Peru - Water Supply and Power Engineering Project

Docmunt of The World Bank FOR OFFICIAL USE ONLY Rqort No. 9169 PROJECT COMPLETION REPORT PERU WATER SUPPLY AND SEWERAGE ENGINEERING PROJECT (LOAN S-11-PE) NOVEMBER 30, 1990 Infrastructure and Energy Division Country Department IV Latin America and the Caribbean Regional Office This document has a restricted distr'bution and may be used by recipients only In the performance of their official duties. Its contents may not ,therwise be disclosed without World Bank authorization.  LIST OF ABBREVIATIONS I ELECTROLIMA Lima Power Company ELECTROPERU National Power Company ESAL Empresa de Saneamiento de Lima MVC Ministry of Housing and Construction PCR Project Completion Report  THE WORLD BANK FOR OFFICIAL USE ONLY Washington, D.C. 20433 U.S.A. Office of Director-CAMeral Opera:it. Dvlu.ti.u November 30, 1990 ME-iORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Peru Water Supolv and Seweraze Engineerinz Proiect (Loan S-11-PE) Actached, for information, is a copy of a report entitled "Projece Completion Report on Peru - Water Supply and Sewerage Engineering Project (Loan S-11-PE)" prepared by the Latin America and the Carribean Regional Office. No audit of this project has been made by the Operations Evaluacion Department at this time. Attachment Thus dcumcnt ha a rsuted dstnbuuon and may >W by n ens olty in Lt perfmance o( tmitr offiaJl dluu. itg contentu may noa mnterWm4 be duiclfd twut World leAnt s=ors=n.  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT WATER SUPPLY AND SEWERAGE ENGINEERING PROJECT (LOAN S-11-PF) Table of Contents Page No PREFACE . .................................................. i EVALUATION SUIO(AJY . ....ii......................................... i PART I : PROJECT REVIEW FROM BANR 'S PERSPECTIVE ................ 1 A. Project Identity .....1 B. Project Background.... 1 C. Project Objectives and Description .. .. 2 D. Project Design and Organization .... 3 E. Project IMlementation.... 4 F. Project Results..... 5 G. Project Sustaimability ... 5 H. Bank Performance............................ . ........ 5 T. Borrower Performance.... 6 J. Project Relationship.... 6 K. Consulting Services.... 6 L. Project Documentation and Data .... 6 PART III STATISTICAL INFORMATION .......................... 7 1. Related Bank Loans. . . 7 2. Project T metable . . ................................... 8 3. Loan Disbursments... . . 9 4. Project Implementation................... . ............ 10 5. Project Costs and Financing . .11. 6. Project Results . . . .12 7. Status of Covenants ................................... 13 8. Use of Bank Resources . . ....................,,. 14 9. Missions . . .................... .,,,. 15 This document has a restricted distribution and may be used by recipients only in the petformance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PROJECT COMPLETION REPORT WATER SUPPLY AND SEWERAGE ENGINEERING PROJECT (LOAN S-11-PE) PREFACE This is the Project Completion Report (PCR) for the Water Supply and Power Engineering Project in Peru (Loan S-11-PE). This loan, in the amount of us$8.8 million, was made to the Empresa de Saneamiento de Lima (ESAL) with the guarantee of the Republic of Peru, and was signed on December 22, 1979. The closing date was December 31, 1983, two and a half years behind schedule. The last disbursement was on June 26, 1984. Total disbursements were US$8.12 million, and US$0.68 million were cancelled. The PCR was prepared by the Infrastructure and Energy Operation Division of the Latin America and the Caribbean Region, Country Department IV, (Preface, Evaluation Summary, Parts I and III). Given the time elapsed since closing of thc loan, it is proposed that Part II not be prepared. Preparation of this PCR was started in October 1989, and is based, inter alia, on the President's Report, the Loan, Guarantee, and Project Agreements; supervision reports; correspondence between the Bank and the Borrowers; and internal Bank memoranda.  - ii - PROJECT COMPLETION REPORT WATER SUPPLY AND SEWERAGE ENGINEERING PROJECT (LOAN S-11-PE) EVALUATION STMMARY Introduction The main objectives of Bank lending to Peru included assistance in the creation of a physical and social infrastructure capable of sustaining development, as well as the strengthening of agencies to implement and operate projects effectively. The Loan S-11-PE, aimed at the above objectives and also supported Government efforts to improve the living conditions of a rapidly expanding urban population. Negotiations were completed on September 8, 1978. Under the terms of the Loan, ESAL and the Mantaro Comission, the letter created within the Housing and the Construction Ministry, were responsible for project implementation. Although Loan S-11-PE was appro-'d on October 31, 1978, and signed December 22, 1978 it