Tunisia - Fourth Water Supply Project

DOmt of The World Bank FOR OFFICIAL USE ONLY Report No. 6423 PROJECT COMPLETION REPORT TUNI SIA NORTHERN TUNISIA WATER SUPPLY PROJECT (Fourth Water Supply Project) LOAN 1445-TUN October 1, 1986 Water Supply and Sewerage Division Europe, Middle East and North Africa Division 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.  EXCHANGE RATES (Tunisian Dinar per US$) Feriod End of Period Period Average (Appraisal Report May 1977) 1977 .4121 .4290 1978 .4034 .4164 1979 .3959 .4065 1980 .4187 .4050 1981 .5157 .4938 1982 .6158 .5907 Closing Date December 1984 1983 .7302 .6785 1984 .8666 .7768 Average Project Period 1977/84 .5448 .5246 ABBREVIATIONS AND ACRONYM DGR Direction du G6nie Rural IDA = International Development Association SIDA = Swedish International Development Authority SONEDE = Soci6te Nationale d'Exploitation et de Distribution des Eaux ONAS = Office National de l'Assainissement lcd = liter per capita per day  FOR OMCIAL USE ONLY THE W3RlO SANK Washington. D.C. 20433 U.S.A. Opstm tvaklwtums October 1, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Tunisia - Northern Tunisia Water SupEly Project (Loan 1445-TUN) Attached, for information, is a copy of a report entitled "Project Comp]etion Report on Tunisia - Northern Tunisia Water Supply Project (Loan 1445-TUN)" prepared by the Europe, Middle East and North Africa Regional Office. Further evaluation of this project by the Operations Evaluation Department has not been made. Attachment This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclsd without World bank authoriation.  FOR OMCIAL USE ONLY TUNISIA NORTHERN TUNISIA WATER SUPPLY PROJECT (Fourth Water Supply Project) LOAN 1445-TUN PROJECT COMPLETION REPORT Table of Contents Page No. PREACE ..RE.A.A......DAP.RA................ ..... 2 BASIC DATA S H E E T ......A....................... (ii) HIGHLIGHTS ...........................,.............. (iv) I. INTRODUCTION Ds.o...............................* I II PROJECT PREPARATION AND APPRAISAL .......... 2 Origin, Preparation and Appraisal.......... 2 Obecies......................... 2 Project Desipior... .....o n... 3 Loan Covenants. ..................................... 3 III. PROJECT IMPLEMENTATION, COST AND OPERATION.......... 4 Effectiveness....................................... 4 Revisions........................................... 4 Implementation...................................... 5 Procurement and Disbursements....................... 5 Costs............................................... 6 Performance of Consultants, Contractors............. 6 and Suppliers Reprin p........................ 6 IV. OPERATING AND INSTITUTIONAL PERFORMANCES............ 6 Operational Aspects for the Project Area............ 6 Operational Aspects for the Executing Agency........ 7 Orgaiato a............. t.. i on..*.. . 7 Institutional Grot r... o w t h ..... . t... 7 V. FINANCIAL PERFORMANCE ...................... ..... .# 8 Financial Resultse...................... *0** ........ 8 Financing Plal.................... 9 Financial Position. ......... ..... 00. . ... 9 Revenues Covenants.................................. 10 This document has a restricted distribution and may be used by recipients only in the performance of their official dutie3. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (coutmed) Page No. VI. PROJECT JUSTIFICATION ................................... ...... .. .. 11 Project Achievements ... .............. . 11 Least Cost Solution ....... ......O..* ....................... 11 Economic Analysis .............................................. 11 VII. CONCLUSIONS AND LESSONS LEARNED ................o..... 12 Conclusions ......................................... 12 Lessons Learned ..................................... 12 LIT, OF ANNEXES Annex No. 1. Comparison of Works Projected and Actually Constructed 1..... . 3 2. Implementation Schedule ............................. 14 3, Loan Disbursements - Appraisal versus Actual ........ 15 4. Comparison of Appraisal Cost Estimates versus Actual Costs . ..... . .... ... 16 5. Operational Data in Project Area .................... 18 6. Operational Data for all SONEDE Regions - Appraisal versus Actual . 19 7. Internal Rate of Return of Water Supply Investment .. 20 8. SONEDE Comparison of 1976-86 Income Statement ..,.... 21 SONEDE Comparison of 1977-86 Balance Sheets . ....... 22 SONEDE Comparison of 19;77-86 Sources and Appli- cations of Funds Statements . 23 MAPS Nos. IBRD No. 12715 (PCR) IBRD No. 12716 (PCR)  - i - TUNISIA NORTHERN TUNISIA WATER SUPPLY PROJECT (Fourth Water Supply Project) LOAN 1445-TUN PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report for the Northern Tunisia Water Supply Project for which a Loan of US$21.0 million was made to the "Societe Nationale d'Exploitation et de Distribution des Eaux" (SONEDE), the national water supply authority. The loan was signed in July 1977, became effective in January 1978 and was closed in December 1984 and about US$376,000 were cancelled in August 1985. The Project Completion Report was prepared by the Europe, Middle East and North Africa Regional Office on the basis of a mission which visited Tunisia in December 1985, and of a review of the President's Report, the Loan and Project Agreements, supervision and progress reports, and related correspondence and internal memos. In accordance with the revised procedures for project performance audit reporting, this PCR was read by the Operations Evaluation Department (OED), but the project was not audited by OED staff. Following standard procedures, OED sent copies of the draft PCR to the Government, the Borrower and co-financier for their comments. However, no coirnel.ts were received.  - ii - TUNLSIA NORTHERN TUNISIA WATER SUPPLY PROJECT (Fourth Water Supply Project) LOAN 1445-TUN PROJECT COMPLETION REPORT BASIC DATA SHEET KEY PROJECT DATA I te Appraisal Actual Total Project Cost (US$ million) 102.9 94.3 Cost Overrun (8.3%) Loan Amount (US$ million) 21.00 Disbursed 20.63 Cancelled 0.37 Repaid to Outstanding to Date of Physical Completion 06/30/82 06/30/84 Proportion Completed by Appraisal Target Date 1002 902 Time Overrun (2) starting from Appraisal Date 36% Internal Rate of Return 8.55% 10.3% Financial Performance: Rate of Return on non Rate of Return on re- revalued net fixed assets valued net fixed assets of 13% in 1979, 91 in of 7.51 in 1979 through 1980 and 5% in 1981; a 1981; starting in 1982, contribution to capital a contribution to i-nvestments of 112 in capital investments of 1982, 18% in 1983, 15% 201. in 1984. Institutional Performance Satisfactory CUMULATIVE DISBURSEKENTS (US$ million) Fiscal Appraisal Actual Year Estimate __ 1978 0.5 0.0 1979 3.9 0.6 1980 9.9 2.8 1981 16.2 7.0 1982 21.0 12.1 1983 18.5 1984 20.5 1985 20.6 1986 (August 1985) 20.6  - iii -e OTHER PROJECT DATA Item Appraisal Estimate Actual First Mention in Files 05/06/76 Government Application 05/18/76 Appraisal Dec.1-18/76 Negotiations Apr.19-28/77 Board Approval 06/02/77 Loan Agreement Date 07/05/77 Effectiveness Date 11/02/77 01/30/78 Closing Date 12/31/82 12/31/84 Borrower Societe Nationale d'Exploitation et de Distribution des Eaux (SONEDE) Cofinancier Kuwait Fund US$23.4 million Executing Agency SONEDE Follow-on Project Name Fifth Water Supply Project Loan Number 1702-TUN Amount US$25.0 million Loan Agreement May 31, 1979 MISSION DATA Month, No. of No. of Staff Date of Purpose Year Persons Days Days Report Identification! Preparation 10/76 2 15 30 11/17/76 Appraisal 11/76 3 17 34 Dec.1-18/76 Post-Appraisal 03/77 2 15 30 04/15/77 Supervision 1 02/78 3 14 42 03/02/78 Supervision 2 11/78 2 5 10 11/29/78 Supervision 3 08/79 2 6 12 08/28/79 Supervision 4 02/80 2 14 24 03/14/80 Supervision 5 08/80 2 6 12 08/29/80 Supervisionk 6 04/81 z 12 24 04/14/81 Supervision 7 12/81 2 8 16 12/30/81 Supervision 8 10/82 2 9 18 10/14/82 Supervision 9 04/83 2 16 32 05/20/83 Supervision 10 03/84 2 11 22 03/14/84 Supervision 11 12/84 2 15 30 01/16/85 Supervision 12 05/85 2 5 10 05/18/85 Completion 12/85 2 15 30 02/00/86 Total 380  -iv - TUNISIA NORTHERN TUNISIA WATER SUPPLY PROJECT (Fourth Water Supply Project) LOAN 1445-TUN PROJECT COMPLETION REPORT HIGHLIGHTS Loan 1445-TUN, was approved in June 1977 for an amount of US$21.0 million to help SONEDE meet increasing water supply demands in five northern governorates including Greater Tunis and assist SONEDE in developing its management information system. The Loan became effective some three months later than originally envisaged due to delay in signing a loan agreement between the Government and the Kuwait Fund for Arab Economic Development, co-financer of the Project (para 3.01). The project was implemented by SONEDE's own staff assisted by foreign consultants for the preparation of detailed design and bid documents and for the supervision of the construction of a dam-reservoir. Parts of the works were commissioned mid-1981 to avoid water cuts in Tunis during the summz.r of 1981. The project construction was completed mid-1984, two years behind original schedule (para 3.03). Total project costs expressed in Dinars were only 13% higher than original estimates despite increases in project scope (para 3.02). The performance of engineering consultants, contractors and suppliers was generally good (para 3.06). Studies to develop SONEDE's management info-mation system were satisfactorily completed by SONEDE's own staff, not by management consultants as expected at appraisal (para 4.03). The company's financial performance was not up to the levels targeted, but nevertheless was considered satisfactory. Planned tariff increases were sometimes delayed, but actual revenue was never far from the level which had been projected. Actual operating expenses exceeded the appraisal forecasts, mainly due to unanticipated salary increases, and investments were substantially larger than forecast. This did not, however, cause significant detrimental effects on the company's operations.  tl v ) The major objectives of the project have been met (para 6.01). The project was the least-cost solution. The internal rate of return is 10.37 (para 6.04), based on the latest tariffs applied in February 1985. The project confirms the importance of adhering to the now generally accepted practice to appraise only on 'he basis of detailed engineering studies.  