Tunisia - National Rural Water Supply Project

Document of The World Bank FOR OMCIL USE ONLY Report No. 12928 PERFORMANCE AUDIT REPORT TUNISIA NATIONAL RURAL WATER SUPPLY PROJECT (LOAN 2134-TUN) APRIL 1, 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 (As of October 1981) Currency Unit = Tunisian Dinar (D) = 1,000 Millimes D 1 = US$2.00 US$ 1 = D 0.500 GLOSSARY OF ABBREVIATIONS CF - Cash Flows DGR - Direction du Genie Rural IBRD - International Bank for Reconstruction and Development IDA - International Development Association OED - Operations Evaluation Department PAR - Performance Audit Report PCR - Project Completion Report SAR - Staff Appraisal Report SF - Self-financing SONEDE - Societe Nationale d'Exploitation et de Distribution des Eaux 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 April 1, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Tunisia National Rural Water Supply Project (Loan 2134-TUN) Attached is the report entitled "Performance Audit Report on Tunisia - National Rural Water Supply Project (Loan 2134-TUN)" prepared by the Operations Evaluation Department. The two distinct components of the project supported: a) the provision of house connections to low income urban households by means of credit facilities and b) improvement/expansion of water supply in rural communities. Both components were successful albeit the rural program reached fewer villages than targeted due to higher than estimated costs. The project also supported the water agency's (SONEDE) effective water conservation and loss reduction program. The generally very good performance of SONEDE, in development, operation and maintenance is marred somewhat by its less than optimum financial performance. However, this area is the main focus of ongoing Bank dialogue with the Tunisian authorities. The Performance Audit assesses the achievements of the project in different areas and rates the project as satisfactory, institutional development as substantial and the sustainability of its benefits as likely. These ratings confirm the ratings based on the findings of the PCR. Attachment 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. ь FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT TUNISIA NATIONAL RURAL WATER SUPPLY PROJECT (LOAN 2134-TUN) TABLE OF CONTENTS Page No. PREFACE ............................................ i BASIC DATA SHEET .................................... ii EVALUATION SUNEMIARY ................................ iv 1. BACKGROUND ..................................... I The Country and the Sector .............................. 1 W ater Resources ..................................... I Sector Responsibilities .................................. 2 Population and Service Levels ............................. 2 Bank Involvement .................................... 3 2. THE PROJECT ...................................... 3 The Project and Its Objectives ............................. 3 3. 51PLEA4ENTATION ................................... 5 Physical Components .................................. 5 Institutional Aspects ................................... 7 Operations ......................................... 8 Environmental Aspects ................................. 8 Economic Aspects ..................................... 9 4. FINANCIAL ASPECTS ................................. 9 5. CONCLUSIONS AND LESSONS ........................... I I MAP 16155 - Tunisia: Major Water Supply System This report was prepared by Mr. Jozsef B. Bdky (Lead Evaluation Officer) and Jean- Francois Landeau (Senior Evaluation Officer), who audited the project in April 1993. 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.  1 PERFORMANCE AUDIT REPORT TUNISIA NATIONAL RURAL WATER SUPPLY PROJECT (LOAN 2134-TUN) PREFACE This report presents the results of the Performance Audit of the National Rural Water Supply project for which Loan 2134-TUN for US$30.5 million was approved on April 27, 1982. The Loan Agreement was signed on May 14, 1982 and the loan became effective on October 20, 1982. After a one year extension, the loan was closed on December 31, 1987 and was fully disbursed in June 1988. The Performance Audit Report (PAR) was prepared by the Operations Evaluation Department. Parts I and III of the Project Completion report (PCR) was prepared by the then Europe, Middle East and North Africa regional Office and Part II by the Borrower. The PCR was forwarded to the Board for information on November 7, 1989. OED has reviewed the PCR, the Staff Appraisal and Presidents Reports, the legal documents and Bank files and discussed the project with the Bank staff involved. An OED mission visited Tunisia in April 1993 and discussed the project experience with officials of the borrower and other involved agencies and beneficiaries. The cooperation of these officials is gratefully acknowledged. The Audit found that the PCR gave a concise and frank account of the project experience. The PAR gives further analysis of the PCR's findings, particularly regarding the rural components', their viability and selection process and provides independent comments and conclusions on various aspects of the project. Following standard OED procedure, copies of the draft PAR was sent to the Government for comment, but no comments were reeived. ' In spite of the project's title, these represent only 41% of the project. 