St. Lucia - Water Supply Infrastructure Improvement Project

Documentof The World Bank FOR OFFICIALUSEONLY ReportNo: 31878-LC PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN INTHEAMOUNT OFUS$3.85 MILLION AND A PROPOSED CREDIT INTHEAMOUNT OFSDR2.6MILLION (US$3.85 MILLIONEQUIVALENT) TO SAINT LUCIA FOR A WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT April 26,2005 Finance, Private Sector and Infrastructure Department Caribbean Country Management Unit Latin America andthe Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENC.Y EQUIVALENTS (Exchange Rate Effective {March 31St,2005)) Currency Unit = Eastern Caribbean Dollar (EC$) EC$(XCD)2.67 = US$1 US$O.37 = EC$(XCD) 1 US$1.508 = XDR 1 XDR0.663 = US$1 FISCAL YEAR January 1 - December31 ABBREVIATIONSAND ACRONYMS CAPEX Capital Expenses CAS Country Assistance Strategy CDB Caribbean Development Bank CMU Country Management Unit CQS Consultant Quality Selection DMP Disaster Management Project EBIT Earningsbefore Income Tax EBITDA Earningsbefore Income Tax, Depreciationand Amortization EC$ Eastern Caribbean Dollar ERR Economic Rate of Return FBS FixedBudget Selection FM Financial Management FMR Financial MonitoringReport GDP Gross Domestic Product GNI Gross National Income GoSL Government of Saint Lucia ICB International Competitive Bidding ICR Implementation Completion Report IBRD InternationalBank for Reconstruction and Development IDA International Development Association ZFC International Finance Corporation INTOSAI International Organization o f Supreme Audit Institutions IRR Internal Rate of Return ISDS Integrated Safeguards Data Sheet kWh Kilo-Watt Hour LC Saint Lucia LCS Least Cost Selection MGD Million Gallons per Day NCB National Competitive Bidding NIC National Insurance Corporation NRW Non-revenue Water  FOR0FFICXA.LUSEONLY Nwsc NationalWater and Sanitation Commission O&M Operations andMaintenance OECS Organization of EasternCaribbeanStates OP Operational Procedure OPEX Operating Expenses OPIC OverseasPrivate Investment Corporation PAD Project Appraisal Document PCU Project Coordination Unit PDO Project Development Objectives PPI Private Participation inInfrastructure PPP Public-Private Partnership PR Public Relations PS Permanent Secretary PSP Private Sector Participation QBS Quality Based Selection QCBS Quality and Cost Based Selection RO Reverse Osmosis (desalination technology) SA Special Account SBD StandardBiddingDocuments SDR Special DrawingRights T A Technical Assistance TOR Terms of Reference UFW Unaccounted-for-Water US$ UnitedStates Dollar WASA Water and SewerageAuthority WASCO Water and SewerageCompany Inc. WTP Water Treatment Plant Vice President: PamelaCox Country Managermirector: Caroline Anstey Acting Sector Director: John Henry Stein Task Team Leader: Jordan Schwartz This documenthas a restricted distributionandmay be usedby recipientsonly in the performanceof their official duties.Its contentsmay notbe otherwise disclosed without World Bank authorization.   SAINT LUCIA WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT PROJECT APPRAISAL DOCUMENT LATINAMERICA AND CARIBBEAN LCSFW Date: April 26,2005 Team Leader: JordanZ. Schwartz Country Director: Caroline Anstey Sectors: Water supply (100%) Sector Director: John Henry Stein Themes: Infrastructure services for private sector development (P) Project ID: PO94416 Environmental screening category: Category B ProjectFinancingData [XILoan [XI Credit [ ] Grant [ ] Guarantee [ 3 Other: ~ For Loans/Credits/Others: Total Bank financing (US$m.): 7.70 Proposedterms: (IBRD):Fixed-Spread Loan (FSL) Graceperiod (years): 5 Years to maturity: 15 Commitment fee: 0.75% Front end fee on Bank loan: 1% Proposedterms: (IDA): StandardCredit Years to maturity: 35 RECONSTRUCTIONAND Borrower:Government of Saint Lucia ResponsibleAgency: Office ofthe Permanent SecretaryofFinance Ministry o f Finance Government o f Saint Lucia Castries, Saint Lucia i  Estimateddisbursements (BankFY/US$m) ?Y 06 07 08 h u a l 3.2 3.3 1.2. hmulative 3.2 6.5 7.7 Project implementation period: Start: 07/15/05 End: 07/15/08 Expected effectiveness date: 07/15/05 Expected closing date: 01/15/09 Does the project depart from the CAS incontent or other significant respects? Ref: PAD A.3 []Yes [XINO .I Does the project require any exceptions from Bank policies? Re$ PAD D.7 [ ]Yes [XIN o Have these beenapprovedby Bank management? [ ]Yes [ IN0 1s approval for any policy exception sought from the Board? [ ]Yes [ IN0 Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [ ]Yes [XIN o Project development objective Re$ PAD B.2 The Saint Lucia Water Supply Infrastructure Improvement Project will support a short term investment program to carry out critical works which are required to achieve the following objectives: (i) alleviate the water shortage in the north o f the country. (The infrastructure works proposed will allow the utility to supply the entire north of the island with a more efficient, continuous and reliable service; (ii) implement urgent investments that will result in additional revenues, reduce the likelihood o f commercial users (important sources of cross-subsidy for poor consumers) abandoning the system and improve the potential o f a successfbl partnership betweenthe government and the private sector. Project description. Re$ PAD B.3., TechnicalAnnex 4 The project will improve the reliability o f the Roseau Dam water supply system by increasing the flow o f water to the north o f St. Lucia as requiredto meet the current shortfall inwater capacity inthat area. The system components that would require upgrading include: the Roseau Dam system pumpingstation, the Roseau Dam system raw water transmission, the Theobalds Treatment Plant and the Morne Bocage distribution pipeline that will connect the Roseau system to the Hill 20 system, which suffers a severe water shortage. The increase inthe extraction capacity from the Roseau reservoir technically reduces the drought returnperiod for which the reservoir was designed. However, since current supply from the Dam i s creating constant shortages, it i s considered that it would be better to increase the extraction capacity from the reservoir and satisfy all the demand in years that are not drought years. The issue o f drought years will be taken care o f in the medium term investment program by the hture owner/operators in which an aggressive water losses reduction program in the distribution network will be pursued while expansion o f the water source for the north i s being considered. The components o f the proposed project are thus the following: Component A: Infrastructure Improvement Works: This component includes the following infrastructure improvement works, which are detailed inAnnex 4: 11 ..  0 Upgrade the Roseau dam pumping station through (a) replacement o f existing pump-motor assemblies to facilitate a pumping capacity o f approximately 10 million gallons per day, and (b) additional works which may include, inter alia, provision o f voltage conditioning equipment, upgrade of switchgear, installation o f adjustable speed drives, upgrade o f pipe works, and replacement o f standby generation to accommodate increased power supply requirements o f the pumping-motor assemblies; 0 Improve raw water transmission between Vanard and Sarot through the installation o f (a) a 24- inch ductile iron pipe between Vanard and Sarot, and (b)joint restraints at river crossings located between Millet and Vanard; 0 Upgrade o f the Theobalds water treatment plant to a capacity of 10 million gallons per day through the installation o f additionaltreatment units; and 0 Upgrade of the Mome Bocage distribution pipeline through the construction o f required works, usingthe existing or an altemative design approach that responds to the supply needs, which may include the installation o f a new (a) pump station at Ciceron, (b) pumping line with capacity to meet water demands up to 2.53 million gallons per day, (c) storage tank of 200,000 imperial gallons at Mome Fortune, (d) gravity main transmission pipeline linked to storage tanks at Mome and Mome DuDon, and (e) storage tank o f 100,000 imperial gallons at Babonneau. Due to the urgent nature o f the works and the close inter-relationship among the components o f the project it i s considered that a tumkey contract will be the most efficient and safe way to implement this type of project and achieve project objectives as demonstrated in other Bank projects such as the Espiritu Santo Water and Sanitation project inBrazil. ComponentB: TechnicalAssistanceand Project Management. This component includes: Provision o f technical assistance required to support Project implementation, carry out Project management activities, and strengthen the capacity o f the PlU staff in Project management and priority technical areas, which may include the provision o f training. The areas o f technical assistance include: 0 Oversight and monitoring o f the quality o f works performed by contractors hired under Part A o f the Project; 0 Carrying out o f studies on the water resources o f the Roseau River, including analyses o f (a) the hydrological capacity o f the Roseau dam and reservoir system, and possibly o f other surface water sources, (b) the potential for increasing the capacity o f the Roseau dam through engineering improvements, and (c) safety and environmental considerations related to such activities; and 0 Carrying out o f a groundwater resources study to determine the quantity, quality and potential use of groundwater in St. Lucia. Which safeguardpolicies are triggered, ifany? Re$ PAD 0.5-6, TechnicalAnnex 13 OP 4.01 The project i s considered category B due principally to the large scale o f excavation planned during the installation o f pipe works. Routes chosen include agricultural areas and roadways which will result in 111 ...  some short-term disruption o f activities. Impacts associated with the project are short-term and associated with the actual construction activities. No natural lands are to be disturbed, no endangered species or critical wildlife habitats are to be disturbed and no relocations o f inhabitants will be required. Traffic management plans and coordination with the Ministry o f Works will be necessary to assure minimal disruption of commerce and to guarantee citizen access to critical services. Other measures associated with site activities are presented inthe environmental assessment developed for the project. There will be some crop loss along the installation routes but this will be minimal and short-term. Once excavations are completed, banana will be re-established along the disturbed routes. Compensation for actual losses and opportunity costs will be managed through WASCO using its existing compensation mechanisms. OP4.37 The project i s associated with a dam in that the works will increase water that i s drawn from Roseau ReservoirKompton Dam. As a result, OP 4.37, Safety o f Dams, has been triggered. This project will not include any structural modifications to the dam nor will it affect the operation o f current safety status o f the structure. The dam i s relatively new, constructed under a World BanWCIDA project in 1996. It i s a concrete construction and on inspection, appears to be very well maintained. Operational procedures at WASCO include the regular maintenance o f the dam and associated appurtenances, daily and bi-annual safety inspections using local engineering contractors, and a required surface and underwater inspection after every detected seismic event. WASCO has presented these inspection reports to the Bank as well as the Dam Operations and Maintenance Manual. Those reports show that the borrower has an effective dam safety program in operation; the borrower conducts and documents full level inspections and dam safety assessments; and that those assessments and findings are satisfactory to the Bank. Significant, non-standard conditions, if any, for: Board presentation: Loadcredit effectiveness: Covenants applicable to project implementation: The effectiveness of the proposed project will depend on the results o f the geostatic testing of a n e w l y built 20" transmission line inCastries, financed by the French government, which needs to be completed and inoperationbefore effectiveness. Inaddition, completion ofthe project-specific annex to the PIU's Operational Manualis also a condition of effectiveness. iv  SAINT LUCIA WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 7 3. Higherlevel objectives to which the project contributes.................................................... 8 B . PROJECTDESCRIPTION ................................................................................................. 9 1. Lendinginstrument ............................................................................................................. 9 2. Project development objective and key indicators.............................................................. 9 3. Project components ............................................................................................................. 9 4. Lessons learned and reflected inthe project design.......................................................... 11 5. Alternatives considered and reasons for rejection............................................................ 12 C. IMPLEMENTATION ........................................................................................................ 12 1. Institutional and implementation arrangements. ............................................................... 12 2. Monitoring and evaluation o f outcomes/results ................................................................ 14 3. Sustainablllty..................................................................................................................... * . . 14 4. Critical risks andpossible controversial aspects............................................................... 15 5. Loadcredit conditions and covenants ............................................................................... 16 D APPRAISALSUMMARY . ................................................................................................. 17 1. Economic and financial analyses ...................................................................................... 17 2. Technical........................................................................................................................... 18 3. Fiduciary ........................................................................................................................... 19 4. Social................................................................................................................................. 20 5. Environment...................................................................................................................... 21 6. Safeguardpolicies............................................................................................................. 22 7. Policy Exceptions and Readiness...................................................................................... 22 Annex 1: Country and Sector or ProgramBackground ......................................................... 23 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .................28 Annex 3: Results FrameworkandMonitoring ........................................................................ 30 V  Annex 4: Detailed Project Description ...................................................................................... 32 Annex 5: Project Costs............................................................................................................... 41 Annex 6: Implementation Arrangements ................................................................................. 42 Annex 7: Financial Management and DisbursementArrangements ..................................... 45 Annex 8: Procurement Arrangements ...................................................................................... 50 Annex 9: Cost BenefitAnalysis .................................................................................................. 54 Annex 10: FinancialAnalysis of the Current and FutureWater Utility ............................... 62 Annex 11: Audited2004 Financial Statements: WASCO ...................................................... 74 Annex 12: Economic and Technical Comparison of Alternatives .......................................... 93 Annex 13: Safeguard Policy Issues ............................................................................................ 98 Annex 14: Project Preparation and Supervision ................................................................... 102 Annex 15: Documents inthe Project File ............................................................................... 103 Annex 16: Statement of Loans and Credits ............................................................................ 104 Annex 17: Country at a Glance ............................................................................................... 105 Annex 18: Maps (IBRD 33948) ................................................................................................ 107 vi  A. STRATEGICCONTEXT AND RATIONALE 1. Country andsector issues Likemanyof its neighboringisland states, Saint Luciais at a development crossroads. With the economy having moved away from traditional agribusiness and declining trade preferences, growth prospects are now closely tied to its competitive position as a tourism destination.' Yet the ability o f the country to absorb further resort development and to grow beyond the approximately one million tourists who now visit the island yearly i s being tested by the extraordinary fiscal constraints that restrict public investment in the island's infrastructure. While the private sector i s recognized as the engine o f sustainable growth for Saint Lucia's economy, the access of developers and hoteliers to basic services i s already affecting their interest ininvesting inthe island.* Inthis context, the water and sanitation sector has emerged as a key factor inthe economic development o f Saint Lucia. Despite a concerted effort in 2000 to turn around the state water utility, Saint Lucia i s suffering once again from a crisis o f confidence and performance in the water sectors3 The government- owned utility which currently controls nearly all water and sanitation services on the island, the Water and Sewerage Company (WASCO), has ceased to make capital investments and has lost the good will o f its domestic and commercial consumers due to severe shortages, mis-billings andpoor quality o f service. Hotels throughout the island are purchasingwater trucked to them in tankers while entire neighborhoods are relying on rainwater, private purchases and storage tanks to compensate for days-on-end without water from the utility. Exacerbating the situation, a severe dry season over the last year has compounded existing water shortage problems forcing WASCO to implement strict water allocation schedules, island-wide, in 2003. These shortages may lead to severe health and quality-of-life crises ifthey are left to f e ~ t e r . ~ The main financial and operational issues faced by the water sector can be summarized as follows: 0 Insufficient cash flow to cover all operating and maintenance costs (let alone servicing dept and maintaining a sustainable level o f investments); 0 Decrepit state o f the utility's assets which are indire needo f a capital infusion; While agriculturehas droppedfrom about 15percent of GDP as recently as 1990to about 5 percent in2003, the impacton employment has beeneven more severe. At the time of the PovertyAssessment of 1996, banana industryemploymentwas about 13,000 and i s now about 3,000. Much ofthat decline, however, has beenpickedup by growthinTourismwhich now accounts 'forRecent about half of GDP along with relatedbusinesses(restaurants, construction). interviewsby the Bankteam with developers, hotel owners, the Ministry of Tourismandthe National Development Corporationrevealedaheightenedsense of concem among developersthat their greenfieldandexpansionplans would not be feasible due to the inability ofthe countryto providewater connections,reliableservice and other basic infrastructuresuchas access roads. Some of the early actions taken by the government to improveits performance included:the corporatizationof a state authority, WASA (into WASCO); the appointment of a private sector managing director and board director; the downsizing of staff by about one-quarter;and a tariff increase in 2000 after many years of a stagnant tariff. In addition, the Governmentsigned a loan with the World Bank that led to the drafting of a water law, the establishment of a regulatorybody and the enactment of a PSD strategy. Without identifying a one-to-onecausalrelationship,the PovertyAssessment noteda worrying rise inlevels of diphtheriaon the islandandcitedwater-bome disease as alikely primary cause. 1  Insufficient supply o f treated water to meet current demand leading to water shortages-particularly inthe populationandresort centers o fthe north; Prospects for further increase in demand for water as a result o f the booming tourist industry and upturninover-all economic growth; and Loss o f good will on the part o f consumers due to the further decline in service after the 2000 tariff increase. Insufficient supply o f treated water to meet current demand leading to water shortages-particularly inthe populationandresort centers ofthe north; The proposed project addresses the most urgentworks requiredto turnaround the performance o f the water utility and to relieve water shortages inthe north. That project i s first described inthe context o fthe strategy for reforming the water utility. Strategic Directionfor the Water Utilityfor a Public-Private Partnership in the Water Sector The Government and the World Bank agree that the water utility's failure to perform has grown out of the legacy of underinvestment in assets, insufficient average tariffs over the past decades and severe human resource constraints. While WASCO has attempted to tum around its performance over the last few years, the utility has been unable to confront that legacy and, instead, has seen its services and assets deteriorate further. Since 2000, the World Bank has been working with the Government o f Saint Lucia through a Technical Assistance Loan for Sector Reform to pursue a strategy that would leverage private sector financing and know-how to reach a sustainable solution for the sector. As a result o f that project's Private Sector Development (PSD) Strategy and direct discussions with the World Bank, the Government o f Saint Lucia has decided to pursue a public-private partnership (PPP) for the utility. Given that a capital injection was required to tum around the utility, management contracts and leasedaffermage were rejected as first altemative approaches. Conversely, the prospects o f a traditional concession met with little interest from the market given the risks associated with those arrangements. The Bank and the Government tumed finally to local and regional investors presentingthe possibility o f a public-private partnership based upon successful Saint Lucian experiences with mixed capital companies. The response to the prospects o f capitalizing the water utility by purchasing a controlling stake have been very positive from institutional investors, local and regional business interests as well as small and international water utilities. While the proposed partnership structure i s described inmore detail inthe following sub-section, the basic premise is that it will comprise a minority share for the Govemment, a likely minority share set-aside for a Saint Lucian institutional investor and an auction for the majority shares to consortia willing to recapitalize the utility with a minimum bid that reflects the immediate investmentneeds o fthe utility. Inthis way, the Government can break from its history ofbailing out the company every several years and the utility can returnto playing a productive role inthe growth o f the economy. Inorder to confront the utility's challenges head on and increase the likelihood of a successful transaction for WASCO, the Government andthe World Bank team have agreed: 2  0 An urgent works program, costing about US$8 million, is required to increase water flows to the north. The Government, residents o f the north and the commercial sector cannot afford to wait for the transaction to be completed inorder to initiate that program. The Government will absorb the cost o f that investment even as the transaction process moves forward. 0 Furthercapital will berequiredfor other short to mediumterm investments. The medium term operational improvements and capital investment program can best be funded from the successful completion ofthe PPP transaction. 0 Tariffs should reflect the rate base o fthe investment after the transaction is complete. The Government and the World Bank recognize that WASCO will only achieve sustainability ifthe new productive investments, fresh capital injection, new management and revamped organizational strategy, are accompanied by a tariff structure that ensures a fair return on investment for the private owner/operators. As a starting point, financial analysis conducted by Technical Advisors to the PSD Strategy and reviewedby the Bank suggest that the current average tariff (approximately U S $ l.15 per cubic meter) i s sufficient to turnaround the utility given other modest assumptions about improved collections, and operations, government willingness to assume debt and the capital injection expected from private investors. Structure of the Transactionfor the Water Utility Public-Private Partnership The primary approach to be pursued for the transaction will be a public-private partnership in which local, regional and international investors will be invited to form consortia and bid to purchase a controlling block o f shares in the new WASCO. The World Bank team i s currently working with the Government to prepare for the transaction on an accelerated time schedule and in parallel to the proposed project. Now that the Water and Sanitation Services Act has been passed into law, the Government will hire a transaction advisor with World Bank hnds from the existing Water Sector Reform T.A. Loan. That advisor is expected to be in place by June 2005 with the auction for the utility to be held by the end o f the 2005 calendar year. During this period, the draft operating license will be finalized and implementingrules and regulations which spell out the responsibilities o f the National Water and Sewerage Commission will be drafted, again with available World Bank funds from the T.A. Loan. Assuming three months for negotiations and financial closure, the new owner/operator may take control o f the Board as early as mid-2006. The proposed schedule, albeit aggressive, appears feasible as engineering feasibility, investmentneeds analysis and financial modeling have already been undertaken and the Government has agreed upon the working structure o f the public-private partnership. In addition, extensive discussions with potential bidders (locally, regionally and internationally) have already taken place. Finally, many o f the likely bidders know Saint Lucia well and have made considerable efforts to evaluate the utility from the perspective o f potential investors andor operators. The agreed upon structure o f the transaction for the public-private partnership being prepared underthe T.A. loan canbe described as follows: 3  0 The ownership structure will be such that private investors will exercise board and managerial control o f the utility although the Government will be expected to maintain a position on the Board with approximately 20 percent o f the shares. In addition to the Government's share, the World Bank team has also identified a Saint Lucia-based institutional investor5 which i s highly interested in an approximately 15 to 20 percent share in the utility under proposed arrangements. That portion will likely "anchor" the investment and will be heldapart from the bidfor the majority block purchase. 0 In addition, the team has held several discussions and two preliminary investor conferences with Saint Lucia's tourism and manufacturing associations to test local interest in equity participation. Local business leaders have expressed interest in participating as consortium members while other private sector representatives expressed a general level o f support for the proposed approach. In addition, regional developers from neighboring islands as well as international water utilities have contacted the Bank to discuss the details o f the proposed initiative and to express their interest in participating in an auction. It i s expected that consortia o f these private participants will be invitedto compete for 60 percent o f the shares o fthe company providing management and board control for the winningbidder. 0 Recognizing that, as a going concern, the utility's investors could not be asked to finance existing debt, the Government will continue to service WASCO's existing debt. So that the new utility will be in a position to borrow against its balance sheet, the Government will most likely write off WASCO's debt from the utility's books. However, as an offset to the liabilities o f the Roseau Dam (WASCO's primary asset), the Government may retain the reservoir in its own accounts. It would then include inthe operating license for the new utility full rights and responsibilities related to use o f the water from the dam as well as proper operations and maintenance o f the facility. 0 Dividends from its equity share, or canon payments are being considered for payment to the Government to compensate, to the degree feasible, for the servicing o f old debt. If the canon is established that is not held subordinate to other dividend obligations, it will be priced and timed so as not to inhibitthe ability o f the private investors to receive a fair return on their investment. That is, any canons or dividend payments to Government would likelybeginat zero following the transaction andbe timed against an improvement in the financial performance o f the utility so as to be ramped up or "capitalized" over time. The same goal and a similar process might also be accomplished through a water extraction fee. 0 Inthe case of a failed transaction (Le., no qualified consortia submit offers or only non- responsive bids are received), the Government o f Saint Luciawill needto mobilize public finds to undertake the short-term investment program. The European Union andor the The National Insurance Corporation currently holds approximately 17percent o f the power utility, Lucelec. The investment levels suggested for WASCO would be about 20 percent o f the size o f their investment inLucelec in absolute dollars, which inturn i s a relatively small part o f its portfolio and so would not add significant riskto the NICportfolio. 