Ecuador - Guayaquil and Guayas Province Water Supply Project

Report No. 384a-EC CIRCUIATMNG COPY Appraisal of the - mIBE RETURNED TO REPORTS DESK Water'Supply Project for RETURN TO Guayaquil and Guayas Provinc REPORTS DESK Ecuador ONE WEEK June 13, 1974 FILE COPY Regional Projects Department Latin America and the Caribbean Regional Office Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRE:ICY AMD ZQUIVALT Courrey Unit S Scre (SI.) US$1.00 'S.25 S/.1.00 ' US$O.O4 S1.1 millicm Us$40,0OOO ABEVIATICNS AND MASUa 1 m - millimeter - 0.04 inches 1 cm centimeter - 0.39 inches 1 a= moeter = 3.28 feet 1 km - kilometer 0.62 miles 1 1 - liter - 0.26 US gallons 1m 3 - 1 cubic meter - 264 US gallons 1 m3/sec - 1 cubic meter - 86.4 thousand cubic moters per secend per day 2x2.8 millian US gallons kg/cm2 - 1 kilogram per - per day inch square centimeter ABBUVMTIWIS AND ACR(NDL P 5 EhIresa Municipal de Aguas Potable do aaaquil KA,G ba bpreaa Municipal de Alcastarillado de Guayaquil IEOS - Inatituto EcuatriaD de Obras Sanitarias IOB InterAmerican Developmt Bmk WEO a World Health Organization llNDP - United Nationa Developmt Program PAHO - Pan Amrican Health Organization UNCHBP - United Nations Center for Housing, Bilding and Planing FISCAL YER January 1 - December 31  ECUADOR APPRAISAL OF WATER SUPPLY PROJECT FOR GUAYAQUIL AND GUAYAS PROVINCE EMPRESA MUNICIPAL DE AGUA POTABLE DE GUAYAQUIL TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS . .. . . . . . . i 1. INTRODUCTION . . . . . . . . . . . . . . . . . . 1 2o THE SECTOR 2 * 0 0 * * * 0 0 0 0 0 0 0 0 * * 0 2 3. EXISTING WATER SUPPLY OF GUAYAQUIL . a . . . . * . 5 Existing Water Supply Facilities . * * * . . . . . 5 Sewerage System . . . . 0 . a . . * a . a . . , 6 Urban Development Plan . . 0. . . . . 0Q . . . 6 Waterworks Under Construction * a a o . o o 7 4. THE PROJECT 9 . . . . . a 0 0 0 0 0 0 9 Amount of Proposed Loan . .. ... . . . . a 12 Procurement . . . . . . . . 0 o o 0 0 o . 12 Disbursement . . o . . . o a o o . . . 0 . . . . 13 Project Supervision and Administration 0. * a * . 13 Environmental Aspects . . . . . 0 . .e . . . 0 . 13 Urban Development Considerations o . * . * . . . 13 5. JUSTIFICATION . ....... . o . . . . . . 16 Project Selection . .. .. . . . . . . . . . . . 17 Incremental Rate of Return on Investments . . . 0 17 6. THE BORROWER . 0 . 0 . o 0 . 0 0 a 0 0 0 0 0 18 Staff . 0 0 0 . o o o o 0 0 . o a 0 . . o 0 18 Billing, Accounting and Revenue Effectiveness Index (REI) . . * 0 . 0 . . 19 Auditing . . . . . 0 a . . . 0 0 0 0 0 * 9 . * . 0 20 EMAPts Merger with the Sewerage Company 0 0 . . 0 21 The appraisal mission, composed of Messrs. Alfonso Zavala, Lars Jeurling and Claudio Fernandez (consultant) visited Ecuador in October 1973.  TABLE OF CONTENTS (Cont'd) 7. FINANCES . . . . . . . . . . . . . . . e . . v a 22 Introduction . . . . . . . . . . . . . . . . . . 22 Tariffs . . . . . . . . . . . . . . . . . . . . . 23 Financing Plan . . . .. .. .& . . . . . . .. .. 24 Future Finances . . . . . . . . . . . . . . . . . 25 Financial Rate of Return. . .. .. . . . . . . 26 Debt Service Coverage Ratio . ......... 26 8. RECOMMATIONS .A .............. . . 27  TABLE OF CCNTENTS (Contd) ANNEXES NO. 1. The Project 2. Project Cost Estimate 3. Cumulative Quarterly Disbursements 4. a. Total Population and Population Served with Water (Thousands of Inhabitants) b. La Toma Water Treatment Plant Water Production and Consumption (Guayaquil, Daule and Santa Elena Peninsula) c. Lolita Water Treatment Plant Water Production and Consumption (Rural Area) d. Number of House Connections 5. Project Rate of Return 6. Water Pricing Considerations 7. Assumptions for Financial Projections 80 Consolidated Income Statement 9. Cash Flow Statement 10 Balance Statement 11. Existing Tariff 12. EMAPts Asset Revaluation and Depreciation 13. Urban Studies  TABLE OF CONTENTS (Cont'd) LIST OF CHARTS Chart No. Organization Chart of EMAP 8370 Population Growth and Population served in Guayaquil, Daule, Sta. Elena Peninsula and Rural Area 8496 I-Jater Demand from Guayaquil, Daule and Sta. Elena Peninsula 8495 Construction Activity Schedule 8630 LIST OF MAPS Map No. Project Location 10863  ECUADOR APPRAISAL OF WATER SUPPLY PROJECT FOR GUAYAQUIL AND GUAYAS PROVINCE EMPRESA MUNICIPAL DE AGUA POTABLE DE GUAYAQUIL SUMMARY AND CONCLUSIONS i. This report covers the appraisal of a US$38.3 million equivalent water supply project for Guayaquil and part of Guayas Province in Ecuador, a region with a population of about 1.2 million people. One million of them live in Guayaquil, the largest city of Ecuador, its major commercial and industrial center and most important port. A Bank loan of US$23.2 million is proposed, covering the estimated foreign exchange cost of the Project. ii. Guayaquil's population is increasing at the rate of 5.6% annually. The water system serves approximately 500,000 people; the balance of the cityts population, most of which live in the low-income area, is not served by the municipal water supply. Of the 128,000 "rural" population, about 35% receive water service. The quality of service is deficient because of excessive losses and inadequate capacity of the water supply system. Water service will deteriorate further unless facilities are expanded. iii. The Project consists of improvements to the water treatment, transmission and distribution facilities for Guayaquil, and the con- struction of transmission and distribution facilities for the Santa Elena Peninsula, whose 76,000 mostly rural low-income inhabitants do not receive water service now, and for the 14,000 inhabitants of Daule. Construction, engineering and administration are estimated to cost US$38.3 million. The Bank loan would cover 61%, the balance would be financed through municipal and national grants (20%) and internal cash generation (19%). iv. All of the materials and services to be financed out of the proceeds of the loan would be procured in accordance with the Bank's guidelines. Because of a need to use suppliers' credits to finance investments, EMAP in the past did not separate supply and civil works contracts. As a consequence, most contracts were won by foreign contractors. The Bank loan will permit increased participation by local contractors who are expected to win about 50% of the civil works contracts. Most of the contracts for equipment supply, valves and accessories, valued at about 40% of the total project cost, will probably be won by foreign firms. v. The Borrower will be the Empresa de Agua Potable de Guayaquil (EMAP), an autonomous municipal entity. vi. The Project is the least-cost altermative, at any discount rate, for providing the project area with an adequate supply of water.  - ii - vii. Provided the conditions listed in Chapter 8 are met, the Project is suitable for a Bank loan of US$23.2 million equivalent for a term of 25 years, including a four-year grace period.  ECUADOR APPRAISAL OF WATER SUPPLY PROJECT FOR GUAYAQUIL AND GUAYAS PROVINCE EMPRESA MUNICIPAL DE AGUA POTABLE DE GUAYAQUIL 1. INTRODUCTION 1.01 The Government of Ecuador has requested a Bank loan to help finance the first stage of a long-range water supply program for the city of Guayaquil, the largest of the country and its major port. This would be the first project in the water supply sector in Ecuador to be financed by the Bank. The Borrower would be the Empresa Municipal de Agua Potable de Guayaquil (EMAP), an autonomous municipal entity sumolying water to Guayaquil and other towns in the Province of Guayas. The US$23.2 million proposed loan, which represents 61% of the estimated project cost of US$38.3 million, would cover 100% of the foreign exchange component and would be for a period of 25 years including 4 years of grace and would be guaranteed by the Republic of Ecuador. 1.02 The Project would permit EMAP to increase water supply ser- vices from 50% to 80% of the population of the city of Guayaquil by 1977, serving an incremental population of residents in Guayaquil, the city of Daule, expand the service in the city of Daran, and also serve the permanent and seasonal population of the major communities of the Santa Elena Peninsula, a summer resort for Guayaquil and the country, now without public water supply. The Project would improve water service for 452,000 people and serve an additional 102,000 popu- lation in the project area by 1977. 1.03 In July 1973, a preappraisal mission visited Guayaquil to evaluate the status of the preparation of the Project and EMAPts capacity to execute it. Additional information and studies were requested from EMAP and, following the receipt of this data, a mission composed of Messrs. Alfonso Zavala, Lars Jeurling and Claudio Fernandez (consultant) appraised the Project in Guayaquil in October 1973. Mr. Jeffrey Balkind from the Transportation and Urban Projects Department also participated in the mission to evaluate the urban development aspects of the Project and supervise the work of two urban consultants. 1004 Following review by the mission, project components were defined, construction programs rescheduled and cost estimates revised and updated by the engineering staff of EMAP and consultants. This report is based upon this information and the findings and studies of the mission.  -2- 2. THE SECTOR 2,01 The development of the sanitation sector in Ecuador has been adversely affected by inadequate institutions and a lack of organization, both at the central and local levels, and a lack of financial resources. The Ecuadorian Institute for Sanitary Works (IEOS) estimates that in 1973, out of a total population of 6.8 million, 65% of the urban popu- lation and 10% of the rural population had access to public water supply, and some 60% of the urban population was served by sewerage, Sewerage is almost nonexistent in rural areas. The existing deficiencies in water and sewer facilities result in a high incidence of water-borne diseases and high-infant mortality rates, according to IEOS (statistics not available). 2.02 The present urban population of about 3,000,000 inhabitants is expected to increase to over 4,000,000 in 1980, with consequent large investment needs in the urban sanitation sector. The rural population is defined to consist of the population living outside of the capital of the canton (mostly communities with less than 2,000 inhabitants and scattered population). 2.03 In the seven large cities - Guayaquil, Quito, Cuenca, Ibarra, Ambato, Esmeraldas and Loja, water supply and sewerage is the responsi- bility of autonomous municipal entities, "Empresas". Municipal councils, under the supervision of IEOS, are responsible for water services in the other urban communities. In rural areas, water supply and sewerage are handled by local councils supervised by the Ministry of Health. 2.04 IEOS and the National Planning Board are responsible for sector planning. IEOS is responsible for financing, project prep- aration and construction of water supply and sewerage systems in communities of 2,000 inhabitants or larger. For the seven cities mentioned, its activities are limited to approving feasibility studies. The Institute also provides technical assistance to the municipalities. In the past, the activities of the IEOS have been seriously hampered by a lack of financial resources from central government contributions 1/. IEOS has now an earmarked share of the oil royalties, (with the present price and production, it is estimated that this source of funds would provide S/80 million a year), which alleviate its financial problems. 