1 ii PERFORMANCE AUDIT REPORT TUNISIA NATIONAL RURAL WATER SUPPLY PROJECT (LOAN 2134-TUN) BASIC DATA SHEET KEY PROJECT DATA Actual or Actual as Z Appraisal Current of Appraisal item ExpRectation Esimat Estimate Total Project Cost (US$ million) 64,060 64,490 Loan Amount (US$ million) 30.50 30.50 Date Physical Components Completed 6/30/85 12/31/87 Proportion completed by that date (%) Economic Rate of Return Institutional Performance CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY82 FY83 FY84 FY85 FY86 FY87 FY88 Appraisal Estimate (US$ million) 3.46 12.42 22.12 28.40 30.50 30.50 30.50 Actual (US$ million) 0 3.75 10.11 16.92 23.93 28.50 30.50 Actual a % of Appraisal (%) 46 58 64 81 93 100 Date of Final Disbursement: PROJECT DATES Original Plan Revisions Actual First Mention in Files 03/81 03/22/81 Negotiations 03/18/82 03/15-19/822 Board Approval 04/27/82 04/27/82 Signing 05/14/82 05/14/82 Effectiveness 08/23/82 11/23/82 10/20/82 Closing Date 12/31/86 12/31/87 06/30/88 SONEDE's financial objectives and tariffs; retroactive financing. iii STAFF INPUTS (staff weeks) FY82 FY83 FY84 FY85 FY86 FY90 Total Preparation 22.8 22.8 Lending Development 3.9 3.9 Appraisal 16.8 16.8 Negotiations 5.0 5.0 Supervision .9 5.7 4.3 6.0 3.6 .5 21.0 Total 49.4 5.7 4.3 6.0 3.6 .5 69.5 MISSION DATA Date No. of Specializations Performance Types of (mo.lyr.) Persons Represented Ratiny Status' Problems' Identification 03-04/81 2 2 e n.a. n.a. Preparation I 07/81 2 1 e, I f n.a. n.a. Preparation II 09/81 2 1 e, 1 f n.a. n.a. Appraisal 10-11/81 2 1 e, 1 f n.a. n.a. Supervision' Supervision I 09/82 2 1 e, 1 f 1 - 2 F Supervision II 04/83 2 1 e, 1 f 2 - 1 F Supervision III 02/84 1 1 e 1 - 2 F Supervision IV 12/84 2 1 e, 1 f 1 - 2 F - M Supervision V 05/85 2 1 e, 1 f 1 - 2 F - M Supervision VI 11-12/85 2 1 e, I cf 1 - 2 F - H Supervision VII 06/86 2 1 e, 1 cf I - 1 F - M Supervision VIII 05/87 2 1 e, I cf I - 1 F - M Supervision IX 12/87 3 1 e, 1 f, I cf 1 - 1 F - M e = engineer; f - financial analyst; c - consultant 1 = Problem-free or minor problems; 2 - moderate problems; 3 = major problems. F = Financial; M = Managerial. 6 All supervision missions also supervised other ongoing projects. V PERFORMANCE AUDIT REPORT TUNISIA NATIONAL RURAL WATER SUPPLY PROJECT (LOAN 2134-TUN) EVALUATION SUMMARY Background 1. At the time of the appraisal (1981) 3. The Ministry of Agriculture is about half the 6.4 million population of responsible for the management of all water Tunisia resided in urban areas, some two resources. Urban water supplies are the third of it concentrated in the two largest responsibility of the "Societe Nationale cities, Tunis and Sfax. The rural population d'Exploitation at de Distribution des Eaux" was dispersed in some 3,500 small (SONEDE) and the Direction du Genie communities, often in isolated locations Rural (DGR) provides water supply to making the provision of services difficult villages under 500 population. and expensive. 4. At the time of appraisal about 64% 2. The water resources of Tunisia have of the population had access to safe water. been well studied and, in 1981, some 58% Urban coverage was over 90% (75% with of them were being exploited, including 7% house connections). Some 24% of the rural for potable water. Shallow aquifers of the population had access to safe water, mostly north are suitable for serving small through public standpipes. Consumption communities but many of them are saline varies widely across the country, reflecting requiring blending with fresh water. The availability, consumer habits and the major fossil aquifers of the south are standard of living and ranges from about unlikely to be exploitable in the near future, 130 lpcd in high income urban areas to 10 due to their depth and high salinity and lpcd at rural standpipes. temperature. Large demands have to be met from treated surface water sources, mainly 5. The Bank had a long and successful concentrated in the north-west, which involvement in the Tunisia water sector, require impounding and long transmission starting in 1968, through seven operations mains to the demand areas. Desalination, and a total of US$175 million in lending. mainly for tourist areas, is already practiced Additional water supply investments were and waste water reuse is being actively financed under two tourism projects (PAR studied. paras. 1-10). vi The Project 6. The main objectives of the project confirming the high level of demand by low were to: (i) strengthen SONEDE's financial income consumers. position; (ii) expand its rural operations; and (iii) provide credit for house 11. The rural program had a slow start, connections to low income people. largely due to the complexity of the sub- project selection system imposed by the 7. It consisted of: (i) expansion of Bank. The cost related criteria gave rise to existing or construction of new water anomalies when among a group of adjacent systems in 150 villages; (ii) provision of villages one would be rejected on high unit credit facilities for financing 80,000 house cost grounds as the village happened to lie at connections in low income households; and, high elevation, requiring more expensive purchase of 80,000 water meters. pumping. As such a village could not be left without water, due to equity, political 8. Detailed selection criteria were and social reasons, the installations were established for the eligibility of villages financed outside the project, from special for Bank financing based on ceilings for unit funds. The Audit believes that such a rigid cost of water and overall project cost which selection system does not serve a useful resulted in some anomalies. For financing purpose and future schemes should carefully house connections, no selection criteria were assess and consider developmental factors, established but the Bank required that ahead of considerations such as interest rates be positive in real terms. "..cmaximizing the benefits of the loan". 