4  Caribbean Development Bank are possible sources o f support in such a scenario. In order to break from the cycle o f poor maintenance and inefficient operations, the Government will have three choices for the use o f the additional investment capital, estimated at US$12 to $15 million. Those approaches, in descending order o f likely impact, are as follows: P Least Cost Subsidy Purchase or Concession: As a primary alternative, a second- chance auction for either share ownership or the rights to a concession are held based upon a least-cost subsidybid. Inthis arrangement, the outputs expected o f the operator would be clearly defined and payments would be made from the public funds-held in escrow-upon proof o f service delivery according to the those service delivery criteria. The consortium or firm that bids for the least required subsidy to meet those criteria wins the shares or concession rights. The exact performance obligations as well as the ceiling on bids would be determined bythe amount o fpublic funds that couldbe garneredfor the bid. P Affermage Lease: A long-term lease, say 10 to 20 years, would be competitively tendered inwhich the winning bidderwould have access to the revenue generated by the tariffs in exchange for the obligation to operate the utility according to strict Performance criteria. The public resources would be made available to the leasor so that they may implement the capital expenditure program. P Management Contract with Step-up Option: A short-term management contract o f 3 to 5 years, would be tendered which will focus on implementing short-term efficiency gains through improvements incustomer information systems, billings, collections and minor works. Once the utility has demonstrated its ability to cover operating and maintenance costs, a more aggressive form o f private sector participation would be attempted again. While the first phase may be done without the full capital required for the investment plan, the cost o f the Management Contract itselfcould runas highas U S $ l to 2 millionper year. The choice o f which back-up alternative approach to pursue would be made based upon the lessons learned during the transaction (Le., numbers o f bidders, quality o f bidders, and source o f concerns regarding capital requirements, current state o f utility finances and/or regulatory risk). The exhaustive work undertaken for the preparation o f the proposed transaction would serve as the basis for launching the back-up option so that it may be pursued almost immediately following the proposed transaction for a public- private partnership. This information base includes technical and engineering reports, consumer surveying, least cost alternative planning, financial analysis and forecasting o f the utility, and investor surveying. Inaddition, the Government and WASCO have held discussions with the European Union and the Caribbean Development Bank which indicate their interest inproviding additional financial support to the sector. The primary constraint to the first two arrangements would be the ability o f the Government to borrow or dedicate further sums o f money to the sector given its serious fiscal constraints. The trade-offs will be clear, however. Any delay in commitment o f 5  resources will mean greater rehabilitation and investment costs in subsequent years. As such, short-term tariff increases may need to be considered in conjunction with the back- upplan so as to relieve the need for excessive borrowing. TheProposedInvestment Loan in the Context of the Future Water Utility The proposed investment loan i s to finance an urgent works program that will increase water to the north-a project which was specifically requested by the Administration and one which i s aimed at resolving shortages in the most densely populated and developed region o f the island. The Government requested Bank involvement inthe investment project so that it may serve as a complement to the Bank's existing Water Sector Reform Technical Assistance Project (Ln 70960-SLU). The specific objective o f that existing project i s to help the transition o f WASCO from a publicly-managed utility to a privately-operated company under a well-functioning regulatory framework. To date, the project has seen the completion o f a financial and technical analysis o f the sector (including an investment needs analysis), and a PSD strategy (including investors' survey), and has funded the drafting of a new Water Law, recently passed by both houses o f the Saint Lucia's Parliament, which defines the market structure and regulatory responsibilities o f the Water and Sanitation Commission. These institutional, legal and regulatory reforms are needed to underpinthe proposedpublic-private partnershipand to achieve deeper operational reform o f the utility. Inorder to halt the deterioration ofkey assets, avert a worsening water supplycrisis inthe north, reduce the possibility o f abandonment of the system by resorts and hotels6, and help entice the equity contribution o f private investors into the water utility, the Government o f Saint Lucia has asked The World Bank to finance the utility's most urgent rehabilitation works. The components o f this project have been identified by technical advisors, WASCO staff and the World Bank and are described in detail in Annex 4. While the investments planned for financing from the Bank will help to meet part o f the pent-up demand, the speed o f financial turnaround will depend on the performance of the private operator in improving collection rates and reducing losses. Investors are likely to be required to recapitalize the utility with US$15 million to US$20million o f new equity. This will be done through their share "purchases" which will be utilized as equity contribution. Determining the Best Alternative Solution to Water Supply in the North For the short term investment the two alternatives that were considered were thus: (i) increasing the capacity o f the Roseau system from 6 to 10 million gallons per day (MGD) by upgrading existing infrastructure that follows the dam; and (ii) installing a Reverse Osmosis desalination plant in Rodney Bay with a capacity o f about 4 MGD. For this second alternative, the concept that had been proposed to the Government o f Saint Lucia by desalination developers and other interested parties was evaluated for its economic costs as well as its likely environmental impact as part o f the environmental assessment. The desalination alternative presupposes the Hotels and other commercial establishments represent an important source o f cross-subsidy for low volume users such as poorer households. Their abandonment o f the system would be detrimental to the finances o f the utility. 6  disconnection o f the water supply network north to Rodney Bay from that south to it. The southern part would be supplied from the Roseau Dam System which will not be upgraded. Based on a comparative economic analysis, the first alternative was selected as a clear choice based both on the Net Present Value o f the investment and the difference in the costs o f water. The first alternative will not only improve the level o f service, but will also improvethe integrity o f the system for the long term at a lower cost than the alternative. This i s not to say that desalination could not play an important role in future sourcing decisions but that the currently available technology cannot compete with the rehabilitation and minor expansion works proposed for this project. The Roseau system, which i s the primary source o f water supply for the north o f Saint Lucia, has an estimated capacity o f 10 MGD. Current demand levels to the north o f the island, where 80 percent o f Saint Lucians live and where most o f the country's resorts are located, i s estimated at about 7.5 MGD. Because o f constraints inthe infrastructure (transmission, treatment, pumping) that support the dam, it i s only able to supply between 5 and 6 MGD effectively creating regular shortages and rationing o f water. The backlog in investment in pumping stations, the primary transmissionpipeline to the north o f the island and water treatment capacity are the main reasons for the current shortage. These reasons are exacerbated by high levels o f water losses and uncertain consumption patterns driven by partial metering and inadequate consumer information systems. The purpose o f the proposed project i s to address the primary investment backlog inan urgent fashion. The rapid expansion o f the north with respect to residential and commercial development has increased water demand to a point that if the necessary investments are not undertaken it could be detrimental for the health o f the citizens and development o f the island. The complementary public-private partnership described above will be important for the sustainability o f the investment as well as proper demand management, including rational billing and collections and steady reductions in Unaccounted-for-Water through leakage reduction programs. The works that would comprise the project are described ingreater detail below. 2. Rationale for Bank involvement The World Bank i s currently the only institution that is in a position to prepare for and finance the proposed urgent investmentsin a coordinated fashion with the design and implementation o f the planned transaction for the water utility. The financial engineering o f the transaction i s being built around a shifting set o f variables related to investment cost estimates, government debt absorption ability and willingness and potential for other sources o f funding to offset long-term investments. The Bank is closely involved in discussions on all o f these issues each o f which could affect the approach to the transaction. Inturn, the transaction is taking place inthe context o f a new water law and regulatory framework both o f which have been financed and closely coordinated by the World Bank under the Water Sector Reform Technical Assistance Loan. For these reasons, the Government has asked the Bank to finance and assist with the planning of an urgent investment program in such a way as to fit within the regulatory framework and to strengthen the transaction rather than complicate it. 7  The proposed project i s inline with the CAS' objective o f creating an enabling environment for continued or increased private investment insunrise industries and improving living conditions through increasing the efficiency o f infrastructureprovision. 3. Higher level objectives to which the project contributes Oualitv o f Life for the Citizens of Saint Lucia: The rationing o f water in the north o f Saint Lucia has begun to affect citizens of all income levels. The reliable availability o f high quality water throughout the north o f Saint Lucia will likely provide a greater benefit to the lower income segments o f society intwo regards: they pay the highest percentage o f disposable income when they purchase water from vendors, and they are the primary beneficiaries o f the cross-subsidies paid by hotels and commercial entities. That portion o f the proposed project which will serve to keep commercial entities on the system will be substantially converted into a direct subsidy to low volume domestic water consumers, allowing the utility to maintain the current tariff structure and level.* Moreover, by taking on this critical project, the Government has been able to leverage the Bank as a partner in seeking and obtaining grant funds for poor community connections. Originally identified as a target for this project because o f its underserved poor population, water supply to the township o f Dennery will be built with grant funding by the European Union Water Fund. The project proposed in this PAD-identified in the Government's application to the European Union as the required "Partnership Arrangement'- resulted inthe commitment of those grant funds. Economic Growth and Development: Water supply i s a critical factor in tourism development, which, as described in Section 1 above, i s the predominant driver o f economic activity in Saint Lucia following the decline in agricultural dependence. The supply o f potable water and the provision o f a reliable service will improve the likelihood o fhoteliers and developers to invest in these sector and meet the growing demands for the north o f the island. This need has been highlightedby the selection o f Saint Lucia as a host to the Cricket World Cup in2007-an event which will drive the construction o f new tourism facilities provided access to basic infrastructure services can be assured to developers. Regional Development Strategy: The bankruptcy and perennial failure o f public water utilities i s a common development challenge for countries throughout the Caribbean Basin. With similar economic features as well as legal and regulatory structures, the proposed public-private partnership-underpinned by selected public investments-may serve as a pilot for the OECS region and beyond. Saint Lucia offers as case analysis a best practice, layered regulatory arrangement; a refined but tested approach to public-private partnership (as found in its electric utility); and a clearly defined, complementary investmentprogram to enable the transaction. If successful, this initiative can be a significant contribution to the regional development strategy. This particular operationwas not included inthe CAS discussed by the Board on 6/28/01, but is inline with its overall objectives. Hotels, commercial establishments and cruise ships currently represent about 113 of all billings from WASCO. 8  B. PROJECTDESCRIPTION 1. Lendinginstrument The proposed operation would be structured under a Sector Investment Loan (SIL). This instrument was found to be the most adequate as the project pioneers sector investments that, after their completion, will improve the potential o f a successful partnership between the government and the private sector. 2. Projectdevelopmentobjectiveandkeyindicators The Saint Lucia Water Supply Infrastructure Improvement Project will support a short term investment program to carry out critical works which are required to achieve the following objectives: (i) alleviatethewater shortage inthenorthofthe country. (Theinfrastructureworks proposed will allow the utility to supply the entire north o f the island with a more efficient, continuous and reliable service.) (ii) implement urgent investments that will result in additional revenues, reduce the likelihood o f commercial users (important sources o f cross-subsidy for poor consumers) abandoning the system and improve the potential o f a successful partnership betweenthe government and the private sector. Key indicators for the proposedproject are: reduction o f water rationing in the north, sufficient pressure for end users, daily demand being met without use o f storage tanks, a successful transaction to a public-private partnership, and improved financial performance o f the utility. 3. Projectcomponents The project will improve the reliability o f the Roseau Dam water supply system by increasing the flow o f water to the north o f Saint Lucia as required to meet the current shortfall in water capacity in that area. The system components that would requireupgrading include: the Roseau Dam system pumping station, the Roseau Dam system raw water transmission, the Theobalds Treatment Plant and the Mome Bocage distribution pipeline that will connect the Roseau system to the Hill 20 system, which suffers a severe water shortage. The increase in the extraction capacity from the Roseau reservoir technically reduces the drought retum period for which the reservoir was designed. However, since current supply from the Dam i s creating constant shortages, it i s considered that it would be better to increase the extraction capacity from the reservoir and satisfy all the demand in years that are not drought years. The issue o f drought years will be taken care of in the medium term investment program by the future owner/operators in which an aggressive water losses reduction program in the distribution network will be pursuedwhile expansion o f the water source for the north i s beingconsidered. The components o f the proposedproject are thus the following: 9  Component A: Infrastructure Improvement Works: This component includes the following infrastructure improvement works, which are detailed inAnnex 4: Upgrade the Roseau dam pumping station through (a) replacement o f existing pump- motor assemblies to facilitate apumpingcapacity o f approximately 10 million gallons per day, and (b) additional works which may include, inter alia, provision o f voltage conditioning equipment, upgrade o f switchgear, installation o f adjustable speed drives, upgrade of pipe works, and replacement o f standby generation to accommodate increased power supply requirements o f the pumping-motor assemblies; 0 Improve raw water transmission between Vanard and Sarot through the installation o f (a) a 24-inch ductile iron pipe between Vanard and Sarot, and (b) joint restraints at river crossings located between Millet and Vanard; 0 Upgrade o f the Theobalds water treatment plant to a capacity o f 10 million gallons per day through the installationo f additional treatment units; and 0 Upgrade o f the Mome Bocage distribution pipeline through the construction o f required works, using the existing or an alternative design approach that responds to the supply needs, which may include the installation o f a new (a) pump station at Ciceron, (b) pumpingline with capacity to meet water demands up to 2.53 million gallons per day, (c) storage tank o f 200,000 imperial gallons at Mome Fortune, (d) gravity main transmission pipeline linked to storage tanks at Mome and Mome Du Don, and (e) storage tank o f 100,000 imperial gallons at Babonneau. Due to the urgentnature o f the works and the close inter-relationship among the components o f the project it is considered that a turnkey contract will be the most efficient and safe way to implement this type o f project and achieve project objectives as demonstrated in other Bank projects such as the EspirituSanto Water and Sanitationproject inBrazil. Component B: TechnicalAssistance and Project Management. This component includes: Provision of technical assistance required to support Project implementation, carry out Project management activities, and strengthen the capacity o f the PCU staff in Project management and priority technical areas, which may include the provision o f training. The areas o f technical assistance include: 0 Oversight and monitoring o f the quality o f works perfonned by contractors hired under Part A o fthe Project; 0 Carrying out o f studies on the water resources of the Roseau River, including analyses of (a) the hydrological capacity o f the Roseau dam and reservoir system, and possibly o f other surface water sources, (b) the potential for increasing the capacity o f the Roseau dam through engineering improvements, and (c) safety and environmental considerations relatedto such activities; and 10  0 Carrying out o f a groundwater resources study to determine the quantity, quality and potential use o f groundwater in Saint Lucia. 4. Lessons learnedand reflectedin the projectdesign The design o f this project draws on lessons leamed inthe implementation o fthe Water Sector Reform Technical Assistance Loan as well as over fifteen years o fprivate sector participation in infrastructure designprojects throughout LatinAmerica and the Caribbean. These lessons are described below: 0 The World Bank's understanding o f the market for, and proper design of, public-private partnerships has evolved since the inception o f the Technical Assistance project nearly five years ago. As a result o f this "maturing" o f Bank vision and in response to the GOSL's willingness to collaborate, the Bank has proposed lending assistance for the undertakingo furgentworks as well as direct assistance inthe designand implementation o f the transaction. The willingness o f the Government to assume the debt associated with this loan and o f the Bank to prepare this project in advance of the transaction illustrates this new recognition o f the importance o f the public sector's contribution to the sustainability o fpublic-private partnerships inthe water sector. 0 From infrastructure reform initiatives undertakenthroughout Latin America over the last ten years, the World Bank has also learned that successful transactions-particularly in the water sector-depend inlarge part on the apriori existence o f a legal and regulatory framework that i s at once conducive to a private sector investor, sensitive to local legal and cultural attributes and protective o f basic public and consumer interests. With the passage o f a Water and Sewerage Services Act, the establishment o f a water utility commission, the undertakingof a public awareness campaign to learn from and educate consumers, and the design o f a Saint Lucia-specific public-private partnership that includes a continuing role for the Government on the Board o f the utility, the probability o f achieving a successful transaction has increased significantly. Market interest in the transaction appears to reflect the attractiveness o f this new, more balanced approach to public-private partnerships. 0 The Bank has also leamed that Government commitment at the highest levels is required for a successful transaction in a sensitive sector such as water. The sense o f urgency o f the required investments is now a priority in the Government's agenda. This has been confirmed by the appointment o f a senior level Champion o f the reform program from the Ministry o f Finance and the agreement to take on the proposed loan. Utility reform initiatives that are based at the agency or authority being reformed often flounder from lack o f political will or institutional commitment. In contrast to the earlier reform process, the Ministry o f Finance has recently taken on responsibility as the primary counterparts for this project and the attendant transaction. Indeed, the proposed project will have its Program Coordination Unit (PCU) housed at the Ministry o f Finance-with the Permanent Secretary o f Finance serving as the Program Manager-in order to create an environment of commitment to the transaction while sufficient technical support to 11  provide oversight o f the proposed works and reporting on progress will remain housed at the utility. Inaddition to government commitment, the Bank has come to recognizethat the public's understanding and support of a reform initiative will also directly impact the success o f the transaction. Household and focus groups surveying conducted as part of the reform program in Saint Lucia illustrate a general acceptance o f the proposed initiative (with greater interest in water service and quality than the ownership structure o f the utility). Nonetheless, a public relations campaign i s being built around the transaction to ensure a transaction design which i s sensitive to the perceptions o f risk heldby consumers and the perception o ftransparency and fairness required for a smooth transition. 5. Alternativesconsideredandreasons for rejection As explained in Section A and, in full detail, in Annex 11 o f this PAD, two alternatives were considered for alleviating water shortages inthe north o f the island:(i) increase inthe capacity o f the Roseau system from 6 to 10 million gallons per day (MGD) by upgrading existing infrastructure that follows the dam; and (ii) installation o f a Reverse Osmosis desalination plant inRodney Bay with a capacity of about 4 MGD. For this second alternative, the concept that had been proposed to the Government o f Saint Lucia by desalination developers and other interested parties was evaluated for its economic costs as well as its likely environmental impact as part o f the environmental assessment. Based on a comparative economic analysis, the first alternative was selected as a clear choice based both on the Net Present Value o f the investment and the difference in the costs o f water. The first alternative will not only improve the level o f service, but will also improve the integrity o f the system for the long term at a lower cost than the alternative. This is not to say that desalination could not play an important role in future sourcing decisions but that the currently available technology cannot compete with the rehabilitation and minor expansion works proposed for this project. Details o f the comparative economic analyses are presented inAnnex 11. C. IMPLEMENTATION 1. Institutionalandimplementationarrangements The approach taken to implementing this project will be one that combines (i)program management and accountability at the highest levels o f Government; (2) proven fiduciary and disbursement management experience; and (3) contracted third-party and utility-based technical oversight and monitoring. At the management level, The Program Coordinator will report directly to the Permanent Secretary o f Finance who will also serve as the Program Manager o f a Program Coordination Unit. In addition, the Permanent Secretary has identified by the Administration as the "champion" and primary liaison for the water sector reform initiative and public-private partnership transaction. The fiduciary and disbursement responsibilities will be handled by PCU staff with a proven track record o f successful performance. Finally, the 12  technical oversight o f the turnkey contractor will be undertaken by a top quality consulting firm with funds from the proposed project. Inaddition, the utilitywill second a project engineer full- time to monitor and report to the Program Manager and the utility on the status o f the works and performance of the technical advisor and primary contractor. These arrangements are described inmore detailbelow. The PCU o f the proposedproject will be housed at the Ministry o f Finance under the Permanent Secretary o f Finance who will serve as Program Manager. Fiduciary, accounting and disbursement responsibility will be shared with the HIV/AIDS Prevention and Control Project and the Disaster Management Project allowing the proposed project to benefit from a proven, monitored, evaluated and successful PCU arrangement. The additional staff hired for this particular project will consist o f an administrator to be housed in the Ministry o f Finance who will report directly to the Permanent SecretaryProgram Manager and an engineer,with reporting responsibilities to the Ministry o f Finance, who will be seconded to the project by WASCO. The dedicated project engineer will be located at the water utility's office. In addition to these two staff dedicated to the project, the procurement specialist and an accountant working on the DMPII and the HN/AIDS projects will expand their responsibilities to include the proposed project. The Project's OperationalManual i s now being consolidated with the other two Bank's projects with separate annexes for each particular project. The Ministry o f Finance will appoint the Project Coordinator to oversee, coordinate and implement the contracts related to this project on behalf o f the Permanent Secretary o f Finance. The Project Coordinator must be knowledgeable o f the Government's procedures and operations since he/she i s responsible for all correspondence from the PCU to the World Bank and other parties. It i s recommended that this person be also knowledgeable about (i)the water and sanitation sector; (ii)private sector participation; and (iii) Bank procurement guidelines. World The main responsibilities o f the PCU will be to initiate the implementation o f the various components o f the Water Supply Infrastructure Improvement Project; supervise the implementation o f the works and services to be contracted or already contracted under these projects; and prepare progress reports to the World Bank and the Government o f Saint Lucia on the status o f the implementation. The PCU will be responsible for coordinating the implementation, procurement, disbursement and the financial management aspects o f the project. The urgent and integrated nature o f the works suggests that a single turnkey contract will be the most efficient manner in which to undertake the construction components o f the project. This arrangement will greatly reduce the number o f contracts being administered by the PCU. An Engineering Consultant will have primary responsibility for preliminary design and turnkey oversight. The responsibilities o f the Engineering Consultant include the following services: (i) preparation o f preliminary designs and tender invitation documents for all civil, mechanical and electrical works; (ii) assistance to WASCO inthe qualification o f contractors, including the preparation o f pre-qualificationreports where necessary; and (iii) assistance inthe evaluation of tenders and the preparation o f tender evaluation reports, contract documents and negotiationo f contracts. 13  The Services o f the Engineering Consultant will be required for the purposes o f project implementation for a period o f about 4.5 months during which time a contract i s expected to be awarded to a suitable firm to commence implementation o fworks.g After a contractor is selected for executing the works, funds will be disbursed according to achievement o f targets defined in the contract. Infrastructuralworks components must be undertaken in a period o f 1.5 years. Payments will be made at the request o f the Project Managerpermanent Secretary o f the implementing agency or by the Project Coordinator, where the Project Coordinator acts on behalf o f the Project Manager, inaccordance with the method summarized inAnnex 7 o f the PAD. 2. Monitoringand evaluation of outcomes/results To assure that the project i s implemented appropriately and according to schedule, semi-annual and annual project reports that integrate financial management data with project activities involving works, technical assistance and capacity building will be generated by the PCU's project management information system. The expected outcomes presented inthe Annex to this PAD will primarilybe derived from qualitative improvements in service as well as inter-related actions, such as a successful transaction for the water utility. As all o f the data on performance will be required for submission to the regulatory entity under the newly enacted Water and Sanitation Action, project outcomes and results will come directly or indirectly from the regulated utility. The sources o f information for monitoring and evaluation o f outcomes and results will thus be: (1) WASCO and technical auditor under direction o f National Water & Sanitation Commission (NWSC) and the Ministryo f Public Utilities for operational information (quantities o f delivered water, quality o f service, pressure). (2) WASCO and financial auditors under direction o f NWSC for financial information (sales volumes, change in numbers o f connections, revenues and operating ratios). (3) Ministry o f Physical Development for data on applications or licenses for self-production through desalinization. (4) Finally, the Ministry o f Finance will provide updates as requiredon the status o f the transaction. 3. Sustainability The proposed operation i s targeted to interventions that will significantly improve the economic sustainability of the water utility. In fact, the Financial Impact analysis presented in Annex 9 demonstrates a positive return even with the utility absorbing the debt associated with the project. In addition, the assets that will be built by this project are all within the current capability o f the water utility to manage and operate. That said, long-term project performance will also be affected by a successful partnership between the government and the private sector and the expected improvements and operating efficiency that comes from this project. With the passage of a Water and Sewerage Services Act, the establishment o f a water utility commission, the undertaking o f a public awareness campaign to learn from and educate The contracting ofa technical firmto undertakepreliminary design work andto assist tinthe selection o fthe turnkey contractor is already underway financed with available resources fromthe existing Water Sector Reform T.A. Loan. Proposals fromthe short-listed technical firms are expectedbyMay 1l", 2005. 14  consumers, and the design o f a Saint Lucia-specific public-private partnership that includes a continuing role for the Government on the Board o f the utility, the probability o f achieving a successful transaction has increased significantly. Government Commitment: The sense o f urgency o f the requiredinvestmentsi s now a priority in the Government's agenda. This has been confirmed by the appointment o f a senior level Champion o f the reform program from the Ministryof Finance and the agreement to take on the proposed loan. Incontrast to the earlier stages o f the reform process, the Ministryo f Finance has taken on responsibility as the primary counterparts for this project and the attendant transaction. Indeed, the proposed project will have its Program Coordination Unit (PCU) housed at the Minister of Finance-with the Permanent Secretary of Finance serving as the Program Manager-in order to create an environment o f commitment to the transaction while sufficient technical support to provide oversight o f the proposed works and reporting on progress will remainhoused at the utility. Public Trust: In addition to securing government commitment, household and focus groups surveying conducted as part o f the reform program in Saint Lucia illustrate a general acceptance o f the proposed initiative (with greater interest in water service and quality than the ownership structure o f the utility). Nonetheless, a public relations campaign is being built around the transaction to ensure a transaction design which i s sensitive to the perceptions o f risk held by consumers and the perception o f transparency and fairness required for a smoothtransition. 