Tunisia - Fifth Water Supply Project

Documnt of The World Bank FOR OFmICIAL USE ONLY Report No. 6288 PROJECT COMPLETION REPORT REPUBLIC OF TUNISIA FIFTH WATER SUPPLY PROJECT LOAN 1702-TUN June 20, 1986 Water Supply and Sewerage Division Europe, Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  EXCHANGE RATES Currency Unit Tunisian Dinar (D) =1,000 Millimes Appraisal Year Average (1978) : Dl = US$2.53 Average Over Project Period : DI = US$1.86 Completion Year Average (1982): Dl = US$1.61 ACRONYMS IDA = International Development Association IDB = Islamic Development Bank RDE = Regie de Distribvtion des Eaux SIDA = Swedish International Development Authority SONEDE = Soci6t6 Nationale d'Exploitation et de Distribution des Eaux ONAS = Office National de l'Assainissement  FORFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. A 0office Cf ovctewC.erni Opeatiotns Evalwtrnf June 20, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on the Republic of Tunisia Fifth Water Supply Project (Loan 1702-TUN) Attached, for information, is a copy of a report entitled "Project Completion Report on the Republic of Tunisia - Fifth Water Supply Project (Loan 1702-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. Yves Rovani by Otto Maiss '4 Attachment This document has a restricted distribution and may be used by recipients only in the perfotmance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFCIL USE ONLY REPUBLIC OF TUNISIA LOAN 1702-TUN - FIFTH WATER SUPPLY PROJECT PROJECT COMPLETION REPORT Table of Contents Page No. Preface .......................... i Basic Data Sheet ................... ii Highlights ............................. iv I. INTRODUCTION .... * ...........*...e.......... 1 II. PROJECT PREPARATION AND APPRAISAL ................. 2 Origin, Preparation and Appraisal ................. 2 Project's Role in Development Plan ................. 3 Project Description .3................... .... ... . 3 Negotiation and Approval .......................... 3 Loan Covenants .... * .............................. 3 III. PROJECT IMPLEMENTATION, COST AND OPERATION ......... 4 Project Execution .......4.. ........................ 4 Procurement ................................ . .... 5 Project Costs .......* ............................ 5 Disbursement ..... ... **** 5 OJperations ......... ...... 6 IV. FINANCIAL PERFORMANCE .......... .... ....................6 Financial Results ................................. 6 Financial Covenants ..*.............**...**...*..**. 7 Financing Plan .................................... 8 Audit ***.,....****,** **** *..................... 8 , . V. INSTITUTIONAL PERFORMANCE . .............. . . . . . . . . . . 8 Management and Organization ....................... 8 Growth ................. ..... *..*....*********e.*.* 8 Sectoral Development ****....... ............. 9 This document has a restricted distribution and may be used by recipients only in the performanc of their offical duties Its contents may not otherwise be diclosed without World anok authorization.  Page No. VI. PROJECT JUSTIFICATION 9..........*....... ,,,*** 9 Project Achievements 9 Economic Justification ....................**.**.**** 9 . Bank Performance ............. .*..e* ... 9 VII. CONCLUSIONS 10*** **.*.*.*..* ......*****.,o* 10 Annexes 1. Cities and Villages Included in the Project ............. 11 2. Detailed Project Costs .....................,.,., 12 3. Disbursement of the Loan Funds , 13 4. Population, Water Production and Sales ,.....0.......00...0.. 14 5. SONEDE - Income Statements, 1978-1984 ..,..000...0..... 15 6. SONEDE - Balance Sheets, 1978-1984 ....,................,,. 16 7. SONEDE - Source and Application of Funds, 1978-1984, o.... o. 18 8. Comparison of Appraisal Forecast ard Actual Financing Plans . 19 9. Re-Calculation of the Internal Rate of Return m***,********. 20 WMap No. Th1RD No. 19470 ,.  REPUBLIC OF TUNISIA LOAN 1702-TUN - FIFTH WATER SUPPLY PROJECT PROJECT COMPLETION REPORT PREFACE This report reviews the preparation, implementation and achievements of the Fifth Water Supply Project (Loan 1702-TUN) in Tunisia, for which a loan of US$25 million was made to the "Societ6 Nationale d'Exploitation et de Distribution des Eaux" (SONEDE), the national water supply authority. The loan was signed in May 1979, became effective in October 1979 and was closed in December 1983. The project was implemented by SONEDE. The Fifth Water Supply Project was the first sector lending operation for water supply in Tunisia financed by the Bank. It was aimed at connecting an increasing percentage of the urban population to the water network and expanding public water supply services in the rural areas. Project selection, design and appraisal was carried out by SONEDE in accordance with a set of selection criteria