Jordan - Water Supply and Sewerage Project

The World Bank FOR OFFICLAL USE ONLY Report No. P-4294-JO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$50 MILLION TO THE HASHEMITE KINGDOM OF JORDAN FOR A JORDAN WATER SUPPLY AND SEWERAGE PROJECT April 16, 1986 |This document has a restrictod distribution and may be used by recipients only in the performance Iof their official duties. Its contents rnay not otherwise be disclosed without World Bank authorization.|  HASHEMITE KINGDOM OF JORDAN CURRENCY EQUIVALENTS Calendar 1985 January 1986 Currency Unit = Jordan Dinar (JD) US$1.00 = JD .393 JD .368 JD 1.00 = US$2.54 US$2.72 Exchange rate used in the Appraisal Report JD1 = US$2.70 GOVERNMENT OF JORDAN AND WATER AUTHORITY FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS AWSA - Amman Water and Sewerage Authority JVA - Jordan Valley Authority LRAIC - Long Run Average Incremental Cost MCM - Million Cubic Meters MOP - Ministry of Planning NRA - Natural Resources Authority PMCSU - Project Management and Construction Supervision Unit TWB - Thames Water Board USAID - United States Agency for International Development WA - Water Authority of Jordan WSC - Water Supply Corporation  FOR omci4L USE ONLY HASEEMITE KINGDOM OF JORDAN JORDAN WATER SUPPLY AND SEWERAGE PROJECT Loan and Proiect Summary Borrower: The Hashemite Kingdom of Jordan. Beneficiary: The Water Authority of Jordan (WA). Amount: US$50 million equivalent. Terms: 15 years, including three years of grace, at the standard variable interest rate. Relending Terms: Same as the Bank loan. The WA will bear the foreign exchange rate risk. Project Description: The project, which is part of the Government's high priority program to improve the water supply and sewerage services in Jordan, would include: i) extension and rehabilitation of about 450 km of water mains; (ii) construction of one service reservoir and two pumping stations; (iii) construc- tion and extension of about 365 km of trunk and collection sewers; (iv) construction of three and extension of two sewage treatment works; (v) supply of equipment for works operation and maintenance and water sources monitoring; and (vi) consultant services for engineering, construction supervision and water supply systems control. The project would continue the institutional development efforts started under previous Bank loans. The main beneficiaries of the project would be low and middle-income families. Since the WA is reasonably well established, project preparation is at an advanced stage and previous experience in project execution has been very good, no major risks are foreseen during project execution or in reaching the project objectives (para. 65). This document ha a estricted distribution and may be used by recipients only in the petformmace of their official duties Its contents may not otherwise be disclosed without World Dank authordtion.  Local Foreign Total (USS Millions) Estimated Cost*: Water Supply 5.81 13.51 19.32 Sewerage 12.68 12.68 25.36 Sewage Treatment Works 3.14 6.59 9.73 Material and Equipment - 6.76 6.76 Consulting Services and Training 1.49 0.27 1.76 Land Acquisition 0.41 - 0.41 Base Cost 23.53 39.81 63.34 Physical Contingencies 2.19 3.30 5.49 Price Contingencies 6.70 11.41 18.11 Total cost 32.42 54.52 86.94 Interest During Construction - 9.45 9.45 Total Financing Required U2lu Financing Plan: Proposed World Bank Loan - 50.00 50.00 Government Contribution 30.55 13.97 44.52 Customer Contribution 1.87 - 1.87 Total Financing 3.3 Estimated Disbursements: Bank FY 1987 1988 1989 1990 1991 1992 1993 US$ Million Annual 1.0 7.5 12.5 12.5 9.5 5.5 1.5 Cumulative 1.0 8.5 21.0 33.5 43.0 48.5 50.0 Economic Justification: Least cost program. Appraisal Report: Number 6056-JO, dated March 28, 1986. Maps: Numbers IBRD 19509, 19510, 19511. *Cost estimates do not include import duties and taxes, from which the project is exempt.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD - TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE HASHEMITE KINGDOM OF JORDAN FOR A JORDAN WATER SUPPLY AND SEWERAGE PROJECT 1. I submit the following report and reconmendation on a proposed Bank loan to the Hashemite Kingdom of Jordan of US$50.0 million equivalent to help finance a water supply and sewerage project. The loan would be for 15 years, including three years of grace, at the standard variable interest rate. The Government would onlend the Bank loan to the Water Authority of Jordan (WA) on the same terms as the Bank loan. The WA would bear the foreign exchange rate risk. PART I - THE ECONOMY 1/ 2. A report entitled "Jordan Review of the Five-Year Plan" (No. 4129-JO, dated May 1983) was distributed to the Executive Directors in June 1983. An economic mission visited the country in November 1985; its findings have been included in the present text. 2/ Country data sheets are attached as Annex 1. Recent Economic Developments 3. Conscious of the country's limited natural resources, its relatively narrow productive base and the sensitiveness of the economy to changes in its oil-rich regional environment, the Government has pursued liberal, outward-looking policies in trade, labor migration and foreign exchange. This enabled Jordan to alleviate the effects of a very high natural population growth rate (3.4 percent) through massive emigration stimulated by high salaries in the neighboring countries and, until 1982, through rapid expansion of domestic production fueled by an exceptionally high investment rate and rapidly growing export demand. At present, a large part of Jordan's total workforce is employed abroad. In addition to sizable workers' remittance inflows, Jordan has benefited from large inflows of grant aid from neighboring countries as well as from a rapid increase in regional demand for its exports. During the period 1976-82, the yearly inflow of workers' remittances and grants reached on average close to two-thirds of Jordan's GDP. The abundant supply of these resources and a favorable entrepreneurial climate enabled Jordan to maintain both very high consumption and investment rates. 4. As a result, the Jordanian economy expanded rapidly with an annual average GDP growth rate of over 10 percent in real terms during the 1976-82 period; almost full employment was reached. The overall balance of payments 1/ This section is substantially the same as Part I of the President's Report for the Manpower Development Project (P-4166-JO), daced October 10, 1985. 2/ References in the text which follows are to the East Bank of Jordan.  - 2 - remained strong despite a large chronic deficit in merchandise trade. Although exports of goods and non-factor services (primarily agricultural products, manufactured goods, tourism and exports of the new commodities, fertilizers and potash) grew at a rapid rate of about 16 percent in real terms during 1976-82, its small base in relation to imports led to a continuous deterioration of the resource gap. These trade deficits, however, were almost fully covered by factor income and transfers from abroad. Government- guaranteed external borrowing remained therefore within reasonable limits and borrowing on commercial terms was reduced to a modest level. 5. Beginning in 1982, however, the economic slowdown in the neighboring countries has affected the Jordanian economy in many ways, leading to a slowdown of domestic economic activity and a reduction in the inflow of external transfers. The overall economic growth rate slowed to about 5.2 percent (in real terms) in 1983, still a satisfactory performance considering the unfavorable economic environment; foreign grant aid was about 26 percent lower, and workers' remittances stagnated while exports of manufactured goods and services to neighboring countries declined. Imports also declined, in line with the sizable reduction in public and private investments. 6. As a result, the current account deficit for 1983 showed only a slight increase to $390 million. In 1984, the decline in merchandise imports, combined with an increase in exports of manufactured goods, contributed to reducing the balance of trade from nearly $2.5 billion in 1983 to about $2.0 billion. Taking into account a slight reduction in official transfers, the current account deficit fell to $269 million. Although preliminary estimates for 1985 show imports increasing at a slower rate than exports, reduced worker's remittances and grants more than offset the trade gains, leading to a rise in the current account deficit to about 8.2 percent of GDP, compared to 6.8 percent in 1984. 