Morocco - Third Water Supply Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13284 PERFORMANCE AUDIT REPORT MOROCCO THIRD WATER SUPPLY PROJECT (LOAN 2006-MOR) JUNE 30, 1994 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Appraial Year Average (1980) US$ 1 - DH 4.2 Intervening Year Average US$ 1 - DH 8.7 Completion Year Average (1990) US$ 1 - DH 8.1 WEIGHTS AND MEASURES Metric System British/US System 1 centimeter (cm) = 0.39 inches (inch) 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi) 1 square meter (m2) = 10.76 square feet (sq) 1 square kilometer (km2) = 0.38 square mile (sq. mi) 1 metric ton (m/ton) = 0.98 long ton (lg. ton) 1 liter (L) = 0.26 gallon (G) ABBREVIATIONS AND ACRONYMS AH - Hydraulics Administration (Administration de l'Hydraulique) CDM - Charbonnage du Maroc DRSC - Public Utility Directorate (Direction des Régies et Services Concedés) OCP - Office Chérifien des Phosphates ONEP - National Water Production Agency (Office National de l'Eau Potable) PERL - Public Enterprise Rationalization Loan RAD - Régie Autonome Intercommunale de Distribution d'Eau et d'Electricitéde Cassablanca RADEEF - Régie Autonome de Distribution d'Eau et d'Electricitéde FeR RADEEM - Régie Autonome de Distribution d'Eau et d'Electricitéde Meknès RADEEMA - Régie Autonome de Distribution d'Eau et d'Electricitéde Marrakech RADEEN - Régie Intercommunale d'Eau et d'Electricité de Nador RADEEO - Régie Intercommunale d'Eau et d'Electricitéd'Oujda RADEES - Régie Autonome Intercommunale de Distribution d'Eau et d'Electricitéde Safi RADEETA - Régie Autonome de Distribution d'Eau et d'Electricitéde Taza RADEEJ - Régie Autonome de Distribution d'Eau et d'Electricitéde la Province dé El Jadida RADEEC - Régie Autonome de Distribution d'Eau et d'Electricitéde Chaouia (Settat) RADEET - Régie Autonome de Distribution d'Eau et d'Electricitéde Tadla RAID - Régie Autonome Intercommunale de Distribution d'Eau et d'Electricitéde la Province de Tanger RAK - Régie Autonome Intercommunale de Distribution d'Eau et d'Electricitéde Kenitra RAMSA - Régie Autonome Multiservices d'Agadir RDE - Régie Autonome Intercommunale de Distribution d'Eau et d'Electricitéde Tetouan RED - Régie Autonome Intercommunale de Distribution d'Eau et d'Electricitéde Rabat-Salé Régie - Municipal Public Utility Company UNDP - United Nations Development Pogram FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 30, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Morocco Third Water Supply Project (Loan 2006-MOR) Attached is the report entitled "Performance Audit Report on Morocco - Third Water Supply project (Loan 2006-MOR)", prepared by the Operations Evaluation Department. The project represents a phase of what may well be the most systematic effort by the Bank to assist in the development of the water and sewerage sector of a member country. The project aimed to serve low income consumers, expand water supply services in rural areas and strengthen the national bulk water supply agency (ONEP). All physical targets were exceeded. The outcome of the project is rated as satisfactory and its institutional development as substantial. Sustainability is likely. However, shortcomings have been noted in the involvement of rural beneficiaries in the design of local systems, in the level of water tariffs and in the delegation of responsibility to its provincial offices by ONEP. Robert Picciotto by H. Eberhard K6pp Attachment This document has a restricted distribution and my be used by recipients onLy in the performance of their official duties. Its contents my not otherwise be discLosed without WorLd Bank authorization.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT MOROCCO THIRD WATER SUPPLY PROJECT (LOAN 2006-MOR) TABLE OF CONTENTS Page N. PREFACE .................................................. BASIC DATA SHEET ............................................ii EVALUATION SUMMARY ........................................ v 1. INTRODUCTION ......................................... 1 General ................................................. 1 Service Levels ............................................ 1 Sector Organization ........................................ 2 Bank Involvement ......................................... 2 2. PROJECT OBJECTIVES AND CONTENT ...................... 4 3. IMPLEMENTATION ....................................... 5 General ................................................. 5 House Connection Program .................................. 6 Regional Schemes ......................................... 6 Regional Centers (Sector Loan) ............................... 7 Water Resources Development and Studies ...................... 7 Project Costs and Disbursements .............................. 7 4. PROJECT RESULTS ...................................... 9 House Connections ........................................ 9 Regional Schemes ......................................... 10 Sector Loan ............................................... 11 Water Resources Development and Studies ...................... 11 The Medinas of Fez and Marrakech ............................ .11 Sectoral Issues ............................................ 12 Environmental Aspects ..................................... 13 This report was prepared by Messrs. Jozsef B. Biky, Task Manager and Jean-Francois Landeau, Senior Evaluation Officer. Administrative support was provided by Helen Watkins. 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. Table of Contents (continued) Page No. 5. ECONOMIC AND FINANCIAL ASPECTS ...................... 13 Economic Analysis ......................................... 13 Financial Aspects .......................................... 13 6. THE ROLE OF THE BANK AND THE GOVERNMENT ........... 16 The Role of the Bank ...................................... 16 Government Involvement .................................... 17 7. COVENANTS AND DIRECTIVES ............................. 17 Loan Covenants ........................................... 17 8. CONCLUSIONS AND LESSONS ............................. 18 Map IBRD 24486 i PERFORMANCE AUDIT REPORT MOROCCO THIRD WATER SUPPLY PROJECT (LOAN 2006-MOR) PREFACE This is the Performance Audit Report (PAR) on the Third Water Supply Project for which Loan 2006-MOR for US$87.00 million was approved on May 28, 1981. The Loan was signed on September 28, 1981, became effective on March 15, 1982 and closed on December 31, 1989 after three one year extension. US$9.00 million of the loan funds were canceled during implementation and the last disbursement was made on May 22, 1990. The PAR was prepared by the Operations Evaluation Department (OED). Parts I and m of the Project Completion Report (PCR) was prepared by the Middle East & North Africa regional office and Part H by the borrower's implementing agencies. The PCR (Report No. 11951) was forwarded to the Executive Directors on June 16, 1993 for information. In the preparation of the PAR, OED reviewed the PCR, the Staff Appraisal and Presidents Reports, the legal documents and the Bank files and discussed the project with the Bank staff involved. An OED mission visited Morocco in May 1993 and discussed the project experience with the borrower, the implementing agencies and beneficiaries. The cooperation and assistance of these officials is gratefully acknowledged. The PCR provides a concise account of the project preparation and implementation which is well supplemented and amplified by the contribution of the three main implementing agencies in Part II, particularly in the identification of the lessons to be drawn from the project. The Audit, in addition to verifying the findings of the PCR, focused its attention on the results of the project, in particular on the service provided to low income consumers in both the urban and rural areas and provides independent comments on the institutional development aspects of the project. Copies of the PAR were be sent to the borrower for comments and the factual comments received have been incorporated in the text.  ii PERFORMANCE AUDIT REPORT MOROCCO THIRD WATER SUPPLY PROJECT (LOAN 2006-MOR) BASIC DATA SHEET KEY PROJECT DATA (US$ million) Appraisal Actual as % Expectation Actual of Appraisal Est. Total Project Cost 169.00 137.13 81 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 Estimate 0.4 15.2 41.1 76.2 85.7 87.0 Actual 4.3 11.4 19.4 27.6 34.3 46.9 58.4 78.0 Actual/ 28% 28% 29% 32% 39% 54% 67% 90% Appraisal (%) PROJECT TIMETABLE Original Actual Identification 06/79 Preparation beginning 08/79 Preparation end 10/80 11/80 Preappraisal Mission 09/80 10/80 Appraisal Mission 09/80 Lan Negotiations 03/81 04/81 Board Approval 05/81 05/28/81 Loan Signature 09/28/81 Loan Effectiveness 10/31/81 03/15/82 Loan Closing 12/31/86 12/31/89 Project Completion 12/31/85 04/30/90 Ill STAFF INPUTS (staff weeks) FYS3 FY84 FY85 FY6 FY87 FY88 FY89 FY90 FY91 FY92 FY93 Total Preparation 47.7 47.7 Appraisal 38.2 38.2 Negoedom 10.6 10.6 Lmn Prcessing 13.3 13.3 sqmervision 26.2 17.7 14.2 8.2 18.7 12.7 10.2 7.4 115.3 PCR 0.8 3.8 4.6 Total 136.0 17.7 14.2 8.2 18.7 12.7 10.2 7.4 0.8 3.8 229.7 MISSION DATA Stage of Proj. Cycle Mondt/ No. of Days in Specialization Ratings 1/ Nature of Year Staff Field Represented Problems Identification 07/79 2 10 Sanitary engineer Preparation 10/79 4 21 Financial analyst Sanitary engineer Economist 05/80 3 20 Sanitary engineer Financial analyst Economist Pre-appraisal 09/80 2 24 Sanitary engineer Financial Analyst Apprasal 11/80 5 17 Loan officer Financial analyst Economist 09/81 1 12 Sanitary engineer Supervision 01/82 2 4 Sanitary engineer Financial analyst 06/82 