Mozambique - Urban Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4827-MOZ MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 44.0 MILLION (US$60 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF MOZAMBIQUE FOR AN URBAN REHABILITATION PROJECT July 1, 1988 This document has a restricted distribution and may be used by eipients only in the performance of their official duties. Its contents may not otherwise be disclosed witbout World Bank authorioation.  CURRENCY EQUIVALENTS Currency Unit - Metical (plural Meticais) US$1 - 450 Meticais (Mts) Mt 100 - US$0.22 MEASURES AND EQUIVALENTS 1 Meter (m) = 3.28 Feet 1 Square Meter (m.sq) 10.76 Square Feet 1 Hectare = 2.47 Acres 1 Kilometer 0.62 Miles ABBREVIATIONS AND ACRONYMS A de M Agua de Maputo A da B Agua da Beira AfDB - African Development Bank APIE - Administracao do Parque Immobiliario do Estado BPD = Banco Popular de Desenvolvimento BM - Banco de Mocambique CECB Conselho Executivo da Cidade da Beira CECM - Conselho Executivo da Cidade de Maputo DCU Direccao de Construcao e Urbanizacao DFP Direccao da Funcao Publica DNA - Direccao Nacional de Aguas DEC G Direccao de Economia e de Construcao DNEP G Direccao Nacional de Estradas e Pontes DSU - Direccao de Servicos Urbanos ERP - Economic Rehabilitation Program FINNIDA - Government of Finland Development Agency GPE - Gabinete de Promocao de Emprego HABITAR Housing Management and Supervision Unit INPF - Instituto Nacional de Planeamento Fisico MCA M Hinisterio da Construcao e Aguas MAE Ministerio da Administracao Estatal MT Ministerio do Trabalho PIU Project Implementation Unit (MCA) PROHABITA Gabinete de Programas de Habitacao  FOR OFFICIAL USE ONLY MLOZAM4BIQUE URBAN REHABILITATION PROJECT Credit and Proiect Summary * Borrower: People's Republic of Mozambique Beneficiary: Ministry of Contstruction and Water (MCA), Ministry of Labour (MT), Ministry of State Administration (MAE), Conselho Executivo da Cidade de Maputo (CECM), Agua de Maputo (AdeM), Agus da Be4.ra (AdaB), small and micro- enterprises. Amount: SDR 44.0 Million (US$60 million) Terms: Standard with 40 years maturity Onlendina Terms: Not applicable Financing Plan: Government US$ 6.0 million IDA US$60.0 million Cofinancing US$17.8 million Total US$83.8 million Economic Rate of Return: 392 Staff Appraisal Report: Report No. 7279-MOZ. p Maps: IBRD No. 20914 (Mozambique) IBRD No. 20915 (Maputo) IBRD No. 20916 (Beira) This document has a restrited distribution and may be used by recipients onlY in the performance of their official duties. Its contents may not otherwie be disclosed without Wodd Bank aufthz&Wtiv,  NEHORANDUM AND RECOMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF MOZAMBIQUE FOR AN URBAN REHABILITATION PROJECT 1. The following memorandum and recommendation on a proposed development credit to Mozambique for SDR 44.0 million (US$60.0 million equivalent) is submitted for approval. The credit would be on standard IDA terms with 40 years maturity and would help finance an urban rehabilitation project. The project would be cofinanced by FINNIDA for FM 56.3 million (US$13.4 million equivalent) and by Spain for SP 478.5 million (US$4.4 million equivalent). 2. Backtround. The Government of Mozambique embarked upon an Economic Rehabilitation Program (ERP) in January 1987 with the assistance of the World Bank and other donors and the IMF. The ERP has involved major policy changes and the ensuing economic reforms have started to reverse the economic decline of previous years. The success of the ERP at the macro- level has highlighted the need to rehabilitate the country's rundown infrastructure (maintenance of which has been severely neglected) in order to increase efficiency and facilitate a supply response. Particularly at risk is the provision of services essential to the effective functioning of the main transport corridors, which used to be the country's principal foreign exchange earners. The transport irfrastructure of these corridors is being rehabilitated with US$300-400 millions of bilateral and multilateral investments, which need to be supported with functioning urban infrastructure and services. Although several donors, particularly the Netherlands, Italy, the African Development Bank and Finland, have been investing in urban infrastructure improvements, many critical areas remain in urgent need of rehabilitation. At the same time, the economic stringencies of the ERP, including higher prices and public sector lay- offs, have, at least temporarily, exacerbated an already critical situation of urban unemployment and low income levels. Government's concern with these issues led to the request for a project which will initiate rehabilitation of the urban infrastructure (water, sewerage, roads, drainage, erosion control, etc.) and housing while rapidly creating jobs to deal with the problem of growing urban unemployment. The Government's policy of cost recovery has already resulted in a number of important actions to increase resource mobilization, including reduction of food subsidies and substantial increases in housing rents and water tariffs. (In April, 1988 rents were increased two to five times over their previous levels, while water tariffs were increased fivefold in October, 1987). It is estimated that water tarifft, are sufficient to achieve full cost recovery in Maputo. Salaries have risen less rapidly and there is growing concern about the affordability of the package of price increases, which is currently being reviewed in extensive income and expenditure surveys. Government is also initiating a decentralization policy to strengthen local governments to enable them to carry out their assigned functions without  -2- excessive reliance on central goveinment resources. This will involve the strengthening of local authorities through training (with the proposed Center for Urban Management) and technical assistance and the development of local taxation systems and more effective user charges. The project would support these initiatives through its institutional strengthening programs. 