to finance all foreign costs and approximately US$1.2 million equivalent of local costs of selected components and would cover about 86% of the total Project costs. Remaining Project costs of about US$1.0 million equivalent would be met by GOL. Implementation 3.15 WSB would be responsible for Project implementation. Engineering consultants would be utilized for detailed design, preparation of tender documents, evaluation of tenders and construction supervision.1/ Additional engineering input amounting to an estimated 18 man-months also would be required to perform feasibility studies required for the preparation of a phase II project. WSB recently engaged Binnie and Partners (Binnie), a UK firm which participated in Project pre-investment studies, to design the KfW-financed, six towns water supply project and it is expected that Binnie would also be retained on the Project. This arrangement would be acceptable and WSB would continue to retain engineering consultants whose qualifications, experience, and terms and conditions of employment would be satisfactory to the Association. An implementation schedule showing physical elements and timing of the work program is included as Annex 5. In order to expedite progress and effectively coordinate with the KfW-financed six towns water supply project, GOL plans to appoint the engineering consultants shortly so that site investigations and design can begin by April 1979. Commissioning of the physical components of the Project is planned for mid-1982. 1/ Total engineering efforts required for these activities are 140 man-months of which 75 man-months would be required for detailed design and preparation of tender documents.  - 21 - 3.16 The level of construction activity in Lesotho is low and, based upon similar projects recently completed or ongoing in the sector, con- struction is expected to be carried out mainly by firms from RSA. Although a possibility of labor-intensive construction exists for a few selected Prc!-o t components (see para. 3.05) and GOL has requested that force account be permitted, most, if not all, construction activity would be handled through civil works contracts. Unskilled laborers would be recruited locally. Although the formation of a National Construction Company (NCC) is being considered, if accomplished, the formation would be too late for NCC to participate in the Project. 3.17 Land will be needed by the Project as sites for reservoir and treatment units although the precise extent of this need has yet to be determined. Since all land in Lesotho currently is owned by Government and held in trust by the King, no problems are anticipated in gaining access to such sites when required. Although the Project cost estimates do not reflect land acquisition costs, these costs, if any, would not be significant and would be met by GOL. 3.18 WSB will be responsible for maintenance and operation of the Project facilities after commissioning. Although WSB is weak in these areas, training included as part of technical assistance to be provided by FRG (para. 5.13) would minimize the risk of unsatisfactory maintenance and operation practices. 3.19 Dams proposed for the Project are relatively small and generally represent little risk of damage to life or property. Although WSB currently neither owns nor operates dams outside Maseru, future operation of such facilities does not appear to pose any undue risk. Provision for a special review of dam design or periodic inspection by independent experts during or after completion of construction is not necessary in view of the relatively small scale of the works and the limited risk posed by failure. Water Resource Aspects 3.20 Surface supplies constitute the most significant single component of the Project's water supply. Based upon historical records, which generally are adequate, the consultants have designed each of the schemes with a 5% (1 in 20 years) risk of failure of source. This is acceptable. 3.21 Although no current regulation exists which constrains water development or usage, the 1978 Water Act eventually will affect such control. After this Act has become effective through gazetting,, permits issued by HMSB, or a possible successor agency, will be required by all abstractors. Environmental and Health Aspects 3.22 The Project would have a negligible environmental impact although some improvements to public health are anticipated (see para 4.01). However, a recent ODM-financed field study of village water supplies in Lesotho tenta- tively concluded that there are no significant differences in the prevalence,  epidemiology and seasonality of water-related disease in villages with and without improved water supply. The study concluded that the community and household environment is relatively unhygenic, thus contributing to a high incidence of water-borne disease. The study team recommended that, in order to significantly improve public health at the village level, a complementary program of public health education should be introduced together with im- proved standards relating to the construction and operation of rural water systems. The standard of operation and maintenance of WSB facilities is generally higher than for rural supplies and would be further improved through augmentation of staffing and staff training (paras. 