2 4 Sanitary engineer I Financial analyst 1 11/82 2 14 Sanitary engineer Financial analyst 1 02/83 2 5 Sanitary engineer Financial analyst 2 Financial 06/83 2 5 Sanitary engineer Managerial Financial Analyst 2 Financial 11/83 1 14 Financial analyst Managerial 03/84 3 24 Sanitary engineer 2 Financial Financial Analyst Managerial Procurement engineer 2 Financial 09/84 3 18 Sanitary engineer 2 Financial Financial analyst Managerial Procurement engineer 04/85 2 17 Sanitary engineer 2 Managerial iv Stage of Proj. Cycle Month/ No. of Days in Specialization Ratings 1/ Nature of Year Staff Field Represented Problems Financial analyst 04/86 3 14 Sanitary engineer Financial analyst 2 Financial Economist Managerial 12/86 2 14 Sanitary engineer I Financial Financial analyst Managerial 10/87 3 14 Sanitary engineer Financial analyst i 03/88 1 25 Sanitary engineer 08/88 2 17 Sanitary engineer I Financial analyst 10/88 2 17 Sanitary engineer 2 Financial analyst 2 Financial 06/89 1 17 Sanitary engineer 11/89 2 21 Sanitary engineer 2 Financial Financial analyst 05/90 2 21 Sanitary engineer 2 Financial Completion 11/91 1 14 Sanitary engineer 2 Financial I/ 1 = Problem free or minor problems 2 - Moderate problems 3 - Major problems, which are being addressed 4 - Major problems, which are not being addressed  V PERFORMANCE AUDIT REPORT MOROCCO THIRD WATER SUPPLY PROJECT (LOAN 2006-MOR) EVALUATION SUMMARY Background 1. Morocco is situated in the northwestern scheme for low income households. The success corner of Africa, bordered by the Mediterranean of this program prompted its continuation in the Sea, the Atlantic Ocean and Algeria. In 1982 it project under review. had a population of 20.4 million with about 43% residing in urban areas and this is expected to 5. The development of water resources is reach 54% by the end of the century. Although the responsibility of the Hydraulic two large urban centers, Casablanca and Rabat Administration of the Ministry of Public Works. dominate, the country has a balanced network of Production and transportation of bulk water medium and small cities. supplies is undertaken by the Office National de I'Eau Potable (ONEP) while the distribution to 2. Morocco is a water scarce country and the consumers rests with the Regies, the supply and demand are expected to be in balance independent municipal enterprises, in the large by the year 2000 in selected areas. Water towns. In the mid-size to small towns, ONEP resources are well known and, at the time of the ensures distribution if requested by the appraisal some 6% of these were used for municipality. domestic and industrial purposes and 94% for agriculture. Most small and medium cities 6. Bank involvement in the sector started in relied on nearby ground water sources but larger 1968 with the preparation of the First Water centers were supplied by distant surface water Supply Project and since then, seven loans were sources. Water quality in urban centers is approved for water supply and/or sewerage satisfactory but in rural areas they are often projects. Implementation performance has been contaminated. generally good, in terms of achievements but each of the completed projects had substantial 3. At the time of appraisal virtually all time overruns (PAR, paras 1.01 to 1.11). urban residents had access to piped water supply but only some 45% by house connection, the rest relied on public standpipes. In rural areas Project Objectives and Content an average of 25% had access to piped water, the remaining utilized streams, wells and 7. The major objectives listed in the Staff rainwater storage. Appraisal Report (SAR) included: a) improve access to safe water for low income consumers 4. To accelerate house connections, the by house connections and regional schemes; b) Bank financed Second Water Supply Project strengthen ONEP's management; and c) improve (Ln. 1724-MOR) provided funding for a credit planning and development of water resources. vi 8. The project included a large number of 13. The project provided for a "line of components as follows: a) revolving fund for credit" for the financing of improvements and/or financing house connections; b) improvements of extensions of water supply systems in water supply in 32 regional centers; c) (originally) 32 selected regional centers. The construction of two regional water supply selection criteria were complicated but, systems; d) water resources development; and e) eventually, a total of 38 centers were improved. provision of equipment and consulting services Many of these centers also benefitted from the for studies and training (PAR, paras. 2.01 to "social connections" (ow income family house 2.05). connections) program. In these areas, the Audit noted the prominent "political" role of ONEP's Implementation provincial offices as an indication of the importance in the community of reliable water 9. Implementation of the project was, supply. generally, efficient but it still extended three years beyond the target date. This was largely 14. The final cost of the project was some due to the complexity of the original project and 19% below appraisal estimates in spite of the subsequent changes of the project scope and sub- extensive delays. The underrun was mainly due components. As an indication of the to the 100% devaluation of the Dirham which complexity, a total of 323 contracts were compensated for inflation and changes in the awarded including 73 under ICB. project scope. Disbursements were correspondingly slow. In 1987 ONEP requested 10. The total number of house connection the cancellation of US$ 9.00 million of the loan installed exceeded the target by 5% but only and the final disbursement of the now US$ 45% instead of the projected 80% went to low 78.00 million loan was made on May 22, 1990 income consumers. Achievements among the (PAR, paras. 3.01 to 3.12). Regies varied from 50% to over 500%. Project Results 11. Of the two regional projects, the Karia Ba Mohamed scheme was small but vital to 15. All physical results exceeded appraisal replace contaminated ground water supplies. targets. The impact of the delays was most The surface water source required extensive significant in the Errachidia scheme where the treatment due to high turbidity. An addition- long construction period of the main pipeline al problem was the seasonal pollution of the delayed service by some three years. river by olive oil factories. 16. The house connection program increased 12. The much larger Errachidia/Rissani the percentage of families receiving water via scheme was to supply some 170,000 people connections from 48% in 1981 to 65% in 1985. along a 100 km stretch of mainly desert river The corresponding reduction in public standpipes valley. The communities served ranged from should result in health benefits and financial small hamlets to sizable townships. The scheme improvements for the Regies (higher tariffs) and consisted of a transmission pipeline with take off reduction in the non payment of standpipe points serving local reservoirs and public charges by the municipalities. However, standposts. Construction quality is good as is indiscriminate elimination of standpipes will the present maintenance program but local result in hardship for those low income conditions may make the latter doubtful in the household who cannot afford house connection future. despite the credit scheme. vii 17. The average cost of house connections is 20. A particular problem facing the Regie of very high, US$ 263, and is a major impediment Fez, and other similar towns, is the traditional to higher levels of service. As the charge is to center of town, the Medina. An extremely be paid up-front, it represents a useful cash flow dense, old development, the Fez Medina houses to the Regies (and ONEP) which, while it lasts, up to 500,000 people supplied with water tends to obscure the inadequacy of tariffs. through 250 multi-faucet standpipes. However, Heavy connection charges invariably impact on the faucets have been removed and water is the poor and experience shows that including the running 24 hours a day, representing major cost of connections in the construction cost of wastage. The water is free to the users and the distribution system, and subsequently in should be paid for by the municipality, but it is water tariffs, considerably increases the not. "Normal" solutions such as disconnections percentage of house connections. are inappropriate and the Regie, and ONEP, need to resolve this problem with the 18. The Errachidia scheme had mixed results cooperation of the community (PAR,paras. 4.01 as far as utilization is concerned. While in to 4.15). townships and larger villages there is heavy use of the standpipes with consumption reaching 21. ONEP is a well managed, competent over 30 lpcd, in the smaller, traditional villages, agency with well qualified staff. It manages average consumption was reported as low as 2 84% of the water sources and bulk supplies to lped. The reasons are a mix of traditional, the urban centers and expanding its operations cultural and religious attitudes. In traditional into rural areas. The latter is often costly and villages women are reluctant to appear in public uneconomical and ONEP is imposing a 40c/m3 to walk to the standpipes and, where in-village surcharge on its bulk supplies to cover the extra wells are still functioning, they prefer to use cost. The remaining 16% is managed by the them. In addition, higher level of consumption, larger Regies themselves as these sources were resulting in larger volume of wastewater, would developed by the Regies prior to ONEP's make the evacuation of the latter difficult as the existence and by industries (OCP, CDM). mud/earth built villages, with their narrow alleys, are not conducive to internal plumbing. 