Burundi - Rural Water Supply Project

Document or The World Bank FOR OmaCI4L USE ONLY Rlut No. P-4137-Bu REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 9.6 MILLION TO THE REPUBLIC OF BURUNDI FOR A RURAL WATER SUPPLY PROJECT August 12, 1985 Thi dxumdbum a riedui diddb mii my be mi by rekU emly In the pedwm.c of their d &hin.lb gm.b my m dhe.wbe dihed w dw_ Wed _ w Izd |  CURRENCY EQUIVALENTS Currency Unit - Burundi Franc (Flu) FBu 1.00 - US$0.0083 (October 1984) USM 1.00 - FBu 120 (October 1984) SDR 1.00 - US$0.989 WEIGHTS AND MEASURES 1 meter (a) 3.28 feet 1 kilometer (km) - 0.62 mile 1 sq kilometer (km2) 0,386 square miles 1 sq meter (m2) - 10.76 square feet I cubic meter (m3) = 1.13 cubic yards 1 metric ton (ton) - 2,204 pounds GLOSSARY OF ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AIDR Association Internationale de D6veloppement BRB Banque de la Republiqu- du Burundi CIDA Canadian International Development Agency DEER Department of Rural Water Resources and Electrification FED Fonds Europ6en de Dgveloppement Rural GTZ German Technical Cooperation 1CR High Commissariat for Refugees KfW Kreditanstalt f ur Wiederaufbau REGIDESO National Water and Electricity Authority SETEMU Municipal Technical Services UNICEF United Nations Children's Fund USAID United States Agency for International Development FISCAL YEAR Government of Burundi: January 1 - December 31  FOR OmCIAL USE ONLY BURUNDI RURAL WATER SUPPLY PROJECT Credit and Project Summary Borrower : Republic of Burundi Beneficiary: Ministry of Rural Development Amount : SDR 9.6 million (US$9.5 million equivalent) Terms : Standard IDA terms Project : The main objectives of the project would be (a) to improve the Objectives quality and quantity of water provided to the rural population, thereby improving public health and the living conditions of women and children who often must walk long distances to carry water; (b) to strengthen institutional arrangements and introduce cost recovery measures for the rural water supply sector; and (c) to increase the responsibility of local commurrities in the maintenauce and management of water supply facilities. Project (a) Rehabilitation and extension of rural aqueducts in 33 Description areas; (b) Strengthening the organization of DHER and Improving its management effectiveness through the provision of technical assistance and equipment; (c) Training for DHER's staff and for the comminal administrators, accountants and water supply attendants. A program of sanitary education would sensitize the population to the use of potable water. Benefits The major benefit of the proposed project would be the availability of safe potable water for about 160,000 persons living in scattered rural settlements, and an improvement of their health. Quantification of health benefits due to safe water supply is not possible as a variety of other factors influence improvements in health such as health education, availability of food, level of economic activity and hygienic practices. The proposed project would be however a necessary condition of success for public health programs in the areas concerned. The project would also foster the development of communal responsibility for infrastructure serving the local population. Risks : The major risks concern the maintenance of the systems. Experience in Africa has shown that the most promising results are derived from delegating responsibility to the village level and fostering the sense of communal ownership, while providing adequate back-up services and technical assistance. Questions still remain whether the beneficiaries can be sufficiently motivated over a long time to make the necessary monetary outlays, and to join into communal. efforts to maintain and repair the system. The planned health demonstration campaigns as well as the efforts to sensitize local leaders and administrators should help to minimJize this risk. This document has a restricted distribution and may be used by recipients only in the performance of thr oficia dutbiets ontents may not otherwe bediscoed without World Bnk authonzation  - ii - Estimated Local Foreign Total Project Costs I/ - US$ million 1. Rehabilitation & Extension of 33 Rural Aqueducts - Pipes 0.090 1.715 1.805 - Equipment 0.025 0.482 0.507 - Installation 0.178 0.179 0.357 - Earthworks 0.562 0.062 0.624 - Civil Works 0.974 0.974 1.948 - Miscellaneous 0.063 0.064 0.127 Sub-Total 1.892 3.476 5.368 2. Strengthening of DHER - Equipment 0.017 0.233 0.250 - Technical Assistance 0.343 0.577 0.920 - Operating Costs 0.076 0.033 0.109 Sub-Total 0.436 0.843 1.279 3. Training 0.052 0.044 0.096 4. Consulting Services - Supervision 0.198 0.198 0.396 - Audit 0.080 0.080 - Feasibility Studies 0.208 0.678 0.886 Sub-Total 0.406 0.956 1.362 Total Base Costs 2.786 5.319 8.105 Pbysical Contingencies 0.227 0.417 0.644 Price Contingencies 0.776 1.341 2.117 Sub-Total 1.003 1.758 2.761 Total Project Cost 3.789 7.077 10.866 1/ Taxes are negligible.  - iii - Financing Plan Local Foreign Total USS milion IDA Credit 2.42 7.08 9.50 Government and Communes 1.37 - 1.37 Total 3.79 7.08 10.87 Estimated Disbursements IDA Fiscal Year: FY86 FY87 FY88 FY89 FY90 FY91 FY92 US$ million- Annual 1.1 1.8 2.1 1.8 1.3 1.1 0.3 Cumulative 1.1 2.9 5.0 6.8 8.1 9.2 9.5 Economic Rate of Return: Not applicable Staff Appraisal Report: Burundi Rural Water Supply Project. Report No. 5445-BU IBRD - 18670  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF TRE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BURUNDI FOR A RURAL WATER SUPPLY PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Republic of Burundi for the equivalent of SDR 9.6 million (US$9.5 million) on standard IDA terms to help finance a Rural Water Supply Project. PART I - THE ECONOMY1/ 2. The last Country Economic Memorandum on Burundi (Report 4784BU) is dated December 26, 1984. The following section incorporates its findings and conclusions. Country data are provided in Annex I. Background 3. Burundi is a small, land-locked country in East-Central Africa. It covers a territory of 27,835 square kilometers (including its share in Lake Tanganyika), and has a population of 4.4 million inhabitants. With an estimated Gross National Product of US$240 per capita in 1983 it is one of the world's least developed countries. The overall literacy rate was about 25% in 1982, morbidity is high, and basic social infrastructures are still lacking. Limited natural resources, population pressure, scarcity of qua- lified and experienced manpower, and isolation from main trade routes, characterize this extremely poor country. 4. Nearly 95% of Burundi's population is rural, living on scattered homesteads. Bujumbura, the capital city, had about 165,000 inhabitants in 1982. Agriculture, mostly smallholders who grow subsistence crops and cof- fee, contributes about 60% of GDP at factor cost and 90% of merchandise exports. A few large farms grow sugarcane, tea and quinine. Other natu- ral resources are scarce. Identified minerals include nickel, phosphate, petroleum, vanadium, some fluvial gold and calcium, but the economic justi- fication for their exploitation is still uncertain. Burundi's manufactur- ing sector is small, its growth being limited by the small size of the domestic market, the country's isolation from trade routes, vulnerability to disruptions in the external transport corridors, high transport costs, and the lack of skilled manpower. 