5.09 through 5.13). Although the Project would not include funds for a public health education program, Government has indicated that an ongoing USAID-financed rural health development project could be used to accommodate any special health inputs required by the Project. A proposed rural water supply project also being considered for early USAID financing is expected to include a public health education component and would probably be a more suitable vehicle for this component. Additional technical assistance in public health education also is expected from the Irish Government. Other future Bank Group projects 1/ in Lesotho, if necessary, could assist with implementation through coordination with the Health Education Unit under MHSW and the Lesotho Distance Teaching Center under the Ministry of Education. GOL has agreed to furnish to the Association, not later than June 30, 1980, or such other date as may be agreed, a report covering public health education needs in the water supply and sanitation sector through 1982 and a detailed plan or plans of action to meet such needs. GOL also has agreed to exchange views with the Association on said report and plan or plans and promptly thereafter implement such plan or plans taking into account the Association's views. Procurement 3.23 Approximately 87% of the total Project costs would involve construc- tion and supply contracts, about 90% of which would consist of civil works. Equipment and pipe are not manufactured locally and would have to be obtained from abroad with the most likely source, based upon recent experience on similar contracts, being RSA. Although WSB plans to group civil works con- tracts to the extent possible, consideration would be given to receiving concurrently separate bids for works in the individual towns, with a view to encouraging the participation of smaller contractors. These contracts would include the supply of the appropriate materials. No suitable local civil works contractor currently exists but, should this situation change, GOL has requested that provision be made for local preference of 7-1/2%. Except as indicated below, all procurement financed by the proposed IDA Credit would be awarded on the basis of international competitive bidding in accordance with Bank Group guidelines. Minor civil works amounting to about US$0.7 million equivalent, may be constructed by GOL through force account in which case only the materials would be financed by IDA. Contracts for the procure- ment of single items of equipment or contracts for groups of items of equipment, vehicles and spare parts costing less than US$25,000 equivalent each and less than US$100,000 equivalent in the aggregate may be awarded after solicitation of quotations from at least three suppliers. 1/ The Lesotho Third Education project scheduled for appraisal in FY80 would be a suitable vehicle.  - 23 - Disbursements 3.24 Retroactive finance of up to US$100,000 equivalent to finance the cost of preliminary investigations and design by the engineering consultants is proposed. The IDA Credit would be disbursed to meet selected portions of the Project cost as follows: (a) 86% of total expenditure on civil works excluding works constructed under force account, if any; (b) 100% of foreign expenditures or 90% of expenditures for local procurement of materials for works carried out under force account, if any, and for vehicles, equipment or spare parts; and (c) 100% of foreign expenditures or 80% of local expenditures for consulting services as described in Parts B and C of the Project. An estimated disbursement schedule is given in Annex 6. Any Credit funds undis- bursed at the end of the Project would be made available for meeting appro- priate WSB needs closely associated with the Project, subject to approval by the Association. The proposed closing date for the IDA Credit would be September 30, 1983. This allows a margin of about nine months after the estimated completion of work by engineering consultants on the preparation of the phase II project. IV. ECONOMIC AND SOCIAL ANALYSIS Project Benefits 4.01 The Project would provide public water service to some 20,000 new consumers in the Project towns (an increase of about 95%) by 1986 who, for the most part, now rely upon unprotected sources consisting of springs and streams. Secondary benefits would include improved reliability and water quality enhancement to present consumers, and strengthening of WSB. The effectiveness of these improvements in raising the level of public health in the Project towns is dependent upon other factors such as the level of personal hygiene practiced at community and household levels. For this reason, imple- mentation of the Project should be carefully coordinated with other organiza- tions and programs which are mainly concerned with public health and other aspects of community development (para. 3.22). 4.02 The Project would focus on institutional improvements through the appointment of a Chief Executive Officer and a Financial Controller, and through the appointment of consultants to design and implement a commercially oriented accounting system and provide or arrange for related staff training. Other training needs would be met through existing GOL programs (paras. 5.09 and 5.10) and proposed FRG assistance (para. 5.13).  - 24 - 4.03 WSB's financial performance should be improved through the account- ing improvements mentioned in the previous paragraph, and as an outcome of the changes in tariff level and structures which are expected following the completion of the tariff study which would be included in the proposed Project (para. 6.04). Least Cost Solution 4.04 An economic analysis of alternative plans of water supply was made by the consultants for each of the towns. These analyses, which were based upon the 20-year period 1976-96, considered alternative schemes for the same service areas, per capita demands, and levels of service. The least-cost development was determined for each town through a sensitivity analysis considering various growth rates of consumption, discount rates ranging from 5% to 15%, and shadow wage rates for unskilled labor varying from 0% to 100%. The studies showed the relative costs of the various schemes to be fairly insensitive to changes in discount rate and the shadow wage rate for labor. Also, in most instances, the same scheme represented the least-cost solution at all alternative rates of growth, with only phasing or hydraulic capacity requiring adjustment. Rate of Return and Pricing Considerations 4.05 The Project has many of the characteristics of a rural water supply project due to the small size and nature of the Project towns. As indicated in para. 6.07, Project water consumers, together with WSB-consumers located elsewhere, would pay a tariff based on the recovery of cash operating costs and debt service. The internal financial rate of return 1/ which would be negative substantially underestimates the real economic return because health and amenity benefits, as well as consumers' surpluses, for a project such as this are impossible to quantify. Despite this, the Project is worthwhile because of non-financial benefits described in para. 4.01. The average incre- mental cost (AIC) of water in the Projict towns, excluding shadow pricing 2/, ranges from about R 0.5 to R 1.0 per m , using a3discount rate of 11%, as compared to the new tariff level of R 0.33 per m (US$1.44 per thousand US gal) expected to be introduced shortly (para. 6.07). As the Project towns 1/ These range from -4.7% in Mafeting to 1.7% in Teyateyaneng. 2/ In view of the rather unique labor market situation in Lesotho where the best alternative productive possibility of a laborer may range from subsistence farming, where earnings are well below the minimum wage in Lesotho, to working in the South African mines, where earnings are considerably higher than the minimum wage in Lesotho, a shadow wage rate could not be calculated for Lesotho without extensive research.  - 25 -7 are in some of the lowest income areas served by WSB, 1/ it is questionable whether average tariffs could be raised to AIC, although an increasing block tariff could be instituted so that at least the top block could approximate this level. Pricing policies and practices would be among the questions to be addressed by the tariff study to be financed by the Project (para. 6.04). Impact on Poverty Group 4.06 With at least 26% of the households 2/ subsisting below the poverty level of R 197 annual income, the impact upon the poor is likely to be signi- ficant. The 20% of the people in the seven towns who are currently without service can almost certainly be classified among the poverty group. Thus, in extending service to areas surrounding the present supply area, more than 26% of the beneficiaries of the Project are likely to be poor. Project Risks 4.07 The principal risk is that staffing inadequacies might jeopardise Project implementation and/or operations and maintenance, but this risk has been minimized by the measures described in paras. 5.04 and 5.06). 4.08 As it may take some time to establish an adequate information system on which to accurately estimate tariff increases needed to meet finan- cial objectives, it is possible that the estimated tariff increase to meet operating expenses and debt service may produce less than the required revenues (para 6.07). In this case, GOL would have to make further tariff increases and, in the meantime, continue to meet any operating cash deficit. V. THE BORROWER AND THE PROJECT IMPLEMENTING AGENCY Lending Arrangements 5.01 The Borrower would be GOL who would make the proposed US$6 million IDA Credit available to WSB on the terms stated in para. 6.10. Implementing Agency 5.02 WSB is headed by the Chief Water and Sewerage Engineer. Under present arrangements, he has only limited responsibility and authority over personnel and accounting matters. Staff recruitment, compensation, 1/ It is estimated that a poor household of four persons earns no more than R 197 annually (para 2.12). Thus based upon this amount, if the household consumes an average of 20 Ipcd and paid the AIC representing the composite of all project towns its water bill would range from about 7% to about 15% of its total income. 2/ At the national level.  - 2 6 - transfers and dismissal are mainly handled through MW's Personnel Branch which follows uniform government personnel practices. The slowness and inflexibility of these procedures impairs WSB's ability to recruit and retain suitable staff and, although WSB's responsibilities are increasing, many positions remain unfilled. Accounting staff are MF employees, and there have been frequent staff changes which have contributed to a lack of commitment and motivation. Accounting follows GOL practice and is inappro- priate for effective commercial management. A chart reflecting the current organization structure of MW and WSB is included as Annex 7. Future Organizational Plans 5.03 Government recognizes the need for more autonomy to be given to the conduct of water and sewerage operations but, based on past experience in other sectors, considers it prudent to proceed slowly. In May 1978, as a first step, the Minister of Finance issued directions covering the establish- ment of a "Water and Sewerage Service Trading Account" (Trading Account) under MW. The directions would cover the future operation of WSB but, apart from these directions and the other changes mentioned below, WSB's personnel and scope of operations would remain essentially the same. The instrument creating the Trading Account provides for: (a) the appointment of a Chief Executive Officer; (b) the processing of receipts and payments relating to town water supply and sewerage services through the Trading Account, (c) the preparation of an annual profit and loss account and a statement of assets and liabilities. The Chief Executive Officer is to be responsible for the efficient management of water supply and sewerage services, and WSB's staff including accountants and their support staff would be accountable to him. He would be a member of a Board controlling the Trading Account together with representatives of the MF, the MW, the cabinet office responsible for personnel, and another member appointed by the Permanent Secretary (PS) of MW. Major Board recommendations on staffing matters would require the concurrence of the PS, and proposals for tariff increases would require Cabinet approval. Major capital expenditure proposals and the mobilization of finance would continue to be handled through the Central Development and Planning Office of the MF. A separate bank account is to be established through which all receipts and payments relating to water supply and sewerage services would flow. Delegation of powers regarding appointment, promotion and dismissal of staff has recently been granted to WSB and permission to open a separate WSB Bank account has been obtained from MF. Very recently a Ministry of Water, Power and Natural Resources was formed and WSB's operations are expected to be transferred from MW to the new Ministry as soon as administrative arrangements can be made. This would not affect the scope of WSB's operations or the aforementioned directions covering its operations. The water supply system for the small university town at Roma, one of the Project towns, is presently run by the National University of Lesotho, but Government will transfer the system to WSB not later than March 31, 1980. Management and Personnel 5.04 Efforts are being made to recruit a Chief Executive Officer and a Financial Controller through British and Irish technical assistance respec- tively. The appointments would be crucial to the strengthening of WSB's  - 27 - staffing capability and therefore the appointment of qualified candidates to these positions would be a condition of Credit effectiveness. WSB's present Chief Water and Sewerage Engineer has been handicapped by poor health for some time and has been relatively inactive. Much of the responsibility for water supply has therefore been placed upon a young, professionally qualified water engineer whose future responsibilities are expected to include administration of the KfW-and IDA-financed projects. The engineering staff is expected to be strengthened by two qualified expatriate water engineers, one to be responsible for Maseru, the other for district operations, who are expected to join WSB shortly. Appointments to these positions would be conditions of Credit effectiveness. WSB has also recently been strengthened by the recruitment of a Masutho engineer recently graduated from a Canadian university. With the foregoing appointments, WSB's capability would be considerably strengthened. This will be further added to by the GTZ-assisted training efforts described in para 5.13. The Financial Controller would require additional support staff as there are no professionally qualified accountants on WSB's staff nor any staff with any significant formal training in accounting or experience in commercial accounting (para. 5.06). Management Systems 5.05 WSB does not operate as a separate accounting entity. Financial and accounting procedures are in accordance with usual government cash accounting practices and are largely concerned with accountability for parliamentary approved expenditures. Revenues are paid into the Consolidated Revenue Fund and are not related to water supply and sewerage operating expenses, neither of which are readily determinable. Balance sheets are not prepared. Information on such matters as billed revenues, water consumption, debtor and creditor levels, and inventories is either missing or inadequate. Furthermore, capital and recurrent expenditures are not adequately distinguished. 5.06 So that WSB could conform to the accounting provisions of the Water and Sewerage Service Trading Account directions, and also use accounting information for management, it would be necessary to establish accounting practices along commercial lines, including the provision of information on revenues, capital and operating expenditures, assets and liabilities. Fur- thermore, the effectiveness of billing and collections needs to be improved through double entry controls, and the development of controls relating water consumption to billed revenues. Fixed assets records also need to be devel- oped. As most of the Financial Controller's time will be committed to day- to-day activities, the services of accounting consultants will be required to design and assist with the implementation of an accounting system, identify any further staffing needs, and train or arrange for training of accounting staff. When carrying out their assignment, it would be desirable for the consultants to maintain close contact with the Financial Controller