9. The project was approved by the 12. The Audit's visit to several rural Executive Directors on April 27, 1982, the installations confirmed the appropriateness loan was signed on May 14, 1982, became of the design, the high quality of effective on October 20, 1982. The construction and the efficient management, estimated cost of the project was US$63.61 operation and maintenance of these facilities. million equivalent. The Bank loan of US$30.50 million was to finance the foreign 13. The house connections were executed cost of the project and the front end fee, by force account and the rural civil works Completion was scheduled for June 30, 1985 were let under local procurement and loan closing for December 31, 1986 procedures. Materials and equipment were (PAR paras.11-15). bid in bulk orders under ICB. There were no procurement problems. Implementation 14. The availability of actual cost data 10. The house connection program, being was limited. Compared to appraisal a routine operation for SONEDE, proceeded estimates, the 90% increase in the house smoothly. Of the average 50,000 connection component was mainly due to a connections installed per year, some 75% 60% increase in the number of connections were financed from the credit facility, and local inflation. The cost of the rural component shows a 26% increase but this vii hides the nearly 50% reduction in the Finncial Aspects number of villages served. The real cost increase was mainly due to original 18. Although SONEDE's water sales underestimation of the costs. have been increasing by an average of 6.2% per year it has been unable to generate 15. While the strengthening of SONEDE revenues faster than the inflation, due to the is listed as one of the project's objectives, existing tariff policies. The after debt the SAR did not provide for specific steps to service cash flows have been producing a be taken. The Audit found SONEDE to be declining and, practically, negligible return a mature and well organized entity with on fixed assets. If continued, this is likely efficient management and good quality staff. to be a constraint on SONEDE's future However, shortcomings are evident in the development. At the Bank's request, a financial areas and these are the focus of detailed tariff and economic cost of water current Bank dialogue with the agency. study is under way in order to improve the situation (PAR, para. 29f). 16. SONEDE has nationwide responsi- bilities for water supply and, in 1991, it 19. Measured in terms of self-financing reported to be serving 100% of the urban and debt-equity ratios, SONEDE's financial and 30% of the rural population. Its position appears strong but these are largely average 5% annual growth of supply has due to the high level of consumer been declining recently, indicating saturation contributions and the equity financing of its service in urban areas and the fact that investments. However, while SONEDE's industry and tourism is increasingly outstanding long term debt has been developing its own supplies. Operational decreasing steadily, the cost of its standards are high and loss reduction and borrowings has been rising, reaching 19.2% water conservation is high priority. in 1992. In addition, SONEDE is obliged to Unaccounted for water ranges from 18% to carry an open ended exchange risk while it 45 % in different locations but an efficient can not raise its tariffs in real terms (PAR leak detection/repair program is in place in paras. 30-34). all regions. Conclusions and Lessons 17. No economic rate of return calculation was attempted for the project. 20. The project exceeded its physical Justification for the house connection targets in the urban areas and achieved component rested on the recognized benefits significant success in the provision of of "service in the home". The high cost of services in rural areas although the number individual connections was compensated by of villages targeted fell below expectations. the credit scheme supported by the loan. Implementation was efficient and subsequent Some 75 % of the credit recipients were low operations are satisfactory. income households. Assistance for the rural component stemmed from the Bank's 21. The Bank imposed selection criteria declared support for the government's high for financing rural subprojects left much to commitment to accelerate safe water service be desired but improvements are a major for the rural population (PAR paras. 1 6-28). focus of the preparation of a follow-up project. Viii 22. Government equity financing of SONEDE's investments altered the entity's financial requirements and its tariff policies require an urgent review. This is also a major feature of current project preparations. 23. To improve the accuracy of SONEDE's financial statements, the consumer contributions should not be capitalized as equity but shown as income on the income statements. 24. An important lesson to be drawn from the project relates to the inappropriate design of the rural sub-project selection criteria. These should be designed to support the overall objectives of the program and not tied to concepts of Bank loan "efficiency" (PAR paras. 35-42). 1 PERFORMANCE AUDIT REPORT TUNISIA NATIONAL RURAL WATER SUPPLY PROJECT (LOAN 2134-TUN) 1. BACKGROUND The Country and the Sector General 1.1 Tunisia, located on the southern coast of the Mediterranean sea. occupies about 160,000 sq.kms. The Atlas mountain chain divides the country into two distinct, northern and southern regions. The Northern part, a semi-arid area with average annual precipitation of about 600 mm contains most of the arable land and population. The area south of the Atlas mountains is arid to desertic with annual precipitation less than 200 mm. At the time of appraisal (1981) more than half the 6.4 million population resided in urban areas, some two third of this was concentrated in the two largest cities, Tunis and Sfax. The rural population was dispersed in some 3,500 small communities, often in isolated locations, making the provision of services both difficult and expensive. Water Resources 1.2 Water resources in Tunisia have been extensively studied and the overall water balance is well known. The total annual exploitable water resources are estimated at 3 billion cubic meters. In 1981 some 58% of this was already being utilized, including 7% for potable water. Projections indicated that by the year 2000 90% of these resources will be exploited with potable water requiring 22%. Ground water available, in the northern areas, occurs in small aquifers, suitable for serving local communities. Many of these aquifers are also highly saline and unsuitable for human consumption (or even irrigation) without blending with fresh water. Larger demands have to be met from treated surface water sources. Most of these sources are found in the north-west of the country and require large impounding reservoirs and long transmission mains to the demand areas. Sfax, over 300 km to the south, is already supplied from such a source. In the extreme south of the country large fossil water aquifers have been identified but their great depth (over 1000 m), high salinity and temperature make the feasibility of their exploitation unlikely in the near future. Desalination, mainly for tourist resorts, on islands along the south coast line is already practiced and reuse of waste water is being actively studied. 