5. The country is the second most densely populated country in Africa, with a density of 155 per km2. Population pressure has led to declining soil fertility, soil erosion and deforestation. Although 1/ This part is substantially the same as that in the President's Report on a Second Forestry project considered by the Executive Directors on July 16, 1985.  -2- agricultural statistics are poor, there are indications that, in recent years, foodcrop production may have declined in per capita terms. Net population growth is projected at 2.7Z p.a. during the current decade (in absence of migration, however, this growth would be higher; population could triple in thirty years). The implications of this rapid growth for health facilities, schools, employment and land availability are worri- some. IDA has emphasized the urgent need to initiate family planning pro- grams. Although progress has been slow, the Government has recently acknowledged the problem, and a first family health project is being prepared (para. 28). 6. The country has an adequate road network. Main roads are pas- sable all year. There is an international airport at Bujumbura. Burundi, however, remains dependent for most of its imports and exports upon two transport routes to the Indian Ocean through neighboring countries. The Northern Route, by highway from Bujumbura to Mombasa, Kenya, via Rwanda and Uganda is 2,020 km. in length. This route suffers from poor road condi- tions, and cumbersome administrative border procedures. The Central Route, by Darge down Lake Tanganyika, then by railway to Dar-es-Salaam, is 1,425 km. It tends to be inefficient because of long delays in transhipment, and disruptions on the Tanzanian railway. 7. Transport charges on these routes add from 25 to 300 percent to the landed cost of imports. The passage of goods through neighboring coun- tries is hindered by factors which are outside Burundi's control. Interruption of crucial supplies hinders project implementation and forces firms to hold large stocks of inputs and spare parts. In 1980, the Bank prepared a study of the external transport connections of Burundi and Rwanda. A more extensive study covering Burundi, Rwanda, Uganda and Eastern Zaire was carried out by UNCTAD. The findings and recommendations of these studies have assisted the countries and donor agencies to agree on action and priority investments. Several bilateral and multilateral meetings led, inter alia, to the Northern Corridor Transit Agreement which was signed in Kampala in September 1984. The agreement will result in significant simplification of customs procedures at border crossings. On the SouthernRoute, a number of external donors have been financing improvements in physical facilities at the ports of Kigoma and Dar-es-Salaam. IDA is now preparing a report which will update and review the actions taken so far and will help to define improved policies and priority investments in regard to these routes. Economic Developments: Goals and Performance 8. In the mid-1970s, Burundi's economy benefitted from several favorable factors: (i) a new Government, headed by President Bagaza, took power in 1976, ending a period of political instability; (ii) the price of coffee in the international market tripled, resulting in substantial windfall profits and accumulation of public savings; and Ciii) the level of foreign aid to Burundi increased considerably, in support of the new regime's stated commitment to economic development. These circumstances were considered a good omen for the Third Development Plan (1978-82), and expectations for an improvement in living conditions were therefore high.  -3- 9. The Third Development Plan (1978-82) included broad objectives such as the transformation of the economic structure; increased mobiliza- tion of resources for production; the reduction of poverty, together with improved income distribution; and increased access to education and health services. Performance during the Plan period was relatively good especial- ly in comparison with most of the Sub-Saharan countries. On the average, real GDP at market prices rose by 3.1% per year, with gross domestic investment averaging about 13.5% of GDP, far above the 8.0% share of the previous five years. The public sector took the lead in the investment effort, accounting for 90X of the total. Foreign donors financed about 60% of investment expenditures. The growth in total value added was mainly due to the growth in the modern sector stimulated by public investment spending. The output of the subsistence sector, which accounts for 85Z of the population, grew more slowly than the population, widening the income gap between rural and urban dwellers. The effects of the investment program on employment and foreign exchange earnings were limited: most of the projects were capital intensive and created few jobs; moreover, the protection extended to the new ventures made them inefficient and heavily dependent on imported materials, adding little to the country's foreign exchange earning capacity. 10. The financial situation, which had been kept under control during most of the 1970's, deteriorated rapidly at the turn of the decade. This was due to two main factors: Ci) deterioration in the terms of trade - by 75% between 1977 and 1982 - reflecting a decline in coffee prices and a doubling in import prices; and (ii) insufficient and delayed response of the Government to the changing economic environment. To support the balance of payments, the Government relied mostly on a run-down of its reserves; it also increased restrictions on imports and on remittances of foreign exchange abroad. This did not prevent the current account deficit from increasing significantly, to about 12% of GDP in 1982. The Burundi Franc appreciated significantly with respect to the currencies of the major trade partners, reflecting the appreciation of the US dollar to which it was pegged. 11. These unfavorable developments had serious consequences for the budget. The terms-of-trade deterioration reduced import co-acity and led to budgetary problems, as the Government's receipts from coffee exports fell dramatically, necessitating cutbacks in imports and public spending. These factors as well as the poor agricultural crops of 1982 led to a decline in income, which spread into 1983 and resulted in a significant slow down of economic activity. The consequence was a widening of the resource gap, further depletion of reserves, and an accumulation of payment arrears in the Government accounts. 12. During the 1978-82 period, Burundi was able to obtain external financing on very favorable terms. Grant assistance was substantial. In addition, external public borrowing during the period carried an average interest rate of only 2.4% and an average maturity of 31 years including eight years of grace, implying a grant element of about 60x. Debt service remained, therefore, low - at about 5% of exports of goods and nonfactor services during 1978-82. Bank projections indicate, however, a rapid increase to about 20-25% in 1985-86 due to the -bunching- of debt maturities.  - 4 - 13. The lesson of the Third Plan period is that, given the uncertainties and potential volatility of resource availabilities, Burundi must establish development priorities and select investment projects realistically and rigorously. The linkage between macroeconomic planning and the selection of programs and projects needs to be improved. The private sector, nongovernmental organizations, and cooperatives must be enlisted to the maximum extent feasible to participate in the development effort. Project design must take into account the issues of sustainability as well as management capacity. 14. The year 1983 was the first year of the Fourth Development Plan (1983-87), which incorporates an ambitious investment program of US$230 million per year (US$100 million more than what was achieved in the Third Plan Period). To finance this program new fiscal measures were introduced, notably increases of 50 to 100% in the rates of the transaction tax, income tax and the tax on beer consumption, which in the last years had replaced coffee as the single most important source of government fiscal revenue. By mid-1983, however, there were signs of increasing financial stress. The Government tried to cope with the situation by attempting to reduce the investment budget by 45%, but this proved difficult. While 80% of the investment planned for 1983 was actually implemented, this was obtained at a considerable cost: the public domestic debt increased substantially; unpaid obligations accumulated, representing (at end-1983) 301 of Government spending; and the overall budget deficit reached 5% of GDP. Economic growth, which had been negligible in 1982, remained marginal in 1983, with non-agricultural sectors registering an absolute decline. 15. In response to this difficult situation, the Government took a number of important actions. First, in November 1983, the FBu was delinked from the US dollar (to which it had been linked since 1976) and pegged to the SDR, with an implicit devaluation of about 30%. Second, in early 1984, the producer prices of the main export crops were raised to provide stronger incentives to producers. The coffee price was increased by 6%, the tea price by 36%, and the cotton price by 17%. Third, in an attempt to balance the current budget, the Government increased again the rates of the most important taxes, froze public wages and salaries, improved the system of tax collection, and cut the recurrent subsidies to the parastatals. 16. According to preliminary and partial information, the year 1984 was another difficult year. Agriculture was adversely affected by the drought and foodcrop production may have fallen by as much as 5-6%. Cash crop production did not fare better: coffee production fell from a high of 36,000 tons in 1983 to 27,000 tons, offsetting the increase in the output of other cash crops, notably tea. The modern sector registered some growth (owing to the partial liquidation of government arrears), but the poor performance of the primary sector caused total GDP to stagnate. On the financial side, both external and internal imbalances were reduced somewhat. As a result of the 1983 devaluation, Burundi's trade balance improved. However, because of increased factor services payments and debt servicing charges, the current account deficit remained above 12% of GDP. The public finance situation also improved. Revenues were about 20% higher than in 1983, reflecting (a) the impact of the devaluation on revenues from  - 5 - taxes on international trade; (b) reinforcement of tax collection procedures; and (c) improvement in the economic activity of the modern sector. Current expenditures were maintained at about the same level, in nominal terms, and capital outlays were rednced to their lowest level since 1979. As a result, the budgetary deficit was reduced from FBu6.5 billion to FBu3.4 billion (or from 5% of GDP to 3%). Sectoral Developments and Issues 17. The rapid population growth in a country which is already overpopulated represents the most threatening constraint on economic deve- lopment which Burundi has to face (para. 5). The Government of Burundi recently announced its intention to adopt a program to reduce population growth and to establish, as a first step, an Interministerial Family Planning Commission. One of the first tasks of this Commission will be to plan and develop a population program. Implementation of this program will require substantial cbanges in the health care system, which is presently geared to hospital-based curative services in urban areas, as well as an increase in public spending on health, which declined in real terms in the last five years. 18. In Agriculture, the most important issues for future development relate to productivity increases, soil protection, and erosion control. Fooderop promotion is essential in order to assure sufficient food supply for the rapidly growing population. Better utilization of the country's traditional export crop potential and diversification into new export crops appear crucial because of limited potential for other export activities. Priority actions to be undertaken in agriculture are therefore: promotion of applied research, in particular on foodcrops; strengthening and improvement of extension services; adequate and regular provision of inputs; initiation of immediate and longer-term measures to prevent soil erosion and protect the country's agricultural potential; and amelioration of )rganization and operations of the three main export crop subsectors (coffee, tea, and cotton), principally through improvement in the management of agricultural public enterprises and through adequate pricing policies. On the institutional side, further strengthening of agricultural planning, and project preparation and monitoring capacity appears crucial in order to assure effective design and implementation of projects. The concept of Regional Development Companies which the Government established to promote integrated rural development, needs to be carefully reviewed in order to adapt their design to the country's needs and possibilities, in particular in terms of financial and human resources. 