22. The standard and level of service in the However, ONEP now has a substantial body of Regies varies as does their financial situation. data on these issues and, with the up-front Casablanca's old distribution system needs involvement of local communities in the design rehabilitation to reduce the 31% UFW in 1991. and, particularly the location of standpipes, Rabat, by contrast, with relatively new acceptable solutions should be found for future development records a very good 21% UFW in schemes. 1991 and manages an excellent leak detection program. Thfe Regies' autonomy was severely 19. The improvements in the 38 regional curtailed in 1980, particularly in terms of centers were carried out efficiently under the increasing tariffs. direction of local ONEP offices. These well managed offices cooperate fully with local 23. The project's environmental effect was government and municipal authorities in the decidedly positive insofar as all parts of it planning of urban services. They are, however, focused on the improvement of the quality of tightly controlled by ONEP's head office and, water supply services and, consequently, public clearly, greater degree of delegation is health. warranted. viii Economic and Financial Aspects arrears in 1986, arrears continued to be a major problem. An additional covenant limited 24. The complexity and multi-component ONEP's debt service coverage to 1.3:1. By nature of the project did not permit calculation 1986, no financial covenants were in default of economic rate of return (ERR) at appraisal, (PAR, paras. 5.05 to 5.13). nor was it attempted in the PCR. The justification of the house connection program The Role of the Bank and Government (social connections) rested on the obvious benefits of convenience, increased water use as 29. The Audit's discussions with the compared to standpipe use and the consequent Ministries of Interior and Public Works, the health benefits. oversight ministries for the Regies and ONEP respectively, related mostly to the monitoring 25. The designs of the regional schemes and and evaluation (M&E) of the sector's the centers included under the "sector loan" performance. Both ministries were emphatic in component were least cost solutions and, for the their interest in improving M&E in Bank most part, for minimum level of service. financed projects, across all sectors. The Nevertheless, public health benefits clearly Ministry of Public Works expressed continued accrued, particularly for the low income interest in the ECDP. consumers and the rural poor (PAR, paras. 5.01 to 5.04). 30. The role of the Bank has also been positive under the project and, in fact, through 26. Affordability studies were made by its entire involvement in the Morocco water ONEP to assess the payment capacity of its supply and sewerage sector which is one of the potential clients, bearing in mind that prices most consistent support in any member country charged by vendors exceeded ONEP's tariffs of the Bank (PAR, paras. 6.01 and 6.02) nearly twentyfold. The results of these studies lead to the early establishment of the credit Covenants and Directives scheme for the house connections. 31. There were nine specific covenants 27. The main financial covenant designed to under the Loan Agreement and ten under the ensure profitable operations by ONEP was the Project Agreement. Eventually all were working ratio which was to be 1.5 and, to complied with albeit some with significant achieve full cost recovery, the average tariff was delays. In the Audit's view delayed compliance to be equal to the average long-term incremental did not affect the outcome of the project. cost of water. During project preparation the Bank also required a 2% rate of return on net 32. The Audit finds that all relevant fixed assets and this to reach 5% by 1981. Operations Manual Statements (OMS), Tariffs were increased significantly but Operational policy Notes (OPN) and Bank automatic tariff increases to offset inflation were Guidelines have been observed or complied with suggested first in 1983. (PAR, paras. 7.01 to 7.04) 28. Although Bank staff did not anticipate Conclusions and Lessons problems of accounts receivable, these soon became a major issue, particularly from 33. The Audit rates the overall outcome of government departments. These reached such the project as satisfactory, its institutional proportions that there was a danger of the development as substantial and the sustainability Regies not being able to pay ONEP for bulk of its benefits as likely. These ratings agree supplies. Although the government settled the with those based on the PCR. ix 34. The house connection program exceeded the service indicates the need to include the its numerical targets but failed to reach the local population in the planning. percentage of low income population projected. The high cost and up-front payment of these still 38. Ex-post evaluation is being recognized as puts them outside the reach of the poor. an indispensable tool for lesson learning and the Bank is requested to render assistance to 35. The use of standpipes in the traditional establish an appropriate program. centers of towns, the Medinas, present particular problems the resolution of which will have to be 39. Most lessons resulting from the project achieved with the close involvement of the have already been or are being incorporated in community. new projects. The exception appears to be that the high cost of house connections limit the 36. The connection charges represent a access of the poor to the full benefits of the useful cash flow to the Regies but tend to hide service (PAR, paras. 8.01 to 8.08). the inadequacy of tariffs. 37. The Errachidia scheme was a learning exercise for ONEP and the mixed utilization of  PERFORMANCE AUDIT REPORT MOROCCO THIRD WATER SUPPLY PROJECT (LOAN 2006-MOR) 1. BACKGROUND General 1.01 Morocco is situated in the northwest corner of Africa with the Mediterranean Sea forming the north and the Atlantic Ocean its western boundary. The Algerian part of the Sahara borders the south. The country has four climatic zones, the coastal, the interior plains, the (Atlas) mountains and the desert. Significant precipitation is concentrated in the months of November to April. 1.02 According to the 1982 census, of the country's 20.4 million population some 8.7 million or 43% resided in urban areas with urban growth rates averaging 4.5% over the preceding decade. Although this growth rate has been slowing down in recent years, the proportion of the urban population is still expected to reach 54% by the end of the century. While two major conurbations, Casablanca (2.8 million) and Rabat (1.1 million) predominate, Morocco has a well balanced network of medium and small cities. More than 30% of the urban population lives in shantytowns with incomes below the urban poverty threshold but about two third of the GDP is generated in urban areas. Urban incomes are some 30% higher, and growing twice as fast, as in rural areas. 1.03 Morocco is a water scarce country and projections indicate that by the year 2000 supply and demand will balance. Water resources are, generally, well known and, on completion of studies financed under the Second and Third Water Supply projects all potential water resources have been surveyed. At the time of appraisal 6% of the exploited water sources were used for domestic and industrial purposes and 94% for agriculture. 1.04 Most of the small and medium size cities utilize nearby ground water resources. However, major cities, and medium size cities with their aquifers depleted, increasingly rely on more distant surface water source developments with the ensuing increase in costs for dams, treatment plants and long transmission pipelines. Water quality in the urban systems is satisfactory but it is less so in rural areas where local sources may be contaminated by poorly managed sanitation facilities. Service Levels 1.05 At the time of appraisal, virtually all urban populations had access to piped water supply but only some 62% had house connections in 1981. The rest obtained their water from public 2 standpipes, mosques and neighbors. In shantytowns, up to 2000 people used multiple faucet standpipes. In rural areas an average of 25% of the population had access to piped water with only 2.3% supplied by house connec- tions. The remaining 75% relied on traditional sources of streams uncontrolled, dug well and rainwater storage tanks. 