only became effective on June 27, 1979, due to delays in compliance with legal and financial conditions in the Loan Agreement. Obiectives The principal objective of the project was to help lay a sound basis for long-term solutions to Lima's needs in the water supply and power sectors and prepare two projects for possibl Bank financing, the expansion of Lima's water supply system and the Mantaro Transfer. It also aimed at supporting organizational and financial improvements in ESAL, which were preconditons for urgently needed investments to supply adequately Lima's growing population, particularly those living in its slums, with water and sewerage services. Implementation Experience Project implementation was subject to a number of delays (paras. 14 and 17) as a consequence of the combined effects of: (i) inadequate political commitment; (ii) weak adminisorative capability; (iii) shortage of counterpart funds; and (iv) lengthy bureaucratic procedures particularly for the hiring of consultants. Results The project objectives, especially those of institutional reorganization, were ambitious ana for the most part not achieved. They depended on policy decisions which were beyond ES control and the time span of a single project. The policy decisions required from the Government did not materialize. No significant progress was made in solving ESAL's institutional and managerial problems (poor system operation and maintenance, inadequate  - iii - metering and billing, and poor financial and administrative management capabilities) (para 21). However, most of the engineering studies included in the project were completed. Those studies consisted of assessment of water resources and demand in the Lima Metropolitan area, and the development of a water supply and sewerage master plan. The objective of the power sector component was achieved through the successful completion of the Mantaro Transfer Study. Sustainabilitv Overall, the project had mixed results with respect to sustainability. The Government and ESAL did little to initiate sustainable policies, especially with regard to the latter operational and financial improvements, hampering the possibilities of enabl,ng ESAL to administer water resources effectively and to carry vit a major expansion program. However, the project did succeed in improv .' sector knowledge for future development operations (para 23). The water and sewerage master plan for Lima provided the basis for the follow-up project (Loan 2139-PE) aimed at assi,cing the Government in achieving its objective of providing greater coverage of water and sewerage services to the lower income segments of the population. Findings and Lessons Learned. The stated main objectives of the Water Supply and Power Engineering Project (Loan S-ll-PE) were to support long-term solutions to Lima's water and power supply, and increase the efficiency of ESAL. Those objectives proved to be difficult to achieve because of insufficient political commitment and chronic institutional weaknesses. The project was based on an adequate assessment of both the institutional difficulties confronted by ESAL and the financial requirements for long-term sustainability. However, project design suffered from a number of problems, including: (a) lack of a long-term strategy for institutional innovation and change; (b) overestimation of ESAL's absorptive capacity; and (c) underestimation of the political constraints for reform. The Bank tried to accomplish too much without enough understanding of the complexity and difficulties implicit in any attempt at financial and administrative reform. The main lesson to be learned from the two component's incomplete success in implementation terms is that institutional development is a long-term process that should be carefully staged.  PROJECT COMPLETIJN REPORT WATER SUPPLY AND SEWERAGE ENGINEERING PROJECT (LOAN S-11-PE) PART I: PROJECT REVIEW FOMI BANK'S PERSPECTIVE A. Proiect-Identity Project Name : Water Supply and Power Engineering Project Loan Number sS-l.-PE RVP Unit :LA4 - Infrastructure and Energy Division (LA4IE) Country Peru Sector Urban Subsector s Water Supply and Power B. Background 1. Sector Development Obiectives. The Bank since 1978 has been assisting the Lima Water and Sewerage Company (ESAL) as well as the Lima Power Company (ELECTROLIMA), with the assessment of Lima's water and power resources. The Water Supply and Power Engineering Project (Loan S-11-PE) fit into the Government's sectoral development strategy of improving living conditions of the urban population through the expansion of services, while strengthening local capacity to implement and operate water supply and power engineering projects throughout the country. 