7. With the decline in government revenues from grants, public investment has been reduced, and the Government has further intensified its domestic resource mobilization efforts through cuts in subsidies and improved collection of direct and indirect taxes. The main concerns of monetary policy have been mobilizing savings and controlling domestic liquidity. Private savings have improved, but public savings have continued to be negative because of the high level of defense expenditures. To promote domestic savings, greater discretion has been given to the Central Bank in adjusting interest rates and banking commissions. As a result of increases in deposit rates in 1983, savings deposits rose faster than the money supply. A parallel situation materialized in 1984 and 1985 though both savings deposits and the money supply grew at slower rates in those years. Together with a marked decline in inflation to 3.9 percent in both 1984 and 1985, these increases have resulted in interest rates becoming substantially positive again in real terms. Medium-Term Prospects 8. Given the changed situation and outlook in the neighboring oil producing countries, GDP growth in the 4-S percent range as is projected by the 1986-90 Plan appears feasible in the medium term. This projection assumes a reduction in the exceptionally high level of investments achieved during the  -3- early 1980s, which reflected the implementation of a number of large new projects such as potash, fertilizer and a refinery. While the new, natural resource-based industries have provided some new employment opportunities, the economic slowdown and a rapidly increasing domestic workforce (para. 12) are Likely to change the manpower situation in Jordan from one of selective shortages to one of general excess supply. 9. The industrial sector (including mining, manufacturing and construction) is expected to continue to lead the growth of GDP and exports. The new industries have contributed one third towards incremental GDP during 1984-85. Together with an expansion of phosphate mining and cement production, total industrial output would grow at an annual rate of about 6.2 percent for 1986-88 but slow down to an average rate of 4.9 percent per annum for the period 1988-90. Since the rapid expansion of infrastructure and private housing during the boom years of the 1970s and early 1980s has slowed down substantially, the construction industry is likely to grow at a substantially lower rate (3.5 percent per annum) during 1986-90. Thus, industrial growth during the next plan period will have to rely increasingly on the development of small and medium-scale higher technology manufacturing, largely for exports. The projected 5.7 percent per annum for industrial growth (1986-90) assumes that adjustment of the industrial sector in this direction will be achieved, inter alia through changes in protection policies and improvements in export incentives. 10. Increased demand for services by returning Jordanians, coupled with their accumulation of savings and experience, is expected to stimulate private investment and growth of special services to an average annual rate of 4.5 percent per annum in the next few years. However it is expected that the transportation sector and the hotel industry, which at present have a large surplus capacity, will undergo a period of consolidation. In the trade sector, efficiency gains from modernization would likely be offset by increased pressure from higher unemployment to expand the less efficient informal trade sector. In contrast to the expected slow growth of traditional private services, the prospects are favorable for special services which can use Jordan's skilled labor in areas such as consulting, contracting, and maintenance. Agriculture is projected to continue to grow by about 5 percent per annum. 11. The projections for the external accounts assume that exports of goods and non-factor services would grow by an average rate of about 5.0 percent per annum in real terms for 1986-90. Exports from the output of previous and new industrial, natural resource-based projects to the world market would make the largest contribution to this growth performance. The export projections for the late 1980s assume that- adequate measures are taken to develop Jordan's manufacturing exports. The import growth projections assume that imports would slow down in line with the overall economic growth rate. The fall in oil prices is expected to benefit Jordan by reducing its 1986 import bill by about $110 million, or 4 percent of its total merchandise imports, assuming purchases are made at market prices. Even though merchandise exports are projected to approach a rate of increase of 5 percent per annum while imports would grow at a lower rate, the trade deficit could remain large and approach the $3.0 billion mark in 1990. In relation to GDP, however, the resource gap is expected to show a further decline from about 44 percent in 1985 to about 28 percent in 1990. Unlike the past, net workers'  -4- remittances and foreign grants, which are likely to decline, will not be sufficient to meet the growing trade deficit. Jordan therefore would have to rely more on external borrowing (para. 15). To maintain its prudent debt management, Jordan will need to combine external borrowing with increased efforts to mobilize domestic resources, particularly in the public sector. Social Issues 12. Due to the substantial migration of Jordanian workers to neighboring countries and the rapid economic growth, the labcr market situation has been characterized until recently by selective manpower shortages. However, according to recent manpower projections, supply of labor in Jordan in the medium term is likely to show selective surpluses, particularly throughout certain categories of skilled professionals. In 1985, it is estimated that 300,000 Jordanians were working abroad compared to a total domestic employment of about 645,000. Domestic employment includes a relatively large number of foreign workers currently estimated at about 143,000, half of whom are unskilled. A comprehensive manpower and training plan as well as improvements in vocational training are needed to help ensure that the education and training system is geared to meet both domestic and external demands for manpower. 13. The Government continues to emphasize social issues in the 1986-90 Five-Year Plan. Although the social indicators are relatively favorable in most sectors, social services are unevenly distributed across income groups and between urban and rural areas. Housing remains a problem despite the boom in 1978-80, mainly because housing costs have far exceeded the means of the lower income groups. External Assistance 14. With the large, chronic trade deficit offset by inflows of remittances and foreign transfers, the current account of the balance of payments was on average in equilibrium through 1975-81. Net workers' remittances increased from about $160 million in 1975 to about $980 million in 1984. In 1985, however, they decreased to $843 million reflecting the economic recession in the Arab Gulf countries. Following the Baghdad Arab Sunmmit Conference in November 1978, which pledged assistance of about $1.2 billion per year over a 10-year period, net foreign grant aid rose from $400-500 million in 1977-78 to about $1.3 billion in 1980 and 1981; it declined to some $0.8 billion in 1983 and to $0.6 billion in 1985. In 1986 it is expected to remain at $0.6 billion. This decline was the main reason for the current account deficits of $390 million in 1983, and $330 million in 1985, both of which were financed largely by external borrowing and partly by drawing on reserves. Jordan's reserves have remained, however, equal to three months of imports. The external public debt outstanding and disbursed reached $2.5 billion at the end of 1985 (about 66 percent of GNP defined to include workers' remittances). External debt service payments amounted to $317 million in 1985 or 9.7 percent of total exports of goods and services. 