1.06 As the percentage of house connections, in urban systems, have remained the same over years of population growth, the Second Water Supply Project (Ln. 1724-MOR), approved in 1979, included credit facilities to low income households for financing the cost of individual house connections to improve service in the low income housing areas of three major cities. The highly favorable response to this program prompted the continuation of it in the Third project in eight more cities. As a result of this program the percentage of house connections in urban areas was projected to increase to 75 by 1990. Parallel with the improving of service quality in the dense urban peripheral areas, the government has increasingly focused on service improvements in mid-size cities and agglomerated villages. In general, physical investments have taken on a primarily social focus. Sector Organization 1.07 The development of water resources, the operation and maintenance of major dams and the allocation of their use is the responsibility of the Hydraulic Administration of the Ministry of Public Works. Production and transmission of potable water for urban centers is carried out by the Office National de l'Eau Potable (ONEP), under the Ministry of Public Works and sixteen independent municipal enterprises (Rdgies) distribute water in 27 urban agglomeration comprising some 82% of the urban population in 1991. Municipalities, which are responsible for water distribution, can either provide the service themselves or ask ONEP or R6gies to carry it out. ONEP is also responsible for water distribution in administratively chartered semi-rural centers. Non chartered rural centers are supplied by the Direction de l'Am6nagement et de l'Equipement Rural of the Ministry of Agriculture. Adequate coordination and cooperation was reported to have existed among these agencies to ensure harmonious operations and, generally, effective sector development. Bank Involvement 1.08 Bank involvement in Morocco's water supply and sewerage sector started in 1968 with the preparation of the First Water Supply Project (Ln. 850-MOR), approved in 1972, which provided for the construction of water production facilities for the Casablanca coastal zone. The project also provided for the strengthening of the newly created ONEP. The OED Performance Audit issued in December 1981 (Report No. 3721) concluded that the project achieved its objectives. The Second Water Supply Project (Ln. 1724-MOR) was approved in June 1979 and consisted of the further strengthening of ONEP and the improvement of the coastal system from Kenitra to Casablanca and Greater Agadir. This project also introduced the credit system for financing house connections for low income households. The June 1990 OED Performance Audit (Report No. 8725) reported the primary objectives achieved and considered the benefits sustainable. The Fourth and Fifth Water supply Projects, approved respectively in July 1987 3 and November 1993 are under implementation. Additional water supply components were included in seven irrigation and/or rural development and two urban development projects. 1.09 Bank assistance to the sewerage sector commenced with an Engineering Loan (S-7-MOR) approved in August 1977 for the preparation of a sewerage study for the Greater Casablanca Area and was followed, in July 1987, by the Greater Casablanca Sewerage Project (Ln. 2826- MOR), at present under implementation. A summary of the direct Bank lending for the water and sewerage sector in Morocco is presented in Table 1.1 below. 1.10 Throughout its involvement the Bank, apart from funding a series of urgent investments, made up of a judicious mixture of expansion and rehabilitation with an increasing focus on the urban and rural poor, maintained a steady emphasis on institutional strengthening, culminating in the formulation of contractual arrangements (under the Fifth project) between the government and ONEP in 1987, clearly defining the obligations of each in the partnership of developing the sector. TABLE 1.1 - BANK FINANCED PROJECTS Date Loan Amt. Ln. No. Project Name Approved US$ 000 Status 850 First Water Supply 07/18/72 48,000 PAR S007 Sew. Engineering 08/09/77 1,500 PCR 1724 Second Water Supply 06/07/79 40,000 PAR 2006 Third Water Supply 05/28/81 87,000 PCR 2825 Fourth Water Supply 06/02/87 60,000 Ongoing 2826 Greater Casab. Sew. 06/02/87 60,000 Ongoing 3664 Fifth Water Supply 11/23/93 128,000 Ongoing 3665 Fifth Water Supply 11/23/93 32,000 Ongoing 1.11 Implementation performance, of the projects completed to-date, has been generally good, in terms of achievements. However, completion of each of the three projects has been, on the average, three to four years late, including the relatively simple engineering project. Admittedly, under the first project, all vital elements were completed on schedule, ensuring supplies to the Casablanca area, and only housing and training facilities were extensively delayed. The ex-post evaluations place the blame for these delays mainly on "coordination problems" among the several agencies involved. Interestingly enough, these lengthy delays have not resulted in cost overruns, except in the engineering project where the 20% overrun was largely due to extra work assigned to the consultants. 4 2. PROJECT OBJECTIVES AND CONTENT 2.01 The Staff Appraisal Report (SAR) spells out seven major objectives and these may be summarized as follows: a) Improve access to safe water through house connections to low income households in major urban centers and, by construction of regional water schemes, in small towns; b) Strengthen ONEP's operational and management capacity and nationwide water quality control through technical assistance and training; and c) Improve water resource development decisions, the organization of the sector, the selection of rural water supply systems for development and the planning of further water resource developments in the Mid-Atlantic Coast area through a series of related studies; 2.02 The project content matched the complexity of the objectives. The SAR describes, in detail, the eight sets of components (para. 3.03) and the PCR records the additions and/or deletions from the original program. These are not repeated here in detail but the major elements which directly relate to the meeting of the project's principal objectives are listed below: (i) The establishment of revolving funds in eleven Regies and a number of centers managed by ONEP for the financing of credit programs to pay for house connections and associated distribution system extensions by low income households - funds were included for a total of 147,650 connections. The eligibility criteria for receiving credit were elaborate but the primary factor was to be the family income which was restricted to DH 1,500 per month (later doubled; (ii) Improvement and extension of water supply systems in about 32 centers under ONEP management - the selection of centers was to be based on agreed criteria; (iii) Construction of regional water supply systems in the Errachidia-Erfoud Rissani and the Karia Ba Mohamed areas for populations of 170,000 and 7,300 and peak production capacities of 320 and 30 liters/second respectively - both these areas had limited quantity and highly polluted existing water sources; (iv) Construction of boreholes in 24 centers for assessing aquifer yields - existing sources were close to exhaustion and plans were needed for future expansion - this work was to be carried out by the "Direction de l'Hydraulique" of the 5 Ministry of Equipment (later the Hydraulic Administration of the Ministry of Public Works, Vocational Training and Higher Level Staff Training); and (v) Provision of equipment, laboratories, and consulting services for a series of studies and training; 2.03 ONEP's, and the Regis' practice of requiring up-front payment of the cost of house connections (US$ 200 in 1980 prices) provided for a useful cash flow but restricted the affordability to higher income households. The experience with the credit scheme under the Second project was so favorable that the Bank decided to continue it in the Third project. 2.04 The construction of the regional schemes was expected to provide ONEP with useful experience in executing and operating water supply systems in remote rural areas and was to have provided prototypes for future Bank assistance to operations in rural Morocco. 2.05 The component in (ii) above is labeled in the SAR as the "sector loan component" as the relevant portion of the Bank loan was, essentially, a "line of credit" on which ONEP would draw, provided the agreed selection criteria were met. These criteria, elaborated in SAR paragraphs 3.25 to 3.28 and Annex 4, were very complicated, considering that the limiting criterion was a total investment costs of HD 5 million or about US$1.2 million. 3. IMPLEMENTATION General 3.01 Project completion was scheduled for December 31, 1985 with loan closing a year later. In the event, the loan was closed on December 31, 1989 and completion of the project is reported as April 30, 1990, almost double of the estimated implementation period. That the original plan was highly optimistic is indicated by the almost total absence of major interruption, extraordinary delay or inefficient implementation. On the contrary, ONEP's and all other participating agencies' overall performance was commendable but the complexity of the project as a whole and of certain components, both technical and administrative, was, clearly, underestimated or unrecognized at the preparation/appraisal stage. As an indicator of the complexity, a staggering total of 323 contracts were awarded, including 73 on ICB. With the exception of the house connection program in a few Regies, actual implementation on all components started with considerable delay due to "coordination" and "administrative" problems, indicating, perhaps, that the project received less than optimum preparation or a greater than warranted optimism, or both. 3.02 The Part I of the PCR provides a concise history of project implementation, component by component, listing the reasons for delays and or changes. Regrettably, there is very little analysis of the consequences of the delays and/or the lessons to be drawn from them. Similarly, Part II of the PCR contains detailed accounts (they do overlap, to some extent) from the three 6 main implementing agencies (ONEP, the Regies and the Hydraulic Administration) and, while these are invaluable for record purposes and for the additional light they throw on particular