Tunisia - Rural Water Supply Development (Seventh Water Supply) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4669b-TUN STAFF APPRAISAL REPORT TUNISIA RURAL WATER SUPPLY DEVELOPMENT PROJECT (Seventh Water Supply Project) November 11, 1983 Water Supply and Sewerage Division Europe, Middle East and North Africa Regional Office 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.  CURRENCY EQUIVALENTS (As of April 15, 1983) Currency Unit - Tunisia Dinar, D 1,000 Millimes D 1 US$1.55 US$ 1 0.646 D 1,000,000 = US$ 1,548,000 ABBREVIATIONS ft = foot m meter ha = hectare mm millimeter Km = kilometer Mm3 million of cubic meters inh = inhabitant m3/sec cubic meters per second lcpd = liters per capita per day min minute MEASURES AND EQUIVALENTS Metric System U.K. System Kilometer (km) = 0.62 mile (mi) Meter (m) = 3.28 feet (ft) Cubic meter (3) = 220 gallons (g) Million cubic meters/year (Mm3/year) = 0.603 million gallons per day (mgd) Liter (1) = 0.220 gallon (g) Liters per second (1/sec) = 19,000 gallons per day (gd) GLOSSARY OF ACRONYMS ADB = African Development Bank AFESD = Arab Fund for Economic and Social Development DGR - Direction du Genie Rural DSSB = Direction des Soins de Sant6 de Base of the Ministry of Public Health IBRD - International Bank for Reconstruction and Development IDB = Islamic Development Bank KfW = Kreditanstalt fUr Wiederaufbau OED - Operations Evaluation Department ONAS = Office National de l'Assainissement RDE = Regie cle Distribution des Eaux RDP = Rural I)evelopment Program SFD = Saudi Fund for Development SIDA = Swedish International Development Authority SONEDE = Societe Nationale d'Exploitation et de Distribution des Eaux SONEDE's FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY TUNISIA RURAL WATER SUPPLY DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. INTRODUCTION ............................................ 1 II. THE WATER SUPPLY SECTOR. 2 General Features. 2 Water Resources. 2 Population and Service Levels. 3 Constraints and Priorities in the Sector. 4 Previous Bank Loans and Credits in the Sector 5 Investment Program in the Sector. 6 The Sewerage Subsector. 8 III. DEMAND AND MARKET ASPECTS. 8 Water Consumption and Sales. 8 Growth of House Connections .10 Composition of the Demand .10 Future Water Sales ................... ......... 11 IV. THE PROPOSED PROJECT .11 Project Genesis and Concept .11 Objectives of the Project .12 Project Description .13 Proposed Investments .15 Project Execution .16 Selection and Review of Subprojects .16 House Connections .17 Project Financing .................. ; . .. 18 Procurement .19 Disbursements .20 V. THE EXECUTING AGENCY .20 Background ............ 20 Past Performance .21 This report was prepared and written by Mr. Fritz Rodriguez and Mr. Nabil Shehadeh. Mr. Charles Todd provided assistance at headquarters. 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.  - II - Table of Contents (Continued) Page No. Organization and Management ......................... 21 Staffing ................................... 22 Current Practices and Procedures .................... 23 Outlook of SONEDE's Future Operations ............... 24 VI. FINANCE ................................ 24 Financial Performance in the Sector ................. 24 Revenues in the Project Area ........................ 26 SONEDE's Future Finance ............................. 26 Monitoring System ................................... 27 VII. PROJECT JUSTIFICATION ................................... 28 Project Benefits .................................... 28 Least-Cost Solution ................................. 28 Economic Efficiency in the Sector ................... 29 Affordability ....................................... 29 Environmental Aspects ............................... 29 Institution Building .30 Risks ............... 30 VIII. AGREEMENTS REACHED AND RECOMMENDATIONS ............ 30 LIST OF ANNEXES Annex No. 1 Mid-1982 Service Levels in the Water Supply Sector 2 SONEDE's Five-Year Investment Program (1982-86) 3 Population Served and Water Sales by SONEDE 4 Forecast of Water Consumption and Sales 5 Average Investment Cost in the Project Area 6 Per Capita Investment Cost in Villages 7 Terms of Reference for Financial and Organizational Studies 8 Project Costs by Type of Procurement 9 Project Costs by Type of Expenditures 10 Annual Project Investments 11 Allocation of the Loan Proceeds 12 Selection and Review of Subprojects 13 Estimated Schedule of Disbursements 14 SONEDE - Organization Chart - 1983  - iii - Table of Contents (Continued) Annex No. 15 SONEDE - Income Statements - 1982-1991 16 SONEDE - Table of Sources and Application of Funds - 1982-1991 17 SONEDE - Balance Sheets - 1982-1991 18 Income Statements in the Project Area 19 Assumptions for Financial Projections 20 Monitoring Indicators 21 Calculation of the Average Long-Run Marginal Cost of Water 22 Selected Documents and Data Available in the Project File Map No. 17436 Project Location  I I  TUNISIA RURAL WATER SUPPLY DEVELOPMENT PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1.01 This report appraises a water supply project for about 600 rural com- munities in Tunisia, with a current total population of about 225,000. The project would be Tunisia's first comprehensive attempt to rationalize proce- dures for the installation and operation of public water supply services in rural areas. It basically includes the construction of water supply systems in a number of villages and the setting up of an appropriate network to operate and maintain these systems. The proposed works and a related health education program, which cover a group of villages for which adequate water supply sources have been identified, are estimated to cost US$104.4 million, with a foreign exchange component of US$50.0 million, and are programmed to be executed during the years 1984 through 1989. A Bank loan to finance the foreign exchange component is proposed. 1.02 The proposed project would be the Bank's seventh operation in the water supply sector. While major progress has been accomplished in providing water supply services in cities and towns where they are practically available to the whole urban population, less than half of the rural population is now served by public water supply systems. Of some 4,500 existing villages, only a thousand are now equipped with piped water supply systems. The Government is committed to change this situation and to invest the large amounts required for providing the remaining villages with public water supply. The previous Bank loans greatly contributed to the current high level of water supply ser- vices in the urban sector. The Government's expectation is that the Bank would bring similar contribution to the shaping and strengthening of the rural water supply sector. 1.03 The project concept was first discussed with Tunisian officials in Washington in July 1982. During these discussions and further project prepa- ration in Tunisia, the sector organization in rural areas was reviewed, with particular attention to the line of responsibility for the operation of the rural systems. Agreement was also reached on a financing plan for the project and the level of cost recovery in the project area. A mission composed of Messrs. Fritz Rodriguez and Nabil Shehadeh appraised the project in April 1983.  II. THE WATER SUPPLY SECTOR General Features 2.01 Centrally located on the southern bank of the Mediterranean Sea, Tunisia occupies an area of 160,000 km2 which is rather poorly endowed with natural resources. The Saharan Atlas that runs from west to east at about 280 kms south from the northern coastline, separates the country into two distinct regions: to the north of the Atlas it is a semi-arid area where a majority of the population lives and where most potentially irrigable land is found; industries and other economic activities are concentrated in the northern coastal areas. The mean annual rainfall in this region does not exceed 600 mm. To the south of the Atlas it is an arid land with an average annual rainfall of less than 100 mm (see Map IBRD No 17436). 2.02 Tunisia is administratively divided into 21 governorates, 136 coun- ties and 155 communes. Slightly more than half of the estimated 1983 total population of 6.9 million, which is growing at an average annual rate of 2.7 percent, is considered urban. About one-third of the urban population resides in the two largest metropolitan areas of Tunis and Sfax. Meanwhile, the rural population is widely dispersed into more than 4,500 locations which are often isolated from each other and whose low population density to a great extent impedes rapid implementation of water supply and sanitation systems in these locations. Water Resources 2.03 The overall water balance in Tunisia is well known. The annual total volume of exploitable water resources amounts to 3 billion cubic meters, of which 58 percent is already tappied, including 7 percent for potable water. By the year 2000, more than 90 percent of the resources will be in use, with 22 percent for potable water. Most of the fresh surface water resources are, however, found in the north-west, requiring large impounding reservoirs to optimize their yield and long transmission mains to convey their water to the consumption centers. Groundwater resources in the north have limited capa- city, making them only suitable for potable water supply to small towns. Generally, surface water is used for the supply of the large cities in Tunisia. 2.04 This situation is further compounded by the fact that the salinity of some of these resources is so high, that they are unfit for human consumption or even irrigation, unless mixed with fresh water from other sources. In addition, water demand for urban and agricultural use in the southern part of the country already exceeds the available water resources in this region and water must be brought in from the north to meet the demand. Gradually, it would become more and more necessary to resort to desalination and reuse of wastewaters in this part of the country. 2.05 The Ministry of Agriculture allocates water resources in the country. An autonomous public entity, the "Societe Nationale d'Exploitation  - 3 - et de Distribution des Eaux" (SONEDE), whose operations are supervised by the Ministry of Agriculture, is responsible for the production and distribution of potable water in urban areas and large villages. A department of the Ministry of Agriculture, the "Direction du Genie Rural" (DGR) has been responsible for providing public services, such as water supply, sanitation, road maintenance, etc. in rural areas and villages with a population of under 500. Water supply systems in these villages are operated and maintained by offices of the governorates. 2.06 Conscious of the need to conserve and use effectively scarce water resources, the Government enacted in 1975 a water code to regulate the collec- tion and allocation of the water sources, and to establish usage priorities. As provided in the code, a National Water Committee was set up to assist the Ministry of Agriculture in the management of the water resources. 2.07 The Government has also prepared three master plans for long-range development and use of the water resources in the northern, central and southern parts of the country. The construction of the first phase of the Northern Master Plan, which involves the impounding and transfer of the Medjeraah River waters, is almost completed. The Bank provided financial assistance to the Government (Loan 1431-TUN, Sidi Salem Multipurpose Project) for the execution of this phase. A second phase is under preparation with assistance from the Federal Republic of Germany. The Master Plan for Central Tunisia has reached the draft stage and is awaiting Government approval. The Master Plan for Southern Tunisia has been completed. Based on this pLan, the Bank has made a loan (1796-TUN) for the Southern Irrigation Project. Finally, the Government is executing a potable water conservation plan which in the long-run may reduce potable water consumption by 15 percent (para. 3.03). Population and Service Levels 2.08 An updating of the 1975 population census, based on a sampling of wards and carried out in 1980, estimated the total population at 6.4 million, of which 52 percent or 3.3 million lived in urban areas. Of the rural popula- tion, which in that year reached 3.1 million or 48 percent of the total popu- lation, nearly two-thirds was agglomerated in villages. The remaining rural population was dispersed in isolated scattered locations. In the last fifteen years, the percentage of rural population compared to the total population has steadily decreased from 60 percent in 1966 to 48 percent. It is anticipated that the rural population would stay during the next ten years at about 3 million to represent less than 38 percent of the total population by 1990. 