Bolivia - Major Cities Water and Sewerage Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY 63r& A/ p7_ So Report No. 8479-BO STAFF .PPRAISAL REPORT BOLIVIA MAJOR CITIES WATER AND SEWERAGE REHABILITATION PROJECT NOVEMER 6, 1990 Country Department III Infrastructure and Energy Operations Division Latin America and the Caribbean Region his doeument has a restded dstribution _md may be aned by s o r In the pedonami of their offlcici duties. Its contents may not otherwise be dislosed wthout World Bank aut_orizn.  CURRENCY EQUIVALENTS Currency Unit Boliviano (B$) US$1 ' B$3.1 B$1 US$0.32 US$ - SDR 0.72 SDR - US$1.39 WEIGHTS AND MEASURES km Kilometer (0.62 miles) 1 Liter (0.2642 U.S. gallons) m3 = Cubic meter (264.2 U.S. gallons) He. Hectare (2.5 acres) PRINCIPAL ABBREVIATIONS AND ACRONYMS ANESAPA National Association of Water Supply and Sanitation Institutions (Asociac!6n Nacional de Empresas de Agua Potable y Alcantarillado) CORPAGUAS - Corporation of Water and Sanitation (Corporaci6n de Agua y Saneamiento) DSA National Office of Health and Sanitation (Direcci6n de Salud Ambiental) EMSO= Economic Management Strengthening Operations Project FNDR National Fund for Regional Development (Fondo Nacional de Desarrollo Regional) FIS = Fund for Social Investments Fondo de Inversi6n Social IDB = Inter-American Development Bank KfW = Kreditanstalt fur Wiederaufbau (German Assistance Agency) LIBOR = London InterBank Offered Rate MH - Ministry of Health (Ministerio de Previsi6n Social y Salud) MPC = Ministry of Planning and Coordination (Ministerio de Planeaci6n y Coordinacion) MUA = Ministry of Urban Affairs (Ministerio de Asuntos Urbanos) PAHO = Pan American Health Organization RDC Regional Developmcnt Corporation SAGUAPAC = Santa Crus Public Services Cooperative Limited (Cooperativa de Servicios Publicos Santa Cruz Limitada) SAMAPA - La Paz Municipal Water and Sewerage Services Company (Servicio Aut6nomo Municipal de Agua Potable y Alcantarillado de La Paz) SEMAPA Cochabamba Municipal Water and Sewerage Services Company (Servicio Aut6nomo Municipal de Agua Potable y Alcantarillado de Cochabamba) UNDP United Nations Development Programme FISCAL YEAR January 1 - December 31  FOR OFFIQLU USE ONLY BOLIVIA MAJOR CITIES WATER AND SEWERAGE REHABILITATION PROJECT TABLE OF CONTENTS CREDIT AND PROJECT SUHMARY .................................... 1 I. THE SECTOR .......... . . . ....... 4 Population, Service Levels and Healthl.... 4 Sector Organization, Responsibilities and Functioning..................................... 4 Past Water and Sanitation Investment and Financing......... .... . . ... .# ......*...... 6 Constraints to Sector Development.a....... 6 Government Plans ......7.. .... . .7 Financial Strategiesr .... .............. 8 Improvement of tha Sector Institutional Arrangements .................................... 8 Improvement of Central Sector Institutions....... 10 Comitments for Sector Improvements Under the Proet..................... 10 Bank/IDA's Past Role in the Water Supply Sector.. 11 IDA Country and Sector Strategy and Rationale for IDA Involvement....lvo...o........ 11 II WATER AND SEWERAGE SERVICES IN THE PROJECT AREAS.... 12 o n e ra.l00.. . ........... ............ 12 La Paz Metropolitan Aree a..... ........ ..* .... 13 Santa Cz... ........14.......... ............. 14 Cochabamba .......... *... .............. 15 III. THE BORROWER AND THE EXECUTING AGENCIES.............. 16 Fondo Nacional de Dessrrollo Regional (FNDR)..... 16 Water Utility of La Paz - Servicio Autonomo Municipal de Agua Potable y Alcantarillado (SANAPA) ................. ; ...................... 17 Water Utility of Santa Cruz - Cooperativa de Servicios Publicos Santa Cruz Limitada (SAGUAPAC) 1...8.............. ...... 18 Water Utility of Cochabamba - Servicio Municipal de Agua Potable y Aleantarillado (SfAPA) ........................................ 19 Tariff Actos.................... 20 This report Is basd os the fiadiag of Appraisal Miostsin which visited Bolivia In S_pteube.cter 1098. The Project tem eed of mess. Julio Liaes and Welter St.tt.... me. mart" ires, Us. Sar aof, nd Mr. Joe Augusto Carvalho aJvi.sd the Projec tean on legl aspects. Mr. P ilpe Vill rdr misted In wate- resoure lsues. Mr. Roy Rman reviewed the report. Meare. Plan-Chen Lob and Graham Smith approved the report. M_s. Miriam Vasquez ad Mirlim Allen produce the port. This document has a festcted disrbution an may be used by recipients only in the performance of their official dutiesv Its contents may not otherwise be discWsed without World Bakauthorization.  - ii - IV* THE .................................. ............. 20 Project Orign ............................. ...... 20 Project Objectives .................................. 21 Project Description .............................. 21 Project Financing and on-lending Arrangements.... 25 Project Implemenration........................... 26 Annual Project Review ............................ 27 KfW-IDA Coordination ........... 27 Disbursements ...... ............ ..... .............. .... 29 Financial Strategy for the Project Executing Agencies .... .......*.......................**.*.... 30 Financial Prospects of SAMAPA".................... 30 Financial Prospects of SAGUAPAC .................. 31 Financial Prospects of SEMAPA. ................... 31 Other Commitments Required of the Project Executing Agencies ....................... ....... 31 Reporting and Auditing ........................... 32 Projert Justification, Benefits and Affordability ......................... 32 Institutional Impact ............ ... 33 Environmental Impact ............... ............. . 34 Risks and Safeguards ......... 34 V. AGREEMENTS REACHED AND RECOMMENDATIONS ............... 35 ANNEXES ANNEX 1 Action Plan for the Institutional Improvement of the Sector ............................. ......... 38 Attachment 1. Financial Policies for the Water and Sanitation Sector.................................... 40 Attachment 2. The National Component: Technical Assistance and Training. ........... ............ *fo* 42 Attachment 3. Terms of Reference for Technical Assistance and Training Program for the Executing Agencies................................. 45 ANNEX 2 (A) Project Execution Schedules of SANAPA for La Pre Execution Schedules of SA49 (C) Project Execution Schedules of SAGUAPAC for Santa Cu ............................ 52 (C) Project Execution Schedules of SEtAPA for ANNEX 3 Thresholds on Types of Procurement.................. 58 ANNEX 4 Allocation of the Proceeds of the Credit ............ 59 ANNEX 5 Credit Disbursement Schedule ........................ 61 ANNEX 6 Notes to Financial Statements...................... 62 Attachment 1. Income Statement of SAMAPA............ 64 Statement of Cash Flow of SAMAPA ...... 65 Balanee Sheet of SAMAPA............... 66 Financing Plan of SAMAPA .............. 67 Basic Data of SAMAPA .................. 68  - 111 - Attachment 2. Income Statement of SAGUAPAC ..........0 69 Statement of Cash Flow of SAGUAPAC .... 70 Balance Sheet of SAGUAPAC ................ 71 flnanciag Plan of SAGUAPAC..* ......... 72 Basic Data of SAGUAPAC................ 73 Attachment 3. Incwme Statement of SEZAPA ............ 74 Statement of Cash Flow of SENAPA ...... 75 Balance Sheet of SEMAPA ............... 76 Financing Plan of SEMAPA ........... 000 77 Basic Data of SEMAPA .................. 78 ANNEX 7 Performance Targets of SAPA ....................... 79 ANNEX 8 Performance Targets of SAGUAPAC ...... ............... 80 ANNEX 9 Performance Targets of SEMAPA....................... 81 ANNEX 10 Documents and Data Available in the Project l...l.... 82 MAPS IBRD No. 22438  -I - BOLIVIA MAJOR CITIES WATER AND SEWERAGE REHABILITATION PROJECT CREDIT AND PROJECT SUMLARY Borrowers Republic of Bolivia. IntermediEry Agenev: National Fund for Regional Development (PNDR). Beneficiaries: Servicio Autonomo Municipal de Agua Potable y Alcantarillado de La Paz (SAMAPA), Cooperativa de Servicios Pablicos Santa Crux Lmimtada (SAGUAPAC) y Servicio Municipal do Agua Potable y Alcantarillado de Cochabamba (SE(APA). Amountt SDR 25.2 million (US$35 million equivalent). Termss Standard IDA, 40-year term. Onlendina Terms: The Government will on-lend to FNDR and FMDR in turn will relend to the beneficiaries US$33.7 million equivalent to be repaid in 20 years with five years of grace. The Government will charge FNDR a rate one and a half percentage points below the LIBOR rate; FNDR will charge the beneficiaries the LIBOR rate plus one percentage point. The Government will bear the SDR-US Dollar exchange risk; the beneficiaries will bear the US Dollar-Boliviano risk. Cofinancins: Kreditanstalt fur Wiederaufbau (KfW), US$8 million equivalent, in parallel. Prolect Rationale: Water and sanitation service levels in Bolivia are the second lowest in the western hemisphere. The Government's and IDA's main priorities for Bolivia include investments in the water and sanitation sector which conform to appropriate technical standards, address the needs of the poor, mobilize substantial Internal resources and have a strong impact on sector policies and management. Projeet Obiectivesl The obojectives of the proposed project are as follows: Benefits: improve and expand water and sanitation services in the major cities of Bolivia, benefiting a total population of about 1,000,000 improve the operational efficiency of the water utilities responsible for services in those cities; start introducing improved sector policies and institutional arrangements to accelerate sector development country-wide; improve the capabilities of the central sector agencies for overseeing the operating agencies of the sector; and  -2- Improve coordination between the Bolivian authorities and donors in preparing and financing sector-wide projects. Descriptiont The project includes the following major componentst rehabilitation and expansion of water supply, sewerage and sewage treatment systems in La Paz, Santa Cruz and Cochabamba; technical assistance and training; engineoring services to complete final designs and assist in developing future investment plans; and studios to introduce msnagement system for the central government agencies to monitor sector performance. Risks: The main project risks are that: first, the Government could fail to effectively implement the policy and institutional framework to Improve sector performance country-wide; second, FNDR could fail to become an effective soctor load agency; and third, the donors could fail to support the policies introduced by the Government. The Government's recent approval of a framework for the sector financial policies and its commitment to their implementation would effectively reduce the first risk. IDA's close supervision of FNDR as the intermediary for the project woulc reduce the second risk. A coordinated effort to prepare a follow-up project of sector scope to be cofinanced with external donors would reduce the third risk. The proposed joint annual review of the project issues by the beneficiary utilities, the FNDR, the Governmont and KfW would lead to timely plans of action to remedy any identified shortcomings.  - 3 - Ettimated Project Costs (US$ million) Component Local Foreign Total La Paz 7.0 7.4 14.4 Water 2.1 4.7 6.8 Sewerage 4.9 2.7 7.6 Santa Crus 4.7 8.0 12.7 Cochabamba 5.1 8.6 13.7 National Component 0.5 0.8 1.3 Total Base Cost 17.3 24.8 42.1 Physical Contingencies 1.7 2.5 4.2 Prlce Contingencies 2.5 4.0 6.5 Total Proiect Cost 21.5 31.3 52.8 Taxes 3.4 0.0 3.4 PPF-444-B0 0.1 0.7 0.8 Total Investment Cost 25.0 32.0 57.0 Fiancinz Plan AMwAPA (La Paz) 5.1 0.0 5.1 SAGUAPAC (Santa Cruz) 4.1 0.0 4.1 SEMAPA (Cochabamba) 4.8 0.0 4.8 XfW 4.4 3.6 8.0 IDA 6.6 28.4 35.0 Total 25.0 32.0 57.0 Estimated Disbursements: IDA FY 1990 1991 1992 993 1994 1995 1996 Annual 0.0 6.1 9.1 9.9 6.7 2.4 0.8 Cumulative 0.0 6.1 15.2 25.1 31.8 34.2 35.0 Rate of Returns 12S  - 4 - I. THE SECTOR Population. Service Levels and Health 1.01 The population of Bolivia is estimated at 6.9 million, about equally distributed between urban and rural. About 60S of the urban population live in the three largest cities, La Paz, Santa Crum and Cochabamba. Some 202 live in other six departmental capitals and the remaining 20% live in cities of between 2,000 and 10,000 people. Of the rural population, some are concentrated in communities of less than 2,000 people, but most live dispersed (less than 100 clustered dwellings) throughout the country. The total population of Bolivia has been growing in the 1980s by about 3% per annum; the urban population by about 4% and the rural at 1X per annum. The three largest cities grow the most. This pattern of growth is expected to continue, as lack of jobs in the rural areas and mid-size cities of the highlands press their population to migrate to the largest cities, especially Santa Cruz. 1.02 Water and sewerage service levels in Bolivia are the second lowest in the western hemisphere and the lowest in Latin America. Only about 30% of the total population has access to piped water through house connections and another 152 has easy access to piped water from public standpipes. Of the urban population, some 552 has house connections and some 8% has easy access to public standpipes. Even in the largest cities of Bolivia, only about 702 of the population has a house connection. In the rural areas, some 25% of the population has access to water from small water systems through yard connections or from public standpipes. The regularity of service and the quality of water are uneven, but rationing and some form of contamination predominate throughout the country in both urban and rural areas. The population without access to piped water get it mainly from vendors at a high cost in urban centers and from springs or small lakes in rural areas. Service levels in sanitation are far lower than in waters only about 30% of the urban population is connected to a sewerage system and only 12% of the rural population has latrines or other sanitacion facilities. Poor water and sanitation services contribute to causing high infant mortality (117 deaths per 1,000 live births-- the second highest in the Western Hemisphere) and to raking enteric diseases in Bolivia the second among all reported illnesses and the first among all causes of mortality. Sector Orzanization, Responsibilities and Functionin: 1.03 The water and sanitation sector in Bolivia, comprising many institutions, is complex. Three ministries, those of Planning and Coordination (MPC), Urban Affairs (MUA) and Health (MH) share responsibilities for formulating sector policies; none heads the total sector. MPC has sector-wide responsibilities as it coordinates all external and government financing to the sector. MUA oversees the urban sub-sector. A Committee under MUA - which includes representatives of the Cadaster Unit and MPC - reviews and approves tariffs for the urban water utilities. MH formulates water and sanitation 1bealth policies for the whole sector and oversees the i-ral subsector.  - 5 - 1.04 Operationally autonomous companies are responsible for water and sewerage services in the nine departmental capitals of Bolivia. These companies are private cooperatives in Santa Crus and Tarijat they are utilities owned by tlhe municipalities in the other departmental capitals including La Paz. Boards of directors composed mainly of municipal authorities govern these utilities. Municipal councils often interfere with boards' authority in submitting tariffs for government approval. 