and appraisal procedures set out in the Loan Agreement. As part of the project, a review of development objectives and financial policies in the sector was also undertaken by SONEDE. A Bank mission visited Tunis in December 1984 to discuss the prepara- tion of the project completion report. The operating and financial data, related to the project implementation and presented in this report, were provided by SONEDE. In accordance with revised procedures for project performance audit. reporting, this PCR was read by the Operations Evaluation Department (OED), but the project was not audited by OED staff. Following standard procedures, OED sent copies of the draft PCR to the Government and the Borrower. However, no ccoments were received.  - ii - REPUBLIC OF TUNISIA LOAN 1702-TUN - FIFTH WATER SUPPLY PROJECT PROJECT COMPLETION REPORT BASIC DATA ShEET KEY PROJECT DATA Item Actual or Current Appraisal Estimate Expectation Total Project Cost (US$million) 71.5 72.0 Underrun (Percent) 0.7 Loan Amount (US$million) 25.0 25.0 Disbursed 25.0 25.0 Repaid Date of Physical Completion 12/31/82 12/31/81 Proportion Completed by Above Date (Percent) 100 87 Time Overrun (Percent) 40 Economic Rate of Return (Percent) 8 8 Financial Performance: Rate of Return on non Rate of Return on re- revalued net fixed assets valued net fixed assets of 13X in 1979, 9% in of 7.52 in 1979 through 1980 and 51 in 1981; a 1981; starting iil 14Q2, contribution to capital a contribution to invtstments of 112 in capital investment of 1982, 18S in 1983, 202. 15S in 1984. Institutional Performance Good Good Cumulative Disbursements (US$million) FY 1980 0.3 2.8 FY 1981 9.6 11.0 FY 1982 15.7 22.4 FY 1983 23.7 25.0 FY 1984 25.0  - iii - OTHER PROJECT DATA Original Item Plan Revision Actual First Mention in Files 03/16/77 Government Application - -- 07/15/77 Negotiations -- 04/09/79 Board Approval -- --- 05/22/79 Loan Agreement Date - - 05/31,79 Effectiveness Date 10/01/79 11/30/79 10/19/79 Closing Date 12/31/82 12/31/83 12/31/83 Borrower Soci6te Nationale d'Exploitation et de Distribution des Eaux Executing Agency "i of " of Follow-on Project Name Sixth Water Supply Project Loan Number 2134-TUN Amount (US$million) 30.5 Loan Agreement Date 05/14/82 MISSION DATA Month, No. of No. of Staff Date of Purpose Year Days Persons Days Report Identification 10/77 4 2 8 03/03/78 Pre-Appraisal 06/78 4 1 4 07/07/78 Appraisal 10/78 17 2 34 04/23/79 Supervision 08/79 6 2 12 08/24/79 Supervision 02/80 14 2 28 03/14/80 Supervision 08/80 6 2 12 08/29/80 Supervision 04/81 12 2 24 04/15/81 Supervision 12181 8 2 16 12/30/81 Supervision 10/82 9 2 18 10/14/82 Supervision 04/83 16 2 32 05/20/83 Supervision 03/84 11 2 22 03/14/84 Completion 12/84 12 2 24 10/28/85 Total 119 234  - iv - REPUBLIC OF TUNISIA LOAN 1702-TUN - FIEFTH WATER SUPPLY "ROJECT PROJECT COMPLETION REPORT HIGHLIGHTS 1. Loan 1702-TUN of US$25 million was made to "Societe Nationale d'Exploitation et de Distribution des Eaux" (SONEDE) in May 1979 to help finance a US$72 million water supply project. The project constituted a major part of the water supply program included in Tunisia's Fifth Development Plan (1977-81) and consisted of expanding water supply services in the medium-size cities and rural areas to raise the percentage of population served by piped water systems from 64 percent in 1979 to 70 percent by the end of 1981. Responsibility for the selection of agglomerations where water works were to be executed, as well as the appraisal cf the works, was delegated to SONEDE which also carried out construction supervision. As part of the project, a review of the development objectives and financial policies rn the water supply sector was undertaken by SONEDE. 2. The project was successfully implemented and the objectives were achieved beyond the appraisal expectations. Water works were executed in eight cities and tweuty-seven rural centers. Water sales increased to 150.5 Mm3 in 1982 from 115.7 Mm3 in 1978. During the same period, the number of connection lines increased by almost 50 percent frem 349,200 to 514,600. The appraisal had forecasted sales of 143.4 Mm3 and 505,700 connection lines in 1982. The appraisal costs in US dollars remained unchanged. The loan was closed just a year later than foreseen at appraisal, to provide sufficient time for the return of retention money on civil works contracts for the project. 