2.09 The total population is projected to grow at an average annual rate of 2.7 percent through the end of this decade to reach 8.3 million by 1990. The urban population, however, would grow at a much faster rate (about 3.3 percent per annum), with a substantial part of this growth stemming from rural migration to urban areas. The population distribution between urban, rural agglomerated and rural dispersed, is likely to continue to move in favor of the urban population, with the dispersed rural population accounting for less than 10 percent of the total population by the end of this century. Based on  the expected population distribution, it appears that priority for the provi- sion of public services should be accorded to the agglomerated rural popula- tion, as per the proposed project, since the villages have received little investment in the past as compared to urban areas and their population is not projected to decline through the end of the century. 2.10 Using the 1980 househcld survey (para. 2.08), the Bank-defined poverty threshold was estimated at D 120 in 1980 prices in urban areas and D b6 in rural ones; this threshold is equivalent to US$230 and US$115 respect- ively in 1983 prices. The same survey indicated that in both areas, the per- centage of population living in absolute poverty had decreased since 1975, but at a much faster rate in urban areas (from 25 to 12 percent) than in rural ones (from 18 to 14 percent). More than 80 percent of the urban population is concentrated in cities with more than 10,000 inhabitants. Almost half of the agglomerated rural population lives in villages of less than 500 inhabitants. Some 70 percent of the rural agglomerations, or about 3,150 villages, have less than 200 inhabitants. As the average per capita investments in water supply increase as the number of people per system decreases, it appears that enormous investments would have to be made by the Government in water works to reach a substantial percentage of the agglomerated rural population. 2.11 Service levels in Tunisia as of mid-1982 are given in Annex 1. In that year about 70 percent of the total population had access to safe piped water supply. 1/ This included aLmost all the urban population (about 91 per- cent), 70 percent of which was supplied through private house connections. In the rural areas only about 46 percent of the population had access to safe public water supply, and only 15 percent of the rural population was served by private house connections. Constraints and Priorities in the Sector 2.12 The major constraint to rapid expansion of public potable water supply in Tunisia is the remote location of fresh water sources from the con- sumption centers, which requires the construction of long transmission pipe- lines. The result is that water is very costly, because of high capital and operating expenses of the pipelines. Another constraint is the high salinity of many water sources which can be used only in conjunction with fresh water from other sources. The per capita investments in transmission facilities tend to become prohibitive as the population per system decreases. 2.13 So far, the Government has given its first priority to the urban areas where it has been able to quickly reach a large number of consumers. Today, almost the entire urban population is served by public water supply systems. The Government is now turning its attention to the agglomerated rural population for which the per capita investments, however, are going to be much higher and progress slower than in the urban sector, because of the size and the multitude of rural agglomerations to be served. The Government's 1/ By definition, a dwelling irn urban areas is considered served when a public piped water source exists at a distance of not greater than 100 meters from the dwelling, or in rural areas at not more than 300 meters.  -5- objective is to provide the entire agglomerated rural population with public water supply services by the end of this century. Parallel to that, the Government is programming funds for improving the supply sources of the scattered rural population which nevertheless is encouraged to settle in the existing villages. 2.14 To reach the above service levels in the rural areas, it is estimated that, excluding SONEDE's investments in large villages, the Government would have to invest D 728 million (US$ 1127 million) (in current prices) by the year 2000, an amount that the Government might not be able to afford in view of other priorities and possible budgetary constraints. Previous Bank Loans and Credits in the Sector 2.15 Since 1968, the Bank Group has become extensively involved in the sector and has assisted in financing six projects of SONEDE (five loans and a credit). SONEDE itself was set up in 1968 under the first Bank operation. The first loan (581-TUN) of US$15.0 million, made in January 1969, financed water supply works in the areas of Tunis and Sousse. In June 1970 the International Development Association made a credit (209-TUN) of US$10.5 mil- lion to assist in the financing of improvement and expansion works in eight areas of the country. These first two projects, which were jointly financed with the Swedish International Development Authority (SIDA), constituted the major part of the National Water Supply Program for the 1968-73 period. They were successfully implemented, albeit with some delay. A Project Performance Audit Report on these two loans, dated February 1978 and prepared by the Operations Evaluation Department (OED), confirmed the successful implementa- tion of these two projects, attributing their success to the presence of an efficient autonomous institution, SONEDE, and an equitable tariff policy which ensured the financial viability of this institution. 2.16 A second loan (989-TUN) of US$23.0 million was made in May 1974 to help SONEDE finance the construction of water supply systems in the second largest city, Sfax, and 62 large rural centers. This project was also successfully implemented, though following some changes in its original design. An OED report, dated May 1982, on the execution of this project concluded that the detailed engineering design of the project should have been completed prior to its appraisal. For some time this has now become the practice in the Bank. 2.17 In June 1977, the Bank approved a loan of US$21.0 million (Loan 1445-TUN) to finance the construction of production and distribution faci- lities in five northern provinces. The Kuwait Fund for Arab Economic Development is co-financing this project. In May 1979, a sector loan of US$25.0 million (Loan 1702-TUN) to finance water supply works in a number of villages was approved. These two latest projects are still under construc- tion, but are at a very advanced stage of execution. Loan 1445-TUN would be closed at the end of 1984 and Loan 1702-TUN at the end of 1983. More recently, the Bank has made a sector loan of US$30.5 million (Loan 2134-TUN)2/ to help SONEDE finance water supply works in about 150 large villages and the 2/ Report No. 3785a-TUN, National Rural Water Supply Project, April 5, 1982.  cost of low-income customers' house connections. The execution of this project has just started. 2.18 In addition, the Bank Group assisted in the financing of a tourism infrastructure project (Loan 858-TUN and Credit 329-TUN of September 28, 1972), which included water supply works valued at US$18.5 million. Finally, the Sidi Salem Multipurpose Project (Loan 1431-TUN), which covers the first construction phase of the Northern Water Master Plan (para. 2.07), is to meet domestic and agricultural water ciemand in the northern part of the country. This project, which is almost ccmpleted, is already providing raw water to treatment works which supply Greater Tunis. 2.19 SONEDE's performance under the Bank operations has been good, and has contributed to major improvements in the sector. The percentage of urban population connected to the systems, which was only 43 percent in 1968, has now reached 72 percent. Today, 'SONEDE is a financially viable public entity managed by experienced and dedicated staff. In 1982 the Operations Evaluation Department of the Bank undertook a review of the program of operations of the Bank Group in the water supply and waste disposal sector in Tunisia. 3/ The conclusion of this review is that commendable achievements have been accom- plished in urban localities and large rural settlements, but that much remains to be done in smaller rural centers. The objective of the proposed project is to initiate actions to redress this situation by providing these centers with adequate public water supply services. Investment Program in the Sector 2.20 As mentioned earlier, water supply to rural centers with a population of less than 500, has been planrned and executed by the "Direction du Genie Rural" (DGR) of the Ministry cf Agriculture. Such execution is usually integrated and financed under a special development program in rural areas known as "Rural Development Program" (RDP), which is administered by the governorates' offices and which covers the provision of basic services in the country's rural areas. During the Fifth Development Plan (1977-81), few investments were made in water supply works in rural centers. In this period SONEDE invested D 8.2 million (US$12.7 million) (about 5 percent of its total capital funds) in 144 villages. Meanwhile, the DGR invested D 15.0 million (US$23.2 million) to provide 269 centers with water supply services and to establish 1,800 water points and equip 900 wells. Of this amount D 10.6 million (US$16.4 million) was spent under the RDP program. 2.21 These investments have, h-owever, resulted in few improvements in the rural sector. A large number of the 4,500 rural locations are still without a safe water supply source. The Government intends to change this situation by boosting investments in the rural sector. There are, however, major constraints to rapid development of the rural sector, such as the high per capita investment required, the difficulties to recover costs in small villages and the absence of efficient operating agencies in the rural areas. These issues are being addressed in the proposed project. 3/ Report No. 4146, Sector Operations Review: The Water Supply and Waste Disposal Program in Tunisia, October 20, 1982.  2.22 The Government is currently implementing its Sixth Development Plan (1982-86), under which SONEDE is committed to invest a total of D 274 million (US$ 424.2 million) in the sector, of which D 223.5 million (US$346.0 million) would be in urban areas, and D 50.5 million (US$78.2 million) in large vil- lages. In addition, the Government has allocated D 120 million (US$ 186 mil- lion) to help speed up the installation of public water supply systems in smaller villages. A main objective of the proposed investments in the urban sector is to increase the proportion of the urban population directly connected to the systems from the present 72 percent to 80 percent, leaving only 20 percent of the urban dwellers dependent on public standposts. 2.23 The objective of the proposed investments in the rural sector is to increase the percentage of the rural population served by public water supply from its present 46 percent to about 56 by the end of this decade. Overall, some 550,000 rural people would benefit from the proposed Government investments; about half of them would obtain their supply under the proposed project, and the remainder under a separate project to be executed by the DGR and possibly to be partly financed by a proposed loan of DM 30 million (US$12.0 million) from the Federal Republic of Germany (Kreditanstalt fiir Wiederaufbau - KfW). The Bank has been in contact with KfW, discussing the proposed investments in the sector, with a view to coordinating the approaches of the two projects. The proposed investments in rural water would account for about 7 percent of the Government's capital investments during the Sixth Plan, reflecting the priority given by the Plan to allocating more funds to poverty alleviating projects in neglected areas. About 30 percent of the investments in rural water supply would be financed by foreign sources, including the Bank loan, thus lessening the impact of these investments on the Government's budget. 2.24 In addition to the proposed KfW loan, the DGR has recently received two loans, one of DM 25 million (US$ 10.0 million) from the Federal Republic of Germany (KfW) and another of KD 0.6 million (US$ 2.0 million) from the Arab Fund for Economic and Social Development for projects currently under implementation. 2.25 Now that the provision of water supply services in urban agglomera- tions has reached a satisfactory level, the Government is giving more and more attention to rural areas. SONEDE, which reached the objectives set out under the Fifth Development Plan (1977-1981), is expected again to perform well under the current plan. Its investment program during the Sixth Development Plan was reviewed during the appraisal of the Sixth Water Supply Project (Loan 2134-TUN) and found appropriate for the sector development. 