2.05 The first national sanitation program (1966-1972) prepared by IEOS concentrated on the urban centers over 2,000 inhabitants. Out of the total planned investments of about S/1.5 billion, 77% was 1/ Out of S/85 million budgeted for capital investments in 1966-1972, only 500,000 have been available because the Government has preferred to channel the funds available for the sector outside IEOS and limited the functions of the latter to technical assistance.  -3- actually invested. International loans, mainly from IDB, accounted for almost 40% of the total financing and local government financing for about 40h Central government contributions (IEOS included) were about 20%. IEbS built facilities that accounted for about 15% of the total invest- ments, and the "sempresas" facilities for the remaining 85%. 20o6 The objective of the second program (1973-1977), now being implemented by IEOS, is to serve 50% of the total population with water (80% in urban areas, 25% in rural areas) and 40h% writh sewerage (70% in urban areas, 14% in rural areas). S/2.2 billion (US$88 million) are to be invested over the 5-year period (some 95% in urban areas), Local government contributions and international loans are each planned to finance slightly over 40% of the program; central government contri- butions, less than 15% and internal cash generation, less than 5%. 2.07 In order to carry out this program, a revolving fund for urban and rural sanitation has recently been created. The fund is administered by IEOSo The fund, through which most of the development program for the sector will be financed, will be funded from central and local government contributions, petroleum royalties and inter- national loans. 2.08 Until now, IDB and supplierst credits have been the main inter- national source of finance for the sector. IDB loans were made for idater supply in Quito (US$7 million in 1963 and US$18.8 million in 1972) and sewerage in Guayaquil (US$7.6 million). A US$11 million IDB loan for water supply and sewerage for small and medium-sized cities has recently been made effective. 2.09 The major problEns of the sector are: (i) Revenues generated within the sector cover operation and mai_tenance of the systems but, as a whole, are inadequate to cover depreciation; even less earn a rate of return on net fixed assets; (ii) IEOS has little demonstrated capacity to prepare and execute projects and would need to be substantially strengthened to carry out the ambitious national sani- tation plan. Most local institutions are also weak; (iii) The existing training program is inadequate to meet the needs of the national plan; and (iv) Domestic consulting firms, contractors and industry have limited capacity to design and execute projects and supply the materials necessary to carry out the plan. A WHO-Bank technical assistance mission will visit Ecuador later this year to review sector needs and assist IEOS to make insti- tutional improvements, establish training programs, etc.  2.10 The proposed project would be the vehicle for institutional improvements in the Guayaquil area, and would permit the establishment of a financially self-sufficient water operatian without need for govern- ment subsidies through earmarked taxes or direct budgetary contributions, resources that could be used to finance social projects such as rural water supply programs.  -5- 3. EXISTING WATER SUPPLY OF GUAYAQUIL Existing Water Supply Facilities 3.01 EMAP is the water supplier for the entire Guayas Province and its capital, Guayaquil. It supplies about 50% of the population (476,ooo) of Guayaquil, and about 48% (62,000) of the population of the "rural" towns of Naranjito, Milagro, Ingenio San Carlos, Yaguachi and Duran (Eloy Alfaro). 3.02 The source of water for Guayaquil is the Daule River. The minimum dry weather flow observed during the last 50 years is 13.3 m3/sec, well above the expected demand for the year 2000 for Guayaquil and the Santa Elena Peninsula. Five brooks, 95 km east of Guayaquil, yielding over 0.4 m3/sec, are sufficient to provide water supply demands for the other towns up to 1985. 3.03 Water distributed in auayaquil is treated in the La Toma water treatment plant, located 23 km north of the city, through a conventional sedimentation and rapid sand filtration system producing 140,000 mn /day, and a solid contact reactor and rapid sand filtration system with a capacity oL 80,000 rin/day. The rural towns are served from the Lolita water treatment plant, a plain sedimentation and slow sand filtration facility located 54 kcn east of the Guayas River. 3.o4 The water distribution system in Guayaquil is unsatisfactory; extensive leakage in the downtown network and other sections of the city are causing high losses and low pressure service (6 to 10 psi) in most of the distribution network. The great amount of unaccounted-for water, due to excessive consumption by unmetered customers and leakage in the distribution system is illustrated in the following tabulation: m3/d % Production 196,000 100 Residential consumption (unmetered consumption estimated on the basis of average metered consumption) 79,000 4o Commercial and industrial consumption 25,000 13 Unaccounted-for water 92,000 47 Of the 92,000 m3/d unaccounted-for water, three quarters (36% of production) are estimated to be lost through leaks in the system, 21,000 m3/d (11% of production), through waste by unmetered consumers.  -6- 3.o5 Existing reservoir capacity in Guayaquil is 94,000 m3 and represents 31% of the average daily production required by 1980. This is considered adequate because the city is served by a separate water supply for fire protection and the system is connected to the treatment plant by two parallel transmission mains. 3.06 Operation and maintenance of the water production facilities is good, and failures in the distribution system are quickly repaired. 3.07. Water meter maintenance and repair is inadequate: 12% of the existing meters are known to be defective, are not being repaired and should be replaced. The meter maintenance shop has a limited capacity for calibration and repairs, although personnel is well-trained. BEAP is now in the process of purchasing two-meter testing and repair benches and intends to establish a meter maintenance program. Assurances were obtained during negotiations that such a program be established by December 31, 197h. Sewerage System 3.08 Sewerage services for the city of Guayaquil are provided by the Municipality (Concejo Cantonal de Guayaquil), through the Municipal Sewerage Company of Guayaquil (EMAG), an autonomous entity, presently only acting as the executive administrative agency for a US$7.6 million loan from IDB, in a first sewerage project with a total cost of US$13.1 million. 3.09 Maintenance and operation of the sewerage systems serving Guayaquil and other towns, are legally EMAG's responsibility, and are being carried out by the Municipality without any charge to the users for the services provided, 3.10 The sanitary sewerage system of Guayaquil serves only 200,000 inhabitants (about 4&% of the population served with water supply). After the IDB financed project is completed in 1975, an additional 200,000 people would be served. 3.11 EMAG is presently preparing a second loan application to IDB to finance a project of S/800 million (US$32 million) for a second stage of the sanitary sewerage system, the first stage of a storm drainage system, a suburbio earthfill project, and the paving of certain primary roads (Estructura Vial Basica). Urban Development Plan 3.12 Because of the lack of municipal urban planning and ineffective development controls, public utility service expansion in Guayaquil has not followed a rational plan. EMAP has been extending services to residential and industrial areas under political pressures and "de facto" situations, especially in the northern part of  -7- the city. The low-income population migrating to the city has been con- centrating in the western zone of Guayaquil (El Suburbio), an area which now has an estimated population of 400,000 inhabitants, and where basic sanitation services are deficient because tidal swamplands cover large areas. In October 1973, the Municipality and UNDP signed a contract for the preparation of an Urban Development Plan for Guayaquil. EMAP intends to participate in the preparation of this plan and will use it as a basis for the Project's proposed water supply master plan to year 2000. Urban planning is further discussed under para. 4.16. Waterworks Under Construction 3.13 EMAP has contracted some important waterworks, now under con- struction, to satisfy existing needs of the low-income population. These facilities are not part of the Bank project and are financed by EMAP (see paragraph 3.14). The objectives of these works are: (i) to construct by March 1975 water supply facilities and 30,000 house connections (not including meters) in the "suburbio" for an estimated population of 300,000 in- habitants scattered over an area of 1,200 hectares. (The supply and installation of meters for these con- nections are to be financed from the proposed Bank loan - see para. 4.04); (ii) to serve the southern part of Guayaquil up to Puerto Maritimo, including potential urban development of the El Guasmo area, and housing projects of the Ecuadorian Institute of Social Security and the Housing Bank; (iii) to increase from 220,000 to 320,000 m3/day the capacity of the La Toma water treaument plant by modification to the sedimentation basins and construction of other im- provements to permit a future increase in the filtration rate (expansion of the filtration facilities is included in the Bank project); (iv) to increase the raw water pumping capacity from the Daule River to the La Toma treatment plant from 220,000 to 320,000 m3/day; (v) to install 25,000 water meters through the end of 1974 to eliminate the existing unmetered house connections in the central area of the city. Assurances were obtained during negotiations that all these works be executed and completed as planned.  -8- 3.14 The financing of these waterworks has been provided as follows: (i) the construction of a transmission main up to Puerto Maritimo, distribution system for the "suburbio" and house connections, through a suppliers' credit from SOCEA-HALBERGERHUTTE, a french-german joint venture, for S/195,000,000 (US$7.8 million), of which 25% is to be paid during the construction period (September 1971 - March 1975) and 75% in five more years, up to 1980, at an interest rate of 8%; (ii) the increase of the sedimentation capacity of La Toma treatment plant, contracted at S/16.25 million (US$o.65 million), using current funds from EMAP's 1973 and 1974 budget; and (iii) the purchase and installation of new pumping equipment and water meters from EMAP's current funds, to be disbursed in 1973 and 1974, for a total of S/43.8 million (US$1.75 million).  -9- 4. THE PROJECT 4.01 The Project is the first stage of a long-range program. It would be carried out in three and a half years, 1974-1977, and would have the objectives of: (i) providing water supply to 80% (960,000 inhabitants) of Guayaquilts 1977 population, concentrating primarily on extending service to low-income families in the "suburbio"; (ii) serving the towns of Duran and Daule where, by 1977, an additional population of 35,000 inhabitants would benefit from the Project; and (iii) supplying water to the Santa Elena Peninsula towns, including some small villages (rural population) located along the road from Guayaquil to Santa Elena, serving about 60% of. a 1977 resident popu- lation of 43,000 and 100% of a tourist population of 24,000 of the same year. The second stage would start in 1978 to cover the needs of Guayaquil and other Guayas Province cities up to the year 2000. For this purpose, a master plan for the year 2000 and a feasibility study to cover the needs up to 1985 would be prepared during the first stage of the Project (see para. 4.16). 4.02 Four hundred thousand people live in the "suburbio" area of Guayaquil without adequate water supply. Three hundred thousand live in an area where a distribution system is now under construction (see para. 3.13). One hundred thousand live in the Suburbio West, for which the Bank project will provide facilities. This is a squatter area west of the city, prone to flooding. The settlement has been partially upgraded and further improvements are in progress. The inhabitants of this area will be the major beneficiaries of the Bank project. 4.03 The towns of the Santa Elena Peninsula, Playas (General Villamil), Salinas, Santa Elena, La Libertad and Ballenita (see map), are attractive to tourists during the warm season from January to April because of the beauty of its beaches. Their permanent population of 76,000 inhabitants (and another 24,000 temporary residents) obtains water mqstly from water tank trucks at a very high cost, often at S/60/mJ (US$2040/m3), that is, 24 times the average cost of residential users in Guayaquil. This water is contaminated and comes from shallow, unprotected wells 30 to 50 k1m away,  -10- 4.04 The principal elements of the Project are detailed in Annex 1, and summarized below: (i) interconnection of the force-main system of 16"', 42'1 and 50"V diameter pipelines to convey an average of 320,000 m3/day raw water to La Toma water treatment plant; (ii) increase the La Toma filtration rate to 320,000 m3/day; (iii) purchase and installation of 15,000 im of a 72t1 diameter transmission main between La Toma and Tres Cerritos Reservoir, to increase the capacity of the transmission system (with existing 42"' and 50"s transmission mains) to 320,000 m3/day; (iv) pipe replacement and distribution ne-twork improvements in downtown Guayaquil, Urdesa and other sections where existing pipes have been corroded; (v) expansion of the distribution system in Eloy Alfaro (Duran), Santa Ana, Mapasingue and the Suburbio West, to serve low-income population, new low-cost housing projects of the Ecuadorian Institute of Social Security and the Housing Bank, and other new urban developments to relocate people living in substandard areas in Guayaquil; (vi) installation of a water supply service to the nearby town of Daule for a design population of 24,000 in- habitants; (vii) construction of a water system for the Santa Elena Peninsula, with a total capacity of 25,000 m3/day (see Annex 1); (viii) purchase and installation of 30,000 water meters in the "suburbiott area, where a water distribution system is now being installed (see para. 3.13); (ix) water supply Master Plan for Guayaquil and other areas served to year 2000 and a feasibility study to the year 1985. 4.05 The communities to be served on the Santa Elena Peninsula are located from 50 to 120 km from Guayaquil. Available studies and a preliminary review of desalination costs indicate that neither desalination nor groundwater are feasible. However, contrary to con- clusions presented in earlier reports, EMAP is now successfully ab- stracting limited amounts of groundwater in the peninsula. If sufficient groundwater could be found to serve the-town of Playas, the Project could be reduced by about US$2.0 million. In the less likely event that the towns of Salinas, Libertad, Ballenita and Santa Elena could  -ll- also be served with groundwater, the cost saving could be as much as US$5.0 million. Consequently, EMAP's consultants are now conducting groundwater and desalination studies which would be retroactively financed by the Bank to determine whether these two methods could assist in solving the peninsula's water supply problem. Assurances were obtained during negotiations that no construction will be under- taken on the Santa Elena Peninsula water supply project component for which designs, specifications and tender documents have been prepared, until EMAP's consultants finish the studies and satis- factorily demonstrate to the Bank that the most economical solution has been selected. The presently proposed solution would be modified, if necessary, to reflect the results of these studies. 4.06 Unaccounted-for water in the rural area served from the Lolita water treatment plant is estimated at 79% (see Annex 4). It is caused by excessive leakage, lack of meters (only 22% of house connections metered) and clandestine installations, During the rainy season, the slow sand filtration plant cannot properly treat the raw water high turbidity. The master plan would include studies for the area served by the Lolita plant and recommend improvements to the plant, transmission and distribution facilities. 4.07 The estimated cost of the Project is detailed in Annex 1, and summarized below. The corresponding investment schedule is shown in Annex 2. PROJECT COST ESTIMATE ------S/ million- -US$ million- Local Foregn Total Local Foreign Total Water Production .50 8.00 8.50 .02 .32 o34 Transmission Main 45.75 11050 156.25 1Q83 4.42 6.25 Distribution System Expansion and Im- provements in Guayaquil and Duran 47-50 46.25 93275 1.90 1.85 3.75 Water Supply for Daule 8.00 13.75 21.75 .32 .55 .87 Water Supply for Santa Elena 125.00 241.25 366.25 5.00 9.65 14.65 Water Meters for the "suburbiol? 15.00 12.00 27-00 960 .48 1.08 Construction Subtotal 241.75 43l.753 267 17.27 26-M Land 2.50 _ 2.50 .10 - o10 Master Plan and Feasibility Study 5900 10900 15900 .20 040 o6o Engineering and Adminis- tration (10%) 44o90 22.45 67-35 1.79 .90 2.69 Contingencies: Physical (15%) 36.25 64.80 101.05 1.44 2.59 4.03 Price 47o90 50.70 98.60 1.90 20o4 3.94 Total Project Cost 378.30 579.70 958-00 15.10 23.20 38.30 Total to be Financed 9  -12- 4.08 The estimates are based on designs prepared by EKAP and its consultants, cost estimates updated during the appraisal, and suppliers' cost quotations of equipment and material. Local and foreign exchange components were established on the basis of current works being carried out by EMAP contractors in water distribution, reservoirs, transmission mains and treatment plant improvements. Based on this information, the foreign exchange component of the Project is estimated to be 60% of the of the total cost (65% for physical works and studies, 33% for engineering and administration). All costs have been adjusted for 1974 prices. Physical contingencies of 15% on directly imported equipment and civil works reflect potential additional costs which may arise during detailed design and construction of some of the project components. Price con- tingencies of 10% per annum for local cost and 6% per annum for the foreign exchange component of the Project have been allowed, reflecting local inflation and estimated inflation in suppliers' countries. Should price contingencies rise more than estimated, the distribution component of the Project would be reduced by the amount of such contin- gency increase. Amount of Proposed Loan 4.09 A loan for US$23.2 million, equal to 61% of the total project cost of US$38.3 million, is proposed in order to finance 100% of the foreign exchange component of the Project. interest during construction on the loan, amounting to US$3.15 million, local costs, and engineering and administrative costs, equivalent to US$18,5 million, would be financed by EMAP. Procurement 4.10 All material, equipment, civil works and services to be financed out of the proceeds of the proposed loan would be procured after inter- national competitive bidding in accordance with the Bank's guidelines. For purposes of bid comparison, the Bank's preferential rules would applicable to local and regional suppliers. Ecuadorian suppliers of equipment and material will be eligible for preference equal to the amount of customs duties and other import taxes which a non-exempt importer would have to pay for the importation subject to a ceiling of 15%. The Bank loan will permit competitive bidding without a requirement that the successful bidder finance the cost through suppliers' credits, and will thus encourage and enable the competent local contractors to participate in the construction of the works.  -13- Disbursement 4.11 The Bank would disburse the loan against the CIF costs of all direct imports, the foreign exchange cost of the consultants' services, and up to 25% of the civil works. The cost of the water resources studies on the Santa Elena Peninsula and final designs of the Project being done by consultants would be reimbursed retroactively from the loan account up to a maximum of US$100,000 for expenses incurred after December 1, 1973. Project Supervision and Administration 4.12 Detailed design, cost estimates and tender documents for the construction contracts are being prepared by the technical staff of EMAP and the consulting engineers, Buck, Seifert and Jost, from USA, a firm acceptable to the Bank. Contract administration and construction supervision would be done by EMAP with the assistance of qualified consulting engineers. During negotiations, agreement was reached with EMAP that, prior to the award of contracts, they should engage consulting engineers, satisfactory to the Bank, for the supervision of the construction contracts for the treatment plant improvements, and the transmission main from La Toma to Guayaquil. Environmental Aspects 4.13 The Project would increase water supply in the metropolitan area of Guayaquil, improving service to the poorer areas of the city, presently without an adequate supply and would eliminate or substantially reduce the need to purchase contaminated water from tank trucks. Similar improvements would be achieved in Duran, Daule, and especially the Santa Elena Peninsula. 4.14 1Parallel to the Project, the Municipality of Guayaquil, through EMAG, would be providing sanitary and storm water sewers to the city, improving the cityts environment0 Urban Development Considerations and Studies 4.15 Comprehensive urban planning and specific urban programs are lacking in Guayaquil, impeding the identification of areas where the water supply and sewerage systems should be extended. For this reason, it has not yet been possible to specify in the Project, at the present time, as much of a water distribution component as desirable to fulfill the social and economic objectives of serving as many low- income people as possible. This refers in particular to the "suburbio" and other low-income areas, where the alternative of preventing new settlements or relocating the existing population to more suitable living areas should be investigated, befcre a decision to extend the distribution system can be made. Thus, there is an immediate need for studies to establish how and where the city should grow.  -14- 4.16 UNDP plans to make a grant of Us$600,000 to the Municipality of Guayaquil for a comprehensive urban development study of the metro- politan area. So far, US$90,000 have been committed for preliminary work by UNCHBP, leading to a definition of the scope of the work to be undertaken and terms of reference for consultants to be selected thereafter to execute the study. Meanwhile, the Bank is discussing the scope and orientation of the study with the UNCHBP. Annex 13 outlines the major areas which the Bank considers should be covered by this study. 4.17 EMAP will base its long-range water supply master plan and feasibility studies for the 7-year program of works beginning in 1978 on the UNDP urban master plan. In addition, the UNDP study will be the basis for EMAP decisions on the expansion of water distribution facilities representing about 15% of the Bank project. In view of the long lead time necessary for urban development plans to have a signi- ficant impact on population growth and settling patterns, it is unlikely that more than about a third of the proposed distribution system expansion (5% of project cost) would be modified by these studies. Because the scope and terms of reference for the UNDP master plan study are not yet defined, the Bank project includes funds to enable EMAP to undertake, in addition to the water supply master plan and feasibility studies, urban studies necessary to provide the infor- mation EMAP requires as a basis for its master plan and distribution system studies. The studies which should be part of the UNDP master plan study, but which might have to be done by EMAP, are the following: (i) a study of the costs and benefits of upgrading squatter areas (including expansion of existing areas), especially in the "suburbio"l and Mapazingue (another low-income area); (ii) as an alternative to further "suburbio'" extension, feasibility studies for the extension of infra- structure facilities to other areas of the city, which could be utilized for low-income housing, such as El Guasmo, Mapazingue, Urdesa in the north, and in Duran in the east across the Guayas River; and (iii) a socioeconomic study to establish consumers' capacity to pay public utilities and land tenure in low-income areas. 4.18 The studies to be carried out by EMAP would be the evaluation of alternate sources of supply for the Santa Elena Peninsula described in paragraph 4.05 and the water supply master plan. The latter should be based on the development of Guayaquil foreseen in the UNDP urban master plan and would: (i) Review population growth and urban development and determine water demand in EMAP's service area;  (ii) Evaluate water resources, in particular the adequacy of supply from the Daule River. Demand for irrigation water from the Daule River could reduce the amount of water available for Guayaquil and potential conflicts should be resolved and/or other sources of water evaluated; (iii) Establish a long-range water supply program to the year 2000 and a 7-year investment plan, beginning in 1978, including feasibility studies for the works proposed in the 7-year investment program; (iv) Establish the feasibility of distribution system components of this project in areas which could be utilized for low-income housing in Duran and Guayaquil's districts of El Guasmo, Mapazingue and Urdesa. (Fifteen percent of the project funds are allocated to this distribution system component.); (v) Recommend improvements to the Lolita treatment plant and the transmission and distribution systems served by the plant; and (vi) Review long-range sewage disposal plans of EMAG and recommend solutions to possible corflicts between EMAP and EMAG long-range programs. The funds included in the Project, US$600,000, are sufficient for the studies discussed above and in paragraph 4.05. Should the UNDP master plan include the studies discussed in paragraph 4.17 (i), (ii) and (iii), the funds not required would be used for additional distribution system expansion. 4.19 The lack of urban planning in Guayaquil is caused by the weakness and lack of coordination among municipal institutions responsible for planning, project execution and operation. In particular, the office of Municipal Planning (Planeamiento) is not executing its planning role and appears to have lost the confidence of the Mayor. Although reform of institutions involved in the urban development of Guayaquil is not within the scope of the present project, EMAP should contribute towards a workable urban development program. The Bank should closely follow the execution of the UNDP study and the implementation of its recommendations to assure that institutional improvements will be recommended and implemented. In particular, the UNDP-financed urban study should make recom- mendations on how to strengthen the overall planning and execution of urban investments in Guayaquil.  -16- 5. JUSTIFICATION 5O01 The Project is necessary to cover the immediate and inter- mediate water supply needs of the cities of Guayaquil, Daule, Duran, and those on the Santa Elena Peninsula. In addition, portions of the distribution network in central Guayaquil and Urdesa are badly corroded and need replacements to eliminate excessive leakage; almost 50% of the water produced is lost in leakage through pipes and house coniections, which is reflected in the low revenue effectiveness index (REI) of 33% for 1973 (see para. 6.08). Pressure in the distri- bution system is kept as low as 5-6 psi to reduce leakage and service is reduced nightly to some areas to replenish reservoirs. 5.02 EMAP is now constructing major extensions of the distribution network in the "suburbio", one of the poorest sections of Guayaquil (see para. 3.13). The Project will supply water to this area by reducing waste of water and increasing treatment plant and transmission capacity. The Project will also finance the purchase and installation of water meters for customers served by this extension and the con- struction of distribution facilities for additional consumers in the "suburbio", namely the "suburbio west". Additional water main extensions, also serving the low-income population, will be built as part of the Project once the plans for the development of Guayaquil are better defined (see para. 4.17). 5.03 The Housing Bank and the Instituto Ecuatoriano de Seguridad Social are building new developments for the low-income population in the district of Eloy Alfaro (Duran), and an extension of the distri- bution system there will be necessary in the immediate future. The Bank loan includes funds for this extension (US$2.5 million), which would be disbursed once the appropriate studies have been made and approved by- the Bank. 5.0o Demand and population forecasts will be made as a part of the long-range water plan included in the Project and the Urban Master Plan for Guayaquil. However, the population growth and the immediate water demands up to 1980 have been estimated as shown in the table below (see Annex 4). These estimates are based on existing population growth trends and settling patterns which are unlikely to change sig- nificantly during this short period, and are thus considered reliable. Estimates of the population served are conservative. Santa Elena Peninsula Rural Guayaquil and Daule (Perm. & Seas. Residents) (Duran included) Pop. % Demand Pop. % Demand Pop. % Demand Year ('000) Served ('OOO)m3/d ('000) Served ('OOO)m3/d ('000) Served ('O0O)m3/d 1973 l,0OL 47 196.0 95 0 3.2 128 48 33.0 1980 1,386 85 306.0 136 66 12.0 168 56 25.5  -17- ProJect Selection 5.05 The Project is the least-cost solution to satisfy the ex- pected 1980 water demand. Feasibility studies for distribution system extensions, which represent about 15% of project investments, would be prepared by EMAP's consultants and submitted to the Bank for review. The project elements were selected to achieve maximum immediate impact in water supply service improvements for unsatis- factorily served population, including the low-income population of the "suburbio". Major components to satisfy future demands will be identified and evaluated in the master plan and constructed in 1978 and thereafter. Incremental Rate of Return on Investments 5.o6 The incremental financial rate of return on total investments is about 12%. Because the rate of return calculation is based on the consumers' willingness to pay only as reflected in the water tariff. this rate does not reflect the social benefits (such as health benefits) of providing an adequate supply of safe water to a large segment of the urban poor at tariffs set in accordance with their ability to pay. 5.07 Specifically, the following benefits, which are only marginally included in the revenues collected as a result of the Project, can be mentioned: (i) Health benefits deriving from an increased per capita consumption of safe, treated water piped into the customers' premises; (ii) Improvements in water service. Saf'e water at a satisfactory pressure will be available continuously. In low-income areas, water is now purchased from the tank trucks at S/20/m3, but under the proposed project it will be available on the user's premises at S/2/m3. (iii) Increase in the land values, as a consequence of the installation of water supply axid sewerage services, This increase will be most pronounced in the Santa Elena Peninsula and in the ! suburbio" area. 5.08 If water sales would be 10% less than projected, the incre- mental rate of return would only drop to 11%. 5.09 The Santa Elena Peninsula part of the Project will provide benefits to a poor resident population and high-income seasonal popu- lation. The water tariff will be designed to ensure that the seasonal population pays the full cost of providing the high peak seasonal water demand service (see Annex 6)~ Assurances were obtained during negotiations that the tariff for the Santa Elena Peninsula will accom- plish this goal,  -18- 6. THE BORROWER 6.01 The "Empresa Municipal de Agua Potable de Guayaquil" (EMAP) will be the borrower of the proposed loan. It is an administratively independent municipal entity, reorganized by a municipal Ordinance of August 23, 1972, as an autonomous agency with the purpose of supplying potable water to the city of Guayaquil and the districts (cantones) of the Guayas province; it owns its assets, prepares its budgets, generates its own funds (water services and bond issues) and is authorized to receive other funds for financial assistance (assigned taxes, municipal and government contributions and loans). The August 23, 1972 ordinance supersedes another ordinance creating the Empresa Municipal de Agua Potable de Guayaquil in September 1970 By Supreme Decree No. 692, dated May 11, 1971, the National Government authorized EMAP to supply potable water to the districts (cantones) of Salinas and Santa Elena, both in the province of Guayas. 