Zambia - Urban Restructuring and Water Supply Project

Document of The World Bank Report No. 13853-ZA STAFF APPRAISAL REPORT THE REPUBLIC OF ZAMBIA URBAN RESTRUCTURING AND WATER SUPPLY PROJECT APRIL 17,1995 Energy and Infrastructure Operations Division Southern Africa Department  CURRENCY EQUIVALENT (as of January 31, 1995) Currency Unit = Zambian Kwacha (K) US$1.00 = K 660 FISCAL YEAR January I to December 31 WEIGHTS AND MEASURES I metric ton (tonne) = 1000 kg or 2.205 pounds I meter (m) = 3.2808 feet lkilometer (km) = 0.6214 miles GLOSSARY OF ABBREVIATIONS ADB - African Development Bank CIP - Capital Investment Programs CPDDP - Central Province District Development Support Project CU - Commercially Viable Water and Sanitation Utilities DCA - Development Credit Agreement DISS - Department of Infrastructure and Support Services ESAC - Economic and Social Adjustment Credit FTP - Finance Training Project GDP - Gross Domestic Product GRZ - Government of the Republic of Zambia GTZ - Deutsche Gesellschaft fur Technische Zusammenarbeit IDA - International Development Association IBRD - International Bank for Reconstruction and Development ICB - International Competitive Bidding JICA - Japanese International Cooperation Agency LGA - Local Government Act LG - Local Government LOGOS - Local Governtent Support MLGH - Ministry of Local Government and Housing MEWD - Ministry of Energy and Water Development M&E - Monitoring and Evaluation MOF - Ministry of Finance MT - Management and Training NCB - National Competitive Bidding NGO - Non-Governmental Organization NORAD - Norwegian Directorate for Development Aid NWASCO - National Water and Sanitation Council ODA - Overseas Development Administration (U.K.) O&M - Operation and Maintenance PCU - Programme Coordination Unit PPF - Project Preparation Facility PSRP - Public Sector Reform Project RDC - Resident Development Committee REAP - Revenues Enhancement Action Plan SBD - Standard Bidding Documents SDR - Special Drawing Rights SIAP - Systems Improvement Action Plan SOE - Statement of Expenditure STP - Settlement Technical Plan TA - Technical Assistance TOR - Terms of Reference UNCHS - United Nations Center for Human Settlements URWSP - Urban Restructuring and Water Supply Project WSDG - Water Supply and Sanitation Development Group WSS - Water Supply and Sanitation ZCCM - Zambia Consolidated Copper Mines  ZAMBIA URBAN RESTRUCTURING AND WATER SUPPLY PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. CREDIT AND PROJECT SUMMARY ................................................................ i-iv Chapter 1: SECTOR BACKGROUND ............................. ................................... I A Country Background .................................................................1 B The Urban Context ................................................................ 2 C Urban Water and Sanitation ................................................................ 3 D Bank Experience in the Urban and Water Supply Sectors .................................................. 5 E Strategy and Approach to the Sector ................................................................ 7 F Rationale for IDA Involvement ................................................................ 8 G Related Donor Activities ................................................................ 9 Chapter 2: THE PROJECT ................................................................ 10 A Project Origin and Formulation ................................................................ 10 B Project Objectives .................................................................11 C Project Description ..............................1.................................. 1 D Project Implementation ................................................................ 17 Chapter 3: PROJECT COST ................................................................ 20 A Financing Plan ................................................................ 21 B Flow of Funds ................................................................ 21 C Disbursements ................................................................ 22 D Procurement ................................................................ 23 E Civil Works ................................................................ 24 F Equipment ................................................................ 25 G Consulting Services and Training ............................. ................................... 25 H Procurement Management ................................................................ 26 I Accounting and Auditing ................................................................ 26 J Bank Supervision and Reporting Requirements .............................................................. 27 Chapter 4: PROJECT BENEFITS AND RISKS ................................................................ 28 A Primary Project Justification ................................................................ 28 B Key Indicators of Success ................................................................ 29 C Environmental Impact ................................................................ 29 D Poverty Alleviation ................................................................ 31 E Sustainability ................................................................ 31 F Project Risks ................................................................ 32 Chapter 5: AGREEMENTS REACHED AND RECOMMENDATION . . 33 A Conditions of Credit Effectiveness ................................ . ............................... 33 B Conditions of Disbursement: ................................................................ 33 C Agreements Reached During Negotiations ................................................................ 33 D Recommendation ................................................................ 34  Annexes 1 Items in Project File 2.1 Description of Investment Component 2.2 Description of Demonstration Component 2.3 Local Government Finance Issues 2.4 Local Government Management Issues 2.5 Organization Chart of DISS in MLGH 2.6 Project Implementation Schedule 2.7 Monitoring and Evaluation Framework 2.8 Supervision Plan/Table of Contents of Project Implementation Plan 3.1 Detailed Cost Tables 3.2 Detailed Disbursement Schedule 3.3 Audit Requirements 4 Environmental Analysis Map: IBRD No. 26587 This report is based on findings of Bank missions which visited Zambia in June/July and October 1994, comprising Messrs/Mmes. Imogene Jensen (Sr. Economist and Task Manager), Brian Binder (Municipal Finance Specialist), Roy Brockman (Institutional Specialist ), Hilary Cottam (Urban Poverty Specialist), Dave DeGroot (Urban Development and Housing Specialist), Knut Haukland (Water Engineer), Vijay Jagannathan (Sr. Water and Sanitation Specialist), John Kalbermatten (Water and Waste Management Engineer), Catherine Seibert (Financial Analyst), John Shepherd (Water Resource Management Specialist) and Terry Sketchell (Municipal Finance Specialist). Messrs. Jaime Roman and Art Fields provided procurement advice. Mmes. Joyce Chinsen and Robin Harris provided administrative support in the preparation of the project. Mr. William Dillinger is the peer reviewer. Mr. Jeffrey Racki is the Division Chief, Ms. Phyllis Pomerantz is the Country Operations Manager and Ms. Katherine Marshall is the Director.  - 1 - ZAMBIA URBAN RESTRUCTURING AND WATER SUPPLY PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Zambia Beneficiary: Ministry of Local Government and Housing; City Councils of Lusaka, Kitwe and Ndola; Municipal Councils of Chingola, Kalulushi, Livingstone, Luanshya and Mufulira; and District Councils of Kafue and Mazabuka Poverty: Program of targeted interventions Amount: SDR 21.3 million (US$33.0 million equivalent) Terms: Standard IDA terms with 40 years maturity Commitment Fee: 0.50 percent on undisbursed balances, beginning 60 days after signing, less any waiver  - ii - Estimated Project Costs: (USS million) LOCAL FOREIGN TOTAL A. Water Supply and Sanitation Rebabilitation Water Supply 2.8 8.7 11.5 Sanitation 2.8 2.8 5.6 TA for water and sewer system design and management 0.9 10.3 11.2 Sub-total 6.5 21.8 28.3 B. Conmnunity-based Demonstration Projects Community-based projects 1.1 3.9 5.0 Institutional Support 0.5 0.1 0.6 Sub-total 1.6 4.0 5.6 C. Reform and Capacity-Building Water Sector Management and Policy Studies 0.4 1.6 2.0 Planning, programming and sectoral reform 0.7 4.1 4.8 Project-related TA (accounting support, audit fees, and 0.2 0.2 0.4 procurement) Sub-Total 1.3 5.9 7.2 D. PPF Refrnancing (related to C (Hi) above) 0.2 0.8 1.0 Total Base Cost 9.5 32.5 42.0 Physical Contingencies 0.6 1.3 1.9 Price Contingencies 0.6 2.0 2.6 TOTAL PROJECT COST 10.8 35.8 46.6 Taxes 0.6 - 0.6 Project Cost, net of taxes 10.2 35.8 46.0 Estimated Financing Plan: US$M % IDA 33.0 71 NORAD 11.2 24 Goverrnent 2.4 5 TOTAL 46.6 100 Estimated IDA Disbursements: Fiscal Year Ending June 30 (USS million) Year 1995 1996 1997 1998 1999 2000 2001 Annual 3.3 6.6 8.0 6.9 5.0 3.2 Cumulative 3.3 9.9 17.9 24.8 29.8 33.0 % of Loan Economic Rate of Return: Not applicable. To be calculated as part of project design consultancies. Staff Appraisal Report: 13853-ZA Map: IBRD No 26587  ZAMBIA URBAN RESTRUCTURING AND WATER SUPPLY PROJECT Chapter 1: SECTOR BACKGROUND A Country Background 1.1 Zambia's economy has been in decline since the mid-1970s, as evidenced by Gross Domestic Product (GDP) growth which fell from 3.7 percent per annum in the early 1970s to an average of only 1.1 percent during the 1974-90 period. In response to falling copper prices and deteriorating terms of trade, the Government of the Republic of Zambia (GRZ) during the 1970s and 1980s undertook substantial borrowing to the extent that Zambia's debt is now one of the highest in the world relative to national output and exports. Sporadic attempts at reform during the 1980s foundered, public sector intervention in the economy discouraged private and local initiatives, and by 1990 Zambia was classified as a low income country. 1.2 Over the past four years Zambia has instituted and vigorously pursued an ambitious national program of economic reform. The present government, which came to power in 1991, has dismantled nearly all price and exchange rate controls, eliminated import and export licensing, decontrolled interest rates, lowered and compressed tariff rates and brought inflation down to manageable levels. Comprehensive programs of parastatal privatization and civil service reform have been initiated. While preparing the way for increased private investment, Government has moved to increase efficiency as the primary short term means to boost productivity. However, the success of the reform program overall will depend not only on efficiency improvements, but also on economic diversification and expansion. Infrastructure has a fundamental role to play in creating an enabling environment for such growth and development. 1.3 The ability of GRZ to sustain its sweeping program of reforms will, in Zambia's newly democratic system, depend upon continuing political support engendered by concrete results. The most direct expression of these results will be improvements in living standards, which have been declining in real terms since 1970. Key policy initiatives intended to produce these improvements include rehabilitation and extension of infrastructure and services, devolution of responsibility and authority from central to local government, and reform of distorted land markets and cumbersome delivery systems. Current estimates indicate that annual GDP growth rates of five percent could be attained through higher productivity and increased investment. 1.4 Reform efforts are proceeding throughout all sectors of the Zambian economy. All of these efforts face common constraints: (a) the accumulation over more than two decades of extensive, inappropriate policies and regulations; (b) deteriorating capacity of existing investments to support economic activities; and (c) limited human and financial resources with which to implement new policies, rehabilitate existing systems and extend sustainable services to the majority low income population. Even short term gains in efficiency and productivity in all economic sectors will depend to a significant degree upon successful resolution of these common constraints.  -2 - B The Urban Context 1.5 Overview. Zambia is the third most highly urbanized country in sub-Saharan Africa. Out of a total of 8.3 million residents (1992 World Bank Atlas), 42 percent or nearly 3.5 million are estimated to live in urban areas. Over 60 percent live along the line of rail which connects Livingstone in the South with Ndola in the northern Copperbelt region. In the 1990 census (the last detailed count taken), Lusaka, the capital and largest city, had a population of 870,000. The key Copperbelt cities of Ndola and Kitwe each had populations of over 400,000. 1.6 During the 1960s and 1970s, the production and export of copper led to the expansion of the urban economy. Zambia experienced high levels of rural-urban migration as Zambians sought to benefit from urban-based employment opportunities and subsidized food and infrastructure. However, the decline in the economy eroded many of the benefits of urban living and the Zambia Poverty Assessment (Report No. 12985-ZA dated November 30, 1994) estimates that up to 40 percent of the urban population currently lives below the poverty line. Although outmigration has not occurred commensurate with urban economic decline, urban growth rates have slowed from a rate of 5.8 percent between 1969 and 1990 to 3.7 percent per annum for the period between 1980 and 1990. Urban growth today is thus a function of natural growth, on the basis of which it can be predicted that there will be more than five million Zambians living in urban areas by the year 2000. 1.7 Two central themes arise from the copper-based development of Zambia's cities. First was the underlying assumption dating back to the colonial period that Zambia should remain essentially rural and that towns should not become a permanent home for the majority of workers. From the outset then, legal tenure and the provision of housing or amenities for non-formal residents were not priorities. In practice, rigid regulations governing land use directed organic growth to informal settlements. Over time these residents have become the majority and currently comprise nearly 60 percent of all city dwellers. Consistent with past policies, this majority has limited or no access to formal sources of potable water, sanitary means of solid and human waste disposal, and basic health and educational services. This in turn makes them prone to environmental health risks such as cholera, typhoid and dysentery. 1.8 Second, in the period after Independence, it was assumed that copper export earnings could support sophisticated infrastructure for those who would be Zambia's permanent urban dwellers. Most of Zambia's urban productive and infrastructure capacity in use today was created during the boom years of 1965-74, is costly to maintain and operate, and restricted to formal business and settlement areas. A consequence of this historical development is that Zambia's cities are now spatially segregated, with dilapidated, often inappropriate infrastructure for which costs are not recovered from consumers. Cost recovery has not been emphasized; for example, even as late as 1979, residents in council housing were consuming 200 liters of water per capita per day without paying for it. Furthermore, urban planning continues to be captured by the regulatory framework of these standards. These themes therefore suggest that the challenge in the urban sector is to reconceptualize the planning and provision of urban infrastructure, to improve incentives for its efficient operation and management, and ensure that all future investments are driven by what consumers want and are willing to pay for, rather than by central planning processes.  