4. Critical risks and possible controversial aspects Risk MitigatingMeasure Difficulties with the Project The role of the Project Coordination Unit will be streamlined according to Coordination Unit in implementing the new guidelines o f the C M U to centralize project administration o f the project. different Bank projects in one Project Coordination Unit. The PCU for this particular project will consist o f an administrator located at the Ministry o f Finance and an engineer which will be located at WASCO. The Operational Manual will be consolidated with the other two Bank's projects with separate annexes for each particular project. Construction delays result in a In order to minimize the possibility o f delays, a Turnkey contracting more severe crisis. mechanism will be employed. This will bundle the works, attract the interest o f larger f i i and reduce the possibility o f micro-management o f inputs. Indeed, there is a greater risk to the water crisis o f doing nothing or waiting for the transaction to be completed than o f implementing this project. Delays in the completion o f While this French-funded and executed project i s mostly complete, downstream pipe networks in geostatic testing has not been undertaken to assure the ability of the pipe Castries. (The flow from the network to absorb the necessary pressure. In addition, there i s a small proposed project will depend upon portion o f the pipe which needs to be re-laid with g o v e m e n t funds the effectiveness o f a newly built (EC$700,000 have been advanced by the Government o f Saint Lucia to 20" transmission line inCastries.) undertake these works in an urgent fashion). The Bank team has received assurance from the Ministry o f Finance that this project will be complete and satisfactorily performingprior to the effectiveness o f the Bank project. Project effectiveness will be tied to this outcome. Lack o f coordination between the The teams on the Bank side (TA Loan and the proposed project) have been transaction and the investment staffed by the Country and Sector Directors so as to be overlapping; they project leading to conflicting are currently working as one seamless team. On the Government's side, financial advice to novernment or the PS o f Finance i s now the point person for the entire water reform 15  unfeasible financial structure process, including the proposed project. A World Bank Public Relations presentedto investors. Specialist has been assigned to the team and a local PR firm has been retained for the TA Loan to assure transparency, public understanding and better coordination. The transaction's financial structure i s being built around the assumption o f the critical project proposed inthis PAD. Failure o f the transaction from lack Under the existing TA Loan, the World Bank i s committing considerable o f market interest financial and human resources to assure a successful transaction. The Bank itself has held meetings with institutional investors, the local private sector, the IFC and has held detailed discussions with potential regional and international developers and water operators. Given the unprecedented commitments o f the Government to prepare the balance sheet o f the new company, initiate a regulatory framework, absorb the Bank's project debt and release majority shares for board and managerial control to the private sector, interest to date has been very high. In addition, Lucelec's success as a well-functioning and profitable privately owned company strengthens the perceptions that it i s possible to own and operate a profitable utility in Saint Lucia. Finally, three alternative approaches to public-private partnership with varying levels o f risk assigned to the private sector have been proposed as a back-up in case o f initial transaction failure. (See Section A.l.) In the end, even if the transaction is delayed, the proposed works all utilize the existing assets and technology o f WASCO and can thus be managedby the current utility staff. (Indeed, the IRR o f the project under a failed transaction scenario- continued WASCO management-is considerably lower than a successful transaction but still pass the minimumthreshold for financial viability.) Failure o f the transaction from lack The Government's commitment to the success o f this project has been o fpolitical commitment communicated to the Bank at the highest levels. The Prime Minister now receives the missions andhas signed the Aide Memoires which commit the Government to addressing the utility's debt, absorbing the debt o f the proposed loan, selling a controlling share o f the utility to the private and acting in good faith as the public partner. Moreover, the Permanent Secretary o f Finance has been selected by the Administration to serve as the liaison on this initiative, to house the Program Monitoring Unit and to serve as the champion o f the water transaction. 5. Loadcreditconditionsand covenants The effectiveness of the proposed project will depend on the construction o f a newly built 20" transmission line in Castries, financed by the French government, which needs to be completed andinoperationbefore effectiveness. The risks andmitigating measures relatedto this condition are described above. In addition, the relevant project annex to the consolidated Operations Manual must be complete inorder for the project to enter into effectiveness." lo mainbodyoftheOperationsManual,basedupontheManualfortheDisasterManagementProject,isalreadycomplete. The " 16  D. APPRAISAL SUMMARY 1. Economic and financial analyses A cost-benefit analysis was used to determine the financial and economic feasibility, its distributive impact, and sensitivity analysis o f the investment activities to be financed under the project. The full results are presented inAnnex 9. Inthe financial analysis, the project was appraised measuring its flow of costs and benefits at market prices. In the economic analysis, the project was appraised converting financial cash flows into economic cash flows by converting economic prices, that is, by subtracting taxes and adding subsidies to financial costs. The economic benefits are calculated as the avoided costs o f water rationing to capture the benefits from expected improvements inthe reliability o f the water supply. A distributive analysis was conducted to assess the impact of each activity on specific groups o f stakeholders. Finally, the results o f the financial and economic analysis were tested by conducting a sensitivity analysis. The financial evaluation was undertaken with and without the project beingtransferred ingrants from the Government to the utility. Under the scenario in which WASCO receives the investment costs as a full subsidy from the government, the results show extremely high financial viability o f the project with a financial IRR o f 172 percent and a net benefit o f about EC$23 million. In case no investment subsidy would be granted, the project would still be financially viable as financial benefits exceed financial costs -with a net benefit o f EC$5 million and a financial IRRo f 15 percent. The economic feasibility o f the project was appraised converting financial cash flows into economic cash flows by subtracting taxes and adding subsidies to the financial flow o f costs. The benefits associated with a reduction of rationing were used as a proxy for the incremental economic benefits o f the project. About 13 percent o f current water demand cannot be met today due to production capacity constraints. If no investments are made to increase the production capacity, the water shortage could reach up to 50 percent o f total water demand by 2030. Alternatively, if the project i s implemented, demand could be served and coverage could increase to attain 96 percent o f population. The results from the economic analysis show a net benefit o f EC$6 million andeconomic rate o f retumo f 16 percent. The difference between economic and financial cash flows determines the winners and the losers with the project. The Government will benefit with revenues from taxes for investment and operating costs to be used in the project, but would pay a large cost in the funding o f the investment. The winners are WASCO and the current customers who would reap benefits for about EC$10 million. The project implementation structure has beendesignedto minimize the risks associated with the performance o f the water and sanitation company o f Saint Lucia. Nevertheless, the degree to which the final objective o f the project will be achieved i s directly linked to the improvement o f the level o f service and of the operational performance o f WASCO. Ultimately, the sustainability o f the interventions financed by the project will dependon the sustainability o f WASCO. 17  Annex 10 provides a financial assessment o f WASCO and, inparticular, o f its future capacity to develop into a sustainable entity. WASCO's current financial situation i s quite poor as a result o f low operating efficiency, tariffs that are below levels requiredto cover efficient operating and capital costs, a low and decreasing collection rate for domestic and commercial customers, and limited investments in the system. The company's net reported loss in 2003 was EC$14.3 million. WASCO i s currently not paying interest nor principalpayments on most o f its debt. The company demonstrates considerable liquidity problems directly related to the inability to generate the cash from operations necessary to cover current obligations as well as finance required for capital investments. WASCO's capital investmentsbetween 2001 and 2002 were financed primarily through contributions from the Government as well as other contributors such as bilateral and multilateral development agencies. The results o f the financial model that has been built to calculate financial projections under assumptions listed in Annex 10 show a significant improvement of the financial health of WASCO, within a five year period from the start o f the project. A significant part o f the improvement, and specifically the large increase in revenue, can be directly associated with the investments financed under the context of this project; while the equally significant improvement on the cost side assumed in the model, i s derived from the impact o f the strategy o f the new managementbrought by the new investors. The results o f the model show drastic improvement o f liquidity, linked to increased revenues and the injection o f fresh capital, the retum to profitability and to the ability to sustain a moderate level o f indebtedness and to finance capital investments in part through internally generated finds. 2. Technical The works program which will be implemented under the project, consisting o f the short term investment program for the north, i s infact an urgent investment program aimed at providing the current population o f the north, amounting to about 86,000 residents plus tourists, with a continuous supply ofwater o fpotable quality. Two alternatives have been considered for resolving the water shortage in the northem part o f Saint Lucia: (i) Increase the daily withdrawal rate o f water from the Roseau dam from the current value o f about 6 MGD to 10 MGD; or (ii) Construct a Reverse Osmosis Desalination plant to supply the current water deficit. The investment and O&M costs were estimated for both alternatives and they were subjected to a comparative economic analysis, and to a technical and environmental comparison. The comparative analysis o f the alternative, as described indetail in Annex 11, clearly demonstrates that the altemative o f increasing the daily withdrawal rate o f I water from the Roseau dam from the current value o f about 6 MGD to 10 MGD i s the preferred altemative. The increase in the extraction capacity from the Roseau reservoir basically reduces the drought retumperiod for which the reservoir was designed. However, since what currently happens is 18  that the restrictive extraction capacity results in water shortages every year-regardless o f rainfall-;-it i s recommended to increase the extraction capacity from the reservoir and satisfy demand in years which are not drought years. The risk o f drought should be addressed in the medium-term investment program through new source identification and/or reductions in water losses in the distribution network. In the forthcoming years, major efforts will be directed to reducing such water losses. Due to the urgency inimplementingthe works so as to alleviate the water shortage andprovide continuous supply to the population, it was decided to construct the works under one single turnkey works contract. A turnkey contract saves time as it collapses the design and construction functions into one activity. This approach will also assign the responsibility to one contractor and will avoid coordination issues between various contractors-a critical advantage given the inter- relationship o f the four components o f the project. The Bank has used the turnkey approach in various projects and has found it to be an effective method for procurement and project implementation. Bidding documents based on successful turnkey project will be used in the project. The works to be executed under the project are relatively simple and straightforward, consisting o f replacement o f pumps in a main pumping station, replacement o f a main water pipe, construction o f an additional modular unit in the existing largest water treatment plant and installation o f smaller diameter pipes. The implementation o f these works will provide an important reliefto the water shortage problem inthe North. As part o f the project, water resources management studies will be undertaken to establish the availability and capacity o f potential resources. These studies will include a groundwater resources study and surface water resource study with emphasis on the Roseau river resources, This study will include the establishment o fthe capacity o fthe existing Roseaureservoir, options for increasing the capacity by increasing the height o f the Dam, and identification o f other surface water resources inthe North. 3. Fiduciary The Program Coordination Unit (PCU) that will have overall financial and accounting responsibilities for the project already possesses extensive experience in providing procurement and financial management support to World Bank financed operations. Financial management responsibilities will include: (i)maintenance of accounting records, (ii)processing disbursements, (iii)preparation o f project financial statements in accordance with Bank guidelines, (iv) management and reconciliation o f bank accounts, (v) management o f financial information systems, (vi) preparation and submission o f quarterly financial management reports, (vii) preparation and submission o f withdrawal applications, (viii) coordination with auditors during the annual financial audit exercise, and (ix) adoption o f remedial financial management actions, as necessary, duringproject implementation. The PCU's core staff, which includes the Deputy PCU Coordinator, the Project Assistant for Contracts and the Project Assistant for Financial Management (FM), i s already inplace and will 19  be supplemented by a Program Coordinator (currently being recruited by the Permanent Secretary o f Finance) and an engineering staff who will be seconded from' and housed at WASCO to oversee the technical elements o f the project and to report to the Ministryo f Finance on the performance and status o f the project. Loan funds will be disbursed to a USDollars Special Account (SA) maintained ina commercial bank acceptable to the World Bank. The PCUwill also operate a local currency Special Account, to finance project expenditures inlocal currency, where funds from the main dollar Special Account will be periodically transferred. The initial disbursement into the Special Account will be an advance, and, since the PCUhas extensive experience with financial management o f World Bankprojects and the preparation o fFinancial MonitoringReports (FMRs), subsequent requests for replenishment o f the SA will be based on the quarterly submission o f FMRs. The existing PCU's accounting software will be used to account for the project needs. Annual project financial statements will be audited in accordance with International Standards on Auditing issued by the International Organization o f Supreme Audit Institutions (INTOSAI), by the Office o f the Auditor General, in accordance with TORSacceptable to the Bank. Auditors should provide an audit opinion on project annual financial statements, and a report on internal controls. The project's annual audit report will be required to be submitted to the Bank no later than 4 months following the end o fthe fiscal year (April-March). About 85% o f the Bank's funds will finance a single turn-key contract, representing potential high fiduciary risks. In order to mitigate these risks, the clauses of the turnkey contract will require that the company provide bid and performance bonds. In addition, the selection criteria will include a requirement that the financial viability o f the company be sound. These requirements will be monitored bythe Bankduringthe procurement process. 4. Social In general, the social aspects of the project are positive, beneficial and ultimately affect the population at large. The social segments affected by the project, directly includes all inhabitants o f the country without bias to age, social-economic status or sex. Improvements to the water distribution system include both urban, rural, and vacation home sites, tourism and non-tourism related areas. Cost reductions in operations resulting from improved system efficiencies coupled with the wider availability o f good quality water will likely provide a greater apparent benefit to the moderate and lower economic income groups. The increased reliability of supply will allow for reduced reliance on more expensive bottled water. While not a common practice, there is some local use o f un-treated surface waters particularly for bathing and washing. Elimination o f the need for this practice will have obvious health impacts especially among the young who are particularly susceptible to diarrheal disease and other water bome pathogens. Finally improvements to the supply to the north of the island will enhance the tourism economy and allow for the continued growth in both the tourism and housing sectors. These sectors are currently adversely affected as growth i s limited by the availability o f potable water. Their importance to the financial security o f the utility cannot be 20  understated given that their tariffs are the primary source o f cross-subsidy for low income domestic consumers. 5. Environment The project i s considered category B due principally to the large scale o f excavation planned during the installation o f pipe works. Routes chosen include agricultural areas and roadways which will result insome short-term disruption o f activities. Impacts associated with the project are short-term and associated with the actual construction activities. No natural lands are to be disturbed, no endangered species or critical wildlife habitats are to be disturbed and no relocations of inhabitants will be required. The improved treatment and distribution capacity anticipated as a result o f this project will produce significant benefits to the population o f the northem region o f the country. These include the near 24 hour daily access to potable water, reductions in costs o f production and distribution, and the installation o f a transmission system allowing the elimination o f some electric pumps. The strengthening o f pipe joints along the distribution route will enhance the disaster survivability (e.g. earthquake, flood, and hurricane) of the system and reduce routine maintenance costs associated with the currently inadequatejoint system. Environmental impacts from the project relate largely to the impacts associated with excavations through rural areas and along transportation corridors. Soil stabilization and erosion control measures will be necessary duringthe project. Traffic management plans and coordination with the Ministry o f Works will be necessary to assure minimal disruption o f commerce and to guarantee citizen access to critical services. Other measures associated with site activities are presented inthe environmental assessment developed for the project. There will be some crop loss along the installation routes but this will be minimal and short- term. Banana i s the principal agricultural product for the region. Once excavations are completed, banana will be re-established along the disturbed routes. Compensation for actual losses and opportunity costs will be managed through WASCO using its existing compensation mechanisms. The project i s associated with a dam and as a result, OP 4.37, Safety o f Dams, has been triggered. This project will not include any structural modifications to the dam nor will it affect the operation o f current safety status o f the structure. The dam i s relatively new, constructed under a World Bank/CIDA project in 1996. It is a concrete construction and on inspection, appears to be very well maintained. Operational procedures at WASCO include the regular maintenance of the dam and associated appurtenances, daily and bi-annual safety inspections usinglocal engineering contractors, and a required surface and underwater inspection after every detected seismic event. WASCO has presented these inspection reports to the Bank as well as the Dam Operations and Maintenance Manual. Those reports show that the borrower has an effective dam safety program in operation; the borrower conducts and documents full level inspections and dam safety assessments; and that those assessments and findings are satisfactory to the Bank. 21  A program of environmental screening and management implementationhas beendeveloped and will be included inthe contracting procedures usedunder the project. This is designedto assure compliance with Bank environmental policy and Saint Lucian environmental law. The screening procedure first identifies whether an environmental assessment would be required due to the nature o f the activity contemplated. An environmental assessment has been developed for this project and within that assessment a checklist has been developed which i s used to identify specific activities that may have associated environmental consequences. This includes, for example, paint and solvent usage, worker sanitation, noise management, erosion control. A set o f standard contract clauses have been developed which are to be attached to the project bidding documents. This is designed to assure that these anticipated effects are managed. These requirements are reviewed internally by the appropriate Saint Lucian authorities and then presentedwith the formal approval o fcontract activities. The guidelines and implementation procedures are consistent with Bank policies and operate withinthe framework o f Saint Lucian environmentalmanagement policies. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OPBP 4.04) [ I [XI PestManagement (OP 4.09) [I [XI Cultural Property (OPN 11.03, beingrevisedas OP 4.11) [ I [XI Involuntary Resettlement (OPBP 4.12) [I [XI Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) [ I [XI Forests (OP/BP 4.36) [I [XI Safety o fDams (OPBP 4.37) [XI [I Projects inDisputedAreas (OPBP/GP 7.60)* [ I [XI Projects on International Waterways (OPBP/GP 7.50) [I [XI 7. Policy Exceptions and Readiness No relief from operational or policy is sought under this program. * By supporting theproposed project, the Bank does not intend toprejudice thefinal determination of theparties' claims on the disputed areas 22  Annex 1:Countryand Sector or ProgramBackground SAINT LUCIA: WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT 1. Countrybackground Saint Lucia i s part o f the Windward Islands. The interior o f the island i s mountainous, but there i s more flat land than in Dominica, Grenada, or Saint Vincent. The soil i s generally fertile and the banana industry (and other agriculture products) makes Saint Lucia the biggest exporter o f agricultural products among the OECS member countries. The pleasant climate and the sandy beaches have encouraged the development o f tourism, which has become the main foreign exchange earner inthe economy inrecent years. Despite relatively strong social indicators and a stable economy, poverty and unemployment are still persistent problems. The poverty headcount index indicates that 25 percent o f the population lives below the locally defined poverty line while the unemployment rate is around 19percent. Saint Lucia experienced a markeddecline ineconomic growth during the 1990s and early 2000s. Average GDP growth declined from 6.5 percent per year inthe 1980s to 2.5 percent inthe 1990s and -0.5 percent during 2000-03. This marked slowdown was the result of exogenous shocks (the 9/11 events, the global economic slowdown and a severe drought in 2001) as well as increased competition from lower pricedtourism destinations. The most significant structural shift in the economy since 1996 has been the decline in banana production as favorable market access conditions for banana exports have been removed. The total number o f banana farmers has declined from 13,000 at the time o f the 1996 Poverty Assessment Report to less than 3,000 today. This change has been reflected in the declining contribution o f agriculture to GDP, which was around 11per cent in 1995 falling to around 5 per cent in2003. The Government tried to offset the slowdown and sustain employment as well as meet natural disaster-related costs in the early 2000s through an expansionary fiscal policy, mainly through increased public investment financed by commercial borrowing. As a result, the overall fiscal deficit (before grants) increased from -1.2 percent o f GDP in 1999 to -8.9 percent in 2002 and the public sector debt rose from 39.5 percent o f GDP in 1999 to 65.2 percent in2002. As in other OECS countries, economic performance in Saint Lucia improved in 2003 and 2004 drivenby a revival intourism and the absence of natural disasters duringthat period. Real GDP growth recovered to 3.0 and 3.5 percent in 2003 and 2004, respectively, and the overall fiscal deficit was reduced to 6.3 percent o f GDP in2004. However, despite the improvement in fiscal balances, the total public sector debt as a share of GDP continued to increase (to 70.5 percent o f GDP in2004). This presents a circularity problem as the ability o f the country to absorb further resort development and to grow in its tourism base will be tested by the fiscal constraints that restrict public investmentinthe island's infrastructure. While the private sector i s recognized as the engine o f sustainable growth for Saint Lucia's economy, the access o f develo ers and hoteliers to basic services is already affecting their interest in investing in the island." Inthis "RecentinterviewsbytheBankteamwithdevelopers,hotelowners,theMinistryofTourismandtheNationalDevelopment Corporationrevealedaheightenedsense of concem among developersthat their greenfieldand expansionplanswould not be 23  context, the water and sanitation sector has emerged as a key factor inthe economic development o f Saint Lucia. 2. Sector issues Despite a concerted effort in 2000 to turn around the state water utility, Saint Lucia i s suffering once again from a crisis o f confidence and performance in the water sector.12 The government- owned utility which currently controls nearly all water and sanitation services on the island, the Water and Sewerage Company (WASCO), has ceased to make capital investments and has lost the good will o f its domestic and commercial consumers due to severe shortages, miss-billings andpoor quality o f service. Hotels throughout the island are purchasingwater trucked to them in tankers while entire neighborhoods are relying on rainwater, private purchases and storage tanks to compensate for days-on-end without water from the utility. Exacerbating the situation, a severe dry season over the last year has compounded existing water shortage problems affecting the quality o f life o f the country's 161,000 people. During 2003, WASCO was forced to implement strict water allocation schedules, island wide. These problems have a tremendous impact on the economy o f the country and the residents' quality o f life and have the potential to become severe ifthey are left unattended. In summary, the main financial and operational issues faced by the water sector are the following: 0 Insufficient cash flow to cover all operating and maintenance costs (let alone servicing dept and maintaining a sustainable level o f investments); 0 Decrepit state o f the utility's assets which are indire need o f a capital infusion; 0 Insufficient supply o f treated water to meet current demand leading to water shortages-particularly inthe population andresort centers ofthe north; 0 Prospects for hrther increase in demand for water as a result o f the booming tourist industryanduptuminover-all economic growth; 0 Loss o f good will on the part of consumers due to the further decline in service after the 2000 tariff increase. The Government and the World Bank agree that this situation has grown out o f the legacy o f underinvestment in assets, insufficient average tariffs over the past decades and severe human resource constraints. While WASCO has attempted to turn around its performance over the last few years, the utility has been unable to confront that legacy and, instead, has seen its services and assets deteriorate further. ~~~ ~~ feasible due to the inability o f the country to providewater connections, reliable service and other basic infrastructure such as access roads. I' Some o f the early actions taken by the govemment to improve its performance included: the corporatization o f a state authority, WASA (into WASCO); the appointment o f a private sector managing director and board director; the downsizing o f staff b y about one-quarter; and a tariff increase in 2000 after many years o f a stagnant tariff. Inaddition, the Govemment signed a loan with the World Bank that led to the drafting o f a water law, the establishment o f a regulatory body and the enactment o f a PSD strategy. 24  Defining characteristics of Saint Lucia's Water Sector Dependency on surface water sources. Saint Lucia's supply o f water i s dependant on surface sources. As a result, the occurrence o f rainfall events has a significant impact on the ability o f the company to provide an adequate water supply. This has also forced the company to truck water to communities in an effort to deal with extreme cases o f poor supply. This dependence i s more significant inthe dry season where yields fall by as much as 10 percent o f the normal supply. In addition, the limited treatment capacity at Roseau Dam has resulted in the shutting down o f supply systems inthe north duringheavy rainfall as a result of added turbidityinthe overflow. Backlog in water infrastructure investments. The Roseau system, which supplies approximately 80 percent o f the population, has an estimated capacity o f 10MGD.Because of constraints inthe infrastructure (transmission, treatment, pumping) that support the dam, it i s only able to supply between 5 and 6 MGD effectively which i s not enough for meeting the current demand. The water supply system in the country includes 67 pumping stations, all o f them in a significant level o f deterioration andwithout backup capacity. Low reliability o f water services. Water supply shortages are proving to be a development bottleneck for the hotel sector l3and a major impact on the quality o f life of the population in general. Water supply interruptions in Saint Lucia are more severe as elevation increases; in some cases communities receive water only once per week. Residents who suffer the most include the financially deprived who are unable to purchase storage tanks and are unable to store minimumsupplyrequirements when available. Another concern for residents is the quality o fthe water provided by WASCO. In addition, lack o f customer and sales data has led to an increase inmis-billings, disaffected customers anddecreasingrates ofcollection. Non-revenue water and poor cost recovery. Consumption by 30 percent o f WASCO's consumers i s based on estimated rather than metered consumption. Non-revenue water i s approximately 44 percent of water production in the north. The estimated level o f leakage for WASCO accounts for 36 percent o f water production. In addition to the mentioned critical problems, WASCO has an inefficient commercial management andbilling system that contribute to a poor cost recovery. Around 74 percent o f active connections were billed on a meteredbasis in2003. Long-term investments in sanitation infrastructure. Inaddition to long-term supply needs, improved collection and treatment o f wastewater will require considerable capital investment- in the tens of millions of US dollars-in the 10 to 15 years ahead. Depending upon the willingness and ability of consumers to pay for sewerage and wastewater services through l3 recentsurveyinSt. Luciaindicatedthat largehotelswere dissatisfiedwiththe reliabilityofwater supplies, A The largest hotel inthe sample was of the opinion that disruptions occurred too frequently. Some o f the respondents indicated that during disruptions they had had to make alternative arrangements to purchase truck-carried water at a premium price, or about 30 percent higher than the utility rate. At least one large hotel on St. Lucia has already installed a water desalination plant to cope with the shortage of potable water supplies. 