6.02 EMAP is governed by a Board of Directors of five members chaired by the Mayor of Guayaquil. The other members are: the President of the Water Affairs Committee of the Municipal Council, another member of the municipal council, a member of the local professional association of engineers, and a member of the "Camara de Propiedad Urbana (Charter of TJrban Property O-nners). The manager and internal auditor are appointed by t-he municipal council for an indefinite period. 6.03 The Board meets weekly, and makes major decisions including the approval of the annual budget. The Board is responsible for prep- aration of tariffs and their submittal to the Municipality of Guayaquil. The municipality obtains approval of these tariffs from the Junta Nacional de Planificacion y Coordinacion Economica and the Ministry of Finances. The deputy manager, the legal advisor, the treasurer, and the heads of the Technical, Administrative, Financial and Operations Departments are appointed by the Board of Directors. 6.o)L In November 1973, the Board of Directors approved a new organization for the Empresa which has been reviewed and found ac- ceptable by the Bank. The Manager is responsible to the Board of Directors for the administration of EMAP, and is assisted by a deputy manager (subgerente) and four Department Chiefs (Finance, Technical, Operations and Administrative), who report directly to the Manager's office (see Chart 8370). Staff 6.O' The present manager of the Empresa, the former commercial manager of Guayaquil's private electric power company (EMELEC), has been in charge since September 1972. He is a very capable and dynamic administrator. The position of deputy manager is now vacant because the position has been created under the latest reorganization, but efforts are being made to find a suitable candidate. The staff is  -19- adequate in number and in quality, the new organization functional. During negotiations, assurances were obtained that EMAP will afford the Bank an opportunity to comment prior to any important change in EMAP,s organization. 6.o6 EMAP has sent several engineers to be trained overseas on specific subjects, such as: design, operation, meter maintenance, etc. Personnel in the finance department will require training to administer the new accounting and computerized billing systems now being installed (see para. 6.10). During negotiations, assurances were obtained for the establishment of a local training program for financial personnel. The program could be administered through local universities assisted by PAHO and/or management consultants (see para. 6.10). 6.07 The Empresa has a staff of 80 professional employees and a total of 287 employees, an average of 1 employee per 1,700 persons served. This ratio is relatively low for a utility supplying water only, (Bogota Water and Sewerage Company serves 2,400 persons per employee), but it is expected to improve in the course of the project development, as the population served will nearly double without major staff increase. Salaries paid are adequate and are considered com- petitive for similar requirements in qualifications and responsi- bilities in private activities, except for the position of manager. The salary of the latter will be gradually increased to the level paid in the private sector. Billing, Accounting and Revenue Effectiveness Index (REI) 6o08 The billing system is good and fully computerized, and customers are billed monthly. However, because of EMAPts backlog in installing meters and a 3 to 4-month delay in incorporating the readings of the newly installed meters in the billing cycle, EMAPts revenues are negatively affected. The Revenue Effectiveness Index (REI) 1/ shows the effect water wastage, leaks and slow conversion of unmetered to metered accounts have on EMAP's financial situation. A well-operated company with 100% metering should have an REI of about 75% to 80%, Actual - Projected------------ 1973 1976 1978 1980 Revenues/m3 Produced 1.06 2.22 2.86 3.44 Sucres/m3 Metered 3.22 3.35 3.78 h452 REI 33% 66% 75% 76% 1/ Total revenue: Total m3 water produced average rate per metered m3  -20- Assurances have been obtained during negotiations that: (i) Readings of new meters should be reflected on billing following 30 days of the installation; (ii) A system of payments through commercial banks should be established by December 1974 because EMAP's own cashiers' facilities are deficient; (iii) The REI be increased in accordance with the targets shown above. 6.09 The Tariff Service Regulation Ordinance provides for the following: (i) The Municipality of Guayaquil is exempted from payment for the water service; (ii) All house connections must be metered, and the sub- scribers must pay a progressive tariff based on water consumption and consumer categories, and a monthly meter maintenance charge; (iii) New consumers must also pay a "twater right fee" (Derecho de Abastecimiento) proportional to the assessed value of the property, and a "house connection fee" which includes the value of the water meter. 6.10 The accounting system presently employed by EMAP is not efficient nor practical, but is being replaced with a new system recommended by PAHO, which is satisfactory to the Bank. During negotiations, assurances were obtained from EMAP that the PAHO system will be in operation not later than December 1974, and that consultants will be contracted not later than September 1974 to supervise its implenentation and coordination with an efficient use of EMAP's computer. This accounting system includes fixed asset accounts and will replace the present unsatisfactory fixed asset classification system. Auditing 6.11 There is an internal auditing office reporting to the manager, to ensure that EMAP's accounting conforms with national laws and the Empresals regulations. This office performs its function adequately. However, EMAP does not employ external auditors. Assurances were obtained during negotiations that the proposed borrower will engage external commercial auditors to review EMAPts financial statements and recommend on internal policies, procedures and controls, with 1974 being the first year of audit, and that the auditors' reports will be sent to the Bank within four months of the year audited.  -21- EMAPts Merger with the Sewerage Company 6.12 Sanitary sewerage and storm water drainage for Guayaquil are the responsibility of the municipality, through the Empresa Municipal de Alcantarillado de Guayaquil (EMAG). A comprehensive long-range program has been undertaken with a first stage project financed with an IDB loan, but users are not being charged for this service. The Municipality of Guayaquil has proposed a merger of EMAP and EMAG. The Bank agrees with this prospective merger (EMAP's organization chart shows future sewerage-related activities), but assurances were obtained during negotiations that the eventual merger of the two companies should take place under terms and conditions satisfactory to the Bank.  -22- 7. FINANCES Introduction 7.01 The large investment program (S/258 million or US$10.3 million equivalent), started by EMAP in 1971 (see paragraph 3.13, 3.14 and Annex 1), is being financed by supplierst credits (US$8.5 million, representing 83% of total program cost) and EMAP's net internal cash generation (US$1.8 million). In 1970, EMAP's management foresaw that revenues from the water services would be inadequate to cover its participation in this program. A government decision to assign taxes and municipal contri- butions to the company helped EMAP to cover its participation in the financing of the investment program. As a consequence, EMAP's revenues from water service during the period 1970-73, although increased by 70% due to revenues from 100,000 additional consumers, have been covering its operating costs and depreciation only (and thereby producing a negative rate of return), while earmarked taxes and contributions have accounted for 80% of the Empresa's internal cash generation. Thus, EMAP was able to maintain a satisfactory financial position: as of December 31, 1973, its short-term solvency (current ratio 1.6) and long- term solvency (long-term debt represented 26% of capitalization) were adequate. A summary of EMAP's past finances is given below: -__ _ _ _ S/ million--- 1970 1971 1972 1973 Revenues from Water 57 53 67 95 Operating Costs (36) (45) (50) (76) Depreciation (11) (19) (19) (25) Income before Interest 10 (11) (2) (6) Rate Base 363 545 587 633 Rate of Return 2.8 neg. neg. neg. Taxes and Contributions 44 43 61 64 Gross Internal Cash Generation 65 51 78 83 7.02 Revenues from earmarked taxes are pledged as guarantees of EMAPts supplierst credits. Therefore, they will be maintained during the execution of the Project. However, provisions have been made to increase EMAP's revenues from water (see para. 7.05) so that these taxes can be progressively phased out from the Empresa's total income and used to finance social projects such as rural water supply pro- grams, housing, etc. for the low-income population. After 1980, EMAP will obtain all its revenues from the sale of water and will no longer require earmarked taxes. At that time, the consumer will pay for the service he receives without the help of grants or sub- sidies, a principle EMAP accepts and plans to implement. Assurances were obtained during negotiations that EMAP will grant the Bank a lien on earmarked taxes and other revenues, equal to those granted to EMAP suppliers.  -23- Tariffs 7.03 Present water tariffs in Guayaquil were approved in June 1972 and implemented in 1973. The tariff structure is progressive and based on consumption. The minimum charge of S/28 per month buys 20 m3, and is the same for all categories (residential, commercial and industrial). The charge for consumption over the minimum varies from S/1.60/m3 (lowest residential excess consumption) to S/5060/m3 (highest industrial excess consumption). This tariff structure is reasonable, although a reduction of the 20 m3 minimum consumption allowance should be considered at the time of the next tariff increase, and is shown in Annex ll0 Municipal bodies receive water free, although their consumption is metered. 7.04 The average revenue per cubic meter of water sold is S/1.77. The average price for metered water at the time of appraisal was S/3.80 per m3, the average price for nonmetered water (based on estimated con- sumption) was S/0.70 per m30 At that time, about half of 40,000 con- nections serving 450,000 inhabitants were metered. The average price for metered water is among the highest in Latin America and will decrease as service is extended to lower income groups (connections will double, metered connections quadruple by 1980), but will remain very high. 7.05 Charges for installation and connection are reviewed by EMAP every six months and are established according to assessed property value, diameter of connection, and classification as commercial, resi- dential or industrial. Connection charges are paid over a period of six months. The massive meter installation in the "suburbio" would be more successful if the payment period for connection charges were in- creased to at least five years. EMAP plans to incorporate such an extended payment plan in its tariff. All metered consumers pay from S/5 for a ;1t meter to S/300 per month for a 6" meter as the maintenance charge for the meters, according to size. 7.06 Present tariff levels would be sufficient to cover EMAP's financial needs in 1974 and 1975, based on a reasonable annual increase of 1.4% in per capita consumption, the conversion of existing non- metered to metered connections, and the installation of about 20,000 new metered connections, which would allow the Empresa to reduce its unaccounted-for water from 47% in 1973 to 31% in 1975. However, tariffs should be raised in 1976 to increase EMAP's revenues by 15% to provide the Empresa with the additional funds niecessary to main- tain its participation in the program of works. Subsequently, an annual tariff adjustment of 5% will be necessary topartially compensate for inflation.  -24- 7.07 EMAP will design a differential tariff structure for the seasonal and permanent population of the Santa Elena Peninsula (see para. 5.09 and Annex 6). For financial projection purposes, it has been assumed that all connections in the peninsula will be metered, that the permanent population will have an average con- sumption of 20 m3/month at S/6 per m3, and that the seasonal tourist population will have an average consumption of 50 m3/month during the tourist season (10 m3/montb during the rest of the year) at S/24 per m3. During the season (January-April), the permanent and seasonal tourist population would consume 56% and 44% of total water sold, respectively. Financing Plan 7.08 The financial plan for the period 1974-77 is summarized below. Annex 7 describes the financial assumptions used in the financial projections. EMAP FINANCING PLAN PERIOD 197M-1977 _/ us$ % ------million------ CAPITAL INVESTM1NTS IBRD Project 958.0 38.3 83 Existing Projects 87.9 3.5 8 Interest during Construction 108.9 4.4 9 Total Capital Invest;ments 1b154.d 462 100 =====s =3= ===1 FINANCED BY Net Internal Cash Generation Internal Sources of Funds 630.7 25.2 55 Less: Increase in Working Capital (34-0) (1.4) (3) Less: Debt Service (284.2) (11.3) (25) Funds Available for Capital Investments 312.5 12.5 27 Long-Term Financing IBRD Loan 580.0 23.2 50 Suppliers' Credits 67.2 2.7 6 Total Borrowings 647.2 7 Government Contribution 195.1 7.8 17 Total Long-Term Financing Z 33 7 _  -25- 7.09 The plan is based upon: (i) IBRD financing of S/580 million (US$23.2 million). The Bank loan is assumed to have a term of 25 years, in- cluding four years of grace, and to carry interest at 7 and a commitment fee of 3/4 of one percent; (ii) suppliers' credits of S/67 million (US$2.7 million) for the financing of EMAPts ongoing projects, repre- senting 6% of total investment for the period under consideration. These credits bear an interest rate of 8% and will be amortized in five years beginning 1975 (see para. 3.14); (iii) Government contribution of S/195 million (US$7.8 million) for the financing of 50% of the Santa Elena part of the Project; and (iv) EMAP's net internal resources for S/313 million (US$12.5 million), for financing 27% of the investment. If costs are greater than estimated, the Borrower would be expected to meet overruns, but assurances were obtained during negotiations from the Ecuadorian Government that it will promptly pro- vide the necessary funds if the Borrower cannot do so, and to make available the contribution foreseen in the financing plan. Future Finances 7.10 EMAP's forecast income statements are summarized below. Detailed forecast financial statements are in Annex 8. 1974 l.76 M98 1980 Operating Revenues 125.9 215.3 294.3 411.l Operating Costs 84.8 100.3 119.3 142.7 Depreciation 1/ 25.9 47.3 70.8 93.3 Income before Interest 15.2 67.7 104.2 175.2 Operating Ratio 67.3 46.6 140.5 34.7 Rate of Return 1/ 2.0 6.0 / 6.0 8.0 EMAP's financial performance would continue to be satis- factory after the completion of the Project in 1977, providing the necessary annual tariff increases are made. Assurances were obtained from EMAP during negotiations that EMAP will adjust tariffs to produce revenues from the sale of water sufficient to provide the company with the annual financial rates of return given below: 1/ On revalued fixed assets; see Annex 12. 2/ Based on a 15% tariff increase.  -26- 1974/75 1976 to 1979 1980 and Thereafter 2.0 6.0 8.0 After project completion in 1977, EMAP would generate suf- ficient income to finance around 40% of the construction investment required up to the year 1985. Financial Rate of Return 7.11 The financial rate of return was calculated on the net revalued assets tentatively estimated by the mission. The rate of return should improve during the Project from -0.8% in 1973 to 8.0% by 1980. The main reasons for this improvement are: (i) the increase of subscribers at a rate of 14.2% per annum; (ii) the change of 23,000 unmetered to metered connections by the end of 1974; (iii) a 15% increase in water rates, effective January 1976; (iv) decrease of unaccounted-for water from its high present level of 47% to 20% in 1980. 7.12 The system of revaluation and depreciation of assets is detailed in Annex 12. The existing system is deficient and assurances were obtained during negotiations that a method of revaluation and depreciation satis- factory to the Bank be established by December 31, 1974. Debt Service Coverage Ratio 7.13 This ratio has been satisfactory during 1972 and 1973 (2.5 and 2.0). The projected values up to 1980 would have a maximum of 3.0 by 1980 and a minimum of 1.6 in 1975, which are also acceptable figures. However, in order to prevent the Empresa to undertake uneco- nomical investments, or to assure existing loans (such as IDB loan if EMAG would be absorbed by EMAP; see para. 6.12) without sufficient guarantee of repayment, assurances were obtained during negotiations that EMAP will not incur long-term debts without the Bank's consent unless net income before interest and depreciation is at least 1.5, the maximum debt service in any future year.  -27- 8. AGREEMENTS REACHED AND RECOMMENDATIONS 8.01 During negotiations, the following assurances were obtained: a) From the Borrower: (i) A meter maintenance program acceptable to the Bank will be instituted by December 31, 1974 (para. 3.07); (ii) The ongoing construction program will be carried out by March 1975 and the meters' installation completed by December 31, 1974 (para. 3.13); (iii) Prior to commencement of the construction of the water transmission main for the Santa Elena Penin- sula, a study of alternate sources of water for the peninsula will be carried out by EMAP's consultants (para. 4.05); (iv) Competent consultant engineers satisfactory to the Bank will continue to be employed for studies, design and construction supervision (paras. 4.12 and 4.16); (v) The Santa Elena Peninsula water tariff will be designed to ensure that the seasonal population pays the full cost of water provided for their peak seasonal water demand service (para. 5.09); (vi) EMAP will afford the Bank an opportunity to comment prior to any important change in EMAP's organization (para. 6.05); (vii) Incorporation of new meterd accounts into billing cycle will be improved, payment of bills by customers will be facilitated, and improvements of the REI will be achieved in accordance with the following targets: Year 1973 1976 1978 1980 REI (%) 33 66 75 76 (para. 6.08)  -28- (viii) A satisfactory commercial and cost accounting system, including the classification of fixed assets, will be installed not later than December 31, 1974, and consultants satisfactory to the Bank will be retained to assist and train personnel in its implementation (para. 6.10); (ix) External commercial auditors will be employed to audit EMAPts accounts annually and their re- ports will be submitted to the Bank within four months of the end of the year audited (para. 6.1.); (x) Any future merger of EMAP and EMAG will take place under conditions satisfactory to the Bank (para. 6.12); (xi) EMAP will grant the Bank a lien on earmarked taxes and other income equal to those granted to EMAP suppliers (para. 7.02); (xii) Water tariffs will be reviewed annually and adjusted, if necessary, to produce revenues from the sale of water sufficient to achieve rates of return not less than the following: 1.980 and Year 197j/75 1976 to 1979 Thereafter Rate of return 2.0 6.0 8.0 (para. 7.10) (xiii) Fixed assets on which a rate of return is required will be revalued annually, in a manner acceptable to the Bank (para. 7.12); (Xiv) A debt service coverage ratio of not less than 15 will be maintained (para. 7013); b) From the Ecuadorian Government: (i) that it will make available the contribution foreseen in the financing plan (para. 7.09); (ii) that it will promptly provide the necessary funds to complete the Project (if the Borrower cannot do so), if costs are greater than estimated (para. 7.09). 8.02 With assurances indicated above, the Project constitutes a suitable basis for a Bank loan of US$23.2 million for a term of 25 years, including a four-year grace period.  ANNEX 1 Page 1 of 11 pages ECUADOR WATER SUPPLY PROJECT FOR GUAYAQUIL AND GUAYAS PROVINCE EMPRESA MUNICIPAL DE AGUA POTABLE DE GUAYAQUIL THE PROJECT I. EXISTING WATER SUPPLY FACILITIES Area Served 1. The city of Guayaquil is located on the coast of Ecuador and lies in a low marshy plain the west bank of the Guayas River, at 20111 south latitude and 79053' west of the Greenwich meridian. It is the capital of the Guayas Province and with a population of 1,000,000 people, is the largest city in the country. It is in a tropical area with temperatures varying from 220 to 330 centigrades with two main seasons: rainy warmer season (January through May) called "winter", and a dry season called "summer"', with lower temperatures and scarce precipitation, from June to December. 2. The population in Guayaquil presently served with water supply is estimated at 475,000 inhabitants. West of the city, a large concen- tration of 400,000 low-income squatters live in a flood-prone area called the "Suburbio" without basic sanitation facilities. These people get water from tank-trucks and 30 public fountains, obviously of low quality and insufficient in quantity. 3. On the east side of the Guayas River, EMAP provides water supply service to 62,000 so-called "rural" population in the towns of Duran (Eloy Alfaro), Yaguachi, Ingenio San Carlos, Milagro and Naranjito. These towns have an estimated total population of 128,000 inhabitants. 4. In 1970 the Empresa was given the responsibility of supplying water to the entire Guayas Province, including rural and urban population. The Santa Elena Peninsula, which is formed by the Guayaquil, Salinas and Santa Elena districts (cantones) is under the jurisdiction of EKAP. The peninsula has a permanent population of about 76,000 inhabitants (estimated at the end of 1973) and a seasonal populatian attracted by its beaches to reside in the main towns of Playas (General Villamil), Santa Elena, La Libertad, Ballenita and Salinas. These visitors are mainly the 3% of the higher income population of the city of Guayaquil -nd will amount to an estimated 24,000 persons during the warm season of 1974 (January through April).  