elements, they, unfortunately, also lack opinions and conclusions. This is particularly regrettable from ONEP who was the principal actor in the project and whose candid views would, probably, have enhanced the preparation of future projects. House Connection Program 3.03 The program, following on the success of the Second project, got off to a good start in a few Regies and by ONEP. Ultimately fourteen Regies participated in providing the "social connections" (See PCR pp. 44 for list), exceeding the appraisal targets by about 5%. The family income limit of eligibility for credit was raised during implementation to increase the number of customers. Nevertheless, it is estimated that about 45% of new connections were provided to families below the poverty line. However, not all the participating regies appear to have been equally enthusiastic. Casablanca, Fez and Agadir completed less than 50% of their targets while Rabat-Sale reached over 500% and many more were well over 100%. Some of the regies pointed out that the counts may be misleading, depending on whether one counts the houses connected or the number of take-offs from the delivery pipes. In some cases one take-off may serve two or three houses/families. Regional Schemes 3.04 The two regional schemes each faced different problems. The Karia Ba Mohamed scheme was small but vital for the local population. With no ground water available, the local Sebou river was the only available source of water. However, this water required extensive treatment due to its high turbidity in the rainy season. A particular problem in the area is due to the water pollution created by small olive oil factories along the river banks. ONEP appears to be powerless to stop the discharge from these factories and, since the treatment plant cannot cope with the particular pollution, the plant has to be shut down in October, the time of the olive harvest. Emergency ground water sources are used to provide minimum service. The initial project was completed on schedule but due to additional works, consisting of extended distribution system and additional treatment facilities extended the final completion date to May 1990. The Audit mission has visited the facilities and found the quality of construction as well as the operations satisfactory. 3.05 The Errachidia-Erfoud-Rissani scheme is located in the southeast corner of Morocco, on the edge of the Sahara. With about 100 km of single pipeline, supplied by boreholes at the northern end of the pipeline, it provides water along the Ziz valley to some 170,000 people, 75% of them in scattered rural settlements (ksours). The borehole supply is, in effect, a filtered draw off from an adjacent storage reservoir formed by the Hassan Ad Dakhil Barrage. This solution has avoided expensive treatment and provides satisfactory quality water. The transmission pipeline solution, although expensive to construct and maintain,in per capita terms, replaced very limited local point sources, some of them heavily contaminated. It was reported that clearing up and expanding existing point sources would have been still more expensive. 7 While larger settlements such as Erfoud and Rissani were provided with new or extension of existing distribution systems, the minor rural settlements, consisting of walled villages, were supplied with a single take-off from the main pipeline to a reservoir (usually 200 m3 capacity) and line feeding public standpipes with two to four taps. The standpipes are "managed" by local guard-managers under contracts with ONEP. Maintenance is difficult and, in places, protection needs to be provided against drifting sand dunes. The visit of the Audit mission confirmed that construction quality and present operating conditions are satisfactory but there has to be considerable doubt about the future integrity of the system. The final stages of this project were completed in August 1989. Regional Centers (Sector Loan) 3.06 The original number of 32 centers grew to 38 through a process of eliminations and additions during implementation. Twenty two centers were provided with both production capacity and distribution and sixteen received distribution extensions only. Many of these centers have also benefitted from the "social connections" program. The Audit mission visited a number of these centers in different areas of Morocco from Fez to Errachidia to Qarzazate to Marrakech. In most places the prominent role of ONEP in the community testified to the importance of water in these largely arid areas. In response, the local managers of ONEPs offices cooperated fully with the town authorities and the mission found their joint planning and management efforts most impressive. Urban planning went hand in hand with expansion plans for the water supply systems and provincial development priorities were fully considered in ONEP's water source development plans. Water Resources Development and Studies 3.07 The water resource development work and the various studies were completed as planned but with significant delays. The Water Supply Sector Organization Study was never undertaken as it was decided to await the completion of the Rural Water Supply Master Plan, dealing with the dispersed population, which started in 1990 with UNDP funding. The organization study will be included in the Bank supported Sector Study, scheduled for 1995. Project Costs and Disbursements 3.08 The main factors affecting the final cost of the project were the nearly 100% devaluation of the Dirham during the implementation period and (largely because of that) ONEP's reduction of the use of external assistance that is, avoiding expensive foreign consultants. By all accounts, the latter did not affect the quality of work executed. In addition, there were considerable changes in the project scope. The PCR reports the final cost of the project as US$137.13 million equivalent, compared to the appraisal estimate of US$169.00 million, a 19% underrun. 3.09 The Bank loan, made to the Kingdom of Morocco, was onlent to the several recipients, in a complex re-lending arrangement as follows: (i) US$30.05 million to eleven Regies (see SAR para. 4.06) for the house connection component. A further US$8.1 million was to be held by 8 the government for other Regies to be named later; (ii) US$45.76 million to ONEP for its share of the social connections program, the regional schemes, the "sector loan" and other components; and (iii) US$3.09 million to be used by the government for water resources development and the rural systems study. 3.10 The final cost figures for each of these components were difficult to arrive at. The PCR provides (Part IH, Table 4) a summary of costs, aggregated by major components and each of the three agency contributions in Part II provide their own component's final cost albeit in Dirhams. Conversion of these figures into US dollars is constrained by the lack of data on annual expenditures and corresponding Dirham values. For comparison purposes the Dirham figures are converted at the "average" rate reported in the PCR. Additional project expenditures incurred by the government are not reported separately but are included in the summary figures. During the Audit mission ONEP's officials have confirmed the costs as correct. Table 4.1 below shows the appraisal estimates and final costs by component. TABLE 4.1 - PROJECT COSTS (US$ Million) Component Appraisal Actual Local Foreign Total Local Foreign Total Sector Loan 15.64 9.94 25.58 18.04 9.29 27.03 Regional Schemes 16.48 9.50 25.98 21.35 10.69 32.04 Water Resources 2.86 2.33 5.19 2.10 2.63 4.73 Equipment/Material 1.57 1.84 3.41 4.52 5.75 10.27 Consultants & TA 4.52 3.37 7.89 0.00 3.84 3.84 Contingencies 13.03 8.20 21.23 - - - H. Connections - ONEP 7.36 13.67 21.03 1.59 3.70 5.29 H. Connections - Regies 20.54 38.15 58.69 11.54 42.10 53.64 TOTAL 82.00 87.00 169.00 59.13 78.00 137.13 3.11 As mentioned above, the devaluation of the Dirham substantially increased the value of the available loan funds. At the same time, inflation remained roughly within the range forecast at appraisal. These factors, together with the changes in project scope, resulted in the above picture. The substantial reduction in the ONEP portion of the cost of social connections is due largely to the inclusion of these costs in the cost of the sub-projects under the "sector loan" and the regional schemes. The over 200% increase in the "Equipment and Materials" category is due, partly, to the increased cost of imported equipment and partly to the extended scope of the various categories as well as original underestimation of the quantities of materials. 9 3.12 Disbursements were commensurate with the delayed progress. At the time of the original closing date only 35% of the loan was disbursed. In 1987, ONEP has reassessed its funding requirements and requested the cancellation US$9.00 million from its share of the loan. It is worthwhile to note that withdrawal amounts were unusually low, an average of US$67,000 and, as a result, over 1,100 withdrawals have been made. The last disbursement took place on May 22, 1990, at which time US$ 78.00 million has been disbursed. 