1.9 Urban Infrastructure. The decline of urban services and infrastructure can be directly linked to the decline in productivity of the urban formal sector, which in turn has a reinforcing negative impact on the potential growth of the urban economy. Industrialists for example have cited the lack of basic urban infrastructure as hampering growth, while the demand for extension and rehabilitation of urban services and infrastructure far exceeds available resources. Since 1989 local government capital investments have decreased by almost 80 percent in real terms in the 12 municipalities for which data are available. Where investments have taken place the focus has tended to be on building new infrastructure rather than on rehabilitation and maintenance. Little attention has been given to the sustainability of such investments, and given the cost of the improvements being undertaken, few funds remain for expansion or even maintenance. Furthermore, the strengthening of existing urban infrastructure addresses only a part of the problem. The Zambia Poverty Assessment illustrates the effect on the poor urban majority who, in the face of decreasing wages and employment, must invest more resources in terms of time and money to compensate for the absent or deteriorating services. 1.10 Urban Policy Development. GRZ's primary policy initiative to date in the urban sector has been the devolution of responsibility and authority to local governments. Within months of assuming office in 1991, GRZ passed the Local Government Act (LGA) which substantially increases the administrative and financial autonomy of the country's 22 city and municipal governments. Central government transfers of domestic revenues to local governments have virtually ceased, despite concurrent expenditures on their functions. However, before councils can be held fully responsible, central ministry powers and obligations contained in the LGA need to be changed. For example, the LGA states grants must be provided and thus does not currently reflect the government's intention to eliminate such grants. Other conflicts include central government control over civil service staffing and remuneration at the local level. Nonetheless, while the Ministry of Local Government and Housing (MLGH) retains important and possibly conflicting regulatory functions under the LGA, the main responsibility for planning and implementing urban development now rests with Zambia's local governments. Technical assistance provided as part of the Planning Management and Capital Programming subcomponent will lay the foundation for the development of a comprehensive urban policy and strategy, including changes as needed to the legal and regulatory framework. C Urban Water and Sanitation 1.11 As indicated, at Independence Zambia inherited and initially managed to maintain core urban infrastructure built to high standards. As the country's economy deteriorated, however, maintenance of this infrastructure has been deferred to the point where many urban water and sewerage systems are now on the verge of collapse. This decline in urban services has adversely affected all sectors, including the investment in and development of the private sector that is essential to the growth of the economy. Throughout the country, due to systemic failures, individuals and firms are increasingly forced to provide their own water supply, sanitation and other infrastructure, and to bear the corresponding costs. This represents a significant impediment to the growth and prosperity of these firms, and where they compete with firms that operate in an environment of adequate infrastructure and services, to put them at a competitive disadvantage. 1.12 The impact of the deteriorating urban services has been most severe for the 40 percent of the urban population living in poverty, who bear disproportionate financial and health costs associated with poor water and sanitation. While existing supplies are directed to upper and high income consumers  - 4 - who do not apparently appear to pay the full cost of the services, lower income residents in informal settlements appear to pay excessively high prices, in terms of cash and time, for informal access to low quality water. Many of theses costs, such as those associated with time spent in water collection and risks to health and personal safety, are predominantly borne by women. Perhaps one of the most devastating impacts of the decay in urban infrastructure, with particular impact on the urban poor, is the steady increase in waterborne diseases. Outbreaks of cholera have been recorded in 11 urban centers in recent years and serious infrastructure maintenance and operational deficiencies have been identified in the 22 cities and towns that comprise virtually the entire urban population of the country. Household surveys in poor areas indicate that the current water supply facilities represent neither what the poor want nor what they are willing to pay for. These same surveys identify potable water supply as the foremost priority for improvement. 1.13 Water Policy Development. While developments in the water sector are representative of a wider array of national policy initiatives affecting the urban sector, efforts to rationalize the policy framework and clarify responsibilities are farther along than in most sub-sectors related to urban infrastructure. To overcome a host of problems, a Programme Coordination Unit (PCU) was established in 1993 with the task of recommending to GRZ how best to reorganize the water supply and sanitation sector. The PCU, which reports to the Permanent Secretary of the Ministry of Energy and Water Development (MEWD), is composed of the MEWD, MLGH, National Commission for Development Planning, Ministry of Health, Ministry of Environment and Natural Resources, Environmental Council of Zambia, National Council of Scientific Research, Ministry of Works and Supply, and Ministry of Agriculture, Food and Fisheries. The specific mandate of the PCU is to: (a) recommend policy reforms; (b) clarify the respective responsibilities of the various actors in the sector; (c) propose an appropriate framework for planning, development, operation and maintenance of the infrastructure in the sector; and (d) determine how best to strengthen, restructure, and/or reform the various institutions with responsibilities for service provision. The PCU is supported by a donor-financed secretariat (financed by NORAD and GTZ), the Water Supply and Sanitation Development Group (WSDG), to provide technical and policy support. 1.14 Early in 1994, Cabinet formally accepted a set of sector principles intended to serve as guidelines in the formulation of proposals for the reorganization of the sector. These include: (a) separation of water resource management from water supply and sanitation; (b) separation of regulatory and executive functions; (c) devolution of authority to local authorities and private enterprises; (d) full cost recovery in the long run; (e) human resource development leading to more effective institutions; (f) use of technology appropriate to local conditions; and (g) increased GRZ priority and budget spending to the sector. 