1.05 The Corporation of Water and Sanitation (CORPAGUAS), an agency under MUA with a staff of about 70, is responsible for carrying out investments and overseeing operations of urban water systems other than those of the nine departmental capitals. CORPAGUAS has substantial orerational autonomy, but depends partly on operating subsidies out of the national budget. With some support from CORPAGUAS, small operating companies or community councils are responsible for providing services in certain areas. 1.06 The National Office of Health and Sanitation (DSA), a Department of MH with a staff of about 300, is responsible for overseeing health and water and sanitation services in the rural and fringe areas of the cities (beyond the reach of the municipal utilities). DSA usually collaborates in this with the regional development corporations (RDCs). 1.07 RDCs are departmental public agencies which promote regional development under the oversight of NPC. Although not specialized in the water sector, they play an important role by using part of their royalties for hiring CORPAGUAS to carry out investments in the small towns and carrying out investments directly in the rural areas and fringe areas of the cities of their regions. In general, RDCs do not recover costs from the beneficiaries. 1.08 Two additional sector entities play an Important coordinating role. The first is the National Association of Water Supply and Sanitation Institutions (ANESAPA), created in 1983. ANESAPA is a private association which brings together both public and private agencies. It has proved an efficient organizer of sector-wide training courses. The second is the technical Advisory Committee on Water Supply and Sanitation (COTEAS), which is responsible for formulating sector plans and coordinating sector institutions. COTEAS includes representatives of the national sector institutions, ANESAPA and MPC. MUA chairs COTEAS and provides part-time staff and logistic support. COTEAS does not substitute for a unified sector leadership and oversight of policies by the central ministries, but works well for reaching consensus on broad sector issues. 1.09 Although not specialized in the sector, two new intermediary agencies are expected to play an important role in the sector. One is the National Fund for Regional Development (FNDR). Established in 1988 under the Presidency of the Republic, FNDR has the role of financing national infrastructure projects. The other is the Fund for Social Investments (FIS), also under the Pre-idency of the Republic. FIS was established in 1989 out of the Emergency Social Fund for financing small health and education projects, mainly in the rural areas and the urban fringe areas.  Both FNDR and FIS should help increase investment levels in health-related sectors by coordinating their investment programs and financing them. Both agencies are not self-financing; it is intended that they channel mainly external donations and government grants for investments. Past Water and Sanitation Investments and Financina 1.10 Investments in water supply and sewerage averaged about USS 10 million per year during 1970-1989. These investments increased service coverage levels about ten percentage points, but still the present service coverage levels are well below those prevail'g elsewhere in Latin America (para. 1.02). The quality of services, moreover, deteriorated in some areas as investments were ill-conceived or poorly executed and as many operating agencies failed to generate sufficient cash for replacing or maintaining physical facilities. The operating agencies' contribution to investments from internally derived sources was insignificant or nil. The Government contributed most of the local funds. Donors contributed about 80% of total funds for Investment. The main external donors ln the water sector have been the Inter-American Development Bank (IDB), Kreditanstalt fur Wiederaufbau (KfW), the United States Agency for International Development (US-AID) and IDA. Constraints to Sector Development 1.11 The low investment and service coverage levels in the sector are attributable to several interrelated factors. A major causative factor is the country's weak economic condition and the consequent low income levels of most Bolivians. Several other major constraints, unrelated to the macroeconomic conditions, huwever, have contributed to the poor service levels in the sector as a result of an inefficient and often ineffective use of the available, albeit limited, resources. These constraints are as follows: (a) Project design standards have often been overambitious. Bolivia has yet to adopt cost-effective standards and apply low-cost and appropriate technologies to reduce per-capita investment costs. (b) Cost recovery and financing policies have been too vague and weak for guiding fiscal performance and promotzng financial discipline of the sector operating agencies. The Government, for example, has lacked targets for the water utilities and beneficiaries regarding their contributions to investments; it also has not stipulated conditions of performance for lending funds to the utilities. Even thougb the water utilities of the largest cities have managed to '"ecome financially self-sufficient - as a result of the dwindling availability of the Government grants - the lack of a firm sector financial policy framework has invariably affected the nation's smaller utilities unable to generate funds even for facilities maintenance.  -7- (c) Perpetuating the above constraints is the existing fragmentiition of inicitutional responsibilities for the sector. Since no single institution has the mandate nor the capacity to plan, promote or enforce sector policies, there prevails a general lack of direction and weakness of institutions, inhibiting investment planning and a rational allocation of resources. The interrelationships among sector institutions at all levels, moreover, are not clearly established. The national-level DSA and RDCs, for example, have loose and overlapping responsibilities for carrying out investments and overseeing operations in the rural areas; as a result,, DSA and RDCs have sometimes competed for the same donor resources to carry out projects in the rural areas. The unclear interrelationships have resulted fln wasteful duplication of efforts, avoidance of the more difficult resnonsibilities and prolonged delays in planning investments and securing donor assistance throughout most of the sector. (d) Finally the professional and operational capab:lities of the sector tnstitutior-s at all levels are generally limited due to the lack of adequate training programs in the sector. Gover ment Plans 1.12 Since 1981, Bolivia, under the United Nations' International Drinking Water and Sanitation Decade and with assistance from the Pan- American Health Organization (PAHO) and the German Aid Agency (GTZ), bas been preparing medium-term development plans. Such plans have consistently called for over-optimistic service coverage and investment targets, which the sector institutions, just as consistently, have failed to achieve. In August 1988, the Goverment presented an updated plan covering the -988-1997 period to the Water Decade Consultative Group Meeting. The plan proposes tot.al investments of about US$250 million. This level of investments wou.d increase country-wide service coverage levels for water from about 44Z in 1987 to 55X in 1997 and for sewerage/sanitation from about 24Z in 1987 to about 35Z in 1997. These targets, albeit ambitious, can be achieved if the Government takes necessary measures to overcome the constraints noted earlier. 1.13 The Government's 1988-1997 plan emphasises the adoption of low- cost technologies for new investments and rehabilitation of existing facilities in addition to improving operations and management activities. The plan, moreover, establishes that most operating agencies should cover their operating :ostal, maintenance and replacement of facilities and debt service from their revenues. The principles underlying the plan are thus positive. Yet, as the Government now recognizes, they fall st,ort of overcoming certain major constraints - mostly financial and institutional - to sector development. The plan, for example, fails to emphasize the need or the part of the operationg agencies to internally generate revenues for financing Investments. The Government is currently considering measures tot overcome the plan's shortcomings. Under the auspices of the ongoing IDA- financed Economic Management Strengthening Operation (EMSO) project, the Government is developing solutions for decentralizing service  - 8 - responsibilities for small towns and rural areas from the central agencies to regional and municipal entities. The following paragraphs convey IDA's views on the main financial and institutional strategies to improve the sector's performance. Financial StrateRies 1.14 For the sector to carry out its investment plan for 1988-97, the Government will have to establish targets for internal contribution to Investment, by type of operating agency. Such targets are essential to finance planned investments and to build the capability of the operating agencies for eventually serving the additional debt. Establishing those targets will require fine-tuning, to take into account the poverty level of the communities and the indebtedness of the operating agencies. It is important that most of the utilities of the major cities are required to contribute from their own revenues between 20% and 301 of the funds required by a demanding investment program. Likewise, the rural and the urban fringe areas should be asked to make at least a small contribution in cash or labor. 1.15 To achieve the planned financial targets, the Government will also need to rationalize tariffs and mandate cost controls throughout the sector. The tariff authority should take the lead in identifying the necessary tariff levels. It also should establish appropriate tariff structures, as the present ones are overly complex and in many cases subsidize excess consumption. To contain tariff Increases to affordable levels, the Government will need to establish efficiency standards for the operating agencies. As a practical benchmark, for .xample, the Government could establish guidelines on the number of staff per 1,000 water connections by type of operating agency. 1.16 The Government will also have to enforce compliance of the operating agencies with desirable financial policies and associated technical and efficiency standards. To accomplish this, the most promising strategy would be the linking of approval of financing to the compliance of the beneficiary entities. To ensure an efficient use of resources, the Government should aprly this approach independent of the sources of finance. Improvement of Sector Institutional Arrangements 1.17 Maintaining improved policies for water supply and sanitation would require that the Government streamline the sector's institutional arrangements and clearly demarcate responsibilities among the institutions involved. 1.18 Decentralizi-ng the responsibility for public services to the departmental and municipal levels is the major issue in reorganizing the water supply ana sanitation as well as other sectors. As noted earlier, the Government wishes to proceed with decentralization, as national agencies have proved generally ineffective in progranming investments and overseeing operations throughout the country. The Government, moreover, expects local agencies, which are receiving substantial royalties and other fiscal revenues, to assume an increasing share of financing public  - 9 - services. It should, however, be recognized that decentralizing operations is not without risk. Implementing in the short term a new policy and regulatory mechanisms for overseeing operating agencies will be an arduous task. 1.19 Government officials and consultants are currently working under the IDA-financed ENSO project to develop concrete proposals. It is apparent, however, that regional and local agencies will eventually substitute CORPAGUAS and DSA in carrying out investments and managing/overseeing operations in the small cities and the rural areas. This is sensible, as it would place responsibility squarely on agencies close to the areas of need and sources of support - considerations which are important given Bolivia's size, remoteness of communities resulting from poor communications and the availability of substantial revenues to the political subdivisions. Phasing out DSA's operating responsibilities in the water sector in particular would eliminate a source of confusion and even friction with the RDCs, which are perceived by donors to be more effective than DSA. At the central level, decentralizing operations will make it possible to assign the sector oversight responsibility to a single ministry, MUA - a situation currently precluded by the operating responsibilities of DSA. 1.20 Even if the Government streamlines responsibilities for overseeing the sector in this way, avoiding confusion and duplication of efforts vould further require that the Government demarcate responsibilities between MPC and MUA, as follows: (a) MPC should: (i) approve sector financial policies; (ii) approve the investment and financing plans for the entire sector, including sanitation; (iii) review major investment projects and their justification within the context of the Government's overall public investment program; and (iv) approve internal and external credit for financing sector investments; and (c) MUA, now responsible for the urban sub-sector and potentially for the total sector, should: (i) review and consolidate the financing plan of tho operating agencies and propose them annually to MPC; (ii) endorse investment projects submitted to MPC for approval by the operating agencies; (iii) define and enforce programs for strengthening the management, operating and financial performance of the operating agencies; (iv) define and enforce the application of appropriate technical standards and technology choices for the design of water and sewerage investments; and (v) maintain an information system for the sector including the performance of the sector operating agencies. 1.21 FNDR, as now contemplated by the Government, should be developed into the country's financial and technical apex agency for water and sanitation (as well as other infrastructure sectors for urban areas). The main functions of FNDR will include assistance in project preparation, evaluation of investment proposals, coordination of donor assistance and supervision of projects. All financial assistance should be channelled through FNDR. The Government has already designated FNDR as the technical and financial agent for the proposed project.  - 10 - 1.22 At the operating level, institutional arrangements for the departmental capitals and large cities should remain substantially the sames self-sustaining utilities responsible for providing water and sewerage services to those cities. Yet, there is room for some additional improvement. The municipal utilities need to strengthen their autonomy for proposing tariffs to the Government. Municipal councils have often delayed the implementation of requisite tariffs, even though such implementation, by law, needs the approval of only the utility boards and the Government. Clear financial policies and an active role of the policy tariff authority in monitoring tariff requirements, as proposed under the new policy framework, should restore the autonomy of the above utilities. 