3. Overall, SONEDE's financial performance was satisfactory, though, its finances at times were stretched due to a relatively large increase in investments and a shortfall in net operating income; SONEDE financed with its own funds the program of connection lines, which originally was to be financed from medium-term loans from commercial banks in London. The planned tariff increases were implemented and actual revenues were not far off the projected ones. Actual operating expenses, however, exceeded the appraisal forecasts due to large general salary adjustments that were not foreseen at appraisal. In spite of that, SONEDE carried out the program within the time specified and its financial position was never significantly affected by the reduced earnings. The internal rate of return on the project was calculated to be about 8 percent as estimated during the appraisal. 4. An institutional objective was to provide SONEDE with appraisal capabilities which were achieved under the project. As a result, the project was followed by two more sector operations (Loans 2134-TUN and 2368-TUN), which aimed at expanding further water supply services in rural areas.  REPUBLIC OF TUNISIA LOAN 1702-TUI - FIFTH WATER SUPPLY PROJECT PROJECT COMPLETION REPORT L INTRODUCTION 1.01 The Tunisian Government has always given high priority to public water supply. Until 1968, responsibility for urban water supply was with the "Regie des Eaux" (RDE), a service of the Ministry of Agriculture, which did not have adequate financial resources and independence, nor sufficient qualified staff to permit satisfactory planning and management of the systems for rapid progress in the sector. In 1968, about 90 percent of the urban population had access to a public water supply, of which almost 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 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. 1.02 fo reach these objectives and as part of the conditions for Loan 581-TUN, the Bank's first operation in the sector, the Government in July 1968 established the "Societe Nationale d'Exploitation et de Distribution des Eaux" (SONEDE), as the national water authority responsible for Lhe provision of potable water in urban areas and large villages. So far, SONEDE's achievements in the sector have been remarkable. The percentage of urban population connected to the network has increased from 43 percent in 1968 to 82 percent in 1984 and the number of house connections has more than quintupled during the same period. Much progress has also been accomplished in the rural areas, and SONEDE with the Bank's financial assistance, has installed public water systems in most villages with an agglomerated population of more than 3,000. At the same time, SONEDE has expanded its technical capability and strengthened its financial position. It is expected that SONEDE will have financed over 40 percent of its 1985 investments with internally generated funds includir.g customer contributions. 1.03 The Bank provided continuous support and assistance during the period of SONEDE's development, as indicated by a series of loans and credits from 1969 through 1984. In January 1969, the Bank made Loan 581-TUN 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 a credit of US$10.5 million for water supply works in eight areas of the country. This project was also jointly financed by SIDA in an amount of US$3.5 million. In May 1974, the Bank made Loan 989-TUN of US$23.0 million for water supply systems in Sfax, Tunisia's second largest city, and in a number of rural centers. In June 1977, the Bank approved Loan 1445-TUN of US$21.0 million for the expansion of water supply works in the northern part  -2- of the country, including Greater Tunis. The distribution works in Tunis were co-financed by the Kuwait Fund for Arab Economic Development in an amount of US$23.4 million. 1.04 In addition, the Bank Group assisted in the financing of a tourism infrastructure project (Loan 858-TUN and Credit 329-Tun, February 1972), which included US$8.2 million for water supply works. More recently, the Bank made Loain 1431-TUN of US$42 million for the regulation and conveyance of the Medjerdah River waters (Sidi Salem Multipurpose Project). Water supply works for US$4.2 million were included in this project. SONEDE was the executing agent of the water works included in the tourism and the Sidi Salem projects. 1.05 The first three projects (Loan 581-TUN, Credit 209-TUN and Loan 989-TUN) have been completed and audited by the Operations Evaluation Department (OED). The conclusion of the OED's audit reports was that the objectives of the three projects were met and that SONEDE had developed into an efficient and well-managed institution. Subsequently, the OED carried out an overall evaluation of the Bank's water supply operations in Tunisia and concluded that more financial assistance should be directed at the rural areas. The Fifth Water Supply Project (Loan 1702-TUN, US$25.0 million, May 31, 1979), for which this completion report has been prepared, was aimed at establishing an appropriate framework fo.