1.15 In December 1994, a Cabinet Memorandum was passed which clarified the organizational structure and respective roles of the different entities involved. Adoption by GRZ of a sector strategy which defines sector restructuring was a condition for second tranche release under the Economic and  Social Adjustment Credit (ESAC)(Cr.2577-ZA); the condition was met by Cabinet's approval of this memorandum. Key elements of this strategy are as follows: * First, the PCU would be transformed into the National Water and Sanitation Council (NWASCO) answerable to MEWD. This statutory body would be responsible for (i) development of policies and standards; (ii) preparation of strategic plans and investment programs; and (iii) monitoring and regulating water supply and sanitation service delivery and the organizations providing these services. * Second, MLGH would be responsible for all executive functions related to water supply and sanitation. It would assist councils in the performance of their water and sanitation delivery functions in the urban, peri-urban and rural areas. Capital development funds (GRZ and external) for water supply and sanitation would be channeled through the recently established Department of Infrastructure and Support Services (DISS) in MLGH. DISS would facilitate the design, programming and implementation of local authority infrastructure projects, and ensure that local authorities have access to the resources needed to construct and manage critical infrastructure on a sustainable basis. * Third, feasibility studies and pilot programs for establishing commercially oriented water supply and sanitation utilities would be commissioned in the Copperbelt and Northwestern Province to represent urban and rural conditions, with the former to be supported under this project (para 2.16). D Bank Experience in the Urban and Water Supply Sectors 1.16 Bank experience in both the urban and water sectors in Zambia has been limited. Bank experience in the urban sector is restricted to the Lusaka Squatter Upgrading and Site and Services Project (Ln. 1057-ZA) which was approved in late 1974 and completed at the end of 1981. This project was one of the Bank's first urban initiatives in Africa, and was implemented during a period of economic difficulty in Zambia, as copper prices dropped 40 percent in the midst of the international oil crisis and escalating regional conflicts. Nevertheless, the Lusaka project met its physical development objectives and established a system of community participation that, while no longer current today, was a model in the urban development field for that era. 1.17 The Lusaka project eventually provided more than 30,000 new and improved homesites (communal water supply facilities, etc.) in the informal settlements of the capital city and established a significant cadre of Zambian professionals with expertise in low-cost housing, many of whom remain in government employment. The project did not, however, achieve financially sustainable operations and associated institutional reforms were not fully realized. Among the lessons learned, positive and negative, are the following. First, the presence of a relatively large concentration of houses replete with basic infrastructure in Lusaka led to the emergence of economic activities in the informal sector. Further, as was highlighted in the Zambia Poverty Assessment, the granting of legal status to participating compounds in the project enabled them to become centers of economic activity which persist today. The significance of regularizing land tenure is thus a critical lesson learned from the Lusaka project. Second, the delivery of public services failed for a variety of reasons, but most fundamentally because:  (i) water supply service levels were not based on what residents wanted; (ii) technical norms were often unrealistic; (iii) community organizations were expected to operate and maintain facilities even though they were not consulted during planning and implementation; (iv) cost recovery was through a consolidated service charge for water, without an effective system of sanctions against defaulters, other than to cut water supply at communal taps (one for 25 houses); and (v) apathy of city council officials, due in part to confusion over who was responsible, exacerbated low cost recovery. 1.18 Bank experience in the water and sanitation sector in Zambia is equally sparse. In this sector, the Rural Water Supply Project Credit (Cr. 1362-ZA) was intended to provide piped water to 29,000 people in four main towns and point system water supply to an additional 110,000 people in six rural districts in Northern Zambia through the construction of wells and boreholes. The physical objectives of the project were largely met, although implementation was hampered by IDA's suspension of disbursements to Zambia from 1987-91. The project was deemed unsuccessful and unsustainable, largely because GRZ failed to impose the financial control systems and tariff increases necessary to cover operating and maintenance costs. Individual districts had little incentive to improve their revenue collection because all revenues were credited to central government. A positive outcome, not part of the project, was that the project enabled IDA to assist in the initial GTZ-funded institutional study for reorganization of the water sector which has led to the policies currently being introduced by GRZ. 1.19 Although not directly a part of Bank projects, several innovations in intermediate sewerage technologies were attempted in the 1950s and 1960s in the Zambian cities. Sewered aquaprivies were established in low income council housing on the premise that residents consuming less water could be serviced by lower cost low volume wastewater disposal systems. However, a World Bank review of these technologies in 1978 indicated that as there was no check on water consumption (owing to a lack of enforcement of tariffs), water consumption was excessive, which completely destroyed the validity of the "intermediate" solutions. Seventeen years later these houses have virtually no water supply because the public water supply system has almost collapsed, and most residents have reverted to primitive pit latrines. 1.20 With the benefit of hindsight, and experience from the Lusaka project, the following lessons can be learned. First, the underlying assumption that "appropriate technology" could be delivered through existing operationally inefficient institutions did not hold up to experience. Second, the presumption that the poor would be satisfied with a centrally determined level of service proved incorrect. The poor, in fact, were investing time and cash to acquire privately provided water, and had definite preferences as to service levels and willingness to pay. Third, experiences from diverse countries suggest that under suitable incentive structures, community-based organizations in low income areas are often more successful in tackling local operational problems, such as system breakdowns, and recovering operation and maintenance costs, when compared to large water and sanitation utilities.  E Strategy and Approach to the Sector 1.21 The objective of the Bank's country assistance strategy (last discussed in conjunction with the Economic and Social Adjustment Credit (Cr. 2577-ZA), dated March 1994) is to assist GRZ in its efforts to achieve sustainable economic growth and thereby reduce poverty. Although the broad-based reforms adopted by GRZ have been both courageous and significant (para 1.2), the reforms have been insufficient to secure the level and nature of supply response required to achieve the overriding goal of decreasing poverty. To assist GRZ, the Bank's overall strategy for FY96-98 is to encourage sustainable economic growth by continuing to support macroeconomic stabilization and structural reform policies, promoting further private sector development and greater public sector efficiency, and increasing direct assistance to the poor and vulnerable groups. With respect to infrastructure, key elements of this strategy are to: (a) improve the enabling environment for private sector growth through investments in infrastructure and human resources; (b) decentralize and restructure the delivery of infrastructure and services to enhance efficiency and sustainability; and (c) remove subsidies and encourage private sector participation in the provision of public services. This project would help to remove constraints to economic growth and diversification by addressing issues of public service reform with particular emphasis on devolution of responsibility to local levels, adoption of demand-based approaches to infrastructure planning and implementation, improvements to revenue generation and cost recovery for municipal services overall, and development of human resources. 