1.23 For the smaller cities and the rural areas, decentralization involves the introduction of new institutional arrangements and assignment of specific responsibilities. These arrangements should be flexible: some departments might justify a regional water company responsible for providing services in their cities; in other departments - those with a few smaller cities - it will be more sensible that small local companies or community boards operate the services with support from either the water utility of the departmental capitals or the RDCs. RDCs, moreover, should be clearly responsible for coordinating investments and overseeing operations in the rural areas. improvement of Central Sector Institutions 1.24 Upgraded institutional arrangements by themselves will be insufficient to accelerate sector development unless the sector institutions improve their management systems and performance. In the central government, it is essential that MUA establish an information system to monitor the performance of the operating agencies it oversees. As evidenced by high levels of unaccounted-for water and poor financial reports, operating agencies throughout the sector, including those of the largest cities, need to Improve their commercial and information systems. In addition, more resources should be devoted to training, particularly in operational practice and management of the utilities. Commitments for Sector Improvements Under the Project 1.25 Although the proposed project - as presented in Chapter IV - focusses mainly on specific Investments in La Paz, Santa Crus and Cochabamba, the Government and IDA have agreed to make it a vehicle for introducing sector reforms. The Government and IDA also agree on the afore-mentioned overall strategy. To assist the Government in introducing the sector reforms, IDA prepared a strategy paper (June 1990) which includes, interalia, recommendations for institutional arrangements to guide the Government's work under the EMSO project. Within this context, the proposed project will support the Government's efforts to improve overall sector performance. To raise the level of water sector investments, the Government has passed In October 1990 an executive decree establishing the sector financial policies. This decree makes any future financing of water and sewerage investments conditional on the borrowing utility's ability to meet financial targets; in this context, it establishes targets by type of utility (Annex 1). To support the  - 11 - restructuring of the sector, assurances were obtained during negotiations from the Government that it will: (i) by December 31, 1991, redefine and discuss with IDA the institutional arrangements needed to improve the performance of the water and sanitation sector; and (ii) by June 30, 1992, start implementing the agreed changes. This effort would be guided by the proposals made in the afore-mentioned IDA Sector Strategy Paper. In this connection, the proposed project includes components aimed at upgrading the capabilities of concerned government agencies to effectively oversee the urban sub-sector and to develope FNDR into an effective lead agency (paras. 3.07 and 4.08). The Government and FNDR have already agreed on action plans to car-y out those components (Annex 1). While the proposed project will address mainly the needs of the urban sub-sector, IDA, with UNDP assistance. is studying the specific needs of the rural population. Donor assistance would continue to be sought to help Government accelerate the development of the rural sub-sector. The IDA Sector Strategy Paper would be the basis for continuing dialogue with the Government and donors to secure donor support for the Government's efforts. The proposed project, involving the financial participation of IDA and KfW, would signal the start of a joint institutional effort in the sector that needs to be fostered in future by other donors as well. Bank/IDA's Past Role in the Water Supply Sector 1.26 The Bank has financed new water systems in small urban centers through CORPAGUAS under Loan 1324-BO (project cost - US$ 13 million; Loan - US$ 4.7 million); IDA has financed the expansion of the water and sewerage systems of Santa Cruz under Credit 948-BO (project cost - US$ 17.1 million; Credit - US$ 9 million). Considering the rampant inflation prevailing during most of the project execution period, the completion of both projects, on balance, was a significant achievement of the executing agencies. A completion report for Loan 1324-BO was issued in 1987. Even though two cities decided not to participate in the above project, CORPAGUAS mawaged to construct some 70 systems in a period of eight years. The Santa Cruz Project was completed in eight years at the end of 1987, with some reduction in scope because of limited resources of the utility. A completion report for Credit 948-BO was issued in 1989. Loan 1324-BO helped improve only marginally the limited capabilities of CORPAGUAS. Neither of the above two operations however addressed overall sector-wide issues that have hampered sector development. IDA Country and Sector Strategv and Rationale for IDA Involvement 1.27 Sirce the Government established sound macroeconomic policies in 1985186, it has been one of IDA's main priorities to assist Bolivia in promoting orderly economic growth and improving the living conditions of the poor. The main objective of lending to Bolivia is to assist the Government's efforts to boost the country's economic growth and social development through the financing of projects with the following goals: help sustain the current macroeconomic program; improve the financial management of the public sector; restructure key productive sectors of the economy; improve basic infrastructure needed to support productive sectors; and attack poverty directly by creating jobs and upgrading social services. The projects in the water sector fit the above lending strategy provided that they assist investments of high priority, which conform to appropriate technical standards, address the needs of the poor, and have a strong impact on sector policies and management. The proposed project meets the above country and sector strategy.  - 12 - 1.28 A two-phase lending strategy for IDA is being emphasized for the water sector. In the first phase, IDA should finance the proposed project to improve the water and sewerage services in the cities of La Paz, Santa Cruz and Cochabamba and to strengthen the institutional capabilities of the water utilities in these cities. These water utilities have carefully prepared the project to include investments of high priority, benefiting a substantial number of the urban poor (para. 4.30). The project, moreover, would enable the Government to introduce a sector policy framework and to improve the institutional arrangements. During the initial stage of this project, IDA would continue its dialogue with the Government and other international lending agencies as well as bilateral donors to coordinate actions for achieving the sector strategy. In parallel, IDA, with UNDP assistance, will also be focussing on the water and sanitation needs of the poor in the rural areas and the urban fringes to identify affordable technologies and sustainable institutional mechanisms. Follow-up funding for pilot implementation projects will be sought from bilateral donors. A health project, moreover, would include a sanitation component for the periurban areas of the major cities. Complementing the coverage of Bolivia's needs for the water sector, the IDB is considering projects for the mid-size and small cities. In the second phast., if the Government makes satisfactory institutional progress, IDA could consider a sector loan managed by FNDR and other appropriate agencies, and cofinanced with external donors under a common policy framework. The performance of the sector would continue to be carefully monitored under the proposed project. II. WATER AND SEWERAGE SERVICES IN THE PROJECT AREAS General 2.01 In 1989, engineering consultants reviewed the status of water supply and sanitation services in the three project areas to determine the most urgent investments to be included in the project. They identified mainly investments in rehabilitation or works which would make better use of existing facilities, as those investments, to a large extent, had been neglected in the project areas. Investment priorities were, based on the lowest capital cost per additional population served. In the city of Santa Cruz, a close adherence to an existing master plan was warranted in order to maintain a rational expansion of services in the future. In general, for the three project cities, as long as investments followed a rational growth pattern for the cities and were not expected to scrain the finances of the executing agencies, the consultants selected those schemes providing the maximum possible benefits to the poor. A substantial number of the urban poor fortunately live in areas which can be easily served by the proposed schemes. To make the services affordable, the consultants, to the extenz possible, planned investments based on low-cost technologies, especially for sewerage. IDA agrees with the resulting investment strategy. The following paragraphs susmarize the status of services in the project areas and the investment strategy.  - 13 - La Paz Metropolitan Area 2.02 Population and the Physical Setting. The La Paz Metropolitan area, which comprises the c'ty of La Paz (Bolivia's largest city) and the satellite municipality of El Alto, has a total population of about 1.2 million. The city of La Paz is spread over steeply sloping valleys and up the surrounding hillsides, at tetween 3,200 and 3,900 meters above sea level. El Alto, housing about 402 of the total population and the aetropolitan airport, is located on a plateau aoove La Paz at about 4,200 meters above sea level. 2.03 Service Levels and Qualitv. Service levels In the La Paz area are low compared to those prevailing in othe. Latin American capitals witn a higher-than 90% coverage in water and 80Z in sewerage. Only about 751 of the population of the total area has house connections. The remaining population obtains water from some 1,600 public standpipes, vendors and private wells. The water produced by the La Paz water company is of good quality, but is often contaminated at the tap on account of frequent breakages in older networks. Service levels for sewerage are much lower than for water. Only some 50% of the population is connected to the sewerage network. In line with these low service levels, the incidence of water-related enteric diseases has been high and causes concern. The coverage of services is about equal in the city of La Paz proper and in El Alto. 2.04 Water SuPPlY System. The La Paz metropolis obtains water from a system of rain water reservoirs and snow-melt catchments in the mountains. It has four treatment and distribution systems, two in the city of La Paz and two in El Alto. The Pampahasi system in the southern area of La Paz lacks the capacity to provide services to the neighboring population. That system accounts only for 20Z of total water treatment capacity but already serves about 30X of the population of the La Paz metropolis. The distribution network of the Pampahasi system is also very limited. 2.05 Sewerage System. There are two independent sewerage systems in the area, one for La Paz and one for El Alto. Both discharge untreated domestic sewage and industrial and mining wastes into separate waterways. The steep slopes and broken terrain make it difficult to expand sewerage services in La Paz. The network system of El Alto has grown rapidly in recent years, with assistance from the Emergency Social Fund (para. 1.09). Construction of the required major interceptors, however, has lagged behind. 2.06 Investment Strategy. Engineering consultants who are preparing the project have determined that expansion of the Pampahasi system is the Investment of utmost priority in the area. Even without the benefit of an updated water master plan (which is to be financed shortly by IDB), it is apparent that this investment would be first in the least-cost expansion of water services. As for sanitation and pollution control, the urgency of constructing sewage interceptors and a sewage treatment plant in El Alto is siso evident. The sewage interceptors would make it possible to better use and derive revenues from the existing secondary water supply networks. The sewage treatment plant would be the initial step in abating pollution in the area at a low cost.  - 14 - Santa Cruz 2.07 Population and the Physical Setting. The city of Santa Cruz (departmental capital) has a population of about 600,000 growing at over SS per annum, mainly through migration from poorer areas of the country. Santa Cruz Is in a flatland by the Pirai River at about 100 m above sea level. The city grows by concentric 'rings' according to a regulating plan, which is largely enforced by high real estate taxes and sound decisions by the private cooperatives responsible for public services. Mainly because of the proxility of the Pirai river, Santa Cruz is well- endowed with water from both shallow and deep wells. Because of the flatness of the land, however, the city needs to resort extensively to pumping of both water and sewage. 2.08 Service Levels and Quality. Water and sewerage service levels in Santa Cruz are uneven. About 702 of the total population obtain water of very good quality from house connections (almost all metered). This population is mainly located in the inner rings of the city. The remaining population obtain water mainly from shallow wells which are often contaminated by latrines polluting the high water table in most of Santa Cruz. Sewerage service levels are very low, even by national standards; only 302 of the population is connected to the sewerage system. People not connected to the sewerage system have either bore-hole latrines or septic tanks. 2.09 Water Supply System. Santa Cruz derives its water from some 20 deep wells distributed in two major fields, the north field and the south field. Recourse to pumping stations and storage tanks to regulate flow Is extensive. The distribution system, completed up to the so-called third ring, serves about 51,000 connections. 2.10 Seweraae System. Santa Cruz has a system of sewerage interceptors and networks serving a total of 22,000 connections at present. The total system is divided into two major subsystems, following the city's topography: the western subsystem, which discharges into the Pirai River; and the eastern subsystem, which discharges into open fields near the Grande River. Sewage is partly treated through oxidation ponds. Some older sewerage treatment ponds have ceased to be operational and thus require major rehabilitation works. 2.11 Investment strategy. The consultants who are preparing the project have determined that the expansion of water supply services is a high priority investment. This expansion pattern would follow the circular growth of the city, along the lines of the water supply master plan. The consultants have also recommended that some investments in the sewerage sector be given priority to profit from major interceptors vhich already exist in densely populated areas. Though the project provides for sewerage investments, additional financing would be needed to improve sewerage service levels in the needy areas. It is anticipated that as a part of the overall sector investment strategy for Santa Crus, future projects - including a possible IDB operation - would focus on additional sewerage needs.  _ 15 - Cochabamba 2.12 Population and the Physical Setting. The city of Cochabamba (departmental capital) has a population of about 400,000 people. It is located in a valley in the center of the country, at about 2,600 meters above sea level. Partly because water sources are little known and partly because agricultural enterprises have traditionally obtained priority to water sources, drinking water is extremely scarce in the Cochabamba area. 2.13 Service Levels and Quality. Deviating from the national pattern, the state of water service in Cochabamba is worse than for sewerage. Some 70% of the population has a house connection (mostly unmetered); the remaining population obtains water from standpipes and vendors. This coverage is about average for the major cities in Bolivia. Water throughout Cochabamba, however, is severely rationed. Moreover, water is often contaminated because old pipes which are dry most of the time absorb contaminants easily. On balance, the quality of water service in Cochabamba is the lowest of the larger cities and is comparable to that of medium-size cities in the poor areas of Bolivia. Sanitation services in Cochabamba are, in contrast, better than those of the other major cities of Bolivia, with some 60X of the population connected to the sewerage system. 2.14 Water SuPP1Y System. The water supply system of Cochabamba is complex and inefficient. It comprises three surface sources (one infiltration gallery, one spring and one pond) and three well-fields. The superficial sources have poor yields, mainly because of the poor state of the facilities. The current well-fields also have poor yields, because of the inappropriate selection of sites and their inadequate design and equipment. Water from these sources is treated in three plants in different locations of the -ity. The distribution network, which is poorly integrated, carries water to some 33,000 house connections throughout the city. 2.15 Sewerage System. The sewerage system of Cochabamba has expanded along a well conceived master plan. The current system works well. 2.16 Investment Strategy. Engineering consultants have determined that the main priority in the Cochabamba area is to reduce water rationing and abate contamination by keeping the networks loaded at all times. In line with this objective, the basic investment strategy would be to rehabilitate present water production and treatment capacity and expand water production capacity for increasing the supply of water to the population. Additional production capacity would come from wells drilled in a proven well-field. The consultants have also indicated that potential water sources from deep wells should be sufficient to cover the needs of Cochabamba until about year 2010. This has been confirmed by French consultants who carried out a preliminary study of water resources financed with a grant from the French Government. Further knowledge of the yields from additional potential well-fields, however, is essential to safely plan their long-range development and efficiently allocate water between agricultural and human use.  - 16 - 2.17 On the bssis of the French consultant studies -albeit preliminary- it appears that Cochabamba will not need, at least in the medium term, the much-discussed Misicuni water scheme comprising a dam and a long transmission main. This scheme would produce only 1 m3/sec at an investment cost of about US$60 million, which is five times higher per m3 than that of water produced from wells. Since water for drinking and irrigation is scarce in the valley of Cochabamba, the Government is still attracted to the scheme. From IDA's viewpoint, convincing arguments regarding the economic justification of the dam and an estimate of associated enviro=mental impacts are still lacking. To allay IDA's concern, the Government, during negotiations, has agreed that it shall neither undertake nor allow its agencies to undertake any water project costing over US$10 million in the departments of the three beneficiary cities unless it has furnished evidence satisfactory to IDA that the project is technically and economically justified. The Government has further agreed to furnish to IDA, by December 31, 1992, a plan to allocate water resources between human cons-mption needs and agricultural use in the Cochabamba area and commence implementation, by June 30, 1993, of the agreed plan. III. THE BORROWER AND THE EXECUTING AGENCIES 3.01 The Borrower will be the Government of Bolivia; the credit will be on standard IDA (40-year) terms. The water utilities of La Paz, Santa Crus, and Cochabamba will be the executing agencies for the investment components in their areas of responsibility. The Government will carry out technical assistance studies to improve its capacity for overseeing the sector; FNDR will be responsible for preparing a follow-up project amenable to sector lending (para. 4.08). FNDR will also be the technical and financial agent for the IDA-assisted components to be carried out in the three project cities. Fondo Nacional de Desarrollo Retional (FNDR) 3.02 FNDR is an agency established in 1988 under the Presidency of the Republic with legal entity separate from that of the central goverrment. FNDR's main objectives are to promote investment projects in infrastructure - to be executed by local governments and enterprises - and to channel local and external funds for the projects. A five-member board of directors governs FNDR. The President of the Republic chairs the board and appoints all other members, including representatives of the ministries of finance and planning, and a Director General, who also is the FNDR's chief executive. 3.03 FNDR's organization comprises four operating divisions reporting to the Director General: Promotion and Programming, responsible for identifying projects; Projects, responsible foz helping prepare projects and assessing them; Control and Supervision, responsible for executing legal documents, supervising project execution and approving disburseamentst and Finance and Administration, responsible for obtaining financial  - 17 - resources, disbursing loans and pzoviding for FNDR's support services. With good coordination, this organization and alignment of responsibilities could work well. FNDR, with the assistance of consultants, is taproving the coordination needs among Its divisions. 3.04 With some 30 total staff, FNDR appears moderately overstaffed; it will appear more so when it frees itself from the task of supervising old Government-funded projects. The professional staff is well trained but Inexperienced in project work. Still FNDR, with little friction, could fit staff to requirements mainly by keeping their highly trained staff and adding selected staff with sector experience, while undertaking additional project work. To maintain qualified staff, FNDR has funding from UNDP, which affords a stable source to pay competitive salaries. 3.05 Although FNDR's statute favors lending to undeveloped regions and permits it to lend them at low interest rates, this is not a formal Government policy. FNDR's manuals, however, call for scrutinizing all projects on their merits and always lending at positive real interest rates. 3.06 FNDR still has to develop essential management systems and acquire the experience necessary to fulfill the essential role of promoting sensible projects. FNDR is replacing its original manuals, which reflected the role of a passive financial intermediary, with manuals which reflect the role of a promoter. Government officials and FNDR staff at all levels agree that FNDR is yet to become a dynamic generator of investment projects. The proposed water supply project and a mnicipal project that the IDB is currently considering would afford FNDR good experience to foster that role. 3.07 Under the proposed water project, FNDR should upgrade its capabilities for coordinating the preparation and execution of projects. Serving as an intermediary under the project will train FNDR staff in IDA procurement and disbursement procedures. Responsibility for the study to prepare a follow-up project would enbance FNDR's capabilities for project processing and coordinating donor assistance. The project, moreover, will include a program of technical assistance and training to develop FNDR into an effective lead agency for infrastructure projects - especially In water and sanitation (para..4.08). The execution of this program and the introduction of improved operating procedures have been discussed with the Government (of which FNDR is a line agency). Also, to foster FNDR's capacity to oversee the preparation of the follow-up project, it was agreed with the Government that FNDR, in addition to its technical and finanial staff, will maintain a qualified sanitary engineer specialist on their staff. Water Utility of La Paz - Servicio AutSnomo Municipal de AIu& Potable v Alcantarillado (SAMAPA) 3.08 SAMAPA Is a municipally owned semi-autonomous water utillc.y responsible for providing water and sewerage services to the city of La Paz and the satellite municipality of E1 Alto. It is governed by a five-member board composed of the Mayor of La Paz who chairs the board, and representatives of the municipality, the MUA, the RDC and the Bolivian  - 18 - Association of Engineers. The board is empowered to approve tariffs subject to review by the central government, and to appoint the general manager. The municipal council, however, exceeding their proper role of policy oversight, has sometimes interfered with that process in the recent past, resulting in tariff adjustment delays and instability of the management team. SAM4APAts organization is appropriate. It includes operating departments for commercial administration, operations, project execution and finance/ldministrstion. In spite cf politica3 pressures, a competent professional has remained in place as General Meaager for over two years. The present middle management team, on balance, is satisfactory. With some 600 staff (10 per 1,000 water connections), SAMAPA is overstaffed. That staff, however, is staunchly protected by a powerful union. The unaccounted-for wj.ter rate is high at 332 (though reduced from over 40X in the recent past), reflecting aging and sub-optimal past investments, as sell as stil -deficient commercial systems. SAMAPA's accounting practices and systems are adequate to account for project transactions and financial statements to be presented to outsiders, but need substantial upgrading for generating information useful for management decisions. 3.09 SAMAPA's financial performance has substantially improved in the last few years. In 1986, SAMAPA was unable even to cover operating and maintenance costs out of its revenues. In April 1987, responding to the Government's macroeconomic policy of requiring major public utilities to cover service costs, SAMAIA increased its tariffs by about 402 in r*1 terms. This increase enabled SAMAPA to cover operating costs and part of its substantial debt service during 1987 and 1988. SAMAPA invreased tariffs again by about 50Z in real terms in late 1989. The resulting average tariff level of about US$0.17 per m3 for water and sewerage services combined has enabled SAMAPA to cover all operating costs, current maturities of its debt service and replacement investments out of its revenues. Still, SAMAPA must prudently manage new investments and debt, as it must pay some overdue debt on top of current maturities. SAMAPA, moreover, needs to simplify its tariff structure (para. 3.14), raise sewerage tariffs relative to those of water, and reduce cross-subsidies among its customers. Water Utility of Santa Cruz - Cooperativa de Servicios PCtblicos Santa Cruz Limitada (SAGUAPAC) 3.10 SAGUAPAC is a private cooperative responsible for providing water and sewerage services to the city of Santa Cruz. It is owned and ultimately controlled by all users of services and governed by a board composed of members elected among and by those users (cooperative members). An elected president legally represents SAGUAPAC and chairs its board. The board appoints a general manager, who is the chief executive of SAGUAPAC. Managerial and other staff in SAGUAPAC are generally qualified at all levels. The total number of staff is about 370. With some 7 employees per 1,000 water connections, SAGUAPAC is an efficient water utility compared to other large utilities in Bolivia. SAGUAPAC meters virtually 1002 of water connections; unaccounted-for water is about 292, significantly lower than for most water utilities in Latin America. SAGUAPAC's organization is appropriate. It includes line departments for commercial operations, administration/finance, operations and engineeringlproject execution. On  _ 19 - balance, SAGUAPAC's departments satisfactorily fulfill their responsibilities. SAGUAPAC, however, could introd:xce some improvements, like metering at the production source, upgrading operation and maintenance, updating of the user census, modernizing the users' file and establishing a consistent system to charge consumers fixed charges that reflect the pressure they put on increasing capacity. Also, SAGUAPAC could improve its management information and accounting system, although it already keeps satisfactory accounting records and prepares acceptable financial reports. 