4. PROJECT RESULTS 4.01 All physical results, generally, exceeded appraisal targets. The effects of the delays varied from component to component. With the exception of the Errachidia regional scheme, where the long completion time of the main pipeline meant, effectively, that service to the consumers did not materialize until some three years after the target date, all other components delivered full service to some consumers on or about the target date. House Connections 4.02 ONEP and the Regies installed 41,000 and 92,659 connections respectively, a total of 133,659 connections against the (revised) target of 126,350. Among the Regies there was a great variation in achievements as the Table on page 44 (Part II) of the PCR shows. These variations were due to the difference in demand, the efficiency of managing the program in the Regies and distribution system limitations. As a result some Regies could not utilize the allocated funds and these funds were reallocated to other Regies. 4.03 Although, initially, some 80% of the connections were to be provided for "low income" population, in the end, only some 46% of the connected consumers came from this category. Rural or semi-rural people were reluctant to borrow money for water connections. This also explains the fact that in mid-project, the limit of the family income, a basic criterion for eligibility for credit, was doubled to permit "not so low income" customers to take advantage of the credit. 4.04 The average cost of an individual connection ranged from DH 2,290 (US$263) in Marrakech to DH 4,266 (US$ 490) in Tanger. A full 60% of the connection cost represented "initial connection fee". The very high charges represented a useful cash flow, up front, to ONEP and the Regies but, in terms of "financial performance" it hides the inadequacy of the tariffs. In other words, when the rate of connections slow down, and the cash flow depends, more and more, on revenue from water charges, it becomes precarious. Nevertheless, under the program, the percentage of household supplied by house connections increased from 62% in 1981 to 65% in 1985 with a parallel reduction in public standpipes, at least in the urban areas. The benefits of this is shared between the consumers and the utilities. The consumer receives a safe and convenient supply, eliminating (sometimes) long walk to crowded standpipes and potential contamination and the utilities were able to charge (at least) the first tranche tariff 10 instead of the lower, "preferential tariff" charged for standpipe water which the municipalities did not pay, anyway. 4.05 Charging heavy connection fees is practiced in many countries and this practice invariably impacts on the poor who can not afford the charge. Credit programs "appear" to help but the interest charges only increase the burden. Experience shows that it is much better to include connection costs in the construction costs of the distribution system and, eventually, in the overall water tariffs, and only charge a nominal connection fee/meter rent and a refundable deposit equal to one month billing. Where this method is applied, it is noticeable that the percentage of house connections is much higher than in cities where high connection charges are levied. Regional Schemes 4.06 The Karia Ba Mohamed scheme achieved its general objective of providing alternative supply to the meager ground water sources of the area. The enhanced treatment plant can cope with the high turbidity of the rainy season but not with the pollution generated by the olive oil industry. ONEP is working on acceptable solutions but the industry is traditional to the area and any proposed action is likely to be sensitive. 4.07 The Errachidia/Rissani scheme is a good example of the difficulties the construction, maintenance and operations a water supply system faces in desert conditions, scattered, tradition bound consumers and long distance from "head quarters". The "ribbon development" of the area was , originally, dictated by available cultivable land and local water sources. The government and ONEP are to be commended for implementing the scheme and the initial problems, particularly the low demand in certain villages, are now under investigation and have, in fact, been the subject of a detailed socio-economic study in 1993 by the Bank, namely TWUWS. 4.08 The Audit mission visited the scheme and gathered its own findings. The Errachidia scheme covers settlements in a narrow strip of land over a 100 km long. Strung out roadside villages built of mud and earth lie between larger townships, the southernmost one being Rissani. The villages are quiet, their population reserved while in the towns, commercial bustle is evident. These differences also define the use of water along the pipeline. The traditional village people are reluctant to go outside their walls, particularly women to collect water from standpipes. In fact, in one of the northern villages the standpipes have never been used. Closer to the towns ten year old "managers" were conducting brisk business selling water for DH 0.05/5 liter. Inside the villages some traditional wells still operate. One such well, visited by the mission, had a wall separating men and women on either side, underlining the strong cultural traditions to be overcome by modern systems. ONEP gives consumption figures for certain parts of the system, at standpipes, at 2 to 5 lpcd while the study referred to above concludes 10 to 14 lpcd. On the face of it, such low consumption figures would not only make the scheme uneconomical but also makes it difficult to maintain acceptable quality of water. 11 4.09 However, the Audit's discussions with users of the standpipe (in the southern villages) also noted voices of dissatisfaction with overcrowding and long waiting. Some families used donkeys carrying large containers, overcoming the "weight" problem. In these places, the small capacity and fragile faucets presented one of the major problems and, according to reports many families were already asking for house connections. These, for the time being, may prove problematic as the mud built houses would be vulnerable to leaking water and the densely constructed villages present a formidable problem for waste water disposal. However, electricity is already there and some form of plumbing cannot be far behind. 4.10 ONEP, by now, has a large amount of data and material on these schemes which should supply it with lessons for future planning in similar areas. An indispensable part of such planning will be to secure the views of the local population regarding the siting of standpipes, the level of desire for house connections and affordability, particularly of the connections themselves (see above on cost of same). Sector Loan 4.11 Improvements and/or extensions of water supply production and/or distributions systems were carried out in a total of 38 centers, exceeding the target number of 32. Many, if not all were also the beneficiaries under the social connections program. The Audit mission visited centers in several provinces (Fez, Ourzazat, Marrakech). The work in these centers were managed from the provincial ONEP offices. These offices were, without exception efficiently run by motivated and well qualified staff who had the close cooperation of the provincial Governor and all had impressive plans for future developments and all were hoping for future Bank assistance. The mission noted, however, that each of these offices were held on a tight rein by ONEP's head office in Rabat. All data and funds collected had to be sent to Rabat and their budget was controlled from there. A greater degree of independence is clearly warranted. Water Resources Development and Studies 4.12 All work undertaken under these headings were carried out efficiently albeit with delays resulting from greater than anticipated complexity of the areas studied. The Hydraulic Administration is, by now, clearly a well organized and competent agency, well able to undertake the continuing study and development of Morocco's water resources. The Medinas of Fez and Marrakech 4.13 The visit to these two traditional centers of these ancient cities provided an interesting and revealing view of water supply in exceptionally dense developments. The Fez Medina houses some 500,000 population in veritable maze of houses. No motorized transport is permitted (nor is there room for it). Although house connections (reportedly) exist, water supply is mainly by over 250 elaborate and decorative public standposts from which the faucets have been removed and water flows 24 hours a day. Although usage is heavy, as the mission witnessed, the wastage is enormous and, the municipality does not pay the bills. Yet, outside 12 the Medina, the Regie of Fez has been rapidly eliminating standpipes as loss makers. UFW which has been running at 50% two years ago is now improving with an impressive leak detection program and the replacement of some 25,000 water meters. The well managed Regie, however, is still facing a serious problem (the water sources of Fez are very limited) but the long-range plan has identified the solutions for servicing water supply. 4.14 The Marrakech Medina is a replica of Fez although its standpipes did have faucets and water was being sold by "contractors" at some of them. Nevertheless, the problem of wastage is serious and, as elsewhere, the municipality is either unable or unwilling to pay its bill on a regular basis. 