15. Jordan's impressive growth, pragmatic economic and social policies and efficient economic management have helped to attract large amounts of foreign assistance. The grant component of this foreign assistance is projected to decline gradually in real terms over the next few years. The  -5- projections on that basis indicate a need for average gross external borrowing of about $1.1 billion over the 1986-1990 period, modly in later years. While bilateral and multilateral sources dan be expected to provide the bulk of external resources, Jordan is likely to resort increasingly to the financial markets, and this would result in a hardening of loan terms. On these assumptions, the debt service ratio as a percentage of exports of goods and services is projected to reach 13.1 percent by 1990. Given this outlook and the country's record of prudent management, Jordan remains creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS 1/ 16. Jordan has received 20 Bank loans totalling $474.4 million and 15 IDA credits totalling $86.1 million (net of cancellations) of which all the credits and two loans have been fully disbursed. Project implementation and disbursement performance have been generally satisfactory. In recent years, disbursements have amounted to about 55-65 percent of disbursements estimated at the time of appraisal, and this disbursement percentage has been generally higher than the average for the EMENA Region. The IDA credits have financed projects in key sectors, such as education, highways, water supply and sewerage, power, irrigation and tourism. By mid-1978, Jordan had attained a stage of economic development where it could be considered creditworthy for Bank lending and had reached a GNP per capita level that exceeded IDA limits. IDA lending was thus discontinued after March 1978. IFC has made investments in Jordan with total commitments of $94.8 million. Annex II contains a summary statement of Bank loans and IDA credits and IFC investments as of March 31, 1986. 17. Under its last two development plans, Jordan has aimed at restructuring its economy to achieve a wider manufacturing base, to reduce its dependence on external grants, and to spread the benefits of development among different regions. The Bank's strategy has been tailored to support those objectives and in particular is designed to help the Government: (a) to diversify the country's economic base and promote exports; (b) to alleviate manpower and infrastructure constraints in the productive sectors; and (c) to encourage more balanced growth and distribution of social services among regions and income groups, with particular emphasis on low-income groups. 18. Within this broad framework, past lending has emphasized support for capital infrastructure and manpower development. Since 1962, Bank Group lending has focussed on water supply and sewerage, power and energy development, education and urban and municipal development. The Bank Group has also lent for irrigation, agricultural and industrial credit, transportation, and tourism, and recently became involved in the health sector with a loan for a Primary Health Care Project. In addition, the Bank Group has financed technical assistance for developing and implementing a plan for expanding phosphate rock mining. An engineering credit was made in FY75 to help prepare a large project for potash production from the Dead Sea via solar evaporation, for which a loan was approved in September 1978. These projects have been designed with an emphasis on institution building to assist the agencies involved to develop their capabilities to plan, prepare, and implement projects on their own. In addition to the proposed water supply and I/ Substantially the same as Part II of the President's Report for the Manpower Development Project (No. P-4166-JO), dated October 10, 198S.  -6- sewerage project, future lending would include projects for transportation, urban development, power and energy development, and industry and mining. IFC has provided loans and equity contributions for a major fertilizer project and for projects in the construction materials subsector. It has also assisted the capital market and leasing ventures. 19. The Bank has recently helped the Government to review the energy, water supply, health, urban and education/training sectors, and the Bank's economic and sector work will continue to focus on strengthening the macroeconomic and sector base for our lending program. The Bank's economic work program aims to deepen and broaden the well-established poliry dialogue with the Government in priority areas: (i) development planning, with a focus on resource mobilization and allocation; (ii) industrial and trade policies, including technology transfer and export strategy/promotion and industrial subsector studies; (iii) regional development and equity and efficiency of government revenues and social expenditures; and (iv) manpower development. These subjects are crucial because the substantially tighter balance of payments situation expected for the rest of the decade calls for increased efforts to step up domestic resource mobilization, to stimulate manufactured exports and to optimize resource allocation, while making particular efforts to reduce rural and urban poverty. 20. At the end of 1985, the actual Bank Group share in Jordan's total external public debt was estimated at 8.4 percent, and its share in debt service was 7.4 percent. In 1987, the Bank Group's shares in debt outstanding and in debt service are expected to be about 6.5 and 9.4 percent, respectively. PART III - THE WATER SUPPLY AND SEWERAGE SECTOR The Setting 21. Water Resources. About 80 percent of Jordan's land area is desert. Availability of water depends largely on rainfall, ranging from moderate amounts (600 millimeters per year) in the northern uplands to negligible amounts in the southern and eastern deserts, over 85 percent of which is lost through evaporation. As the more conveniently located sources of municipal and industrial water supplies have become fully utilized, surface and groundwater in other areas, hitherto used for agriculture, will have to be transported at high cost over long distances and/or steep gradients to meet these needs. The rapid growth of the economy in recent years and the associated increase in municipal, industrial and agricultural water demands. coupled with Jordan's high rate of population increase, have put serious pressure on the country's limited water resources; and water scarcity may become a principal constraint to economic growth. In these circumstances, it is crucial for Jordan to realize the maximum benefits from its limited resources by the continued development and implementation of a sound sector strategy and through prudent water resource management. 22. Water Supply. About 87 percent of the urban population is supplied through house connections. However, due to source and distribution system inadequacies, the supplies in many areas are intermittent. Over 30 percent of the water produced for municipal water supply is lost through leakage, due in part to corroded pipes in the major distribution systems; with improved water supply and distribution system pressure, the rate of leakage has increased.  However, leaks are expected to be reduced through ongoing rehabilitation and replacement of older mains (para. 30). Even where public piped water supply exists there is a danger that intermittent supplies can lead to contaminated water because effluents can enter the system through leaks when it is depressurized. This risk is particularly acute where septic tanks and cesspits are used. 23. Sewage. At present, only four cities (Amman, Salt, Aqaba, and Jerash) have sewage collection and treatment systems, and only about 25 percent of Jordan's population is connected to a piped sewerage system. Sewage systems are being constructed in the Greater Amman area (Amman, Baqa'a Valley and Wadi es Sir), Irbid, Zarqa, Ruseifa, and in ten medium size cities, six in north Jordan and four in the south, eight of which are included under the Bank financed Eight Cities Water Supply and Sewerage Project (Loan 2425-JO), which will provide services to another 30 percent of the country. In areas where sewage systems do not exist, the wastes are discharged in septic tanks, cesspools and similar facilities. Despite significant efforts to provide sewerage in recent years, rapid growth in urbanization, rising standards of living and extensive but uncoordinated land development have caused individual waste water disposal facilities to become inadequate, particularly in high density areas and in soils with limited percolation capacity. Occasionally, overflows or improper disposal of cesspool waste occur, creating major health hazards. Severe outbreaks of cholera have occurred in Jordan, the latest in 1981. The infant mortality rate has declined in recent years but still remains high (60 per 1000 live births in 1982) as does the incidence of water-related infectious diseases. This suggests the need for continuing efforts to improve water supply and sanitation conditions in the country. Government Strategy in the Sector 24. The scarcity of water and the high cost of its development have long been recognized by the Government. Based on a number of studies over the years, including the Bank's Water Sector Study (para. 31), available water resources are projected to be adequate to meet municipal and industrial needs beyond the turn of the century with a modest increase available for irrigation if the Government continues to pursue appropriate policies in the following areas: (i) proper allocation of known resources and new resource development (which includes transfer of water from water surplus to deficit areas, continuing exploratory work for ground water sources and further development of remaining surface sources); (ii) prudent water resource management by strengthening the sector's institutional capability; (iii) quantity and quality control of water and wastewater, including the protection of water sources; (iv) development of policies related to reuse of waste water; (v) development of appropriate cost recovery and other financial policies; and (vi) manpower planning and training. 