3.11 SAGUAPAC has a long tradition of satisfactory financial performance; it managed to cover at least all operating costs even through the chaotic macroeconomic conditions of Bolivia in the early 19809. SAGUAPAC's overdue receivables are insignificant. The combined water and sewerage tariff of about US$0.25 per m3 permits SAGUAPAC to cover operating costs, debt service and maintenance investments. Regular capital contributions from members equivalent to about 202 of tariff revenues enable SAGUAPAC to recover capital costs and substantially contribute to financing the expansion of services. Although SAGUAPAC is an efficient utility, its total charges per user of services are about 502 above the next highest in Bolivia. These charges, however, are justifiable, because SAGUAPAC must pay the high salaries prevalent in Santa Cruz and pump sewage across the flatland of Santa Cruz at a high energy cost. Water Utility of Cochabamba - Servicio Municipal de Agua Potable y Alcantarillado (SEMAPA) 3.12 SEMAPA is a semi-autonomous municipal agency responsible for providing water and sewerage services to the city of Cochatamba (population 400,000). Its institutional arrangement (board composition and powers, etc.) is similar to that of SAMAPA. SEMAPA has been free from political Interference and maintained a stable and competent management cadre for several years. Staff at all levels are generally qualified and highly motivated. The general manager, who is appointed by the board, is the chief executive and legal representative of SEMAPA. SEMAPA's organization, which is satisfactory, includes major operating departments for finance/administration, project execution, commercial, and operations/maintenance. With some 300 staff (10 per 1,000 water connections), SEMAPA appears overstaffed. It will be able to substantially increase staff efficiency as it rehabilitates or restructures deficient physical systems throughout the city. Moreover, SEMAPA should reduce the unaccounted-for water rate (currently at 32Z). Operation and maintenance, commercial administration and management information systems need upgrading. SEMAPA, however, maintains reliable records and produces acceptable financial reports for external use. 3.13 On balance, SEMAPA's financial performance has been satisfactory in the last few years. The current average tariff of about US$0.18 per ms for water and sewerage services combined enables SEMAPA to cover operating costs and maintenance investments out of operating revenues. High connection charges to upper-income custemers - which are acceptable in view of widespread water rationing - complement SEMAPA's revenues available to finance investments. In the near future, SEHAPA will have to adjust the structure of its charges by lowering connection fees and raising tariffs,  - 20 - following the improvement of services. Also, it will have to adjust its tariff structure to reduce excessive cross-subsidy to low-income customers (para. 3.14). SEMAPA, In spite of extended rationing which encourages customers to default, has now much room to improve the collection of its billings to private customers. Improvenents in this area and in operational efficiency should enable SEMAPA to undertake substantial investments in the near future; SEHAPA has no debt at present, as the Government in the past subsidised all o' its investments. Tariff Actions 3.14 As a condition of negotiations, SAMAPA and SEMAPA have increased tariffs by about 301 in June 1990, to achieve a tariff level in real terms consistent with financing at least 25Z of investment costs out of their revenues. SAGUAPAC, which corrects for inflation frequently, already fulfills this requirement. Agreements were reached during negotiations that SAMAPA and SEMAPA shall Imp1.ement a more efficient tariff str.cture by April 1, 1991. The political interference in the post by the municipal councils, particularly in La Paz, has caused concern regarding tariff approvals. Thus, the Government, as a condition of negotiations, has submitted to IDA a legal opinion from tl-t Attorney General of Bolivia confirming that the water utilities included in the project require only approval of the Government to set water supply and sewerage tariffs, and that there is no other authority empowered for setting tariffs except the Government and the boards of directors of those utilities. In this connection, a special condition of default of the proposed IDA credit was agreed at negotiations stipulating as an event of default any interference by the beneficiary municipality or an agency other than the Government that would restrict the autonomy of the executing agencies to set tariff. IV. THE PROJECT Proiect Origin 4.01 IDA identified the proje.t in 1987. The Government initially wanted to include all nine departmental capitals in the project. It was, however, apparent that no agency existed in Bolivia with the mandate and capability to be the lead agency for a nationwide project assisted by lending agencies. Thus, the Government and IDA agreed to undertake a project limiting investments only to the three largest cities of Bolivia. In August 1988, IDA granted the Government an advance from the Project Preparation Facility (PPF) for US$750,000 to finance the preparation of the project. By end-1988, with Government consent, the utilities of the three cities engaged engineering consultants to define a project including investments and institution building activities of top priority. In 1988, the French Government gave a grant of US$150,000 to the Bolivian Government for carrying out a preliminary study of water resources in the area of Cochabamba. The project was appraised in September 1989. Negotiations took place in Washington during September 21-24, 1990. The Bolivian delegation was led by the Under-secretary of Public Investment and International Cooperation from MPC.  - 21 - Pr@iect Ob octives 4.02 The proposed project has the following objectives: (a) ltprove and expand water and sanitation services in the major cities of Bolivia (La Pa:, Santa Crus and Cochabamba), mainly by: (1) rehabilitating water production fac1ilities and increasing water distribution capacity in La Pa: to benefit a population of about 200,000 (132 of the metropolitan population in 1995); (Ui) construct sewerage networks in the municipality of El Alto, to benefit a population of about 200,000 (132 of the metropolitan population in 1995); (iII) install water production and distribution facilities in areas currently not served in Santa Cruz, to benefit a population of about 300,000 (352 of the population of Santa Crus in 1995) and expand sewerage networks to benefit a population of about 30,000; and (iv) rehabilitate and expand water production, transmission and distribution facilities In Cochabamba, to benefit a total population of about 300,000 (502 of the population of Cochabamba in 1995) with access to piped water or elimination/reduction of rationingt (b) improve the operational efficiency and management systems of the water utilities responsible for services in the above cities; (c) introduce a framework of sector policies and the Institutional arrangements to accelerate the development of the water supply and sanitation sector country-wide; (d) improve the Institutional capabilities of central agencies for overseeing the water sector, mainly through the Introduction of management systems; and (e) improve coorditation between the Bolivian authorities and donors in preparing and financing sector-wide projects. Pro1ect Description 4.03 The proposed project, to be executed during 1990-1995, -sill include priority investments in the three major urban centers of Bolivia and (under a national component) studies for Improving management of the water sector country-wide. KfW will cofinance the project in parallel. Kfw will restrict its assistance to the municipality of El Alto administered by the La Paz water utility. Project components are detailed below. 4.04 Part A(1) of the Proiect. Project components for SAWAPA financed by IDA will include: (a) expansion of the Pampahasi water treatment plant, to increase its capacity from 400 l/sec to 700 l/sec; (b) construction of a storage tank;  - 22 - (c) construction of water transmission line from the Pampahasi plant to the Calacoto, Chasquipampa and Caiconi southern areas of La Paz; (d) construction of water distribution infrastructure covering about 240 Ha. area; (e) purchase of equipment for operation and maintenance; (f) consultaneies to prepare final designs for the transmission lines and distribution infrastructure; and (g) technical assistance and training. 4.05 Part A(2) of the Project. Project components for SAMAPA financed by KfW will include: (a) construction of sewerage networks (including connections) using low-cost technology for an area of about 300 Ha. in the municipality of El Alto; and (b) construction of a sewage treatment plant in El Alto. 4.06 Part B of the Proiect. Project components for SAGUAPAC will include: (a) expansion of the water system in the northern area of the city, including drilling and equipment of two deep wells, construction of a storage tank with capacity of about 4,000 m3 and a pumping station with capacity of about 500 1/Sec, and installation of about 100 Km of pipe and connections; (b) expansion of the water system in the southern area of the city, including drilling and equipment of two deep wells, construction of a storage tank with capacity of about 4,000 m3 and pumping station with capacity of about 500 1/Sec, and installation of about 100 Km of pipe and connections; (e) expansion of the water system in the eastern area of the city, including drilling and equipment of one deep well, construction.of a storage tank with capacity of about 4,000 m3 and installation of about 50 Km of pipe and connections; (d) rehabilitation of production and distribution facilities, including replacement of about 100 Km of pipe; (e) rehabilitation of a sewage treatment pond; (f) construction of a sewerage network for about 100 Ha. area using low-cost technology designs; (g) acquisition of equipment and computer systems;  - 23 - (h) construction of a building for SAGUAPAC's offices; (i) consultancies for preparing final designs; and (j) technical assistance and training for institutional Improvement. 4.07 Part C of the Pro1ect. Project components for SEMAPA will include: (a) rehabilitation of the Wara Wara reservoir including construction of a transmission main and storage tank and installation of filters to increase water flow by about 100 llsec; (b) rehabilitation of the Vinto wellfield including installation of a transmission main and construction of a treatment plant to increase water production capacity by about 170 l/sec; (c) rehabilitation of the Chungara infiltration gallery including construction of a transmission main and storage tank and installation of filters to increase water production capacity by 60 llSec; (d) rehabilitation of the Cala Cala water treatment plant to increase its capacity by about 400 l/sec; (e) rehabilitation of the Cona-Cofia pumping station; (f) construction and equipment of four deep wells and construction of a 13 Km transmission main for a production capacity of 200 llSec; (g) expansion of distribution infrastructure throughout the city$ including construction of some two storage tanks with total capacity of about 10,000 m3 and installation of about 110 Km of networks and some 10,000 water connections and moters; (h) consultancies to prepare final designs for investment components and a water supply master plan; and (i) equipment, technical assistance and traiaing for institutional improvement. 4.08 Part D of the Proiect. The national component will includes (a) technical asistance to prepare guidelines for the analysis of water supply and sanitation projects for MPC; (b) technical assistance to prepare a framework of tariff policies and a system of indicators to monitor the performance of the operating agencies of the urban sub-sector for UA;  - 24 _ (c) technical assistance to prepare operating manuals and introduce models of technical, economic and financial analysis for FNDR; (d) training of staff of FNDR, central government department and other agencies - both urban and rural - operating In the water sector but not carrying out investments under this project; (e) preparation of a follow-up sector lending operation including Identification of potential investment priorities In the urban sub-sector; and (f) the acquisition of computer equipment for MPC and MUA. Annex 1 presents the terms of reference for the above studies and the training program. 4.09 The estimated total project cost at current prices is US$51 million, including the IDA project preparation advance. The total foreign exchange cost would be US$32 million or 562 of total investment cost. The base cost is estimated at US$42 million in March 1990 prices. Physical contingencies Included are 101 for civil works and materials. Price contingencies are based on a 1990-1995 project implementation plang and international inflation rates of 72 in 1990 and 52 thereafter. About US$1.3 million of total project cost is for the national component (22). The remaining US$55.7 million is distributed among the executing agencies as follows: US$20 million for SAMAPA (352 of total project cost); US$17 million for SAGUAPAC (302); and US$18.7 million for SEMAPA (332). A s-wary cost table is shown below. For the IDA-financed components, detailed project execution, cost and financing schedules are presented in Annex 2.  - 25 - Table 4.1 Sumary Project Cost Estimate 8ol iviano ml I7I0ons US4 Mlli ions Foreign s N of Component Local Foretgn Totel Loual Foreign Total Total La Paz 20.8 21.2 41.6 7.0 7.4 14.4 51 Water (IOA) t.8 18.9 19.7 2.1 4.7 0.8 71 Sewerge (Kfw) 14.5 7.8 21.0 4.9 2.? 7.6 8 Santa Cruz 18.6 28.6 87.1 4.7 6.0 12.7 08 Cochobamba 14.0 24.9 89.7 6.1 8.6 18.7 8 National Component 1.5 2.8 8.0 0.5 0.0 1.8 01 Total Base Cost (8/98 )T -1 1"1 121 TCiM IW5 42. 59 PhSigcal ContIngenches 4.9 7.8 12.2 1.7 2.5 4.2 6o Price Contingencios 7.8 11.6 16.9 2.5 4.0 6.5 01 Total Prolet Cost 62.4 9S.8 168.2 21.5 81.8 52.8 59 Taxs 9.9 0.0 9.9 8.4 9.9 8.4 0 PPF (444-B0) 0.8 2.0 2.8 0.1 9.7 0.8 8? Total Investment Cost 72.6 92.8 165.4 26.0 82.9 57.9 56 Proiect Financint and On-lending Arrangements 4.10 KfW and IDA will provide all external assistance for the project. Of the proposed IDA credit of US$35 million, US$0.8 million will be used to repay the PPF and US$1.3 million to finance the National Component. The remaining US$32.9 million will finance investments of the three beneficiary city utilities (SAMAPA, SAGUAPAC and SEMAPA). Both IDA and KfW financing represent approximately 751 of the total cost of their respective components. The beneficiary utilities, on average, will finance 25Z of investment costs from internally generated revenues. A summary project financing plan is shown In the following table. IDA financing will be In the form of a credit to the Government on standard 40-year terms. IDA funds for the three city utilities will be on-lent to FMDR under a subsidiary loan agreement, and MNDR in turn will reland them to the throe beneficiary utilities under separate subsidiary loan agreements. The term and conditions of the subsidiary loan arrangements are as follows: repayment period for all subloans-20 years, with 5 years grace; annual interest rate from the Government to FNDR - LIBOR minus one and a half percentage points; and from FNDR to the utilities - LIBOR plus one percentage point. The Government will assume the SDR-US Dollar exchange risk; and the utilities will assume the US Dollar-Boliviano risk. The on- lending spread of two and a half percentage points for FNDR is considered appropriate to cover its operating costs and the inherent lending risk.  - 26 - The overall on-lending rate methodology ensures that FNDR remains aligned to market rates. On-lending terms for the Kfi loan will be somilar to those of the IDA credit. Signature of all subsidiary loan agreements between the Government and FNDR, and between FNDR and the beneficiary utilities, on terms satisfactory to IDA, will be a condition of effectiveness of the proposed IDA credit. Table 4.2 Summary Prolect Financing Plan Amounts (US$ Million) X OF TOTAL SAMAPA SAGUAPAC SEMAPA NATIONAL TOTAL (La Pasz)(Sta.Cruz)(Cocha.) Investment Cost 19.7 16.8 18.4 1.3 56.2 99 Repayment of IDAIPPF 0.3 0.2 0.3 - 0.8 1 Total financing required 20.0 17.0 18.7 1.3 57.0 100 Sources of funds IDA 6.9 12.9 13.9 1.3 35.0 61 PPF repayment 0.3 0.2 0.3 - 0.8 1 Investments 6.6 12.7 13.6 1.3 34.2 60 KEW 8.0 - - - 8.0 14 Local 5.1 4.1 4.8 0.0 14.0 25 Proiect Imvlementation 4.11 MPC, assisted by consultants, will carry out the study to prepare guidelines for the review of investment projects. MPC will also coordinate training activities under the national component; in this conection, it will hire ANESAPA to manage the program. MZUA, assisted by consultants, will carry out the study to prepare a framework for approving tariffs and introduc2mg the system to monitor the performance of the operating agencies of the urban sub-sector. FNDR, with the assistance of consultants, will carry out the study to prepare a follow-up project of sector-wide scope. FNDR also will be responsible for coordinating procurement and disbursing IDA credit funds for the national component. As noted earlier, It will also be the financial intermediary for the components in La Paz, Santa Cruz and Cochabamba. As such, MRDR will be responsible for the sub-loans to the beneficiary utilities, preparing project progress reports and overseelig compliance with credit covenants by the utilities. SAMAPA, SAGUAPAC and SEMAPA will be the executing agencies for investments in their areas of responsibility. These agencies will hire consultants to prepare the designs and tender documents for the larger and more sophisticated sub- components; their own staff will prepare the less complex designs and supervise the execution of project investments. These arrwagements should work well, considering the proven capabilities of these agencies for efficiently managing comparable projects. In accordance with current  - 27 - government policies, procurement agencies designated by the Government will manage procurement under the project. 