25  increased user fees, a portion o f that capital cost i s likely to be required from public funds.14 As such, the Government will increasingly find itself under countervailing pressures: confronting environmental/health concerns and their impact on tourism on one hand and prioritizing public spendinggiven serious fiscal constraints on the other. While the private operator o f the utility may be able to access financing and manage and maintain the sanitation assets more efficiently than a government agency, in the end, either the tax payer will pay or the consumer will pay for the services. Which consumer pays, however, i s also an important consideration. Aside from user fees, land developers and hoteliers could be required to build wastewater treatment facilities themselves, perhaps with social obligations related to servicing local communities "bundled" into the project. While this might be one way o f passing along the cost o f sanitation to tourists, it could only be implemented under careful consideration for the competitiveness o f St Lucia in attracting tourism investment. The World Bank is thus working with the Government as part o f the transaction design process to find an affordable manner to finance needed sanitation investments. The plan will consider the economic and financial trade-offs involved with higher watedsanitation tariffs, bundling o f investment requirements (hotels with sewerage connections, wastewater treatment and/or outfalls) and financing from the public budget (perhaps with donor support). All that said, it should be noted that the population, including tourists, inthe project area totals about 100,000-a relatively small figure. A significant portion o f that population is dispersed among small settlement, rural areas and isolated resorts. Inthese cases the flows o f wastewater are quite small and on-site solutions will likely remain the most practicable. This type o f "off- grid"wastewater management is adequate and does not present serious environmental problems. The main challenges related to wastewater contamination are concentrated in Castries and the Rodney Bay area. Castries, the largest city in Saint Lucia i s by most standards, a small city, with a population o f 60,000. Proper financing and management o f its wastewater system will be a priority inthe design o f the transaction strategy for the public-private partnership. 3. Government'sstrategy Since 2000, the World Bank has been working with the Government o f Saint Lucia through a Technical Assistance Loan for Sector Reform to pursue a strategy that would leverage private sector financing and know-how to reach a sustainable solution for the sector. As a result o f that project's Private Sector Development (PSD) Strategy and direct discussions with the World Bank, the Government o f Saint Lucia has decided to pursue a public-private partnership (PPP) for the utility. The Bank and the Government have agreed upon a structure for the company that will include a minority share for the Government, a likely minority share set-aside for a Saint Lucian institutional investor and an auction for the majority shares to consortia willing to recapitalize the utility with a minimum bid that reflects the immediate investment needs of the l 4The logic o f public financial support for sewerage and wastewater treatment investments i s a well documented feature o f infrastructure economics baseduponthe recognition o f sanitation as a merit good. That is, the benefits accrued to society from sanitation services through health and environmental improvements extend beyond the individual's interest in"consuming" andpaying for the service. 26  utility. Inthis way, the Government can break from its history o fbailing out the company every several years andthe utility can retum to playing a productive role inthe growth of the economy. Inorder to confiont the utility's challenges head on and increase the likelihood of a successful transaction for WASCO, the Government andthe World Bankteam have agreed: 0 An urgent works program, costing about US$8 million, is required to increase water flows to the north. The Government, residents o f the north and the commercial sector cannot afford to wait for the transaction to be completed inorder to initiate that program. The Government will absorb the cost o f that investment even as the transaction process moves forward. The components o f this project have been identified by technical advisors, WASCO staff and the World Bank and are described indetail inAnnex 4. 0 Furthercapital willberequired for other short to mediumterm investments. The medium term operational improvements and capital investment program can best be funded from the successful completiono fthe PPP transaction. 0 Tariffs should reflect the rate base o f the investment after the transaction i s complete. The Government and the World Bank recognize that WASCO will only achieve sustainability if the new productive investments, fresh capital injection, new management and revamped organizational strategy, are accompanied by a tariff structure that ensures a fair return on investment for the private owner/operators. As a starting point, financial analysis conducted by Technical Advisors to the PSD Strategy and reviewed by the Bank suggest that the current average tariff (approximately US$l-15 per cubic meter) is sufficient to tumaround the utility given other modest assumptions about improved collections, and operations, government willingness to assume debt and the capital injection expected from private investors. Over the last four months, the Government has made considerable effort to expedite this reform initiative. The Ministry o f Finance has taken the reins o f the transaction design and sector reform, appointing a highlevel Champion to the process. Inaddition, Parliament has passed the Water and Sewerage Act that puts inplace its regulatory framework, and the Administration has agreed to take on the financing o f the proposed urgent works project while agreeing upon the outlines o f a transaction in which board and managerial control will be granted to a consortium o f investors/operators. 27  Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies SAINT LUCIA: WATER SUPPLYINFRASTRUCTUREIMPROVEMENTPROJECT Project:PO70244 - Water Sector ReformTechnicalAssistance Project The development objective o f the Water Sector Reform Technical Assistance Project i s to prepare and transmit the water company to private sector management within a sound legal and regulatory framework. There are three components that comprise this project. The first provides technical assistance for the strengthening o f the regulatory and environmental framework by revising the Water Act and the drafting o f supporting implementingrules and regulations as well as the license for a new operator. The second component conducts and implements a technical and financial feasibility study for the private sector participation carried out within the regulatory work described above and a transaction advisor to help implement the public-private partnership. The third component funds project management and a public information and dissemination campaign. IP Rating: S DO Rating: S Project:PO86469 LC DisasterManagementProjectI1 - The project aims at further reducing the country's vulnerability to adverse natural events (hurricane, floods, etc.) through investment in risk management activities. As such, the objectives of the project are to further strengthen(a) infrastructure against the impact o f adverse natural events (hurricanes, flooding, etc.) through the implementation of physical mitigation measures; (b) the response capacity in case o f adverse natural event (hurricane, flooding, etc) through capacity building, equipment purchase and investment in emergency infrastructure; and (c) the institutional capacity o f the various ministries and agencies dealing with disaster management through the provision o f adequate facilities, critical equipment, technical assistance and training. IP Rating: S DORating: S Project:PO77687 Saint LuciaEmergencyRecovery Project - Project's objective are: (a) To help safeguard and maintain the productive capacity o f the country's tourism sector, notably by securing the industry's energy needs inthe aftermath o f the September 1lth events; (b) To enhance security at key airport and seaport facilities in line with international standards, with the aim o f preventing acts o f terrorism and safeguarding the sub- region's image as a safe destination; and (c) To strengthen the country's institutional capacity to develop and implement security plans, procedures and measures as mandatedby the international civil aviation andmaritime transport regulatory agencies. PRating: S DORating: S 28  CARIBBEAN DEVELOPMENT BANK(CDB) CDB i s currently financing specific works inthe water sector (briefly described below). Metering and Leak Detection: Works entail the procurement and installation of cold water domestic meters and bulk meters which can be easily configured for electronic and remote sensing in the future along with all the necessary appurtenances to form a complete looped supply as established by WASCO's Standards. It shall also include the procurement o frelevant and appropriate technologically advanced leak detection equipment, which will be used in reducing the level o f wastage due to leakingpipes thus resulting in the lowering of Unaccounted for Water (UFW). Vieux Fort Water Supply (Grace): The works entail the procurement and installation o f a 1.5MGD direct immersed ultra filtration membrane filtration plant, including the upgrading of the water intake accordingto WASCO's design andstandards. Hill20 Raw Water Supply: Works entail the procurement and installation of relevant pump sets and switch gear for the Talvem Pump station complete with the improvement and upgrade o f the standby power generation plant along with the refurbishment and upgrade o f all existing structures. The systems shall have the capacity o f beingmonitored locally or by remote sensing and shall have full SCADA capabilities. It shall also include the procurement and installation of adequately sized raw water transmission mains to replace the existing twin supply lines. The system shall be complete with all necessary appurtenances to prevent damages from pressure transients and surges. CastriesSewerage System: The works entailprocurement and installation o f5 adequately sized grinder pump sets complete with switchgear, bulkmagnetic flow meters and standby power generation along with the refurbishment and upgrading o f all existingstructures. 29  Annex 3: ResultsFrameworkandMonitoring SAINT LUCIA: WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT ResultsFramework PDO ProjectOutcomeIndicators Use of ProjectOutcome Information Alleviate water shortage inthe north Improved reliability and regularity Verification o f project effectiveness o f the country providing a more o f service throughout north for and capacity o f utilityto implement efficient, continuous and reliable commercial and domestic end users. and manage investment. service. Daily demand being met without dependence o n storage tanks. Sufficient pressure at end user level. IntermediateOutcomes IntermediateOutcome Use of Intermediate Indicators OutcomeMonitoring: Improve reliability o f the Roseau Increasedextraction capacity o f the Measure performance o f turnkey D a mWater Supply System by Roseau dam from 6 MGDto 10 contractor to implement increasing the flow o f water to the MGD. infrastructure improvement works. north o f Saint Lucia. Reduce the likelihood o f commercial Increased sales to commercialusers. Measure effectiveness o f WASCO users abandoning the system. to deliver service Increase the potential o f a successful Transaction completed. Demonstrate interest o f private partnership between the government investors to participate inthe and the private sector. transaction. Improve collectionratios and Improved financial performance Measure WASCO's ability to improve economic sustainability o f particularly: Increased revenue leverage investment and achieve WASCO Decreasedoperating ratio financial sustainability. Strengthen institutional capacity o f Sustained operational performance Assurance of regular and correct the P C U for implementingthe o f PCU. disbursements and effective project. oversight o fprojects. 30  2>I :'3Y m 'c  Annex 4: DetailedProjectDescription SAINT LUCIA: WATER SUPPLY INFRASTRUCTURE IMPROVEMENT PROJECT Component A: Infrastructure Improvement Works (Single Turnkey Contract) There are two main water supply systems inthe north o f the island: (i) Roseau System the comprising the John Compton Dam, Millet Intake, 24" and 32" Raw Water Transmission Pipeline, Theobalds Water Treatment Plant (WTP) and associated service reservoirs, pumps and pipingnetworks; and (ii) Hill 20 System which comprises intakes at La the Sorciere, Talvem and Marquis, Hill 20 WTP and associated service reservoirs, pumps andpipingnetworks. The Roseau System is the principal system supplying approximately 80 percent o f the 86,000 population located in the north o f the island. The system covers the constituencies o f Castries South, Castries South East, Castries Central, Castries East and Castries North and Gros Islet. The Hill 20 System, although smaller, primarily services the Babonneau constituency. Although the dam was designed with a capacity o f approximately 10 million gallons per day (MGD), the Roseau System reliably produces its maximum o f approximately 6.0 million imperial MGD year roundprimarily due to the reliable supply o f raw water stored by the Roseau Dam. The Hill 20 System i s not as reliable but can produce up to 1.2 MGD during the rainy season. Duringthe dry season, reductions in water production can be expected to be as high as 80 percent. Historic production figures illustrate a declining pattern over the years which, is expected to continue into the future. These downward trends with regards to the production at Hill20 duringthe dry seasonhave initiatedplans to link the two systems. Linking the Roseau System with the Hill 20 system will allow WASCO to supply the entire north o f the island with a more efficient, consistent and reliable service and to better use the intended capacity o f the existing dam. The infrastructure improvement works included inthe proposedproject are the following: 1.John ComptonDamPumpingUpgrade The John Compton Dam pumping facility i s the primary intake and transmission o f raw water in Saint Lucia. The sequence o f operations that form part o f this facilty require abstraction o f water from the dam using a parallel-pump configuration consisting o f five (5) pumps, pumping in sequence to a collecting tank located at the Millet Ridge which flows by gravity to the Theobalds Water Treatment Plant at Ciceron in Castries. Currently, the existing configuration cannot meet the forecasted demand for the year 2000 and beyond, to the year 2025. Thus, in accordance with findings o f Stanley & Associates, recommendations for an upgrade to the facility have been made. The Water & Sewerage Company Inc. (WASCO) undertook a survey o f the relevant components of the water supply system and have developed suitable proposals to mitigate some o f the concerns coming out o f the sub-committees findings. Some o f the problems identified were: 32  1. Inadequate capacity to maintain current demand as well as back up capacity in the event o f mechanical and or electrical failure. 2. Inadequacy o f standby generation capacity inthe event o fpower failure. With the John Compton Dam as the primary source, recommendations are in order to increase the output o f the current facility to match current and future demands. The sites have been visited, and the recommendations have been reviewed andrefinedby the Bank team's Lead Engineer. The proposed solutions to the above system inadequacies are as follows: 0 Upgrade o f pumpingcapacity to match future demand. 0 Upgrade o f pipework and other civil works. 0 Replacement o f the current standby generating set to accommodate for the increased power supply requirements o f the larger appropriately matched pump-motor assemblies. 0 Installation o f a SCADA systemto facilitate available data and pump and switchgear remote operations at Theobalds Treatment Plant. The scope o f work required includes the replacement o f all existing pump-motor assemblies. This upgrade will facilitate a pumpingcapacity o f approximately 10MGD as opposed to the existing 6 MGD capacity. The recommendation o f the energy audit and power supply to the Roseau Dam will provide details associated with this upgrade. This included the replacement o f existing pump/motors 1-5 with more efficient units to achieve projected flow rates by implementinga least cost upgrade program. This upgrade should include requisite voltage conditioning equipment, upgrade o f switchgear and after further investigations, possible installation o f adjustable speed drives. The resulting increase in power supply requirements would warrant an increase in the generating capacity o f the existing standby `genset' and slight changes to the electrical appurtenances inclusive of the Motor Control Center to accommodate the increased electrical demand required to sustain the maximum pumping capacity in the event o f a power loss at the station. 2. Removalof Vanard-Sarot Bottleneck This component focuses on Stage I1o f the Roseau Basin Water Development Program and particularly on the raw water transmission pipeline between Vanard and Sarot. A report submitted by Stanley and Associates (John Compton DamProject Consultants) in 1997, was usedas the basis for this review. The recommendations outlined are based on current needs and projected demands in 2015 and will generally improve the reliability o f the water supply to approximately 86,000 persons. Proposed improvements include the following components capable o f supplyingthe estimated 2015 demand: 33  0 New 24" DuctileironpipebetweenVanard andSarot, 1300m This pipeline would be installed along a similar route to the existing 18" pipeline which would upgrade the raw water transmission pipeline capacity o f up to 10 MGD (Roseau & Millet Supply). 0 Joint restraintsfor 24" SteelPipeline The joint restraints will be located between Millet and Vanard at river crossings to further improvethe integrity ofthe pipelineparticularly duringheavyriver flows. The proposedworks outlined will: 1. Provide a morereliable raw water supplyto the WTP. 2. Provide a pipeline capacity to satisfy projected demands in2015. Table 1 below summarizes the current and projected demands as well as the existing capacities o f the infrastructure components requiredfor production. Table 1.- Current & ProjectedDemands(Roseau System) Existing Demand Demand Demand Demand SYSTEM Capacity 2003" 2010" 2015* 2020" OMGD) (MGD) (MGD) (MGD) (MGD) ROSEAUSYSTEM 6.20 (max) 7.19 8.66 9.92 11.41 a)Pumps 6.00 (max) b)Pipeline 6.20 (max) c)Treatment 6.20 (max) Plant Figures do not I clude deman generated by private storage tanks. This proposal has re-emphasized the urgent need to address the present and projected demands through infrastructure improvements. The infrastructure improvements outlined will not only improve the level o f service to over 25,000 households up to 2015 but will also improve the integrity o f the system. 3. Expansionof the TheobaldsWater TreatmentPlant(WTP) The T.R.Theobalds Water Treatment Plant or the Ciceron Water Treatment Plant as it was formerly known was commissioned in March 1993 as part o f the upgrade o f the general water works that formed part o f the Roseau Basin Water Development Project. The components under this project was the construction o f a 750,000,000 gallon rock filled water dam complete with a pumping station, a new water intake and raw water transmission pipeline at Millet, a 100,000 gallon header tank at Millet, a raw water transmission pipeline between Millet and Ciceron, a modem water treatment plant at 34  Ciceron and finally the first phase o f a new treated water transmission main from Ciceron to Port Castries. The T.R.Theobalds Water Treatment Plant is designed to meet the needs o f persons living in Castries and Gros Islet. The areas covered by the plant are the entire Castries area inclusive o f the Roseau Basin and Babonneau as well as Gros Islet inclusive o f its rural areas. As indicated previously demand calculations for the north o f the island indicate a current domestic demand (2003) o f 5.39 MGD. The demand from the commercial sector such as hotels, cruise ships and other largeconsumers i s as highas 2.5 MGD. In addition during the dry season, the systems are subjected to a suppressed demand generated by private storage tanks. A total daily demand o f 7.89 MGD, not including the storage demand, can thus be expected. The treatment plant was designed to treat an average o f 5.2 MGD or a maximum o f 6.5 MGD(under good raw water quality conditions) andwas expected to meet the population demandup to the year 2005 before any upgrades to the plant was necessary. The plant is o f a conventional design with a rapid mixing chamber for chemical addition, a flocculation chamber with baffles, two sedimentation chambers and four dual media (anthracite and sand) filter bays along with terminal disinfection usingchlorine gas. To date the treatment plant i s treating on average a total o f 6 MGD to meet the population demands for Gros Islet and Castries inclusive o f their surrounding rural areas. This increase in treatment capacity i s in keeping with the maximum design capacity o f the plant to produce 6.5 MGD. Minor modifications have already been made to the plant with respect to the filter media in two o f the bays and the use of a coagulant aid - Polymer (PAX-18). The original intention as proposed by Stanley and Associates, was to duplicate the plant in order to produce a maximum of 10.0 MGD to meet the population demands beyond 2005. The limiting factor however i s the raw water pumping capacity as well as the upgrade o fthe bottleneck at Vanard. A numbero foptions havebeenreviewed to varyingextents. These options were : 1. Expansion andModification o f the existing plant from 5.OMGD to approximately 10MGD. 2. Replacement o f the four dual filter media bays with membrane filters to treat 10 MGD. 3. Decentralization o f the treatment facility at Ciceron to Sarot and Ciceron. Ofthe options outlined above Option 1was selected as the preferred option. This option includes the following: 0 Expansion of the existing facility rather than duplication, as duplication o f the existing facility would result ina capacity o f above 10 MGD, which i s beyond the capacity o f the raw water transmission line (10 MGD) after the removal o f the bottleneck. This suggests that there will be extra capacity, which will not be utilized, inthe foreseeable future. 35  Modification o f receiving chamber where necessary to allow for the increase in flow. Introduction o f plate or tube settlers. It has been suggested that the use o f settlers will improve the efficiency of the clarifiers by at least 40 percent to 50 percent and can go up to 150 percent for plate settlers in particular- (Okun & Schulz, 1984). The settlers will increase the surface area inthe clarifier, thereby reducing the settling time (S,) by less then 50 percent. This will allow for treatment o f water ina reduced timefi-ame. Utilization or recycling o f the backwash water fi-om the filters. At 6.0 MGD the total back wash water generated i s approximately 70,000 gallons per filter or 280,000 gallons per back wash cycle. It is therefore recommendedthat a settling tank or pond be constructed for the back wash water which would normally be disposed of. At 9.0 MGD, the total backwash water will be approximately 100,000 gallons per filter or about 400,000 gallons per back wash cycle. Inorder to reuse the backwash water it will be necessary to construct a pond to contain this water and to recycle it, Since the back wash interval presentlyis over 3 days and with the intended increase to 9.0 MGD, it is anticipated that the backwash interval will reduce to every 2 days. Trucking o f Sludge from backwashing process to Beausejour Sewage Treatment Facility for further processing and drying. Option 1was the preferred option for the following reasons: Allows for the maximization o f the existing plant, through the utilization o f modification strategies. Modification strategies will increase the throughput and improve the efficiency o f the existingplant by at least 40 percent to 50 percent. Allows for the recycling o f the backwash water fi-om the filters. This translates to between 280,000 gallons to 400,000 gallons per backwashcycle. Allows for the elimination o f the discharge o f backwash water into the open environment, hence reducing the risk o f pollution, which i s a common practice at present. Operating cost data for comparative analysis for the other options were not available. The operations and maintenance requirements and associated costs for membrane filter plants are known to be higher than that o f conventional plants such as that at Ciceron. (Reference i s made to experiences o f Sevem Trent Intemational in this regard.) Reintroduction o f the Sarot Treatment Plant only was not adequate to provide the additional capacity required. There would still be a need to modify the existing plant at Ciceron. Highriskofnew membranefilter technology. 36  4. Upgrade of Morne-BocageDistributionLine This component focuses on Stage I1o f the Roseau Basin Water Development Program and particularly on the Morne, Bocage and Mome DuDonWater Distribution System. A report submittedby Stanley and Associates in 1998,i s usedas the basis for this report. The high elevation areas in the Castries region, such as Upper Morne Du Don, Bocage, Upper Entrepot and Carillie, are supplied by both systems. During the rainy season, excess water produced by the Hill 20 System i s the primary source o f potable water. During the dry season, however the water produced by Hill 20, very often, is not even capable o f supplyingthe Babonneau region. Therefore the primary source of water during the dry season is thus from the Roseau Systemvia pumping from the Theobalds WTP to the Mome via an 8" PVC pipeline which then gravity flows to the Bocage reservoir through a badly corroded 6" cast ironpipeline. Current domestic demand (2003) requires a pumping capacity at Theobalds WTP o f approximately 1.84 MGD and a gravity line with a capacity o f 1.69 MGD. Current capacities for the pumping and gravity system are 0.9 MGD and 0.76 MGD respectively. Table 2 summarizes the existing system capacities andpresent andprojected demands. During the dry season, poor infrastructure and the lack of raw water in the Hill 20 System, dictate that stringent rationing schedules be implemented. Most o f the high elevation communities in the Castries and Babonneau areas which enjoy a daily supply during the rainy season, only receive a supply for a few hours once or twice weekly. Residents who suffer the most include the financially deprived who are unable to purchase storage tanks and are unable to store minimum supply requirements when available. Table 2 -Current & ProjectedDemands(Roseau System & Hill20 System) Existing Demand SYSTEM Capacity 2003" (MGD) (MGD) ROSEAUSYSTEM a) Ciceron P.S. 6.20 (max) 7.19 b) Morneto 0.90 (max) 1.84 Morne c) MorneDu 0.76 (max) 1.69 DonPipeline HILL20 SYSTEM a) Wet Season 1.20 (max) 0.70 b) Dry Season 0.24 (min) TOTAL 1. Wet Season 7.40 (max) 7.89 2. Dry Season 6.44 (min) * Figuresdo not ii lude demandgeneratedbyprivatestorage tanks. 37  The recommendations outlined in this proposal and those of Stanley and Associates are based on current needs and projected demands in 2015 and will generally improve the level o f service and the reliability o f the water supply to over 30,000 persons. Proposed improvements include the following components capable o f satisfying the estimated 2015 demand. 0 New Ciceron Pump Station at TheobaldsWTP A new pump station is required at Ciceron with sufficient capacity to meet water demands estimated at 2.31 MGD in 2015. The recommendation i s for three duty pumpsand one standby pump. 0 New dedicated 12" Pumping Main This new 1900m pipeline will be required for pumped flows to Mome Fortune from Theobalds WTP. Due to the large capital expenditure associated with pipeline upgrades and due to the critical function o f this specific pipeline it i s recommended that this pumpingline will have sufficient capacity to meet water demands estimated at 2.53 MGD in2020. e New 200,000 Imperial Gallon (Igal) tank at Morne Fortune This tank provides additional storage which is necessary for ---- Flow stabilization duringpeak demand Flow stabilization required for firefighting Emergency storage To provide gravity feed to Mome DuDon, Bocage and Hill20 Systems 0 New 12" gravity main, 4900m This new pipeline will function as a dedicated transmission pipeline directly to existing storage tanks at the Mome and Mome Du Don. A special pipeline link and valve assembly will allow the supply to feed the Bocage Reservoir and the Hill 20 WTP. 0 New 100,000 Imperial gallon (Igal) tank at Babonneau This storage facility will be required near the Hill 20 WTP to accept flows from the Mome. This facility will also perform similar functions o f the tank at Mome Fortune as outlined above. These additional future requirements include: 0 Capacity upgrade of Ciceron Pump Station The development o f new components and the strengthening o f existing components inthe Ciceron to Mome DuDonDistribution Systemwill: 1. Provide a more reliable supplyto the high elevation communities in Castries. The communities to benefit the most from this project include those supplied from the Bocage and Mome Du Don Reservoirs. It should be noted however that other communities supplied by the Mome storage tanks and the Rock Hall Tanks will 38  enjoy a more reliable level o f service as well as potential residential development from Carellie to Choc. 2. Allow water produced by the Hill 20 system to be reserved for the Babonneau area thus providing a more reliable supply to that region. 3. Provide a link between the Roseau System and the Hill 20 System. This will allow water produced at the Theobalds WTP to be conveyed to the Hill 20 WTP for distribution at critical times, particularly duringthe dry season. 4. Provide the basis which will allow for the development o f a long term link between the Hill20 and Roseau Systems which will eventually allow WASCO to supply the entire north of the island with a more efficient, consistent and reliable service. 5. Allow for future development o f a pressure management program which includes, pressure zoning and efficient distribution o f supply. 6. Improve the supply pressure and storage required for firefighting or other emergencies. 