19. Manufacturing Industry. Industrialization is constrained by limited natural resources, low productivity of the industrial labor force, acute shortage of managers, as well as by the country's small market, low purchasing power of its population, and difficult transport conditions which increase costs. Burundi does offer, however, certain advantages for industrial development: basic infrastructure is available in the major urban center at reasonable costs; the country's land-locked situation provides a natural protection for import substitution projects; and domestic finance is readily available to manufacturers. During the 1978-82 period, protectionist measures created a favorable climate for manufac-  - 6 - turing expansion. Manufacturing value added in the modern sector grew at an average annual rate of nearly IO in real terms, reaching about 5X of GDP in 1982. Most of this expansion has been oriented to the domestic market. Production remains typical of the first generation of import substitution, based on imported raw materials with exports limited to processed coffee, tea, cotton and a few other items. Capacity utilization is low because of the small size of the domestic market, high tariffs in neighboring countries, and high production costs. However, due to the monopolistic situation enjoyed by most firms and the "cost-plus" system of price control, the sector is profitable despite its inefficiencies. Since the mid-1970s, the Government has established a number of public enterprises to manage large industrial operations that the private sector had avoided because of their complex management and large financial requirements. Most -of these public enterprises have been created without an adequate financial structure and/or sufficient qualified personnel and are now a drain on the budget. The Government has recognized these problems and has taken some measures to deal with them: among these measures were the elimination of virtually all recurrent subsidies to public enterprises and the creation of a Public Enterprises Commission (CGEP) to design restructuring programs for public enterprises, sell some of them to private investors when possible, and phase out those unlikely to become viable. 20. Burundi faces a range of problems in the energy sector. The first and most important is the increasing scarcity of fuelwood and other traditional fuels on which almost all of Burundi's population depends for cooking and heating. Another is the high cost of oil imports whose value rose by 450% between 1977 and 1982. In addition, only 2% of the population has access to electricity. The Government, with assistance from the UNDP/3ank energy management program and other donors has started to imple- ment a program (i) to improve forestry sector management and policy; (ii) to reduce woodfuel demand by introducing more efficient cookstoves and charcoal kilns; (iii) to develop the use of peat as a substitute for wood, charcoal and petroleum products; (iv) to investigate alternative supply arrangements for oil imports; and (v) to participate in the Ruzizi hydro- electric regional project, improve the transmission network and establish a strong unit for power planning. Exploration is also underway to assess Burundi's hydrocarbon potential. 21. The Government has made considerable efforts to develop basic education and increase primary enrollments. Average percentages of capital and recurrent budgetary expenditures allocated to education are comparable to those of other African countries. However, the primary enrollment rate in public schools is only about 30%. Measures are therefore being taken to increase the share of resources which are devoted to basic education, adopt cost saving measures at the secondary and university level, and rationalize the use of existing facilities. The Ministry of Education is also providing assistance to improve the quality of education given in private schools and adult social centers.  -7- The 19B3-87 Fourth Plan 22. The Fourth Plan projects real GDP (factor cost) growth of 3.7% per year between 1982 and 1987 and total investments of FBu1O7.2 billion (in constant 1981 prices), equivalent to about US$1,200 million. Barring an unforeseen and substantial improvement in coffee prices and a major inflow of fresh financial aid, achievement of the Fourth Plan objectives does not seem likely. 23. The Plan assumes that 30X of the investment financing will come from domestic sources (20% from the budget, 1OZ from bank credit and the private sector) and 70X from foreign aid. This implies an annual average of US$160 million in foreign aid for project financing, which is almost twice what was received during the Thir-i Plan Period. This increase, while not impossible, does not appear very probable; a more conservative figure would be between US$100-130 million per year. The Government may therefore have to cut the investment program, perhaps to some 60% of rhe original amount. Regional Development 24. Regional development in Central Africa may offer new possibi- lities to Burundi's economy. In September 1976, Burundi, Rwanda and Zaire signed a convention establishing the 'Economic Community of the Countries of the Great Lakes' (CEPGL). The Community, which has its seat in Gisenyi, Rwanda, aims inter alia at stimulating and intensifying intra-regional trade and cooperation in a wide range of activities. A major objective of the Community is the exploitation of energy resources in the Great Lakes region. A first major project in this sector has been the Ruzizi Power Hydroelectric Project, cofinanced by the European Development Fund, the regional Development Bank (BDEGL), Italy, and IDA, which has just started. A glass container project, which is the first major regional Industry to be implemented under the aegis of the CEPGL, is also underway. The three countries have set up a joint development bank (BDEGL) to finance regional development projects, in particular exploitation of methane deposits in Lake Kivu and development of a fishing industry around Lake Tanganyil'a, and participate in the East Africa export promotion zone. PART II - BANK GROUP OPERATIONS AND STRATEGY 25. The history of Bank Group operations in Burundi closely follows the country's political and economic evolution since independence in 1962. To the political turmoil of the 1962-1976 period corresponds a phase of limited operations (coffee production, highway engineering and maintenance, and water supply). With the period of increased political stability after 1976, came a rapid acceleration of IDA lending for agriculture and highways as well as an extension of assistance to new sectors: fisheries, forestry, education, industry and rural development. Financing was also provided to improve the telecommunications and power network, explore the feasibility of exploiting nickel deposits, strengthen the capacity of the Ministry of  8 Planning, and improve the management of urban services in Bujumbura. As of March 31, 1985, Burundi had received 23 credits totalling US$196 million; 11 credits, totalling about US$49 million had been totally disbursed. IDA is now one of the main sources of financial assistance to Burundi. 26. Project Implementation. Project performance is, on the whole, satisfactory. The disbursement rate of 27% in FY82-84 is above the average for countries of the Eastern and Southern Africa Region. Physical implementation of infrastructure projects or components (roads, schools, coffee stations, telecommunications) has been satisfactory. In the productive sectors the record is mixed. While agricultural projects had some significant success in increasing the production and quality of coffee, and in increasing forcst areas, they have had limited impact on increasing food crop production because of the absence of technical packages which could be readily adopted by farmers and the lack of a coherent policy on agricultural inputs and services. The DFC Project failed to develop a pipeline of smill enterprise projects in the industrial sector, partly due to the weak management of the Development Bank. Operation of the glass container project financed by IFC is affected by depressed market conditions, competition from cheaper imports and the lack of progress in the negotiations of preferential tariffs with Rwanda and Zaire. The fisheries project failed largely because it was too complex in relation to the institutional and management capacity of the implementing agency. 