25. Aided by sound government policies, water conservation is generally practiced throughout the country. The cost of water to consumers is very high in Jordan compared to most other developing countries, and consumption per capita is relatively low on average. The Government has made impressive strides in developing the sector. It has embarked on a program of large water projects to help relieve water shortages, particularly in the upland areas of northwest Jordan. During the last Five-Year Plan period (1981-85), almost 16  -8- percent of public sector investment was allocated for water and irrigation, about seven times the corresponding actual investments in the previous plan period (1976-80), and continued priority for the sector is expected in the next plan period (1986-90). Furthermore, the Government has adopted a policy for adequately treating all sewage from industries and municipalities which are sewered so that effluents may be suitable for reuse in agriculture and, with the assistance of the United States Agency for International Development (USAID), has developed a data management system for monitoring the quality and quantities of water resources in the country. The newly created Water Authority (WA) (para. 26) is responsible for maintaining and policing this system. In order to deal with the problems of intermittent water supply and leakage, the WA is implementing a program to systematically detect and repair leaks and to improve water distribution (para. 30). These efforts should help reduce the level of unaccounted-for water as well as the risk of bacteriologically unsafe water. 26. Institutional Aspects. In the past, the sector was plagued with problems of inadequate coordination due to the large number of institutions involved in water production and supply for different user groups. This often led to duplication of efforts and sub-optimal investment decisions. As recommended in the Bank's Water Sector Study, an autonomous agency, the WA, was created in December 1983 to take over the responsibilities for providing water supply and sewerage services, water resource management and monitoring, planning, development and allocation, and water quality monitoring for the whole of Jordan. This has set the institutional framework necessary to better conserve critically scarce water resources in order to sustain economic growth. The thrust of the WA's work is to formulate policies and take appropriate measures to augment the country's usable water resources, to efficiently allocate these among the various competitive users and to ensure that the water allocated is used economically. In order to undertake its mandated role the WA is studying alternative organizational solutions with the assistance of a management advisor. 27. In view of the growth of sector-related institutions and operational facilities, the demand for trained personnel has become an urgent matter. In tne past most of the institutions involved in the sector had some training programs, and several educational institutions provided some sector-related training, but this was generally ad hoc, unfocussed and uncoordinated. With the assistance of USAID, the WA is in the process of implementing a national training program to satisfy both short- and long-torm problems in this area. 28. Tariffs for urban municipal water supply and sewerage have generally been in line with the cost of these services. However, ineffective control of groundwater extraction by industry and agriculture, where tariffs or extraction fees have not been imposed or are below costs of production, has contributed to the need for early development of distant water sources at high cost. A tariff study for municipal and industrial water uses, to be completed by end-1986, will help develop the necessary financial strategies (para. 56). Experience With Past Lending 29. IDA commenced its assistance to the sector in the 1960s. The FY62 Credit 18-JO for $2.0 million and FY64 Credit 43-JO for $1.5 million supported water supply development respectively in Amman and in five other cities. In  -9- the 1970s, the Government concentrated its efforts on developing the water supply and sewerage services of Amman, which also resulted in the creation of the former Amman Water and Sewerage Authority (AWSA). The FY73 $8.7 million Credit 385-JO and FY78 $14 million Credit 780-JO assisted in the development of AWSA and helped finance investments for Amman's rapidly expanding needs for additional water supply and sewerage facilities. These projects have been successfully completed, and completion reports for Credits 385-JO and 780-JO have been prepared. The lessons learned from the above projects include the need for better coordination in planning and execution of projects and the particular importance of reducing unaccounted-for water in a largely water deficit situation. It was also noted that while substantial efforts had gone into the institutional development of AWSA, weaknesses remained, particularly in its financial department. These factors have been taken into account in the design of later projects. 30. In FY83, the Bank provided further assistance through Loan 2213-JO of $17 million for the improvement of the water supply and sewerage services for the cities of Zarqa and Ruseifa. A prime project objective was to strengthen the Water Supply Corporation (WSC), the project implementing and operating agency, which was responsible for water supply and sewerage in areas outside Amman and the Jordan Valley Authority. Technical and financial advisors have already been engaged, and measures to improve operations and financial management are underway. With the reorganization of the sector, responsibility for the execution and operation of the project has been taken over by the WA, which will be assisted by these advisors in its organizational development. The Bank also approved in May 1984 a loan of $30 million (Loan 2425-JO) to the WA for the Eight Cities Water Supply and Sewerage Project (para. 23) and in January 1985 a loan of $30 million (Loan 2483-JO) for the first phase of the extension and improvement of the water supply and sewerage services in the Greater Amman area. Project execution for the three ongoing projects is progressing well, and they are expected to be completed during 1987, well ahead of schedule. Actions are also being taken to reduce unaccounted-for water through improved metering, billing and leak detection. WA staff members have recently been trained in leak detection at the Thames Water Board (UK), which is providing a short term advisor. The WA has also ordered water meters and leak detection equipment and plans to have a satisfactory metering system in place by no later than 1988. This, combined with actions being taken or planned with regard to water main rehabilitation and meter reading and billing, should reduce unaccounted-for water on a country basis from 45 percent of the water produced at present to a target level of 25 percent by 1990. This would be a notable achievement, and the target level would be acceptable in the medium term for a system of this age. Rationale for Bank Involvement 31. Given the close association between the Government and the Bank in developing a strategy for the sector and the responsiveness of the Government to Bank advice, it is appropriate that the Bank continue to play an active role in the sector. The Bank's Water Sector Study (Report No.4699-JO, June 1984) made several recommendations concerning the sector's organization and financial policies; outlined a strategy to develop available water resources for meeting the needs of competing users; established general recommendations for appropriate wastewater disposal; and formulated associated investment programs. Based on this, the Bank's overall strategy in the sector includes  - 10 - assistance to the Government in implementing policies to efficiently manage and allocate the country's scarce water resources, executing technically sound and economically feasible projects to increase usable water resources (including effluent reuse), strengthening the WA, including training, establishing sound pricing policies to assure economic use and conservation of water and providing for adequate standards in works operation and maintenance. 