ANNEX 1 Page 2 of 11 pages 5. Outside of 80 house connections in La Libertad wlich receive an average of 17 m3/month fram a small surface water source, there is no public water supply in the peninsula. Water is obtained from shallow unprotected wells and sold to the users through water tank-trucks (tanqueros), at a cost of $.15 to 0.60 per cubic meter. Sources of Water 6. There are two main water sources for the city of Guayaquil and the rural area: (a) The Daule River, a tributary of the Guayas Riverp with a maximum recorded flow of 1806 m3/sec on March 7, 1972, and a minimum dry weather flow of 13.3 m3/sec, said to be the lowest in 50 years, a yield well above the expected supply requiremret.,s of Guayaquil through the end of the century; this water is biologically, physically and chemically suitable for treatment and subsequent human consumption; (b) The rural area is supplied with water originating on the western slope of the Andean Mountai_ns in a zone called Bacay, from five impounded streams yielding a minimum of 0.4 m3/sec., sufficient to serve the towns mentioned up to 1985. Other future water sources have been preliminarily selected such as the Milagro aquifer, Chacuayacu and Padul rivers and Santa Lucia streams. Water Treatment 7. Raw water for Guayaquil is pumped from an intake on the Daule River to La Toma treatment plant, by 7 diesel engines driven pumping units with a maximum rate of 220,000 m3/day, through two force mains, one of 42"* 4 (prestressed concrete) and the otheS 50" $ (ste.el) with a length of 1,700 meters, and a capacity of 320,000 m /day at a TDH of 90 meters. A third 16" 4 pipeline is kept as a standby force main. 8. Water treatment is provided in two plants. One of them, La Tomaa, 23 kms. north of Guayaquil, has a capacity of 200,000 m3/day, but production has been increased to a sustained yield of 220,000 m3/day without affecting the quality of the finished water. The plant has two different systems; the first one built in 1950 is conventional, with chemical coagulation, sedimentation and rapid sand filters and a capacity of 120,000 to 140,000 m3/day; the other built in 1971, consists of a so id contact reactor and rapid sand filters, with a production of 80,000 m'/day. Both systems have pH correction with lime, chlorine disinfection, and produce water with a quality that is satisfactory and ccmnplies with WHO Standards for Public Water Supply.  ANNEX 1 Page 3 of 11 pages 9. The other, the Lolita treatment plant, located 54 kms. east of Guayaquil, has an installed capacity of 36,000 m3/day, and was used to supply water to Guayaquil up to 1972. The water entered the city through 4 underwater pipes across Guayas River, which were difficult to maintain and are now damaged and out of service. This plant, built in the beginning of the century, purifies water by plain sedimentation and slow sand fil- tration, followed by disinfection with chlorine. 10. The Lolita plant production is presently consumed in coamunities on the left side of the Guayas River, such as Naranjito, Ingenio San Carlos, Milagro, Yaguachi and Duran (Eloy Alfaro), served by two 55 kilometers long transmission lines of 11" and 22" diameter. An estimated 79% of the 32,000 m3/day presently produced is unaccounted for. There are 6,070 registered house connectimis of which only 1,320 have water meters in these towns and an additional estimated 1,000 clandestine connections along the transmission lines and in the city of Milagro. Water Transmission 11. Two transmission mains, a 421" diameter pretensioned steel cylinder concrete pipes and a 50" diameter steel pipe, both with cathodic protection, and with a length of 21,500 meters, provide a carrying capacity of 220,000 m3/day from the La Tora treatment plant to the West Reservoir. Both lines are in good condition, but the concrete pipe has been tapped at the air and drainage valves in 19 places to serve new residential and industrial developments at a rate of 18,000 m3/day. It is recommended that the use of the 4211 pipe to feed these new and future developments, be regulated. Water Distribution 12. The distribution network consists of 1,200 km of pipe ranging from 42" to 3" in diameter over an area of 30 square kilometers. In downtown Guayaquil, the distribution pipes (some 50 years old) are in poor condition and corroded; a high percentage of breakage is registered, and water losses due to leaking pipes are also high. A similar situation exists in Urdesa Urbanization due to the corrosion of unprotected cast iron and galvanized iron pipe. 13. Reservoir capacity in Guayaquil is provided through seven water tanks with a volume of 94,000 m3, which amounts to 48% of the average 1973 daily production, including the presently high estimated losses and wastages in the system. This reservoir capacity is satisfactory. 14. There is an independent raw water fire protection distribution network in an area of 400 hectares in the older part of the city of Guayaquil, with a water intake on the Guayas River, pumping station and storage tanks located on El Carmen hill, northeast of the city.  ANNEX 1 Page 4 of 11 pages 15. Service pressure in the distribution system is low; the closest point to the Santa Ana Reservoir, the beginning of the Salado waterfront network has cnly 20 lbs/sq. in. of pressure during the day, downtown Guayaquil, 10 lbs/sq. in. and the farthest part, the Unidad Vecinal Sur, a social security fund development, 6 km. to the south, only 6 lbs/sq. in. The high leakage rate in the network seems to be the main cause of this situation. 16. The Empresa conducts bacteriological analyses of the water dis- tributed, through 10 to 12 daily samples. Tests are made for MPN Coli and Total Bacteria counts and residual chlorine. Due to the condition of the distribution network and the lack of pressure, some contamination of the water has been observed in the third quarter of 1973. 17. There were 41,500 house connections in Guayaquil by the end of 1973, of which only 29,000 have water meters. This is one of the main causes for high unaccounted-for water and wastage, since unmetered consumers are charged the tariff corresponding to the minimum consumption, encouraging the waste of water. An EMAP program, now underway, has the target of metering all connections by the end of 1974. Present Water Consumption 18. Present consumption in Guayaquil and the "rural" area was assessed on the basis of information collected from EMAP's billing offices and a survey of the first one to three months'consumption in houses where unmetered house connections were changed to metered ones. A major factor in the high number of persons served per connection, is that apartment buildings and houses have only one house connectian per building. For Guayaquil, the following figures were obtained in 1973: Category Consumption Production Thousand m3/day lpcd Thousand m3/day Residential 100 210 Industrial and Commercial 25 Total 125 196 A consumption of 305 lpcd was assumed in the residential non-metered connections, likely to be reduced when meters are installed. As a result, the per capita water production in 1973 has been calculated in 411 lped, with 36% of water produced as losses in the system, and around 47% total unaccounted-for water.  ANNEX 1 Page 5 of 11 pages II. WATERWORKS UNDER CONSTRUCTION 1971 - Contract with SOCEA-Halbergerhutte (September 1971 - March 1975) The main purpose of this contract is to serve the "SSuburbio"l or West Water Supply System, benefitting an estimated 3CO,000 low-income inhabitants. It includes: (i) 5,600 ml of 1,250 mm # pipe, transaission main from the West Reservoir, 800 mm 0 transmission line to Puerto Maritimo with 11,3b0 ml, and Reservoir Oeste with 22,000 r3 capacity, including 2 passes over Estero Salado; (ii) mains and distribution network, 162 km of pipe with diameters varying from 88 mm to 800 mm; and (iii) installation of 30,000 house connections without including meters. Contracted Cost: US$7.80 million Total progress through December 1973 is around 60%, and has been the main investment activity this year. The investment distribution is: 1971 - 7.5%; 1972 - 22.5%; 1973 - 30%; 1974 - 30%; 1975 - 10%. 1973 - Contract with ZURN-INAEC -(Augst 1973 - December 1974) (i) Transformation of two presedimentation tanks into settling tanks, with coagulation and flocculation units in the old plant, and addition of pipelines to adapt the plant to increase treated water production in 120,000 m3/day; (ii) Coastructi3n of a elevated steel tank with a capacity of 1,000 m and installation of two electric pumps for filter washing. Contracted cost: us$0.65 million Investment: 1973 - 30%; 1974 - 70%.  ANNEX 1 Page 6 of 11 pages 1973 - EMAP Meter Program and Others (i) To buy and install 25,000 meters in direct house connections (guias directas) as follows: 1973 - 7,000 units 1974 - 18,000 units Cost: US$1.00 million (ii) Various small investments according to Budget 1973. Cost: US$0.36 million 1973 - New Pumping Units to be Installed in the Intake on the Daule River by EA (i) Two new units (1 diesel and 1 electric driven) and two new electric motors for two new Worthington pumps. Cost: US$0.39 million This equipment has been bought and will be installed by EMAP, in the first quarter of 1974, to bring the total raw water pumping capacity to 320,000 m3/day, including a standby. III. PROJECT DESCRIPTION The Problem 1. The EMAP's jurisdiction covers the Guayas Province. With regard to present and future water services, the area may be divided into three parts: (a) towns located at the left bank of the Guayas River: Eloy Alfaro (Duran), Milagro, Yaguachi, Ingenio San Carlos and Naranjito; (b) the city of Guayaquil and the town of Daule, on the right bank of the Guayas River; (c) towns located on the Santa Elena Peninsula, including Playas, Salinas, La Libertad, Ballenita and Santa Elena, and a number of small villages (Porsorja, Progreso, San Antonio, Cerecita, Changon). 2. These areas all are poorly served with water, the pressure is low and the losses from leakage and wastage are excessive. The population is growing more than 5% per year and to meet these needs a long-range water suply program is required. Several constraints force us to divide the long-range program in two stages: immediate needs up to 1977, and a second project or Master Plan up to year 2000. These characteristics are:  ANNEX 1 Page 7 of 11 pages (a) lack of an urban development master plan for the city of Guayaquil as well as for the region that includes the districts (cantones) of Guayaquil, Milagro, Naranjito, Yaguachi, Daule, Santa Elena and Salinas. (b) the urgent needs of the squatter population of the "Suburbio" in the western section of Guayaquil, settled on low, often flooded land that has been costly and painfully partially earth-filled; the "Suburbio" population amounts to 400,000 inhabitants around 40% of the total in the city; (c) a comprehensive feasibility study of water supply for the city of Guayaquil and the Guayas Province is not available; instead, individual designs for additions and improvements of the raw water pumping stations, La Toma water treatment plant and the transmission mains, for extensions of the distribution system for Daule and the Santa Elena Peninsula water supply were made available to the mission. Nevertheless, a project, to satisfy the immediate needs, has been defined and cost estimates brought up to date with the participation of EMAP's consulting engineers and technical staff. Final designs of the project are being prepared now by the technical department of the Eupresa, with the assistance of their consulting engineers, and should be sent to the Bank for review prior to the completion of negotiations. Description of the Project Water Intake, Pumping Station and Force Mains 3. The Empresa is adding 120,000 m3/day pumping capacity to the raw water intake system located 24 km. north of the city of Guayaquil and by the time the project is started, the new pumps should be installed. This will bring the total capacity to 320,000 m3/day which appears to be sufficient until 1980, when water demand will exceed this capacity. The project also includes interconnection of the force mains of 42" and 50" diameter with a 16" diameter standby line to bring the total carrying capacity of the force mains system to 320,000 m3/day with a TDH (Total Dynamic Head) of 90 meters. La Toma Water Treatment Plant 4. The La Toma water treatment plant is now being improved to double the coagulation and settling yield of the old sedimentation units to produce up to 320,000 m3/day of settled water, but the rapid sand filters do not have the ability to treat this water. The project proposes to increase the filtration rate of the first plant 80 to 16Q lts/min/m2 by changing the sand filtration media to dual sand-anthracite media, and adapting the rate-of-flow controllers and operating tables to this increased capacity, and thus raise the overall plant output to 320,000 m3/day.  