2. Policy Context. The main objectives of Bank lending to Peru were to assist in (a) the creation of a physical and social infrastructure capable of sustaining and fostering development; (b) the expansion of productive capacity in critical sectors; (c) the consolidation of structural and institutional changes; and (d) the strengthening of agencies to implement and operate projects effectively. 3. In 1980, Peru's population was estimated at 17.3 million inhabitants, of whom 9.7 million lived in urban areas. The 6.9 million inhabitants of Lima accounted for about 40 percent of the country's urban population and was expected to reach 9 million by 1990. At the time of appraisal, only half of Peru's population had access to p.table water and only 40 percent was connected to sewer systems. To head off a water crisis, the Government explored a number of long-term solutions. Among the options considered was the transfer of the waters of the Mantaro river across the continental divide and to use it for generating electricity and for providing additional raw water to Lima's water supply system. A comprehensive survey of the country's hydro power potential was already under way supported by a German Government grant and funds from the Bank's power loan (2115-PE). 4. In 1970, the Government created the Empresa de Saneamiento de Lima (ESAL) to provide water and sewer services to the Greater Lima Metropolitan  -2- area. In September 1981, the Government reorganized the water supply and sever sector to increase efficiency. A new institution, the National Service for Water Supply and Sanitation (SENAPA) was created with the responsibility of planning, coordinating and providing technical assistance for all urban areas. Water companies in the largest cities, including Lima, became subsidiaries of SENAPA with a considerable degree of financial and administrative autonomy. 5. Linkages Between Proiect. Sector and Macro Policy Obiectives. Overall project objectives, in line with Government policies were to promote gr-eater sector efficiency and financial viability, and expand service coverage. The project was mainly oriented to support the Government's initiative of setting the basis for long-term solutions to Lima's water and power supply, and for future nation-wide operations in both sectors. Both components shared the same objective of correcting institutional deficiencies within a broad plan of increasing efficiency of public investment. C. Proiect Obiectives an_ escription 6. Proiect Obiectives. The purpose of the project was to: (a) lay the basis for long term solutions to Lima's water and power supply and for related future investments; and (b) support organizational and financial improvements in ESAL in order to enable it to provide adequate supply of water and sewerage services to Lima's population. 7. Prolect Description. The origin of the project goes back to 1971 with the Government's idea of a multipurpose project for water supply and power generation. The proposal consisted of facilities to transfer water of the Mantaro river across the continental divide to Lima, which at the same time could be used for power generation at Sheque power station, and for water supply to Lima Metropolitan area. T'e Bank had some doubts about the rationality behind this project and agreed to finance further feasibility studies aimed at defining the scope of the project and assessing the risks involved in the operation. In early 1976 the Bank proposed to the Peruvian authorities a two-part operation comprising: (i) a water supply component; and (ii) the Mantaro Transfer feasibility study. 8. Proiect Componentn. The project comprised two main components: (a) the ESAL component, US$6.13 million (55.0 percent of total project cost), and (b) the Mantaro component, US$4.97 miilion (45.0 percent of total cost). Specifically the project included: (a) ESAL component: (i) assessment of water resources and demand in Lima. including a leak detection and correction, and a metering program, US$2.39 million (21.5 percent of costs); (ii) water and sewerage master plan, US$2.04 million (18.4 percent of total costs); and (iii) strengthening of ESAL's organization, management and finances, US$0.4 million (4.5 percent of total project cost). (b) The Mantaro component: feasibility studies for water transfer from the Mantaro River for multipurpose use, water supply and electricity, and selection of the site and timing of the Sheque Hydroelectric plant.  - 3- D. Proiect Design and Orianization 9. The executing agencies of the pro,ect were ESAL and the Mantaro Commissionl for the water end the power component respectively, while COFIDE (National Development Bank) was to act as financial agent for the project and to administer the proposed loan on behalf of the Government. It was also entrusted with the responsibility of monitoring the adequacy of ESAL's financial performance, as well as supervising the execution of the financial rehabilitation program requiring the company to generate enough revenues to cover its operating and maintenance expenditures, debt service payments, and the counterpart funds needed for the ESAL component. 