- SONEDE's increased involvement in rural areas. The Fourth Project (Loan 1445-TUN) was completed at the end of 1984 and a completion report will soon be prepared for it. H. PROJECT PREPARA1JON AND API AALSAL Oriin, Preparation and Apprai 2.01 Prior to Loan 1702-TUN, the Bank financed large regional urban projects which were appraised by Bank Staff. The number of individual projectsin rural areas, however, was high and their selection and appraisal by the Bank would have required long processing time and consequently would have resulted in slow progress in the rural sector. Following the execution of the first four Bank-financed projects, SONEDE's technical capability had been greatly strengthened and it became evident that project selection &nd appraisal could be delegated to SONEDE, on the basis of agreed procedures that SONEDE would follow for the projects to be financed under a Bank loan. 2.02 As part of the project preparation, SONEDE determined the average per capita cost of water works in medium-size cities and rural agglomerated villages, taking into account both capital and operating costs discounted at 10 percent. The average per capita cost is a function of the population connected to the network, and is conversely proportional to the size of the population. It was agreed that SONEDE would use the average per capita cost as the main criterion for selecting projects to be financed under the Bank loan. It was further agreed that in order to provide SONEDE with some flexibility in project selection, any project with a per capita cost not exceeding the average cost by two standard deviations, would be eligible for financing under the Bank loan. Agreement was also reached with SONEDE on the ,coutent and format of appraisal reports that SONEDE would submit to the Bank for each project.  2.03 The project preparation started in October 1977 and during that period, the Bank concentrated on strengthening the appraisal capability of SONEDE. Feasibility studies and appraisal of a variety of projects were carried out by SONEDE staff and reviewed by the Bank. The project was appraised in October 1978. The appraisal mission evaluated in particular SONEDE's management and fir.ancial performance. Proiect's Role in Development Plan 2.04 The Tunisian Fifth Development Plan (1977-1981) included investments of US$464 million in water supply works. The objective of these investments was to increase the percentage of urban population connected to the network to 77 percent and to provide some 50 villages with pub.ic water supply. In particular, from mid-1979 through 1981, SONEDE was planning to invest US$72 million in restructuring the distribution networks in medium-size cities, constructing new systems in villages and expanding the distribution networks into low-income areas to increase the number of house connections. The Fifth Water supply Project was conceived to cover this part of the Fifth Investment Plan. Project Description 2.05 The project consisted of a number of subpr.'acts to provide water supply services in rural agglomerated villages, expand and improve primary distrbution systems in the country's intermediate cities, and expand the distribution networks into low-income areas of the cities. In addition, the project included a review of the service level objectives and financial policies in the water supply sector and the formulation of priority projects for the sector development. The selection and appraisal of subprojects was to be carried out by SONEDE. The project was progrLJmed to be completed by the end of 1981, with the loan closing a year later. Negotiation and Approval 2.06 SONEDE was invited in April 1979 to negotiate a loan of US$25 million for the project. The foreign exchange balance of US$7.7 million was to be financea by commercial credits which were to be used to refinance credits accorded by SONEDE to new customers to finance hookup charges to the network. The local costs were to be fiiLanced by SONEDE. Negotiations were held in Washington, DC from April 9-12, 1979. The loan was approved on May 22, 1979 and became effective on October 19, 1979. There was no special condition of effectiveness. Loan Covenants 2.07 The Loan Ag- .ement with SONEDE contained the following main covenants: (i) The Borrower had to carry out a sector review in accordance with terms of reference and a timetable acceptable to the Bank, and, at the completion of the study, had to review the conclusions of the study with the Government and the Bank and implement the agreed recommendations (Section 3.02);  (ii) SONEDE had to submit to the Bank reports, plans and tender documents related to the subprojects (Section 3.04); (iii) The Borrower had to maintain records adequate to reflect, in accordance with consistently accepted accounting practices, its operations and financial conditions (section 5.01); (iv) Annual