ANNEX 1 Page 8 of 11 pages Transmission Main Capacity Increase 5. The present 21,500 m. long tpansmissian mains of 422" and 50" diameter, have a capacity of 213,000 m'/day, at a loss of head of 1.08 mts. per 1,000 mts. Additional capacity will be required by 1976, and the project provides for th$ construction of a 72" i transmission main with a capacity of 345,500 m'/day. The combined capacity of these mains will be adequate for the ultimate capacity of the La Toma treatment plant. This new 72" F transmission main will be 15,000 m long, interconnected with the other 412" and 50" diameter mains. Another 7,500 meter section of the 72" # main should be installed during the second stage of the long-range program between 1977 and 1980. Extensions and Improvements of the Distribution Network 6. EMAP engineers in charge of the operation of the distribution system have expressed their concern for the frequent pipe breakages in downtown Guayaquil, Urdesa and other residential areas; sample exavations show that old, unprotected steel and cast iron pipes are corroded and need to be replaced. A high percentage of losses and unaccounted-for water is caused by leaky pipes in these areas. 7. Nearly 60% of the population of Guayaquil has a low income (less than 2,000 Sucres month/family) and most of them live without basic sanitation services in the "Suburbio". The municipality has been trying to organize this squatter population by land upgrading and laying out blocks and streets in a flood-exposed area of about 1,200 hectares west of Guayaquil, a very costly and time-consmning work; this area does not have basic sanitation services and some of its inhabitants have to be relocated in places not yet well-defined. A water distribution network is now under construction for the main upgraded part of this "Suburbio" sections but not the #Suburbio" west. 8. To improve this situation, the project includes the following distribution system works: (i) The replacement of parts of the distribution network in downtown Guayaquil, Urdesa and other residential areas, of the corroded and broken pipes detected as determined by the hydrometric and leaks-detection study now being carried out by EMAP and its consulting engineers; (ii) Distribution network expansion for the less developed and poorer sections of the city of Guayaquil, and low-income population housing development program  ANNEX 1 Page 9 of 11 pages areas such as Eloy Alfaro (Duran), Mapasingue, Santa Ana, San Pedro, "Suburbiohl west, and some other municipal urbanizations resulting from the relocation of low-inceme dwellers from nonconsolidated areas, according to studies being carried out now and during the project's execution. Water Supply Service for the City of Daule 9. The city of Daule, in the district of the same name, is located 34 kn. north of Guayaquil amid a rich and productive agriculture and cattle zone; it has a population of 12,000 inhabitants distributed over an area of 110 hectares. Presently a small part of the people of Daule get low- quality water with a high chloride cmtent from wells, through a provisinal distributim network and an elevated tank; nevertheless, the objectionable taste of this water cmpels many people to buy water produced in the La Toma treatment plant and transported by water-tank trucks (tanqueros). 10. A new water supply for the city of Daule has been considered in the project to serve an estimated population of 25,000 inhabitants by the year 1990, for an average water consumption of 43 lts/sec (5,750 m3/day), representing 230 liters per capita per day, and an hourly peak of 78 lts/sec. Water will be conducted from La Toma water treatment plant by a 17 kmi, 12" d pipeline. Water Supply System for the Santa Elena Peninsula 11. According to a National Government Supreme Decree dated May 14, 1971, EMAP was given the responsibility of supplying water services to the main to-wns located in the districts (cantones) of Guayaquil, Salinas and Santa Elena, in the Santa Elena Peninsula, one of the most beautiful sumer resorts in Ecuador. 12. It has been estimated that by 1977, at the end of the project4s first stage, 67,000 persons in Playas (General Villamil), La Libertad, Ballenita, Santa Eleaa, Salinas and the villages of Progreso, Posorja, San Antonio, Chongon, and Cerecita will be benefitting from a water supply service, including the seasonal populaticn (January through April), when an estimated 2% of the Guayaquil higher-income population move to the beaches as residents. 13. Estimates made by EKAP and local municipalities indicate that at the end of 1973, the total permanent population was around 76,000 inhabitants, including the small villages mentioned, and that the expected seasonal addition or transient population would be near 22,000 persons. In this figure beach visitors are not included during the weekends which may amount to 60,000 persons in one day.  ANNEX 1 Page 10 of 11 pages 14. Assuming that conveying water from Guayaquil to the town in the Santa Elena Peninsula is the least-cost solution (seawater desali- nation and groundwater abstraction are under study), the Project con- templates supplying the water needs of the permanent and tourist population at the peak seasonal demand (January-April) up to year 1990 for an estimated 170,000 inhabitants. 15. Twenty-five thousand m3/day of water would be conveyed from the West Reservoir in Guayaquil to Santa Elena Reservoir in Santa Elena, through a 24" diameter transmission main (58.4 km - first section) and a 20" diameter pipe (64.0 km - second section); at the end of the first section in Las Monas Reservoir, a branch line 16" diameter 30 km long would carry the water to the beach town of Playas (General Villamil). The water for Salinas, La Libertad, Ballenita and Santa Elena would be distributed from the Santa Elena Reservoir. The city of Salinas is farthest from the reservoir, 15.3 km away, and represents the maximum transmission main length of 138 km from Guayaquil to Salinas. Two pumping stations with a total head of 100 meters each have been included in the first section of the transmission main. Installation of Water Meters in the "Suburbio West" 16. A water distribution network is actually under construction in the upgraded part of the "Suburbio" west. This network includes domestic water connections for about 30,000 low-income families. Water meters were not included in the construction contract. 17. According to legal requirements, all house connections must be provided with water meters. Water wastage in unmetered connections of dwellers of similar socioeconomic conditions is very high, according to field observations made by EMAP's distribution system operation engineers, and the high consumption of previously nonmetered consumers registered in the first month after meter installation. 18. The purchase and installation of 30,000 water meters for the prospective consumers of the "Suburbion west has been included in the Project; this program should be initiated by the end of 1974, and completed throughout the development of the Project, and should be carried out with the participation of specialists to educate the population in this poor section of the city on the benefits of water use. Feasibility Study and Water SUpply Master Plan for Year 2000 19. Long-range planning programs to provide an adequate water supply for the fast-growing city of Guayaquil are required. It has not been possible for EMAP, until now, to prepare such a future-looking  ANNEX 1 Page 11 of 11 pages scheme, due to the lack of a sound urban development master plan and the need to examine on a broad basis, and with regional criteria, the future water supply requirements of the other towns and villages located in the Guayas Province. 20. Guayaquil has been growing at 5.6% per annum during the last decade half of which is due to immigration. This rapid growth highlights the urgent need to plan for commercial, industrial and residential areas, transportation services, markets, public utilities, and recreation areas. An evaluation of such projects from a socioeconomic viewpoint should be a major concern of the UNDP Urban Study. This will in turn affect EMAP's plans for future water supply services. 21. Considering that urban development planning is a municipal responsibility and that the UNDP is assisting the Municipality in this endeavor, the following activities have been included in the project: (i) A feasibility study and long-range water supply master plan for Guayaquil and towns under EMAP's jurisdiction, with the eventual development of a sewerage master plan if merger with the sewerage company should take place. The study should be coordinated with the municipality's urban development study; (ii) Study of the costs and benefits of upgrading squatter areas, (including expansion of existing areas), especially in the "Suburbio"2, Mapasingue, El Guasmo, and other similar low-income areas; (iii) Feasibility studies for the extension of the water distribution network and sewer system (if merger takes place), to areas suitable for urbanization; funds have been included in the project for construction of distribution systems of these new urban developments into which low-income population is relocated. The disbursement of this part of the Bank loan will be contingent upon the completion of these studies and their subsequent approval by the Bank; and (iv) A socioeconomic study to establish capacity to pay for housing, public utilities, transportation, and determine land tenure in low-income areas. March 8, 1974   ANNEX 2 Page 1 of 2 Pages ECUADOR WAUTR SUPPLY PROJECT FOR GUAIAQUIL AND GIAYAS PROVINCE _MSRESA MWIICIPAL DE AGUA POTAEL DE rUAYAQUIL Proj3ect Cost Estimate Local Foreign Local Foreign Cost Cost Total Cost Cost Total -=---Sucres (S/-000) --US$(1OOO)