4.12 The consultancies and the training program to improve the institutional capabilities of SAMAPA, SAGUAPAC and SEMAPA will be carried out in accordance with a plan of action and terms of reference agreed with IDA during appraisal and confirmed during negotiations (Annex 1). This plan will be reviewed and revised if necessary by October 1 each year. 4.13 Status of Proiect Preparation. Consultants have prepared the feasibility studies for the project and have made substantial progress in designing project components. Final designs for investments to be carried out early during the early phases of project execution were completed by July 1990. Detailed engineering of the remaining physical components will be carried out during project implementation, as will be the measures for land acquisition, as needed. Annual Proiect Review 4.14 On the basis of the progress report of the first half of each year and the financial plan (para. 4.28 and 4.30), IDA, RNf, the water utilities, FNDR and the Government, by October 1 each year, will conduct an assessment of progress made in reaching the objectives of the project. This annual review will concentrate on the followings implementation of sector policies and institutional arrangements by the Government, FNDR's establishment as an effective lead sector agency and in preparing the future lending programs, financial performance of the beneficiary utilities, progress of physical components and execution of the institutional development program. The assessment of performance during the year should lead to a plan of action satisfactory to IDA to remedy any shortcomings. Assurances were obtained during negotiations from the executing agencies, FNDR and the Government that they will participate in the annual project reviews and will carry out the plans of action agreed during such reviews. KfW-IDA Coordination 4.15 RfW and IDA will finance largely independent but complementary project components. Close coordination between IDA and KfW, however, will be essential with regard to project conditionality and supervision, to ensure that the project's broad objectives are met. Because of this, the approval by RfW of a loan for the project under terms satisfactory to IDA with appropriate cross-default will be a special condition of effectiveness of the IDA Credit. Procurement 4.16 Procurement for the IDA-financed and MfW-financed components will be carried out in accordance with the respective guidelines of each institution. KfW guidelines call for bidding among German and local sources. Procurement of contracts to be financed by IDA and RfW under the project has been designed on a parallel financing basis.  - 28 - 4.17 To expedite project execution, procurement of the IDA-financed civil works and goods will be packaged in a few large contracts for each of the three beneficiary utilities. Supply-and-install contracts will be employed for the construction of water pipe-lines and pumping stations. Foreign firms are expected to win most bids for the purchase of equipment and for large construction contracts. Foreign firms also are expected to receive award of most consultant contracts. Foreign civil works contractors and consultants are expected to hire local firms to carry out a substantial part of their contracts. 4.18 Under the proposed credit, contracts for civil works valued at US$500,000 equivalent or more, and equipment and materials purchases valued at US$100,000 equivalent or more will be procured through international competitive bidding (ICB). Contracts for civil works valued at less than US$500,000 equivalent, and for equipment and materials valued below US$100,000 equivalent but above US$20,000 equivalent would be awarded on the basis of local competitive bidding procedures (LCB), acceptable to IDA. The aggregate value (on net of taxes) of contracts awarded though LCB would not exceed US$3.0 million equivalent for civil works and US$1.7 million equivalent for equipment and materials. (This would translate to US$1.0 million equivalent for works and US$0.5 million equivalent for goods for each of the three beneficiary utilities and US$0.2 million equivalent for goods purchased under institutional strengthening programs). Contracts for minor items of equipment and materials valued at US$20,000 equivalent or less, would be awarded through local/linternational shopping procedures requiring no less than three offers from eligible suppliers. The aggregate value of items so procured would not exceed US$500,000 equivalent for the project (or US$100,000 equivalent for each of the three utilities and US$200,000 equivalent for goods purchased under institutional strengthening programs). Shopping procedures will not, however, apply to civil xorks. In the evaluation of ICB bids, local manufacturers will be accorded the usual margin of preference for goods (15S of CIF price or custom duties whichever is lower). All procurement documentation (tender documents, proposed award, contract) under ICB will require IDA's prior review. For LCB, IDA will also review tender documents for the first two civil works and goods contracts for each of the executing agencies, in order to ensure satisfactory documentation. Consultant services will be procured in accordance with the IDA Guidelines. The stipulated limits for IDA's prior review of bidding documents would result in a coverage of about 90S of the total estimated project cost of IDA-financed components. An overview of the procurement method is shown below. The thresholds on proctirement are summarized in Annex 3.  - 29 - Table 4.3 Procurement Method and IDA Disbursements (US$ Million) Procurement by Dank Procurement by Froj.ct El m_t ICB LCB Shopping Other Subtotal CofTnancler Total 1. CIvIl Works 18.9 8.2 17.1 6.6 23.7 (6.6) (1.5) (860) 4.0* (.90) 2. Materials and EquIpment 19.6 1.8 0.6 21.9 4.0 25.9 (17.9) (1.7) (.5) (20.0) 4.0* (20.0) 8. Technical Assistance 2.7 2.7 2.7 and Traninng (2.5) (2.6) (2.5) 4. Engineering Consulting 4.7 4.7 4.7 Services (4.4) (4.4) (4.4) Total 8S.4 5.0 6.6 7.4 46.4 10.6 57.0 (24.4) (3.2) (0.5) (6.9) (35.0) (8.06* (85.0) Note: Figures include taxes and the PPF; those in parenthesis give respective amounts financed by IDA. * Refers to items for La Paz sewerage project financed by KfW and procured under KfW procedures. Disbursements 4.19 For investments of the three executing agencies and for the national component, the proposed IDA credit would be disbursed against: for equipment and materials - 1001 of expenditures (excluding taxes) and for consulting services and training - 1001 of expenditures. For civil works, the credit would be disbursed against: 251 of expenditures of SAMAPA; 60% of expenditures of SAGUAPAC; and 501 of expenditures of SEMAPA. Retroactive financing in an amount not exceeding SDR 1.15 million (or US$ 1.5 million approx.) will be provided in respect of project-related expenditures incurred between May 4, 1990 and loan-signing and complying with IDA guidelines. To expedite disbursements, FNDR will maintain a special account of US$2,000,000. IDA, on the basis of standard documentation, would replenish the special account for local expenditures and foreign expenditures in amounts of not less than US$250,000. For contracts with a total cost below the prior-review limits for civil works and the purchase of equipment and materials, disbursements would be made on the basis of statement of expenditures. The procurement and disbursement documentation for these contracts would be retained by the project executing agencies for later review by Bank Staff during project supervision. These records would be routinely reviewed during the annual audit. Annex 4 presents the allocation of credit proceeds by category; Annex 5 presents the credit disbursement schedule.  - 30 - Financial Stratetv for the Proiect Executing Agencies 4.20 The three water companies which will be executing agencies are in a good financial position to undertake the project. Through fulfilling realistic f'nancial and operating targets, they should be able to finance satisfactorily their overall investment plans during project execution. The financial strategy for the executing agencies requires that they: (i) contribute cash to cover at least 252 of their Investment programs out of their revenues during project execution so as to become capable of paying the project debt and continue their investment programs in the future; and (ii) at least, be able at the end of project execution to cover their operating costs, debt service, increases in working capital and maintenancelreplacement investments (equivalent to revalued depreciation) out of their revenues. On the basis of demanding but viable financial forecasts for the agencies (Annex 6), compliance with the above conditions is anticipated. Annex 6 presents the financial statements of the project executing agencies. Financial Prospects of SAMAPA 4.21 During the project execution period (1990-1995), SAMAPA would carry out total investments in the order of US$43 million, including about US$20 million under the present project. About US$22 million of loan funds from external sources, including US$15 million of loans under the project, would finance about 502 of the cost of total investments. Contributions from external sources and developers would finance some 152 of investment costs. SANAPA would finance the remaining 352 of the requirements of its investment program out of its internal cash generation. This will be an ambitious undertaking, considering that SAMAPA will have to pay about US$40 million for debt service and finance working capital needs for substantially increased investment and operating activities during project execution. 4.22 To cover the requirements of Its investment and financing plan, SAMAPA will have to maintain a very solid financial performance during the project execution period. To support that plan and monitor SAMAPA with a reliable financial indicator, assurances were obtained from SAMAPA during negotiations that it will maintain a ratio of operating costs excluding depreciation to operating revenues, of no more than 0.50 in 1990 and thereafter. To prevent potential shortfalls and delays in adjusting tariffs, assurances were also obtained from SAMAPA during negotiations that, by April 1, 1991, it will introduce a system to automatically adjust tariffs in line with inflation on a quarterly basis. Finally, as a measure of last resort for securing payment arrears from the public sector, the onlending agreement between the Government and SAMAPA will enable SAMAPA to withhold payments to the Government in amounts equivalent to outstanding receivables from the Government or public agencies of three or more months overdue.  - 31 - Financial Prospects of SAGUAPAC 4.23 During the project execution period, SAGUAPAC will carry out total investments in the order of US$37 million, including US$17 million under the present project. About US$21. million of loan funds from external sources, including US$13 million of loans under the project, would finance about 57Z of the cost of total investments. SAGUAPAC would finance the remaining 43Z of the requirements of its investment program out of its operating revenues and capital contributions by its members. 4.24 To support the above investment and financing plan and to monitor SAGUAPAC with a reliable financflal indicator, assurances should be obtained from SAGUAPAC during negotiations that it will maintain a ratio of operating costs to operating revenues plus customer contributions, of no more than 0.70 in 1990 and 0.65 in 1991, and thereafter. To prevent delays in obtaining government approval for adjusting tariffs, assurances were obtained from SAGUAPAC during negotiations that, by April 1, 1991, it will introduce a system to automatically adjust tariffs in line with inflation on a quarterly basis. Financial Prospects of SEWAPA 4.25 During the project execution period, SEMAPA would carry out total investments in the order of US$28 million, including US$12 million under the present project. About US$20 million of loan funds from external sources, Including US$14 million of loans under the project, would finance about 702 of the cost of total investments. SEMAPA would finance the remaining 302 out of its internal cash generation. 4.26 To support the aforementioned investment and financing plan and to monitor SEMAPA with a reliable financial indicator, assurances were obtained from SEMAPA dtring negotiations that i.. will maintain a ratio of operating costs excluding depreciation to operating revenues, of no more than 0.80 in 1990, 0.65 in 1991, and 0.55 in 1992, and thereafter. In spite of the recent tariff increase (para. 3.14), the severe drought experienced earlier this year, which has exacerbated water rationing, may very well inhibit financial performance through 1991. To prevent shortfalls or delays in adjusting tariffs, assurances were obtained from SEMAPA during negotiations that, by April 1, 1991, it will introduce a system to adjust tariffs automatically in line with inflation on a quarterly basis. Other Comnitments Required of Project Executing Aftencies 4.27 Project investments and debt service under the project will be substantial for all executing agencies; additional investments and debt might tax the financial capabilities of those agencies to the limit. Thus, to help ensure that the financial plans of the project executing agencies will adhere to strict priorities, assurances were obtained during negotiations from each of those agencies that, except as IDA otherwise agrees, they will abstain from: (i) carrying out any investment project other than the present one costing over US$2 million for SAMAPA and US$1.5 million for SAGUAPAC and SEMAPA, unless IDA receives satisfactory evidence that those investments are technically and economically justified and  - 32 - financially viable; and (Ui) incurring new debt, unleas the net revenues of the agency for the fiscal year immediately preceding the date of such incurrence or for a later twelve-month period ended prior to the date of such incurrence, whichever is the greater, shall be at least 1.3 times the estimated maximum debt service requirement of the agency for any succeeding fiscal year on all debt of the agency, including the debt to be incurred. 