2 Sector Responsibilities 1.3 The Ministry of Agriculture is responsible for the management and allocation of all water resources. In 1975, the Government has enacted a "water code" for the regulation of water resources and user priorities. The code also provided for the establishment of a National Water Committee to assist the Ministry of Agriculture in the management of the water resources. 1.4 The "Societe Nationale d'Exploitation et de Distribution des Eaux" (SONEDE), an autonomous public entity under the supervision of the Ministry of Agriculture, is responsible for the production and distribution of water in urban areas and large villages. The Direction du Genie Rural (DGR) is in charge of providing water supply services to rural areas and villages under 500 population. Separate master plans have been prepared for the northern, central and southern regions of the country for the long-range development and use of water resources which are in various stages of implementation. In parallel with the development activities, the government has launched a water conservation program with a view to reducing wasteful use and losses which, in the long run, is expected to reduce overall per capita consumption by 15%. Population and Service Levels 1.5 The estimated 1980 population of Tunisia was 6.4 million of which some 3.3 million (52%) lived in urban areas. About two thirds of the rural population lived in agglomerated villages, the rest in widely scattered, remote, locations. The overall population growth has been steady at around 2.7% per annum and expected to remain so until the turn of the century. Urban growth rates are much faster at 3.3%, due mostly to rural to urban migration. This is also expected to continue and the dispersed rural population is projected to decline to below 10% by the year 2000. 1.6 At the time of appraisal, about 64% of the population had access to safe, piped, water supply. Urban coverage was over 90%, about 75% being supplied through house connections. Some 24% of the rural population had access to safe, public, water supply with only about one in five by house connections, the rest served by public standpipes. The remaining population relied on shallow wells and streams. 1.7 Metering and recording of consumption by the various user categories became systematic in 1968 when SONEDE was created. From that period onward, water production has been growing at an annual average rate of 6.7%, reaching 140 Mm3 in 1981. The average domestic per capita consumption in Tunis was dropping from the high 139 liters in the 1960s, reflecting the increasing number of lower consumers being connected to the system. Consumption varies widely across the country, reflecting availability, consumer habits and standard of living. Standpipe consumption ranges between 10 and 20 Ipcd. In most areas, even higher income consumers are still collecting rain water for general use, keeping per capita consumption levels relatively low. 3 1.8 Water supply for the dispersed rural population (communities of less than 500 people) is the responsibility of the DGR. The activities of the DGR were generally limited to the provision of sanitized shallow wells equipped with handpumps and water points and a number of simple piped systems. The government has increased activities in this subsector and directed SONEDE to step up the provision of services in the communities too large for DGR to serve. Bank Involvement 1.9 Bank involvement in the water supply sector in Tunisia started with the Tunisia Water Supply Project (Ln. 581-TUN), approved on December 3, 1968. A major component of this project was the establishment of SONEDE which, in essence, laid the groundwork for both the rapid improvement of water supply services in Tunisia and the Bank's long, and generally successful involvement in the sector. This was followed by six successive operations, including the project evaluated in this report (one IDA credit and five IBRD loans). The total lending amounted to 175.0 million. By and large all projects were successfully implemented, albeit some with significant delays. The Seventh Water supply project (Ln. 2368-TUN) is still under implementation and another operation is in preparation. Substantial water supply investments were also financed under two Tourism Infrastructure projects. 1.10 The relationship between the Bank and Tunisia in the water supply sector has been consistently good and the Bank's contribution and advice is appreciated. However, the close relationship maintained over many years has, perhaps, contributed to the apparent leniency of the Bank toward the deteriorating financial performance of SONEDE in the latter years of the project under review. 