Jamaica - Kingston Water Supply Project

RESTRICTED Report No. TO-694a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK POR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE KINGSTON WATER SUPPLY PROJECT JAMAICA April 9, 1969 Public Utilities Projects Department  CURRENCY EQUIVALENTS Currency Unit - Jamaican Pound (LJ) sh - shillings (20 shillings - WJl) d - pence (12 pence - 1 shilling) US$1 - LJ 0.416 US$1 million - UJ 416,667 TaJ - US$ 2.40 UJ million - US$ 2.4 million ABBREVIATIONS Commission - The 1k'ter Commission Kingston, Jamaica NWA - National A*ter uthority Corporate Area - Kingston and St. Andrew Parishes, PAHO - Pan American Health Organization UNDP (SF) -- United Nations Development Program (Special Fund) Gallon - Imperial Gallon (1 gallon = 4.5 liters or 1.2 US gallons) IMgd - million Imperial gallons per day (1 lMgd - h.544 Cubic Meters/Day) gcd - gallons per capita per day (1 gcd - 4.54 liters/day) IMg - million Inperial gallons ppm - parts per million FISCAL YEAR April 1 - March 31 i.e. fiscal year 1969 - year ending March 31, 1969  APPRAISAL OF THE KINGSTON WATER SUPPLY PROJECT JAMAICA TABLE OF CONTENTS Page No. Summary 1. Introduction 1 2. The 14ater Supply and Sewerage Sector in Jamaica 2 A. Relation to Jamaican Economy 2 B. Administrative Structure 2 3. Existing 'Water and Sewerage Facilities in Kingston and St. Andrew and Development Program 4 A. 1ater Supply 4 B. 11ater Quality and Reliability 4 C. Sewerage and Sewage Disposal 5 D. Development Program - Water Supply and Sewerage 5 E. EMergency Program 5 4. The Project 6 A. Description 6 B. Cost Estimates 6 C. Design, Construction and Supervision of Construction 7 D. Procurement and Disbursement 8 5. Justification 9 6. The Proposed Borrower 11 A. Organization and Management 11 B. Financial Position and Earnings 12 Accounting 12 Audit 13 Balance Sheet 13 Past Income 13 C. Water Rates 13 Billings and Collection 15 Sewerage Rates 15 7. Future Finances 16 A. Financing Plan 16 B. Financial Projections 17 8. Conclusions and Recommendations 19 This report is based on the findings of a Bank mission consisting of Ivlessrs. V. Rajagopalan and F. Lamson-Scribner which visited Kingston in February and July/August, 1968.  LIST OF ANNEXES ANNEX 1 EKisting Witer Supply Systems of the -ater Commission 2 Detailed Description of Proposed Project 3 Cost Estimates of Proposed Project 4 Construction Schedule 5 Wdater Consumption Statistics and Projections 6 Incremental Return on Proposed Project 7 Organization chart 8 Estimated Balance Sheet, March 31, 1968 9 Summary Income Statements 1964-1968 10 Schedule of Water Rates - Existing and Proposed 11 Estimated Income Statements 1969-1976 12 Estimated Sources and Application of Funds 1969-1976 13 Estimated Balance Sheets, 1969-1976 iAP Existing Water Works and Proposed Project  JAMAICA APPRAISAL OF THE KINGSTON WATER SUPPLY 1D`JECT SUMMARY i. The Water Commission, Kingston, Jamaica has requested a Bank loan to assist in financing a project to improve and expand the water supply facilities in the Kingsten area. The loan would be guaranteed by the Government of Jamaica. This report covers the appraisal of the proposed project. ii. The project has the highest priority in the water supply and sewerage sector in Jamaica. Demand for water in the Kingston area exceeds the reliable capacities of the existing sources and new sources of supply have to be brought into use. The project would provide additional capacity sufficient to meet estimated demand until about 1976. iii. The Ilater Commission is a semi-autonomous agency, responsible for water and sewerage services in the Kingston area. The Commission has managed its water supply and sewerage systems reasonably well and is aware of the need to strengthen middle management in general and financial control and accounting in particular. Corrective measures are being under- taken. The Commission should be capable of carrying out the project and operating the system. iv. The project would consist of development of a spring and several wells to provide the additional supply to the Kingston area. It would in- clude construction of an intake at the spring, provision of pumps and a pumping main from the spring to Kingston. En route, water from the wells included in the project would be pumped into the same main. The water wjould be chlorinated before distribution. The project also provides for distribution system improvements and a service reservoir in Kingston. The total cost is estimated at US$ 9.1 million equivalent, including in- terest during construction. The proposed Bank loan of US$ 5 million would cover all of the direct and some of the indirect foreign exchange costs of the project. The project is technically sound; estimated costs are reasonabL.e v. A public utility type of accounting system has recently been initiated by the Commission, but for firmly establishing the new system and the training of personnel, the Commission needs to employ competent chartered accountants. The Commission also is to establish a new post of Chief Financial Officer to strengthen its financial management. vi. Although almost all service connections are metered, in the past the water rate schedule did not encourage economic usage. The Commission has recently adjusted the rates and simplified the structure in order to earn a return of at least 8%, and to encourage economic usage. Based on the new rates, the rate of return on the incremental investment would be about 22%. vii. The project is suitable for a Bank loan of US$ 5.0 million equiv- alent for a period of 20 years, including a four-year grace period.  JAMAICA APPRAISAL OF THE KINGSTON WATER SUPPLY PROJECT 1. INTRODUCTION 1.01 The Water Commission, Kingston, Jamaica (Commission) has applied for a loan from the Bank to help finance a project to improve and expand the water supply facilities in the Kingston metropolitan area where there has been a critical water shortage. The loan would be guaranteed by the Government of Jamaica. 1.02 The project is estimated to cost about US$ 9.1 million equivalent, and a loan of Us$ 5.0 million is proposed to cover the foreign exchange costs including cost of consulting services and interest during construction. Remaining local currency costs of the project would be financed by funds generated from internal operations. 1.03 The Bank's first contact with the Commission was in June/July 1966. At that time the proposal,based on studies by the Commission's consultants, was to obtain additional water from a new reservoir to be built by damming the Rio Pedro River at Harkers Hall. The total cost was estimated at about US$ hO million. A Bank mission examined this proposal and recommended that further exploitation of ground water and the use of surface water in the area be considered. To assist the Government of Jamaica, the Bank retained the services of Leggette, Brashears & Graham, consulting ground water geologists, New York. A consultant geologist made a field investigation of the geological and hydrological conditions in the Kingston area during September 1966 and advised that additional supplies of ground water could be developed. 