7. Reduce the projected effective storage capacity o f the John Compton Dam and o f the Theobalds WTP by a component equivalent to the increase inlevel o f service. Calculations illustrate that the 2003 demand exceeds the capacity of some existing components in the distribution system by over 120 percent (Morne to Morne Du Don Pipeline). This proposal has re-emphasized the urgent need to address the present and projected demands through infrastructure improvements. The infrastructure improvements outlined will not only improve the level o f service to over 6000 households but will also improve the integrityo f the system. b Component B: TechnicalAssistance and Project Management This component includes: 0 Consulting services for: P Oversight and Monitoring o f the Quality o f Works o f the Turnkey Contractor. An engineering consulting firm will be retainedto oversee the works o f the turnkey contractor. Oversight o f turnkey works i s different than supervision o f a conventional work contract in that the consultant does not review quantities but rather concentrates on quality controVquality assurance so as to ensure that the contractor complies with his commitments. The consulting firm will provide regular reporting to the PCU on the performance o f the contractor against explicit outputs as defined inthe final tender documents. 39  > Roseau River Surface Water Resource Study and Capacity o f the Roseau D a d e s e r v o i r System Analyses. Hydrological analyses will be conducted to determine the potential supply capacity o f the Roseau river, and if necessary, o f other surface water sources, as well as a study o f the existing supply capacity o f the Roseau D a d e s e r v o i r System and the potential for increasing the capacity o f Roseau Dam through engineering improvements (such as the increased elevation o f the existing dam). These studies will include safety andenvironmental sensitivity analyses. 9 Groundwater Resources Study. Whereas preliminary analyses conducted in the past indicated that the volcanic formation of Saint Lucia would render groundwater resource unusable, a more indepth study to determine the potential quantity, quality and perspective o f use o f groundwater on the island is needed. Based on available geological information, a groundwater resources study will be conducted to estimate the potential o f groundwater resources in Saint Lucia for the future development o f water supplyon the island. 0 Additional support to the PCU and the Government in TA and training, as necessary. Financing o f PCU staff and additional consultants, as may be needed, and financing o f training activities, as required. 40  Annex 5: ProjectCosts SAINT LUCIA: WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT Local Foreign Total Project Cost By Component and/or Activity us us us $million $million $million 1.Infrastructure Improvement Works 3.47 3.47 6.94 2. Technical assistance and Project 0.32 0.32 0.63 Management Total Baseline Cost 3.79 3.79 7.57 Physical Contingencies 0.17 0.17 0.35 Price Contingencies TotalProjectCosts' 3.96 3.96 7.92 Interest duringconstruction Front-end Fee 0.02 0.02 TotalFinancingRequired 3.96 3.98 7.94 1 ProjectBreakdown InfrastrutureImprovementWorks Sub-components Roseau Dam Pumping Station Upgrade 0.35 Vanard-Sarot Pipe Replacement 1.OO Expansionof the Ciceron Treatment Plant 3.20 Morne Bocage DistributionPipeline 2.39 PhysicalContingency 0.35 TOTAL 7.29 Supervision of Works 0.200 Studies Surface Water Resources and Safety of Roseau Dam 0.150 Groundwater Resources 0.050 PIU Staff & Equipment PIU Staff 0.200 Office Supplies and Computers 0.030 TOTAL 0.630 'Identifiable taxes and duties are US$ 0, and the total project cost, net o f taxes, i s US$m7.94. Therefore, the share o fproject cost net o f taxes is 100%. 41  Annex 6: ImplementationArrangements SAINT LUCIA: WATER SUPPLY INFRASTRUCTURE IMPROVEMENT PROJECT PROJECTCOORDINATION UNIT A Project Coordination Unit will be formed under a Project Coordinator reporting to the Permanent Secretary in the Ministry o f Finance. The Project Coordination Unit (PCU) will also include an engineer located in WASCO. The main responsibilities o f the PCU will be to initiate the implementation o f the various components o f the Water Supply Infrastructure Improvement Project, supervise the implementation o f the works and services to be contracted or already contracted under these projects, and prepare progress reports to the World Bank and the Government o f Saint Lucia on the status o f the implementation. The responsibilities o fthe Project CoordinationUnit are: . Supervise, monitor and coordinate the activities for the effective and efficient implementation o f the Water Supply Infrastructure Improvement Project Supervise all procurement processes; m Monitor performance on the construction o f all works undertakenunder the Water SupplyInfrastructure ImprovementProject; Manage the Project's Bank accounts 9 . Prepare monthly, semi-annual, and annual reports relating to the project to the World Bank and Government o f Saint Lucia and other stakeholders (as deemed appropriate by the Government o f Saint Lucia); such reports consisting mainly o f financial, management, progress andprocurement reports; The staff hired for this particular project consists o f an administrator to be housed inthe Ministryof Finance and an engineer which will be located at WASCO, in addition to a technical engineer, a procurement specialist and an accountant that have been contemplated for DMPII and the HIV/AIDS projects respectively. The support staff o f these projects includes a Project Assistant-Financial Management, Project Assistant- Contracts, Administrative Assistant, Clerk, Secretary/Typist, and an Accounts Clerk. The Project Coordinator is assigned by the Minister o f Finance to coordinate and monitor implementation progress according to agreed upon performance indicators and report to the Government o f Saint Lucia: 1. Co-ordination o f the contributions o f entities participating in this Project and overall co-ordination and implementation o f the Project; 2. Communications with the Bank on day-to-day Project matters; 3. Oversee the procurement o f civil works, furniture, equipment, technical assistance specialist services, training and all other goods, works and services under the Project; 42  4. Preparation o f the Quarterly Project Management, and Annual Report, and in collaboration with the Bank, an ImplementationCompletion Report (ICR); 5. Maintenance o f all Project financial accounts, which, must be separate from all other accounts; and ensuring annual audits, are preparedin a timely and complete fashion; 6. Preparation and processing o f Applications for withdrawal o f proceeds from Credits and Loans. 7. Monitoring and evaluation of the Project andits components. 8. Presentation o f Project before other entities. The above responsibilities cannot be delegated or transferred either by the PCU or the Executing Agency to other personnel or units without the prior written consent o f the Bank. During the execution of the project activities, and to ensure the successful accomplishment o f project objectives, close collaboration with WASCO and well-defined roles i s essential. The existing project Organizational structure i s captured in Figure 1 below. Figure 1:Project Organizational Structure PS Finance/ Project manager I PIU Project Coordinator PIU Project Coordinator .......................... 1Project Engineer WASCO's staff Procurement :................. Contractor ,.....: i.....:Sharedwith HIV/AIDS and DMPll 43  PCU Staff salaries, sundry items, office supplies, utilities and other operational costs would be financed by the loadcredit proceeds up to a total amount of US$ 200,000 and will be procured underprocedures acceptable to the Bank. The PCU will be responsible for coordinating the implementation, procurement, disbursement and the financial management aspects of the project. The urgent and integrated nature o f the works requires that a turnkey contract will be used for the construction components of the project. The responsibilities of the Engineering Consultant include the following services: (i) preparation o f preliminary designs and tender invitation documents for all civil, mechanical and electrical works; (ii)assistance to WASCO in the qualification o f contractors, including the preparation o f pre-qualification reports where necessary; (iii) assistance in the evaluation o f tenders and the preparation o f tender evaluation reports, contract documents and negotiation of contracts. WASCO shall provide the Engineering Consultant with access to all available data relevant to the Services. The selected engineer will be required to submit six (6) copies o f each report to the Water and Sewerage Company Inc. as follows: (i) an Inception Report within two weeks of commencement of the contract. This report will detail the initial findings and confirm the Consultant's detailed work schedule and methodology; and (ii) Monthly Progress Reports to advise on the status o f the consultancy. 44  Annex 7: FinancialManagementandDisbursementArrangements SAINT LUCIA: WATER SUPPLYINFRASTRUCTUREIMPROVEMENT PROJECT On the basis o f the assessmentsperformed, the financial management team recommended the following: 0 The Project CoordinationUnit(PCU), currently locatedinthe Ministryo fFinance and responsible for managing the fiduciary aspects o f three World Bank projects (the Emergency Recovery Project, Emergency Disaster Management Project, the HIV Aids Project), will manage the fiduciary aspects o fthe project; 0 The P C U already has in place an adequate financial management system to manage the fiduciary aspects o f World Bank projects; and 0 After the PCU carries out the proposed action plans presented inthis assessment, it will have in place adequate financial management arrangements that meet the Bank minimum fiduciary requirements to manage the financial activities o f the project. The following actions will be carriedout bythe PCU: 0 The SpecialUSD account will be opened inthe Bank o f Saint Lucia. 0 Since the PCU has extensive experience with report based disbursement procedures, loan funds will be disbursed to the Special Account on the basis o f FMRs; 0 Each quarter, the PCU will prepare the Financial Monitoring Reports (FMRs) to be submitted to the Bank the FMRs will include a narrative outlining the major project achievements for the quarter, the project's sources and uses o f funds, a detailed analysis o f expenditures by sub-component, a physical progress report, a procurement report, a procurement table and any additional schedules required for disbursement purposes; and 0 Annual project financial statements will be audited in accordance with International Standards on Auditing issued by the International Organization o f Supreme Audit Institutions (INTOSAT), by the Office o f the Auditor General o f Saint Lucia, in accordance with terms o f reference (TORS) acceptable to the Bank. About 85% o f the Bank`s funds will finance a single turn-key contract, representing potential high fiduciary risks. In order to mitigate these risks, the clauses o f the turnkey contract will require that the company provide bid and performance bonds. In addition, the selection criteria will include a requirement that the financial viability o f the company be sound. These requirements will be monitored by the Bank during the procurement process. FinancialManagementImplementationArrangements Annex 6 details the project's implementation arrangements. The project's PCU, located in the Permanent Secretary of Finance's Office will be independent fiom the utility company WASCO. The PCUwill consist o f an administrator to be housedinthe Ministry o f Finance, who will report directly to the Program Managerpermanent Secretary o f 45  Finance, and a staff engineer housed at WASCO dedicated to the investment project who will help to oversee and report on the technical aspects ofthe work. The use of the existing PCU to manage the fiduciary aspect of the project (both financial management and procurement activities) was recommended by Financial Management and accepted by the Ministry o f Finance in order to utilize a single entity for the coordination of externally financed project work. This i s designedaround the recognition that the PCU has experience inmanaging the fiduciary aspects of Bank projects through its involvement with the HIV/AIDS, Emergency Recovery and Disaster Management projects. This arrangement utilizes the existing resources and expertise inBank financed projects in Saint Lucia, assures consistency o f approach across projects, and achieves economies o f scope and scale in the funding o f the units. The loan disbursement aspects o f the proposed project will be managed centrally by the PCU, under the management o f the Permanent Secretary o f Finance, as detailed inthe flow o f funds section below. RiskAssessment Summary Inherent risk. Inherent risk i s the susceptibility o f project finds not being used as intended, if we assume that there were no internal controls. Saint-Lucia is a middle- income country. There are existing country public financial management systems in place, supporting certain level o f accountability and internal controls. Overall country risk can be estimated as medium. About 85% o f the Bank's funds will finance a single turn-key contract, representing potential high fiduciary risks. Inorder to mitigate these risks, the clauses o f the turnkey contract will require that the company provide bid and performance bonds. In addition, the selection criteria will include a requirement that the financial viability ofthe company be sound. These requirements will be monitored by the Bank during the procurement process. Control risk. The proposed Project Coordination Unit has experience working with external donor-financed projects. It was observed during the preparation o f the project, that financial managementhntemal control arrangements designed to provide a reasonable assurance that misuse o f funds would be prevented or detected and corrected on a timely basis are inplace, thus, the control risk i s considered to be medium. Detection risk. Given the combination o f inherent and control risks, acceptable level of detection risk i s medium. This translates into a standard number o f project supervisions (2 per year). Budgeting Project will have a small amount o f counterpart funding. Budget for this component (estimated at US$240,000) will be spread over two fiscal years. Project annual budgeting will be based on the cost tables, and updated according to the latest information as the implementationwill roll-out. 46  Accountingsystem andRecords The project will use the existing accounting software to maintain the project accounts. The software will allow for the tracking o f inflows by fimding source, and outflows by: (i) component; (ii)fundingsource; (iii) project disbursement category. Based on this information relevant financial reports can be prepared. The Chart o f Accounts i s being drafted, and will be finalized by the project effectiveness. Accounting Records: At the implementing agencies, transactions are recorded as incurred, and all primary supporting documentation will be maintained to facilitate ex- post reviews and the extemal annual audits. Such documents should be maintained for a minimumperiodo ffive years. InternalControls The project will adapt the Financial Management manual currently utilized by the HN/AIDS and EmergencyRecovery project. The Water project specific information, i.e. the Chart o f Accounts, the Reports formats, etc. will be added as part o f the Annexes to the Manual. Safeguard over Assets. Assets acquired by the project will be in the custody o f the respective institutional departments. Each implementing agency will keep detailed records o f equipment acquired. The amounts in this register will be reconciled monthly against the respective accounting balances. At least one annual physical inspection will be undertaken by the implementing agency staff, preferably with the participation o f staff from the extemal auditors. Reporting The PCU will be responsible for producing the Financial MonitoringReports (FMRs) on a quarterly basis to be submitted to the Bank. The FMRs will provide useful monitoring information and will be used for disbursement purposes. The FMRs will include a narrative outlining the major project achievements for the quarter, the project's sources and uses of funds, a detailed analysis o f expenditures, a physical progress report, a procurement report, a procurement table and any additional schedules required for disbursementpurposes. FMRs should be submitted to the Bank no later than 45 days after the end o feachreportingperiod. The annual financial statements will include the project's sources and uses o f funds, a detailed analysis o f expenditures, a schedule o f withdrawal applications presented during the year, a reconciliation o f the Special Account, notes to the financial information and managementrepresentation letter. These reports will be prepared by the PCU and made available to the auditors after the end o f each fiscal year. Audit Arrangements Project financial statements will be audited annually. As in most OECS countries, the Director o f Audit is responsible for auditing and reporting on the public accounts o f the 47  country, including projects funded by international organizations. The Auditor General's Office has performed adequately in the past in terms o f the quality o f the audit reports provided and the timely delivery o f annual audited financial statements for World Bank projects. Therefore, annual project financial statements will be audited in accordance with International Standards on Auditing issued by the International Organization o f Supreme Audit Institutions (INTOSAI), by the Office o f the Auditor General, in accordance with TORs acceptable to the Bank. Auditors should provide an audit opinion on project annual financial statements, and a report on internal controls. The project's annual audit report will be required to be submitted to the Bank no later than 4 months following the end o f the fiscal year (April-March). DisbursementArrangement Project funds will be channeled to the project through a Special Account denominated in US Dollars to be opened by the PCU ina commercial bank. The PCUwill operate a local currency Special Account, to finance project expendituresinlocal currency, where funds from the main dollar Special Account will be periodically transferred (funds sufficient to cover no more than 30 days worth of expenditures) and will be operated in accordance with the procedures and guidelines set forth inthe Bank's DisbursementHandbook. As eligible expenditures are incurred, the PCU will withdraw the amount to be financed by IDA and IBRD from the Special Account (US$or EC$) in accordance with the financing percentage agreed. Proceeds o f the loadcredit would be disbursed to the U S Dollar denominated special account managed by the PCU following effectiveness. Disbursements will be made based on report based disbursement procedures (FMR applications) submitted to the Bank on a quarterly basis (no later than 45 days after the end o f each quarter) since the PCU has extensive experience with financial management o f Bank projects and the preparation o f Financial MonitoringReports (FMRs). FinancialManagementAction Plan Area/Action I Responsibility/Tobe completedby 1. Flow of Funds 1.1.PCUto open the project bank accounts: PCU, project effectiveness the Special Account inU S dollars inthe bank selected, and the Project account inlocal currency inthe bank selected. 2. Staffing. Project Coordinator PCU, project effectiveness Complete TORs at Ministryo f Finance, shortlist andpresent qualifications to Bank for clearance. 3. AccountingandInternalControl 3.1. Create the Chart o f Accounts inthe PCU, project effectiveness 48  accounting system to reflect the disbursement categories for the project and project - activities. 3.2. Adapt the FMmanual for the project PCU, project effectiveness needs, add the project specific information (FMRsformats. Etc.) inthe form ofthe Annexes. 4. ExternalAudit 4.1. Submit final Audit TORSto the Bank for PCU, project effectiveness review and clearance. 4.2. Once the Bankclears the TOR, proceed PCU, project effectiveness with the appointment o fthe auditors. SupervisionPlan. Based onthe project assessmentperformed-recommended frequency o f supervisions - 2 per year. Table 1.Allocation of Loanand CreditProceeds(US$million) Expenditure Category SDR SDR US$ Total US$ % of (As US$ (Million) Million Equivalent) financed Works 2.450 3.628 3.075 6.70 100% Goods 0.020 0.030 0.000 0.03 100% Consulting Services and Training 0.080 0.118 0.230 0.35 60% Operating Costs 0.050 0.074 0.025 0.01 60% Unallocated 0.501 0.50 Front-end Fee 0.019 0.02 I 100% Total 2.60 3.85 ;oSL will finance goods and part o f opera i g costs anc onsultants with counterpart funds upto an amount o fUS$240,000. Table 2. Estimateddisbursements(Bank FY/US$m) FY 06 07 08 Annual 3.2 3.3 1.2 /Cumulative1 3.2 I 6.5 I 7.7 I 49  Annex 8: ProcurementArrangements SAINT LUCIA: WATER SUPPLYINFRASTRUCTUREIMPROVEMENT PROJECT A) General Procurement for the proposedproject would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBF2D Loans andIDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure categories is presentedbelow. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. Procurement of Works: Civil works procured under this project, would include water supply infrastructure and other related works, mainly: pumping stations, installation o f pipes, water treatment plants etc. The works will be procured usingthe Bank's Standard Bidding Documents (SBD) for all international competitive bidding (ICB) and National SBD agreed in advance with the Bank when national competitive bidding (NCB) procedures are used. It is envisaged that all project works will be procured under a single turnkey contract, awarded following ICB procedures. For this contract, specialized bidding documents will be developed by the Borrower and agreed with the Bank, based on documents used in other Bank-financed projects where the turnkey approach has been successfully applied. Inthe event that some works contracts are not covered by the turnkey contract, additional works would be procured using one of the methods identified in the table below, which establishes the thresholds for the use o f each method. Procurement of Goods: Goods to be procured under the project include computers, software and office equipment. The procurement o f these goods will be done using the Bank's SBD for any I C B (not expected), and National SBD agreed in advance with the Bank when national competitive bidding(NCB) procedures are used. Selection of Consultants: Consulting firms will be employed to provide services such as supervision of works, technical assistance (TA) support to the PCU, studies o f water resources management, dam safety, etc., training and workshops; and other specialized technical expertise. Individual consultants will behired to provide technical advisory and project management support services. OperationalCosts: Operational costs will include reasonable expenditures to carry out the project such as travel and per diem costs for the PCU staff and personnel authorized by the PCU coordinator (for instance, WASCO technical staff that might be needed to 50  support implementation); rentals o f cars or other services required to support implementation; project vehicle fuel; communications (including Intemet connectivity); maintenance o f PCU facilities, equipment and vehicles; consumable materials and supplies. Thresholdsfor ProcurementMethodsandPriorReview Expenditure Contract Value Procurement ContractsSubjectto Category - - (Threshold) Method Prior Review IUS $ thousands I I I 1.Works >1,000 ICB All 150-1,000 NCB First2 contracts <150 3 Quotations Firstcontract 2. Goods >150 ICB All 25-150 NCB First 2 contracts <25 Int'l&Nat.. Shopping None 3. Consulting Services -3.A Firms >loo QCBS,QBS,FBS,LCS,CQS All 4 0 0 `6 None Regardless of value Single Source All -3.B Individuals Regardless of value Comparison of 3 CVs inNone accordance with Chapter V o f the Guidelines I B. Assessment of the agency's capacityto implementprocurement Procurement activities will be carried out by the PCU already in place in the Finance Ministryto manage the ongoing Disaster Management and HN/AIDS Prevention and Control projects. The existing PCU will be expandedto include an administrator, housed in the Ministry of Finance, and an engineer seconded to the project by WASCO and located at the water utility's office, but with reporting responsibilities to the Minister o f Finance. The procurement Specialist and accountant hired for the Disaster Management and HIV projects will perform the same functions for the new project and the project Operational Manual will be consolidated with that o f the other two Bank projects, with separate annexes for each project. The Operational Manual already includes, in addition to the procurement procedures, the SBDs to be used for each procurement method, as well as model contracts for works, goods and consultant services An assessment o f the capacity o f the Disaster Management project PCU to implement procurement actions for that project was carried out by a Bank Procurement Specialist in January 2004. The assessment reviewed the organizational structure for implementing the previous project and the interaction between the PCU's Procurement Officer, the 51  Ministry's relevant central unit for administration and finance, and the Central Tenders Board. This January 2004 capacity assessment found the overall project risk for procurement to be AVERAGE and subsequent missions to supervise the ongoing project have confirmed that this rating i s still valid and that good progress has been made in implementing the Action Plan for procurement capacity adopted at that time. The PCU will be responsible for coordinating the implementation, procurement, disbursement and the financial management aspects o fthe project. Inaddition, to support the PCU and WASCO in the ICB process to award the turnkey works contract, an Engineering Consultant will be hired at the project's outset to provide the following services: (i)preparation o f preliminary designs and tender invitation documents for all civil, mechanical and electrical works; (ii) assistance to WASCO in the qualification o f contractors, including the preparation o f pre-qualification reports where necessary; (iii) assistance in the evaluation o f tenders and the preparation of tender evaluation reports, contract documents and negotiation o f contracts. C. ProcurementPlan The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. An indicative Procurement Plan has been agreed between the Borrower and the Project Team and i s available at the PCU in Castries and on file in the Bank's IRIS. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. D. Frequencyof ProcurementSupervision In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the PCU has recommended one full supervision mission every year to carry out post review o fprocurement actions. Detailsof the ProcurementArrangementsInvolvingInternationalCompetition. Goods andWorks andNon-consultingservices. (a) List o f contract Packages which will be procured following ICB and Direct contracting: 1 2 3 4 5 6 7 Ref. Contract Estimated Procurement P-Q Domestic Review No. (Description) Cost* Method Preference by Bank Bid- ments (yedno) (Prior / Post) Opening 1 Turnkey $7,290,000 ICB No No Prior ---k Dec. 2005 Contract 52  (b) All ICB Contracts and allDirect contracting willbe subject to prior review bythe Bank. ConsultingServices. (a) List o f Consulting Assignments with short-list o f international firms. Ref. No. Descriptionof Estimated Selection Review Expected Comments Assignment Cost Method by Bank Proposals (Prior I Submission Post) Date 1 Supervision of $200,000 QCBS Prior Nov. 2005 Works (b) Consultancy services estimated to cost above US$lOO,OOO per contract and Single Source selection o f consultants (firms) will be subject to prior review by the Bank. (c) Short lists composed entirely of nationalconsultants:Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract, may be composed entirelyo f national consultants inaccordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. 53  Annex 9: Cost BenefitAnalysis SAINT LUCIA: WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT The objective of this project i s to alleviate the water shortage in the northern part o f the island. The current shortage i s going to increase due to the rapid growth of the tourism sector, and the demand for water that this growth i s generating. To reduce the water shortage in the North, the project will increase the capacity of the water supply system from about 6 million gallons per day (MGD) to 10 MGD, through the upgrade o f the current water supply system and expansion o f the treatment plant capacity. I. Objective A cost-benefit analysis was used to determine the financial and economic feasibility, its distributive impact, and sensitivity analysis o f the investment activities to be financed under the Water Supply InfrastructureImprovementProject. 11. Methodology The project was evaluated from two different perspectives. Inthe financial analysis, the project was appraised measuring its flow o f costs andbenefits at market prices. Financial costs were obtained by multiplying the prices paid by WASCO for each input by the amount consumed o f such inputs. Financial benefits were assumed equal to the estimated flow o f financial revenues defined as current tariffs multiplied by the number o f customers (for non-metered), or by the estimated consumption (for metered). In the economic analysis, the project was appraised converting financial cash flows into economic cash flows by converting economic prices, by subtracting taxes and adding subsidies to financial costs. But instead o f using the financial benefits the economic benefits are calculated as the avoided costs o fwater rationing to capture the benefits from expected improvements inthe reliability o f the water supply. Once the economic and financial feasibility was determined, a distributive analysis was conducted to assess the impact o f each activity on specific groups of stakeholders, including the Government, WASCO and customers. Finally, the results o f the financial and economic analysis were tested against real world uncertainties by conducting a sensitivity analysis, which assessed the impact o f changes in critical assumptions on the feasibility o fthe project. Scenarios. "With" and "without" project scenarios were built to identifythe incremental costs and benefits associated with each investment component. The "with" project scenario considered the proposed investment plan and its associated targets, which are related to increase in supply capacity; no operational or commercial improvement was considered. The "without" project scenario considered that water service would continue unchanged without a change in coverage levels because o f the sharp increasing water shortages. 54  Incremental Costs and BeneJits. Costs and Benefits are expressed inconstant prices and projected over 30 years, the estimated lifetime o f the project, including the implementation period. The cash flows were discounted using a rate o f 12 percent, assumed to be a proxy o f the Saint Lucia's opportunity cost o f capital. Benefits o f the project include reduction or elimination o f rationing and intermittent water provision, and an increase o f water coverage. Financial benefits were estimated based on current tariffs, number o f customers, and volume o f water consumed. Economic benefits were estimated based on the cost o f rationing as a proxy o f the benefito f improving water service reliability. 