4.15 The two Medinas above are the largest and most well known but, according to reports, similar areas exist in most older towns on a smaller scale and the same type of problems. "Normal" solutions such as disconnections, regulating flows and rationing cannot be applied for political and cultural reasons and, for the same reasons, the Regies and/or the municipalities have not been trying very hard. It is quite clear that solutions imposed from the outside of the communities will not work. The Audit can offer no solutions based on experience, due to the unique nature of these areas but an obvious avenue would be to sit down with the local community or religious leaders and work toward an internal control system. Sectoral Issues 4.16 ONEP is a well managed, competent agency with well qualified staff. It is managing 74% of the water sources and bulk supplies for urban and rural consumption and an ever growing area of rural distribution. The regies control the remaining 15% of source works developed by them, in the past. The strong central control of ONEP may have been necessary in the past but it is becoming a retarding factor in its development. A greater degree of delegation to the provincial offices is warranted. These offices need close cooperation with the "local" Regies who are responsible for distribution. At present, these relationships range from the tenuous to very close depending on the distance from Rabat and political factors. The resolution of this may well originate from the "Water High Council" which includes His Majesty, the King. 4.17 ONEP's rural operations are expanding rapidly and, in the future, moving to more and more remote areas, will become more and more expensive. At present, ONEP is imposing a DH 0.40/m3 surcharge on all bulk supplies to cross subsidize expensive or uneconomical supplies such as the unviable settlements near the southern border, maintained for political reasons. 4.18 In the Regies, standard and level of service, efficiency and financial viability varies greatly. Most of them also distribute electric power and the water services are often subsidized from the more efficient power service. The autonomy of the Regies has been curtailed severely in 1980 and they have to obtain permission to raise tariffs from a number of ministries. The distribution system of Casablanca is old and UFW is about 31% in 1992. Rabat, by contrast, 13 with its more recent developments records UFW of 21% in 1992, a very good performance. Replacement of old distribution piping is a continuous program and the leak detection service is excellent. Environmental Aspects 4.19 None of the project components raised specific environmental concerns. The improvements in water supply in the various parts of the country should result in improved public health. The pollution of the Sebou river by discharges from the olive oil factories has become a public concern and it should be stopped, in due course. Similarly, the lack of adequate sanitation and wastewater disposal in the villages of the Errachidia region and, for that matter, everywhere where the water consumption of the population has increased as a result of the project, waste water issues have come to the attention of the authorities and the communities. 5. ECONOMIC AND FINANCIAL ASPECTS Economic Analysis 5.01 No economic rate of return was calculated at appraisal for the project as a whole or for individual components. The multiple and diverse components were not suitable for such calculations nor were the benefits clearly identifiable. Understandably, the PCR did not attempt such calculations either. 5.02 The benefits of the house connections were obvious if compared to the service at public standpipes, both in terms of convenience and quality of water. Although the connection charges were high, the response indicated that the urban poor were willing to make the sacrifice to obtain water inside their homes. 5.03 The solutions for the regional schemes and for the centers included in the sector loan component were designed as least cost solutions and, in general, for minimum standard of service. However, the levels of consumption reached, at least initially, in the Errachidia scheme indicated that the economic return, as far as ONEP is concerned, is, indeed, very low. 5.04 Public health benefits, though unquantifiable, have to be clearly substantial, particularly for those below the poverty line. On full development of the schemes, close to one million people will have, for the first time, received safe and reliable water supply. Of these, some 160, 000 would be rural poor. Financial Aspects 5.05 Affordability: During project preparation, ONEP conducted a study to assess the payment capacity of potential clients. Oddly, it was assessed by how much (in months) payments would 14 be late: 82.2% of those surveyed would be able to pay within one year.' This uneconomical pattern contrasted with the observation that water vendors in the same area charged 18 times (28 times in summer) more than ONEP. Eventually, a clear compromise between the need for full cost recovery and concern for affordability was to set up a fund to help consumers pay on credit for the connection fees. 5.06 Revolving Fund: The concept of revolving fund has the merit to smooth disbursements to final users when administrative procedures and budget controls add delays. There was some confusion in the Bank about the urgency of the revolving fund in this project. Only the third supervision mission (March 1983) -one full year after loan effectiveness- recommended that the revolving fund be set up. There was some good reason: disbursements amounted to US$0.8 million, equal to 5.3% of the US$15.19 million projected for the end of 1982. 5.07 Working Ratio: The main financial covenant to ensure profitable operations by ONEP was the working ratio, another name for the operating income. It was crudely defined as needed to be above 1.5 times operating expenses. Assuming that a utility in an investment mode (i.e. with a continuing program of capital expenditures) can balance its finances with a 50% margin over operating costs to cover both depreciation, financial expenses, and profits is arbitrary. It may be enough or not depending on the specific situation. Mention of the working ratio disappeared from supervision reports around 1986 when the financial restructuring of ONEP was first mentioned. 5.08 Cost Recovery: The premise was that tariffs would achieve full cost recovery by charging the average long-term incremental cost of water.2 The concept of full cost recovery was pushed to the limit when the Bank requested that the commitment fee on its loan be passed on to the final beneficiaries at DH35 per client' while the exchange risk on the same loan was assumed by the government. 5.09 Subproject Selection: The criterion involved a comparison of the discounted per capita investment cost plus operating cost with a predetermined ceiling. The purpose was to eliminate proposed works whose per capita cost was excessive while still giving a preference for populated areas. As it was foreseen that ONEP cash flows "could be rather modest in years to come"4 and certainly insufficient to cover local cost of subprojects, another selection criterion was added. Local cost financing had to be secured for a subproject to be eligible for Bank refinancing although the Bank loan clearly allowed local cost financing. /1 Memorandum about ONEP study, July 17, 1980. 2/ Yellow Cover SAR (March 9, 1981). / Letter to the Prime Minister's Office (September 15, 1980). 4/ Project Brief (December 4, 1979). 15 5.10 Tariffs Increases: The Bank acknowledged "the rather cumbersome procedures [for ONEP] to obtain tariff increases"' early in project preparation. The tariff covenant required a 2% rate of return on net fixed assets in 1979, to climb to 5% in 1981. This was after including, as ONEP revenues, the operating subsidies received for the loss-making centers.There was no tariffs adjustment to offset inflation between 1977 and mid-1982 although it reached 11.9% over the period.I As shown in Table 1, some catching up was engineered during project implementation (76.2% of cumulative increases vs. 53.9% of inflation), but not enough to make up for the lost time between 1977 and 1982. An automatic tariff adjustment to cover cost increases was suggested for the first time in 1983. TABLE 5.1: ONEP TARIFFS IN REAL TERMS end 1977 mid 1982 1985 mid 1988 tariffs 100 120 188.8 211.4 inflation 100 153.9 207.9 236.8 In 1984, the Bank judged the tariff level insufficient to ensure the viability of ONEP and some R6gies, but this was not recorded in the project ratings. The tariff structure of the Regies consists of five categories, that is three tranches of domestic tariffs (0-24m3; 24-60m3; and > 60m3;) a "preferential" tariff for standpipes and an industrial tariff). Each Regie sets its own tariff levels within these categories. The levels are progressive (the degree varies) within the domestic tranches but industrial tariffs are generally lower than the highest domestic tariff. 5.11 Accounts Receivable: Toward the end of project preparation, Bank staff offered the dangerous prediction that a "problem of accounts receivable does not exist in the Third Project".9 Sixteen months later (and two days after loan effectiveness), the Bank was urging ONEP to obtain the settling of arrears by government agencies. This plea became a recurrent item in supervision reports and follow-up letters to concerned authorities. By end 1982 it was recognized that the financial situation of R6gies was so precarious due to government agencies' arrears that, in turn, they may be unable to pay ONEP for bulk water."o The government paid DH43 million (US$5.47 million equivalent) to clear water arrears. Bank staff noted in 1984 that ONEP could threaten government agencies to cut off water if they did not clear arrears. S/ Project Brief (June 24, 1980). 6/ Consumer prices (IMF, "International Financial Statistics"). 7/ Letter to ONEP (August 15, 1983). 'I/ Letter to Prime Minister's Office and Supervision Report (both October 23, 1984). 9/ Memorandum (December 8, 1980). 10/ Memorandum to Mr. Picciotto (November 5, 1982). 