1.0h The Commission's consultants reviewed these recommendations and proposed two alternative schemes for using both underground and surface sources in stages. These alternatives were again examined by a Bank mission in February 1968 and the proposed project to meet the water demand up to about 1976 was agreed upon. 1.05 The main items of work under the proposed project would include construction of additional wells and tapping of Tulloch Spring to yield about 12.5 IMgd, transmission lines to Kingston, and the strengthening of the existing distribution system. The Commission has already undertaken an emergency program to utilize 3-5 IMgd from the Ferry River to alleviate the water shortage during the recent drought. This program was an inherent part of the proposals reviewed but the pressing need for water demanded quick implementation; procurement was not in accordance with Bank require- mnents and it is, therefore, excluded from proposed Bank financing. 1.06 The appraisal of this project is based on information submitted to the Bank by the Commission, consultants' reports, and on field investigations by Bank appraisal missions composed of Messrs. Rajagopalan and Lamson- Scribner in February and July-August 1968.  - 2 - 2. THE WATER SUPPLY AND SEERAGSE SECTOR IN JAMAICA A. Relation to Jamaican Economy 2.01 The island of Jamaica covers an area of about 4,411 square miles (20% larger than Puerto Rico or Cyprus) and has a population of about 1.9 million. In recent years the natural increase in population has been about 3. per year wYhich was reduced to an actua1 rato of abVout_ 2% due to emigration. The density of population per square mile is about 420 which is high; more significant is the density per square mile of agricultural land which is estimated at 1,050 persons. Population pressure in the rural area, together with inadequate opportunities for employment, has intensi- fied migration to the urban areas. 2.02 Some 30% of Jamaica's population lives in the parishes of Kingstorn and St. Andrew (Metropolitan Kingston), where population growth has averaged about 1l% per annum during the past decade. In Kingston parish, which covers only ten square miles, the population density is 13,650 per square mile, and the growth in density over the past two decades has been about 25%, whereas in the adjacent parish of St. Andrew the density is 2,271 per square mile corresponding to a threefold increase in the same period. 2.03 During the period 1963-67, the average annual growth for the over- all economy was about 5%. Significant growth in manufacturing has taken place and employment in manufacturing has been rising. About 55% of all factories in Jamaica are located in M4etropolitan Kingston. 2.04 The tourist sector in Jamaica has been expanding rapidly and emerging as the second most important earner of foreign exchange after mineral products. Wlith Government encouragement, the outlook for con- tinued growth of tourism appears bright. The growth of tourism on the island as a whole directly affects the Kingston area both in terms of increased tourist population and need for services in Kingston and in- directly in increasing related business and commercial activities as a result of tourism elsewhere. 2.05 The continuing growth of Metropolitan Kingston demands the pro- vision of adequate water supply as an essential infrastructure. Populatior of this area is expected to continue to increase at about 4% per annum during the next decade. The situation in the Kingston area presents the single largest problem in the water supply sector in Jamaica at present. B. Administrative Structure 2 .06 The provision of water supply and sewerage services in Jamaica has been regarded as a responsibility of the 14 local parish councils on the island with the exception of two adjacent parishes - Kingston and St. Alndrew, known together as the Corporate Area, where the responsibility has been assigned to the Water Commission (paragraph 2.08).  2.07 Outside Kingston there are only a few towns with most of the population residing in semi-urban and rural communities. Most of these communities have access either to a public water supply system or to natural water courses or wells. In 1963, the Government established the National Water Authority (NWA) to promote the development of economic water supply systems outside the Corporate Area. It is responsible for providing, improving, operating and maintaining water supply and sewerage services. To date, Government's policy decisions have restricted the NWA to the producticn and sale in bulk of water to the parish councils and retained in the parish councils the responsibility for maintenance and operation of the distribution systems, for dealing with individual con- sumers and for prescribing and collecting water rates. The NWA has carrie(d out a number of small water supply projects and the first phase of the Montego Bay sewerage scheme. With US AID financial assistance, feasibility studies have been made for water supply schemes in Montego Bay, Grange Hill/Little London, Spanish Town, Dornoch and Morant Bay. Bilateral financing for these projects is being explored. 2.08 The Corporate Area covers the Kingston metropolitan area, the capital and commercial center of Jamaica. The provision of piped water supplies has been more vigorously pursued in the urban portion of this area than elsewhere. The first Kingston water works wqas inaugurated in 1809. Since then, seven different authorities have guided the affairs of the Water 1%krks. The present organization, the Wgater Commission, was es- tablished in 1936, and is responsible for providing both water supply and sewerage services in the Corporate Area. During its existence over the past 30 years, the Commission has steadily expanded its water supply facilities with the growth in demand due to population increases and ex- pansions of area of supply. The sewerage services, however, have not growm simultaneously, and organized public sewerage systems exist only in certain sections. A feasibility study for sewerage in Kingston is to be started shortly. 2.09 The future sources of water for the Corporate Area are located outside its legal boundaries. In order to ensure proper development and utilization of the water resources in the region, the NWA and the Commis- sion have set up a joint committee. Assurances have been obtained from Government that the Commission has the right to abstract wrater from the proposed sources and that further abstraction from the same areas that might prejudice the yield from the project sources would not be permitted. 2.10 There are no sewerage schemes outside Kingston and Montego Bay. As most of the communities are small in size, septic tanks and seepage pits are used.  -14- 3. EXISTING WATER AND SEVRAGE FACILITIES IN KINGSTON AND ST. ANDREW AND DEVELOFvIENT PROGRAM A. IWJater Supply 3.01 The Commission's water supply system covers an area of about 55 square miles. Supply is derived from both ground and surface water sources. The !,tg Water and Hope River catchments provide the main surface sources and have been developed in stages. WT;ater from these sources under- goes filtration arid chlorination before distribution; supply is mainly by gravity. The surface sources have a long-term maintainable yield of about 21 INgd. Water from wells located in different parts of the supply area is pumped into the distribution system after chlorination. The existing wells have a maintainable yield of about 12 IMgd during normal years. Details of existing facilities are given in Annex 1 and illustrated on the YNap. 3.02 There are no private surface water supply systems in the area. The Commission has authority to control the development and use of wells. There are some private wells which are used almost exclusively for in- dustrial, commercial and institutional purposes. Water for domestic purposes is drawin entirely from the Commission's piped water system. 