27. The impact of projects on institutional development has been mixed. In some projects (e.g., Coffee), the presence of an effeccive tech- nical assistance team led to a successful project implementation but did not result in the strengthening of the capacity of local institutions. In the education and telecommunications projects, on the other hand, efforts in institution building and training have had good results, and the assis- tance provided under the Second and Third Technical Assistance Projects has strenghtened the capacity of the Ministries of Planning and Agriculture to identify and address key policy issues; select, prepare and monitor pro- jects; and improve interministerial coordination. In most cases, IDA-financed projects have provided a useful framework for policy discussions and decisions. Discussions under the Education projects led, inter alia, to the adoption of cost savings and cost-recovery schemes, a pore equitable distribution of school facilities, reorganization of secondary education, and development of non-formal education for adults. The urban project has accomplished major changes in urban programs over the past several years including the lifting of rent ceilings and the adoption of cost-recovery schemes. 28. Country Assistance Strategy. IDA's strategy is tc assist the Government in developing and implementing a realistic medium-term adjustment program while pursuing long-term development programs designed to address the country's structural constraints. Our policy dialogue will be pursued through a Structural Adjustment Operation which is now being prepared. At the same time, IDA will continue to support long-term efforts to develop human resources, increase agricultural production, and develop and maintain infrastructure which will have a significant long-term impact  -9- on production, as well as policies and specific project choices which would improve the equity of income distribution. Priority will be given to the design of an action program to control population growth. We believe that given the broad development needs of Burundi, and the need to strengthen the management capacity of the Burundian administration, it is important that the Bank remains active in the main sectors of the economy. The Government needs objective and coherent advice on the overall management of the economy as well as sectoral issues and policies and no other donor or institution (with the partial exception of the IMF) is in a position to play this vital role. 29. In order to implement this strategy, our economic work will in- clude the review and monitoring of the investment program, studies to iden- tify ways of increasing the efficiency of the public sector and a CEM (FY86-87). As to sector work, the emphasis will be on agriculture and industry, in particular: (i) studies on land use issues, erosion control and agroforestry, export crops promotion and financial aspects of agricultural projects; and (ii) a tariff study and a study on long term potential for industrial diversification and regional cooperation. In addition to the proposed SAL (para. 28), the lending program includes projects in agriculture (agricultural services; fooderops; forestry; export crops); human resources (education; health/population; water supply); transport and communications; and energy. To complement IDA SAF resources, a special effort will continue to be made to assist the Government in securing cofinancing. PART III - THE WATER SUPPLY SECTOR 30. Water Resources. Burundi is a hilly country with good rainfall and two rainy seasons. There are many springs and surface waters which could provide adequate water supply. However, due to lack of sanitary protection, the quality of the water provided by these sources is either doubtful (unprotected springs) or quite poor (streams, marshlands). This leads to the spreading of water-borne diseases which represent more than 70Z of all endemic diseases. 31. Sector Organization. Water supply services in urban areas (Bujuinbura and 25 secondary centers) are the responsibility of REGIDESO, a parastatal company which is also in charge of the generation, transmission and distribution of electricity, and is supervised by the Ministry of Public Works, Energy and Mining. Sanitation in Bujumbura, formerly under the responsibility of a sanitation department attached to REGIDESO, was recently transferred to a new public corporation, the Municipal Technical Services (SETEMU). SETEMU is now planaing to extend its activities to the 15 main provincial towns. Since February 1979, water supply in rural areas has been the responsibility of the Department of Rural Water Resources and Electrification (DEER) of the Ministry of Rural Development. The DHER is in charge of planning, design, construction, operation and maintenance of the rural water supply and electricity systpms. In 1982, the Government started delegating responsibility for communal services and infrastructure to the comaunes which levy taxes or charges to finance these- services.  - 10 - 32. About 92% of the urban population (defined as communities with 3,000 people or more) is served through private connections or public standpipes. In Bujumbura, 50,000 m3 per day are distributed to 6,098 pri- vate connections (17% of the population) and 163 standpipes. In Gitega, the second largest town in Burundi, 89% of the population is served through 365 private connections and 20 standpipes. In the nine other towns already operated by REGIDESO, about 60,000 inhabitants are served through 284 private connections and 60 standpipes. About 22% of the rural population is served mainly through springs that are more or less protected and aque- ducts. The rest of the rural population relies on unprotected springs and polluted streams or ponds, which are at relatively great distance since people generally live in the upper part of the hills while water sources are at lower levels. 33. Sector Development. The Fourth Development Plan (1983-87) includes water supply projects for an amount of US$35.07 million of which US$10.75 million for rural areas, and sanitation projects for Bujumbura, for a total amount of US$23.19 million. The proposed investments are all justified except for the Bujumbura sewerage project, which however is not likely to be implemented due to lack of external financing. During Project implementation, an updated three-year investment program for the water supply sector would he submitted annually to IDA for comments (Section 3.03 (a) of the draft Development Credit Agreement). Furthermore the Government of Burundi would ensure that every investment in the sector is technically, economically and financially justified (Section 3.03 (b) of the draft Development Credit Agreement). Several water supply projects are being implemented in urban areas: Bujumbura, Gitega and 23 secondary centers, all to be operated by REGIDESO. The major development projects in progress for rural areas are the Ngozi-Kayanza project financed by Belgian Aid and- the protection of 4,300 springs implemented by UNICEF with Canadian and Australian financing. 