2. THE PROJECT The Project and Its Objectives 2.1 The principal objectives of the project were: (a) to assist SONEDE in strengthening its financial position; (b) to expand SONEDE's services in rural areas; and (c) to facilitate the obtaining of house connections by the lower income population by providing credit facilities; 2.2 The project represented a portion of SONEDE's Sixth Development plan (1982- 86) the twin targets of which were the continued but modest improvement of the already high 4 levels of urban water supply services and the substantial increase of service coverage in rural areas. It consisted of: (i) expansion of existing or construction of new water supply systems in 150 villages (populations over 500); (ii) provision of credit facilities for the financing of house connection by low income households and; (iii) purchase of 80,000 water meters; 2.3 The natural long term objective of the water sector is the provision of access to safe, reliable, water supply to all. As the urban areas are already very close to this target, the government increased the emphasis on providing service to the rural population. SONEDE's Sixth Development Plan provided for the construction of water supply systems in 212 villages (all without adequate water at the time) and the Bank project were to include financing for 150 of these. According to the Appraisal Report "...in order to maximize the benefits of the project, the cost of water must be minimized". On these grounds, the principal selection criteria, for a village to qualify for Bank financing, of a maximum marginal cost of 1.50 per m3 of water (1981 prices) was chosen. This figure was reported to be the result of statistical studies, based on 15 projects analyzed, and which would qualify some 60% of the villages. Additional criteria included: (i) the total capital cost of any village system should not exceed 1.5 million equivalent; (ii) the sub-project should be the least cost solution and (iii) water sources, sufficient for the life of the sub-project, should have been identified. Bank approval was required for all sub-projects to be included. While criteria (ii) and (iii) are normal and eminently sensible, the Audit has questions as to the appropriateness of the "marginal cost" and "capital cost" limits imposed and these will be discussed later in this report. 2.4 Regarding the proposed credit scheme for the financing of the house connection program, the only criterion set was that credit would only be made available to domestic consumers. No income limitation or "means test" were to be applied as the ongoing program reportedly demonstrated that only low consumption consumers (largely the same as low income) have applied for credit in the past. However, the Bank insisted that the interest rate charged to the households be positive in real terms. 2.5 The project was approved by the Executive Directors on April 27, 1982, the loan was signed on May 14, 1982 and became effective on October 20 1982, two months later than scheduled. The total estimated cost of the project was 63.61 million equivalent. The Bank loan of 30.50 million was to finance the foreign cost of the rural and house connection components and the front end fee. Completion was scheduled for June 30, 1985 and loan closing projected for December 31, 1986. 5 3. IMPLEMENTATION Physical Components 3.1 The house connection program proceeded smoothly and the number of connections made by the original completion date exceeded appraisal estimates by about 40%. These type of works were routine operations for SONEDE presenting no particular problems. The steady annual rate of installations, averaging about 50,000 over the last ten years confirms the continuing demand for better service. Nearly 75% of these connections were being installed under the credit scheme confirming the demand by the low income consumers. However, this rate of progress is expected to decline as saturation levels are reached in the major urban areas. The appraisal envisaged about 80,000 connections to be financed under the project at the total cost of TD 14 million, excluding the cost of water meters, of which 50% was estimated to be foreign exchange. The credit facilities provided for a five year redemption at interest rates (at appraisal) of about 11 %. 3.2 The rural water supply program had a slow start due to a combination of factors. These included: lack of previous experience with this type of work and the required "appraisal" within SONEDE, the complexity of the Bank-imposed selection criteria, the large number of relatively small contracts to be administered, the reluctance of contractors to bid for the more remote locations and the higher than anticipated cost of the schemes. On completion, only 77 out of the planned 150 village schemes were executed at considerably higher cost than estimated at appraisal. 3.3 The Audit discussed the rural component with head office and regional officials of SONEDE and visited several schemes in the north-west of Tunisia. As mentioned in paragraph 8., the Tunisian government accorded high priority to the provision of water supply services in rural areas. And, although regional equity and "need of water" was and is part of the consideration in village selection, the planners clearly (and reasonably) gave priority to areas where water sources were accessible and the greatest good can be done with the least cost. However, meeting the Bank's selection criteria (see para. 13.), in many instances, presented particular difficulties for the planners. There were several examples where, in the same geographic area, a particular village did not meet the cost limitation criteria (while others, nearby, did) because of (say) higher elevation would result in greater pumping costs. In such cases, it would have been clearly unreasonable to leave that village without service, so the government was obliged to find alternative funding.' This had to result in inefficiencies as one out of several village systems, in the same area, would be constructed under a different process of funding, contracting and supervision. The claim in the appraisal report that the Bank's selection criteria will ensure that the "benefits of the loan are maximized" is, in the opinion of the Audit, only valid if we count nothing but the number of people served with the loan proceeds. In future Bank projects, as the government's program of serving all villages progresses, the "Bank type" criteria would have to be either progressively relaxed or more and 7 There is a "President's Fund" and a "National Solidarity Fund", the latter based on private donations for the financing of village water supply schemes. 6 more of the "marginal villages" would have to be rejected. This clearly would be both impractical and inequitable and the Bank should review its subproject selection criteria applied to these type of projects and concentrate them on essential parameters such as extent of need, economies of scale, least cost solution and administrative efficiency. There will always be truly extreme cases where villages are so far from water sources that the only "economic" solution would be to move the people (which is politically unacceptable) and scarce "special funds" should be reserved for these. 