3.03 The Commission serves an estimated 500,000 people, over 90% of the population in the Corporate Area, through some 700 miles of water mains of various sizes. There are about 50,000 service connections and 60 public standpipes. It is estimated that about 66% of the consumption is by domestic users, 20% by commercial and industrial users, and l% by Government agencies and others. There are pronounced seasonal and annual variations in usage. The maximum daily usage is about 25% higher than the daily average. Per capita consumption has averaged 60 gallons per day except during years of drought or natural calamities. B. 1ater Quality and Reliability 3-04 The Cormission maintains a well equipped laboratory supervised by a competent sanitary engineer. The results of regular tests indicate that the water supplied is bacteriologically safe. A close watch is maintained over chloride content in well waters, and wells showing ex- cessive chlorides are shut down until the quality improves. In 1968, however, because of the acute shortage of water, well waters with high chloride content had to be used. 3.05 1Water pressures are quite high and because of the large differ- ences in elevation of the city, pressure reducing valves are utilized in many parts of the distribution system. Service has been continuous except for one recent period when supplies were restricted due to drought.  - 5- C. Sewerage and Sewage Disposal 3.06 The Commission operates sanitary sewerage systems serving approxi- mately 90,000 people in some of the older sections of Kingston and in new housing developments. The remaining area is served by seepage pits and septic tanks. Two primary sewage treatment plants treat sewage from the Kingston area and two extended aeration plants serve certain new housing developments. The Kingston and St, Andrew Corporation and some private contractors operate septictank emptying services. The Commission accepts the delivery of the septic tank contents at its sewage pumping station and collects a fee for this service. D. Development Program - Water Supply and Sewerage 3.07 Over the next 3 years the Commission proposes to spend about 'J 6 million (about US$ 14 million equivalent) to expand and improve its water supply system. Beyond that no firm plans have been made but feasi- bility studies for the Harkers Hall and Mahagony Vale projects have been carried out and other possible sources are under investigation. The main component in the present program is the project for Bank finance (hJ 3.8 million). The major part of the balance is for the stabilization of the existing Hermitage Dam; this work has not yet been started. Distribution system extensions, minor source development and the emergency program men- tioned in paragraph 1.05 and discussed further in paragraph 3.10 account for the remainder. These are all under construction. The present program would be sufficient to meet the Corporate Area's water needs until about 1976. 3.08 In the absence of a sewerage plan for the Corporate Area, the Commission has been undertaking mainly ad hoc sewerage schemes for some communities and some extension and improvement works in the industrial area of Western Kingston. Over the period 1969-72, the Commission proposes to spend about MJ 2 million on sewerage schemes under construction and minor sewer extensions. Finance for these works is provided by Government and bilateral sources. 3.09 Proposals for making a study of the sewerage and drainage problencl in Kingston have been under consideration for some years. A feasibility study financed by a Canadian loan is to be undertaken shortly for preparing a comprehensive sewerage scheme. E. Emergency Program 3.10 The emergency program (paragraph 1.05) has been undertaken in view of the prolonged drought in the area which resulted in the average daily production decreasing from 30.2 IMgd during 1966/67 to 27.9 IMgd during 1967/68. This program, estimated to cost about LJ 300,000 is being financed by a Government loan. It involves activation of some existing wells, more intensive exploitation of ground water, and the use of 3-5 IMgd of somewhat sgaline water from springs feeding the Ferry River. The activation of exist- ing wells has been done, and new wells have been drilled. Construction of the Ferry River scheme is underway. This scheme has been designed to fit in with the proposed project. Water from this source must be diluted witl water from the proposed project sources before distribltico ex:.31t i} emergency.  - 6 - 4. THE PROJECT A. Description 4.ol The proposed project, which constitutes about 60% of the Commis- sion's water supply program for 1969-1972, would derive water from two unde;- ground sources (i) Tulloch Spring, about 20 miles from Kingston, and (ii) wells in the Spanish Town area, about 12 miles from Kingston, which will be called "Headvnrks wells". Tulloch Spring yields at least 7.5 IMgd during years of normal rainfall and an average supply of 5 IMgd is proposed from the Headworks wells. A detailed project description is given in Annex 2, and the locations of the proposed works are shown on the Map. 4.02 The project would include intake works, pumps, and chlorinating equipment at Tulloch Spring, and a pumping main from Tulloch to Kingston. En route, a balancing reservoir would be provided. Suitable existing wells in the Spanish Town area would be purchased and a few new wells would be drilled and equipped with pumps. The well waters would be chlorinated and pumped into the Tulloch-Kingston main. Somewhat saline water from the Ferry River scheme (emergency program) would also be pumped into the Tulloch- Kingston main and diluted with water from the project sources to acceptable salinity levels before distribution. 4.03 Water from the project would be distributed through existing and proposed mains into the lower zones of the Kingston distribution system and also sold in bulk to NWA for distribution in Spanish Town and adjacent areaw. Service storage would be increased by constructing a one-million gallon reservoir at Harbour View. Two booster pumping stations would be estab- lished and additional distribution mains would be laid to strengthen the system. In order that water can be taken from Tulloch Spring without re- ducing the flow available in the Rio Cobre for irrigation, the project also includes provision for the development of additional wells which would pump water into the river during low water periods offsetting the diverted flow of Tulloch Spring. B. Cost Estimates 4.04 The total cost of the project is estimated to be about UJ 3.8 million (equivalent to about US$ 9.1 million). The proposed Bank loan of US$ 5.0 million equivalent of 55% of total project cost would cover the foreign exchange costs of material and equipment procured on the basis of international competitive bidding, part of the foreign ex'change component of locally produced goods and of civil works contracts, foreign exchange costs of consulting services and interest during construction. The cost estimate follows and is given in detail in Annex 3, which also gives the estimated expenditures year by year, during the construction and disburse- ment period 1969-1972.  