32. The proposed project has been designed to support the Bank's overall strategy. It would help the Government implement high priority projects within the next Five-Year Plan for the sector designed to keep pace with increasing water demand and requirements for sound sewage disposal systems. It would play an essential role in providing assistance and advice, and in ensuring proper follow-up actions, for: (i) the development of water resources management and conservation procedures; (ii) the development of appropriate management and organizational systems for the WA; (iii) judicious selection and formulation of potential projects and related investment strategies; and (iv) improvements in operational areas such as financial plazning, accounting, auditing, manpower planning and training. Proiect Area 33. The proposed project will cover the population centers of Greater Arman, the Jerash area and the town of Aqaba, which are shown on the attached maps. Amman, the capital of Jordan, has grown rapidly in the past two decades and has become a major metropolis surrounded by growing suburbs and outlying coumhnities. The economy of the Amman region (including the neighboring Zarqa/Ruseifa municipalities) has been characterized by a contiuuing shift from agriculture to the industrial and service sectors. Jerash, located some 40 bm north of Amman, is a major tourint attraction; and Aqaba, Jordan's only port, located at the Red Sea, is increasingly important for the country's industrial development as well as for the transit of goods to Iraq. The total popuLation of these areas in 1985 was about 2.0 million and is projected to increase to 2.4 million by 1990 and 3.4 million by 2000. This would represent about 75 percent of Jordan's population by 1990. About 89 percent of the urban population and 84 percent of the rural are connected to the public water supply system, the remainder being served by public taps, water tankers and to a minor extent by private wells. Water consumption for connected supply averages about 85 liters per capita per day (lcd). Water supply facilities are generally well operated and maintained, although some 6 percent of water samples being taken are bacteriologically unsatisfactory. With regard to water supply sources in Jordan, an analysis of projected water demand and water availability indicates that existing water sources and those currently under development would be sufficient to 1990, and total water resources would be sufficient beyond the planning period 2005. 34. Although significant efforts are being made in the construction and extension of sewerage and sewage disposal works (para. 23), the needs have not yet been satisfactorily covered. In Amman municipality about 80 percent of the population is connected to the piped severage system, and in Jordan as a whole about 25 percent is being served. The remainder relies mainly on cesspool installations with effluent percolating into the ground, which operate with varying degrees of efficiency depending upon loadings, soil conditions and maintenance. Maintenance costs (emptying) can be significant and in many instances the cesspool effluent overflows or is pumped illegally  - 11 - into the streets, creating a sanitary nuisance and a health hazard. With the completion of ongoing projects (para. 23), the percentage of the population connected to public sewerage services would increase to about 55 percent of the total population by 1987. 35. Master plans for sewerage have been prepared for the Greater Amman and Irbid areas, but project implementation thus far has been limited to the central cities, leaving the fringe areas without proper excreta disposal facilities. Studies have also been made for other major urban centers and an inventory of required systems with a tentative establishment of priorities have been carried out for all major towns and villages. Since it would neither be feasible nor economical to cover the whole population with piped sewerage and sewage disposal systems, the Bank and the WA have agreed on basic criteria to develop the subsector which are: (i) extension of sewerage systems in areas already provided with sewage disposal works in order to obtain optimal utilization; (ii) identification of areas where there is a threat to groundwater sources being used for potable water supply; (iii) identification of areas where, because of impermeable soil conditions, individual excreta disposal facilities are not economical because of frequent and costly pump outs; (iv) identification of areas with high population densities and significant growth potential; and (v) provision of simple but adequate sewage treatment enabling effluent reuse for irrigation purposes. 36. Since water production facilities are presently sufficient, the first priority in the subsector should be the extension and improvement of water transmission and distribution systems in order to optimize the use of existing water sources, with the ultimate goal of covering the total population with satisfactory piped water supplies. At the same time, existing distribution systems should be continuously maintained and rehabilitated in order to reduce water losses and hence defer the development of new and costly water sources. In order to maintain the use of existing groundwater sources, their protection from sewage infiltration should be safeguarded. With adequate water supply, the need will also increase for improved waste collection and disposal facilities, particularly in high population density areas. The construction and extension of sewerage and sewage treatment works are thus an important priority. Furthermore, the reuse of treated effluents will provide a valuable contribution to water conservation. PART IV - THE PROJECT Project History 37. The proposed project is based on the priorities developed in a phased master plan for wastewater collection and disposal in Greater Amman as well as a study of the primary and secondary water distribution systems in the Amman, Balqa and Irbid Governorates, which evaluates overall availability of water sources, their phased extension and their allocation among different users. Proposed works for Aqaba and Jerash are also based upon master plans for sewerage and sewage disposal facilities. The project was appraised in November 1985. Negotiations were held in Washington, D.C. during March 17-19, 1986. The Jordanian Delegation was headed by Mr. Mohammed Kilani, President, Water Authority of Jordan (WA). A Staff Appraisal Report (No. 6056-JO), dated March 28, 1986, is being distributed separately. The main features of the loan and project are outlined in the Loan and Project Summary and in Annex III. Maps of the project area are attached.  - 12 - Project Objectives and Description 38. The project is expected to have a significant impact on the living conditions and health standards of populations in the project areas. Its major objectives include assistance to the Government: (i) in developing an optimal investment program for the sector; (ii) in improving water resource management and conservation and water systems operation procedures; (iii) in rehabilitating and extending water distribution and sewage collection systems; (iv) in augmenting present efforts to reduce unsccounted-for water; (v) in reducing groundwater pollution by the collection and treatment of sewage; (vi) in providing for recycling of treated effluents; and (vii) in the continued development of the Water Authority (WA). 