1.22 Strategic objectives of the project include creation of commercially-oriented water and sanitation utilities, near term improvements in critical urban infrastructure and services with particular emphasis upon laying the groundwork for service improvements to the largely unserved urban majority, in concert with the institutional and policy reforms necessary for equitable and sustainable sectoral growth in the medium term. Water supply and sanitation have been accorded the highest priority for near term rehabilitation, on the one hand because of direct links to health and productivity, the extent of the population currently unserved, and the significant fixed investments currently in danger of collapse; and on the other because of the progress already made in legislative reform and on the policy agenda. Lessons learned from efforts in water supply and sanitation to encourage greater use of commercial practices, foster accountability of service providers to service consumers, and manage infrastructure at the lowest appropriate level, will in turn be used to shape the medium-term approach to the provision of urban infrastructure and services overall. 1.23 To achieve these overall objectives, the Urban Restructuring and Water Supply Project (URWSP) aims particularly to assist the participating urban local authorities to: (a) efficiently and equitably manage existing infrastructure and services, based on what residents want and are willing to pay for;  - 8 - (b) provide incentives for employees and organizations responsible for operations and maintenance of urban services to work in accordance with transparent and consistent performance criteria; (c) foster accountability of civic planners and service providers by ensuring that key decisions on service level choices are made at the lowest appropriate level; and (d) test out institutional processes through which future investment programs represent value for money for all service users in urban towns, and are effective in checking urban environmental deterioration. 1.24 Consistent with this phased approach, it will be important that planning and policy-related decisions await the completion of the relevant project investigations. Thus each participating local council will be required to agree, as part of the subsidiary legal agreement, that they will protect dwellings and structures within community compounds and informal settlements from demolition, unless this demolition is required to provide essential urban services. However, such demolition would be subject to prior review by IDA and must be conducted in line with IDA resettlement policies. Under the Planning, Management and Capital Programming technical assistance, the "as built" plans of each council will be reviewed, particularly as they have deviated or invalidated structure plans, sectoral master plans, and existing provisions of the Town and Country Planning Act. Findings will be discussed with all parties, and development plans, zoning ordinances and other related regulations will be revised accordingly. 1.25 Once the medium-term framework is in place, a follow-on project is envisioned that would extend the lessons learned in water supply and sanitation to the provision of urban infrastructure and services overall. F Rationale for IDA Involvement 1.26 The range and complexity of problems facing urban areas clearly point to the need for integrated and appropriate urban and water policy frameworks that would not only guide the transition from subsidized infrastructure and devolution of service delivery from the central government to local entities, but also address appropriate directions for the medium and longer term. Given the fragmentation of efforts to date, IDA is well placed to assist GRZ in the development of an integrated approach involving the establishment of an appropriate policy framework, rehabilitation of essential urban services, and improvements in urban efficiency as well as managerial and financial capacity. IDA's involvement in a range of related sectors (roads, health services, education, poverty alleviation) would be key in playing this integrating role. The project further builds upon and facilitates implementation of the overall policy framework for water supply and sanitation, the development of which was supported by the last adjustment credit (para 1.15). By beginning to address the needs of urban residents who currently fall outside the formal structure, the project would also help to improve the level and sustainability of services to the poor.  9- G Related Donor Activities 1.27 As noted previously, the German aid agency GTZ and the Norwegian aid agency NORAD have had long-standing relationships in the water sector in Zambia (para 1.13); they are particularly active at the level of MEWD in providing technical support as part of the Secretariat. They and several donors have been or are involved at the local and/or community level, including UNCHS, JICA and Irish Aid. There have also been a number of NGO initiatives in the water sector, among them World Vision and Catholic Charities. The donor community has been less involved in the urban sector. The British aid agency, ODA, has just begun an large-scale initiative with MLGH aimed at improving the accounting and financial skills at the local government level with the Local Government Support Project (LOGOS). The proposed IDA credit has been designed to complement and build upon the ongoing donor support being provided in the water and urban sectors in Zambia.  - 10- Chapter 2: THE PROJECT A Project Origin and Formulation 2.1 The virtual cessation of subsidies which followed the 1991 revision of the Local Government Act (LGA) (para 1.10) left Zambia's local councils -- already incapable of providing basic services to their informally settled, low income majority populations -- unable to prevent the rapid deterioration of existing urban infrastructure. Outbreaks in urban areas of cholera and other infectious diseases related to inadequate safe water supply prompted GRZ, in late 1993, to request IDA assistance to effect short- term rehabilitation of critical urban water and sanitation systems, and delineate more extensive reforms required to promote equity and local self sufficiency in infrastructure and service provision, maintenance and operations. 2.2 The project has been formulated in light of GRZ's broader reform objectives including poverty alleviation, decentralization of authority and responsibility, encouragement of private sector and local initiatives, and promotion of efficient sectoral economic performance. The project's design explicitly recognizes the immediate need to address critical water and sanitation system rehabilitation requirements while initiating the longer term reform processes, without which broader investments in urban infrastructure and services would be unsustainable. With respect to long-term water supply development, appropriate consultations have been held with the WSDG, the PCU support unit. Project design has been guided by extensive consultation with stakeholders, including results from the Bank- supported Zambia Poverty Assessment and follow-up interviews with residents in peri-urban areas. Formal consultation with MLGH and all local councils, including both elected and appointed officials, proposed for participation in the project has been achieved through a series of workshops and participatory exercises at the community level. This process will continue throughout project implementation and phased infrastructure design and investments will be tied to informed, representative decisions achieved over time through broad consultation. 