Project Cost Estimate InE J In US$ Local Foreign Total Local Foreign Tct& - - Thousands - - - - - Tulloch Springs Intake & Pumps 39 67 106 94 161 2 Headworks Wells & Booster Pumps 102 107 209 245 257 ' River Flow Augmentation *l1s 58 50 108 139 120 Tulloch-Kingston Transmission 634 927 13561 1,521 2,225 3,7L.& Service Reservoir & Balancing Reservoir 129 23 152 310 55 6 Distribution Mains 182 262 444 437 628 1,1 06 Housing 25 - 25 60 - Land 8 8 19 - L Sub-total 1,177 1,436 2,613 2,825 3,446 63,; Contingencies 2h3 148 391 583 355 Price Escalation 120 74 194 288 178 Consulting Services 167 133 300 401 319 Sub-total 1,707 1,791 3,498 4,097 4,298 8,2r I-nterest during Construction - 277 277 _ 665 6C. Total 1,707 2,068 3,775 4,097 4,963 ,(- =20== =01 x-m 1J1"= V- S_-. Construction costs are derived from estimates made by the consultants anid are based on preliminary designs for the project, results of recent bids fur similar works in Jamaica and the West Indies, and on current quotations fol- equipment and materials. Indirect foreign exchange expenditures of about US$ 40G,000 on locally procured goods and services are included under local costs. The estimate includes a provision for price increases of ahou< 10% on local costs and 5% on foreign costs and a contingency provision of about 20% on local costs and 10% on foreign costs. A higher contingency has been allowed on local costs which consist of pipe laying and civil workl' expenditures mainly because of the difficult terrain in which the Tulloch- Kingston main has to be laid and the site conditions at Tulloch Spring hfP. works. The estimated cost of consulting services include detailed engineei'- ing, preparation of contract documents and supervision of construction. '.^X cost estimates and the underlying assumptions are reasonable. The propos,xi oroject is expected to be completed in about three years. A constructiorn s;chedule is shown in Annex 4. '.. Design, Construction and Supervision of Construction t .05 Howard Humphreys & Sons, a British firm of engineering consul.ail. ,ho made the feasibility studies for this project has been retained by t'.v oimmission to prepare detailed designs and tender documents, to eval'a :  - 8 - and to supervise construction. It is essential that the Commission closely review the work of the consultant and provide the necessary coordination with other authorities, in order to accomplish the project on schedule. h.06 Substantial changes were made in the project during appraisal, and it was agreed that the consultants would submit to the Commission and the Bank for review and approval, the detailed designs for the various com- ponents before preparing tender documents. This arrangement is satisfactcry. To avoid delay, the Commission started detailed engineering at the time of project appraisal. It is proposed that the Bank should reimburse the foreign exchange costs of consulting services incurred by the Commission on the project after July 1, 1968. t.07 The Commission would be responsible for the proposed project. Con- struction is expected to be done entirely by contractors, except for drilling and testing of wells. The Commission is utilizing an existing well drilling rig provided to the Government under a UNDP (SF) project for a ground water survey for the drilling and testing of Headworks wells. D. Procurement and Disbursement h.08 The procurement of goods from abroad is regulated by the Ministry of Trade under the Trade Law. A system of import control by licensing is operated in respect of imports from certain countries or of certain items listed by the Ministry. The borrowier will have to obtain special permission from Governnent to adopt the Bank's procurement procedures. However, no special problems are envisaged in this regard and the items to be financed by the Bank loan would be procured through international competitive bidding in accordance with the Guidelines for Procurement under Bank loans. Dis- bursements would be against the actual foreign exchange costs or against the foreign exchange component of locally manufactured goods and services. 4.09 Local manufacturers are expected to compete for the supply of cer- tain goods. It was agreed during negotiations that a margin of preference to local manufacturers of 15% or the amount of customs duty whichever is lower would be provided. Construction contracts will also be awarded on the basis of international competitive bidding. It is expecWed, however, that local firms would be successful in obtaining these contracts. Only the foreign exchange component of such contracts would be eligible for Bank reimbursement. h.1O In the event of there being any savings in the foreign exchange costs, it is proposed to use the balance of the loan for further distributio- system extensions and improvements, the need for which might develop in the next three years. These would be subject to approval by the Bank. Other- wise the unused balance of the loan would be cancelled.  - 9 - 5. JUSTIFICATION 5.01 The Government of Jamaica accords a high priority to the provisict of adequate water supply to Kingston, the capital and largest city in Jamaica. During the past few years, Government has been supporting feasibility studie', for possible projects to bring additional amounts of water to Kingston. 5.02 The existing water supply facilities in the area are being fully utilized. During a drought in 1967-68, the Commission had to place restric- tions on the use of water. While the production needed to meet demand was over 30 IMgd, actual production during the drought was less than 28 DMgd. The emergency program undertaken by the Commission will help to tide over this situation, but is not adequate to fully meet the future needs. The proposed project, which would utilize new fresh water sources, is therefore an urgent and essential measure. Upon completion of the proposed project,the supply to the metropolitan area would be increased on the average by about 12.5 IMgd. This additional capacity is expected to be fully utilized by 1976-77 according to the following assumptions. 5.03 The past consumption and forecasts of demand are shown in Annex 5. From 1961 to 1968, the population in Kingston has increased at an average rate of about 4% per annum. This growth has been due to intensive migraticn from other parts of Jamaica as well as the natural increase in population. It is expected that growth would continue at about this rate during the next few years at least. With the expansion of Kingston harbor, and the proposals for redevelopment of the Twater front areas of old Kingston and construction of a causeway across Hunts Bay linking downtown Kingston with communities to be developed to the west, further rapid urbanization of the area is anticipated. Already a number of new housing developments have been built and others are under planning and construction, and water supply will have to be extended to these areas. In addition, Government's efforts and policies in the development of tourism have been very successful and arny water supply development should take into consideration the tourist sector requirements. 