3.4 The several village systems visited by the Audit mission were all sound design, high quality construction and, given their sometimes remote location, have excellent maintenance and management. A village scheme typically would consist of a small reservoir (at a high point or elevated), a gravity feeder pipeline, a basic distribution network and strategically located public taps. House connections were made available where requested. The concerns raised in the PCR regarding maintenance were either misplaced or already noted by SONEDE and acted upon. The systems are of standard design, they adequately meet the current needs and capable of expansion. The mission's discussions with the relevant regional managers also confirmed that SONEDE, in the technical and administrative sense, has a perfectly viable rural water supply management system. Safe water quality is ensured by treated water supply from a major source (traversing transmission pipeline) or suitably disinfected local source. 3.5 The house connection program was, and is being carried out by force account. The majority of the civil works were let under local procurement procedures and equipment and materials were bid, in bulk orders, under ICB. There were no procurement problems. Sub- project designs and supervision were carried out by SONEDE's own staff in a satisfactory manner and contractors generally performed well. 3.6 The PCR provides minimum information regarding the final cost of the project. The Audit was also unable to obtain additional information but it is clear that two major factors influenced the final cost, namely the higher than expected cost of the rural schemes and the significant (66%) devaluation of the Dinar between 1981 and 1987. A summary of the estimated and final cost of the project is reproduced below in Table 1. The costs in 1987 US dollars are illustrative only since the year by year expenditures, converted at the appropriate exchange rates are not available. 7 Table 1. - Project Costs I =0.83TD Item TD (Million) 1=0.5TD (1981) (1987) Appraisal Actual Appraisal Actual Rural Centers 16,185 20,459 32,370 26,351 House Connect. 14,000 26,714 28,000 34,408 Water Meters 1,620 2,546 3,240 3,280 Total Project 31,805 49,719 63,610 64,039 Front End Fee 225 286 450 451 Total Cost 32,030 50,005 64,060 64,490 3.7 The paucity of detailed cost information permits only limited analysis. It appears clear that the over 90% increase in the cost of the house connection component (in dinar terms) was due, mainly, to the 60% increase in the number of connections installed. Local inflation was another contributor. The Audit considers the devaluation of the dinar unlikely to have had serious influence as it seriously doubts that foreign costs amounted to 50% of this component. The 26% cost increase shown for the rural component hides the fact that only about half the 150 systems targeted were, in fact, completed. The real cost increases (over 50%) represent mainly underestimations at the appraisal stage. Institutional Aspects 3.8 The borrower and implementing agency, SONEDE, established in 1968, is an autonomous public enterprise, owned by the government and operates under the tutelage of the Ministry of Agriculture. It is a well managed and competent authority, by any standard. The project objectives, set at appraisal, included inter alia the strengthening of SONEDE in: (i) supporting the adoption of a new long range financial policy; (ii) its involvement in rural areas; and (iii) its capacity for developing and managing sector type projects. However, the appraisal report does not provide for specific steps or actions for meeting these objectives nor does the PCR contain any references regarding their achievement or otherwise. Indirect references in the PCR to institutional shortcomings relate to the inadequacies in SONEDE's progress reporting during implementation and to less than satisfactory management of its rural operations. These references are not supported by elaborations of the detailed shortcomings. 8 3.9 The Audit mission discussed these matters with SONEDE officials and, inter alia, obtained documents reporting SONEDE's operational activities. In particular, the Annual Statistical Report contains an excellent compilation of operational data including, in some cases, comparative records spanning ten years. In the Audit's opinion, the data and its analysis provides more than adequate management information for the efficient planning of SONEDE's activities in terms of forward planning and service needs. Although the report does not separate the rural operations for special analysis, the mission's (admittedly limited) review of sample rural operations gives no reason to doubt the operational sustainability of the rural sub-sector. SONEDE appears to have no difficulty in recruiting suitably qualified staff in any area of its operations. Its total staff, in 1991, was 4,880 and, as a measure of its operational efficiency, it almost doubled the number of connections per employee from 122 in 1982 to 203 in 1991. One of the weaker elements of SONEDE's operational database is cost accounting, the improvement of which is a major focus of the Bank's current dialogue with the agency. Operations 3.10 SONEDE's operations are nationwide and it is responsible for the provision of water supply to all communities with population exceeding 500. Its 1991 annual report claims 100% service in urban areas of which 90.7% is served by house connections. SONEDE also serves 30% of the rural population. The annual growth of consumption, in SONEDE's systems, averaged over 5% between 1969 and 1991 but, in recent years, the growth declined drastically to between I and 2 percent. This appears to be due partly to saturation of service in urban areas, the decline of average per capita consumption and the fact that industry and tourism have been developing their own sources. Unaccounted for water (UFW) is reported to have averaged 30.1% in 1991 ranging in various locations from a high of 45.2% to a low of 17.9%. Water conservation and reduction of losses is a major target in SONEDE's operations and each district/regional office has a staff responsible for "economy", meaning conservation in the area. The mission reviewed these activities in the Beja district and these were entirely satisfactory. Leak detection is systematic and effective and the accurate records of remedial works (pipe replacement etc.) provide a sound base for management decisions regarding the intensity of the program in the different localities. Water quality control is equally effective in ensuring safe supplies from the systems. 