PROJECT COMPLETION REPORT TUNISIA: NORTHERN TUNISIA WATER SUPPLY PROJECT (Fourth Water Supply Project) (Loan 1445-TUN) 1. INTRODUCTION 1.01 In Tunisia, responsibility for planning, design, construction and operation of water supply systems in urban areas and large villages is assigned to an autonomous public entity, the "Soci6te Nationale d'Exploitation et de Distribution des Eaux" (SONEDE), which is overseen by the Ministry of Agriculture. Water supply in small villages is the responsibility both of "Direction du G6nie Rural" (DRG), a department of the Ministry of Agriculture, for planning, design and construction, and of the Offices of the Provincial Authorities (governorates) for cperation and maintenance. 1.02 One of the major constraints to rapid expansion of public piped water supply in Tunisia is the remote location of fresh water sources from the main urban centers, requiring the construction of unusually long transmission pipelines. This situation is further worsened by the fact that some highly saline sources can only be used in conjunction with other fresh sources. The cost of the transmission pipelines becomes decisive, as the population size is small, making the per capital investments prohibitive. In 1968, when SONEDE was established, about 90 percent of the urban population had access to a public water supply, of which only half had house connections. The percentage of population served in rural areas was much lower, about a third of this population. The Government's objectives at that time were to give priority to the urban sector where it could get the maximum benefits with its limited financial resources and to connect a larger segment of the urban population to the water networks in order to increase water sales and thus available financing for further expansion of the water systems. 1.03 The Bank provided continuous support and assistance in establishing and developing SONEDE, as indicated by a series of loans and credits from 1969 through 1979. In January 1969, the Bank made Loan 581 of US$15.0 million for water supply works in the regions of Tunis and Sousse. These works were jointly financed by the Swedish International Development Authority (SIDA) with a loan of US$5.0 million. A year later, the Association approved Credit 209 of US$10.5 million for water supply works in eig,.t areas of the country. This project was also jointly financed by SIDA in an amount of US$3.5 million. The Third Water Supply Project (Loan 989 of US$23.0 millionm made in 1974) concentrated on water supply systems in Sfax and in a number of rural centers. A Fifth (National Water Supply) Project (Loan 1702) was approved in 1979. It was a sector loan, to finance distribution improvements and extensions in urban areas where production capacity was adequate, and to provide service in rural villages not previously served. The Bank loan was for US$25 million, and credits for financing connections were provided by British banks. All these projects have been completed and audited by the Operations Evaluation Department (OED) except for the Fifth Project for which a project completion report was prepared and is now being audited. 1.04 The Fourth Project (Northern Tunisia Water Supply Project - Loan 1445-TUN, US$21.0 million, June 2, 1977) for which this completion report has been prepared, was aimed at meeting the water supply requirements in the northern provinces and assisting the Government's house connection target (para 2.02 (i)).  - 2 - I1. PROJECT PREPARATION AND APPRAISAL Or.in, Preparation and APraiS 2.01 Immediately on SONEDE's formation, an allocation of water resources was made between potable water and other uses, notably irrigation, with SONEDE receiving first priority. Between 1962 and 1972, about 402 of public investment in agriculture had been devoted to hydraulic works, which nearly doubled irrigated areas. Towards the end of the 1960's, however, the increasingly important need for potable water made it clear that a more rational study of overall water resources was needed if all future needs were to be met. In 1969, a start was made, with a Bank technical assistance grant of US$150,000, on a National Water Master Plan, with a detailed study of the Northern Region; the Plan proposed an optimum utilization of water resources by a complex system of dams, hydroelectric works, interconnection canals and drainage channels, in order to improve irrigation, restore agricultural production, mininize flooding and produce potable water for the major population centers and for rural areas. The Master Plan of the Northern region led to two Bank loans: (i) the Sidi Salem Multi-Purpose Project (Loan 1431) which included, among other components, the construction of an impounding dam (Sidi-Salem) to control and regulate the Medjerdah River and of a 12c km long Canal (Medjerdah - Cap Bon) to convey water for irrigation and water supply of the areas of Tunis and Cap Bon. The Bank provided US$42 million, one-quarter of the estimated foreign exchange cost of the project. Financing also came from other external sources, including Iran, the Federal Republic of Germany and China; (ii) the Northern Tunisia Water Supply Project (Loan 1445) which included the construction of production facilities drawing raw water from the Interconnection Canal constructed under the Sidi Salem Project. The Northern Tunisia Water Supply Project was appraised in December 1976 on preliminary designs satisfactorily prepared by two foreign consulting firms, one for the production facilities, the other for the