34. Sector Constraints. The main constraints in the water supply sector are the lack of financing and the shortage of qualified staff in the ministries responsible for the sector, which results in inadequate planning, poor economic analysis of projects and weak supervision. Rural water supply systems are often inadequately maintained and local authorities rely on the DHER which is not able to provide the required services. In the urban water supply sub-sector, the main issue is the water tariff which is too low. A tariff study to be carried out in 1985, financed by the African Development Bank (AfDB), is expected to propose a new tariff level and structure which would be applied in 1985 for all the water systems operated by REGIDESO (para. 46). Water supplied through public standpipes is metered and billed to the municipalities but municipal arrears have accumulated because of shortage of municipal revenues.  - 11 - Bank Operations and Objectives in the Sector 35. The Bank's objective in the water supply sector is to support the Government's efforts to supply the population with safe water at the least cost. A subsidiary goal is to improve the operating efficiency of the principal sector institutions. The Bank financed, in 1966, a first water supply project (Credit 85-BU) for Bujumbura which contributed to the establishment of REGIDESO. This company is developing into a solid insti- tution and is now supported by French, German and AfDB financing. The Urban and Integrated Rural Development/Ngozi III Projects included a small component to improve water supply systems in their respective areas. The priority is now to develop rural water supply systems, strengthen their management and establish cost recovery systems. PART IV - THE PROJECT 36. The proposed Project was prepared by DRER with the assistance of consultants. The project was identified in May 1979, and pre-investment studies and final design were carried out by consultants with financing from the Project Preparation Facility in October 1984. A report entitled Burundi Rural Water Supply Project' (No. 5445-BU, dated July 22, 1985), is being distributed separately to the Executive Directors. Negotiations were held in Washington from June 18 to 20, 1985. The Burundian delegation was led by Mr. Kabura, Minister of Rural Development. The main features of the credit and project ar given in the summary at the beginning of this report and in Annex III. Project Objectives 37. The project's main objectives would be: (a) to improve the quality and quantity of water provided to the rural population, thereby improving public health and the Living conditions of women and children who must walk long distances to carry water; (b) to strengthen institutional and financial arrangements for rural water supply; and * (c) to increase the responsibility of local communities in the maintenance and financial management of water supply facilities.  - 12 - Project Description 38. The proposed project would include the following components: (a) Rehabilitation and extension of rural aqueducts in 33 areas. The works would include the reconstruction of sub-surface intakes, transmission lines, break-pressure tanks, storage reservoirs, valve chambers, and public standpipes. Water would generally be distributed through public standpipes; private connections would supply in particular dispensaries, schools, community houses, traders and artisans. In selecting the components, priority was given to the rehabilitation and extension of existing rural water supply systems. One system only, Ruhehe, is entirely new. This respresents a total of 626 km of pipes and 585 standpipes. (b) Strengthening the organization of DHER and improving its manage- ment effectiveness through the provision of technical assistance and equipment; Cc) Training for DHER's staff and communal administrators, accountants and water supply attendants. A program of sanitary education, consisting in the projection of movies and slides, would sensitize the population to the benefits to be obtained from use of potable water. (d) Consulting Services: (i) engineering services for construction supervision; (ii) audit of DHER's accounts; and (iii) feasibil- ity studies for about 40 additional rural water supply systems. Cost Estimates 40. The total cost of the project is estimated at US$10.87 million, of which US$7.08 million, or -approximately 65Z, represents the foreign exchange component. Base cost estimates are expressed in- prices as of early 1985. Costs of works were estimated on the basis of consultants' feasibility studies and detailed design for the first lot of works. Since goods and equipment for project purposes would be imported free of customs duties and internal taxes, base costs are net of tax liabilities. Taxes on locally procured goods (mainly cement and fuel) estimated at 6% of local costs have been included in the estimate. Physical contingencies of 12% have been added to the cost of the works. Price contingencies for local costs have been estimated as follows: 18% in 1985, 12% in 1986 and 1O0 from 1987 onward; price contingencies for foreign costs are basod on estimates of international inflation as follows: 8% in 1985, 9% in 1986-88, and 7.5% in 1989. In addition, the effect of the estimated difference in the domestic and international inflation rates on the exchange rate of the FBu to the US$ over the construction period of the project was computed and added to the foreign cost in the FBu tabulation.  - 13 - Financing Plan 41. The proposed IDA credit equivalent to US$9.5 million would finance 87% of total project cost, representing 100% of foreign exchange costs requirements and 64% of local costs (US$2.4 million equivalent). The commnes to be served by the facilities of the project would contribute to about 5% of the works, or US$0.27 million (pars. 51). The Government's contribution would amount to US$1.1 million equivalent. The Government would make the proceeds of the credit and its own contribution available to the executing agency (DHER) and to the Communes as grants. To ensure the availability of adequate local funds, IDA would be given the opportunity to review the DHER annual budget for the next fiscal year by August 31 of each year (Section 3.03 (c) of the draft Development Credit Agreement), and the Government would maintain a Project Advance Accou-nt in which an amount of at least FBu 25 million would be deposited following the signature of the Credit Agreement. Starting on January 1, 1987, the Government would maintain in the account a balance of at least FBu 40 million (Section 3.01 (b)(ii) of the draft Development Credit Agreement). Implementation 42. DHER would