2.26 Annex 2 gives a breakdown of SONEDE's proposed investments during the Sixth Development Plan. About 84 percent of them are to be financed by SONEDE's net internal cash generation, customers' contributions and borrow- ings. The balance of 16 percent would be financed by the Government. Though the Government would finance a high proportion of the cost of the proposed project (para. 4.24), overall, its financing of the investments in the sector would remain relatively low compared to other countries at similar stage of development. The Government's financing share is expected to decline further in the future, as SONEDE would be able to reserve more of its funds for rural works.  -8- The Sewerage Subsector 2.27 A national authority, the! Office National de l'Assainissement (ONAS), is responsible for the planning, construction and operation of sewer systems in the country. Presently, about 42 percent of the urban population have their dwellings connected to public sewerage which exists in some 30 cities. In the rural areas, most houses provided with water connections are equipped with waste water disposal systems (septic tanks or seepage pits). In general, there is no sanitation problem in the rural areas, due to the extremely low population density in these areas. 2.28 The Bank has also been active in the sewerage subsector and has already made three loans for sewerage works. A first loan of US$28.0 million to the Government (Loan 1088-TUN, First Urban Sewerage Project, February 1975) was for the expansion of sewer systems and wastewater treatment in Greater Tunis. 4/ A second loan of US$26.5 million (1675-TUN) to finance sewerage works in Greater Tunis and Sfax was approved in 1979. More recently, the Bank has approved a third loan of US$34.0 million (2255-TUN of June 1983) to finance sewerage works in a number of medium-size towns. The Bank-financed Tourism Infrastructure Project (Loan 858-TUN and Credit 329-TUN of September 1972) also included US$16.6 million for sewerage works. Finally, on a closely related subsector, the Bank has recently made a loan of US$25.0 million (2289-TUN of June 1983) for a flood protection project in Sfax, Tunisia's second largest city. III. DEMAND AND MARKET ASPECTS 5/ Water Consumption and Sales 3.01 Volumes of potable water consumed in Tunisia have been recorded since 1958. The records are, however, considered reliable only from 1966, after meters were installed on most of the service lines and a rigid maintenance program started to be implemented. The implementation of the metering and maintenance programs became more systematic following the creation of SONEDE in 1968. Around that time less than half of the total population had access to piped water supply systems. In 1968 water sales amounted to 63.4 Mm3 while water produced reached 97.5 Mm3, with the result of more than 35 percent of the production unaccounted-for. In that year only 39 percent of the urban population was connected to the systems. In the ensuing years, sales kept growing at an average annual rate of 6.7 percent, reaching 152.9 Mm3 in 1982, when 61 percent of the total population had access to piped water supply. More than 70 percent of the urban population in 1982 was served by direct service lines. 4/ This loan was closed on December 15, 1982 and a Project Completion Report was issued on June 13, 1983. 5/ This analysis has been carried out only for the population segment served by SONEDE. The population served by the governorates is very small (less than 8 percent of the total population), and its inclusion in the analysis would not substantially affect the results.  - 9 - 3.02 Meanwhile, water production in that year increased to 218.5 Mm3, with only 30 percent of this volume unaccounted-for. 6/ Still, the percentage of unaccounted-for water is considered too high and SONEDE's objective is to reduce it to not more than 25 percent by 1990. To this end, SONEDE has been installing new master meters at the production sources and on some hydrants, and replacing domestic meters which are considered defective. These steps would enable SONEDE to arrive at a better estimation of volumes of water pro- duction and sales. SONEDE also carries out a permanent leak detection program to keep losses at a minimum. 3.03 Present overall per capita water consumption differs widely in the country. It varies from a high of 323 liters/day in some areas of Greater Tunis to a low of 80 liters/day in the Governorate of Mahdia, with a national average of 146 liters/day. This difference to some extent stems from domestic consumption which averages 139 lpcd in Tunis, but only 42 lpcd in Mahdia. Still, the present per capita consumption is considered too high for a country like Tunisia with so limited water resources. SONEDE's long-term objective is to reduce it by about 15 percent. To achieve that, SONEDE is proposing to implement its part of the water conservation plan (para. 2.07), which would include the compulsory use of low water consumption sanitary fixtures in dwellings, the recirculation of industrial water and reuse of treated wastewater. The per capita consumption in rural areas averages 42 liters/day. Domestic consumption by people supplied at public taps does not exceed 20 lcpd. 3.04 The evolution of water sales during the last twelve years is shown in Annex 3. As can be seen in column 12 of this table the average use at a ser- vice line has steadily decreased during the last 12 years, as water supply services have been provided to increasing percentages of the population. This decrease is attributed to reduced usage by low-income families which are served last by the systems. As the network is progressively expanded into lower income and rural areas, the average use at a service line would continue to decrease. Meanwhile, the average per capita consumption has increased from 117 lcpd in 1971 to 146 lcpd in 1982, reflecting the increased number of dwellings connected to the network and improved living standard in Tunisia. 3.05 About 44 percent of the current total production comes from surface sources and the remainder from groundwater aquifers. The entire production in the south is from groundwater; more than 65 percent of the production in the north is from surface sources. The quality of water distributed in the north is good; it is poor in the south. SONEDE presently exploits about 370 water production units, 2,850 kms of transmission pipelines and 4,670 kms of distri- bution pipes. 6/ The percentage of unaccounted-for water as computed by SONEDE is made up of: (i) water used for fire fighting and street cleaning, which is estima- ted to account for about 5 percent of the total production; (ii) defective domestic meter recording which is suspected to be 3 percent below real sales volumes; (iii) production overestimation, krnown to be important for old springs and wells and believed to average 10 to 15 percent; and (iv) leaks in the networks, which are estimated to account for 7 to 10 percent of the total production.  - 10 - Growth of House Connections 3.06 The number of service lines which were only 102,000 in 1968 steadily increased to almost half a million at the end of 1982, a growth of more than 11 percent per annum. However, during the same period water sales rose annually by only 6.1 percent, reflecting the situation of higher population density and lower consumption in the newly served areas. The evolution of the service lines is shown in Annex 3. The average annual consumption at a con- nection continued to decline in the last 12 years. In 1971 it was about 46m3/month; it decreased to 26 m3 in 1982. On the other hand, the average per capita consumption continuecl to increase from 117 liters/day in 1971 to 146 liters/day in 1982. It is foreseen that this trend will continue during the remaining years of this decade, but at a much slower pace. 3.07 In villages equipped wiith public water supply, some 40 percent of the population is served by house connections. Presently, some 800,000 people are served by 1,322 public standposts which in general are located every other block in low-income urban areas, and in rural locations. Each urban public tap serves about 600 people, a service density which is considered adequate. Public bath and washing facilities are also provided in these areas. Composition of the Demand 3.08 A breakdown of potable water consumed in 1982 apportions the various uses as follows: Domestic (House Connections) 54.0 Domestic (Standposts) 3.0 Public 20.5 Commercial and Industrial 14.4 Tourism 6.4 Other 1.7 All Uses 100.0 Essentially, potable water consumed in Tunisia is for domestic and public uses 7/ which account for about 77.5 percent of total consumption. The commercial and industrial uses represent about 14 percent of all uses, reflecting the moderate level of industrialization in Tunisia. Probably, the present public water usage is on the high side and can be reduced through better control of leaks in public buildings. 3.09 SONEDE's largest consumers with service pipes of 80 mm in diameter or more, accounting for only 0.1 percent of the total customers, use about 23 percent of the total volumes. The largest users with pipes of 40 mm or more, 7/ They account for less than 60 percent in industrialized countries where commercial and industrial uses account for more than 35 per- cent of the demand.  - 11 - totalling less than 1 percent of all customers, consume about 39 percent of the total volumes. The smallest users with pipes of less than 15 mm, the majority of which are domestic and which account for more than 92 percent of all customers, consume only about 44 percent of the volumes. The above dis- tribution indicates that a meter maintenance program, and the system operation in general, should give priority to the largest customers. Future Water Sales 3.10 A forecast of water consumption up to 1991 is shown in Annex 3 and illustrated in Annex 4. The projection of future water sales is based on a mathematical model relating water demand to the number of service lines. It is assumed that the percentage of the total population served and directly connected to the network would increase to 95 percent by 1991, and to reach that level SONEDE would execute annually on average 47,500 service lines. With such an annual increase in the number of service lines, it is foreseen that water sales would grow at an average annual rate of 4.1 percent to reach 224 Mm3 by 1991. It is estimated that about 919,000 service lines would be in operation in 1991. Based on SONEDE's past performance, the projected water sales and numbers of connections appear attainable. 3.11 Assuming that the percentage of unaccounted-for water would progress- ively decrease to about 24 percent in 1991, the production in that year would then reach 295 Mm3 that SONEDE should be able to generate, as the required production infrastructure already exists or is under construction. The maxi- mum day demand is calculated to be 30 percent higher than the yearly average demand; the maximum hour consumption exceeds the average demand by 70 percent. 3.12 The percentage of the total population presently served by direct house connections is relatively low (42 percent) and there is still a poten- tial market available to SONEDE. Various tariff increases have regularly been implemented in the past, in line with inflation. But at the same time personal income has grown in real terms, thus offsetting any effect that price increase could have had on demand. In the end more people have had their dwellings connected to the systems and the per capita consumption has increased. The expectation is that this trend would continue in the future and that the projected growth of service lines and water sales would be met. IV. THE PROPOSED PROJECT Project Genesis and Concept 4.01 The proposed project originated from studies undertaken by SONEDE during the last two years in relation to the provision of public water supply to the country's rural areas. Public hearings of the Sixth Development Plan had revealed that for the rural population piped water supply was in urgent need and that the original amount allocated in the Plan (D 59.0 million or US$91.0 million) was totally inadequate to make appreciable progress in installing public water supply in the rural areas. As a result, the Government decided to increase the share of rural water supply works to  - 12 - D 120.0 million (US$186.0 million) and to entrust SONEDE with more responsi- bility in the rural sector. While until now SONEDE has been providing water supply to large villages (with more than 500 inhabitants), beginning with this project SONEDE would start supplying water to rural centers with a population as small as 100. Meanwhile, the DGR would continue to provide water to villages with less than 100 inhabitants and to the dispersed rural population. 