and, if possible, the consultants should commence their task shortly after the appoint- ment of the Financial Controller. The Project provides for consultants to effect accounting improvements and their appointment, on terms and conditions acceptable to the Association, would be a condition of Credit effectiveness. Terms of reference for the engagement acceptable to GOL and the Association  - 28 - have been prepared. GOL and WSB will consult with the Association, not later than March 31, 1980, about the consultant's recommendations, and will promptly implement such measures as are considered appropriate, based on a time schedule acceptable to the Association, including the recruitment of any additional staff needed to establish effective accounting procedures. Billings and Collections 5.07 Meter readings are made monthly and bills are sent out by post. Bills are paid at WSB's Headquarters and at District Revenue offices and paid into GOL's Consolidated Revenue Fund. WSB's policy is to disconnect consumers after accounts are overdue more than one month, but lack of transport and adequate staff to monitor overdue accounts has made it difficult to adhere to this policy. Consumer accounts are kept manually. They lack double entry controls and, due to staffing difficulties, the maintenance of the records has deteriorated. Adequate statistical information is not available on total outstanding accounts, billings, or water consumption and, although collection performance appears good based on accounts listed as overdue, an overall assessment of the effectiveness of the billing and collection system in relation to water supplied cannot be readily made until WSB's information system is improved. Audit 5.08 As GOL's audit department would not have the staff to conduct the audit of commercial accounts, it would be necessary for the Auditor General to delegate his responsibility to a private auditing firm. To ensure that audits are of a satisfactory standard WSB will have its accounts audited annually by auditors acceptable to the Association and WSB's audited accounts would be submitted to the Association within nine months after the end of FY1980 and not later than six months after the end of subsequent fiscal years. Manpower Development and Training 5.09 WSB is a small organization currently serving a population of not more than 80,000 and, consequently, its training needs are not large. The responsibility for WSB manpower development rests with the training unit of MW, the Chief Training Officer of which is appointed under a UN arrangement. The training officer has prepared a training program for MW and another dealing specifically with WSB's training needs. The latter document includes manpower projections for WSB's managerial, professional and technical needs and some proposals for meeting the related educational and training needs. However, more specific plans are required (see paras. 5.12 and 5.13). 5.10 At present, three Basotho are pursuing undergraduate studies in engineering and are expected to be available for employment by WSB over the next two or three years. No plans or estimates have yet been made for training accountants either at the professional or technician level, but this is probably because WSB's accounting staff has been supplied by MF. 5.11 Lesotho has a Technician Training School which gives diploma level training in civil engineering and another institution, the Lerotholi Training  - 29 - Institute (LTI), gives instruction for craftsmen such as plumbers. WSB recruits employees from both these institutions. LTI is a possible source of specific job-related training but special courses would have to be arranged. 5.12 A more detailed identification of the skills needed to carry out WSB's functions, an assessment of when they will be required, the identifica- tion of the sources and amount of funds to carry out a training program, and arrangements with specific institutions or training centers for a program to meet WSB's needs are required. A major portion of WSB's needs is likely to be on-the-job training, and WSB's supervisors are likely to require training in the skills of on-the-job training. 5.13 After their November 1977 appraisal of the six towns water supply project (para 3.01), KfW indicated that a comprehensive training program for technical personnel should be "launched" by the end of 1978 and that KfW would support GOL's request for technical assistance from the FRG for this purpose. As a first step, officials of the West German Ministry for Economic Cooperation have agreed to submit to their Cabinet a proposal for a DM1.5 million (US$0.78 million) grant for technical assistance which would provide a comprehensive review of training needs and provision for other training assistance. To the extent that WSB's training cannot be met through the ongoing MOW training program for WSB or through other local resources (paras. 5.09 and 5.11), FRG would fund any training assistance required. VI. FINANCIAL ANALYSIS Past Performance and Present Financial Situation 6.01 WSB does not presently operate as an accounting entity although this will be changed after an accounting system has been designed and WSB's account- ing staff strengthened. In the past, water supply and sewerage assets have been mainly financed by external grants to GOL. An estimated notional balance sheet at March 31, 1978 for WSB, with fixed assets valued at replacement cost less depreciation (para. 6.05), is given below: Assets Liabilities and Capital ---------------------