39. The project includes the following major components: (i) extension of 150 km and rehabilitation of about 300 km of water mains for the water distribution systems (including a service reservoir and two pumping stations) in the Greater Amman and Jerash areas; (ii) extension of about 365 km of sewerage systems in the Greater Amman, Jerash and Aqaba areas; (iii) construction or extension of five sewage treatment works (of which two are existing) in the Greater Anmman area and Jerash to provide additional sewage treatment capacity; (iv) equipment for monitoring and control of water sources and water distribution systems including water meters, pipes, valves and standby pumps; (v) consultant services for engineering, construction supervision and operation control and monitoring; and (vi) training. The equipment and consultant services provided for monitoring and control of water sources and distribution systems is part of the WA's ongoing program to provide information by tracking water production and distribution in order to improve operational efficiency. The various alternatives selected and project components recommended represent the most feasible, least cost solutions. The proposed phasing of the various project components and the design criteria used are appropriate. Project Costs and Financing Plan 40. The total cost of the proposed project, including physical and price contingencies (in end-1985 prices), is about $86.9 million, of which about $54.5 million (63 percent) is in foreign exchange. In addition, interest and other charges during construction amount to about $9.5 million. Cost estimates do not include import duties and taxes, from which the project is exempt. The project cost includes physical contingencies of about 9 percent of the base cost. Price contingencies amount to about 26 percent of base cost and physical contingencies. The price increases for both civil works and material and equipment for foreign cost expenditures have been estimated at 7.2 percent for 1986, 6.8 percent for 1987-88, 7 percent for 1989, 7.1 percent for 1990 and 4 percent thereafter; and for local cost expenditures at 5 percent for 1986 and 7 percent thereafter. 41. The proposed Bank loan of $50 million would cover about 78 percent of the foreign exchange and 52 percent of the total financing requirements of the project, including interest and other charges. The balance would be financed by the Government as equity contributions and from internal sources of the WA through customer contributions. The Bank loan would be made to the Government for 15 years, including a three-year grace period. The Government would onlend it on the same terms and conditions to the WA, under a subsidiary loan  - 13 - agreement satisfactory to the Bank, the execution of which would be a condition of effectiveness. The WA would bear the foreign exchange and variable interest rate risks. The onlending rate would be significantly positive in real terms as the current domestic inflation rate is about 5 percent per annum. 42. Procurement and Disbursements. Procurement arrangements are si-urized below: Procurement Method 1/ Proiect Components 2/ ICB LCB Other Total - US$ Million Water Supply 23.41 3.50 - 26.91 (12.20) (1.80) (14.00) Sewerage 30.92 4.50 - 35.42 (16.20) (2.30) (18.50) Sewage Treatment Works 13.55 - - 13.55 (7.70) (7.70) Equipment 8.42 - - 8.42 (8.00) (8.00) Consulting Services - - 2.23 2.23 (1.80) (1.80) TOTAL 76.30 8.00 2.23 86.53 (44.10) (4.10) (1.80) (50.00) 1/ Figures in parentheses are the amounts to be financed under the Bank loan. 2/ For water supply and sewerage about 9 and 11 contracts, respectively, grouped on the basis of location and timing, are expected to be awarded. For sewage treatment works five contracts are expected to be awarded. For equipment, contracts will be grouped during the course of project execution. 43. All equipment supply contracts and those civil works contracts estimated to cost more than $1.5 million would be procured through International Competitive Bidding (ICB) in accordance with Bank Group guidelines. About 88 percent of total project costs would be procured under ICB. Other civil works contracts with an aggregate cost not exceeding $8.0 million would be awarded on the basis of local competitive bidding procedures, which have been reviewed by the Bank and are satisfactory. For equipment to be procured under ICB, a domestic preference of 15 percent or the import duty, whichever is lower, would be used for the purposes of bid evaluation. Documents and awards for all contracts under ICB would be subject to prior review by the Bank. It is anticipated that local contractors will be awarded the bulk of the civil works contracts, while local agencies or foreign suppliers may be awarded the contracts for treatment plants and equipment, which would represent about 20 percent of total project costs. Consultants would be selected in accordance with Bank guidelines. 44. The proposed loan would be disbursed as follows: equipment, supplies and installation, 100 percent of foreign and 85 percent of local expenditures;  - 14 - civil works, 60 percent of total expenditures; and consultant services and training, 100 percent of total expenditures. The estimated disbursement schedule in the Loan and Project Summary takes into consideration the standard disbursement profile for Jordan which is six and a half years on average for all types of loans. In order to expedite disbursements, a special account (revolving fund) of $2.0 million (equivalent to an average of about four months disbursements) would be opened by the Government and would be replenished on the basis of standard documentation for eligible reimbursable expenditures. Disbursements for contracts below $50,000 equivalent would be claimed under statements of expenditures, documentation of which would be retained for review by Bank missions. The loan closing date would be December 31, 1992. 45. The extension and improvement of water and sewage systems in Jordan is a continuous process; and for some key contracts, retroactive financing is recommended in order not to delay critically needed improvements. Such financing is proposed for expenditures incurred after November 1, 1985 for an amount up to $3.0 million (6 percent of the total Bank loan). CQntracts would be awarded and disbursements made according to procedures satisfactory to the Bank. Project Execution 46. The WA has established a separate Project Management and Construction Supervision Unit (PMCSU), which has been responsible for preparing the project and which would continue to be satisfactorily staffed. During project implementation, the PMCSU would be assisted by engineering consultants for project management, tender evaluation and preparation of contract documents, finalization of detailed engineering, and supervision of construction works and equipment supply and installation. These consultant services are expected to be provided by the same firms undertaking the engineering design. Final engineering including preparation of tender documents is expected to be completed for the bulk of the works by mid-1986. The WA is in the process of acquiring land for the sites of the sewage treatment works. This is scheduled to be completed by mid-1986 and, based on past experience, should pose no difficulties. The WA has sewer regulations that require properties to be connected to the sewage system as it is constructed. While sewerage is generally desired, the expense required for sewer connections may pose some financial difficulty for lower income groups to be served. However, based on previous experience from the Amman area, less than 2 percent of the beneficiaries may need financial assistance. The WA has agreed to assist low-income families with appropriate arrangements for sewer connections. A project monitoring and reporting system, including selected financial performance indicators, has been agreed with the WA. Agreement has also been reached that the WA would prepare quarterly progress reports to be sent to the Bank, commencing from the second quarter of 1986. The project is expected to be completed by December 31, 1991. The Implementing Agency 47. The WA (para. 26), the beneficiary of the proposed loan, is an autonomous agency which reports to the Prime Minister's office and enjoys independent financial and administrative status. Operations and maintenance of water supply and sewerage is carried out in three regional offices, each  - L5 - under a manager, but supervised by related headquarters' departments and subject to control by Water Councils composed of public and private sector representatives. The WA has already taken over the Amman Water and Sewerage Authority (AWSA), the Water Supply Corporation (WSC), the water resources branch of the National Resources Authority (NRA), the water department of the Jordan Valley Authority (JVA) and about 300 municipal water supply operations. 48. The number of staff in the different water and sewerage related organizations now incorporated into the WA total about 3,000 people, which corresponds to about 11 employees per one thousand connections served, which is reasonable given the fact that the WA's responsibilities are spread over the whole country and the population density. outside Amman is low. Furthermore, another 550 people, previously belonging to the NRA, are engaged in well drilling activities. Through the creation of the WA, a number of overlapping functions have been eliminated and staff from separate organizations brought together to work in consolidated units. While this will contribute to increased productivity, additional staff will still have to be recruited to operate the new sewerage systems being built under this project and others. By the time this project is expected to be completed, WA staff are projected to grow to about 4,000. Attracting and retaining technical staff do not pose problems, as salary levels are competitive. 