4.28 To enable IDA to properly monitor the financial performance and plans of the project executing agencies, assurances were obtained from each of those agencies during negotiations that they wills (i) by October 1 each year, submit to IDA for its review and comment an investment and financing plan, financial projections and monitoring indicators of performance for the current and the following five years; and (ii) propose measures, including adjustments to tariffs and other charges, to comply with the above financial covenants. Also, assurances were obtained from the Government during negotiations that it will support the executing agencies in taking the measures needed to meet institutional and financial commitments under the project. 4.29 Based on compliance with their financial commitments to IDA, the project executing agencies, as portrayed in the financial projections (Annex 6) and monitoring indicators (Annexes 7 through 9) would be in a solid financial condition at project completion in 1995. Their debt service ratio would be over 2. Moreover, as indicated by internal cash generation in excess of revalued depreciation, all executing agencies would be on a sound footing to undertake investments to further improve service coverage and quality in the cities under their responsibility. ReRorting and Auditing 4.30 The format of the progress reporting system was discussed and agreed with the Government and the executing agencies. Assurances were obtained that beginning in 1991, FNDR and the project executing agencies will submit reports to IDA as follow:s (i) by February 28 and August 31 each year, semi-annual progress reports for the six months ended December 31 and June 30, respectively; (ii) by May 31 each year, annual audited financial statements and related opinions and statements on project execution, compliance with loan covenants, and disbursements under statement of expenditure procedures, for the preceding fiscal year; and (iii) six months after the closing date of the IDA Credit, a project completion report. Proiect Justification. Benefits and Affordability 4.31 The project is fully justified in economic and social terms. The works selected are of the highest priority and would help meet service backlogs and permit an orderly expansion of urban growth in the project areas. Moreover, these works represent the least-cost solution among several alternatives. A total population of about one million will benefit from the project. About 0.5 million of this population have a family income below two minimum salaries (minimum salary Bol$150 or US$55/month, which is considered a low income). The number of beneficiaries and total project cost translate into an investment of about US$65 per capita to provide either water and sewerage services, which is low compared with  - 33 - regional averages of around US$100 for similar technical standards. The predominance of Investments to rehabilitate or better use existing facilities will make it possible to expand services at a low per-capita cost. 4.32 La Paz. Water investments in La Paz will benefit a total population of about 200,000. Sewerage investments in the neighboring municipality of El Alto will also benefit a population of about 200,000. The internal rate of return estimated for water and sewerage investments combined is in the order of 10%. Tariffs in real terms prevailing during the project execution period are in the same order as long-run marginal cost. With moderate cross-subsidy through the tariff structure, however, water and sewerage tariffs will be affordable to the poor. A low-Income family consuming 15 m31month would pay a bill equivalent to 1-2S of two min4mum wages for water and sewerage services combined. 4.33 Santa Cruz. The project will give access to safe drinking water through house connections benefiting a population of about 300,000 and to sewerage services benefiting a population of about 30,000. Unquantifiable health benefits would be substantial, as most of the population benefiting under the project take water from surface wells contaminated by latrines in areas with a high water table. The internal rate of return for water investments in Santa Crus is in the order of 15S. Water and sewerage tariffs reflect long-run marginal cost. They, however, are affordable to the poor with minimal cross-subsidy. The bill for some 15 m3/month of water with surcharge for sewerage services would be 1S of the family income prevailing among the low-income segment in the urbanized area of Santa Cruz. This low percentage to a large extent reflects the high income prevalent in Santa Cruz, compared to the national average. 4.34 Cochabamba. Water supply investments in Cochabamba would benefit about 300,000 people, including some 150,000 with new water connections and some 150,000 with reduced rationing. In addition, by keeping most networks full at all times, the project would reduce the risk of the dry networks absorbing contaminants, and thus help eliminate a health hazard to a large population in Cochabamba. The internal rate of return of investments under the project in Cochabamba is in the order or 152. Tariffs through the project period will reflect long-run marginal cost. However, they will be affordable to the poor, as, with moderate cross-subsidy, they would pay about 1-2S of the family income to cover average water and sewerage services combined. Institutional Impact 4.35 The project will also help upgrade the capabilities of the beneficiary utilities and start a more accelerated development of the total sector. As portrayed in the attached monitoring indicators (Annexes 7 through 9), the beneficiary utilities would substantially increase their operating efficiency. Improving the operational efficiency of those utilities would help contain tariff increases in real terms and thus benefit the total population of the project areas. For the utilities of La Paz and Cochabamba in particular (that had not been involved with IDA projects in the past), implementation of the proposed project should upgrade their capabilities for establishing investment priorities,  - 34 - selecting and managing consultants and supervising the execution of investments. The project also would help the FNDR develop into an effective lead agency for water and sanitation projects in the urban sub-sector. Furthermore, by helping introduce improved financial policies and institutional arrangements, the pzoject would enhance the sector prospects for increasing investment levels and efficiency and thus the quantity and quality of services country-wide. Environmental Imract 4.36 Although investments in water facilities under the overall project exceed those in sewerage and sewage treatment facilities, the additional water introduced under the project would not worsen the environmental conditions in any of the beneficiary cities. For La Paz, however, the. proposed sewerage investments would actually exceed those in water facilities. In Cochabamba, water supply investments will be carried out in areas which are served by a sewerage system. In Ssanta Cruz, the available limited resources will have to be allocated preferentially to water facilities, in spite of pressing needs for expanding sewerage services. This makes sense, given the high priority need to provide drinking water from safer sources than from the existing polluted shallow wells. The proposed rehabilitation of a sewage treatment pond should improve water quality in the Pirai River from which several communities, living downstream of Santa Cruz, take water. It is anticipated that all beneficiary cities under the project would further benefit from additional sewerage investments under future projects including the proposed secto: lending scheme (para. 4.08). Risks and Safeguards 4.37 The main project risks are that: first, the Government could fail to effectively implement the policy and institutional framework to improve sector pezZormance countrywide; second, FNDR could fail to become an effective lead sector lead agency; and third, the donors could fail to support the policljs introduced by the Government. The Government's recent approval of a framework for the sector financial policies and its commitment to the implementation would effectively reduce the first risk. IDA's close supervision of FNDR as the intermediary for the project would reduce the second risk. A coordinated effort to prepare a follow-up sectorwide project cofinanced with main donors will reduce the third risk. The proposed joint annual review of project issues by the beneficiary utilities, FNDR, the Government and KfW would lead to timely plans of action to remedy any identified shortcomings. On the basis of recent experience with Bolivia and continuity of Government conmitment to rational macroeconomic and sector policies, it is anticipated that most project objectives would be substantially met.  - 35 - V. AGREEMENTS REACHED AND RECOMMENDATIONS 5.01 During negotiations, assurances were obtained from the Government that it will: (a) by October 1 of each year, conduct a review of project performance with the project executing agencies, FNDR, KfW and IDA, to determine actions needed to remedy any identified shortcomings (Para. 4.14); (b) take all actions necessary to enable the project executing agencies to meet their covenants under the project (Para. 4.28); (c) by December 31, 1991, submit to IDA a plan for changing the sector's institutional setup, which should take into account recommendations In the IDA Water Sector Strategy Study, and, by June 30, 1992, start Implementing the agreed institutional changes (para 1.25); (d) by December 31, 1992, discuss with IDA a system to allocate water resources between human consumption needs and agricultural use in the Cochabamba area and, by June 30, 1993, start implementing the agreed system (Para. 2.17); and (e) except as IDA otherwise agrees, refrain from undertaking or letting any of the agencies undertake any water production scheme costing over US$10 million in any of the departments of La Paz, Santa Crux and Cochabamba, unless IDA has been furnished with evidence, satisfactory to IDA, that the proposed scheme is technically and economically justified (pare. 2.17). 5.02 Also during negotiations, assurances were obtained: (a) from all the executing agencies included ir, the project, SAMAPA, SAGUAPAC and SEMAPA, that they will: (i) carry out an action plan for institutional Improvement, and review this plan with IDA and update it as needed by October 1 each year (Para. 4.14); (ii) by April 1, 1991, introduce a system to adjust tariffs in line with inflation on a quarterly basis (paras. 4.22, 4.24 and 4.26); (ii) obtain IDA agreement before assuming new debt which would result in lowering the debt service coverage ratio below 1.3 (Para. 4.27);  - 36 - (Iv) by October I each year, propose to IDA an operational and financial plan including morntoring indicators and financial projections for the current and the following flve years, and take all actions necessary to meet financial covenants and the agreed targets of performance in the current and the following year (Para. 4.28); and (v) adhere to reporting and auditing requirements (Pars. 4.30). (b) from SAMAPA only, that it will: (iM introduce an Improved tariff structure by April 1, 1991 (Para. 3.14); (ii) maintain a ratio of operating costs (excluding depreciation) to operating revenues of no more than 0.50 in 1990 and thereafter (Para. 4.22); and (iII) obtain IDA agreement before undertaking any investment project with cost exceeding US$2,000,000 (para. 4.27) (c) from SAGUAPAC only, that it will: (i) maintain a ratio of operating costs excluding depreciation to operating revenues plus contributions from members, of no more than 0.70 in 1990 and 0.65 in 1991, and thereafter (Para. 4.24); and (ii) obtain IDA agreement before undertaking any investment project with cost exceeding US$1,500,000 (para. 4.27). (d) from SEKAPA only, that it will: ($) introduce an Improved tariff structure by April 1, 1991 (Para. 3.14; (i1) maintain a ratio of operating costs excluding depreciation, to operating revenues, of no more than 0.80 in 1990, 0.65 in 1991, and 0.55 in 1992 and thereafter (Para. 4.26); and (MiL) obtain IDA agreement before undertaking any investment project with cost exceeding US$1,500,000 (para. 4.27). 5.03 A special condition of default was agreed at negotiations stipulating as an event of default any action by the municipality or any agency other than the Government to restrict the autonomy of the executing agencies to set tariffs (para. 3.14).  - 37 - 5.04 The following are special conditions of effectiveness: (i) approval by KfW of its loan for this project (Para. 4.15); and (it) signature of on-lending agreements for the IDA funds between the Government and INDR and between FNDR and the executing agencies, on tenms satisfactory to IDA (Para. 4.10). 5.05 With the above assurances, agreements and conditions, the proposed projoet io suitable for an IDA Credit of SDR 25.2 million (US$33 milllon equivalent) on standard, 40-year terms.  - 38 - ANNEX 1 Page 1 of 2 BOLIVIA MAJOR CITIES WATER AND SEWERAGE REHABILITATION PROJECT Action Plan for the Operational. Financial and Institutional Improvement of the Sector To inprove their institutional capabilities, the Government, the FNDR and the beneficiary utilities will carry out actions as follow: The Government Actions Tartot Time Frame Issue a Decree on Sectcr Financial By October 1990 Policies. (completed) Contract consultancy to assist preparing By March 1991 and implementing investment guidelines, a framework for approving tariffs and an information system to monitor the urban sub-sector (Attachment 2). Implement the system proposed under the By March 31, 1992 above consultancy as agreed by the Government and IDA. Carry out a training program (Attachment During project execution 2). The FNDR Contract consultancy to assist In By March 1991 preparing and Implementing operational manuals and systems to assess projects (Attachment 2). Carry out a training program Through project execution (Attachment 2). Maintain a water and sanitation engineer Through project execution with qualifications and experience satisfaetory to IDA.  - 39 - ANNX I Page 2 of 2 The Beneficiary Utilities Actions Taraet Time Frame Meet targets established in monitoring Through project execution indicators as agreed during negotiations or as subsequently roviewed by IDA each year and revised if necessary with IDA's agreement. Contract consultancy to improve By March 1991 management systems (Attachment 3). Implement improved tariff structure By April 1, 1991 (SAMAPA and SEMAPA only). Implement the systems proposed under the By September 1992 above consultancy as agreed by the utilities and IDA (Attachment 3). Carry out training program Through project execution (Attachment 3).  - 40 - ANNE 1 Page 1 of 2 BOLIVI MAJOR CITIES WATER AND SEWERAGE REHABILITATION PROJECT Financial Policies for the Water and Sanitation Sector 1. Introduction. This summarises the financial policies which the Bolivian Government has introduced in the water supply sector as a condition of presentation of the credit to IDA Executive Dixectors. 2. General. As a general rule, the operating agencies of the Water Supply and Sanitation Sector should recover the operating and investment costs of providing services through advances from and charges to the beneficiaries. To the extent possible, moreover, tariffs should reflect the marginal cost of services. Designing tariffs to hold down consumption for postponing substantial investments will be appropriate. 