16 However, nothing so extreme was ever done. One year after the clearing of outstanding government arrears, they were again "too high". The solution was to have the concerned agencies pay half of their annual consumption in March and the balance in November. "Too high" government arrears were noted in every supervision report during the period without significant Bank actions to prevent their recurring. 5.12 Financial Covenants: Besides the working ratio, a covenant limiting the debt-servicing coverage to no less than 1.3:1 was introduced to ensure that ONEP was not borrowing more than it could repay. The Bank expressed confidence that the financial covenants "will be adhered to"." However, the rate of return covenant for 1981 was not met.2 In 1982, ONEP posted a loss and "solvency" was mentioned as an issue.'3 In 1986 no covenant were noted to be in default, but the financial restructuring of ONEP was discussed for the first time and government arrears were still judged too high." ONEP's financial performance was rated 2 instead of 1 in the last supervision mission (4 months) before loan closing; it was rated 3 less than one month after." 5.13 Loan Terms and Exchange Risk: The Bank loan was granted for 16 years and 7 months (from signing to maturity) including a grace period of 4 years and 1 month. The slow disbursements (US$27.13 million at end 1985 vs. US$82.50 million projected) effectively curtailed the actual grace period. The exchange risk is borne by the Government. It proved to be substantial. As of April 30, 1993, the exchange risk just due to the currency pooling system amounted to US$6.27 million or 21.3% of the outstanding debt. Since loan signature, the DH has lost an additional 42.5% vis-a-vis the US dollar. If the situation does not worsen nor improve, the annualized exchange losses until maturity would add 11.6 percentage points onto the nominal interest rate of 9.6%. By comparison, the rate of return generated by ONEP on assets is, therefore, insufficient to pay for the effective cost of Bank funds. 6. THE ROLE OF THE BANK AND THE GOVERNMENT The Role of the Bank 6.01 Over twenty two years the Bank provided a steady financial and technical support to the water and sewerage sector in Morocco. During this period a mutual respect and cooperation "/ Memorandum from Mr. Picciotto to Mr. Stern (April 23, 1981). 12/ Supervision report (March 28, 1983). No financial data were annexed to support the assessment. 13/ "The 20% tariff increase was not sufficient to restore solvency." (letter to ONEP, August 15, 1983). 14/ Supervision Report (May 21, 1986). It contained no financial analysis of ONEP, however. is/ Supervision Reports (August 14, 1989 and January 25, 1990, respectively). 17 evolved which resulted in one of the most successful Bank assistance program in the sector. The Bank was instrumental in the development of the coordination among the various agencies in the sector and, in particular, in the development of ONEP. Although "sins of omission" have occurred in projects, such as the exclusion of the Regies and the local population from the planning and managing this project, the lessons have been learned and appropriate actions included in the follow up projects. The ongoing Loan 2825-MOR is focused on rehabilitation and maintenance of water supply systems and on major sewerage improvements in Casablanca and the Fifth Water Supply project continues the expansion and strengthening of regional centers. Government Involvement 6.02 The Audit mission held discussions with the Ministries of Interior and Public Works, the two most closely involved with the sector. While the Ministry of Interior has oversight of the Regies and, in particular, over the tariff issues, the Ministry of Public Works, through its Hydraulic Administration influences the physical development of the sector and ONEP. A subject extensively discussed with the Secretary General of the Ministry of Works was monitoring and evaluation (M&E) and, in particular, ex-post evaluation. The mission was informed that the Minister takes personal interest in these matters and has strong views on the use of M&E indicators. he urged the Bank to apply these, systematically across sectors and that the indicators should be used to follow up matters and not just collected as data. The Ministry is, of course, well aware of the ECDP and eager to participate with the Bank in the development of evaluation in the ministry and continued support of OED would be welcome in this regard. In 1991 a small study was carried out with UNDP financing which recommended that an evaluation unit be set up in each department of the Ministry with a central unit to coordinate the work. At the time of the Audit no action has been taken. The mission recommends that the Region take this matter on their future work in the sector in Morocco. 7. COVENANTS AND DIRECTIVES Loan Covenants 7.01 The PCR lists nine specific covenants under the Loan Agreement and ten under the Project Agreement between the Government and ONEP, over and above the routine agreements which are part of all Bank loans. Compliance with the covenants relating to the completion of the Water Supply Sector Study (La 3.02) and that relating to progress reports on house connections (LA 3.05 (a)) has been extended to the National Water Supply Rehabilitation Project (Ln. 2825-MOR). The PCR reports compliance, albeit some of them delayed, with all covenants. 7.02 The Audit's review concludes that the delays in compliance with a number of covenants did not cause the delays in project progress but rather, the implementation delays caused late compliance. 18 7.03 The usefulness of specifying the Working Ratio as the prime indicator of ONEP's financial health (PA 4.04(a)) is discussed under the Financial Aspects. Directives 7.04 The Audit finds that all relevant Operations Manual Statements (OMS), Operations Policy Notes (OPN) and Bank guidelines have been observed or complied with. 8. CONCLUSIONS AND LESSONS 8.01 The Audit rates the overall performance of the project as satisfactory and its institutional development as substantial. The sustainability of the benefits of the respective components is likely. 8.02 The house connection program was more successful in some Regies than others. It exceeded its overall numerical targets but it failed to reach the targeted percentage of low income consumers. To reach the overall target the eligibility criterion relating to minimum income was raised, indicating that the high cost of the house connections, notwithstanding the availability of credit, is still outside the reach of many low income households. It is not clear whether this became evident during the Second project or in ONEPs' affordability study but the target of 80% of the connections being low income households was way off the mark. 8.03 The traditional centers of some cities, the Medinas, with their exceptional densities, present a particular problem in the provision of water supply services and, in particular, the reduction of wastage of scarce water resources. Due to the political and traditional sensitivity of this issue, resolution should be sought at the community level with the support of the highest authorities. 8.04 The connection charges represent a useful cash flow to the Regies (and ONEP) and as such, tend to hide the inadequacy of the water tariffs. 8.05 The two regional schemes, particularly the Errachidia scheme, represented a learning exercise for ONEP, both in terms of design and management. The mixed utilization of the service indicates that much greater emphasis should be placed on consulting the local population at the design stage to accommodate cultural and religious traditions. The introduction of modern water supply services should be done in parallel with the introduction of comparable sanitation and wastewater disposal services. 8.06 Although ONEP has significantly decentralized its operations into provincial centers, there is insufficient delegation of responsibility, particularly on the financial side, to develop the full potential of these centers. 19 8.07 Ex-post evaluation is recognized as an indispensable tool for drawing the lessons of experience from sector development projects and the Bank (the Region) should assist, in the course of its projects, in the development of appropriate programs. OED should cooperate in this effort. 8.08 Most of the lessons resulting from this project have already been identified by the borrower, ONEP and the Bank and have been or are being incorporated in subsequent projects. The only exception appears to be the imposition of high connection charges which, in spite of the success of the credit program, still prevents the poorest from connecting to the system. Where this is coupled with the wholesale elimination of public standpipes, the poor has no alternative but to revert to, possibly polluted, wells or vendors. The latter might have a higher unit cost but the payments are in small amounts.  Mteerraneon Sea MOROCCO THIRD WATER SUPPLY PROJECT O ERRACHIDIA-ERFOUD-RISSANI REGIONAL WATER SUPPLY SYSTEM (s IBRD 15498 fo, d.i) KARJA BA MOHAMED REGIONAL WATER SUPPLY SYSTEM (s IBRD 15499 1or d.t,1I) A ONEP NATIONAL HEADQUARTERS Z ONEP REGION HEADQUARTERS .v * ONEP CENTERS REGION DIVISION BOUNDARES. MOUNTAINS d--E- - RAINFAI. OVER 400mm l PER YEAE v RIER$ AND WADIS - Kl FE5 PROVINCE CAPITALS* RARA! NAT,ONAL CAPTAL A E - PROVINCE BOUNOARIES* •- INTERNATIONAL BOUNDARY -i --••• INTERNATIONAL ROUNDARY APPROXIMATE - 32Y - Öa EhZA IAT 1 R C OG YNn O GK M go.n OUARZAZATE 0 130 20 300 AGADIR ä Lxe P KN.OMt4