111. Assumptions The basic data underlying this analysis comes from the Saint Lucia Government Statistics Department, and WASCO. Population. The 2004 populationwas estimated usingdata from the 1991and 2001 Census. The project area i s limitedto the Northernregionthat comprises Castries, Anse- La-Raye, Canaries, and Gros-Islet. Projections were made usingthe growth rate for the region, 1.92 percent per year. Table 1. Population in theNorth Region 2001 Annual Growth rate Census from1991to Peopleper Household Castries 60,390 1.51% 63,164 20,943 3.02 Anse-La Raye 5,954 1.69% 6,261 2,132 2.94 Canaries 1,741 -0.33% 1,724 621 2.77 Gros-Islet 19,409 3.69% 21,640 7,577 2.86 Total North 87,494 1.92% 92,789 31,274 2.97 Water Coverage. Current levels o f water coverage were calculated using data from the 2001 Census and WASCO'S commercial information. The results show that about 79 percent o f households are currently registered and billed by WASCO, while 5 percent o f households get the service through public pipe but are not billed. The actual coverage i s 84 percent; this means that approximately 77 thousand people receive water supply service, o f which 69 thousand are billed for their service. The coverage o f 84 percent was maintained for the "without project" scenario. In the "with project" scenario, coverage increased to 96 percent because o f the expansion o f the production capacity. Water Consumption. For metered residential customers the assumed consumption was 34 gal/day; corresponding to the average o f the 75 percent o f households metered; and for non-metered residential customers it was assumed 36 gal/day. Consumption from commercial and government customers was assumed to be 31 percent o f residential consumers' consumption, according to current pattems. For the tourism sector, consumption was differentiated between hotels and cruises. The hotels' consumption was estimated according to size, service provided (all-included or conventional), and 55  occupancy rate. The consumption varied from 709 gal/room/day in large hotels with all- included service, to 233 gal/room/day in small hotels. Since the occupancy rate i s not 100 percent all the time, consumption was adjusted taking into account actual occupancy rate, which was 65 percent in 2004. The adjusted average consumption per room was 202 gal/day, as it i s shown below. For ships the consumption used was 80 thousand gallon per visit. Hotel occupancy Hotel Consumption Consumption/room Type of hotels rate (Janualy- Capacity Per room (adjusted with occupancy rate) June 2004) # rooms gal/room/day gal/room/day Large hotels high water users 81% 216 709 575 Other larger hotels 49% 2,024 305 150 Small hotels 64% 914 233 150 Average 65% 3,154 311 202 Hotel Occupancy Rate. Itwas assumed constant at 65 percent duringthe lifetime o f the project, with exception o f 2007 when there will be a world cricket tournament. It was assumed that for two months, the hotel occupancy rate would be 100percent, raising the average occupancy rate for that year. Production Capacity was kept constant at its current level o f about 6 MGD in the "without project" scenario. On the other hand, for the "with project" scenario, capacity was increased to 10 MGD according to investmenttargets. Tarus were kept unchanged inreal prices inbothwith andwithout project scenarios. Revenues were calculated as the sum o f service charges for metered and non-metered consumers. For metered customers service charges were estimated as the volume o fwater billed multipliedby the corresponding tariff. For non-metered consumers service charges were estimated as the number o f non-metered connections multiplied by the fixed monthly charge. The result was affectedby the revenue collection rate. Revenue Collection Rate It i s definedas sales collected over total sales. Inboth scenarios remained at current level o f 78 percent, since the project does not include efficiency improvements. Investment. Inthe "without" project scenario, the onlyinvestment considered was the connection cost required to keep coverage constant. In the ``with" project scenario investment costs consisted of: (i) project costs (shown in table 3); (ii)complementary investment related with service expansion (connection costI5) during lifetime o f the project; and (iii) replacement o f mechanical equipment o f the Roseau pumpingstation, in years 10 and20 at a cost o fUS$350,000. l5I t i s assumed a cost per connection o f US$ 150. 56  ImprovementWorks 3.47 2. TA and Project Management 0.32 TotalBaseline Cost 3.79 3.79 Contingencies 0.17 0.19 0.37 TotalProject Cost 3.96 3.98 7.94 Non-Revenue Water. Current losses were estimated at 44.2 percent, o f which 38 percent corresponded to physical losses and 6 percent to commercial losses. For the "without" project scenario Unaccounted For Water was kept at its current level. For the "with" project scenario it was assumed that pipe replacement would reduce leakage and make physical losses reach 32 percent; commercial losses remainedunchanged. Operation and maintenance (O&M) costs included the cost o f labor, chemicals, power, maintenance, and general costs. O&M for the "without" project scenario was based on current unit costs, including the required maintenance to maintain the current coverage level. O&M costs estimated for the "with" project scenario were calculated by examining the expected impact o f the proposed project. Labor cost was calculated as the number o f employees per 1,000 water connections (labor productivity) multipliedby the number o f connections and the average cost per employee. Labor productivity was kept unchanged. Social contributions, including labor related taxes, were assumed at 30 percent o f nominal salaries16, 50 percent o f the social contribution does not return to workers and i s treated as a tax in the evaluation. The costs o f chemicals and electricity were calculated based on their unit cost and on projected volume o f water produced. Maintenance and administrative costs were calculated as percentages o f the sum o f labor, chemical and electricity costs. Taxes included a service charge on goods o f 4 percent, and 1.5 percent environmental levy, on investment and operating costs (excluding labor costs). Subsidy. The Government will fund the investment as part o f a plan to improve the operation o f the water company so as to facilitate the transfer o f the company to a private operator. As such, the investment costs are a subsidy due to the serious financial difficulties with which WASCO is faced. (For more details about the financial state o f the utility, see Annex 10). Yet, to enable the actual financial viability o f the project (not the utility), the analysis will also determine the financial viability o f the project in case such a subsidy would not exist. IV. Resultsof the Cost BenefitAnalysis FinancialResults TheJinancial viability o f the project was appraised from an investment point o f view, which excludes the cost o f financing and therefore allows a more accurate assessment of l6Socialcontributions include: NationalInsurance(5%), PAYEtaxes (13%), and other deductions of 12%. 57  the inherent financial return o f the project. Cost and benefits were measured at market prices o f June 2004 and calculated based on the assumptions presented in the previous section. The financial evaluation was undertaken with and without grant from the Government. Under the scenario inwhich WASCO receives the investment costs as a full subsidy from the government, the results show the high financial viability o f the project with a financial IRRof 172 percent and a net benefit o f about EC$23 million (Table 4). Incase no investment subsidy would be granted, the financial viability o f the project i s still secured. On the other hand, if WASCO pays for the project, the situation i s still financially viable as financial benefits exceed financial costs - with a net benefit o f EC$ 5 million and a financial IRRo f 15 percent. Table 4. Resultsof FinancialAnalysis (EC%000 ) Present Value ofFlows (EC$ 000) I Benefits 1 Costs I NetBenefit 1 IRR Financial Results WASCO gets full subsidy on projectcosts 41,632 18,121 22,911 172% WASCOpaysfor project cost. 41,632 36,222 5,409 15% EconomicResults The economic feasibility o f the project was appraised converting financial cash flows into economic cash flows by subtracting taxes and adding subsidies to the financial flow o f costs. The benefits associated with a reduction o f rationing were used as a proxy for the economic benefits o f the project. Cost of Rationing. About 13 percent of current water demand cannot be met today due to production capacity constraints. If no investments are made to increase the production capacity, the water shortage could reach up to 50 percent of total water demand by 2030. Alternatively, if the project is implemented, demand could be served and coverage could increase to attain 96 percent o f the population. The benefits o f avoiding rationing was used to estimate the benefits associated with improvement in service reliability for the different categories o fcustomers. The following assumptions were made: Households. To mitigate the impact o f rationing and intermittence, people normally store rainwater in tanks during the rainy season; while during the dry season they get water from other scarce alternative sources. Conservatively, the cost o f rationing during the rainy season was assumed to be zero, since most o f the households have already purchased storage tanks and therefore using rainwater i s essentially without costs for most households. During the dry season, the- benefits o f avoiding rationing were assumed equal to the average residential tariff, as very few alternative sources are available. The average rationing cost was estimated at EC$5.56 per 1,000 gallons. 58  0 Government. The cost o f rationing cost was assumedzero. 0 Hotels and Commerce. The cost o f rationing was definedas the opportunity cost o f the next best alternative: water from desalination plants. This solution was considered as one o f the alternatives for this project and its estimated cost was calculated at US$ 1.75/m3or EC$ 21.24 per 1,000 gallons. (For more details, see Annex 11 Economic and Technical Comparison o f Altematives.) These costs are very close to the current tariff paid by commercial consumers (EC$20 per 1,000 gallons) and hotels (EC$22 per 1,000 gallons). The fact that the cost o f desalination and the current WASCO tariff are more or less equal for these groups o f consumers means that any increase in WASCO tariffs for this group can easily result in this customer groups replacing water provision through WASCO by water provided through desalination plants. Such a replacement would seriously impact the revenue flows o f WASCO. 0 Ships. It was supposed a rationing cost o f zero, as cruise ships have sufficient alternatives in the OECS region to get their water provided. The current policy to provide water through cruise ships as a priority i s likely to be continued inthe near future. The results from the economic analysis show anet benefit o fEC$6 million andeconomic rate o fretum of 16 percent. Table 4. Results of Economic Analysis(EC$000 ) Present Value of Flows J Benefits costs Net BeneJit IRR Economic Results 39,667 33,865 5,803 16% V. DistributiveAnalysis The difference between economic and financial cash flows determines the winners and the losers with the project. The net profit o fEC$ 394,000 is equivalent to the difference betweenthe incremental economic and financial retum. Who pays for it and who benefits from it i s presented indetail inTable 5. 59  Table 5. Distributionof CostsandBenefits Present Value of Flows (EC$000) Without Subsidy on Withfull subsidy on Investment Investment Government Taxes On Investments 1,038 1,038 On operating costs 1,320 1,320 Total taxes 2,358 2,358 Subsidies on investment (17,506) Total Government 2,358 (15,148) Customers Current Customers Households 1,859 1,859 Non-residentialCustomers 7,879 7,879 Subtotal Current customers 9,738 9,738 New Customers (11.702) (11.702) Total Consumers I (1,964) (1,964) WASCO 17.506 I TotalBenefit I 394 I 394 I The Government will benefit with revenues from taxes for investment andoperating costs to be usedinthe project, but would pay a large cost inthe funding o f the investment, so that their net cost i s estimated at EC$15 million. The investment subsidy provided through the Government will benefit WASCO or in case the transaction i s successful the private operator. The bigwinners are current customers who would reap benefits for about EC$10 million. The loss showed for the new customers represents just the cost they would pay for the service. Because no data was available on the actual costs that non-connected households pay for water supply services nor about their water consumption behavior, it i s obvious that the calculation for new customers i s incomplete. It i s likely that new customers by getting access to the piped network will avoid costs inthe form o f time spent on hauling water, health impacts due to the consumption o f unsafe or insufficient water or cost o f scarce alternative sources. It should also benoted that increasing coverage ofresidential consumers i s likely to have a negative impact on the flows o frevenues o f WASCO as due to the cross subsidies in the tariff structure, the benefits o f getting unconnected households as new customers are lower than the cost o f serving them. VI, Sensitivity Analysis Sensitivity analysis. Based on a series o f sensitivity analyses, some variables were identified as those conveying major risks to the expected outcome. These variables include possible overruns in investment costs, overrun in operating and maintenance costs, possible delays in implementing the project, variation in consumption, changes in hotel occupancy rate, and changes inrationing costs. The impact and risk significance of theses variables i s summarized inTable 6. 60  Table 6. RiskVariablesand their Impact andRiskSignificance Investment cost overrun Direct impact on investmentcosts. Largely under management control. Conveys a moderate risk to the economic results. For values higher than 33 percent the project would have negative economic returns Direct impact on operating costs. Largely under management control. Conveys a ~Operating costs overrun high risk to the financial and economic results. Ifoperating costs overruns more than 4 percent the project would have a negative economic NPV. Investment Delay Direct impact on benefits. Largely under management control. Conveys a moderate riskto economic results. Iftheproject is delayed morethan two years, the returns are negative. Hotel Occupancy Rate Direct impact on benefits. It is under no management control. For values higher than50 percent the project would have positive economic returns. Consumption Direct impact on benefits. Based on consumer's decision and hence beyond management control. Conveys a moderate riskto the project. Ifconsumption decreases more than 12 percent, the economic results become negative. Rationing cost Direct impact on benefits. Based on customer's solution for avoiding rationing. For rationing cost 85 percent or higher to the assumedvalues, the economic returnsare Inconclusion, the project is financially and economically viable under the assumptions depicted in the description of the utility presented in the main text and in Annex 10 of this PAD. The financial IRR of the project is 15 percent, while the economic rate of return is 16 percent - assuming a net benefit when the project is implemented. 61  Annex 10: FinancialAnalysis of the Current andFutureWater Utility SAINT LUC1A:WATERSUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT The degree to which the final objectives o f the proposedproject, as presented in Section A.2 o f the main text o f this PAD, will be achieved i s directly linked to the improvement o f the level o f service and o f the operational performance o f WASCO. While the project shows a positive Internal Rate o f Return even under current management arrangements, the performance o f the interventions financed by the project will depend on the performance o f WASCO. While Annex 9 evaluates the economic and financial costs and benefits o f the proposed investment, this Annex analyzes the financial performance of WASCO as well as the impact o f the proposed investment and the transaction on the performance o f the future water utility. This Annex thus provides an assessment o f WASCO and, inparticular, o f its financial capacity to develop into a sustainable entity. Background In March 1999, the GoSL passed into law the first Water & Sewerage Act which redefined the roles and responsibilities o f governmental agencies and prescribes a regulatory and operating framework for the development o f Saint Lucia's water sector. Over the last six years, the Government has implemented certain elements o f the Act, in parallel with several political and managerial initiatives, in order to reinvigorate the nation's water sector. A new Water & Sewerage Act has been enacted in Parliament in March 2005. The above mentionedinitiatives include: 0 the transformation o f the water utility from a state agency (WASA) to a government owned corporation (WASCO); 0 the replacement o f WASCO's board o f directors with private sector representatives, and the appointment o f a new General Manager and a Managing Director who were expected to bringa greater business-like culture to the utility; 0 a down-sizing effort, supported largely through voluntary retirements, that has decreased the permanent payroll from about 320 staff to about 279 staff;. 0 a one time increase inthe average water tariff in 2000, the first increase innearly a decade; 0 the creation o f a National Water and Sewerage Commission to regulate the sector (as defined inthe Act passed inMarch, 1999) as well as the actual appointment o f the eight commissioners. While these initiatives and the corporatization were intended to provide WASCO with a basis for performance improvement, these changes alone have not been sufficient to break the cycle o f consumer dissatisfaction, financial decay, and poor service. The opening o f WASCO to the private sector is expected to resolve three main constraints that the water and sewerage sector in Saint Lucia currently faces: 62  dilapidated state o f existing water and sewerage infrastructure system (technical constraints) inability o f WASCO to undertakeurgentlyneededcapital investments and to service outstanding debt (financial constraints) need for even greater managerial and operational expertise within WASCO (managerial constraints). Current Performance WASCO's current financial situation i s quite poor, having deteriorated since 2000 (see table o f indicators below) as a result o f low operating efficiency (e.g., highNon-revenue Water, or, NRW), a low and decreasing collection rate for domestic and commercial customers, and limitedinvestments inthe system. Table 1:WASCO's Summary FinancialStatements. Incomestatement [EC$`0001 1 - 20001 20011. 20021 20031 20041 Operating Revenues 33,726 32,852 33,733 31,187 31,595 Bad Debts Expense (3,471) (6,901) (2,143) (4,322) (1,758) Operating Expenses (22,935) (24,050) (22,688) (24,426) (25,150) N e t Operating Income 7,271 1,902 8,902 2,438 4,690 Depreciation (10,596) (9,778) (9,938) (10,725) (10,179) N e t finance costs (5,679) (4,815) (4,744) (4,335) (4,213) Amortisation o f deferredcapital assistance 2,837 2,626 2,680 2,721 2,533 Unrealized (1oss)igainon foreign exchange 3,253 1,119 (3,114) (4,374) (2,344) Other incomel(1oss) (156) 9 0 7 352 N e t incomel(1oss) for the year (3,069) (8,937) (6,214) (14,268) (9,161) Some concrete indications of this deterioration are a decrease in net operating margin (from 127.5 percent in 2000 to 108.5 percent in 2003), low liquidity (demonstrated by a net decrease incash in2 o f 3 years between2000 and2002 and a poor current ratio, and a cash balance o f only EC$200,000 at end 2003), an increase inthe company's debt burden andnet trade receivables, and an erosiono f the fixed asset base and shareholder's equity. Table2: WASCO'sSummaryFinancialStatements.Cash flow statement [EC$`0001 r +. aooO~ 2001~ a0021 2003 1 (7.177) 95 2971 23'72 (7329) (3D42) (3.414) (2207) 11999 2973 301 (343) The direct impact o f the company's operating inefficiency is most closely reflected inthe company's net operating income - also known as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The company's EBITDA margin (EBITDNOperating Revenues), fell from 22 percent in 2000 to 15 percent in 2004. A financially sound utility would generally be expected to register an EBITDA margin greater than 25 to 30 percent. Low EBITDA margins may indicate that the utility's tariff levels are too low andor that the operating efficiency i s poor. 63  Staff costs represented about 46.5 percent o f operating costs in WASCO in 2003. WASCO's efficiency - whether on active or total customers - compares favorably with other water utilities inthe region, however between 2000 and2003 average compensation per employee increased approximately 12percent innominal terms. Table 3: StaffCost Analysis" I JLne 20001 20011 20021 20031 % 20041 Primary Data (1) Number of Employees 274 293 305 294 279 (2) Number of Total Customers 47,493 49,449 50,964 51,963 (3) Number of DisconnectedCustomers 11,760 (4) Number of Active Customers 40,203 (5) Total Staff Costs (in EC$ `000) I / 10,170 10,727 12,025 12,199 12,523 (6) Total OPEX (in EC$ `000)21 26,456 30,951 24,831 28,749 26,908 Indicators (7) Employees per 1000Customers (total) 6.2 6.2 5.8 5.4 (8) Employees per 1000Customers (active) 6.9 (9) Average annual compensation per employee (in EC$ `000) 37.1 36.6 39.4 41.5 44.9 (IO) Staff Costs as a % of OPEX 38.4% 34.7% 48.4% 42.4% 46.5% Notes: Source are audited financial statements (2000-2003),2004 unauditedfinancial statements, customer billing system, I / Salaries and wages plus gratuities and pensions. 21Includes bad debt expenses, excludes depreciation. WASCO's total billings remained stagnant from 2001 through 2004. Domestic customers account for about one-half o f the company's total billings. Hotels are the second largest customer category interms o fbilling. Table 4: CustomerBillingsBreakdown" in EC$ `000 Domestic 15,799 16,440 16,008 16,153 49% 51% 51% 51% Hotels 6,300 5,675 5,686 6,124 20% 18% 18% 19% Commercial 4,588 4,759 4,740 5,031 14% 15% 15% 16% Government 4,096 4,790 4,033 3,402 13% 15% 13% 11% Boats, Ships, & Tankers 1,261 764 966 973 4% 2% 3% 3% WASCO's overall collection efficiency (collections as a percent o f billings) increased in 2003 as a result o f extraordinary payments by the Government for past arrears. In fact, receipts exceeded billings in 2003, yielding a collection ratio o f 102 percent. Excluding receipts from Government, the collection ratio was considerably lower than that (83 percent). Collections from domestic customers - which account for about one-half o f billings and thus have a high incidence on the company's overall rate - dropped to 80 percent in2003, and commercial collections to 71 percent. The company's net reported loss in 2003 was EC$14.3 million. In fact, despite the fact that WASCO i s currently not paying interest nor principal payments on most o f its debt, the company demonstrates considerable liquidity problems. Excluding debt, related obligations from WASCO's current liabilities yields a current ratio o f 0.80, which i s still below the minimum that would be considered financially sound. The company also has "Source:auditedfinancialstatements,through2003,unauditedfinancialstatements2004. '* Source: Wasco Finance Department 64  been carrying an overdraft totaling approximately EC$3 million and, at end-2003 WASCO only hadEC$200,000 inthe bank. These liquidity problems are directly related to the fact that the company i s not generating the cash from operations necessary to cover current obligations as well as finance required capital investments. WASCO's capital investments between 2001 and 2002 were financed primarily through contributions from the Government as well as other contributors such as bilateral and multilateral development agencies. About EC$7 million o f the EC$10.9 million invested during this period were financed with such contributions. At end-2003, WASCO's borrowings totaled approximately EC$90 million. EC$80 million o f this i s owed to GOSL (consisting o f a number o f loans in multiple currencies made directly to GOSL and then on-lent to WASCO), EC$7 million o f this is a commercial bank loan, and the remaining EC$3 million i s a bank overdraft. Given its cash flow difficulties, WASCO i s currently only servicing its commercial bank loan and the bank overdraft. Onthe loanwith GOSL, WASCO continues accruing interest. Table 5: WASCO's SummaryFinancialStatements.Balancesheet [EC$'0001 I' ' XiOOl 20011' 20021 20031 16.318 12.156 15.661 10923 4631-53l.Q43634.'143 211109 181162 20~329 15665 191.603 186.169 182.821 115.491 TOMAS$& 313613 204874 202851 191156 " d " i i e J + L Q m t h f i m k 63,392 30052 37.451 41,494 aheTclrrert=s s 1 6 9 6 6 A 2 . 3 & l u l 9 T o t a l m l t ~ s 81.464 46.818 52.189 57314 L r m g ~ I i ~ e r ; LJr@rm debt 57374 51.668 49.772 48.490 lhfewdcapaalassisrmre 64.492 63232 61907 59820 Enployrretirmeviatdi@n 644 865 2485 2632 Totalbngtrmlipbilitms 122.710 115,766 113.765 110942 n " c ' r qui* 8.439 42.250 36.897 22901 TotdIiabiWicsBrE~ a i a m 204834 ana851 191.156 The increase in debt since 2001 has been accompanied by an even faster decrease in shareholder's equity (due to the accumulation o f net losses). As a result the company's total debt to equityratio has risen from 1.9 in2001 to 3.35 in2003. WASCO's current debt burden, as well as its general financial situation, has prevented the company from accessing funds required for financing its capital investment requirements. From 2000 to 2003, annual depreciation charges have been about twice as great as capital investments. Since depreciation charges exceeded capital investments, the company's net fixed assets fell from EC$192 million in2000 to EC$175 million in2003. 65  This decrease (combined with a rise inthe company's number o f customers) ledto a fall o f about 28 percent in the value o f gross fixed assets per customer, a worrying indicator o fthe condition of buried assets and o f security o f service. Financial Projection: assumptions The main tariff assumptions used to derive the revenue projections are that the current tariff structures and consumption bands are maintained throughout the projection period. Beginning in 2006, tariffs are adjusted annually at the projected rate o f local inflation. In 2009, a 15 percent increase will apply across all tariff categories. WASCO's billing system exhibits significant deficiencies, thereby resulting in the need for adjustments (reductions) to gross revenues during the past few years (equal to 7 percent in 2003). The model assumes a reduction o f 5 percent o f water charges untilnew customer database has been implemented. The approach and assumptions used in the demand forecast have been developed by Stone & Webster using the year 2003 water balance as the base year from which projections of consumption are made up to the year 2015 using a component-based approach. The base case demand scenario i s based on an estimated level o f suppressed demand. Inthe early years o f the projection period, projected production i s not sufficient to meet this level o f suppressed demand and unmet demand i s allocated by the model proportionally across all customers based on the percent o f forecast demand that i s not met. Projected staff costs are based on the actual number o f employees and the average compensation package per employee. The projected number o f employees i s derived based on attaining a target level o f 5 employees per 1000customers based on a 5 percent annual decrease in this indicator beginning in 200619. The current average annual compensation per employee i s based on costs presented as "salaries and wages" as well as "gratuities and pension" in WASCO's audited financial statements. The base case assumes that this average compensation will increase annually at the rate o f local inflation plus2 percent (resultinginreal increase o f 2 percent per year). Since water production currently accounts for over 90 percent o f the electricity consumed by WASCO, projections o f electricity expenses are based on the projected volume o f water produced. As a result o f the fact that WASCO has recently hired consultants to determine areas where efficiency savings could be realized, the model assumes an annual increase o f 2 percent in the efficiency o f the use o f electricity per gallon o f water produced, capped at 10 percent with respect to the level registered in 2003. The unit cost o f electricity is expected to increase at the rate o f inflation. Basedonemployeeand customer figures for June 2004, WASCO currentlyhas about 6.9 employees per 1000 customers. 66  The operations and maintenance costs primarily reflect those associated with repair and maintenance o f structures, equipment and vehicles. In2003, they totaled about 13 percent o f WASCO's total operating costs. The model assumes annual expenditures on operations and maintenance equivalent to 2.0 percent o f the company's net fixed asset value. This percent i s lower than WASCO's average for the past 4 years (in the order o f 2.1 percent) due to the capital investments in maintenance foreseen in the projected capital investment plan. The treatment o f water currently accounts for the vast majority o f expenses on chemicals at WASCO. For this reason, projections o f expenses on chemicals are based on the projected volume o f water producedby all sources other than the desalination plants. The base case assumes that the unit cost o f chemicals will increase annually at the local rate o f inflation. In 2003, WASCO spent over EC$700,000 to truck water to customers. The model assumes that untilproduction i s increased to meet full demand inthe North and the South separately, WASCO will have trucking expenses o f EC$400,000 in the North and EC$300,000 inthe South. Inscenarios that include the development anduse o f desalination plants, all o f the costs (including electricity) o f operating the desalination plants are calculated. The fixed operating costs are equal to 12.5 percent o f the gross cumulative investment in desalinationplants. The base case assumes a variable cost o f operation o f the desalination plantso fEC$14.77 per thousand gallons (thisis equivalent to US$1.5 per cubic meter). All o f the operating costs of the future wastewater schemes projected in the capital investmentplan are calculated within this cost component. For membranetreatment, the base case assumes an operating cost o f EC$0.15 per person per day. In the case o f treatment through extended aeration the assumption i s EC$O.18. Finally, for treatment via lagoons the assumed cost i s EC$O.Ol perpersonper day. WASCO's average o f bad debts expense as a percent o f water and sewerage revenues in 2002 and 2003 was about 6 percent. The model assumes that this ratio will be equal to 5 percent throughout the projection period. The model also assumes that WASCO will beginpaying a levy to the National Water and Sewerage Commission in 2007. The levy will be equivalent to approximately US$500,000 and will increase on an annual basis at the rate o f local inflation. In 2003, administrative expenses totaled approximately EC$2 million (just below 8 percent o f WASCO's total operating costs). The largest items within this category are utility expenses (about 23 percent of total in 2003); stationery and office supplies; professional fees; training; insurance; and licenses, fees and subscriptions. Beginning with the total in 2003, the base case assumes that administrative expenses will increase annually at the rate o f local inflation. Projected depreciation i s the sum o f depreciation on existing assets plus depreciation on the assets to be put inplace during the life o f the projection period. The model assumes 67  an average annual depreciation rate o f 2 percent o f the gross value o f the company's assets. The following assumptions were used for project financing and capital structure: the private consortium would purchase 65 percent o f shareholding in WASCO, whilst N I C would purchase 15 percent, for a total o fUS$15 million. The base case scenario assumes that all current borrowing from the Government of Saint Lucia is written off in 2005. As a result, beginning in2006, the model does not project any interest payment on this debt. The model assumes that 60 percent o f capital investments will be financed with loans from commercial loans. Internally generated cash i s assumed to be the source o f the remaining 40 percent of financing. The assumed terms o f the future loans for financing the projected capital investment plan are: 12 years to repay principle, and an interest rate o f 8 percent. The base case assumes a dividendpayout ratio o f 65 percent for any year in which the company registers apositive net income. Based on the current Performance and the assumed performance improvements in the future, WASCO's financial situation will gradually improve over the next five years, as shown inthe summary table inthe next page. Financial Projection: results The results o f the financial model that has been built to calculate financial projections under the above listed assumptions show a significant improvement o f the financial health o f WASCO, within a five year period from the start o f the project. A significant part o f the improvement, and specifically the large increase in revenue, can be directly associated with the investments financed under the context o f this project; while the equally significant improvement on the cost side assumed inthe model, i s assumed to be the impact o f the strategy o f the new management brought by the new investors. Given the assumptions incorporated in the financial model, the projected results can provide a reasonable approximation of the future performance o f WASCO. The results o f the model show drastic improvement of liquidity, linked to increased revenues and the injection o f fresh capital, the returnto profitability and to the ability to sustain a moderate level o f indebtedness and to finance capital investments in part through internally generated funds. The improvement shown by a selected number o f indicators i s evident. The model calculates that over the next five years the EBITDA margin will increase from the current value o f 8 percent to over 40 percent. This number i s in line with comparable well- performing water companies . The operating ratio is a good indicator o f the capacity o f a company to finance investments: it i s calculated as the ratio o f operating expenses over operating revenues. The lower the ratio, the higher the percentage o f operating revenues that is available to finance capital investments. In the case o f WASCO, the model shows a decrease fiom the current value o f92 percent to a very healthy 55 percent. 