3. Tariff Structures. Tariff structures should include separate tariffs for water and sewerage services, which should reflect the cost of each of those services. 4. Lendina Rates. Loans from public entities to the sector operating agencies, as a muinmum, should be positive in real terms. S. Direct Subsidies. Direct subsidies for investments will be acceptable. These could be provided as follow:s (a) By municipalities, Departmental Governments and RDCs, subject to ad-hoc conditions required by the Government in projects partly financed by the Government or international agencies. (b) By the Central Government for: (i) projects that benefit the poor in the urban fringes and the rural areas; and (11) reconstruction projects in case of natural disaster.  - 41 - ANK 1 Atte_baet I Pag. 2 of 2 The above Government subsidies would be provided through the national budget. They will require clearance from the sector ministry and the Ministry of Planning and Coordination (MPC). 6. Contribution to Investments from the Beneficiaries. For all projects in the Water and Sanitation Sector, the executing agencies or the users of services will contribute to finance a percentage of investment costs with their own funds, as follows: (a) the water utilities of La Paz, Santa Crus and Cochabamba, at least 202; (b) the water utilities of departmental capitals or other medium-size cities, at least 152; (c) the operating agencies for the small cities (which must generate enough revenues to cover operating costs and debt service), at least 102; and (d) the beneficiaries in the urban fringes and the rural areas working alone or within community organizations (who might receive grant for financing investments), at least 15, to be provided mainly in beneficiaries' work. 7. Enforcing Policies. To make the sector 9perating agencies comply with financial policies, the sector central agencies should carry out actions as followst (a) the MPC should only approve and FDR and PIS should only finance projects which are designed following the above policies; and (b) the MPC should constrain access to donor and government resources of those agencies that fail to comply with these financial policies. 8. Information Reouirements. The operating agencies' failure to provide data to the sector ministries for monitoring compliance with policies and operating performance will be considered an event of default of loans provided by FDR and PIS.  - 2- ANNEX 1 Attachment 2 Page 1 of 3 BOLIVIA MAJOR CITIES WATER AND SEWERAGE REHABILITATION PROJECT The National Component: Technical Asslstance and Trainbna 1. The Government of Bolivia will carry out a program to lmprove sector management, with emphasis in the functions of the central government agencies to oversee and coordinate the sector. The program will lnclude consulsancies to introduce systems for the central government to manage the sector and trainlng of staff of its agencies. Consultancies Objectives 2. The objectives of the consultant's work will be to provide services as follow:s (a) develop guidelines to prepare and ssess water and sanitation projects; (b) develop a framework for preparing and approving tariffs for the urban sub-sector; (c) design and implement a brief nformation system of operating and financial information for the MUN to oversee the urban sub-sector; and (d) design and mplemnt operational manuals and project management systems for the FDR. Scoie of Work 3. Gutdelines to Prepare and Assess Pro4ects. In the area of project preparation and assessment, the consultants should carry out the following tasks: (a) develop a format for the operating agencies to update the status of services, the description of physical systms,t the technical constraints and the potential solutions; (b) by amount of investment and size of urban center, propose standards of project preparation and assessmaet, including consideration of priorities, computation of minimum cost and consideration of rate of return;  ANNEX 1 _ 43 - Attachment 2 Page 2 of 3 (e) establish procedures and model documents under which operating agencies will submit and the central government entities will approve projects; and (d) propose hurdle parameters for approving projects. 4. Framework for Setting Tariffs in the Urban Sub-Sector. In the area of tariffs, the consultants should carry out the following tasks: (a) review and assess a sample of present tariff resolutions; (b) develop tariff principles and models, and simple tariff structures which take into account the concept of marginal cost and a minimum amount of cross subsidy for the very poor; (c) develop pol cies for charges other than tariffs; (d) propose mechanisw for essily updating tariffs according to inflation; and (e) prepare a decree establishing a framework for approving tariffs. 5. Information System for the MU%. In this area, the consultants should carry out the following tasks: (a) establish models of summary financial statements which the operating agencies could submit without significantly changing their systems; (b) establish other indicators Which the operating agencies should provide and prepare guidelines to compile those indicators; (c) propose a system for collecting and maintaining the information, including computarized records; and (d) design a publication to disseminate the above information. 6. Manual and Systems for the FDR. For the FDR the consultants should carry out the following tasks: (a) propose improvements to the general and water and sanitation operations manuals, and assist in !mplementing those improvements. The consultants should define the steps staff should follow during project processing, the extent of analysis in those steps, and the sumary form and brief memoranda for documenting those steps;  ANNEX I 44 - Attachment 2 Page 3 of 3 (b) prepare examples of technical sta'dards and solutLons for representative systems in the water sector." These examples would not substitute for a review by a sanitary engineer, but should provide a basis for any professional to inquire about gross inconsistencies among service 3tandards, design parameters and average unit costs; (c) propose and assist in implementing a simple model to prepare financial projections of water supply utilities; td) propose and assist in implementing simple models to compute the internal rate of return and average incremental cost of water projects; and (e) train the FDR staff on the job for using the above mentioned manuals and models. TraininR 7. Training will consist of courses *broad and seminars organized by ANESAPA, as.follows: (a) courses abroad will includes (i) six-week courses in management for about four staff of the ministries and two engineering staff _4 the FDR; and (Li) training visits to operating agencies and water sector central instltutions for about four staff of the ministries and two staff of the FDR. (b) courses organized by ANESAPA will include: (i) courses in operation of treatment plants; (ii) courses in control and maintenance of networks; (iii) courses in commercial operations for small agencles; and (iv) courses in financial projectlons using a very simple model for small agencies.  -45 Ame INE Attabhment 3 Page of 4 BOLT VI& MAJOR CITIES WATER AND SEWERAGE REHABILITATION PROJECT Terms of Reference for Technical Assistance and Trainina Program for the Executint Atenctes 1. To Improve their institutional capabilities, SAMAPA, SAGUAPAC and SEMAPA, (each of them denominated the company) will hire consultants to introduce upgraded management systems, and carry out project-related training programs. Common terms of reference for the consultancies and a common training program follow: Obiectives of the Consultants Work 2. The objectives of the consultancy are the following: (a) assess the management reporting, budget and accounting systems, propose improvements and assist in implementing them; (b) assess commercial record-keeping, billing, collection and customer service procedures, recomend improvements and assist in * implementing them; Sc) assess operation and maintenance procedures and technical records, propose improvements and assist in implementing them; (d) assess the computer applications for the commercial system, propose Improvements and assist in implementing them; and (e) on the basis mainly of the above work, propose improvements to the standards for developing computer applications, and assist in preparing a plan for systems development. Scone of Consultint Services 3. General. The consultants will conduct their work here describod and whatever work is needed to reach the above-mentioned objectives. As part of their work, the consultants should gain an understanding of the management objectives, present organization, operations and information systems of the company, and formulate recommendations to improve operational efficiency and management control. In the conduct of their work, the consultants will coordinate closely with the company's personnel. The consultants, however, will be solely responsible for evaluating the company's operations, and their recommenJations and proposed systems. 4. The consultants should train the company's personnel in operating and assist the company in Implementing the designed systems until such systems are working smoothly. To fulfill this responsibility the consultants should:  - 46 - ANE 1 Attachment 3 Page 2 of 4 (a) formulate the requirements to implement the proposed systems; and (b) promptly report to management any material Impediments to systems implementation and the means to overcome those Impediments. 5. Manatement Reportint. On the basis of their review of the company's operations and the distribution of responsibilitier and with detail appropriate for each management level, the consultants will design a management reporting system which should include, but not necessarily be limited to, the followings (a) financial statements which should comply with generally accepted accounting principles; (b) complementary financial statements including revaluation of fixed assets and depreciation and items required for tarift planning; (e) operatling and capital budget compliance reports for various management levels, identifying controllable costs and non-monetary performance indicators; (d) customer monitoring information reports; (e) formats of financial projections for long-range financial planning and short-range cash management; and (f) reports to monitor service standards. In designing the reporting system, the consultants should: (i) identify reports or records of the company that should be modified or eliminated; and (ii) make the different sets of reports compatible and linked by clear rules. 6. Formtlation of Plans and Budgets. The consultants should prepare standards, procedures and forms for the preparation of long-range physical and financial plans, annual operating and investment budgets and cash management. The procedures for budget preparation, with economy of labor, should fulfill the requirements of management and those of the central Government. The budget procedures should provide for review of financial and physical goals along responsibility lines. 7. Accounting. To support the reporting system, the consultants should introduce in the company compatible financial and responsibility accounting systems. These systems should enable the company to establish pricing policies separately by service and identify controllable costs. They should include, but not necessarily be limited to, the following:  -47_ Attacbment 3 Page 3 of 4 (a) system of accounts and instructions to operate the accounts; (b) detailed explanation of how the accounts integrate the various reports; (c) design of forms; (d) definition of the flow of documents; and (e) specification of accounting controls. 8. Commercial Systems. In the commercial area, the consultants will assist the company in improving commercial management. For this, the consultants should propose and assist in implementing the followings (a) a model of customer master file and procedures for updating such file; (b) improvements for meter reading, billing and collection procedures; and (c) a system of attention to customers, which should include the handling of complaints and follow up of final resolution of such complaints. 9. Operation and Maintenance Procedures and Technical Records. On the basis of their review of the company's operations and technical records, the consultants should propose and assist in implementing the following: (a) procedures for the operation and maintenance of! facilities; (b) improvements to the control of water production and distribution; (c) procedures for maintaining macro-meters, reading them and keeping records of those readings; and (d) a system of technical records including production and distribution facilities. 10. Commercial Application. In this area, the consultants should: (a) review the current system, Identifying shortcomings; (b) propose Improvements; (4) design the new system, preparing the necessary system, user, operation and control manuals; and (d) assist in implementing the improved system.  - 48 - Attaghment 3 Page 4 of 4 11. Systems Development. In this area, on the basis of their work, In the commercial application, the consultants should: (a) propose the organization, procedures and forms, for the companies to decide on what applications to computerize; and (b) propose a set of priorities for future syste development. Phasing of the Consultants' work and Reporting Requirements 12. The consultancy should be carried out in three separate phases with the decision to proceed from one phase to the other made only after each phase is substantially completed as agreed upon with the consultants. The three phases would be: (i) evaluation; (ii) planningldesign; and (iii) Implementation. The work to be performed under each phase would be as follows: (a) Evaluation Phase. Existing systems and procedures would be assessed, deficiencies identified and improvements proposed. The recommendations for changes would include an assessment of the Impact these changes may have on the organization as a whole. (b) PlanninglDesi2n Phase. In this phase the proposed changes would b9 designed and procedures for their implementation developed. (c) Implementation Phase. The Improvements and systems developed in the planning phase would be implemented in this phase through the coordinated effort of the company's staff and the consultants. Trainint 13. Each company's training program through project exeocution will consist of the following: (a) intensive courses in English during a total period of about six -weeks for a key member of the management team; (b) intensive courses in management during a period of about six weeks for two key members of the management team; (c) internships of 2-4 weeks in modern utilities for some five professionals; (d) internships of 2-4 weeks in modern utilities for some 10 technicians mainly in the areas of operation and maintenance and commercial administration; and (e) assistance of! some 100 staff to the ANESAPA courses on operation and maintenance and commercial operations.  me Bl W1ERt AND SE E IL"ATlaN PROJECT IwRW;Tv EXaT0F SCEUk l S WFR 1A xrA Cam. 0aarlpstlu Bee Loat# t wo 100 1901 12 lou low 199. Cast C a. bOertr 4etW Ibaarter brter barter barter Ore S I t inw V I n inIV it 1 Ix V I 11 tv IV I n sit TV I mi u IV I n m IV A Vate rplg 7 1 I 1 I I I I A.1 _pahm T. 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