3.11 Rural system operations, in the areas visited by the mission, were satisfactory. Controlled and directed from the nearest regional centers, each system has a permanent, on site, supervisor, usually recruited from the area, whose simple duty is to "observe and report" and ensure the security of the facilities. Environmental Aspects 3.12 Neither component of the project had significant environmental effects. The majority of urban areas are sewered and where individual wastewater disposal facilities are used, the low per capita consumption and low densities allow safe disposal. The rural water systems eliminated the use of polluted local sources and, undoubtedly, improved public health conditions. 9 Economic Aspects 3.13 No economic rate of return could be calculated for the project, due to the difficulties in quantifying the benefits. Justification, for the house connection component, rested on the recognized benefits of service in the home versus collecting water from standpipes and, in the rural areas, on the basic need of safe water. The PCR did not provide recalculated values. As the government's declared policy in the sector can be summed up in "safe water for all", with social considerations paramount, the primary factor in project selection had to be the "least cost solution". This was, evidently, well observed not only in the project but in all of SONEDE's programs. The SAR states that, at the time of appraisal, the highest tariff level "would be nearly equal to the average long run marginal cost of water, based on a 10% discount rate.. .which is considered adequate for Tunisia". Although the adequacy of the tariff levels is in doubt (see financial issues), at the current tariff levels, the low consumption group spends between 2% and 4% percent of family income on water, well within the Bank's guidelines. However, the assessment of the impact of water tariffs on the poor does not take into account the high cost of house connections charged to the consumers which is one of SONEDE's most stable cash source (see para. 33 below). In 1992 the average cost of a house connection was D170 but little detailed information is made available on this by SONEDE. One of the most beneficial contribution of the project was the credit made available to householders to finance house connections, repayable over five years. As already indicated some 75% of the connections were installed under the credit scheme. 4. FINANCIAL ASPECTS 4.1 Water sales, in dinars, have increased by 52.4% between 1985 and 1992 (or 6.2% p.a.) and by 2.3% p.a. by volume. This is below the compounded consumer price increase over the same period. Although SONEDE looks at the connection charges as a means to supplement tariff increases, their contribution have also declined in real terms. The inability of SONEDE to generate revenues at a pace faster than inflation is a significant constraint for its future development. While SONEDE can rely on the security provided by its monopoly, it is forced into a sub-optimal equilibrium with the present tariff policy. Under the preparation of the next water supply project the Bank requested that a thorough tariff study be carried out with particular emphasis on the economic cost of water (LRMC) and the appropriateness of the existing five tier tariff structure, under which the effectiveness of cross subsidization is somewhat doubtful. 4.2 Cash flows (depreciation plus net profits) have been contained in the low TD20 million range since 1988, further highlighting that profitability is lagging inflation. Cash flows adjusted for the increase in accounts receivable (which are foregone revenues) have been hovering well below TD20 million. As a result, the return on gross fixed assets has been low, averaging 2.7%. On total fixed assets (including works-in-progress) the average return was 2.4%, but it has been declining slowly yet steadily since 1989. After debt service in principal, the available cash flows were so low as to produce negligible returns on gross fixed assets (Table 1). 10 Table 1: Cash Flows and Rates of Return on Assets 1985 1986 1987 1988 1989 1990 1991 1992 Cash flows (CF) 20.2 20.9 12.1 15.6 20.5 19.5 17.9 20.2 CF adj. for acc.receiv. n.a. 18.8 11.6 15.1 18.2 15.3 15.7 16.0 same.after debt serv. n.a. 6.7 -4.7 -1.6 4.6 4.3 2.0 3.9 Rate of return on total fixed assets n.a. 1.3 -0.8 -0.3 0.7 0.6 0.3 0.5 4.3 Measured only by its self-financing ratio and its debt-equity ratio, SONEDE's financial position has been strong thus far. Self-financing (before debt-servicing) averaged 61.8% since 1989. This was partly due to the lower level of investments carried out since then (average of TD32.3 million p.a. during 1988-92 compared to TD51.2 million over 1985-87). After adjusting for accounts receivable, the average self-financing was still high at 51.7%. Yet the accounts receivable situation had the effect of erasing 10 points of self-financing every year, which is a substantial loss. After debt-servicing, the self-financing capacity generated by operations has been around 10% only. Table 2: Self-financing from Operations 1985 1986 1987 1988 1989 1990 1991 1992 av. 89-92 Self-financing (SF) 40.6 39.5 23.8 44.7 63.7 61.1 63.0 59.2 61.8 SF adj. for acc.receiv. n.a. 35.5 22.8 43.3 56.5 48.0 55.3 46.9 51.7 same after debt serv. n.a. 12.7 0 0 14.3 13.5 7.0 11.4 11.6 4.4 SONEDE is operating at a low debt-equity ratio. This ratio has steadily decreased from a low .55:1 in 1985 to .23 in 1992. During the period under review, the outstanding long- term debt decreased constantly from TD155.5 million in 1986 to TD109.0 million in 1992. The policy of adding no new net debt was possible because SONEDE relied on equity to finance its capital investments. It was also due to the increasing cost of debt, which rose from 12.8% p.a. in 1986 to 19.4% p.a. in 1992. During the last six years, the total cost of debt, which includes exchange losses on the Bank loans, averaged 17.3% (according to income statement data). This is much higher than the return on fixed assets documented above. a Negative figure. 