audits of SONEDE's accounts and financial statements had to be carried out by independent auditors acceptable to the Bank, and the auditors' reports submitted to the Bank within six months after the end of a fiscal year (Section 5.02); (v) SONEDE was committed not. to incur any long-term debt without the Bank's concurrence, unless SONEDE's net annual revenues, before depreciation and interest, were at least 1.5 times the projected annual debt service on the proposed and existing debts (Section 5.04); (vi) The annual return on SONEDE's revalued net fixed assets in operation, less customers'contributions and assets in agglomerated rural centers, was to be not less than 7.5 percent (Section 5.05); 2.08 In May 1982, as part of the Sixth Water Supply Project (Loan 2134-TUN), the rate of return covenant was changed to a cash contribution to capital investments. Under Loan 2134-TUN, SONEDE was: (a) committed to contribute with internally generated funds not including customers' contributions, at least 20 percent of its capital investments in 1982 and subsequent years; (b) committed to contribute with internally generated funds including customers' contributions at least 40 percent of its capital investments; and (c) no longer committed to revalue its fixed assets. HII. PROJECT IMPLEMENTATION. COST AND OPERATION Project Emecution 3.01 The loan agreement provided that the project execution would be completed by the end of 1981, in accord with the implementation period of the Fifth Investment Plan. The original closing date of the loan was December 31, 1982. The project actually was completed at the end of 1982 and the loan closed on December 31, 1983. Under the project, primary systems in eight cities were restructured and expanded. At the same time, water supply networks were installed in twenty-seven rural villages. A list of these cities and villages with their characteristics and the costs of the works is given in Annex 1. As part of the project, SONEDE installed 165,400 house connections i.e. 11,400 more than forecast at appraisal. 3.02 Because of delays in obtaining data from other governmental agencies, SONEDE did not meet the appraisal deadline (December 31, 1979) for preparation of a timetable for execution of the sector review. The timetable was established at the end of 1980 and after that, the review was carried out  diligently. Its recommendations were followed in the preparation of the Sixth Water Supply Project for which Loan 2134-TUN of US$30.5 million was made in May 1982. Procuemelt 3.03 Pipes and equipment for the project 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. Part of this supply was won by foreign manufacturers for an amount of US$4.6 million. The remainder was attributed to local suppliers in an amount of US$16.8 million equivalent. Civil works covered small subprojects in the interior, which were not attractive to foreign contractors. Local competitive bidding procedures were followed for these works and all of them were won by local contractors, as foreseen at appraisal. SONEDE had no difficulty to comply with the Bank guidelines and procurement was carried out in a satisfactory manner. Overall, the performance of contractors on the project was excellent. nrojet Costs 3.04 Actual and estimated project costs are compared below: Local Foreign Total Local Foreign Total 0*,. D Million ........... ....... ...US$ Million..0* Appraisal Estimate 15.52 12.92 28.44 39.30 32.71 72.01 Actual Costs 24.98 13.43 38.41 46.50 25.00 71.50 Increase (Decrease) 9.46 0.51 9.97 7.20 (7.71) (0.51) Increase (Decrease) 2 61.0 3.9 35.1 18.3 (23.6) (0.7) The total project cost in US dollars practically remained unchanged, while in Tunisian dinars it increased by 35.1 percent. The increase resulted from the appreciation of the US dollar vis-a-vis the Tunisian dinar during the project execution period. The exchange rate, which was US$1 for D 0.395 at appraisal and which was assumed to remain constant during the project implementation, fluctuated to an average of US$1 for D 0.537. The decrease in the foreign component is due to the fact that SONEDE used its own funds (instead of medium-term loans from cormercial banks in London) to finance credits to new customers. 