68  From a financial sustainability point o f view, the debt service coverage ratio2', an indicator o f the ability o f a company to service its debt and interest repayments, will increase from 1.1 to above 5. The quick ratio21 will similarly increase from an unsustainable 0.3 to over 2. Conclusions From an investor's perspective, the retum on invested capital in WASCO will have to reach values above 12 percent. The proposed financing scheme to reach that target i s robust in its structure, achievable operationally and targeted to interventions that should significantly improve the economic sustainability o f WASCO. The cash injection anticipated from the transaction, the proposed investment,andthe efficiencies that can be achieved by commercial operation o f the utility present an opportunity for investment in an economically sustainable utility that can produce a positive retum on invested capital after year one. This can be achieved under current tariff levels, adjusted for inflation, with only modest increases inreal average tariffs after service levels havebeenimproved. ~~ 2o The debt service coverage ratio i s calculated as EBITDAover the sumo finterest andprincipal repayment. The quick ratio i s calculated as current assets (minus inventories), over current liabilities. 69  ...._ , . - . , . Table 6: Selected Financial Indicators . _ _ . . I .-. . . . . . . . , . _ . I .- . . . . . . . . m a Historiel Hismricl Historic1 Historic 20001 2001l 20021 2003 j . . . . ..- . . . . . . . . . i, I 8 -. . Worhg capital I. I - O P E - - 26,456 ' " 30,951 24,831 28,749 26,908 29,079 29,599 30,775 31,328 33,164 ~ 1 1 "- 32295 , 3 months ofCashOPEX 6,614 , 7,738 6,208 , 7,187 6,727 7,270 7,400 I 7,694 7,832 8,099 8,291 EBITDA 7,271 I 1,902 8,902 2,438 4,690 4,215 5,781 1 8,471 15,289 26,333 28,103 OperatingRevenues 33,726 32,852 I 33,733 I 31,187 31,598 33,293 35,380 ' 39,246 46,617 58,728 61,267 EBITDAMarginPo) 21 6% 58%! 264% 7.8% 14.8% 12.7% I 16.3% 21 6% 328% 44 8% 45 9% I I 'DebtSenrice I n t e i e s t ev-Ense_s_ QL%? G819 Principlerepayments (1,526: (1,659) TotalDebtSemce (4,021: (5,477) Opera- Ratio TotalOperakgExpenses 26,456 30,951 24,831 28,749 26.908 I 29,079 29,599 30,775 31,328 32,395 33,164 I OperatrngRevenues --------- 33,726 32,852 33,733 31,187 31,598 33,293 35,380 39,246 46,617 58,728 61,267 I 0pexlReven;e 78% 94%1 74% 92% 85%O' 87% 84% 78% 67% 554: 54% I Debt Senrice Coverage Raiio EBITDA 4,690 4,215 5,781 8,471 , 15,289 26,333 28,103 DebtSemce 4,266 I 1,878 1,876 4,895 2,510 4,021 5,477 EBITDAlDebtSemce 110 ' 224 3 08 1.73 6.09 6.55 5.13 I I QuickRatia Current assets rnventones - 18,413 15,487 17,796 !2,867 15,049 18,232 43,347 34,531 ' _- 35,217 33,189 30,385 I Current Labilities 81,454 -- -- -- 4,818 52,189 57,314 59,438 19,976 22,678 17,456 15,083 15,216 17,480 Currentratio 0 2 0 3 0 3 0 2 0.3 1 0.9 1.9 2.o 2 3 22 1 7 I I i I Retornoninvestedcapital I I NOPLAT (8,286: (5,489) (6,061: 3,972 5,639 11,755 22,09C 22,768 Investedcapital L131211 -- -- 123,740 17,151 71,806 92,105 97,858 120,221 142,271 ~- ROIC -6% -4%; -35% 6% 6%1 129 189 16% 70  Tablc 7: Rslnncc Sftcct  72  I`f I C 11'1 '1 10.596 9,778 9,938 10,725 10.179 10,276 1.809 2,832 3,534 4243 5,334 ElKr ( 1 , t . 11 73  Annex 11: Audited2004 FinancialStatements: WASCO SAINT LUCIA:WATER SUPPLYINFRASTRUCTUREIMPROVEMENT PROJECT Water and Sewerage Company Incorporated Financial Statements December31,2004 (expressed inEastern Caribbeandollars) 74  Pricewaterhousecoopers Pointe Seraphine P.O. Box 195 March 31,2005 Castries St. Lucia, W.I. Telephone (758) 456.2600 Facsimile (75fl) 452.1061 To the Shareholders of Water and Sewerage Company Incorporated We have audited the accompanying balance sheetofWater and Sewerage Company Incorporated(the Company), as of December31, 2004 and the related statements ofincome, changes in shareholders' equity and cashflows for the year then ended.These financial statementsare the responsibility o fthe Company's management,Our responsibility is to express an opinion on these financial statements basedon our audit. We conducted our audit in accordancewith International Standardson Auditing. Those standards require that we plan andperform the audit to obtain reasonableassurance about whether the financial statements are free o f material misstatement.An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures inthe financial statements. An audit also includes assessingthe accountingprinciples usedand significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audit providesa reasonablebasisfor our opinion. Our examination indicated seriousdeficiencies in internal control over bade receivables. As a result, we were unableto obtain direct confirmationo ftrade receivable balances or to satisfy ourselves concerning the validity or collectibility ofthese accountsby altemative means. Accordingly, we were unableto determine whether adjustments were requiredin respecto ftrade receivable balances, sales, bad debt expense, loss for the year, deficit and working capital. Inour opinion, exceptfor the effects of adjustments, ifany, which we might have determined to be necessary had we been able to satisfy ourselves as to the trade receivable balancesindicatedinthe preceding paragraph, these financial statements presentfairly, in all material respects, the financial positiono fthe Companyas o f December 3 1,2004 andthe results of its operations and cash flows for the year then ended in accordance with InternationalFinancial Reporting Standards. Without further qualifying our opinion, we draw attention to the going concem issue inNote 2 to the financial statements which indicatesthat the Company incurred a loss of $8,575,754 for the year endedDecember 31, 2004 (2003 $14,267,955) and, as o fthat date, the Company's current liabilities exceeded it's current assets by - $46,831,883 (2003 - $41,648,421) and had a deficit of $41,064,054 (2003 $32,488,300). We also draw - attention to share capital in Note 13 and contingent liabilities inNote 19 to the financial statements. Chartered Accountants Antigua ClrariehW. A. Walwyii RolxnI Wlkinw,n Bilrbodoc I.AndrewMarvhuw PhilipSI. E.Atkinron R.MlchaelB y w Ashley R. Ciarke GloriaR.Eduanlo WayneI.Fields MdurlceA Franklin MarmA. Halch StephenA. Jardine Lindell E.Nwe Erian0.Rohllixln Chriwphrr 5. Sambrano R. Charis 0.Tihbiti Ann M.Walloce-Etco~k Mlchrllrl.wll~te-ving Grenada Phil#p%,E. Alkmion ireritlent inBarhadmi SI l u i i a Anlliom, D Alkmon RlrhardN.C. Peiwkirr 75  Water and SewerageCompany Incorporated Balance Sheet As at December31,2004 (expressed inEasternCaribbeandollars) 2004 s 2003s Assets Currentassets Cashandcashequivalents(Note 5) 500397 200,405 Trade andother receivables(Note 6) ,707,068 1 ,666,185 Inventories (Note 7) ,565,061 ,798,023 16,772,726 15,665,213 Property,plantand equipment(Note 8) 168,219,267 175,491,199 Total assets 184,991,993 191,156,412 Liabilities CurrentLiabilities Borrowings(Note 9) 33,099,255 28,383,5 I4 Trade andother payables(Note 10) 28,441,681 26,866,447 Provisionfor other liabilitiesand charges (Note 19) 2,063,673 2,063,673 63,604,609 51,3 13,634 Borrowings(Note 9) 47,139,845 48,490,112 Employeeretirementobligation(Note 11) 2,674,638 2,631,556 Deferredcapitalassistance(Note 12) 57,247,911 59,820,366 Totalliabilities 170,667,003 168,255,668 Equity Sharecapital(Note 13) - - Contributedcapital 55389,044 55,389,044 Deficit (41,064,054) (32,488,300) Totalequity 14,324,990 22,900,744 Totalliabilitiesand equity 184,991,993 191,l56,4 12 Approved by the Boardof Directorson March31,2005 76  Water and Sewerage Company Incorporated Statementof Income For the year endedDecember31,2004 - (expressed in EasternCaribbean dollars) 2004 2003 $ $ Sales 32,272,369 31,186,559 Direct expenses (18,908,611) (1 7,808,906)- Grossprofit 13,363,758 13,377,653 Administrative expenses (18,463,054) (21,944,857) Other gains, net (Note 16) 2,721,514 2,728,082 , Operatingloss (2,377,782) (5,839,122) Financecosts (Note 17) (6,197,972) (8,428,833) Loss for the year (8,575,754) (14,267,955) 77  Water and Sewerage Company Incorporated Statement of Changes in Shareholders' Equity For the year ended December31,2004 (expressed in EastemCaribbeandollars) 2004s 2003 $ Contributedcapital At beginningofyear 55,389,044 - 55,117,206 Contributionsfrom the Governmentof St. Lucia 271,838 At end of year 55,389,044 55,389,044 Deficit At beginningofyear (32,488,300) (18,220,345) Lossfor the year (8,575,754) (14,267,955) At end ofyear (41,064,054) (32,488,300) Equity, end ofyear 14,324,990 22,900,744 78  Water and SewerageCompany Incorporated Notes to Financial Statements December 31,2004 (expressedin EasternCaribbean dollars) 1 Generalinformation The Water and SewerageAuthority Act, 1984was repealed on February25, 1999. However, all subordinate legislation, orders, notices and loanapprovalresolutionsmadeunderthe Water and SewerageAuthority Act, 1984, and in force immediately beforeFebruary25, 1999,remainedin force. EffectiveNovember 1, 1999, the operationsof Water and Sewerage Authority (the Authority)were transferredto a new corporate entity, Water and Sewerage Company Incorporated(the Company).The new Companywas incorporatedunder the laws of St. Lucia. Like the Authority, Water and Sewerage Company Incorporated is wholly-ownedby the Government of St. Lucia.All assets, liabilities and obligationswith the exceptionofcertain lands were transferred to the Company. The Company is exempt from the payment ofany dutiesor taxes. The registeredoffice ofthe Company is situatedat L'anse Road. 2 Summary of significant accounting policies The principalaccountingpoliciesapplied inthe preparationofthese financial statementsare set out below. These policieshavebeenconsistentlyapplied to all years presented,unlessotherwisestated. Going concern The Companyincurred a loss o f$8,575,754 for the year endedDecember31,2004 and hadadeficit of $41,064,054 at December 31,2004 (2003 deficiency of$46,831,883 (2003 - $41,648,421) - $32,488,300).At that date, the Companyalso hadaworking capital was in defaultofcertain loansto the Governmentof St. Lucia and had acontingentliability as indicatedinNote 19. The ability ofthe Company to continue to operate as aviable entity is dependenton improvement o fthe collection ofwater and sewerage charges, the successfulimplementationofmechanismsdesigned to restructure its operations andthe continuedfinancialsupportofthe Governmentof St. Luciaandother financial institutions. Basis of preparation The financial statementsofthe Water and Sewerage Company Incorporatedhavebeenpreparedinaccordance with InternationalFinancialReportingStandards(IFFS) andunder the historical cost convention. The preparationof financialstatementsin conformity with JFRSrequiresthe use ofcertaincritical accounting estimates. It also requiresmanagementto exerciseitsjudgement in the process of applyingthe Company's accountingpolicies.The areas involvingahigherdegreeofjudgement or complexity, or areas where assumptions and estimates are significantto the financial statements, are disclosedinNote 4. Cash and cash equivalents Cash and cash equivalents include cash on hand, depositsheldon call with banks and bankoverdrafts. Bank overdrafts are is shownwithin borrowings in current liabilitieson the balancesheet. Trade receivables Trade receivables are recognizedinitially at fair value and subsequentlymeasured at amortizedcost usingthe effectiveinterestmethod, less provision for impairment.A provision for trade receivablesis establishedwhere there is objectiveevidencethat the Company will not be able to collectthe amountsdue accordingto the original termsof receivables.The amountof the provision is the differencebetween the asset's carryingamount and the presentvalue of estimatedfuture cash flows, discountedat the effective interestrate. The provision is recognised in the incoine statement. 79  Water and SewerageCompanyIncorporated Statement o fCashFlows For the year ended December31,2004 (expressed inEasternCaribbean dollars) 2004 s 2003s Cash flows from operatingactivities Loss for the year (8,575,754) (14,267,955) Adjustment for: Gain on disposal o fproperty, plant and equipment(Note 16) (2,697) (6,751) Depreciation (Notes 8 and 14) 10,085,212 10,724,5 19 Amortisation of deferred capital assistance (Notes 12 and 16) (2,718,817) (2,721,331) Finance costs (Note 17) 6,197,972 8,428,833 Operating profit before working capital changes 4,985,916 2,157,315 (Increase)/decrease in trade and other receivables (4,411,321) 5,037,041 Decrease/(increase)in inventories 232862 (559,095) Increase/(decrease) intrade and other payables 1,575,234 (3,530,183) Cash generated from operations 2,382,791 3,105,078 Interest paid (726,441) (733,349) Net cash generated from operatingactivities 1,656,350 2,371,729 Cashflows from investingactivities Purchaseofproperty, plant and equipment (Note 8) (2,833,083) (3,398,997) Proceedsfrom disposal of plant and equipment 22,500 11,499 Increase inemployee retirement obligation 43,082 546,206 Increase in deferred capital assistance(Note 12) 146,362 634,2 17 Net cash usedin investing activities (2,62 1,139) (2,207,075) Cash flows from financingactivities Repayment of borrowings (277,044) (614,589) Proceeds from borrowings 1,898,726 - Increase in contributedcapital - 271,838 Net cash generated from/(used in) financing activities 1,621,682 (342,75 I) Net increase/(decrease)in cashand bank overdrafts 656,893 (178,097) Cash and bank overdrafts at beginningofyear (2,799,500) (2,621,403) Cash and bank overdrafts at endingof year (Note 5) (2,142,607) (2,799,500) 80  Water and SewerageCompany Incorporated Notes to FinancialStatements December 31,2004 (expressed in EasternCaribbean dollars) 1 General information The Water and SewerageAuthority Act, 1984 was repealedon February 25, 1999.However, all subordinate legislation, orders, noticesand loan approval resolutions made under the Water and SewerageAuthority Act, 1984, and in force immediately before February 25, 1999,remained inforce. EffectiveNovember 1, 1999,the operations o fWater and SewerageAuthority (the Authority) were transferredto a new corporate entity, Water and Sewerage CompanyIncorporated(the Company). The new Company was incorporated under the laws o f St. Lucia. Like the Authority, Water and Sewerage CompanyIncorporated is wholly-owned by the Government of St. Lucia. All assets, liabilitiesand obligations with the exception o fcertain lands were transferred to the Company. The Company is exempt from the payment o f any duties or taxes. The registered oftice o fthe Company is situated at L`anse Road. 2 Summary o f significant accounting policies The principal accounting policies applied in the preparationo fthese financial statements are set out below, These policies have been consistently applied to all years presented, unless otherwise stated. Going concern The Company incurred a loss o f$8,575,754 for the year ended December 31,2004 and hada deficit o f $41,064,054 at December 31,2004 (2003 deficiency of $46,831,883 (2003 - $41,648,421) - $32,488,300). At that date, the Company also had aworking capital was in default o f certain loans to the Government o f St. Lucia and had a contingent liability as indicated inNote 19. The ability o fthe Companyto continue to operateas a viable entity is dependenton improvement o fthe collection o fwater and sewerage charges, the successful implementationof mechanisms designedto restructure its operations and the continued financial support o fthe Government o f St. Lucia and other financial institutions. Basis of preparation The financial statements ofthe Water and Sewerage CompanyIncorporated have beenprepared in accordance with International FinancialReporting Standards(IFRS) andunderthe historicalcost convention. The preparationo ffinancial statementsin conformity with IFRSrequires the use o fcertain critical accounting estimates. It also requiresmanagementto exercise itsjudgement in the process o fapplyingthe Company's accountingpolicies. The areas involving a higher degree ofjudgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed inNote 4. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits heldon call with banks and bank overdrafts. Bank overdrafts are is shown within borrowings in current liabilities on the balance sheet. Trade receivables Trade receivables are recognized initially at fair value and subsequentlymeasured at amortized cost using the effective interest method, less provision for impairment. A provision for trade receivables is established where there is objective evidencethat the Company will not be able to collect the amounts due according to the original terms o f receivables. The amount of the provision is the difference between the asset's carrying amount and the presentvalue o festimated future cash flows, discounted at the effective interest rate. The provision is recognised in the income statement, 81  Water and Sewerage Company Incorporated Notesto Financial Statements December 31,2004 (expressed inEasternCaribbean dollars) z Summary of significant accounting policies...continued Deferred capital assistance Capital assistance, primarily in the form of grants receivedfrom sources other thanthe Government of St. Lucia, are recognisedat their fair value when there is areasonableassurancethat the monieswill bereceivedand the Companywill comply with the attachedconditions. Capital assistancerelatingto costs are deferredand recognisedinthe incomestatementover the period necessary to matchthem with the costs that they are intendedto compensate. Capital assistance relatingto the purchaseofproperty, plant and equipmentare includedin non-currentliabilities as deferredcapital assistanceand are creditedto the income statementon a straight-line basis over the expected lives ofthe relatedassets. Contributed capital Contributed capital representsprimarily moniesreceivedor liabilities waived from the Govemment of St. Lucia and are recognisedat fair value inthe periodin which they are receivedwaived. Provisions Provisions for environmentalrestoration, restructuringcosts and legalclaims arerecognisedwhen the Company ha apresent legal or constructive obligation as a resultofpast events; it is more likely than not that an outflow of resourceswill berequiredto settle the obligation;andthe amount hasbeenreliably estimated. Provisionsare not recognisedfor future operating losses. Where there are a number ofsimilar obligations, the likelihoodthat an outflow will be requiredin settlement is determinedby consideringthe class ofobligationas awhole. A provisionis recognisedeven ifthe likelihoodof an outflow with respectto any one item includedinthe same class of obligationsmay be small. Revenue recognition Sales are recognisedupondeliveryof productsand customer acceptance, if any, or onthe performance of service, Sales are shown netof discounts.Other revenues earnedby the Companyare recognisedon an accrual basis. Foreign currency translation Functional anduresentationcurrency Itemsin the financial statements are measuredusingthe currencyof the primary economicenvironment inwhich the entity operates(``the functionalcurrency"). The financialstatementsare presentedinEasternCaribbeandollars, which is the Company's functional andpresentationcurrency. Transactionsandbalances Foreigncurrencytransactionsare translatedinto the functional currencyusingthe exchangeratesprevailingat the datesofthe transactions.Foreignexchangegains and losses resultingfrom the settlementof suchtransactionsand from the translation atyearend exchange rates ofmonetaryassets and liabilitiesdenominatedinforeign currencies are recognisedin the income statement. Comparatives Where necessary,the comparative figures have been adjustedto conform with changes in presentationin the current year. 82  Water and SewerageCompany Incorporated Notesto Financial Statements December 31,2004 (expressedin Eastern Caribbeandollars) 3 Financial risk management The Company's activitiesexposeitto a variety of financialrisks: foreignexchangerisk, credit risk, liquidity risk and interestraterisk. Foreignexchangerisk Changes inforeign currencyrates may expose the Companyto currency risk. The Company has an exposure to fluctuationsin foreign currency exchange rateson certainloans denominatedin foreign currencies.These are detailedinNote9. Credit risk Creditrisk arises from the possibility that counterpartiesmay default ontheir obligations to the Company.The amounto fthe Company`s maximumexposureto credit risk is indicatedby the carryingamount o f its financial assets. The Company operates St. Lucia's water supplyand sewerage facilities and financial instruments, which potentiallyexpose the Companyto concentrationsof credit risk, consistprimarilyoftrade receivables.The Company performsperiodiccredit evaluationsof its customers' financialcondition.The ability o fthe Company to continueto operate as aviable entity is dependent on improvementof the collection ofwater and sewerage charges as well as the successfulimplementationofmechanismsdesignedto restructure its operations. Liquidity risk Prudentliquidityrisk management impliesmaintainingsufficient cash and marketablesecuritiesandthe ability of fundingthroughan adequate amountofcommittedcredit facilities. In light ofthe working capital deficiency as indicated inNote2 managementaimsto maintainsufficient lines ofcredit to meetday to day operations. Interest rate risk Differencesincontractualrepricing or maturitydates and changes ininterest ratesmay expose the Company to interestrate risk. The Company's exposure and interestrateson its financial assets is disclosed inNote 9. Fair valueestimation Fair value amounts representestimatesofthe considerationthat would currentlybe agreed uponbetween knowledgeable,willing partieswho are underno compulsionto act and is best evidencedby aquoted market value, ifone exists.None bf the Company's financialinstrumentsare traded ina formalmarket. Estimatedfair values are assumedto approximatetheir carryingvalues. 83  Water and Sewerage CompanyIncorporated N o t e s to Financial Statements December31.2004 (expressed in Eastern Caribbeandollars) 4 Criticalaccounting estimates andjudgements Estimates andjudgements are continually evaluated and are based on historical experience and other factors, includingexpectations o f future events that are believed to be reasonable under the circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, bydefinition, seldom equal the related actual results. The estimate and assumptionthat has a significant risk o f causing a material adjustment to the carrying amounts o f assets and liabilities within the next financial year is discussed below: useful lives o f Dlant and eaubment The Company's management determines the estimated useful lives and related depreciation charges for it's plant and equipment. This estimate is based on projected lifecycles. It could change significantly as a result o f the asset mapping exercise and pipe replacement project undertaken during the year. Management will increase the depreciation charge where useful lives are less thanpreviously estimatedlives, or it will Writeaff or Write- down technically obsolete or non-strategic assets that have been abandoned or sold. Were the actual usefullives o f the plantandequipment to differ by 10%frommanagement's estimates, the carrying amount o f the plant and equipment would be an estimated $918,185 higheror $834,789 lower. 5 Cash andcash equivalents 2004 s 2003 s Cash at bank and inhand 500,597 200,405 Cash at bank balances are non-interest bearing. Cash and bank overdrafts included the following for the purposes o f the casMow statement: 2004 2003 $ $ Cash and cash equivalents 500,597 200,405 Bank overdrafts (Note 9) (2,643,204) (2,999,905) (2,142,607) (2,799,500) 84  Water and SewerageCompanyIncorporated Notes to FinancialStatements December 31,2004 (expressedinEastemCaribbean dollars) 6 Trade and other receivables 2004 2003 $ $ Trade receivables 28,133,447 26,275,176 Less: provisionfor impairment o ftrade receivables (16,936,171) (15,352,58 1) Trade receivables,net 11,197,276 10,922,595 Claims for projects 1,551,759 1,509,503 Less: provisionfor impairment o f claims for projects (488,238) (488,238) Claims for projects, net 1,063,521 1,021,265 Other receivables 1,640,830 1,188,716 Less:provisionfor impairment of other receivables (552,280) (552,280) Otherreceivables,net 1,088,550 636,436 Prepayments 357,721 86,489 13,707,068 12,666,785 7 Inventories 2004 2003 $ $ Chemicals 162,749 198,677 Fuel 5,959 3,895 Pipes and fittings 2,280,470 2,351,566 Miscellaneous stock 115,883 171,324 2,565,061 2,731,462 Goods-in-transit 66,561 2,565,061 2,798,023 85  86  Water and Sewerage Company Incorporated Notes to Financial Statements December 31.2004 (expressedinEastern Caribbeandollars) 9 Borrowings Loan Facility Reference Purpose of loan Withdrawn Less 2004 2003 Repayment $ $ Loans from Government of St. Lucia CDB 2O/SFR - To carry out aspecific water CDN$ 57,922 supply project US$ 161,769 S K R 5,884 YEN 12,022,636 EUR 6,283 908,087 886,796 CDB - 37lSFR To carry out a specific water CDN$ 542,021 supply project STGE 173,682 S K R 978,307 US$ 993,409 SDR 1,040,976 9,564,588 9,205,142 CDB - 8lSFWOR To assist infinancing the US$ 6,178,907 RoseauDamBasin Project CDN$ 527,145 STGf 93,158 18,347,672 18,334,665 CDB - 45lSFR To assist inrehabilitation of storm damage US$ 1,774,228 4,790,415 4,820,399 World Bank To carry out the RoseauBasin SDR 2,615,315 Water Development program US% 1,634,109 15,378,441 14,932,665 Caisse Francais To carry out the Rodney Bay Sewer Project EURO 4,439,719 16,362,584 15,048,871 OPEC Fund To assist in financing Roseau DamWater DevelopmentProject US$ 1,345,880 3,633,876 3,656,622 Loans from financial Institutions Bank of Saint To repay St. Lucia Electricity Lucia Limited ServicesLimited EC$ 8,500,000 8,500,000 6,988,561 Bank of Saint To purchasevehicles Lucia Limited EC$ 110,243 110,243 - 77,595,906 73,813,721 Current borrowings (30,456,051) (25,383,609) Non-current borrowings 47,139,845 48,490,112 (8) 87  Water and SewerageCompany Incorporated Notes to Financial Statements December 31,2004 (expressed in EastemCaribbeandollars) 9 Borrowings...continued 2004 2003 $ s Current Bank overdrafts (Note 5) 2,643,204 2,999,905 Govemmentof St. Luciaborrowings 29,796,413 24,703,938 Bankborrowings 659,638 679,671 33,099,255 28,383,514 Non-current Governmentof St. Luciaborrowings 39,189,241 42,181,222 Bankborrowings 7,950,604 6,308,890 47,139,845 48,490,112 Total borrowings 80,239,100 76,813,626 All bankborrowingsare guaranteedby the Govemmento f St. Lucia. The above borrowingagreementscontain variouscovenants,which the Company is required to meet. As at December 31,2004, the Company was indefaultof certainofthese covenants. However,the lendershave givenno indicationthat their levelof supportwill notbemaintained. Maturity ofnon-currentborrowings: 2004 2003 $ $ Between1and 2 years 5,807,427 6,513,627 Between2 and 5 years 15,353,671 17,368,285 Over 5 years 25,978,147 24,608,200 47,139,845 48,490,112 The weighted averageinterestratesat the balancesheet date were as follows: 2004 2003 YO Yo Bankoverdrafts 10.50 10.50 Government of St. Lucia borrowings 6.20 6.20 FinancialInstitutions 9.00 10.00 88  Water and Sewerage Company Incorporated Notes to Financial Statements December 31,2004 (expressedin EasternCaribbeandollars) 9 Borrowings.. .conlinued The company's exposure to foreign currencyexchangerate risk at the year end is as follows: 2004 2003 $ $ Unitedstates dollars 32,638,416 32,842,708 Specialdrawingright currency 15,331,290 14,699,472 Euro 16,385,740 15,070,168 Canadiandollars 2,520,958 2,351,106 GreatBritishpound 1,390,825 1,282,026 Swedishhoner 402,239 366,710 Japanese yen 316,195 302,970 68,985,663 66,9 15,160 The exchange rate of the EasternCaribbeandollar (EC$)to the UnitedStates dollar (US%) has beenformally peggedat EC$2.70=US%l.OOsinceJuly 1976. 10 Trade and other payables 2004 2003 $ $ Trade payables 1,841,697 2,089,849 Loaninterest payable 14,350,178 13,110,773 St. LuciaElectricity ServicesLimited 3,147,327 2,542,044 Unexpendeddeveloperscosts 161,057 144,334 Otherpayables and accruedexpenses 7,151,412 7,258,222 Consumerdeposits 1,455,486 1,456,703 Employeeretirement obligation(Note 11) 334,524 264,522 28,441,681 26,866,447 11 Employee retirement obligation 2004 2003 $ $ Employeeretirement obligation 3,009,162 2,896,078 Less:currentportion (Note 10) (334,524) (264,522) Longtermportion 2,674,638 2,631,556 The amount representsthe Company's obligation in respectof gratuitiesdue to employeesupon retirementor terminationof employment under collectiveagreements with the St. LuciaCivil ServiceAssociation andthe National WorkersUnion effectiveJanuary 1, 1993 andApril I,1993 respectively. These agreementsterminated on December31, 1995, March31, 1996,March31, 1998 andDecember 31, 1998andwere immediately replacedby similar agreements, which expired on December31,2001. These agreementswere transferredfrom Water and Sewerage Authority onNovember 1, 1999. (10) 89  Water and SewerageCompanyIncorporated Notes to Financial Statements December 31.2004 (expressed in EasternCaribbean dollars) 12 Deferred capitalassistance 2004 2003 $ $ At beginningo fyear 59,820,366 61,907,480 Received in the year Amortisation inthe year (Note 16) 146,362 634,217 (2,7 18,817) (2,721,331) At endofyear 51,247,911 59,820,366 13 Share capital 2004 2002 $ $ Authorised: Unlimited ordinary shares Issuedand fully paid: NilordinaIyshares The legal formalities for allotting the shares pursuant to Section 18(2) of the Companies Act 1996have not been completed. 14 Expensesby nature 2004 2003 $ $ Employee benefits (Note 15) Depreciation (Note 8) 12,404,193 12,199,128 10,724,5 19 Power 10,085,2 12 5,638,831 5,129,415 Maintenance 3,537,202 3,505,034 Baddebts expense 1,674,125 4,322,358 Other expenses 1,017,275 734,748 Chemicals 937,846 806,208 Transport and travelling 862,3 11 746,332 Utilityexpense 441,280 476,844 Stationery and office supplies 245,961 364,600 Bank interest and charges 304,269 280,734 Professional fees 105,886 262,312 Training 117,268 201,531 Total direct and administrative expenses 37,371,665 39,753,763 90  Water and Sewerage CompanyIncorporated Notes to Financial Statements December31,2004 (expressedinEasternCaribbean dollars) 15 Employeebenefits 2004 2003 $ $ Salariesand wages 11,544,218 11,456,468 Social security costs 428,317 405,982 Gratuities andpension 431,598 336,678 12,404,193 12,199,128 T h e company had 269 employees at December 31,2004 (2003 -281). 