49. Institutional Development and Training. Institutional assistance is being provided to the WA by the Bank under the Zarqa/Ruseifa Project (Loan 2213-JO) and by the USAID, with which the Bank cooperates closely. Management advisory services are included under the Zarqa/Ruseifa Project to assist the WA develop its organizational structure, establish staffing and training needs, develop an appropriate management information system and propose personnel policies. Technical advisors have been engaged to assist the WA to improve operating and maintenance practices, to set up a data collection system for project planning purposes, and to prepare major projects. Financial advisors have been engaged to assist the WA develop its accounting and financial management systems. USAID is assisting the WA to evaluate the need for computerizing its various activities and would finance the subsequent installation of computer facilities, which is expected to take place during 1986. 50. The WA is undergoing a period of consolidation. Because of the urgent need to ensure satisfactory water supplies and to provide adequate sewerage and sewage disposal facilities, it has heavily concentrated on the development of its project planning, preparation and implementation capacity. As impressive strides have been made in these areas, the WA is now concentrating on organizational development, accounting and financial management information systems, computerization, tariffs and training. As in the past, Bank supervision efforts of the proposed project will emphasize the institutional development of the WA. 51. The WA has an ongoing training program financed largely by USAID. The program provides for training of managerial and professional staff abroad and operating staff at local institutions. The financial advisor is providing on-the-job training to the accounting staff in implementing a public utility accounting system. Several facilities in Jordan now provide training for technicians in civil, mechanical, electrical and chemical engineering. Programs have been or are being developed for training in water supply and  - 16 - wastewater engineering and specifically for sewage treatment plant operators, in view of the number of plants to be commissioned in the near future. The USAID has prepared a proposal for a long-term training program which is providing a framework to address the training needs of the WA in the years to come. To supplement this, the proposed project includes a minor training component requested by the WA which would involve a possible "twinning arrangement" with the UK Thames Water Board (TWB) and would include WA's staff being sent to TWB for training. 52. Billing, Accounting and Audit. The WA's efforts in the area of billing/collection and accounting are generally satisfactory and are being improved. The WA is planning to expand its own computer facilities, and by end-1987 all billing will be computerized and done in-house. The accounts receivable for the overall operations represent about four months of sales, which is satisfactory. The management of the WA is devising measures to further improve bill collection, including incentives for bill collectors and the introduction of computers. The WA's accounting system in its Amman operations follows the standard public utility format on an accrual basis and is reasonably well kept; that outside Amman is still on a cash basis and is not entirely satisfactory. The WA is extending the accrual system to its entire operations and computerizing it. A new manual of accounts, prepared by the financial advisor, is now being implemented. Finally, the WA has just completed the process of valuing the assets it has taken over (para. 47), using the services of a firm of chartered surveyors and valuation experts. With regard to auditing, WA accounts would continue to be audited by independent auditors acceptable to the Bank and experienced in public utility systems; financial statements and audit reports, including for the Special Account and for statements of expenditures, would be forwarded to the Bank within six months after the end of the fiscal year. Financial Position 53. The financial position of the WA reflects the nationwide scope of its operations; the scarcity of water, which makes it imperative to protect sources and to treat and recycle effluents; low average consumption levels; the locational mismatch between water sources and consumption centers, which necessitates the transportation of water over long distances and steep gradients; and relatively high construction costs. The effect of these difficult circumstances means that water tariffs in Jordan are the highest in the Middle East Region. 54. The WA derives most of its revenues from water and sewerage charges based on metering. In small communities without a piped water supply and for a large nomadic population, the WA provides a tanker supply or a free supply from water points. The unit costs of providing these services are up to ten times higher than those in larger centers. Tariffs in line with such costs would be totally unaffordable; thus, costs of these operations exceeding the corresponding revenues have been covered by the Government. During 1985, the WA took over a large number of water supply systems spread out all over the country along with the personnel employed in these operations. The resulting increase in its wage structure had a temporary negative impact on its financial performance for the year. In the past, however, WA net revenues have been sufficient to cover its operating costs and debt service. At the end of 1985, the WA had a current ratio of 2.2 and a debt/equity ratio of  - 17 - 33/67, which reflects the significant role of the Government in the financing of the WA's facilities. 55. The WA's tariffs are proposed by its Board of Directors and approved by the Council of Ministers. The WA charges for its sewerage operations through a combination of surcharges on water consumption and connection fees and an annual tax based on property rental values, which is collected by the Government and passed on to the WA. Water tariffs in its piped supply operations are adequate and in line with the cost of these services, while the cost of providing tanker supply and free water point service has been supported by the Government. The WA's average revenue from the current system of sewerage charges is financially adequate. 56. As part of the Bank's loan for the Zarqa/Ruseifa Project, it was agreed that a tariff study would be carried out which would propose various combinations of tariffs, user charges and levies for water and sewerage for the Government's consideration, taking into account the need for water conservation, affordability to the poor and the financial viability of the WA. The scope of the study was subsequently expanded to cover the entire country. The study is now being carried out by consultants financed by USAID, and its results are expected to be submitted to the Bank for review by the end of 1986. The study will serve as a basis for establishing a new tariff structure. 57. Future Financial Performance. The period covered by the projections (1986-92) will be one in which the WA must consolidate the large number of systems it has taken over, while rapidly growing at the same time. The number of water connections will rise by a third and of sewerage connections by about three times during the period. By the year 1992 the volume of water sales is expected to be double that of 1985; and with the new sewage systems, related volumes to be billed would be almost five times as great. The volume of water supplied by tankers and at water points is expected to level off by 1990. The revenues from water sales would increase about three times the present level and the revenues from sewerage and the taxes collected for sewerage services increase by about six times. In the same period operating expenses would rise about 2.5 times the present level. The difference between revenues and expenses would leave a margin which would be sufficient for the WA to meet its overall financial objectives. 