3.05 At appraisal, it was expected that 33 percent of the investments would be made in cities and 67 percent in rural villages. This proportion practically remained unchanged (32:68). More detailed costs are shown in Annex 2. Disbursement 3.06 Based on categories of Schedule 1 of the Loan Agreement, the loan proceeds were disbursed as follows:  -6- Appraisal Category Estimate Percent Actual Percent (US$ Million) (US$ Million) I 5.4 21.6 3.6 14.4 II 14.6 58.4 21.4 85.6 III 5.0 20.0 TOTAL 25.0 100.0 25.0 100.0 The loan was disbursed within the proportions foreseen during the appraisal. The closing date was extended a year to allow more time for payment of retention money on the contracts. At the time of the original closing date, US$21.8 million or 87.3 percent of the loan was disbursed. A comparison between the actual and forecast schedules of disbursement is shown in Annex 3. Operations 3.07 Actual and forecast water production and sales during the project execution period are compared in Annex 4. The overall conclusion is that the appraisal forecasts were remarkably accurate. Annual water sales were projected to reach 161.2 Mm3 in 1984; in that year, SONEDE sold 165.7 Mm3, 2.8 percent greater than projected. Water production in 1984 amounted to 235.7 Mm3 or 15.1 percent higher than the appraisal estimate of 204.8 Mm3. This deviation resulted from the percentage of unaccounted-for water which was slightly higher than the projected one (29.7 vs 27.0). The population estimate, on the basis of which the number of house connections was projected, was particularly accurate. The appraisal projected an urban population of 3,605,000; the actual population was recorded to be 3,681,000. As a result, the actual number of house connections in 1984 slightly exceeded the appraisal projection (594,000 vs 589,000). Iv. FINANCIAL PERFORMANCE Finncial Results 4.01 SONEDE's actual and estimated (appraisal) income statements, balance sheets and cash flows for the years 1979 through 1984 are shown in Annexes 5 through 7. The company's financial performance during execution of the project developed along lines as projected at appraisal, with two major exceptions. First, under the Fifth Development Plan, more investment was made than had been projected at appraisal. During the period 1981-84, SONEDE invested D220 million instead of D205 million projected in the Development Plan, a 7.3 percent increase; and as earnings decreased and long-term borrowings remained unchanged, SONEDE had to rely on short-term loans to finance the additional investment. Second, actual operating expenses exceeded the appraisal forecast more than doubling the projections in 1983 and 1984. 4.02 A comparison of selected financial results in 1982 with the appraisal projections is shown below:  -7- Actual Appraisal Increase(Decrease) .*e.D million.... Percent Operating Revenue 38.30 40.02 (4.3) Cash Operating Expenses 21.46 12.07 77.8 Operating Income (Before Depreciation) 16.84 27.95 (60.3) Total Debt Service 9.70 9.62 0.8 Increase (Decrease) in Working Capital (8.54) 2.22 (484.7) Capital Investment 63.98 58.45 12.9 Total Borrowing 29.37 24.13 21.7 Government and Customer Contributions 20.93 18.21 14.9 A major departure from the appraisal projections was the greater than anticipated operating expense, which resulted in a major decrease in working capital. Part of the higher expense stemmed from large salary increases that the Government approved diring the project execution, which were not foreseen at appraisal. 4.03 During execution of the project, SONEDE's current ratio decreased from 0.72 in 1979 to 0.40 in 1982, reflecting the decreasing working capital as accounts payable for investments increased while SONEDE continued to execute ongoing construction. In the ensuing years, the current ratio improved reaching 0.67 in 1984. Although debt service coverage was well above 1.7 in most years, accounts receivable increased from 8 months of billings in 1979 to one year by 1981. Receivables dropped to about 10 months of billings by 1984, but debt service coverage fell to about 1.45 with rapid increases occurring in principal payments as grace periods ended on earlier borrowings. Financial Covenants 4.04 Under Section 5.05 of the Loan Agreement, SONEDE was committed to earn a return of not less than 7.5 percent on its revalued net fixed assets in operation less customers'contributions and assets in agglomerated rural centers. Because the system of accounts in Tunisia is based on historical costs, and because of the difficulty in excluding assets of rural centers, SONEDE did not revalue its assets, and the Bank agreed in 1982, on the occasion of negotiating its loan for the Sixth Water Supply Project (Loan 2134-TUN), to change the earnings covenant to a cash generation/contribution to investment covenant to be applied from 1982 onwards. 4.05 SONEDE's return on non-revalued net fixed assets was 13 percent in 1979, 9 percent in 1980 and 5 percent in 1981, levels which, of course, were not satisfactory although doing no apparent harm to the company's operations. Its contributions to its capital investments were 11 percent in 1982, 18 percent in 1983 and 15 percent in 1984. 4.06 In addition, 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 never below 1.7, but, as mentioned above, it dropped to 1.45 in 1984.  -8- Financig Plan 4.07 A comparison of the actual financing during the period 1979-1982 with the financing plan at appraisal is shown in Annex 8. Overall, the total requirements remained almost as forecast; however, SONEDE's working capital decreased substantially during the period considered, instead of a small increase as projected at appraisal. This decrease was necessary to compensate for the shortfall in earnings, the level of borrowing being virtually the same as had been projected. In effect, net internal cash generation decreased from D56 million projected at appraisal to D29 million, accounting for only 15 percent of the financing sources instead of 28 percent projected at appraisal. Meanwhile, actual customers'contributions more than doubled the projections, and Government contributions were one fourth less. Audit 4.08 Section 5.02 of the Loan Agreement required that SONEDE's accounts and financial statements be verified 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 some delays resulting from the time and action required by SONEDE to review and approve the reports. As a result, under the Seventh Water Supply Project (Loan 2368-TUN of February 1984), the submission time was modified to nine months. V. IS UTIONAL PERFORMANCE Management and Organiation 5.01 A major objective of the project was to provide SONEDE with the capability to select and appraise projects. The Loan Agreement contained a set of criteria and procedures that SONEDE had to follow in selecting and proposing projects for Bank financing. The application of these criteria was to lead to the selection of the most economical projects. SONEDE fully met this objective and experienced no difficulty in presenting projects which were all approved by the Bank. The experience that SONEDE has acquired in executing the project, has been extended to other investment programs which are now thoroughly evaluated prior to their consideration for financing. Following the project implementation, SONEDE has been given appraisal responsibilities under the two subsequent Bank-financed projects (Loans 2134-TUN and 2368-TUN) which are currently under execution. Growth 5.02 SONEDE's activities have grown considerably as a result of the project implementation. Between 1978 and 1982, the company's net fixed assets more than doubled and the number of customers increased by almost 50 percent. The appraisal projected 505,700 customers at the end of 1982; the actual number was 514,600, an increase of about 2 percent. The number of employees increased from 3,145 at the beginning of 1979 to 4,100 at the end of 1982. At the same time, however, staff efficiency increased. While in 1978, there were  - 9 - 9.2 staff per 1,000 customers, in 1982 there were only 7.5. Staff salaries and fringe benefits are very competitive and SONEDE had no difficulty in recruiting 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'Emplcl et de la Formation professionnelle", a Government-operated agency. Sectoral Development 5.03 The project contained a study of SONEDE's financial policies and sector development objectives with a view to determining adequate means to accelerate the installation of public water supply systems in rural areas. The study was carried out by SONEDE staff and concluded that, in order to improve services in the rural areas, SONEDE should progressively take over operations in the rural centers and that investments in these centers should be entirely financed by the Government; SONEDE should, however, meet or, rating expenses and finance renewal and expansion works in the centers with its own funds. These conclusions and recommendations were discussed with the Bank. The Sixth and Seventh Water Supply Projects were formulated on the basis of these recommendations. VL PROJECT JUSTIFICATION Project Achievements 6.01 The project was primarily conceived to expand public water supply in the medium-size cities and rural areas. The expansion of the distribution networks in the cities was aimed at increasing the number of connection lines avd consequently SONEDE's revenues. The program in the rural areas was the first attempt to mobilize resources for the provision of potable water in the smallest rural centers. All these objectives were achieved. Water supply networks in eight cities were expanded and the program of house connections was fully executed. As a result, the number of house connections increased from 349,200 to 514,600 and water sales from 115.7 Mm3 in 1978 to 150.5 Mm3 in 1982. Water works were built in 27 villages to serve 98,000 people. The sector review was carried out and a new financial scheme adopted for water works in rural areas. Economic Justification 6.02 All the subprojects which were financed under the loan represented the least-cost