4.02 Vested with this new responsibility, SONEDE in 1982 carried out a feasibility study of alternative water supply sources for villages with agglomerated population. For some 800 of them, the least-cost sources were identified to be existing water transmission pipelines or groundwater resources located within the villages' limits. The per capita investment cost in each of these villages was also calculated and distributed in accordance with the population size of the villages. The required average investment in different groups of villages is shown in Annex 5. 4.03 On the basis of this study, and parallel to SONEDE's current invest- ment of D 50.5 million (US$78.1 million) in large villages, the Government is proposing to invest D 57.4 million (US$88.8 million) in smaller rural agglome- rations for which water resources have been identified. Assuming that these investments would be made in vilLages with the lowest per capita investment cost, it has been estimated that under the Government's proposal, about 600 villages would be equipped with water supply. The Government has further decided to entrust SONEDE with the execution and operation of the proposed works. SONEDE, which is an efficient agency, is well equipped to execute the program diligently. To this end it has expanded its organization to include a special technical unit to promote the installation of rural water supply works and coordinate the execution of the proposed project (para. 5.05). Objectives of the Project 4.04 The proposed project has many objectives. The first one is to pro- vide a larger share of the rural population with public water supply servi- ces. At the moment only 46 percent of this population has access to such services, compared to 91 percent in the urban sector. A second objective is to assist SONEDE in its efforts to promote adequate operation and maintenance of the rural systems. So far, there has not been much progress in the rural areas because of limited revenues in these areas and the Governorates' difficulties in maintaining good operation of the systems. Under the proposed project, the operational activities in most of the villages would be carried out by SONEDE. For isolated villages far from the existing water supply network, SONEDE would promote the establishment of water users' associations or would enter into management contracts with individuals or existing organizations for the operation and maintenance of the water supply systems in those villages. Participation of these groups to some extent would reduce the cost to SONEDE of operating and maintaining the systems. 4.05 A third objective would be to assist SONEDE in expanding its organization to cover the design, construction and operation of water supply systems in villages with a population of less than 500. Until now SONEDE has built and operated systems in large villages which require not much cross-subsidy for their operations. In the past, water supply systems in  - 13 - smaller villages have been built by the DGR which, however, does not operate them. So far, the DGR has constructed more than 450 systems whose operation is directly supervised and subsidized by the governorates. These systems are, however, inefficient and poorly maintained. 8/ The proposed project would seek to put in place a viable institutional operational framework in the rural areas. Project Description 4.06 The proposed project includes: (i) the installation of piped water supply systems in about 600 villages with a population varying between 100 and 1,500, and the recalibration of transmission mains from which the villages would be supplied with water (paras. 4.07 and 4.08); (ii) the installation of house connections and related pipe extensions in rural areas (paras. 4.07, 4.21-4.23); (iii) the provision of drilling and operational equipment (para. 4.09); (iv) the research, design and testing of new materials and equipment for rural water supply projects (para. 4.08); (v) the carrying out of financial and organizational studies, with the objective of formulating an appropriate financial strategy for the sector development (para. 4.10); and (vi) the carrying out of a public health education program in the villages to be provided with piped water (paras. 4.11 and 4.12). 4.07 Under the proposed project, water supply systems would be installed in villages located in all the governorates but Tunis. Most of these systems would receive their supply from existing transmission mains, which in some cases would need to be re-sized. It is estimated that at least 40 percent of the villages' population would be served by house connections, which in general would consist of standpipes in the yards. SONEDE's policy is to encourage the installation of private service lines, as more public health benefits are expected to generate from such mode of service. The necessary distribution networks, as well as standposts needed to serve the remaining population, would be provided under the proposed project. 4.08 The estimated number of subprojects in each governorate is shown in Annex 8. The estimated cost of the subprojects is based on conventional 8/ SONEDE intends gradually to take over the operation of these systems.  - 14 - engineering design that SONEDE normally follows for its subprojects. SONEDE, however, would try to lower the cost of the subprojects by using cheaper yet adequate materials and equipment for the conditions prevailing in rural areas, such as pipes and tanks in polyvinyl chloride, galvanized pipes, etc. The research, design and testing of these new materials and equipment would be carriec out by SONEDE staff who has the required capability to undertake such task. 4.09 For a majority of villages in Tunisia, groundwater is the only water supply source. But most often, the characteristics of the aquifers are not known and as a result, project design cannot be carried out for the villages. The proposed project covers the supply of drilling equipment (including casings and screens) for constructing exploratory wells in the next group of villages to be provided with piped water. The supply of operational equipment, included in the proje.ct, would basically cover tools and equipment that SONEDE would need for the execution and operation of the proposed systems, such as cranes, radio communication systems, vehicles, etc. 4.10 Water tariffs are the same all over Tunisia. This national tariff structure allows cross-subsidization of tariffs within the sector, under which the provision of water servictes in the medium-size cities and towns is subsidized by the operations in the two largest cities, Tunis and Sfax, and in some agglomerations with local groundwater resources. The level of the subsidies is not, however, known. And with the proposed expansion of SONEDE's services to small villages, the subsidies would further increase. The extent to which such cross-subsidization is feasible and its upper limits would be investigated in a study of the cost of providing water supply services to different agglomerations in the country. The study would in particular cetermine how the cost in small centers can be reduced through consumers' participation and direct contributions to capital investments and operating expenses of the water supply systems. Terms of reference for the study are outlined in Annex 7. During negotiations, assurances were obtained from SONEDE that it will carry out the financial and organizational studies in accordance with agreed upon terms of reference, will initiate them not later than October 1, 1984, complete them by March 31, 1986 and a month later submit them to the Government and the Bank. Following this submission the Government, by June 30, 1986, will review the findings and conclusions of the studies with the Bank and SONEDE and agree with them on a plan for the implementation of approved recommendations. The Government and SONEDE will thereafter implement this plan of action. 4.11 The objective of the health education program is to change the knowledge, attitude, practices and level of readiness of the rural population in relation to the use of water supply, and to make it aware of the relationship between waterborne and communicable diseases and unsafe sanitary practices. The program would be executed by the "Direction des Soins de Sant6 de Base" (DSSB) of the Ministry of Public Health and would be addressed to both adults and children. The M4inistry would try to reach the adults through appropriate mass meetings in the villages, during which specific problems regarding the collection, transport, storage and use of potable water would be discussed with the population. The current health education program in schools would be reinforced by revising the curricula and educational approaches on health and sanitary awareness to school children, as well as the revision of the training of teachers with regard to public health education.  - 15 - 4.12 To reach the above objectives, it is proposed that staff of DSSB visit the villages included in the project to discuss the sanitary practices in these villages. It is further recommended to supply the equipment and materials that would be required to support the proposed activities in the villages, such as vehicles, audio-visual aids, etc. Technical assistance would also be given to residents wishing to improve the plumbing systems in their houses and the disposal of wastewaters in their yards. A detailed outline of the public health education program was discussed and approved during loan negotiations. Assurances were also obtained that the Government will opportunely execute the agreed public health education program in all the villages to be provided with piped water under the project. Proposed Investments 4.13 The total investments, needed for the work program outlined in para. 4.0b, are estimated at D 67.4 million (US$104.4 million), with a foreign ex- change component of US$50.0 million or 47.9 percent of the total cost. Detailed cost estimates of the project are given in Annexes 8 and 9. Scheduled annual investments in the project are shown in Annex 10. A summary of the cost estimates follows: Local Foreign Total Local Foreign Total % Item ----- D Thousands ------ ---- US Thousands ----- Pipe Supply & Laying 14,141 13,350 27,491 21,890 20,666 42,556 52.1 Storage Tanks 4,130 4,292 8,422 6,393 6,644 13,037 16.0 Pumping Stations 990 1,360 2,350 1,533 2,105 3,638 4.4 Drilling & Opera- tional Equipment 191 574 765 296 888 1,184 1.5 Health Education Program 210 145 355 325 224 549 0.7 Sub-Total 19,662 19,721 39,383 30,437 30,527 60,964 74.7 house Connections and Extensions 3,281 2,969 6,250 5,079 4,596 9,675 11.8 Physical Contingencies 2,889 2,850 5,739 4,472 4,412 8,884 10.9 Construction Super- vision 772 376 1,148 1,195 582 1,777 2.2 Studies 210 - 210 325 - 325 0.4 Total Cost (Mid-1983 Prices) 26,814 25,916 52,730 41,508 40,118 81,626 100.00 Price Escalation 8,330 6,303 14,633 12,894 9,757 22,651 27.7 Front-End Fee - - - - 125 125 0.2 Total Project Cost 35,144 32,219 67,363 54,402 50,000 104,402 127.9 (Current Prices) X 52.1 47.9 100.0 52.1 47.9 100.0 4.14 The proposed investments are for about 600 subprojects distributed in twenty governorates of Tunisia. They are based on price levels prevailing at mid-1983 and detailed bills of quantities of the proposed works. The base  - 16 - costs already include customs duties on imported equipment and other taxes on sales and services. They have been further increased by 15 percent for physical contingencies and 3 percent for construction supervision which would be carried out by SONEDE staff. To provide for price escalation during the execution of the subprojects, the mid-1983 foreign prices are projected to increase by 4 percent during the second half of 1983, 7.5 percent in 1984, 7 percent in 1985 and 6 percent thereafter; the local prices are foreseen to increase by 5 percent during tha second half of 1983, 9 percent in 1984 and 8 percent thereafter. The estimated price increases appear appropriate for this type of project in Tunisia and are derived from experience obtained from ongoing contracts for civil worlks and equipment and materials supply. Price escalation would account for about 28 percent of the base costs plus physical contingencies and construction supervision. 4.15 Annex 11 shows the planned annual investments (in current prices) for different types of expenditures. A major share of the investments would be in the supply and installation of pipes, which would account for almost two- thirds of the total expenditures. Direct foreign expenditures would be made for the purchase of ductile iron pipes, equipment for storage tanks and pumping stations, and operational equipment. About D 12.2 million (US518.9 million) would be paid for customs duties and other taxes. Project Execution 4.16 The proposed investments would be made during the years 1984 through 1989. Detailed design is available for about a hundred subprojects whose execution would start once the loan has been approved. The project execution would be administered by SONEDE's new rural unit (see paras. 