2.3 Formulation of the project has emphasized development of capacity within existing ministerial, council and community structures. Overall project supervision will be achieved through DISS in MLGH (para 1.15), with the 10 participating councils and their constituent communities playing the key roles in formulating the designs and reforms necessary to sustain local investments. In order to achieve efficient utilization of resources, the proposed project would be implemented in close coordination with two streams of relevant donor-financed urban and water supply sectoral efforts. The former includes the LOGOS Project within MLGH, which seeks to strengthen the local government capacity and thereby facilitate the devolution of responsibility to the local councils, both urban and rural; initial activities focus on local government finance, performance appraisal and participatory planning (para 1.27). The latter includes GTZ and NORAD support to the PCU and its technical arm the WSDG, first to devise and subsequently implement an integrated water sector policy and program (paras 1.13-1.15).  B Project Objectives 2.4 The objectives of the project, to be achieved over five years, are to: (a) provide immediate solutions to the most severe water and sewerage infrastructure deficiencies in nine key urban areas; (b) test out community-generated and managed water and sanitation demonstration projects which meet articulated needs at an affordable price while strengthening local councils' capacities to support community based initiatives in Lusaka and the participating Copperbelt councils; and, (c) initiate broader institutional and financial reforms required for providing organizational incentives for investing in, operating and maintaining infrastructure based on residents' perceived needs and willingness to pay. C Project Description 2.5 The overall approach of the project is to address high priority needs of the urban populations and, based on the lessons learned as each component is structured and implemented, begin the process of reorienting and restructuring the way infrastructure and services are provided. First, based on the priority attached to the water sector expressed in various fora by central and local government and by residents themselves, the project proposes to use water supply as an entry point for developing future investment programs, initially concentrating on rehabilitation, in formal settlement areas and testing institutional options in peri-urban, unserviced areas. Both activities focus on a participatory demand- based approach, and as such, seek to break the persistent cycle of non-payment and inadequate service provision. Second, technical assistance and studies will be provided to support immediate improvements in participating council's management capacity and propose alternative methods of organizing services and evaluating trade-offs. Third, capacity building assistance will look to the medium-term and outline how future urban policy can avoid mistakes of past policies. Project Components 2.6 The project comprises three components as follows: a) water supply and sanitation system rehabilitation (US$28.3 million, 67 percent of total project base cost); (b) community-based water and sanitation demonstration projects (US$5.5 million, 13 percent of total project base cost); and (c) sectoral and local government reform and capacity building (US$8.2 million, 20 percent of total project cost).  - 12 - The project's reform and capacity building component will be carried out in 10 key urban areas, including the Copperbelt councils of Ndola, Luanshya, Kitwe, Kalulushi, Mufulira and Chingola and the councils of Lusaka, Kafue, Mazabuka, and Livingstone in the south. Lusaka will not be included in the rehabilitation component of the project due to significant investment committed by other donors. Only the Copperbelt councils and Lusaka will initially participate in the demonstration project component as these projects will require extensive supervision; expansion of this component will be considered in the course of the mid-term review. Together, the 10 councils participating in the project serve more than 3.5 million people, and comprise more than 80 percent of Zambia's current urban population. Water Supply and Sanitation Rehabilitation (US$28.3 million) 2.7 The rehabilitation component of the project will restore water treatment facilities to design capacity and ensure potability of water supplied to more than 1.5 million individuals in nine urban centers as summarized below: Council Total Population Pop. with Household Estimated Total Population (estimate) Connections Population Served Served by Standpipes Chingola 370,000 207,000 11,000 218,000 Kafue 200,000 120,000 22,000 142,000 Kalulushi 150,000 90,000 90,000 Kitwe 400,000 127,000 120,000 247,000 Livingstone 120,000 70,000 18,000 88,000 Luanshya 200,000 50,000 50,000 Mazabuka 42,000 11,000 21,000 32,000 Mufulira 200,000 134,000 20,000 154,000 Ndola 600,000 348,000 198,000 546,000 TOTAL 2,282,000 1,157,000 410,000 1,567,000 Restoration of existing treatment facilities to design capacity will increase bulk water supply in the nine councils by at least 30 percent overall. 2.8 This component of the project was originally based on a government-sponsored consultant survey in 1993 of the water and sewerage system rehabilitation requirements of 22 urban councils. An update of this survey was carried out in the second quarter of 1994, sponsored by NORAD. Three Bank preparation missions during 1994 then evaluated the identified needs with particular emphasis upon immediate requirements to prevent the collapse of existing facilities, sustainability and the degree  - 13 - to which proposed investments address priority needs of the council populations. As a result, two levels of priority rehabilitation measures have been identified, as follows. 2.9 Level I rehabilitation requirements comprise about two thirds of proposed investment and will address the most urgent, public health-related deficiencies in the water and sewage treatment works of the nine participating councils. These urgent improvements mainly include rehabilitation and replacement of treatment equipment and facilities leading to immediate improvements in the potability and restoration of bulk water supply and the reduction of the most critical water contamination. Level I improvements also include training in leak detection and remedial measures. Level 11 rehabilitation will focus mainly upon distribution systems and sewerage. This work will be designed and implemented in light of each council's performance in enacting necessary reforms and based upon thorough consultation with consumers regarding design and pricing alternatives, as well as the results of the environmental analyses. More complete descriptions of the works to be carried out in each of the participating councils are contained in Annex 2.1. 2.10 A program of three consultancies will support the sustainable rehabilitation of water and sewerage systems in the participating councils. The first two, described in this paragraph below, will provide short-term and transitional assistance, while the third (para 2.16(a)) provides the basis for determining sustainable, commercially-oriented solutions for managing water supply and sanitation services. NORAD will finance both the detailed design of the two levels of rehabilitation requirements (a), and the construction supervision, management and training contracts for a period of two years (b). The latter will provide a transition period during which appropriate long term solutions can be evaluated and implemented. These include: (a) design of Level I and II rehabilitation requirements including acquisition of equipment and training in leak detection. This package of assistance is scheduled to commence in the third quarter of 1995. The TOR, developed with GRZ, were agreed and finalized at negotiations' . Level I design work, for which extensive design and consultative work has already taken place, will be completed as quickly as possible in order to address public health risks. Level II design work, involving mainly sewerage, will be guided by a process of consultation regarding design alternatives, affordability, and community priorities. This consultancy includes an environmental review of the proposed works, including specification of and a program for taking any mitigation measures required. (b) construction supervision contract for the duration of the rehabilitation work. (c) management and training (MT) contracts for a period of two years beyond the construction to ensure that rehabilitated systems are operating properly, local staff are recruited and trained, and a smooth transition is made in each participating council to new management systems. These contracts, the detailed TOR for which will be drawn up through the design assistance package, will be closely coordinated with the study of commercially oriented management options (para 2.16(a)). All TOR for the project, other than those to be developed in the course of the described consultancies, are available in the project file.  - 14 - A condition of effectiveness for the IDA credit is Government's meeting all conditions precedent to the effectiveness of the NORAD Grant Agreement. Community-Based Demonstration Projects (US$5.5 million) 2.11 This component of the project is expected to be implemented in about seven peri-urban communities, and to extend water supply to at least 250,000 low income people in Lusaka and the Copperbelt councils. The component has the dual objectives of developing sustainable water supply and sanitation systems in low income urban communities and of testing institutional mechanisms and linkages within and between local councils and participating communities. 2.12 Preparation of this component has built upon lessons learned with previous upgrading projects in Zambia and with approaches to community-based water and sanitation in other countries in which the Bank has been active (see Annex 2.2). A process of systematic client consultation during project preparation was conducted and resulted in two broad conclusions which have shaped the demonstration component design. First, community demands for differentiated service levels can only be accommodated with a sufficiently flexible, consultative preparation process. Second, the project seeks to test out institutional arrangements that provide incentives for both communities to exercise choice and local authorities to respond to these choices. 2.13 These conclusions have led to the following design principles for projects proposed for funding under this component: (a) projects must be community-generated; communities should have a choice in the design, implementation, monitoring and management of the project; (b) projects must be within the technical, financial and managerial capacity ot ommmunitiea; these capacities will vary among communities, but in all cases an economic test based on demand considerations (e.g., based on services they want and are willing to pay for) will play a screening role; (c) councils must have access to technical assistance to enable them to respond to and effectively participate in processes at the comrnunity level; sustainability of the project approach hinges upon this principle and the demonstration component will build upon institutional support efforts initiated within councils through UNCHS and ODA projects, and intermediation support from the project; and (d) each participating council should participate fully in the design of component implementation procedures and in defining appropriate roles; as with communities, the capacities of councils will vary and their roles in the demonstration project must be consistent with available resources and with the policy objective of delegating responsibilities to the lowest appropriate level. 2.14 In order to support capacity building at the community level and strengthen institutional linkages between communities and councils, assistance will be provided by experienced NGOs in the action planning process leading to demonstration project implementation and operations. In each of the participating councils, the demonstration project planning process will establish the basis for broader participatory planning for multi-sectoral service provision in low income communities in future urban  - 15 - investment programs. The project will support contracts with NGOs for this purpose. To strengthen this learning by doing approach, the Bank will review the first technical plans from each participating municipality as a condition of disbursement for each subproject. A fuller description of the demonstration component is contained in Annex 2.2. Reform and Capacity Building (US$8.3 million) 2.15 An integrated program of policy and institutional reform and capacity building is required to achieve the proposed project's objective of promoting sustainable, locally-driven and managed development processes. The training, data gathering and analysis, and planning needed to ensure establishment of informed, decentralized decision making processes will be supported through two sets of capacity building assistance. The first set, which includes an assessment of water system management options as well as water sector resource and policy studies, addresses issues and requirements specific to the water sector. The second set provides support initially to strengthen local government capacity in the short-run and then, building in part on lessons learned in water supply and sanitation, to provide the foundation for improved management of urban infrastructure and services overall. TOR and implementation schedules for all consultancies and studies were finalized during negotiations, except where the TOR are to be developed in the course of other studies as noted below. 2.16 Water and Sewerage Management. (a) Examine water system management options for the participating councils in coordination with the design activities described in para 2. 10(a) above and in fulfillment of the Cabinet decision to investigate the feasibility of commercially oriented water supply and sanitation organizations (para 1.15). The Cabinet memorandum directed PCU to undertake feasibility studies on the establishment of such organizations in the Copperbelt and Northwestern province; consistent with the urban focus of this project, this assistance will provide the basis for implementing the commercially oriented management structures specified in the Copperbelt. Among other things, this study will ensure that each council's rehabilitation works are designed and implemented within a framework of tariffs and incentive structures that is financially and economically feasible. Because the study is intended to pilot the concept for other areas, IDA and PCU will jointly supervise the consultants' work. Given its GRZ mandate and its broad representation, the PCU will provide a forum for review and consideration of proposals developed in the course of the study. These TOR, developed with GRZ, in consultation with PCU, were agreed and finalized at negotiations. (b) Execute water sector policy studies necessary to integrate urban water management with national and regional strategies. First priority will be given to a study of the water resources and environmental management requirements of the Kafue River system along which the majority of the councils participating in the project are located. The objective of this study is to: (i) establish a monitoring system which will provide the data needed to develop a comprehensive environmental and water resource management plan (including the provision of equipment to determine quantity and quality of water at key points of the river system); (ii) determine water needs (quantity and quality) of all users in the Kafue River Basin; and (iii) draft TOR for an environmental and urban resource management study, as well as the management of the  - 16 - monitoring system. The consultant shall draft TOR for the study using, as a point of departure, the proposal prepared by the Environmental Council of Zambia. Particular attention will be given, especially in the Copperbelt, to the effects of mining and related industries upon the river system. Building upon this initial effort, funding is also provided to undertake similar studies in other districts with significant urban populations and/or major industrial activities. Funding is further provided to support continuing input by local governments and communities in the development of national water management strategies and policies. 