implement the project. To carry out the final design studies including detailed survey and hydrogeological works, DHER appoLnted AIDR as engineering consultants. Another contract is under negotiation with the same consultant for assistance in evaluation of tenders, drafting of contracts and supervision of construction. Construction works would be executed in three successive lots. Detailed designs were completed in April 1985 for Lot 1 (Ngozi Region), bids would be called by October 1985 and contracts awarded by March 1986. The works would be started in July 1986 for Lot 2 and January 1988 for Lot 3, after completion of Lot 1. Not more than six systems would be under construction at the same time, in order to facilitate construction and supervision. The communes concerned by the project would contribute to the construction mainly for earthworks and supply of raw materials (sand, gravel). Training 43. Training sessions would be held at an existing training center for municipal administrators and for water supply attendants. On-the-Job training would be provided for communal accountants by the general accountant of the project unit and for DHER personnel by the experts of the project unit and of the consultant's supervision team. DHER engineers and technicians would attend training seminars abroad. Health demonstration campaigns would be conducted to sensitize local leaders on the benefits of improved water supply.  - 14 - Procurement 44. Equipment, pipes and civil works would be grouped in three bidding packages corresponding to each of the three lots of works, and pro- cured under international competitive bidding in accordance with Bank guidelines except for civil works of two systems in each lot. Separate bidding documents would be prepared for civil works of these six systems in order to encourage the participation of local contractors. For equipment, a margin equal to the applicable customs duties and other import taxes, with a maximum of 15%, would be applied to the bids of qualifying local manufacturers, if any. For civil works, a preference of 7.5% would be applied to bids from local contractors. Construction of works would involve only three main contracts, one for each of the three lots of works, plus possibly six contracts with local contractors. Every contract above USS300,000 would be subject to prior review from IDA. Disbursement 45. Credit funds would be disbursed as follows: for materials and equipment, including pipes, 100 Z of foreign or of local ex-factory expenditures and 80% of local expenditures for other items procured locally; for civil works, 80 percent of total expenditures; and for consultants' services and training, 100 percent of foreign and 80 %of local expenditures. AllI disbursements would be fully documented. To ensure prompt availability of funds from the Credit for the project, a separate Special Account (revolving fund) would be established in the "Banque de la PEpublique du Burundi' (BRB), or a commercial Bank acceptable to IDA with an initial deposit by IDA of US$0.5 million to be periodically replenished as needed (Section 2.02 (b) and Schedule 3 of the draft Development Credit Agreement). Implementing Agency 46. DHER is headed by a Director who is appointed by the President upon nomination by the Minister of Rural Development. A Management Committee comprising DRER Director, his deputy and the heads of its technical, administrative, and finance divisions coordinates DEER's operations. A Consultative Council headed by the Director General of the Ministry of Rural Development is responsible for coordinating DHER's activities with those Ministries and Government agencies having an interest in rural water supply and rural electrification. The Ministry of Rural Development exercises a control over DHER's operations in particular with regard to i-nvestments and staffing. There is no clear delineation of responsibilities between DHER and REGIDESO which provides water supply and electricity services in the secondary and tertiary centers in the country's interior. However, this question will be addressed within the context of an AfDB financed study covering tariffs and institutional aspects, which is about to start. Terms of reference of this study were reviewed by the appraisal mission and found to be adequate. A Steering Committee, composed  - 15 - of representatives of DHER, REGIDESO and other agencies concerned, would monitor the carrying out of the study. The Government would furnish to the Association the reports emanating from the study, would exchange views thereon with the Association and would not take any action based on the study, nor modify the present organization of the water sector without prior consultation with the Association (Section 5.01 of the draft Development Credit Agreement). 47. The organizational structure of DHER would be strengthened. Under the Project, the UHER would be divided into four departments: (i) water supply; (ii) electricity; (iii) operations and technical support; and (iv) administration and finance. To alleviate the shortage of ex- perienced staff and provide training, three experts would be recruited: a water engineer as project coordinator, a maintenance engineer and an ac- countant. Because of its importance to project implementation, the ap- pointment of the Project Coordinator would be a condition of credit effect- iveness (Section 6.01 of the draft Development Credit Agreement). The maintenance engineer and accountant would be appointed within four months of credit effectiveness (Schedule 4 of the draft Development Credit Agreement). Terms of reference were agreed upon during negotiations. DHER's Finances 48. DHER's financial reporting system is primarily geared to ensuring compliance with the overall limits for recurrent and investment expenditures as set forth in the Government's budget and since customer charges are insignificant and relate only to electricity operations, there are neither consolidated nor separate balance sheets or profit and loss accounts for the water supply and electricity operations. Consumer billing is limited to DHER's electricity operations in five centers where the same tariff as REGIDESO is presently used. REGIDESO's tariffs were recently increased by 20%, which is adequate, and their structure is being reviewed. In addition, new customers pay a lump sum for the installation of new connections. To what extent meters are regularly read, bills distributed and amounts collected is difficult to assess at present, as the customers are scattered in remote centers in the country's interior. Furthermore, in an effort to promote the consumption of electricity DHER initially installed connections without the upfront payment and did not insist on regular payment of electricity bills. This has created arrears of about FBu 1 million out of which 80 Z are from electricity sales and 20 X from connection charges. While the major part (70 Z) of these arrears is due by private customers, 30 Z is due by Government agencies. One of the major tasks of the accounting expert would therefore be to assist DHER to address this issue and to improve DHER's billing, collections and accounting as well as its financial reporting and capital expenditure accounting systems. During negotiations assurances would be sought from the Government that, starting in FY86, DHER will produce separate accounts (income statements, fund flow statements, and balance sheets) for its water and electricity operations in sufficient detail to permit assessment of the cost of its main activities in each sector (Section 4.03 of the draft Development Credit Agreement).  - 16 - 49. Since the combined revenues for electricity charges and meter installation represented only 1 percent of DHER's operational budget in 1983, DRER depends on Government appropriations for its operations and investments. The Government would continue to ensure the availability to DHER of such funds as shall be required for its electricity operations and would periodically review the adequacy of the level of charges for electrical services in relations to their costs (Section 5.02 of the draft Development Credit Agreement). The proposed project will represent a first step in the introduction of cost recovery measures for water services (para. 51). Audit 50. So far an external audit of DHER's annual accounts has never been carri-d out. Although the accounts of URER are subject to control by the Commissioner of Accounts (Cominissaire aux Comptes) and the Directorate of Inspectors of the Ministry of Finance, the first control by the Directorate of Inspectors was completed only in January 1985. Under the project, (l) DHER's accounts would be regularly audited by independent auditors acceptable to the Association from FY85 onward; and (ii) the audit report including the auditor's certificate would be forwarded to the Association within six months of the end of eacn fiscal year (Section 4.01 of the draft Development Credit Agreement). Cost Recovery 51. Cost recovery schemes for municipal services have been successfully established in the Municipality of Bujumbura under the Urban Project. Under the proposed project, each commune would contribute at least 5 percent of the project construction cost in the commune, which would represent the equivalent of about 10% of the average annual village expenses, and the Ministry of Rural Development would ensure that adequate arrangements are made therefor (Section 3.04 of the draft Development Credit Agreement). In addition, the communes would finance recurrent expenditures, estimated at 4 to 6 percent of the monetary income of the directly benefitting population. The charges to be collected from the beneficiaries would cover all operating and maintenance expenses as well as contribute to a fund to be utilized to cover major repairs and systems expansions. (Section 5.03 (a) of the draft Development Credit Agreement). The level of charges would be reviewed in October of each year to determine their adequacy (Section 5.03 (b) of the draft Development Credit Agreement). The village council would, through the local administrator, collect the water charges and house connection charges which will be deposited into a separate account with the Savings Bank of Burundi (Section 5.03 (c) of the draft Development Credit Agreement). Once the rehabilitation and/or expansion of the water supply systems have been executed by DHER, the systems will be handed over to the village councils who will be in charge of operating ard maintaining them.  - 17 - Accounting, Billing and Auditing 52. All finAncial traosactions and accounting of each commune are under the supervision of a provincial inspector who reports to the Ministry of Interior, accounting and control procedures would be reviewed by the technical assistance team in order to assess their adequacy and propose and implement modifications as and where necessary. A new system of meter reading, billing and collection of the water charges to be operated and maintained at the local level, would also be designed by the technical assistance team. Training of local staff (local administrators as well as local accountants) in the application of these procedures and systems would be carried out in seminars to be organized partly on a country-uide basis and partly at the regional level. The technical assistance team would alsoorganize seminars for the provincial inspectors on accounting and control procedures. As the auditing of the accounts of the communes by external auditors would not be practical, the control procedures within the Ministry of Interior would be strengthened, and accounts would be verified annually by the Inspectors of the Ministry of Finance. Reports related to the inspection of the accounts would be made available to the Association for its review and comments. (Section 5.04 of the draft Development Credit Agreement.) Project Benefits 53. The major benefit of the proposed project would be the avail- ability of safe potable water for about 160,000 persons living in scattered rural settlements. Quantification of health benefits due to safe water supply is not possible as a variety of other factors influence improvements in health, such as health education, availability of food, level of econowic activity and hygiene. The proposed project would be however a necessary condition of success for any public bealth program In the areas conoerned. The project would also foster the development of comunal responsibility for infrastructure serving the local population. Moreover, tbe project would result in considerable improvements in the planning, implementation, and supervision of rural water systems at the country level. This institutional strengthening should provide the basis for extending and replicating, in the future, the construction, operation and maintenance of rural water systems. Project Risks 54. The major risks concern the msaintenance of these systems. Expe- rience in Africa has shown that the most promising results are derived from the combined effects of delegating responsibility to the village level and fostering the sense of communal ownership, while providing adequate back-up services and technical assistance. Questions still remain whether the beneficiaries can be sufficiently motivated over a long time to make the necessary monetary outlays, and to join into communal efforts to maintain and repair the systems. The planned health demonstration campaigns and the efforts to sensitize local leaders and administrators should help minimize this risk.  - 18 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 55. The draft Development Credit Agreement between the Republic of Burundi and the Association, and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 56. Special conditions of the project are listed in section III of Annex III of this Report. A special condition of effectiveness would be the recruitment of the Project Coordinator. 57. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 58. I recommend that the Executive Directors approve the proposed Credit. A.W. Clausen President Attachments Washington, D.C. August , 1985 :~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4  -19- Annex I - ALE 19 Pae8 1 of 5 ff^~~~~~ moats. umcmes p s- s U C_~ ~~~inuo -- - 0inn UMR nra n.m~~D 27.3 27J