5.04 While wiater consumption forecasts based on these estimates of pOpli-- lation to be served seem reasonable, the higher water rates recently intro- duced may reduce water usage up to 10%. This is based on indications that demand was reduced about 10% when the Commission raised rates temporarily in 1968 because of drought. In most cases reduction in water consumption after a water rate increase is temporary and demand returns to original levels rapidly. If the reduction is not temporary, demand projections could be set back by a period of up to two years. This would result in the postponement of the next construction phase by a similar period. 5.05 A number of alternative sources of water for the Kingston area were considered by the consultants including impoundment dams at Harkers Hall or l1ahagony Vale, desalination of sea water or brackish river water and use of ground water and surface sources. Different systems for treating and de- livering water to the populated area were also examined. The proposed project wias selected as the most economic of the alternatives after a cz- parison using a discount rate of 10%.  - 10 - 5.o6 If demand grows in accordance with the forecast, the incremental rate of return for the proposed project is estimated to be about 22%, (see Annex 6, page 1) on the basis of the new w*ater rates (paragraph 6.17). Or. the other hand, if demand projections are set back two years due to higher water rates, the incremental rate of return would be reduced to about i6%4, (see Annex 6, page 2). These rates of return are calculated valuing the water sold at the new rates from 1969 onwards. This method of calculation results in an understatement of the project's benefits. Consumers' al- ternative methods of obtaining water would be costlier than the supply of water through the proposed water system.  - 11 - 6. THE PROPOSED BORROWER A. Organization and Management 6.01 The Commission is a semi-autonomous agency which operates under the Kingston and St. Andrew (Water Commission) Law of January 1937 as amended. It must submit its annual budget for approval to the Ministry of Local Government, the governmental agency responsible for its affairs. 6.02 The Commission is administered by a board of nine members inclu- ding the Chairman; all are appointed by the Minister of Local Government. The Chairman, who is also the Chief Executive Officer, exercises most powers on a day-to-day basis with the assistance of an engineering depart- ment under a chief engineer and an administrative office under a secretary," manager. Government has agreed to ensure that the Chief Executive Officer of the Borrower would at all times be appropriately qualified and competenlt. An organization chart, with a summary of functions of the various sections, is given in Annex 7. The Pan American Health Organization (PAHO) has furnished advisory services to the Commission on organization and proceduras.. 6.03 The Commission has powers to appoint and dismiss its own staff. Vacancies in sanctioned staff positions are filled by recruitment made by the Commission. Approval of Government is required for creating additional posts. 6.o0 The Commission's top management is dedicated and experienced. Mosil of the senior staff, however, are near the retirement age and there is a shortage of second-line management, as the entry of new staff into the or- ganization has been slow. This deficiency is recognized by the Commission and efforts are underway to recruit and train second-line personnel. Salary levels constitute a major problem and the Commission is negotiating with Government to obtain approval of higher salaries. The Commission proposes to utilize fellowships made available by PAHO for necessary training of personnel abroad. The training of operators will be undertaken locally. 6.05 The Commission utilizes the services of consultants for engineerirng, design and supervision of construction of major water supply improvements and sewerage works. Howard Humphreys & Sons, engineering consultants, has been closely associated with the Commission since 1935 and has carried out all the major studies, project preparation and supervision of construction of the Commission's water supply improvements. All major works are execute-i through contractors. 6.06 The financial affairs of the Commission are currently the re- sponsibility of the secretary/manager who is assisted by a chief accountant. The Commission is to establish within one year from the date of the loan agreement, a new post of chief financial officer to strengthen this aspect of operations.  - 12 - 6.07 The Commission has a permanent staff of about 913 (152 in the engineering department, 122 in the secretary's office and 669 miscellaneou_1 technical and non-technical staff classified as weekly paid staff) and approximately 700 laborers are engaged every year on a part-time basis. TIi- Commission performs plumbing services for its customers, a service usually provided by private plumbers, which is partly responsible for the large number of personnel employed. Nevertheless, the number of personnel is higher than needed. The Commission has agreed to limit hiring new staff in the future until this situation is remedied. 6.08 The staff of the Commission does not form part of the Civil Service, but the Commission provides comparable pension and other benefits. Non-supervisory personnel are labor union members and there have been frequent disputes over pay increases. The substantial increase in labor costs between 1967 and 1968 was due to a tribunal award and another increasec was granted in September 1968. 6.09 The water supply systems in the "Corporate Area" lhave been reasonably well operated and satisfactorily maintained, and the Commissioni, assisted by its consultants, should be able to carry out the proposed pro- ject satisfactorily. B. Financial Position and Earnings Accounting 6.10 In the past, the Commission has maintained its accounts on a cash basis and separately for water supply and sewerage services. There were no property accounts and depreciation was not recorded. As the loans which financed assets were repaid the value of such assets was eliminated from the balance sheet. In view of this procedure, the published balance sheets of the Commission do not indicate fixed assets, depreciation, accounts re- ceivable or bad debts. 6.11 The past system of accounting has not provided adequate financial data for efficient management or information for the financial evaluation of the undertaking. The Commission recognized this deficiency and engaged Price Waterhouse & Company as accounting consultants to formulate financial statements from available records, for purposes of the IBRD appraisal of the proposed project. To effect a permanent changeover from the existing system to a public utility accrual type of accounting system, the Commissiae- sought and obtained assistance from PAH0. The advisory services provided by PAIIO included an accounting advisor who helped to develop and introducs an accrual type of accounting system during mid-1968. Although the initial changeover to the new system has been made, full implementation and trainirio of personnel will take some time and the Commission will be in need of further assistance in this respect. The Commission agreed during negotia- tions to employ qualified accountants acceptable to the Bank to assist in establishing sound accrual accounting practices applicable to public utilities.  - 13 - Auclit 6.12 The accounts of the Commission are audited by the Auditor General of the Government of Jamaica. The audit primarily consists of verificaticn of actual expenditures incurred and comparison with the budget which had previously been submitted to Government. The Auditor General does not have sufficient staff to carry out the full commercial type of audit normally required by the Bank. The Commission will, therefore need the services of an independent auditor. This audit could be done solely by chartered accountants, or could be basically done by chartered accountants with the Auditor General having the overall responsibility. Both arrangements have functioned successfully with other public authorities in Jamaica. The Commission has agreed to have its accounts audited annually by independent qualified accountants. Balance Sheet 6.13 The estimated balance sheet as at March 31, 1968, is provided in Annex 8. This balance sheet has been constructed from available financial data; fixed asset accounts have not been audited (such accounts were not maintained), but it is not expected that audit would change the accounts adversely. The balance sheet should be revised in accordance with the position developed by the chartered accountant, (see paragraph 6.11), which will take time; holding up the loan for such an audit is not justified. Despite the exclusion of some assets, the 1968 balance sheet shows a satis- factory position. The ratios of current assets to current liabilities at 3.8 and debt at about 34% of total capitalization are satisfactory. Past Income 6.14 Income statements for the five years ending iqarch 31, 1968 are summarized in Annex 9. Over the last four years there has been a steady decline in earnings as revenues stayed reasonably constant, but operating costs and financial charges increased substantially. Despite a modest Government subsidy every year, the sewerage side of the Commission's business has operated at a loss during the entire five years necessitating transfer of funds from water operations. Sewerage rates wiere increased sub- stantially in 1967-68, but water rates remained constant from 1962 to 1968. 6.15 The current earnings position of the Commission is quite adverse. For the year ending March 31, 1969, a loss of 4.J 350,000 is estimated, after charging depreciation of about UJ 500,000. C. Water Rates o.16 Almost all water service connections are metered, except public standpipes and fire hydrants. Until April, 1969, the rate schedule estab- lished a minimum monthly charge and a specific volume of water based on the taxable appraised value of a property and a rate per thousand gallons for wiater in excess of the specified volume. Exemption from payment of  - 14 - rates is made to a few consumers, principally schools. There are a small number of public taps for which a base charge per month per person is levied. One perscn in each community served by a public tap is responsible for col- lecting the revenue and paying it to the Commission. 6.17 Consultants provided under the PAHO advisory services team to the Commission made a detailed study of the existing rate structure and rates and their recommendations were discussed with the Bank, the Commission and the representatives of the Ministries of Finance and Local Government. A simlpler rate structure and new water rates were put into effect from April 1, 1969. It includes a monthly service charge and a charge of 2sh/l,000 gallonr for the first 3,000, 3sh 6d/1,000 gallons for the second 3,000 gallons and 6sh/l,000 gallons for consumption in excess of 6,000 gallons for domestic consumers. Commercial and industrial consumers are charged 7sh/l,000 gallori- For the domestic consumers, the lower rate would provide a reasonable quantity of water to maintain sariitary standards and the higher rates are expected to reduce uneconomic consumption. These rates are higher than the existing rates in other parts of the island and reflect the concept of obtaining a return on assets rather than just covering operating costs and debt service. 6.18 Revenues obtained from the revised rates will be sufficient to yield a return on net fixed assets in service of over 10% until the project is completed; a small rate increase then will be necessary to provide a return of 8% or more. Cash generated is expected to be sufficient to cover the costs of minor annual expansions and contribute a portion of the cost of the proposed project and the next major program in the future. 6.19 The Government and Commission have agreed to maintain water rates at a level sufficient to yield a minimum rate of return of 8% on reasonably valued iwater supply system assets in service, and to make an annual review. 6.20 Changes in water rates are initiated by the Commission and sub- mitted to the Minister of Local Government for approval. One to three months are required to effect a rate change. 6.21 In addition to the water rates, the customers pay the cost of connecting to the water main excluding the cost of the meter which is pro- vided by the Commission. The average connection charge is UJ 12. 6.22 In the case of housing developments, the developers provide at their cost the distribution system in accordance with the Comrission's specifications. After completion, however, the system becomes the property of the Commission and is maintained by it at its own cost. Costs incurred in the installation of public fire hydrants are billed by the Commission to either subdivision developers or the Kingston and St. Andrew Corporation. Maintenance of hydrants is carried out by the Commission and charged to the Kingston and St. Andrew Corporation or to private property owners, as appropriate.  A15 - Billings and Collection 6.23 Service meters are read monthly. Bills are sent out monthly, mostly by mail, and payments are made either through the mail or in person at the Commission's office. 6.24 Bills are usually dispatched within one week of the meter reading, and payments normally take place during the month following the month to which they relate. Customers are given 30 days grace for payment of bills and there are no penalties or rebates for delayed or prompt payments. How-- ever, as -water supplies are only cut off for accounts in arrears at the end of each quarter, consumers have from one to four months to pay bills. Approximately 12,000 connections are locked off annually. Of these, some 1,500 connections are physically cut off and the meter removed. In most cases, services locked off or cut off for non-payment are eventually re- connected or reopened. Uncollected accounts or bad debts are negligible. Sewerage Rates 6.25 The costs of providing sewage and waste disposal services by the Commission are primarily met by a tax levy on all properties connected to the sewierage system. The sewierage taxes are collected by the Government Collector of Taxes and passed to the Commission together with certain grarts from Government. Revenue obtained from sewerage taxes is now sufficient to meet the costs of operating the system. During negotiations, Government agreed that the rates and other changes levied for sewerage and waste dis- posal services together with funds provided by Government if necessary, will be sufficient to cover costs in the future.  - 16 - 7. FUTURE FINANCES A. Financing Plan 7.01 A forecast of sources and application of funds for the years 1969-1976 is attached as Annex 12. The financing plan for the years of project implementation 1969-1972 is summarized below: Total Total 1969- 1969- 1969 1970 1971 1972 1972 1972 mL 7 TT (l J ) (7J (TJT TS f,s Bu IJ - - - - - - 000 s- Application of Funds Construction - Wlater Proposed Project I! - 1,836 1,096 166 3,498 8,395 Prior Programs 736 616 600 400 2,352 5,o65 Future Programs - - - 500 500 1,200 Construction - Sewerage 744 980 105 205 2,031 4,882 Increase in Accounts Receivable 9S 200 - 100 399 958 Decrease in Accounts Payable 184 - - - 181 4L1 Total 1,763 3,632 2,201 1,371 8,967 21,521 Sources of Funds Internal Cash Generation 424 1,579 1,774 1,777 5,554 13,330 Les3: D6+t Service 393 715 1,00b 1,098 3,240 7,776 Net Cash Generation 31 834 770 679 2,314 5,554 Proposed IBRD Loan - 1,277 649 142 2,068 4,963 Government Loans: Prior Programs 1,186 1,555 705 605 4,051 9,722 Cash Resources - 546 34) 77 55) 534 1,282 Reduction (Increase) Total 1,763 3,632 2,201 1,371 8,967 21,521 1/ excludes interest during construction which is deducted under debt service. 7.02 Total program costs for both water and sewerage for the period 1969-1972 are estimated at UJ 9 million. The proposed Bank loan of about UJ 2 million would cover 23% of the program, self-generated funds would amount to about UJ 2.3 million or 26%, and loans from Government would total about UJ 4 million or 45%; cash resources would be drawn down about UJ C-5 million to cover the other 6% of the program. The loans from Government }'57e  - 17 - either been approved or will be approved before undertaking specific pro- jects. The Commission's contribution to the program is limited because water rates in the past were not sufficient to provide a reserve toward major programs. In addition, the total program includes substantial ex- penditures for sewerage works which, to date, Government has elected to cover through loans rather than by increasing sewerage rates to cover part of project costs. 7.03 The proposed Bank loan of US$ 5.0 million is assumed to carry interest at 613j. Based on the nature of the project, a term of 20 years, including a grace period of four years is proposed. 7.04 This financing plan is satisfactory. During negotiations, Government agreed to make available or cause to be made available, all funds needed to complete the project as well as funds needed for other programs approved. Terms on such loans would be satisfactory to the Bank. B. Financial Projections 7.05 Estimated income statements for the period 1969-1976 are shown in Annex 11. These forecasts are based on water rates in effect on April 1, 1969, with an increase of about 6% after project completion in order to ensure an 8% return on net plant in service, and that sewerage operations wTill break even, either through charging higher rates or through Government subsidy. Depreciation charges are included. These statements assume water sales projections based on extrapolation of past trends. If demand and sales are reduced due to recently introduced higher water rates, these pro- Jections would be optimistic and rates would have to be adjusted. 7.06 Based on these projections, debt service coverage is at least 1.6 for the 1970-1976 period, which is adequate (see Annex 12). 7.07 It should be noted that this project is expected to take care of wTater demands up to about the year 1976, the end of the financial projections. To meet demand in 1977 and beyond, a large new program will have to be urnei- taken, and construction on this may have to start in 1972 or shortly there- after. There are a number of possible ways of bringing more water to the Kingston area; studies are not sufficiently advanced to indicate the economically most desirable alternative and its cost (paragraph 3.07). Over the 1972-1976 five-year span, it is expected that at the rates assumed, the enterprise would generate about EJ 2.4 million (US$ 5.8 million equivalent) to meet all or part of the cost of the new program which will then be necessary. A sewerage program in that period may also be needed. 7.08 Estimated balance sheet positions for 1969-1976 are shown in Annex 13. These carry forward the estimated 1968 balance sheet which did not include most sewerage assets or balancing equity. The Commission is expected to be in satisfactory financial position with debt never more than half of total capital, and current assets to current liabilities ratios in excess of 2.5.  7.09 The Borrower has agreed that additional long-term debt would not be incurred by it or on its behalf, unless net revenues for the previous year provided debt service coverage on existing and proposed debt of at least 1.5 times.  - 19 - 8. CONCLUSIONS AND RECOMMENDATIONS 8.01 The proposed project offers the most practical and economic solution for solving the immediate water shortage problems in the Kingston area and provides water to meet the requirements up to about 1976. The proposed project would yield an additional supply of 12.5 IMgd on the average, strengthen the distribution system in the Corporate Area and pro-, vide the time needed for a thorough study and determination of the most economic project for implementation as the next stage of development. 8.02 The project cost estimates are reasonable, the financing plan is satisfactory, and the construction schedule is realistic. The Commission has operated and maintained its water supply systems satisfactorily, is familiar with the type of facilities proposed under the project and, assisted by its consultants, should be able to carry out the project satis- factorily. The Commission has a sound asset base. Its current earnings position is weak, but will improve through the substantial increases in wiater rates recently adopted. 8.03 During negotiation of the proposed Bank loan, agreement satis- factory to the Bank was obtained on the following: a) The Commission would have the right to abstract water from the proposed sources and that any further abstrac- tion of water from the same areas which might have a detrimental effect on the project sources would not be permitted (paragraph 2.09); b) The Commission would strengthen its financial management with the appointment of a chief financial officer within a year (paragraph 6.06); c) The Commission would engage the services of competent qualified accountants acceptable to the Bank for assisting in establishing accrual accounting practices applicable to public utilities (paragraph 6.11); d) The Commission would engage independent qualified accountants acceptable to the Bank, to carry out an annual audit of its accounts (paragraph 6.12); e) The Commission would maintain water rates sufficient to provide revenues representing a return of not less than 8% on the average net fixed assets in operation in its water supply system (paragraph 6.19); f) Rates and other charges levied for sewerage and waste dis- posal services together with funds provided by Government if necessary, would be sufficient to provide revenues to cover the costs of operating the sewerage system (paragraph 6.25);  - 20 - g) Government wqould provide to the Commission necessary funds to complete the project and to undertake other approved construction programs on terms satisfactory to the Bank (paragraph 7.04); h) Additional long-term debt would not be incurred by or on behalf of the Commission unless the net revenues were at least 1.5 times the maximum debt service re- quirement to be incurred (paragraph 7.09). 