5.05 and 5.06), which would be made up of staff who have performed similar task under the Fifth and Sixth Water Supply Projects (Loans 1702- & 2134-TUN). SONEDE's performance under these two projects has been good and is expected to improve further under the proposed projert. Separate accounts would be maintained for expenditures incurred for the project. Further, the project accounts would be audited by independent auditors who are acceptable to the Bank (para. 5.11). Assurances that the project accounts will be recorded separately and audited by independent auditors acceptable to the Bank, were obtained during negotiations. 4.17 The proposed studies, scheduled to start in October 1984, would be financed by SONEDE and carried out by its staff who have conducted similar studies under the Fourth and Fifth Water Supply Projects (Loans 1445- & 1702-TUN) and qualified for this task. Selection and Review of Subprojects 4.18 Similar to the arrangements made under the Fifth and Sixth Water Supply Projects (Loans 1702- & 2134-TUN), SONEDE would have the responsibility for selecting the subprojects and appraising them. SONEDE's performance under the previous Bank-financed projects has been good and this entity is expected to make an objective appraisal of the subprojects. The project cost estimates are based on a package of subprojects with the lowest per capita investment cost. SONEDE would continue to use this basic criterion in selecting the sub-  - 17 - projects, but would also consider other socio-economic aspects of a subpro- ject, such as the need to improve sanitary conditions in a village and in particular its water supply source, the potential for rapid development of a community, the means of communication of a rural village, the state of its social infrastructure (school, health facilities, etc.). The per capita operating expenses would be about the same for most of the subprojects, since they would be supplied from existing water transmission mains. Consequently, these expenses would not be taken into account in selecting the subprojects. 4.19 The average per capita investment cost of installing piped water sup- ply works in villages generally is proportional to the population size and follows a power curve. The per capita cost in Tunisia has been found to vary from D 480 (Us$ 743) for 100 people, to D 96 (US$ 149) for a population of 1,500. In principle, SONEDE would give priority to subprojects with the lowest per capita investment costs based on their population and any subproject whose per capita cost does not exceed the average cost by more than two and a half standard deviations would be eligible for financing under the Bank loan. Any subproject with a higher cost would have to be approved by the Bank, on the basis of a special justification submitted by SONEDE, before it can be financed by the loan. In calculating the per capita cost of works in a village, contributions by customers, either in capital or labor, towards the initial investments, would be deducted from the stream of costs. 4.20 Annex 12 (Schedule 2 to the draft Project Agreement) gives a checklist of data that SONEDE should compile for all the subprojects and submit to the Bank. For each subproject SONEDE would indicate how it would operate and maintain the system. In case SONEDE would not directly operate a system, it would propose and discuss with the Bank the type of operational organization that it intends to put in place in the village considered. For subprojects with a per capita cost higher than allowed and requiring the Bank's approval (para. 4.19), SONEDE would submit, in addition to the above information, a special justification for making the subprojects. Once a village has been included in the project, SONEDE would inform DSSB of its selection, so that the latter can plan and implement the proposed health education program in the selected village. The submission of a group of subprojects and their eventual approval as necessary by the Bank, should precede bid invitations for the supply of materials and equipment and for civil works for these subprojects. During negotiations, assurances were obtained that SONEDE will follow the procedures outlined in Annex 12 for the selection and appraisal of subprojects, and when required, for the review and approval by the Bank of the selected subprojects. house Connections 4.21 From mid-1985 through 1989 SONEDE expects to install a total of 25,000 house connections in the villages to be served under the project. As mentioned in para. 4.07 SONEDE accords credit facilities to low-income customers to finance the installation cost of their house connections. 9/ 9/ Part of the credits to customers in urban and rural areas are financed under Loan 2134-TUN made to SONEDE in May 1982. The Loan funds for the house connection program would be, however, exhausted in early 1985.  - 18 - These customers are allowed to pay 95 percent of the cost of their house connections over a period of five years with an interest rate of 11 percent. Only low-income domestic consumers are eligible to obtain such credit facilities, which would be extended to all the customers in the project area, based on their current level of income. House connections are the property of the customers who pay a fixed fee to SONEDE for the maintenance of the connections. 4.22 The total cost of the house connection program is estimated at D 7.5 million (US$11.6 million), with a foreign exchange component of US$5.5 million or 47.5 percent of the total cost. This component would be financed under the proposed Bank loan (para. 4.24). House connections in Tunisia are normally executed under force account by SONEDE's own workers or on its behalf. The Bank will reimburse SONEDE for 50 percent of the credits accorded to low-income customers in rural areas. To obtain such reimbursement SONEDE would submit the list of customers to whom credits have been accorded during a given period, together with the amount of the credits to the customers. Verification of the credits would be carried out by supervision missions (para. 4.29). 4.23 During negotiations, assurances were obtained that SONEDE will extend credit facilities to customers in the project area to finance the installation cost of their house connections, that they will be allowed to repay over a maximum period of five years at an interest rate of 11 percent. Project Financing 4.24 A Bank loan of US$50.0 million to finance the foreign exchange cost of the project, including a capitalized front-end fee on the Bank loan, is proposed. The loan would be made to the Government and would mature in 17 years including 4 years of grace, at the standard variable interest rate. In addition, new customers in the project area are expected to contribute D 1.9 million (US$2.9 million) towards the project cost. SONEDE would finance the remaining local cost of the house connection program, the cost of the financial and organizational studies and of construction supervision of the project. On its side the Government is prepared to finance the balance of the project costs. On this basis the financing plan for the project is as follows: Requirements: D Million US$ Million % Local 35.1 54.4 52.1 Foreign 32.2 50.0 47.9 Total 67.3 104.4 100.0 Financed by; SONEDE 4.6 7.2 6.9 Customers 1.9 2.9 2.8 Government 28.6 44.3 42.4 Bank 32.3 50.0 47.9 Total 67.4 104.4 100.0  - 19 - 4.25 The Government would relend to SONEDE the portion of the Bank loan (US$5.5 million) for the house connection program, which it will repay over a period of 13 years after 4 years of grace, with an interest rate of 10.5 percent. SONEDE would bear the foreign exchange risk on this part of the loan. The remaining part of the Bank loan would be passed to SONEDE as an equity contribution and serviced by the Government. To ensure an efficient operation and maintenance of the proposed systems and take advantage of SONEDE's operational experience, the Government in effect has decided to pass its share of the financing of the works in the villages (including the portion of its borrowing from the Bank for the works to be executed by SONEDE in the villages) as a contribution towards SONEDE's equity. In compensation, SONEDE would be required to generate funds necessary for future expansion of the systems. The Government's equity contribution and lending to SONEDE, as well as SONEDE's obligation to operate and expand efficiently the systems, would be recorded in a Project Financing Agreement between the Government and SONEDE. The execution of this agreement, with terms and conditions satisfactory to the Bank, would be a condition of effectiveness. Procurement 4.26 To speed up the procurement process under the project, pipes and fit- tings and other related materials, whose supply is projected to cost about US$31.0 million, would be procured in bulk by SONEDE and put at the disposal of civil works contractors. Contracts for such supply would be awarded following international competitive bidding, in accordance with the Bank Group's Guidelines for Procurement. In evaluating bids for these contracts, a 15 percent margin of preference or the actual customs duties, whichever is lower, would be allowed for goods manufactured in Tunisia. Items such as pumps, motor drives, special valves, etc., which cannot be grouped together since they would be designed and purchased at different times during the project execution, would be procured through local competitive bidding, in accordance with SONEDE's procedures, which are acceptable to the Bank. They are estimated to cost less than US$ 200,000 each, with an aggregate value of not more than US$ 2.0 million. Materials and equipment for SONEDE's operations in the villages to be served under the project and for the public health education program, costing less than US$ 50,000 each and aggregating to not more than US$ 800,000, would be procured through quotations from at least four suppliers in eligible member countries of the Bank. 4.27 The execution proper of the subprojects would be carried out through a multitude of small civil works contracts for pipe laying and the construc- tion of reservoirs and pumping stations widely dispersed in the country. These contracts, whose total value is estimated at US$45.1 million, but which individually would not exceed US$ 300,000, would not attract international builders. Consequently, for a more speedy project execution, they would be awarded on the basis of competitive bidding, advertised locally and in accord- ance with SONEDE's procedures which are acceptable to the Bank. This, however, is not expected to result in higher cost of the works or in lower work quality. In any event, foreign contractors would be allowed to participate in the bidding of the civil works. Wherever it is possible,  - 20 - SONEDE would try to group the civil works contracts in order to speed up the procurement process and the project execution. 4.28 It is further anticipated that works in some small and isolated villages would not even attract local contractors and that SONEDE would have to execute them under force accDunt by its own workers or on its behalf. These works are estimated to amount to US$4.0 million. Except for the supply of ductile iron pipes, pumps, motor drives and special valves, local contractors are expected to win all the contracts. Disbursements 4.29 Annex 11 shows the allocation of the proceeds of the Bank loan according to various types of expenditures. The loan would be disbursed against: (i) 100 percent of foreign expenditures for imported equipment and materials for the project; (ii) 60 percent of local expenditures for the purchase of goods procured locally for the villages' water supply systems and the public health education program; (iii) 40 percent of total expenditures for civil works construction of the villages' water supply systems; and (iv) 50 percent of credits extended by SONEDE to domestic consumers in rural areas to cover the installation cost of their house connections. Overall, the Bank loan would cover 47.9 percent of the total amount of the planned investments. Disbursements for wDrks, executed under force account, would be made against submission by SONEDE of certificates of expenditures, the accuracy of which would be controlled in the field by supervision missions. SONEDE has the administrative and accounting capability to prepare and maintain the records of the certificates, which would also be audited by SONEDE's independent auditors who are acceptable to the Bank (para. 5.11). 