10. Based on the information available to the identification mission in 1976, the Bank was fully aware of both the technical, financial and managerial weakenesses of ESAL, and of problems of financial performance within the power sector which had a poor record in administrative, billing and collecting procedures. The foregoing problems in the power sector were later addresseo by Loan 2179-PE. Organizational and financial improvements in ESAL were key elements in project design. 11. The first part of the ESAL component consisted of studies to assess the volume of water available from all the existing sources in the Lima Metropolitan Area. A second part aimed at producing a water supply and sewerage master plan for Lima, with a proposal for the expansion of Lima's water distribution and sewerage system which would constitute th. -enter of a possible future Bank loan. The third part was designed to strengthen the institutional, technical and financial capabilities of ESAL. 12. The Mantaro component comprised: (a) an optimization study to explore possibilities for stretching existing water resources by such means as unified management of surface and groundwater and reuse of sewage; (b) ecological assessments (particularly the Mantaro's heavy pollution from mine water discharges) and the impact of Mantaro transfer on existing and proposed power stations downstream on the Mantaro, Santa Eulalia and Rimac rivers, which together accounted for the bulk of the country's hydroelectric capacity; and (c) selection of the site and timing of Sheque hydroelectric plant. 13. The two project components were designed to be interdependent but executed by different agencies. Coordination was assigned to working groups integrated by the Project Manager of the ESAL's component, and by representatives of the Mantaro project unit and of COFIDE. 1/ The Mantaro Commission within the Housing and Construction Ministry (MVC), was chaired by the president of ESAL. It included the presidents of ELECTROPERU (National Power Company), and ELECTROLIMA (Lima Power Company) as well as representatives of various ministries. An implementation unit was set up to supervise execution of the studies, including personnel from. the two power companies, ELECTROPERU and ELECTROLIMA.  -4- X. :roiect ImDlementation. 14. Project implementation was subject to a number of delays, taking five years to execute (June 1979 - June 1984) instead of the expected two (part III, Table 2). The closing date was extended twice. The first extension was granted to the end of December 1982, and the second to December 31, 1983. The main reasons for the slow pace in project execution weret (a) slow contracting proCeduras; (b) frequent changes in ESAt's managerial positions which led to ambiguity in both setting policies and action plans; (c) serious conflicts between ESAL and its consultants that hampered the impiementation of the program to upgrade the company's institutional, technical and financial structure; and (d' financing shortfall created by ESAL's low tariff levels and poor bill collection. 15. Mantaro component. The Mantaro tranfer studies were completed in Hay 1981, one and a half years behind schedule. Final dersigns and preparation of bidding documents were provided urder Loan 2179-PE aiming at having the project in operation by 1988. 16. ESAL component. The implementation process was hampered by several deficiencies in project planning and aanagement. ESAL iid not have the appropriate structure nnr the competency and skill levels to carry out the execution of a project cf this complexity requiring reorganization of administrative and financial areas. 17. Management reorganization. Assessment of ESAL was completed in July 1980. Work was satisfactory and on schedule. The implementation phase began in January 1981 and was supposed to be completed by June 1982. However, considerable delays occurred due to: (a) disagreements between ESAL and its consultants in reference to recommendations for institutional reorganization; (b) lack of executive capacity; (c) frequent changes in ESAL's Board of Directors that meant continuous periods of adjustments in the decision-making process; and (d) shortage of counterpart funds. By December 31. 1983 (loan closing date), execution was still behind schedule, with no major progress in the design of the company's planning, engineering and technical operations. 18. Leak detection survey. Works started in January 1980 with a programmed execution period of one year. Most of the leak detection study was satisfactorily completed, but the program recommendations were not implemen