8.04 With the above agreements the proposed project provides a suitable basis for a Bank loan of US$ 5.0 million equivalent for a period of 20 years including a four-year grace period. April 9, 1969  ANNEX 1 Page 1 of 3 pages JAMAICA - KINGSTON WATER SUPPLY PROJECT Existing Water Supply Systems of the WAater Commission General The water supply to the "Corporate Area,, is derived from under- ground and surface water sources. Small streams to the north and north- east of Kingston in the Wag Water and Hope catchments provide the exist- ing surface supply. The underground water sources consist of wells located in the limestone formations and alluvial soils in the area. Surface Sources (i) Wag Water Catchment This catchment has been developed in stages to serve as the principal source of water for Kingston. Originally, there was direct ab- straction from the TWkag liater River but subsequently the Hermitage Dam was constructed to impound the flow of the river and one of its tributaries, the Moresham River. Under later stages of development intakes were con- structed on other tributaries (viz) Mt. Cressy, Tweedside, Pulper, Water- fall Andover, Ivlullet Hall, Boar and Ginger Rivers. These intakes have been located with a view to enable supply by gravity either to the Hermitage Dam or to the treatment works located at Constant Springs. Raw water from the Ginger River intakes also feeds the treatment works at 'Sea View'. A further stage of development envisages the pumping of water from the Wag !W,Tater River into one of the gravity mains whenever required. The long-term maintainable yield available from these sources is about 16 IMgd. During the recent drought period, however, the Commission was able to derive only 14 lMgd. The reservoir formed by the Hermitage Dam impounds some 300 1Mg. It is badly silted and due to a variety of causes the desilting operations started a few years ago have not progressed satis- factorily. The Commission's engineering consultants have raised quiestions on the stability of the dam. The question of strengthening and increasing the height of the dam to impound more water was considered by the Commis- sion; heightening the dam has been abandoned as being too costly. However, the dam is proposed to be strengthened in order to ensure its stability. (ii) Hope River Catchment Water is taken directly from the river to the Hope treatment works. When river flow is in excess of demand, the excess water is di- verted to the Mona reservoir, an open storage reservoir with a total capacity of 825 D1g constructed in 19h7. This reservoir developed severe leaks soon after completion of construction and remedial works carried out since then have reduced the leaks considerably, and the present loss is thought to be between 1.0 and 1.5 IMgd when the reservoir is half full. A continuing program for reducing leakage is underway. The maintainable yield from the reservoir and the river is about 5 IMgd. Water from the Mona reservoir is either pumped to the Hope treatment works or delivere-' by gravity to the slow sand filters at 'Cavaliers'.  ANNEX 1 Page 2 of 3 pages (iii) Raw ttater Mains Some 27 miles of steel mains of different sizes (16"1 to 3311 diameter) convey the raw water from the various intakes to the treatment plants. These mains are stated to be in good condition. Treatment Plants (iv) Sea View A rapid sand filter plant with a rated capacity of 1. IMgd at this location treats water from Ginger River, and supplies the high level areas north of Kingston. (v) Constant Springs. Work is in progress to increase the capacity of the existing rapid sand filter plant with a rated capacity of 12 IMgd to 18 DIgd. An additional clariflocculator unit has been added and the existing 12 filter beds are to be used for dealing wqith the increased flow by changing the filter media, if necessary. Arrangements are underway for testing the use of anthracite filter media in one of the filters. (vi) Hope Filters Six slow sand filters with a total filtering area of 1.12 acres are used to treat the Hope River water. These filters have a rated capa- city of 3.6 to 4.8 Ifgd and are able to treat up to 6.5 fl4gd when needed. (vii) Cavaliers A 2.6 Thlg raw wqater settling basin, four slow sand filters with a total area of 0.92 acres and a 3.2 ETIg capacity open filtered w-rater reservoir are in existence. These works substantially in their present form were completed in 1876. The rated capacity of this treatment plant is 2.9 LMlgd but its output is usually much less due to insufficient water from the Hope catchment area. Adequate facilities exist at all the treatment works for the necessary pre-treatment of wqater and chlorination. In general, these works are in good physical condition and are producing water of uniformly good quality. Underground Sources (viii) Wtiells in Limestone Formations Wells tapping the limestone formations of Long Mountain and the Red Hills areas have been utilized for several years. The yield from sevan wells in these areas has averaged 7 2Igd. These wells are capable of yielding more and are utilized to draw additional quantities for short periods. Continuous pumping at the higher rates tends to increase the chloride content of the water.  ANl,17, 1 ?age 3 of ' page, In 1962, three new well sites were located in the St. Catharine Plains (White Marl Wells). The total yield available is 5 IMgd but only twu wells are normally utilized so far to produce 3 IMgd. There has been an increase in chloride content of the water. (ix) Liganuea Plain Gravel Wells There are four wells in the alluvial gravel deposits of the Liganuea Plain; these are located in the built-up urban area which is only partially sewered. The present abstraction from these wells is about 3 IMgd and further exploitation of this source is not anticipated. lWater from the wells is pumped into the distribution system after chlorination only, the normal dose ranging between 0.4 to 1 ppm depending on the well. Chlorine gas is injected into the pumping main under pressure. Distribution System Some 700 miles of water mains (3" diameter and above) have been laid over the years in the supply area. A minimum residual pressure of 60 feet is maintained in the distribution system and supply is normally con- tinuous. There are a number of service reservoirs with a total capacity of about 28 IMg. A large section of the distribution area is supplied by gravity from the reservoirs. Investment in Plant and Equipment The investment made in plant and equipment by the Commission since 1955 are summarized below: Year later Sources & Treatment Distribution Othersl/ Total - - - - - - - - - (T'J - OCOos) - - - - - - - - - - 1955 10.0 30.0 50 90 1956 13.0 108.0 17 138 1957 42.5 32.5 - 75 1958 20.0 155.0 - 175 1959-60 44.5 99.5 21 165 1960-61 145.5 118.5 - 264 1961-62 135.0 132.0 - 267 1962-63 754.0 126.0 - 88C 1963-64 830.0 - - 830 1965-68 275.0 2/ 200.0 - Total 2,269.5 1,001.5 88 3,359 1/ This item includes equipment for laboratory and office, machines, tools and vehicles; 2/ The 1965-68 program is under implementation. It also provided an arrort'r of 4,J 1,150,000 for stabilizing the Hermitage Dam but since no work haW been started, it is not shown. April 9, 1969  rfi i 3'k! Y Pag_ i of