4.30 Estimated quarterly disbursements of the proposed Bank loan and of Government funds are given in Annex 13. Disbursement of water supply loans in the EMENA region on average extends over an eight-year period and in Tunisia over seven and a half years. Because the proposed project entails a sector loan, which would be disbursed faster than specific projects, as evidenced in the Fifth and Sixth Water Supply Projects (Loans 1702- and 2134-TUN), a seven-year disbursement period is foreseen for the Bank loan. 4.31 The closing date of the proposed loan would be June 30, 1991, or eighteen months after the project completion, which is the time required to monitor the performance of the works and return retention money on the project's civil works contracts. V. THE EXECUTING AGENCY Background 5.01 The proposed project wculd be executed and later on operated by SONEDE, the national water supply authority, which was established in 1968 to replace a Government office, the "Regie de Distribution des Eaux (RDE)", in an effort to shape up adequately the financial and managerial resources of the sector. SONEDE has the status of an autonomous public enterprise, but is  - 21 - managed as a commercial undertaking. It is owned by the Government and opera- tes under the tutelage of the Ministry of Agriculture, SONEDE is the borrower and beneficiary of previous Bank Group lending to the sector (Loan 581-TUN, Credit 209-TUN, Loans 989-, 1445-, 1702- and 2134-TUN), as well as the exe- cuting agency for the water supply component of the Tourism Infrastructure Project (Loan 858-TUN and Credit 329-TUN) and the Sidi Salem Multipurpose Project (Loan 1431-TUN). Past Performance 5.02 So far the Bank Group has made five loans and one credit for a total amount of US$ 125 million to finance six SONEDE projects. The first three projects were successfully executed by SONEDE and are now in operation. They were conducive to the rapid expansion of public water supply services, which has taken place in Tunisia since their completion in 1974. The fourth and fifth projects are near completion and already are considered successful. The execution of the sixth project has just started. The setting up of SONEDE has also been successful and has produced the reforms necessary for improving water supply operations in the country. At the end of 1982, after 14 years of operations, SONEDE had more than doubled its water sales (from 63.4 Mm3 in 1968 to 152.9 Mm3 in 1982), and more than quintupled the number of house connections (from 102,000 to 514,586). SONEDE now provides technical assistance to similar organizations in African countries. Organization and Management 5.03 Annex 14 shows the current organizational structure of SONEDE. A Board of twelve members, chaired by SONEDE's General Manager, supervises the company's activities. Nine Board members are public officials and represent the Government Ministries and other public agencies involved in the water resources sector. The remaining three Board members, though appointed by the Minister of Agriculture, represent the private sector and SONEDE's customers. The overall control exercised by the Government, beyond the appointment of the Board members, covers other decision processes such as approval of the com- pany's investment programs, borrowings and tariff levels. 5.04 The General Manager is appointed by the Minister of Agriculture and is responsible for the day-to-day operations which are handled by five departments: production and distribution in Greater Tunis, production and dis- tribution in the rest of the country, new works, engineering studies, and administration and finance. Two divisions in charge of internal audit and organization, and operational control assist the General Manager in preparing long-range planning and policies. Under the existing agreements for the pre- vious loans, SONEDE is committed to consult with the Bank before making any changes in its organization and administrative structure. 5.05 SONEDE's involvement in rural water supply so far has been limited to large villages and has accounted for a small proportion of its investment program. In addition, its involvement has taken place in villages which already had an embryo of urban development. Under the proposed project, SONEDE would execute a large number of small subprojects (about 125 each year)  - 22 - in villages with a population down to 100. The nature of these subprojects would be somewhat different from projects in urban areas, and special atten- tion would have to be paid to the type of materials and equipment for the sub- projects, with a view to reducing the cost of the rural systems. To ensure a quick and efficient execution of the proposed project, SONEDE has set up a rural unit, which would be exclusively in charge of the planning and execution of rural subprojects. 5.06 The rural unit would be attached to the department of engineering studies as shown in Annex 14. In addition to the engineering aspects of the subprojects, the unit would assist in promoting the installation of piped water systems in villages and would undertake research and experiments on low cost technology for rural systems. The organizational structure and functions of the unit were discussed and approved during negotiations. In addition, assurances were obtained that the unit would be maintained during the project execution. 5.07 At present, SONEDE has; a fairly good, decentralized operating network in place in the country, which should be able to operate most of the proposed systems without any major expansion, since the concerned villages are located close to SONEDE's existing operating centers. However, for some isolated villages SONEDE would need to make special arrangements for the operation of their systems, like opening and closing of valves, start and shutting off of pumps. For these villages SONEDE intends to put in place water users' associations or to enter into management contracts with individuals or existing organizations to carry out the routine operations described above. Recommendations for the setting up of an appropriate institutional structure for water supply operations in the country's villages would be made in the financial and organizational studies included in the project (para. 4.10 and Annex 7). Meanwhile, the Government should allow SONEDE to take all necessary actions including increasing its tariffs, to ensure adequate operation and maintenance of the proposed systems. Assurances to that effect were obtained during negotiations. Staffing 5.08 At the end of 1982, SONEDE's staff numbered 4,200 or an average of one employee per 1,000 people served. This ratio is considered adequate for SONEDE's type of decentralized organization, but should continue to decrease slowly, as SONEDE is now sufficiently staffed with engineering and adminis- trative personnel to meet the requirements of future expansion of its operations. The creation of t:he rural unit is not expected to result in any significant increase of staff. SONEDE's salaries and conditions of service are competitive with those of other sectors in Tunisia and are adequate to recruit and retain qualified personnel. 5.09 Current staff training in SONEDE is considered adequate. In collabo- ration with the "Office de l'Emploi et de la Formation Professionnelle", SONEDE maintains a continuous training program for its personnel. In addi- tion, a number of short-term seminars covering various aspects of its opera- tions are arranged each year by SONEDE for its staff. It also regularly arranges for overseas scholarships for its engineers to specialize in sanitary  - 23 - engineering and other areas related to water supply. Since the initiation of the Fifth Project, which is a sector loan (1702-TUN) for large villages, SONEDE has also focussed the training of its staff on the planning, financial and economic evaluation of projects. In the future, the staff will be encour- aged to continue to follow specialized courses of the Economic Development Institute of the Bank Group and of other advanced institutions. Current Practices and Procedures 5.10 SONEDE's accounting system is comprehensive. Its financial accounts, billing of water sales, related charges and new connections, inventory control and payroll, are performed on a computer programmed and operated by its staff. A cost accounting section monitors the cost effectiveness of each sec- tion and activity. SONEDE performs annual physical inventory controls and recorded levels of inventories are reliable. 5.11 SONEDE's operations are monitored by a Technical Controller and a Financial Controller who are appointed by the Government, and who are advisory members of the Board of Directors. In addition, an external audit of SONEDE's financial statements is carried out annually by independent auditors who are acceptable to the Bank. The existing agreements between the Bank and SONEDE provide for the submission to the Bank of the auditors' annual report within six months after the close of each fiscal year. In compliance with this provision, the audit of SONEDE's 1982 accounts was carried out and submitted to the Bank. The audit reports, however, have been received with some delays, because of the time needed by SONEDE to review the reports prior to their submission to the Bank. It has now been established that, after the close of a fiscal year, a period of nine months is needed to finalize and audit the company's financial statements, before the audit report can be submitted to the Bank. Consequently, it was agreed with SONEDE that its annual financial statements would be submitted to the Bank within six months of the end of a fiscal year and the audit report within nine months. Audit reports for the health education component would be prepared by the Controller General of Finance and submitted to the Bank within nine months after the end of a fiscal year. These assurances were obtained during negotiations. 5.12 SONEDE bills its customers on a rotating basis every three months for the volume of water consumed and for a fixed charge covering meter rent and connection maintenance. Collection from private customers is efficient. As of December 31, 1982, accounts receivable stood at about two and a half months of sales. Receivables from municipal authorities (6 percent of total bil- ling), however, are collected at a slower pace than those of the private con- sumers and Government offices, though this has been improving, following the implementation of a special collection system from municipalities, which was adopted in 1981. The existing agreements between the Government and the Bank commit the former to take all necessary steps to enable SONEDE to receive full payment for water consumed by all national, regional and municipal entities within a reasonable period of time after billing. This has been restated in the loan agreement for the project. 5.13 SONEDE carries insurance covering motor vehicles, fire damage to buildings, third party liability and special coverage for damages caused by  - 24 - polluted water accidentally distributed by SONEDE, all of which are considered adequate. SONEDE is self-insured for workmen's compensation and has set up a special fund for this purpose. Projections of the fund requirements indicate that the current contributions towards the fund are sufficient. All supply and civil works contracts for the project will be insured by private companies against loss and damage in shipment, accidents, fire and property damages. Outlook of SONEDE's Future Operations 5.14 Since its creation in 1968, SONEDE has steadily expanded its services to larger segments of the population and has continued to build up its operating efficiency. As a result, about 91 percent of the urban population is now fully served by public water supply systems. But so far, only a small proportion of the rural population has been provided with such systems. In general, the per capita capital investments of water supply increase as the population size decreases. Thus, because of the small size of the villages (between 100 and 1,500 people), the required investments would be high compared to those which were spent in the urban areas. In addition, the operation of the rural systems would be difficult, because of their limited access, the high number of smaLl systems to be maintained, and above all, the small revenues that would be collected in the villages. 5.15 Now that SONEDE has practically resolved the problem of water supply in the urban areas, it is focusing its efforts on accomplishing the same in the rural areas. It is, however, an expensive proposition which cannot be met without the Government's financial support, and cross-subsidies from the urban sector. To reduce SONEDE's operating expenses in the villages and at the same time ensure an efficient maintenance of the systems, an imaginative organization needs to be put in place in the rural areas. The proposed project seeks to lay the ground for this organization (paras. 5.06 and 5.07). VI. FINANCE Financial Performance in the Sector 6.01 The major investor and operator in the potable water supply sector in Tunisia is SONEDE which at present provides water to 91 percent of the urban population and 29 percent of lhe rural population. An additional 17 percent of the rural population is served by the governorates. The DGR, which is a department of the Ministry of Agriculture, also invests in rural water supply works. Its investment program, however, is small compared to SONEDE's (D 15.0 million vs D 173.0 million during the years 1977 through 1981). The systems built by the DGR are operated and maintained by offices of the governorates. A national tariff structure is applied by SONEDE, with a view to maintaining affordable services in small communities. Tariffs are not levied in the villages served by the governorates. In some instances the villages' communities provide funds for their systems' operations, which however are inadequate. 