alternatives of water works for the communities. In addition, the selected package of subprojects was the one with the greatest return for SONEDE. In order to assess the economic value of the project, the internal rate of return on the investments was re-calculated. On the basis of the actual cobts and revenues throughout 1984 and projected ones through 2010, the internal rate of return was calculated to be about 8 percent, equal to the return estimated at appraisal. Bank Performance 6.03 The First and Second Water Supply Projects were instrumental in  - 10 - promoting good managerial and financial procedures in SONEDE. The Third and Fourth Projects helped SONEDE in expanding water supply services in the country and consolidating its financial basis. The Fifth Project allowed SONEDE to develop its appraisal capabilities. SONEDE is now fully equipped to screen well-designed projects and outline the conditions necessary for their successful implementation. 6.04 The project implementation was supervised regularly. Between Board presentation in May 1979 and the project completion in December 1982, a total of eight supervision missions visited Tunisia. It should be noted that these missions supervised at the same time the Third and Fourth Projects. The missions'advice and follow-up letters were instrumental in improving SONEDE's operations and management. SONEDE is pleased with the project results and the Bank's performance during the project execution. VII. CONCLUSIONS 7.01 The project was the first sector lending operation for water supply in Tunisia and was successfully implemented. The project objectives were achieved beyond the appraisal expectations. A major expansirn of the public water supply network was accomplished, allowing the percentage of population connected to the network to raise from 70 percent to 77 percent. The number of connection lines increased by almost 50 percent. In addition, the project provided an opportunity for SONEDE to establish a long-term program for the provision of potable water in rural areas. 7.02 Project selection and design and construction supervision were carried out efficiently by SONEDE's staff. The project was completed with a small delay due to the time needed to return retention money on the civil works contracts. The quality of project construction was good. 7.03 A major institutional objective was to strengthen SONEDE's appraisal capability. This was attained as reflected in the formulation of the two subsequent Bank-financed sector operations (Loans 2134-TUN and 2368-TUN), which aim at further expansion of public water distribution in rural areas. November 26, 1985.  REPUBLIC OF TUNISIA LOAN 1702-TiN - FIFTH WATER SUPPLY PROJEt PROJECT COMPLETION REPORT CITIES AND VILLAGES rMCLUDED IN THE-PROJECT Percent of Per Capita Thtal Population Population Water Sales Consumption Number of Civil Works 1 Cit y E.DUIla.ti.n _Served-t Served m3 - liters/day Connectin1s Dt 1.000 Beja 45,316 38,065 84 2.230,377 161 6,301 397.40 MedJez Elbab 15,390 12,774 83 542,700 116 2,129 386.27 Nefza 4.673 3,084 66 44,643 40 514 1SO.62 Goubellat 5.294 1,800 34 117,033 178 300 --- Maagoula 3,480 2,916 84 32,798 31 486 30.90 Hammam Sayala 240 750 32 13,913 51 125 51.63 Kef 31,977 28,140 88 1,051,030 102 4,690 164.28 OJerissa 8,515 2,214 26 62,936 78 369 223.28 Tejeroutne 9,322 9,042 97 237,200 72 1,507 --- Kasserine 35,105 33,350 95 1,081,170 89 5,980 113.36 Menzel 8ourguiba 51,527 34,008 66 3,254,611 262 5,668 144.60 Zaghouan 9,333 9,240 99 391,326 116 1,540 493.54 Tabarka 9,245 9.060 98 549,503 166 1,510 164.91 Overdref 2/ 7,991 7,032 88 193,157 75 1,172 Metou1a 2/ 7,359 5,004 68 129,484 71 834 2. Kerkenia 17,506 10,854 62 194,806 49 1,809 1,401.62 El ASnia 1,268 1,014 80 15,221 41 169 Ojebenania 6,855 5,484 80 121.883 61 914 452.62 Melloulech 757 522 69 15,865 83 87 52.79 Hezeg 6,386 894 14 14,595 45 149 --- Louza 1,757 246 14 6,773 75 41 E1 Bridje 3/ 1,083 498 46 14,951 82 83 Sir Mroua 3/ 372 294 79 7,062 66 49 --- Douala 3/ --- --- --- --- --- --- 84.04 Bent Atta 645 516 80 6,763 36 86 24.62 Menzel Bouzaiene --- --- --- --- --- --- Ain Meskhta 544 245 45 3,282 37 40 79.58 Moulares 4/ --- --- --- --- --- --- 633.21 Redeyef 4, - -- --- --- --- -- -- Joumine 1,050 --- --- ------ --- --- Metlaoui 8,010 --- --- --- --- 374.51 Jeradou 3,080 --- --- --- --- --- 8S.39 Creteville 1,430 --- --- --- 78.76 Mornag 7,030 --- --- --- --- 159.66 Menzel Mehiri ',160 --- --- --- --- 41.77 I/ Exclude pipes and equipment which were directly supplied by SONEDE. 2/ Served by the same system. 3' Served by the same system. 4/ Served by the same system. |_  REPUBLIC OF TUNISIA LOAN 1702-TUN - F PROJEC PROJECT COMPLETION REPORT DETAILEO PROJECT COSTS .......... Actual Costs ........... ........ Appraisal Estimates. Loca1