58. Agreement was reached under the Bank loan for the Greater Amman Water Supply and Sewerage Project (Loan 2483-JO) that the WA would from fiscal year 1985 onwards: (i) for its metered water services maintain or adjust tariffs to provide sufficient revenues to cover its operating and maintenance expenses (excluding depreciation), debt service or depreciation, whichever is higher, and increases in working capital; and to finance commencing in fiscal year 1987 not less than 5 percent and from fiscal year 1989 onwards not less than 10 percent of the average annual investment cost; and (ii) for its sewerage operations, implement a system of user charges, fees and levies sufficient to cover full operating and maintenance cost (excluding depreciation) and debt service or depreciation whichever is higher. For its water services by tankers and at water points, agreement was obtained that the Government would compensate the WA for any deficits resulting from such operations. (The level of operational subsidies received by the WA for the operation of its tanker services has been around JD 2.0 million per year.) Based on unaudited  - 18 - financial results for FY84 and the first three quarters of FY85, the WA complied with these financial covenants in 1984 but fell short in 1985 mainly due to the large number of small urban and rural systems which were taken over during the year. 59. While this takeover process is almost complete, the accounting systems procedures and control outside Amman need to be improved, due mainly to poor past practices and the general scarcity of qualified accounting personnel in Jordan. The WA is exerting significant efforts to remedy the situation (para. 52); however, it will take four to five years before any significant improvements in WA's financial operations become apparent. In the absence of a cost accounting system it is difficult to allocate operating costs in a meaningful way between metered water, sewerage and water tanker services. Hence, it has been agreed that a new financial covenant be used under the proposed loan to replace the existing covenants. This would require the WA to meet all operating and maintenance costs (excluding depreciation), debt service or depreciation whichever is higher, and adequate increases in working capital from its water supply and sewerage charges. Under this financial discipline, the former operating subsidies for water tanker service would be eliminated. The new approach would require the same level of financial effort from the WA, since the funds which the WA received from the Government for water tanker services were on a long term basis about equal to the contribution the WA would have made to investments under the existing financial covenant. Besides eliminating operating subsidies from the Government for tanker services, the new approach would make establishing tariffs and monitoring financial operations much more realistic and transparent. Furthermore, while the WA's investments after 1990 would consist largely of continuous extensions to water supply and sewerage networks, major new water source developments are expected to be lumpy, lasting only a few years, and would distort the tariff setting formula under the old covenant. It has also been agreed that the WA would provide the Bank, three months before the beginning of each fiscal year, with copies of its forecast budget for the fiscal year, financial projections for the following two years as well as its proposals for any adjustments in tariffs. 60. In the period 1985-92, the WA's debt-equity ratio would be around 43:57, which is satisfactory and also indicates that, in spite of the important role that the Government will play in sector financing, a significant portion of the capital expansion program would be debt-financed. In the same period the WA's fixed assets in operation would double. Average water tariffs would have to go up about 65 percent in this period, only slightly above the adjustment necessary for inflation, which confirms the financial adequacy of the present water tariffs. Average charges for sewerage would not have to grow as much because of savings from economies of scale. The projected water supply and sewerage charges would be within the customers' ability and willingness to pay (para. 61), and internal cash generation should cover debt service and provide small increases in working capital. Affordability of Water 61. The cost of water services in Jordan is high. The long-run average incremental cost (LRAIC) of water at a discount rate of 10 percent varies between JD 0.370/m3 in areas where water is locally available to JD 0.490/M3 for areas such as Amman, where part of the water has to be pumped  - 19 - over long distances. However, the water tariffs and sewerage charges as projected would not impose a serious burden on even the lowest income population. The lowest quintile of average monthly household income in the Anman area is about JD 137. Assuming an average household size of five persons and an average per capita water consumption of 65 liters/day, the average water and sewerage bill would be about JD 5.20 per month (about 3.8 percent of the household income), which is considered affordable. Such charges are generally less than the cost to maintain cesspool installations. The proposed tariff study (para. 56) will include the determination of appropriate sewerage charges for cost recovery and the means for collecting them, which may be either by continuing the present system of a combination of tariffs, user charges and levies or by a sewerage surcharge based on water consumption. Project Benefits and Risks 62. The proposed project is part of the Government's high priority program to improve the water supply and sewerage services in Jordan. It would contribute to an increase (from 1986 to 1990) in the percentage of population served by piped water supplies from 89 percent to close to 100 percent and by waterborne sewerage systems, including sewage treatment facilities, from 32 percent in urban areas to about 85 percent. Direct beneficiaries of the project are estimated at over 300,000 people. The benefits accruing from the project would be substantial but cannot be meaningfully quantified. In assessing these benefits, reducing the incidence of waterborne infectious diseases and the pollution of waters used for various purposes and improvements in the quality of life are all important factors. However, using the revenues from sewerage as a proxy of the benefits accruing from this project, the economic rate of return (ERR) would be about 10 percent. 63. The ERR does not take adequate account of important socio-economic benefits to be derived from this project including: (i) improved water supply and extended sewage collection systems, which would result in enhanced hygienic standards and subsequently have a favorable impact on general health conditions; (ii) the reduction in cesspool effluents percolating into the ground to enable the continued use of groundwater sources for domestic water supply thus avoiding replacement by far more costly alternatives; and (iii) the use of treated effluents for irrigation purposes which would contribute to agricultural development and improve the use of Jordan's scarce water sources. The proportion of the project that would benefit, and that could be ascribed to, the urban poor is estimated at about 35 percent of the population to be served (about 100,000) and about 30 percent of project costs and related benefits. 64. The project would continue the Bank's assistance to Jordan in strengthening sector institutions started under previous credits and loans. The creation of the WA was supported by the recent water sector study and is the principal step towards rationalization and higher efficiency in the use of water. Given the favorable response of Jordan to the Bank's analysis of sector issues and policy recommendations, it is appropriate that the Bank continue to play an active role in the future evolution of the WA and the sector. The project would provide a continuing opportunity to help develop the technical and financial management capabilities of WA staff through association with supervision consultants and Bank staff.  - 20 - 65. Risks. A project risk, if any, may relate to the possibility of not achieving the projected number of sewer connections, which could affect the WA's income and overall financial viability. Until now, however, the population has indicated a willingness to connect to the sewerage system when it becomes available, primarily because it provides cost savings as well as being convenient. It is expected that this trend will continue. Furthermore, it is expected that the tariff study would recommend a tariff structure that would make sewerage services more affordable to the lower income group while at the same time ensuring the financial viability of the WA. PART V - RECOMMENDATION 66. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments April 16, 1986 Washington D.C.  -21- ANNE I Page Tlof 7 u~~~~ macic. ZCJRJj03 (snfmD LINENS p ND"E (MDI 303353W MORN MIDDL usNUE INK1 awIW a