6.02 Most of SONEDE's initial equity was provided by the Government by transferring the ownership of fixed assets (less related debts) of the "Regie de Distribution des Eaux" (RDE) to SONEDE (see para. 5.01). In the years  - 25 - following its creation, SONEDE's equity has increased considerably through retained earnings and customers and Government contributions, reaching D 156.5 million (US$242.3 million) in 1982. Of this total, consumers have provided about 55 percent and the Government the remainder. 6.03 SONEDE's capital structure is satisfactory. In 1982 its debt/equity ratio was 39:61 and its operating ratio 81 percent. Results of SONEDE's operations in 1982 (Income Statement, Cash Flow Statement, and Balance Sheet in Annexes 15 through 17) indicate that SONEDE's performance was satisfactory in that year. 6.04 As previously mentioned, the Government is currently executing its Sixth Development Plan (1982-86) and as part of the plan SONEDE is planning to invest about D 274.0 million (US$ 424.0 million) in water supply works. Of this amount, D 50.5 million (US$78.2 million) or 18.4 percent would be in rural areas. Under the current financing plan, SONEDE is expected to finance about 20 percent of its capital requirements by internal cash generation, and 64 percent by customers' contributions and borrowings. The balance of 16 percent would be covered by a Government equity which would amount to less than taxes and custom duties to be paid by SONEDE to the Government during the same period. This financial plan was set out in the loan agreement with SONEDE for a sixth water supply project 10/ (Loan 2134-TUN) and highlights the sector's strong financial performance. 6.05 In fact, SONEDE's financial performance would have been even much better, had its foreign debt service not grown so dramatically recently, due to the devaluation of the Tunisian Dinar vis-a-vis the US Dollar 11/. Because of the exchange rate increase, the 1980 level of SONEDE's foreign debt service has increased by about 75 percent in 1982 dinars. 6.06 By the end of the Sixth Development Plan in 1986, SONEDE expects to serve the entire urban population and thus to be able to direct more financial resources to rural areas where water supply services presently lag. Enormous investments are, however, required to reach an appreciable percentage of the rural population with public water supply services, and the current investments of SONEDE are not expected to increase the service levels very much by 1986. In view of that and because of SONEDE's current high financial commitment, the Government has decided to finance additional works in the rural areas and to pass the assets as equity to SONEDE, as the Government did for the urban facilities at the time of SONEDE's creation in 1968. While SONEDE would continue to finance about 84 percent of its capital investments with its own resources, it would finance less than 7 percent of the works included in the proposed project, as these investments in the rural sector would be made directly by the Government (para. 4.24). Nevertheless, SONEDE would be in charge of the operation of the villages' systems and would generate the funds necessary for their maintenance and expansion. 10/ Report No. 3785a-TUN, National Rural Water Supply Project, April 5, 1982. 11/ The exchange rate of the Tunisian Dinar has increased from D 0.4 for one US dollar in 1979 to D 0.7 in 1982.  - 26 - Revenues in the Project Area 6.07 SONEDE presently applies a progressive tariff structure which takes into account both the level of consumption and the type of usage. The first level corresponds to a maximum domestic consumption of 20 m3 per household per quarter, which is charged at D 0.080/m3 (US$0.47/1,000 gallons). A flat rate of D 0.180/m3 (US$1.05/1,000 gallons) is applied for consumption at standposts, which is usually paid by local authorities. These two rates would be applied in the project area, as consumption would not exceed 20 m3 per household per quarter in the dwellings or would take place at standposts. It is estimated that 65 percent of the total consumption in the project area would be at private house connections and the balance at standposts, resulting in an average revenue of D 0.115/m3 (US$0.67/1,000 gallons) in 1983 prices. The consolidated national average revenue is currently D 0.223/m3 (US$1.31/1,000 gallons). 6.08 Annex 18 shows forecast income statements in the project area during the years 1986 through 1991. Revenues in the area are projected to be sufficient to meet operating and maintenance expenses, with a small surplus to cover part of depreciation. The balance of depreciation would be met by SONEDE's nationwide revenues. The depreciation allowances would be used to expand and renew the proposed systems as necessary. This financial strategy for the rural sector appears adequate to ensure the proper maintenance and expansion of the villages' systems. The possibility of further expanding cross-subsidization from the urban sector to the villages to cover part of the investments in the villages, wouLd be investigated under the financial and organizational studies included in the proposed project (para. 4.10). SONEDE's Future Finance 6.09 SONEDE's forecast financial statements from 1983 through 1991 are shown in Annexes 15 through 17. The assumptions made in preparing these statements are detailed in Annex 19. The project facilities would be incorporated in SONEDE's fixed assets, as they come into operation from 1986 onwards. Government equity in SONEDE's capital would increase accordingly. The costs of operating and maintaining the works included in the proposed project and the impact of these costs on SONEDE's revenues requirements were taken into account in preparing the financial statements. Tariffs are projected to increase in the future to enable SONEDE to meet its objective of financing 20 percent of its capital investments with its net internal cash generation (Loan Agreement 2134-TUN, Section 5.05), though this percentage would fall to 16 and 18 percent in 1983 and 1984 respectively, due to exceptional working capital requirements during those years. 6.10 SONEDE has increased its average tariff by 20 percent in 1983 and is expected to increase it again by about 20 percent in 1984. Further increases would not be justified as they would only be required to cover exceptional increases in working capital related to the advancement of investments included in the Sixth Development Plan. SONEDE's record with regard to the implementation of tariff increases is outstanding (about 86 percent since 1982). Furthermore, the shortfall, in cash generation in 1983 and 1984 would be compensated by higher percentages of self-financing in later years.  - 27 - 6.11 During negotiations agreement was reached with the Government and SONEDE to restate the financial covenant of Loan 2134-TUN in the agreements for the proposed project, namely that SONEDE would generate during each fiscal year revenues sufficient to cover its operating expenses (excluding depreciation), debt service requirement, any increase in working capital other than cash, and not less than 20 percent of the annual average of its estimated capital expenditures in the year considered and the two following years. To ensure that the above revenue requirement would be met, it was agreed that SONEDE, before November 30 of each year, would review with the Bank the adequacy of its tariffs and thereafter take the necessary measures to generate adequate revenues during the ensuing year. 6.12 Also, the understanding reached under under Loan 2134-TUN, that SONEDE would finance at least 40 percent of its capital expenditures with its revenues and customer contributions during the period 1982-86 and subsequent periods agreed between the Bank and SONEDE, was repeated in the agreements for the proposed project. 6.13 The projections show that SONEDE's financial performance would continue to improve in the future. Its debt:equity ratio would fluctuate on the average around 33:67, reaching 27:73 in 1991. The current assets/liabilities ratio, excluding short-term maturities of long-term debts, would improve through the period to reach about 1.4 in 1991. Over the projection period, the operating ratio would be about 70 percent. Internal cash generation would cover debt service adequately, as debt service coverage is projected to fluctuate around 1.8 during the projection period. Under the existing loan agreements with SONEDE, it is committed not to incur any long-term debt (except for the projects covered by the agreements) without the Bank Group's concurrence, unless its projected internal cash generation for each fiscal year during the term of the debt to be incurred would be at least 1.5 times its projected debt service in each such year on all its debt including the debt to be incurred. This commitment was restated in the agreement for the proposed project. Monitoring System 6.14 Annex 20 shows the technical and financial indicators which would be monitored during the project execution. This Annex also gives the values forecast for these indicators in the years 1983 through 1991. These values were discussed and agreed upon during negotiations. Agreement was also reached with SONEDE that it will: (i) report the evolution of the indicators to the Bank on a quarterly basis during the project execution, and on an annual basis for five years after the project completion; and, (ii) carry out any reasonable remedial action suggested by the Bank, aiming at meeting the target values of the indicators. 6.15 At negotiations, assurances were also secured that SONEDE, within six months following the closing of the loan, will prepare and submit to the Bank a completion report on the execution and initial operation of the subprojects, their costs and the benefits derived and to be derived from them, the performance and fulfillment by the Government, the Bank and SONEDE of their respective obligations under the Loan Agreement and the Project Agreement, and the accomplishment of the objectives of the Bank loan. The Government would prepare a similar report for the health education component.  - 28 - VII. PROJECT JUSTIFICATION Project Benefits 7.01 Throughout this report em[phasis has been laid upon the current low level of public water supply services in the rural areas and the need to improve the operation and maintenance of water supply works in the villages. At present, only about 46 percent of the rural population is served by public water systems. And even in the villages where systems already exist, services are rather sporadic and unsatisfactory. The Government's objective is to increase the percentage to 56 percent by 1990, and to pursue the execution of the program during the next decade, so as to reach about 80 percent of the rural population by the end of the century. Under the proposed project, water supply networks would be installed in about 600 villages to serve an estimated future population of 350,000 by the year 2005. About 40 percent of this population would have their dwellings connected to the networks; the remainder would be served at public taps. 7.02 SONEDE, which is an experienced operator and which already possesses a large operating network in the country, would be in charge of the operation and maintenance of the water supply systems in the villages. A further advantage of having SONEDE own the villages' systems would be to allow cross-subsidization between the urban and rural sectors. SONEDE in effect is expected in the future to finance the system expansion in the villages with its own funds, which would be generated mainly in urban areas. 7.03 Water is essential for sustaining life and potable water supply is a basic service that Government must make available in cities and villages. Many benefits would derive from the proposed project. First, there are those which individual consumers would derive from the water supply that would become available to them and which would translate in water sales by SONEDE. These sales would, however, represent a minimum measure of the direct benefits of the project. More importantly, there would be many benefits to society at large from the provision of safe water in the villages. The many health and environment benefits that the proposed project would generate, such as reduced expenses for health care, lower infant mortality, workers' higher productivity, improved learning by children who would have to devote less time for carrying water, housewives' higher productivity, should produce a high economic return on the proposed investments. These kinds of benefits are, however, difficult to quantify and a meaningful economic rate return cannot be calculated. Least-Cost Solution 7.04 For each subproject SONEDE would submit an economic comparison of feasible alternatives to show the least-cost solution. In addition, as the study on special materials and equipment for rural systems progresses (para. 4.08), SONEDE would investigate the possibility of reducing the cost of the subprojects by introducing the use of these materials and equipment. The calculation of the per-capita cost of a subproject and the determination of  - 29 - its eligibility for financing under the Bank loan would be made for the least-cost alternative. The design criteria to be used for the subprojects were reviewed and found acceptable. Economic Efficiency in the Sector 7.05 A uniform tariff structure and level is applied all over Tunisia, thereby providing cross-subsidization from larger to smaller agglomerations. Therefore, to estimate the economic efficiency of a project, the use of the tariffs as a proxy for benefits is not appropriate. This is particularly true for the proposed project which is undertaken upon the premises that part of future capital investments would be supported by revenues in the urban sector. An economic judgment can be passed only on the whole investment program in the sector. 