3. Rationale for Bank Group Involvement. The Government of Mozambique has been working closely with IDA in developing and implementing its Economic Rehabilitation Program, for which two IDA credits have been provided and a zhird is under preparation. In support of these initiatives, IDA is also developing a program of project-based credits to strengthen the adjustment process. The intervention proposed under this project is an integral part of this process in that it would directly assist in offsetting some of the social costs encountered in the transitional phase of adjustment and at the same time improve the environment in the two key urban centers, creating conditions for broad- based economic development through rehabilitation of infrastructure and s -rvices and institutional strengthening, particularly of local government. These activities would complement existing and proposed IDA interventions in other sectors, including education, health, industry, transport and agriculture. The cost recovery aspects of the project, in conjunction with more affordable housing standards, are an important step towards more rational pricing of urban services. These, and the introduction of more effective user charges and new local government taxes, will provide a significant impetus to local resource mobilisation. IDA intervention is also appropriate to complement the investments of other donors in the sector and to help ensure an overall coherency to sector development. Finally, IDA's extensive experience in the sector will help Government adopt appropriate replicable solutions. 4. Prolect Objectives. The project's objectives are to stem the deterioration in basic urban infrastructure and services in Maputo and Beira and to mitigate the social impacts of structural adjustment through the implementation of a program of urban rehabilitation and employment generation. This program would aim to (i) rehabilitate key elements of urban infrastructure and housing; (ii) provide employment through labor- intensive construction methods and stimulation of small and micro- enterprises, particularly in the building materials industry; and (iii) strengthen the local institutions responsible for provision and maintenance of urban infrastructure and services and assist their efforts to become more financially independent through resource mobilization at the local level. The project would also aim to demonstrate the replicability of new approaches to infrastructure rehabilitation and housing rehabilitation. 5. Project Description. The project would consist of the following inter-related components in Maputo and Beira: (i) rehabilitation and limited extension of the road, storm drainage, water distribution and sewerage networks, and of coastal protection works (45Z of project costs); (ii) rehabilitation of low income housing together with completion of unfinished (since independence) buildings and upgrading and extension of  -3- sites and services (33% of project costs); (iii) provision of equipment and spare parts for municipal services (6% of project costs); (iv) provision of credit for small and micro-enterprises and for materials loans for home construction (7% of project costs); and (v) technical assistance and training for the implementing agencies, the municipal authorities k_hrough the Center for Urban Management) and the institutions responsible for promotion of small scale enterprises together with project management (9% of project costs). The project would be carried out over a period of six years under a tightly defined implementation program under the control of the Project Implementation Unit in the Ministry of Construction and Water. Funds would be provided for civil works, equipment and vehicles, training and technical assistance and operating costs. The total cost of the project is estimated at US$83.8 million equivalent, with a foreiga exchange component of US$68.7 million (82%). A breakdown of costs, the financing plan and disbursement schedule are shown in Schedule A. Amounts and metnods of procurement and the categories of disbursement are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Mozambique are given in Schedules C and D, respectively. The SAR No. 7279-MOZ, dated July 1, 1988 is being distributed separately. 6. Agreements Reached. During negotiations, the Government provided assurances on the following: (i) completion and follow-up of an IDA- assisted local government linance and administration study to strengthen the operational and financial viability of municipal authorities (the action plan based on the findings of the study would be furnished to IDA by March 31, 1989 and reviewed with IDA by June 30, 1989); progress on implementation would be reviewed annually thereafter; (ii) strengthening of initiatives already taken by Government to achieve full cost recovery for the components for which direct cost recovery is possible, including water, sewerage and housing rehabilitation and lines of credit (about two thirds of project cost); a water and sanitation tariff study would be completed for review by June 30, 1990 when an action plan to implement its recommendations would be agreed upon, and targets set for the water and sanitation agencies in Maputo and Beira to achieve financial viability by 1993; (iii) by June 30, 1989, and annually thereafter, GOM and IDA would undertake reviews of housing strategy, with the objective of achieving full cost recovery in public sector housing, the reviews to include levels of rents and adequacy of maintenance of existing State-owned housing (all new housing is privately owned); and (iv) provision to IDA by March 31, 1989 of socio-economic surveys assessing the affordability of the package of cost recovery measures proposed by Government in this and other sectors and subsequent review with IDA by June 30, 1989 when an action plan to address their findings would be drawn-up. Updates of these surveys would be reviewed annually thereafter. 7. Justification and Risks. The expenditure of relatively small amounts on infrastructure rehabilitation will save the need for much larger future investments in reconstruction and will yield relatively high economic rates of return, estimated at 39%. The investments in Beira are essential to the development of the Beira transport corridor which will be one of the country's main foreign exchange earners, while much of the  investment in Maputo will assist in foreign exchange earnings or savings. Risks are that the project may exceed implementing capacity and that the security situation may Impede the completion of some project components. The project's restriction to the two principal cities is intended to minimise the risks associated with limited implementation capacity and the security situation. The Goverrment's demonstrated strong commitment to the objectives and approach proposed and the careful consideration given to the appropriate level and type of Implementation assistance and manpower development. provided by the project will also help to miniuize these risks. )ecommendation 8. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. July, 1988  n.OZAMBlnUc Schedule A Urban Relabilitatoa Project Summrg Project Cob aad finaewtm Plan PROJECT COMPONENTS LOCAL FOREIGN TOTAL -------- SUtS Million