16 Other gains, net 2004 2003 $ $ Amortisationof deferred capital assistance (Note 12) 2,718,817 2,72 1,33 1 Gain on disposal ofplant and equipment 2,691 6,751 2,721,514 2,728,082 17 Finance costs 2004 2003 $ $ Interest expense 4,091,477 4,054,441 Net foreign exchangetransaction losses(Note 18) 2,100,495 4,314,392 6,197,972 8,428,833 18 Net foreign exchangelosses The exchange differences chargedto the income statementare includedas follows: 2004 2003 $ s Financecosts (Note 17) 2,100,495 4,374,392 Direct expenses 39,618 43,582 2,140,173 4,417,974 91  Water and SewerageCompany Incorporated Notes to Financial Statements December 31,2004 (expressedin EasternCaribbeandollars) 19 Contingent liabilities Legalclaims InJanuary 1999aclaimwas filedagainstthe Water andSewerageAuthority inrespectofwork done onthe RodneyBay SewerageProject.The claimwas for $6,174,139 plus interest fromJanuary 26, 1999at 6% per annum. This obligationwas transferredfrom Water and SewerageAuthority to the CompanyonNovember 1, 1999.The Company is legallyrepresentedin this matter. A provisionof $2,063,673 (2003 $2,063,673) has beenmade inrespectof these claims. Furtherprovision - will be made in the financialstatements when the final liability, if any, hasbeendeterminedandagreed. Arrears of taxation The company is contingently liable for surcharges, interestandpenalties on arrears of PAYE, Contractors' Tax and NICcontributionsamountingto $5,641,539 (2003 $5,201,520). Provisionwill be made inthe accounts - when the liabilitieshavebeendeterminedandagreed. Loan agreement InDecember2001, theGovernmentofSaintLucia, theWaterandSewerageCompanyIncorporatedandthe CaribbeanDevelopmentBankentered intoa loanagreementto financethe implementation ofthe "Fifth Water Supply" project. The total projectedcost ofUS$5,271,000 will bere-lentto the Water and Sewerage CompanyIncorporatedon completionofthe project on similarterms andconditionsunderwhich the loanwas made available to the Govemmentof Saint Lucia. At December31,2004 the project was still inprogress. 20 Related party transactions Water and seweragereceivablesinclude %4,318,412 (2003 - $4,189,906) due %omthe Govemment o f St. Lucia. Loaninterestpayableto the Governmentof St. Lucia amountsto $14,350,178 (2003 $13,110,773) (Note 10). - The Company supplied 12%(2003 -9%) of its water availablefor consumptionto the Governmentof St. Lucia andrelatedstatutory bodies. 92  Annex 12: EconomicandTechnicalComparisonof Alternatives SAINT LUCIA:WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT Introduction As described earlier in this PAD, the most immediate water supply challenge in Saint Lucia is the water shortage inthe northern part o f the island. The Roseau system, which was constructed in 1994 and which consists of the Roseau Dam and reservoir, was designed for a production capacity o f 5 million imperial gallons per day (MGD). However consumption in the north has risen beyond the levels forecasted during the design o f the Roseau dam and the construction o f the attending infrastructure (pumping, treatment and transmission). The short term investment program for the North, scheduled to be implemented in about two years (second-half 2005 to first-half 2007), i s in fact an urgent investment program aimed at providing the current population o f the North, amounting to about 86,000 residents plus tourists, with a continuous supplyo fwater o fpotablequality. Two alternatives have been considered for resolving the water shortage in the northern part o f Saint Lucia: (i)Increase the daily withdrawal rate o fwater from the Roseau dam from the current value o f 6 MGD to 10 MGD; or (ii) Construct a Reverse Osmosis Desalination plant to supply the current water deficit. The purpose o f this Annex i s to describe the two alternatives and estimate the cost o f each one (investment and operatiodmaintenance), conduct a comparative economic analysis o f the alternatives, as well as a technical and environmental comparison, and provide a recommendationregardingthe most economically and technically feasible alternative. Descriptionof the AlternativesConsidered Alternative 1 This alternative was proposed by WASCO and is described in detail in the WASCO report on "Infrastructural Improvement Project Proposal", October 2003. The Roseau systemwas designed to enable a daily withdrawal rate o f 5 MGD from the reservoir. The extraction system's maximumcapacity is somewhat less than 6 MGD, which is the flow rate currently withdrawn from the reservoir. The concept o f this alternative i s to increase the capacity o f this system to 10 MGD, which will provide sufficient capacity for future years up to 2015. The incremental flow produced by this alternative is about 4.5 MGD, Le., about 20,000 m3/day. The production system consists o f apumpingstation at the dam site, the pipeline from the damto the treatment plant and the treatment plant at Ciceron. The system components which would require upgrading include the pumping station, part of the pipeline, expansion o f the capacity o f the treatment plant and some additional conveyance mains which are needed inorder to connect the Hill 20 system to the Roseau dam system. The increase in the extraction capacity from the Roseau reservoir basically reduces the drought return period for which the reservoir was designed. However, since what currently happens i s that the restrictive extraction capacity results 93  in water shortages every year-regardless o f rainfall-it i s recommended to increase the extraction capacity from the reservoir and satisfy demand in years which are not drought years. The risk o f drought should be addressed in the medium-terminvestment program through new source identification and/or reductions in water losses in the distribution network. In the forthcoming years, major efforts will be directed to reducing such water losses. The works which will need to be undertaken inorder to implementAlternative 1are detailed in the following table: Table 1.Water SupplyInfrastructureImprovementWorks under Alternative 1 Component Estimated Cost (US%Million) A. Roseau DamPumping StationUpgrade 0.35 B.Vanard-Sarot PipeReplacement 1.o C. Expansion o f the Ciceron Treatment Plant 3.2 D.Mome Bocage DistributionPipeline 2.39 -TOTAL 6.94 ItemBywhich consists of replacing 1,300 meters o f an 18" pipe by a 24" pipe, was estimated by WASCO to cost US$ 1.5 million. Inthis analysis o f alternatives, a total cost o f US$1 million i s assumed as the cost o f replacing the pipe since the original WASCO estimate seems too high. The Morne Bocage Distribution Pipeline i s the connection o f the Roseau system to the Hill 20 system. The investment in civil works under this alternative amount to US$ 6.59 million (items B,C, D). Annual operation and maintenance (O&M) costs for this type o f works amount to about 0.5 percent o f investments, i.e. about 34,500 US$/year. Annual O&M costs o f the electromechanical equipment like the pumping station (item A) amount to about 2.5 percent o f investments, i.e., about 8,750 US$/year. The cost of chemical usedinthe treatment plant was estimated at US$ 0.03 per m3, which for an incremental flow o f 20,000 m3/day translates to about 194,000 US$/year. The Treatment process in the plant is almost completely based on hydraulic processing and hence does not consume energy and does not result inadditional energy costs. The incremental energy costs o f the new pumping station were calculated as the difference between the energy costs for operating the new pumping station and the energy costs for operating the existing pumping station, taking into account a unit energy cost if US$ 0.28 per Kwh.The resultingincremental annual energy cost amounts to about 850,000 US$/year. In summary, the total investment required for Alternative 1is US$ 6.94 million and the annual operation and maintenance cost amounts to US$ 1,087,250. These investment and O&M costs are the input data for the comparative economic analysis presentedbelow. 94  Altemative 2 The concept o fthis altemative is to separatethe distributionnetwork o fRodney Bay andnorth o f Rodney Bay from the distributionnetwork south of Rodney Bay (this can be physically achieved by closing the Mongiraudvalve on the principle 14" pipeline) and to install a Reverse Osmosis desalination plant which will supply water to Rodney Bay and the area north o f it. Under this altemative, the Roseau system will remain practically unchanged and it i s estimated that the 6 MGD currently produced by this system will be sufficient to supply the demand o f all the area south o f Rodney Bay. However, the Mome Bocage distribution pipeline, which will connect the Hill 20 system to the Roseau system will still be needed under Altemative 2, to alleviate the water shortage inthe Hill20 area. The population inRodney Bay and the areanorth o f it is about to 20,000. The existinghotels and those under construction in this area have a capacity o f 7,500 rooms. With full occupancy o f 2 persons per room, the maximum number o f tourists inthis area could reach 15,000 per day. As a result, the total population o f residents and tourists in the Rodney Bay and the area north o f can reach 35,000. The average specific water consumption, taking into account residents and hotel guests, i s 60 GPD/capita, i.e., 0.27 m3/day/capita. The range o f water losses in the distribution network in Saint Lucia i s 45 - 55 percent. Using a figure o f 50 percent will result in a water production rate o f 18,900 m3/day needed to satisfy the demand o f Rodney Bay and the area north o f it. The RO plant considered in this altemative i s one with a production capacity o f 20,000 m3/day. The estimated investment cost o f an advanced technology 20,000 m3/day RO plant is about US$18 million. For the purpose o f the current comparison, it was assumed that a simpler, modular designed plant with simple automation systems will be used. The estimated cost o f such a plant is about US$15 million. The investment cost o f an RO plant of 4,500 m3/day in an unsolicited proposal to the Government o f Saint Lucia was priced at US$5.2 million, excluding taxes and duties. This indicates that the estimated cost o f US$15 million i s relatively conservative. As mentioned, in addition to the investment in the RO plant, an investment o f US$2.7 million will still be needed under this altemative for the Mome Bocage distribution pipeline, to connect the Hill20 systemto the Roseau system. O&M costs for the Mome Bocage pipeline amount to 13,500 US$/year, representing 0.5 percent o f the investment. Electricity cost i s the largest annual cost component indesalination and would be especially high inSaint Lucia due to highenergycost. Specific energy consumptionfor this type ofdesalination plant is about 5 Kwhper m3 of water produced. With a unit energy cost o f US$ 0.28 per Kwh, the annual electricity cost o f the plant will amount to 10.22 US$ milliodyear. Costs of chemical products for treatment o f the raw water and the desalinated water were estimated at us$ 0.05 per m3, which for a flow o f 20,000 m3/day translates to about 365,000 U S$/year. 95  The annual costs for replacement o f the R O membrane amount to US$ 0.04 per m3, which translates to 292,000 US$/year. The annual costs for spare parts amount to US$ 0.05 per m3, i.e., 365,000 US$/year, and manpower costs also amount to US$ 0.05 per m3, Le., 365,000 US$/year. Insummary, the total investment required for Alternative 2 is US$ 17.7 million and the annual operation and maintenance cost amount to US$ 11,620,000. These investment and O&M costs serve as the input data for the comparative economic analysis presented below. ComparativeEconomicAnalysis of the Alternatives A comparative economic analysis o fthe two altematives was carried out, assuming that: (i) both would provide the same benefits; and (ii) both will provide a constant flow o f 20,000 m3/day over the years. For each altemative, the Present Value (PV) o f the expenditure stream during 16 years was calculated suing a discount rate o f 12 percent. It was assumed that the construction period for both altematives i s one year and during this year, O&M cost were nonexistent. For Altemative 1, an additional expenditure o f US$ 350,000 was added in year 10 for replacement o f the Roseau pumping station, considering a life span o f 10 years for electromechanical equipment. For Altemative 2, an additional expenditure o f US$ 15 million was added inyear 15 for replacement of the RO plant. In addition to the PV, the water cost o f each altemative was also calculated, considering an annual flow o f 7.3 million cubic meters per year (equivalent to 20,000 m3/day). The resulting values o f the PV and water cost o f each altemative are presented in the following table: Alternative1:Increaseof Alternative2: RO WithdrawalRateofWater DesalinationPlant fromthe RoseauDam PV, US$million 13.2 89.2 Water Cost. US$/m3 0.26 1.75 The cost o f desalinated water in an unsolicited BOT proposal for an RO plant which the Government o f Saint Lucia received was 1.82 US$/m3, which indicates that the economic analysis of Alternative 2 is reasonable and consistent with market conditions. The results o f this comparative economic analysis demonstrate that Alternative 1,enhancement o fthe Roseau system, i s less expensive than Alternative 2, the RO desalinationplant. As noted, the comparison is based on the assumption that both altematives will provide a constant flow of 20,000 m3/day over the years. However, the conclusion that Alternative 1 i s less costly holds for any pattem o f evolution of the water production over the years, Le., 96  Alternative 1 will be less costly for any pattem o f water demand evolution. That means that if less than 20,000 m3/day will be produced, the values o f the PV inthe table above will be lower, because the O&M costs will be smaller, however the PV o f Alternative 2 will always be larger thanthat ofAlternative 1.Also, the water cost values at lower productionrates will probably be higher than those presented inthe table above. TechnicalandEnvironmentalComparisonofthe Alternatives Alternative 1 is much simpler to operate and maintain. WASCO has been operating the Roseau system for many years; the works o f Alternative 1 will not elevate the complexity o f the system. The operation o f the R O plant under Alternative 2 will be more complex and will require highly skilled technical staff. Altemative 1will not generate any negative environmental impacts. Alternative 2, however, may cause negative environmental impacts resulting from the discharge o f concentrated brine to the Caribbean Sea at a sensitive environment o f fragile ecosystems o f coral reefs and fragile fauna. The area is also frequented by whales, for which high salinity is unfavorable. The energy consumption o f the RO plant might require extension o f the capacity o f energy production in Saint Lucia and that might cause additional negative impacts. It would also be difficult to identify in the Rodney Bay area a suitable site for a desalination plant, which would not have negative impact on the environment, since what would needto be done i s to locate an industrial plant inabeachresort area or alongside protectedparks. ConclusionsandRecommendation Based on the analyses performed, alternative 1 i s the preferred alternative. Given the current costs o f technology and energy, providing desalinated water into a distribution network results in much higher costs than the expansion o f an existing source such as the Roseau Dam. It is therefore recommended to select Alternative 1for the short term investmentprogram 97  Annex 13: SafeguardPolicyIssues SAINT LUCIA: WATER SUPPLY INFRASTRUCTUREIMPROVEMENTPROJECT OP 4.01 ENVIRONMENTAL SAFEGUARDS ProjectClassification - Category B Introduction The urgent need to improve the availability o f good quality drinking water in the northern section o f Saint Lucia has been described in Section A o f this PAD. Current inadequacies o f the distribution system coupled with the demands for growth in the region are placing increasing pressure on the water supply system. The ability to service all population segments i s a priority with the greatest benefit going to low income families. At risk groups include children under 5, the infirm and the elderly. These groups will realize a greater proportional benefit from improved access to public water supplies. The impacts associated with the project will result in induced development in the extreme northern service area (Rodney Bay, Gross Islet) as pent-up development demand i s currently frustrated due to lack o f water. Numerous communities and several hotels have been designed and laid-out with supporting infrastructure but are not developing due to poor land sales. During the preparation phase o f this project, an Environmental Assessment and a Social Assessment were prepared. This section summarizes the recommendations o f those studies. EnvironmentalImpacts Generally, impacts o f capacity improvement are relatedto construction activities at the work site. Only those portions o f the project involving the construction o f new pipelines will affect the community at large as these works will require access to private lands. Those works to occur in public roadways present additional but manageable impacts. The greatest positive impact associated with this option i s that it improves the ability to provide a reliable supply o f potable water throughout the Theobolds WTP service area and reaches into low-income communities where service is poor or non-existent. These are the groups least able to afford developing alternative sources to public water supply. Social Impacts Generally, impacts associated with the capacity improvement, are related to construction activities at the work site. Only those portions o f the project involving the construction o f new pipelines will affect the community at large as these works will require access to private lands. Those works to occur in public roadways present additional but manageable impacts. The greatest positive impact associated with this option i s that it improves the ability to provide a reliable supply o f potable water throughout the Theobolds WTP service area and reaches into low income communities where service i s poor or non-existent. These are the groups least able to afford developing alternative sources to public water supply. 98  While this project will result inthe continued development of the extreme northern service area, the infrastructure and current supply will be adequate to meet the current and anticipated future demand to 2015. Mitigation of Impacts Specific mitigations are outlined in table 1.0 and pertain to the construction phase o f the works contemplated. To implement these requirements, a series o f draft contract clauses have been developed for use inthe preparation o f tender documents. These clauses are designedto require contractor environmental management at the job site and are managed through inspection and hold-back penalties. Table 1. Mitigations to Impacts from Construction Mitigation ~ Impact Stabilize banks o f excavations, erect erosion control Potential for soil erosion barriers where necessary, cover removed soil and re- vegetate excavations when work i s complete Provide sanitary facilities at the construction site or Worker sanitation make arrangements for the use o f existing sanitary management facilities Informed the public through press releases and Interdictiono fpublic community meetings o fplannedworks, coordinate with roadways emergency services to assure no loss incommunity coverage, Coordinate with Min.Works to re-surface roads ina timely fashion, Planworks inorder to minimize blockages and to facilitate traffic flows ingeneral and around local traffic patterns Control or limit the use o fhazardous materials Possible contamination o f substitutingmaterialswith less hazardous products, work sites with fuels and Provide for the safe storage and use o fhazardous hazardous materials. materials through protected storage and worker training, Provide for the safe disposal o fusedhazardous materials inaccordance with Saint Lucian law. Use existing commercial fueling stations, Provide for the secure storage o ffuel supplies inthe field, locate fueling areas away from environmentally sensitive areas such as water courses, Provide for spill control and prevention as part o f the overall fuel management program, dispose o f waste fuels and containers in accordance with Saint Lucian law 99  Impact Mitigation Minimize waste throughjudicious construction Pollution form construction management practices, collect and dispose o f wastes constructionwaste through the Saint Lucian waste management system, provide for the collection and management o fworker generated waste (trash cans at work sites) Manage noise by conduction construction activities Noise from construction duringnormal working hours, alert the community activities whenthe construction is to take place, assure machinery usedinconstructioni s properly equipped with working: muffler svstems. Prohibit the use o f oils on roads for dust control, wet Dustcontrol issues roads with water where necessary usingwater supplied from amroved sources Temporary loss o f crops Identify landswhere crops will beremoved for anduse o f agricultural land construction andnegotiate with farmers and pay at the construction site appropriate compensation Discovery o f cultural- Stop work, notify appropriate authorities to evaluate the historical antiquities site Standingwater and disease Prohibit the long-term accumulation o f standing water vector Droduction suitable for mosauito remoduction Compensation for temporary loss o f crops, harvesting or use o f land will also be required as the project proceeds. A strong communication program should be developed to keep the public and supporting public services informed concerning changing traffic pattems. These will be implemented through the WASCO Public Affairs office and using existing compensation procedures already inplace Management o f induced growth and development is well beyond the scope o f the project and WASCO's capability. Ministryo f Physical Development i s the lead agency and for the indirect impact - Induced Development, the solution i s beyond the capabilities o f WASCO and falls within the domain o fthe Ministry o fPhysicalDevelopment. The issue gets to the heart o f the balance between economy, development, and preservation. For the present, institutional strengthening o f the Ministryo f Physical Development has produced a building code and resulted in improved planning capacity within the ministry. However, the agency i s still unable to effectively manage regional development. Measures are recommended to improve the planning and enforcement o f planningrequirements within this ministry to help develop a coherent development strategy for the northem service area inparticular. To the degree that development is impacted by water connections, this project can assist the planning process by seeking to achieve better coordination in permitting connections between WASCO and the Ministry o f Physical Development. In the development of the project, 100  assistance during the project planning stage can be given to WASCO in strengthening their permitprocess and accountability between the ministry andWASCO. OP 4.37 SAFETY OF DAMS The project consists o f the improvement and construction o f drinking water infrastructure that relies on the Compton Dam and the Roseau reservoir as the source o f raw water. This triggered the requirements identified under OP 4.37 - Safety o fDams. The Compton dam was constructed in 1996 under a World Bank/OPIC program. Based on initial site visits, the dam appears to be very well maintainedwith no obvious sign o f degradation either inthe dam works themselves or with the associated appurtenances. All pumps, pipes, buildings and associated facilities appear to be in excellent condition. Routine maintenance activities were observed during the site visit and included continual vegetation control along the dam and associated access areas. Safety equipment located along the dam, access paths and walkways appeared to be in good condition and regularly maintained. While no technical inspection was made o f the dam structure, all equipment was functioning and apparently in good repair. Security was intact and site access i s screened and limited. Fuelstorage facilities were clean, freshly painted and free from debris. Interviews with WASCO staff indicate that a regular program o f maintenance and professional inspection i s in operation and functioning well. The area i s subject to seismic activity and regular, underwater inspections (by contractor) are made after every seismic event regardless o f magnitude. Wasco appears to have a strong safety inspection program in place and appears to have the technical capability to maintain this level o f surveillance. To verify compliance with OP 4.37, WASCO has submitted to the World Bank their most recent inspection reports together with copies o f their safety management and surveillance program. Reports include: Daily Inspection Records, Bi-annual Inspection Reports, Post-Seismic Scuba Reconnaissance Reports and the Dam Operations and Maintenance Manual. Those reports show that the borrower has an effective dam safety program in operation; the borrower conducts and documents full level inspections and dam safety assessments; and that those assessments and findings are satisfactory to the.Bank. 101  Annex 14: ProjectPreparationandSupervision SAINT LUCIA: WATER SUPPLYINFRASTRUCTUREIMPROVEMENT PROJECT Planned Actual PCNreview 02/24/2005 03/15/2005 InitialPID to PIC 03/10/2005 03/24/2005 InitialISDS to PIC 03/31/2005 04/01/2005 Appraisal 04/15/2005 04/11/2005 Negotiations 04/21-22/2005 04/21-22/2005 Board/RVP approval 05/19/2005 Planned date of effectiveness 07/15/2005 Planned closing date 01/15/2009 Note*: Insteadof Mid-Term Review, one semi-annualprojectreportper year will provide, as an addendum, the status ofthe projectaccordingto the relevantProjectMonitoring Criteriapresentedinthis PAD. Keyinstitutions responsible for preparation ofthe project: MinistryofFinance's Officeofthe PermanentSecretary;WASCO Bank staff andconsultantswho worked onthe project include: Name Title Unit Jordan Schwartz Task Team Leader and Senior LCSFP Infrastructure Specialist MenahemLibhaber Lead Sanitary Engineer LCSFW Caroline van denBerg Senior Economist EWDWS Nico Saporiti Financial Analyst LCSFW JuanDavid Quintero Environmental Specialist / LCSEN Safeguards Specialist Gerald Meier Environmental Consultant LCSFU Luz Maria Gonzalez Economic Analysis Consultant LCSFU Karla Chaman Communications Specialist EXTCD Diana Ortiz Zuluaga Urbanand Water Consultant LCSFW Julieta Abad Team Assistant LCSFP LisaLui Senior Counsel LEGOP SvetlanaKlimenko Financial Management Specialist LCOAA Patricia Macgowan Senior Procurement Specialist LCOPR Bankfunds expendedto date onprojectpreparation: 1. Bank resources: US$80,000 2. Trust funds: US$117,000 3, Total: US$197,000 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: US$30,000 2. Estimated annual supervision cost: US$70,000 102  Annex 15: Documentsinthe ProjectFile SAINT LUCIA: WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT Aide Memoire, Water Sector Reform TechnicalAssistance Project/Infrastructure Improvement Project, January 24- February 4,2005. Aide Memoire, Water Sector Infrastructure Improvement Project, December, 2004. Dam Inspection and Safety Reports, WASCO, 2003 to 2005. Project Appraisal Document. RoseauDam InvestmentLoanProject. 1989. Project Appraisal Document. Water Sector Reform TechnicalAssistance Project. November, 2001. Project Concept Note. Water Supply Infrastructure Improvement Project. March 9,2005 Project Concept Review Minutes. Water Supply Infrastructure Improvement Project. March 15, 2005. RoseauDam Operations and Maintenance Manual, Stantec, 1996. Environmental and Social Impact Assessment for the RoseauDam.June, 1989 Stone & Webster Management Consultants, "Poverty Assessment Report". November 2004. Stone & Webster Management Consultants, "Technical Assessment and Operational Efficiency Report". October 2004 WASCO, "Infrastructural Improvement Project Proposal". October 2003 103  Annex 16: Statementof Loansand Credits SAINT LUCIA: WATER SUPPLY INFRASTRUCTUREIMPROVEMENT PROJECT Differencebetween expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO76795 2005 L C HIV/AIDS PREVENTION & 3.20 1.60 0.00 0.00 0.00 6.40 0.07 0.00 CONTROL PO86469 2004 LC Disaster Management Project I1 3.70 3.77 0.00 0.00 0.00 7.00 -0.35 0.00 PO70244 2002 LC Water Sector Reform Tech Assist 1.30 1.30 0.00 0.00 0.00 1.79 1.os 0.00 PO77687 2002 Saint Lucia Emergency Recovery Project 1.89 4.41 0.00 0.00 0.00 2.95 2.35 0.00 PO77712 2002 6 0 LC Education (APLOl) 6.00 6.00 0.00 0.00 0.00 12.81 6.71 0.00 Total: 16.09 17.08 0.00 0.00 0.00 30.95 9.83 0.00 SAINT LUCIA STATEMENT OF IFC's Held andDisbursedPortfolio InMillionsofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Total portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ~~ ~ ~~ ~ Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. Total pending commitment: 0.00 0.00 0.00 0.00 104  Annex 17: Country at a Glance SAINT LUCIA: WATER SUPPLYINFRASTRUCTURE IMPROVEMENT PROJECT L a t h Upper- POVERTY and SOCIAL America middle- St. Lucia & Carlb. Income 1evelo pment diamond' 2003 Population,mid-year(millions) 0.B 534 335 Lifeexpectancy GNI per capita (Atlas method, US$) 4,050 3,250 5,340 T GNI (Atlas method, US$ billions) 0.55 1741 1,788 Average annual growth, 1997-03 Population(%) 12 15 1.2 Laborforce (%) 2.1 1.8 ;N I Gross ier primary M o s t recent estimate (latest year available, 1997-03) :apita nrollment Poverty(%of populationbeiownationaipoveriyline) Urban population (%oftotalpopulation) 31 77 76 Lifeexpectancyat birth (years) 74 71 73 1 Infant mortaiity(per 1,OOOlivebirths) n 28 B Chiidmalnutrition (%ofchildren under5) Access to improvedwater source Access to an improvedwatersource (%ofpopulation) 96 66 69 iliiteracy(%ofpopuiationage 159 11 9 Gross primaryenroliment (%of school-age population) 111 P9 n 4 -St. Lucia Male 111 01 n 4 Upper-middle-incomegroup Female la a6 n 4 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economic ratios' GDP (US$ billions) 0.25 0.49 0.66 0.69 Gross domestic investmentlGDP 21.7 24.6 22.8 26.6 Exportsof goods andservices/GDP 63.6 67.7 46.3 55.7 Trade Gross domestic savingslGDP w.3 18.9 6.8 15.2 Gross nationalsavingslGDP 22.6 14.1 P.4 n.1 Current account balance/GDP -6.0 -n.7 -P.5 -14.3 Interestpayments/GDP 0.4 10 13 1.7 Total debt/GDP a2 20.5 613 53.2 Total debt service/exports 1.3 3.2 7.0 6.6 Presentvalue of debVGDP 59.8 Presentvalue of debt/exports 136.7 indebtedness 1983.93 1993-03 2002 2003 2003-07 (averageannualgroMh) GDP 9.0 1.2 2.2 17 GDP percapita 7.5 -0.2 15 0.6 STRUCTURE o f the ECONOMY 1983 1993 2002 2003 Growth of Investment and GDP (%) (%of GDP) Agriculture 15.0 n.9 6.4 5A 40 T industry 18.3 210 18.5 m.o Manufacturing 9.5 7.5 4.6 5.O Services 66.7 66.1 75.1 76.6 Private consumption 63.3 65.6 56.3 57.2 Generalgovernment consumption 22.4 14.3 26.9 27.6 imports of goods and services 71.0 73.6 52.2 69.3 I -GDI -GDP 1983.93 1993-03 2002 2003 (averageannualgroMh) Growth of exports and Imports (Oh) Agriculture 5.3 -8.3 -6.5 -11.6 industry 9.8 17 -15 -11 Manufacturing 7.4 -0.5 5.0 0.6 Services 6.6 2.2 11 4.3 Private consumption 9.7 -11 2.9 3.4 Generalgovernment consumption 4.6 9.6 -0.7 4.2 Gross domestic investment 111 3.1 -n.6 28.6 imports of goods and services a.7 -0.7 -6.7 35.0 -Exports -Inports I 105  St. Lucia _________~ ~~ PRICES and GOVERNMENT FINANCE 1883 1883 2002 2003 Domestic prices Inflation (YO) (%change) I Consumer prices 14 0.8 -0.6 0.5 Implicit GDP deflator 3 2 0 4 12 0.1 Government finance (%of GDP,includes current grants) - Current revenue .. 26.3 23.5 23.6 Current budget balance .. 1.4 15 0.3 Overall surplus/deficit .. -4.9 -5.1 -9.3 GDPd#lator -CPI TRADE 1883 1883 2002 2003 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 48 0 0 10 70 500 T Bananas B 51 ll Error Fruits andvegetables 0 1 1 Error 400 Manufactures 14 35 25 Error 300 Total imports (cif) D l 300 3 0 401 Food 24 59 63 11 200 Fuel and energy 0 B 31 42 100 I Capital goods B 64 12 P 2 0 Export price index (S95=WO) 61 93 64 87 97 98 99 00 01 02 Import price index(995=W0) 83 92 04 a1 IExports e Inports O3 Terms of trade (995=WO) 81 D2 DO 100 BALANCE o f PAYMENTS 1883 1883 2002 2003 (US$ millions) Current account balance to GDP (X) Exports of goods andservices 102 333 346 390 imports of goods andservices P l 362 400 453 Resource balance -25 -29 -55 -63 Net income -1 -35 -43 -49 Net current transfers 14 P 73 0 Current account balance -0 -52 -85 -99 Financing items (net) P 51 71 Changes in net reserves 0 -5 7 Memo: Reserves includinggold (US$ millions) 8 58 80 Conversion rate (DEC,iocaWS$j 2.7 2.1 2.1 2.1 EXTERNAL DEBT and RESOURCE FLOWS 1883 1883 2002 2003 (US$ mi//ionsj Composition o f 2003 debt (US$ mill.) Total debt outstanding and disbursed B D1 415 368 IBRD 0 0 6 D IDA 0 5 20 23 1 I Total debt service 1 11 26 21 IBRD 0 0 1 2 G O IDA 0 0 0 0 Coinpositionof net resourcefiow i Official grants 3 14 15 Official creditors 2 D 11 9 Private creditors 0 -1 30 15 Foreign direct investment 10 34 22 I Portfolio equity 0 0 0 F:93 I World Bank program Commitments 0 0 21 0 A IBRD - E BilatHal - Disbursements 0 1 8 6 6-IDA D-Othwmrltilaterai F-Rivate Principal repaynents 0 0 1 2 C-IMF G- Short-tsm 106  MAPSECTION