distribution facilities. Negotiations were held in April 1977 after accounts receivable from Municipalities were decreased, at the Bank's request, from about 16 months to 9 months of water sales. The loan of US$21.0 million was approved on June 2, 1977. Objectives 2.02 The objectives of the project were to: (i) meet the water supply demand in the project area and help SONEDE to provide at least 81% of the expected 1985 country urban population with house connections;  (ii) promote close cooperation between SONEDE and the Greater Tunis District and Government agency reponsible for planning the development of the Tunis metropolitan area; and (iii) help assure pricing adequate to generate part of the funds needed for future expansion of water supply facilities. Project Description 2.03 The project consisted of the construction of facilities to meet the potable water needs of the northern governorates of Tunis, Tunis-Sud, Beja, Jendouba and Nabeul to the year 1990 and technical assistance. The four major components were: (i) production facilities, including an earth dam to create a 12 Mm3 reservoir, two pumping stations, transmission pipelines and a water treatment plant; (ii) extension of the distribution system in Greater Tunis, including installation of two primary mains, the expansion and improvement of the secondary distribution network and upgrading of booster pumping stations; (iii) the extension of distribution systems, including expansion of the primary sytems, improvement of the secondary distribution networks and upgrading or storage and booster pumping in Beja, Madjez-el-Bab, Pont du Fahs, and South Nabeul; and (iv) a study to assist SONEDE in developing and adapting its management information system in accordance with the needs of its future expansion. Revisions to the original project scope are discussed in para 3.02. Loan Covenants 2.04 The loan documents included the following main covenants: (i) SONEDE should maintain water rates adequate to enable it to earn a minimum return of 6% in 1977, and 7.52 in subsequent years, on its net fixed assets in operation, properly valued in a manner acceptable to the Bank; mainly because the system of accounts in Tunisia is based on historical costs, this covenant was changed in May 1982 to a cash-flow/contribution to investment covenant under a subsequent project (Sixth Water Supply Project, Loan 2134-TUN; see para 5.20 below); (ii) SONEDE was to enter into an agreement with the Tunis District for their future cooperation regarding the construction of the water distribution system in Greater Tunis;  - 4 - (iii) beginning with its annual budget for 1978, the Government was to provide the municipalities with the financial means necessary to assure timely payment of their water bills; and (iv) the Government was to make available to SONEDE a contribution of US$23 million for the project and, if necessary, any additional funds required to meet cost overruns, should SONEDE be unable to provide them. 2.05 Each of these covenants was met except for the revenue covenant (paras 5.09 and 5.10). m. PROJECT IMPLI EMAL-ATATION, COST AND OPERATION Effectiveness 3.01 A special condition of effectivenes; required that a loan agreement be signed with an external lender to ensure adequate financing of the distribution works in Greater Tunis. It was only on December 14, 1977 that the Government signed a loan of about US$23.4 million equivalent with the Kuwait Fund for Arab Economic Development and the Bank Loan 1445-TUN became effective on January 30, 1978, about three months later than originally envisaged (November 2, 1977). Revisions 3.02 The most important revisions to the project scope concern the capacities of the production facilities and the distribution facilities in the Greater Tunis area which were generally increased by 10% to 60% according to the components. The nominal pumping capacity from the Medjerdah canal is 3.5 m3/s. instead of 2.8 m3/s.; treatment plant capacity is 2 m3/s. instead of 1.4 m3/s., and primary distribution pipes have a diameter of 1,600 mm instead of 1,250 mm. The main reason why the pumping and pipeline capacities of the production facilities were increased is because during the design stage, a detailed study of the periods of unavailability of the Medjerdah - Cap Bon Canal as a source of water supply due to too high water salinity or repairs showed that peak pumping should be increased in order to deliver a sufficient average water production. The main reason why the sizes of primary distribution pipes in Greater Tunis were increased is because considerations of space for laying pipes in Longested areas and trafic interruptions needed to carry out the works led to the decision to size the pipes for the horizon 2000 instead of 1990 as orginally envisaged. Finally, the construction of two booster stations was postponed to a later stage. All the revisions were reasonable and only reflect the fact that the appraial was made on the basis of preliminary engineering studies and not detailed design. Annex 1 shows a comparison between project elements as appraised and as actually constructed.  -5- hmplementation 3.03 The project was implemented from mid-1977 to mid-1984. In 1978, SONEDE met one of the loan covenants (see above 2.04 (ii)) by entering into an agreement with the Tunis District for coordination of their activities in Greater Tunis. Cooperation between them went smoothly. Bid documents were prepared by foreign engineering firms but supervision of construction was carried out by SONEDE's own staff, except for the earth-dam reservoir for which SONEDE was assisted by a foreign engineering firm. Parts of the works were commissioned by mid-1981 and contributed to SONEDE's water sales for this calendar year. All project components were in operation by mid-1984, two years behind original schedule. Factors for delays were: (i) limited experience of SONEDE's staff in contracting for treatment plant and pumping stati3ns; (ii) fire accident in a control room in 1982; (iii) modifications to surge protection devices in some pumping stations; and (iv) laying of distribution pipes more difficult than anticipated because the terrain was often geologically poor a-id obstructed by unexpected utility lines. Annex 2 shows a comparison between appraisal and actual construction schedules. Procurement and Disbursements 3.04 Civil works, equipment and pipes for the production facilities financed under the loan were procured through international competitive bidding in accordance with the Bank Guidelines for procurement and the provisions set forth in Schedule 4 to the loan agreement. The distribution facilities in Greater Tunis were procured and funded under parallel firnancing from the Kuwait Fund. To speed up project execution, SONEDE decided to combine equipment supply and civil works in two turn-key contracts for two major works, a water treatment plant and pumping stations, instead of placing separate contracts for equipment supply and civil works. In order to maintain its original share of the project financing, the Bank accepted to finance the foreign expenditures under the equipment category (financed at a rate of 100%) and the local expenditures under the civil works category (financed at a rate of 39%). Also, contrary to the original expectations, more pipes, valves and fittings were locally purchased and paid in dinars while having a high indirect foreign exchange component. For procurement of pipes, materials and equipment, the original Loan Agreement provided only disbursement on foreign expenditures. In order to finance the full foreign exchange cost of the production facilities, the Bank agreed on November 1982 to amend Schedule 1 of the Loan Agreement to allow financing of 70% of local expenditures for pipes, materials and equipment. Appraisal and actual loan disbursements by fiscal year and by category appear in Annex 3.  -6- Costs 3.05 Total project costs (Annex 4) amounted to TD49.48 million as compared to TD 43.73 million at appraisal, i.e. an increase of 13.1%. The net increase of TD5.75 million is made up of a number of factors, the most important of which are: (a) pumping and instrumentation oL production facilities: an increase of TD3.34 million, due to increa.sed capacity; (b) primary distribution system in Greater Tunis: an increase of TD3.74 million due also to increased capacity; and (c) secondary distribution system in Greater Tunis: a decrease of TD2.07 million because of postponement of construction of some pipelines to a later stage. This result is very favorable considering the overall increases in project scope (para 3.02). Actually, the prices obtained by SONEDE were relatively low because of good competition between contractors and suppliers. Expressed in US$, the total project cost (Annex 4, page 2) is 8.32 less than originally estimated, but this is misleading because the high value of the US dollar compared with the Tunisian Dinar during the construction period. Performance of Consultants, Contractors and Suppliers 3.06 The performance of engineering consultants, contractors and suppliers was generally good. The engineering consultant chosen for the production facilities performed very well for the design of the earth dam reservoir, and reasonably well for the pumping stations where some adjustments needed to be made on the surge protection facilities. Reporting 3.07 SONEDE, which supervised most of the works with its own staff, was generallly late (from 3 to 17 months) in submitting quarterly progress reports. The situation mproved in 1984 when SONEDE prepared summarized information regarding all projects under construction in only one report sent to all its lenders. IV. OPERATING AND INSTITUTIONAL PERFORMANCE Operational Aspects for the Project Area 4.01 Although the last project components were placed in service by mid-1984, about two years later than foreseen at appraisal, the first project components were already placed in service by mid-1981 and permitted SONEDE to  - 7 - avoid water shortages in Greater Tunis during the summer of 1981. Except for some minor adjustments being made on the check valves of the pumping stations, the facilities constructed under the project appear to be working very well. From 1976 to 1984, about 152,400 Pew c*.