7.06 The economic justification of the investments in the sector is clearly implied by the fact that about 40 percent of SONEDE's water production (i.e., that portion consumed by industry, tourism and the upper income brackets and therefore not to be subsidized) is sold at a current tariff of D 0.310, which is equal to the long-run average incremental cost of water supply in the country, based on an 8 percent discount rate. Thus, these consumers have shown their willingness to pay for the cost of providing additional water and for expanding water services to larger segments of the population. Affordability 7.07 There is a marked difference in the development levels among regions in Tunisia and between urban and rural areas. In this respect, a Government objective is to promote a better balanced regional development and a redistribution of income. The proposed project would meet both parts of this objective. It would allow a substantial consumption increase in the rura' areas and a redistribution of income from the urban sector into the villages. 7.08 The national tariff structure would be applied in the project area. The lowest income households there, served by house connections, are not expected to consume more than 20 m3 per quarter and would pay about D 2 (in 1982 prices) for such consumption. This would account for less than 3 percent of their income, which is within generally accepted norms. The cost of providing water supply services in the rural areas is much higher than the applicable national tariff and would be prohibitive for most of the consumers in the villages. Water consumption at standpipes is paid by the counties administrations. Environmental Aspects 7.09 The proposed project is not expected to have any adverse effect on the environment. Population density in the villages is extremely low and there will not be any major difficulties in evacuating the small quantity of wastewater resulting from the proposed water supply. Most of the dwellings are at present equipped with dry pits which are isolated and present no health hazards. The DGR provides technical assistance to residents who wish to build  - 30 - septic tanks and seepage pits. The proposed project includes a public health education program in the concerned villages. Additional public health needs would be covered under the Bank's First Health and Population Project (Loan 2005-TUN). A second project is currently under preparation. Institution Building 7.10 The accelerated development of the sector started in 1968 with the creation of SONEDE whose first priority in the last 15 years was to provide water to cities and towns. With the Bank's assistance, it has succeeded in this task and is now aiming at accomplishing similar work in the villages. The proposed project is conceived to assist SONEDE in its efforts to expand its services to smaller communities in the country. 7.11 The establishment of SONEDE as an effective national authority with the capability of efficiently managing the sector should remain the Bank's main objective for the sector. Tc this end, the project includes the setting up of a rural unit in SONEDE, a review of the cost of providing water to different classes of consumers and in various locations, and of the design and testing of low-cost materials for rural projects. Risks 7.12 As for any rural water supply project, there are some risks associated with the execution cf the proposed project. A multitude of subprojects is involved and procurement for them may be tedious and lengthy. lhe execution proper of the works also may be difficult because of the lack of facilities and easy access to the villages. There is also the risk that SONEDE may face high operating costs in the project area and difficulties in keeping adequate maintenance of the proposed facilities. 7.13 The measures proposed to be taken in the course of the project execution, such as the establishment of a special rural unit in SONEDE (para. 5.05), the bulk purchase of materials and equipment (para. 4.26) and local bidding for civil works construction should, however, minimize the risks involved under the proposed project. To some extent SONEDE should be able to reduce its operating expenses in isolated villages through the creation of water users' associations or management contracts for the operation of these villages' systems. Finally, the Government is fully committed to improving the situation in the rural areas, thereby to the success of this project, and is ready to assist SONEDE in surmounting the anticipated difficulties. VIII. AGREEMENTS REACHED AND RECOMMENDATIONS 8.01 Agreement having been reached on the issues outlined in Chapters IV through VI, and subject to the condition of effectiveness set forth in para. 4.25, the proposed project is suitable for a Bank loan of US$50.0 million to the Government of Tunisia for a term of 17 years including 4 years of grace.  TUNIS IA RURAL WATER SUPPLY DEVELOPMENT PROJECT MID-1982 SERVICE LEVELS IN THE WATER SUPPLY SECTOR Mid-1982 Population Urban Popu- X of % of Rural Total % of Total Population in 1,000 Growth Rate lation Served Urban Rural Population Served, 1,000 Population Population Population Governiorate Total Urban Rural x per Year 1/ 1,000 Served By SONEDE By Governorates Total Served Served, 1,000 Served (1) (2)=(3)+(4) (3) (4) (5) (6) (7)=(6)xlOO (8) (9) (10)=(8)+(9) (1l)=(l0)xlOO (12)=(6)+(10) (13)-(12)xlOO 3X (4) (2) NORTH Tunis 1,188 1,111 77 3.4 1,097 98.7 68 - 68 88.3 1,165 98.1 Le Kef 262 90 172 1.7 63 70.0 26 29 55 32.0 118 45.0 Siliana 233 43 190 2.7 34 79.1 63 12 75 39.5 109 46.8 Beja 272 80 192 1.3 73 91.3 50 45 95 49.5 168 61.8 Jendouba 342 67 275 1.9 49 73.1 63 15 78 28.4 127 37.1 Bizerte 384 210 174 1.6 209 99.5 37 5 42 24.1 251 65.4 Nabeul 434 236 198 2.4 224 94.9 92 19 111 56.1 335 77.2 Zagnouan 254 69 185 2.8 49 71.0 75 64 139 75.1 188 74.0 CENrER Sousse 304 225 79 2.6 218 96.9 56 14 70 88.6 288 94.7 Monastir 277 226 51 3.1 215 95.1 44 - 44 86.3 259 93.5 Maldia 260 99 lbl 2.5 88 88.9 37 5 42 26.1 130 50.0 Kasserine 281 66 215 2.4 59 89.4 40 42 82 38.1 141 50.2 Kairouan 406 115 291 2.8 87 75.7 33 123 156 53.6 243 59.9 SOUTH Sfax 576 341 235 2.8 340 99.7 63 19 82 34.9 422 73.3 Sidi Bouzid 281 26 255 3.1 19 73.1 50 94 144 56.5 163 58.0 Gabes/Kebili 300 147 153 2.3 117 79.6 76 38 114 74.5 231 77.0 Gafsa/Tozeur 293 177 116 3.2 104 58.8 20 10 30 25.9 134 45.7 Madenine/ Tataouine 373 190 183 3.5 148 77.9 24 30 54 29.5 202 54.2 TOTAL 6 720 3,518 3 202 2.7 3,193 90.8 917 564 1 481 46.3 4 674 69.6 x 100.0 52.4 47.6 61.9 38.1 100.0 1/ For the total population.  TUNISIA RURAL WATER SUPPLY DEVELOPMENT PROJECT SONEDE'S FIVE-YEAR INVESTMENT PROGRAM (1982-86) ku Thousands) - - - - - - - - - - - - Y E A R - - - - - - - - - - - - TOTAL I T E M 1982 1983 1984 1985 1986 82-86 l. INVESTMENTS FOR RENEWALS AND UPGRADING. 8,000 12,295 16,262 16,870 18,172 71,599 Acquisitions and Renewals .1,450 1,500 2,800 3,000 3,200 11,950 Upgrading ............................................. 55D 500 700 1,192 1,287 4,229 Extensions .5,500 9,665 12,062 11,928 12,875 52,030 Water Meters .......................................... 500 630 700 750 810 3,390 Ii. PROJECTS* .55,360 42,000 34,575 33,622 36,782 202,339 Sfax Distribution (IDB) .1,500 1,214 711 1,500 2,016 6,941 Sfax, New Resources. 4,575 1,691 500 2,000 16,000 24,766 Tunis, Cap-Bon (4th P. IBRD) .4,300 3,026 - - - 7,326 Tunis Repartition .1,400 234 - - - 1,634 Sahel, Water from the North (SFD) .15,000 8,918 2,641 1,641 - 28,200 Industrial Area: Gabes (ADB) .675 378 500 - - 1,553 Industrial Area: Gabes (AFESD) .660 1,319 1,400 - 3,379 South Tunisia (KfW) .5,700 1,043 800 1,510 - 9,053 Ghomrassen - Tataouine (KfW) .550 200 493 770 400 2,413 Bizerte, Joumine Dam .4,000 8,000 7,131 2,321 870 22,322 South Bizerte (KfW) .430 - - - - 430 Extreme South, Prospection .2,000 1,115 50 - - 3,165 Rural Centers (USAID 2nd Project) .200 331 - - - 531 Tunis Cap-Bon, Follow-up Project .- - 1,000 1,500 800 3,300 Tunis Repartition, Follow-up Project .1,000 - 500 4,000 6,000 11,500 Cap-Bon Water Production .100 - 200 2,000 4,000 6,300 Renewal of Southern Production .100 - - - - 100 Central Sahel and Southern Sahel Projects .100 . - - - 100 Master Plans (ADB) .1,000 643 2,060 1,630 - 5,333 Master Plans (5th P. IBRD) .1,600 - - - - 1,600 Rural Centers to be improved (ADB) .1,000 210 2,370 3,310 2,150 9,040 Kerkennah (5th P. IBRD) .1,100 1,300 - - - 2,400 Master Plans (KfW) .500 1,000 1,786 1,000 - 4,286 Rural Centers to be improved (KfW) .- 667 - - 1,000 1,667 Rural Centers (Sth P. IBRD) .1,360 2,022 - 3,382 Master Plans SONEDE .2,200 285 - - - 2,485 New Rural Centers .1,640 4,108 4,000 3,172 1,516 14,436 Infrastructure .1,000 1,309 1,388 1,000 1,000 5,697 New Rural Centers (KfW) .400 655 2,045 1,000 - 4,100 Rural Centers to be improved (6th IBRD) .1,270 2,089 5,000 5,268 1,030 14,657 New Rural Centers SONEDE .- 243 - - - 243 TOTAL 63,360 54,295 50,837 50,492 54,954 273,938 *References in parentheses indicate source of international financing when available.  TUNIS IA RURAL WATER SUPPLY DEVELOPMENT PROJECT POPULATION SERVED AND WATER SALES BY SONEDE Total % Total Number of New Water Water Unaccounted- Ave. Use at Per Capita Population 1/ Population Population Served 1/ in 1,000 Service Service Sales Production for Water a Ser. Line Consumption Year 1,000 Served 1/ Total Connected % of Total Lines 1/ Lines 2/ Million m3 Million m % m3/month liters/day (1) (2) (3) (4)=(2)x(3) (5) (6)=(5)xlOO (7) (8) (9) (10) (11)=(10)-(9)x100 (12)= (9) (13)- (10) 100 (4) (10) (7)x12 (4)x 365 1971 5,000 49.0 2,450 755 30.8 132,541 14,220 73.4 104.3 29.6 46.1 117 1972 5,130 50.1 2,568 846 32.9 148,366 17,431 76.8 119.3 35.6 43.1 127 1973 5,270 51.1 2,692 951 35.3 166,774 19,384 82.0 124.9 34.3 41.0 127 1974 5,415 52.0 2,818 1,089 38.6 191,089 29,246 88.3 130.6 32.4 38.5 127 1975 5,562 52.9 2,943 1,277 43.4 223,989 36,554 93.2 142.0 34.4 34.7 132 1976 5,715 55.0 3,145 1,492 47.4 261,687 38,842 97.5 145.5 33.0 31.0 127 1977 5,871 57.3 3,364 1,701 50.6 298,428 34,640 109.7 158.3 30.7 30.6 129 1978 6,032 59.5 3,591 1,895 52.8 332,483 33,471 115.6 167.7 31.1 29.0 128 1979 t,197 60.8 3,768 2,090 55.5 366,614 34,790 123.0 177.5 30.7 28.0 129 1980 t,367 61.0 3,884 2,300 59.2 403,436 38,854 133.7 195.2 31.5 27.6 138 1981 6,541 61.1 3,997 2,537 63.5 445,070 44,404 141.0 206.3 31.7 26.4 141 1982 6,720 61.2 4,110 2,798 68.1 490,929 47,314 152.9 218.5 30.0 26.0 146 1983 6,903 61.3 4,232 3,078 72.7 540,000 50,828 161.3 225.0 28.3 24.9 146 1984 7,092 61.4 4,354 3,366 77.3 590,500 50,172 170.2 235.0 27.6 24.0 148 1985 7,287 61.5 4,482 3,651 81.5 640,586 50,000 177.9 245.0 27.4 23.1 150 1986 7 486 62.1 4,651 3, 936 84.6 690,586 50,000 186.0 255.0 27.1 22.4 150 1987 7,691 62.6 4,816 4,210 87.4 738,586 46,000 194.4 264.0 26.4 21.9 150 1988 7,902 63.3 5,002 4,469 89.3 784,086 45,000 202.2 271.0 25.4 21.5 148 1989 8,118 63.9 5,192 4,726 91.0 829,086 45,000 210.0 280.0 25.0 21.1 148 1990 8,340 64.0 5,341 4,982 93.3 874,086 45,000 217.3 288.0 24.5 20.7 148 1991 8,568 64.2 5,503 5,239 95.2 919,086 45,000 223.8 295.0 24.1 20.3 147 1/ Refer to mid-year statistics. 2/ Correspond to the total number of service lines installed during a year.  34 - ANNEX 4 TUNISIA RURAL WATER SUIPPLY DEVELOPMENT PROJECT Forecast of Water Consumption and Sales Year 1971 1977 1983 1991 1,000 - r vrnT1 I 600 =II I 400 - i _ _ _ __ _ _ _ _ I W Iil ater Sales vs Service Lines C eIon CeIcie XO|5 = 0.9348 o ~~~~Water Production vs Service Lin es j 60 = = 4 0 o, Correlation Coefficient R2 = 099904 40 . _ 105 t Numbcer of Service Lines C Historical Data World Bank-25298  TUNISIA RURAL WAVER -SUPPLY URUEL-OPMENr PROJECT AVERAGE INVESTMENT COST IN THE PROJEC' ARbA Less thou 200Usuoirasts 200 to 400 Inhabitants 400 . OI W bitauls 600 - 1,O00 IUnubirats Mtre Sh- L,000U LI,5dobtoL- No,b-r of 1981 Project Numbe of 1981 P-- Number 1981 Project Number of 1981 Project Number of L9oS 'rojor GOVERNORAr VtisloosL Ptpulation C..", D ilUoge gpP