11 4.5 Except for one year (1989), SONEDE derived greater and more stable self- financing from the "customer contributions" charged for connections (which are capitalized in equity) than from cash flows derived from operations (after adjusting for accounts receivable and servicing debt in principal). This imbalance explains some of SONEDE's complacency when pushing for tariff increases which end up being merely indexed on inflation. Furthermore, to charge the full cost of connections which are still owned by SONEDE raises an issue of business fairness, especially considering the regressive nature of these lumpy fees. Table 3: Financing from Customer Contributions 1986 1987 1988 1989 1990 1991 1992 Addition to equity 39.9 31.3 33.6 23.9 28.4 27.4 22.2 (of w.customer contribution) 21.8 22.9 15.5 -7.5 12.7 13.7 8.9 Customer contrib/investments (%) 41.2 45.0 44.4 0 39.8 48.2 26.1 4.6 The Bank loan was granted for 17 years, including 4 years and 4 months of grace period. The accumulated exchange risk on the Bank loan due to the currency-pooling system was 8.62 million or 56.6% of the loan balance at the beginning of 1993. Due to the recent devaluation of the Tunisian dinar in terms of US dollars, the debt-servicing has been increased by a further 46% as mentioned in para. 32. It is a paradox that SONEDE, which has no operations abroad, is asked to bear an open-ended exchange risk while it cannot raise its tariffs in real terms. This creates a risk for the sustainability of SONEDE's profitability. 5. CONCLUSIONS AND LESSONS 5.1 The project exceeded its physical objectives in the urban areas with over 90% of the population served by house connections in 1991. The achievements of the rural component were significant but well below the targeted 150 villages, largely due to initial underestimation of costs. The standard of living in the villages provided with service increased considerably. 5.2 Implementation was efficient and subsequent operations and maintenance, based on the Audit's evidence, is fully satisfactory. 5.3 The Bank imposed selection criteria for the rural sub-projects left much to be desired but improvements in this area are high priority in the preparation of the current follow- up project. 12 5.4 The government's decision to fund all investments in the sector as equity contribution has altered SONEDE's financial requirements, raises socialequity issues and requires the reforms of its tariffs. Relevant analysis is being carried out under the ongoing project preparation work by the Regional Office. 5.5 SONEDE carries out a systematic analysis of the effect of its tariffs on the changes in the consumption pattern of its various consumer groups which provides an excellent planning tool in forecasting future demand. However, largely due to the uniform national tariff policy, the monitoring of the cost of water in the different regions is virtually ignored or, more precisely, avoided, thereby leaving the economic aspects of the service out of consideration. 5.6 The rationale for capitalizing the connection fees as "customer contributions" in the equity base is not convincing given that SONEDE remains the sole owner of the infrastructure. For improved transparency of SONEDE's accounts, it is recommended that all connection fees recovered from customers be showed in the income statements and not be capitalized as equity. This approach was attempted by the Bank during project preparation when it proposed a combined self-financing ratio including aggregating cash flows from water sales and income from customer contributions. This was not accepted by the borrower and only the self-financing from operations was covenanted in the Loan Agreement. This narrow definition may lead to the wrong conclusions about SONEDE's financial situation as the operating self- financing is reduced by debt-servicing, foreign exchange losses, and accounts receivable to levels which are insufficient. Another attempt at incorporating the cash flows from connection cost recovery should be made to give an accurate picture of SONEDE's financing capabilities. 5.7 The project design and its implementation were relatively simple and the Audit draws only one important lesson from the experience, as follows: There are few countries that have made such strong commitment to improving rural water supply as Tunisia. Equally strong Bank support for such a program is commendable but the criteria for selecting sub-projects for Bank support need to be based on the principles of the "safe water for all" program and the consumer's need and not, primarily, on factors that "maximise the efectiveness of the Bank loan". TUNISIA NATIONAL RURAL WATER SUPPLY PROJECT MAJOR WATER SUPPLY SYSTEMS 4ETE Me/ te O/7n 0/7 Sea et ~TUNIS T"'" ro C~,M B- re consnhn manEl FahEU LE K A E.fid-ville 3 < Se,s ILIANA G///Homm~ -~M. SOUSSEMNSR 6 - -MAHDILA Sbeill. C El Di~m -35* ~KASSERI,ý-W 3 35. Maka sy N.w I. T- GASES H~IIS-k CI,kICICIIC- ~.Existing Projtci _____Pipelines 00 MerleserCvkirs ø..G0//R / Gads 30* GASPumping E oSions MeWe, F~3E sels -0 15v II5h4~~I GREE Averoge Annual Roin(all, in mm. W _____Main Roads MMTA RadIways b Interna-onEl Anrports e Internl,onal Boundores - -...0 20 40 6 0 00 NKILOMETERS / ) Y 6 a nun o E_ g Pjje9