-nections were installed in the four northern governorates of the project area. In 1985, the total volume of water sold in the project area reached 76 million m3 , about 16% less than expected at appraisal because tourism and industrial facilities in Greater Tunis developed less than foreseen at appraisal. Out of this volume, about 14.1 million m3 were produced and distributed through the facilities constructed under the project (Annex 5). Operational Aspects for the Executing Agency 4.02 Considering all the areas served by SONEDE, indicator levels specified at appraisal were generally exceeded (Annex 6). The percentage of urban population connected to the water supply systems already reached 81% in 1983 instead of 1985 as targeted (para 2.02). Total water sold in 1985 reached 160 million m3. about 13% more than expected at appraisal (despite the fact that water soid in the project area was 16X less than expected at appraisal). Total water produced in 1981 reached about 205 million M3, about 17X more than expected at appraisal. The total numbers of existing connections over the 1976-1984 period were above the numbers estimated at appraisal. Unaccounted-fur water was equal or above 292 during the 1981-1985 period, slightly above the target of 28X. Practically all SONEDE distribution pipes are in asbestos-cement, material more fragile but less expensive than steel or ductile iron, and SONEDE's performance is not directly comparable to systems in developed countries where the proportion of pipe in asbestos-cement is limited. Also, in 1984, the number of employees per thousand customers was 6.9, about 47% more than expected, but the number decreased steadily over the years from the high level of 10.7 in 1976 (Annex 6). Orgaization 4.03 The proje.t contained a study to assist SONEDE in developing and adapting its management information system (para 2.03, (iv)). The study was carried out by SONEDE staff (Directorate of Audit and Organization) and not by outside consultants as expected at appraisal. It was satisfactorily completed by February 1979. Over the years, SONEDE's structures have been improved and its management information system developed. Presentiy, SONEDE's management information system is partly computerized and works well. Institutional Growth 4.04 SONEDE's activities have grown considerably as a result of this project and other projects during the period. Between 1978 and 1984, the company's net fixed assets nearly tripled and the number of customers increased by 77 percent. The appraisal projected 615,000 customers at the end of 1984; the actual number was 616,000. Staff salaries and fringe benefits are competitive, and SONEDE has no difficulty in recruiting and retaining qualified staff. There was practically no high level staff turnover during  the project execution. Staff training needs were met with the assistance of the "Office de l'Emploi et de la Formation Professionnelle", a Government-operated agency. V. FINANCIAL PERFORMANCE 5.01 Appraisal and actual Income Statements, Balance Sheets, and Sources and Applications of Furnds Statements for the years 1976 to 1984 appear in Annex 8. Financial Results 5.02 In the period 1976-1984, the number of customers increased at an average rate of 10.4% per year, compared to the appraisal estimate of 10.5X. Total water sales increased at a rate of 6.4% per year, higher than estimated (4.7%) mainly because the consumption per connection was greater than had been estimated (Annex 6). The water tariff reached DT 0.238/m3 in 1984, higher than estimated (DT 0.222); but on average during the nine year period, the average tariff was 22 lower than anticipated. Water revenue reached TD38.4 million in 1984, about ',% higher, and total revenue was about 252 higher than estimated. Compared with revenue in 1976, revenu in 1984 increased by a factor of 4.16, against an estimated increase of 3.42. 5.03 Throughout the period, operating expenses were close to .he estimate except for the costs of personnel and energy, which respectively increased by factors of 4.36 and 6.72, compared to estimated factors of 1.96 and 2.16%. While the ratios of staff per connection and volume sold per staff have improved, salary levels increased more than estimated. Higher increases of energy costs reflected the increased cost of fuel on a worldwide basis. 5.04 Over 1976-1984, total operating expenses increased 3.89 times while total revenues increased 4.16 times; but because the expense increases were more than expected, net operating income for 1984 reached only TD13.5 million, against TD19.80 million projected. In 1984, net operating income represented 24% of total revenues, against 48% projected. 5.05 Interest charges were higher than had been foreseen at appraisal because of higher than exptected rates during the period 1976-1984, and because SONEDE's capital expenses and borrowings were more than expected (TD314 million spent instead of TD220 million). Furthermore, for many of its new loans, SONEDE had to bear the foreign exchange risk. From 1982 onwards, foreign exchange losses were substantial because of increases of exchange rates for the US$ and the Kuwait Dinar. Interest charges as a proportion of total revenues increased from 8% in 1976 to 18% in 1984. Over the period 1976-1984, net income after interest stayed within the range of zero to three million Dinars, as compared to a projected result increasing from 2 million to 16 million Dinars.  -9- Finan.ing Plan 5.06 SONEDE's actual financing during the period 1976-1984 may be compared with the financing plan at appraisal as follows: 1977-1984 (TD Million) ---Appraisal--- -Actual-- Amount % Amount % Gross Internal Cash Generation from Operations 111.4 51 114.8 37 Change in Working Capital & Cash (12.8) (6) (4.7) (1) Change in Deferred Income Tax 4.8 2 -- -- Change in Long Term Advances (1.1) (1) (11.6) (4) Subtotal 102.3 46 98.5 ?2 Debt Service (37.9) (17) (65.0) (21) Net Internal Cash Generation 64.4 29 33.5 11 Borrowings 48.7 22 131.5 42 Government Contributions 50.0 23 85.6 27 Customer Contributions 57.2 26 63.7 20 Capital Investments 220.3 1DQ 5.07 In the 1976-84 period, net internal cash generation provided about llX of capital investments as compared with 29% foreseen at appraisal. Borrowings represented 42% of capital investments instead of 22%, making up internal cash generation shortfalls. Government contributions were slightly higher than expected, both in total amount and as a percentage of capital investment, while customer contributions represented a lower percentage. The share of both contributions taken together in terms of percentage of capital investment was almost as forecast. Financial Position 5.08 From 1976 to 1979, SONEDE's debt/equity ratio decreased; but this was reversed from 1980 to 1984 so that in 1984 the capital structure was close to what it was in 1976. The actual result reflects larger investment than forecast from 1980 onwards and lower earned surplus. Although not as low as had been anticipated, SONEDE's debt/equity ratio in 1984 was 43:57, which may be considered satisfactory. Presently, collection from private consumers is very effective (less than 1.5 months outstanding) but collection from municipalities is slow (about 8-9 months). However, compared with the situation in 1976, collection from municipalities has improved since the Government, in accordance with one of the loan covenants (para 2.04 (iii)), issued Decree No. 77-988 on November 22, 1977 to try to enable SONEDE to  - 10 - receive full payment for water consumed b7 local and municipal authorities within a reasonable time. Revenue Covenants 5.09 SONEDE's returns on the historical value of its net fixed assets in operation, including those of rural centers, were 12.2% in 1979, 7.8% in 1980, and 4.1% in 1981 1 '. Although separate figures have not been available for rural centers, it is estimated that their exclusion would add to the above rates of return approximately one percentage point. Because asset revaluation would result in substantial reductions in the rates of return indicated, it is clear that SONEDE's performance in 1980 and 1981 did not meet the minimum return of 7.5% prescribed in the Loan Agreement. The deficiency is, however, not considered to have been a significant one. 5.10 Because the system of accounts in Tunisia was based on historical costs (as it still is), and because of the difficulty in excluding assets of -'rural centers", the Bank agreed in 1982 in negotiating the loan for the Sixth Water Supply Project (Loan 2134) to substitute from 1982 onwards a cash generation/contribution to investment covenauit for the rate of return covenant. The new covenant was designed to establish revenue levels taking account of forecast needs for growth in working capital as well as for system expansion (specifically, the revenue level which would be considered minimally adequate would produce net internal cash generation covering the yea 's "increase" in working capital other than cash plus 20% of one third of the estimated capital expenditures of the current and two following years). The form of the covenant was intended to smooth the effect of variations in planned future investment expenditures for purposes of current tariff setting, but it did not provide for smoothing in cases of working capital change. As it happened, therefore, the results achieved in 1982, 1983, 1984 calculated according to the covenant formula were "self-financing percentages of 32%, 3%, and 121, respectively, compared to the covenanted minimum of 202, because of major variations in working capital during these years. In 1982, for example, because of increases in accounts payable, the "increase" in working capital was negative, resulting in 321 self-financing for the year. In our view, such variations in working capital should not be interpreted under the framework of the covenant as calling for corresponding swings in tariffs (to meet the 201 criterion), and the figures of 32%, 31, and 12% cited give a misleading picture of performance. SONEDE's self-financing ratios for each of the years in question excluding working capital changes were 11, 181, and 151, respectively, figures which more closely represent what was "contributed" by customers to capital expenditures during each year, and which we believe are a more useful indicator of the adequacy of the tariffs at the time. IX' The Loan Agreement calls for asset revaluation and for exclusion of the value of assets in communities with less than 2,000 inhabitants (1'rural centers").  - 11 - 5.11 SONEDE was committed not to incur any new long-term debt without the Bank's concurrence, if its projected net annual income before depreciation and interest should fall below 1.5 times the projected annual debt service. Debt service coverage during the execution of the Project was always above 1.5 up to 1983, but dropped to 1.13 in 1984. 5.12 Section 5.02 of the Loan Agreement calls for SONEDE's accounts and financial statements to be audited by independent auditors acceptable to the Bank. The audits were performed by a qualified private Tunisian firm and accepted by the Bank. The audit reports were submitted to the Bank with delays beyorid the six months time limit resulting from the time spent by SONEDE in reviewing the reports. As a result, under the Seventh Water Supply Project (Loan 2368-TUN of February 1984), the submission time limit was modified to nine months. VI. PROJECT JUSTIFICATION Proiect Achievements 6.01 The major objective of the project, to meet increasing water demand in four northern governorates and help SONEDE to provide at least 811 of the expected 1985 urban population with house-connections has been met (paras 4.01 and 4.02). Thanks to the project, during the 1977-1985 period, more than 900,000 additional people located in the project area benefited from new connections to the water supply system. leat cost solution 6.02 The use of the Medjerdah River to increase the water supply in the project area was the least cost alternative. Apart from the earth dam reservoir, construction of the production facilities were phased, the first phase for the horizon 1990 only being constructed under the project. Construction of distribution facilities were also phased, but with different design horizon depending on the components. Ecomao'ic Anysis 6.03 At the time of appraisal, incremental water revenues were used as a minimum measure of economic benefits. On this basis, the internal rate of return for the project was 8.62. 6.04 Using the same method, with shadow prices to exclude taxes included in costs, the internal rate of return has been recalculated with actual costs, actual/projected incremental volumes of water sold/to be sold and the latest tariffs applied in February 1985. As detailed in Annex 7, the new rate of return is 10.31. A variation of plus or minus 20% in incremental revenues and operating costs would result in returns varying between 5.61 and 13.51. The long-term incremental cost of water has been recalculated at TDO.350/ms in 1985 prices (Annex 7).  - 12 - VII. CONCLUSIONS AND LESSONS LEARNED conclusions 7.01 The major project objective which consisted in augmenting the water supply to the northern governorates in Tunisia has been met. Thanks to the parts of the works which were commissioned in the middle of 1981, water cuts were not necessary in Tunis during the sunmer 1981 (para 3.03). Costs expressed in Dinars were only 13% higher than estimated (para 3.05) although the capacities of the facilities were generally increased (para 3.02). The company's financial performance was not up to the levels targeted but nevertheless was considered satisfactory. Lessons Learned 7.02 This project confirms again the importance of the practice now generally used to appraise only on the basis of detailed engineering studies, and not of preliminary design studies (para 3.02), in order to avoid important revisions to the project scope. 7.03 Studies to develop SONEDE's management information system were satisfactorily completed by SONEDE's own staff, instead of management consultants as expected at appraisal (para 4.03). This indicates that at appraisal, the Bank underestimated SONEDE's capacity to implement such studies.  - 13 - ANNEX 1 TUNISIA NORTHERN WATER SUPPLY PROJECT ILN. 144S-TUM) COMPLETION REPORt COMPARISON OF WORKS PROJECTED AND ACTUALLY CONSTRUCTED Production Facilities prolected Actual Pumping Capacity -Nominal 2.8 m3's 3.5 m3's -Installed 5.0 m3's -Pumping Station (SP,) to draw raw water from Medjerdah/Goud Power Capacity -Nominal 1700HP 4755 HP -Installed 6800 HP -Earth-dammed Reservoir volume 12 M3 13MM3 -Transmission pipelines between: 1600 mm Hedjerdah Canal and Basin R4 -Diameter 1250 mm Transmission Capacity 2.8 m3's Basin Ry and Treatment Plant -Transmission Capacity 1100 mm Basin Ry and Reservoir -Transmission Capacity 800/600 mm 1250/1000 an -Water Treatment Plant Treatment Capacity Nominal 1.4 m3's 2 m3's -Peak Flow 1.8 m3's 2.5 m3"s -Regulation Reservoir Volume Not Projected 2x10,000 m3 Punping Station (SP2) between Power Capacity Nominal 2 320 HP -Reservoir and Treatment Plant Installed - 5,500 HP Pumping Capacity -Nominal 3.6 m3's 4.0 m3ls -Installed 4.5 m3's -Transmissiri Pipeline between -Diameter 1600 mm 1600 Reservoir and Treatment Plant Transmission Capacity 3.6 m3's 4.0 m3's Pumping Station (SP3) between Basin R4 -Nominal Capacity Not Projected 2 m3's and Reservoir -Nominal Power Capacity 610 HP *Telemeasure 1 System 1 System Distribution Facilities in Greater Tunis Primary Hain to Supply Northern Tunis Dlame^ers 1250/1000 mm 1600/1400/1260 mm Primary Main to Supply Southern Tunis Diameters 1400/1100 mm 1600 nmn Strengthening of Booster Stations 4 Booster Stations 2 Booster Stations New Service Reservoirs Volume 0 2x10.000 m3 Expansion Secondary Network Not Specified 60 km of 800-400 nmn pipes Distribution System in Other Areas Expansion of Primary Systems and Beja, Medjez el Bab. 100 km of 80 Expansion and Improvement of Secondary Networks Pont du Fahs, 500 mm dia. pipes South Nabeul S Pumping Stations Increase Storage and Booster Stations S Pumping Stations S Reservoirs 500 to 1500 mn3.  TtUISIA IO*TEU TUtISIA WAT