2.17 Planning. Programming and Sectoral Strengthening. The key to sustainable locally managed urban development in Zambia is the building of capacity within local councils to plan, finance, operate and maintain infrastructure and services. The demands brought about by the simultaneous devolution of authority and cessation of central subventions to local authorities have put additional pressure on existing management capacity (see para 1.10). (For a discussion of financial and management constraints in particular, see Annexes 2.3 and 2.4.) To meet the need for immediate management improvements associated with water system rehabilitation and to assist participating councils to develop the broader management capacity required for councils to provide infrastructure and services over the medium term, the project includes two assistance packages as follows. a) Immediate Local Government Capacity Strengthening. A significant technical assistance and training activity has been designed to support immediate improvements in participating councils' management capacity. This activity, financed under a project preparation facility (PPF), is scheduled to commence in the second quarter of 1995. Emphasis will be placed upon delineation of Revenue Enhancement Action Plans (REAP) and Systems Improvement Action Plans (SIAP). Satisfactory implementation of these plans will constitute a significant benchmark in evaluating performance particularly as related to Level II investments under the proposed project. Close coordination with the recently initiated LOGOS project will ensure significant improvements in council management in the very near term. b) Planning, Management and Capital Programming. This three year package of phased technical assistance and training will provide the central mechanism for integrating the project's infrastructure investments, institutional strengthening and sectoral reform, as well as lay the foundation for a comprehensive urban policy and strategy. The TOR, developed with GRZ, were agreed and finalized at negotiations. Two multidisciplinary regional teams -- one serving Lusaka and the southern councils, the other based in the Copperbelt -- will assist participating councils to learn from and incorporate the consultative planning processes and attendant institutional reforms developed through the demonstration and rehabilitation components of the project into broader urban planning and capital investment programming processes. Improvements in financial and systems management initiated through the PPF-financed activity described above will feed into and be built upon in this package of assistance. Close coordination will be achieved with the LOGOS project, WSDG activities, UNCHS-supported work on development of a national housing policy and other related sectoral efforts. 2.18 Recognizing the varying capacities of the participating councils, assistance will focus upon establishing representative and equitable processes rather than upon producing a predetermined list of consultant-driven reports and plans. Particular emphasis will be placed upon ensuring that all key actors in council jurisdictions, including elected and appointed officials and community and private  - 17 - sector leaders, are systematically involved in all aspects of the planning and programming processes to be established. 2.19 Assistance will be provided to the DISS (for organization chart, see Annex 2.5) within MLGH to establish the monitoring and overall capital programming systems which are central to the role of this newly established department. Short term specialist assistance will also be available in the areas of legislative reform, geographic information systems, environmental planning and regulation, and other areas as required to define and proceed with the urban sectoral reform agenda. Some technical assistance in the form of short term consultancies related to procurement, disbursements and accounting and auditing will provided to the DISS to assist in the management of the IDA credit. Particular emphasis will be placed upon counterpart relationships, both with government officials and with local consultants, to ensure the transfer of skills throughout the course of the assistance. D Project Implementation 2.20 The project seeks to build institutional, financial and technical capacity in the project areas so that future urban investment programs are developed through a decentralized, demand-driven planning process. The project's immediate investment focus on water supply and sanitation infrastructure is not only because water and wastewater deficiencies are recognized as among the most severe service problems, but also because a single-sector investment program enables the project to test out what works and what doesn't work with respect to institutional and financial arrangements before proceeding to multi-sectoral issues. However, for this approach to be effective, all components must be implemented on time, and given the many interlocking relationships among components, implementation must be guided by a comprehensive monitoring and evaluation (M&E) system. 2.21 The project implementation schedule (Annex 2.6) shows key decision points and points of intersection among the consultancies and investment decisions. Among these, the analysis of tariffs under the water system management options study (para 2.16(a)) and the REAP under the PPF for Local Government Strengthening (para 2.17(a)) will feed into the analysis of the appropriate institutional structure for commercially oriented water supply and sanitation organizations. A decision on the Level II investments will depend on their appropriateness given the business plan developed in the management options study. 2.22 The M&E system (for suggested format see Annex 2.7) will be developed to provide the necessary reference points for: (i) a "doing and learning" process via the water and sanitation initiatives taken under the rehabilitation and demonstration project components, in which the quality of technical assistance and investment progress could be monitored and tracked; and (ii) building up an efficient process of collecting information, consulting with stakeholders, training and technical assistance, which in turn will help to ensure that the design of future urban investments are cost- effective and responsive to user's needs. The M&E system will be an initial output under the technical assistance for Planning, Management and Capital Programming (para 2.17(b)). It will track quantitative information showing financial and physical progress in achieving project milestones, as well as qualitative or process aspects to identify problems in the quality of implementation so that appropriate changes could be made when necessary. 2.23 The DISS will have overall responsibility for coordinating implementation of the project and for ensuring that appropriate procedures (e.g. in regards to procurement and disbursements) are  - 18 - followed and reporting done. The establishment of this unit was agreed in the Cabinet Memorandum on the water sector passed in December 1994 (para 1.15), and the full complement of positions is being finalized. The staffing plan, position description, key positions and timetable for doing so were discussed and agreed during negotiations. The filling of key positions will be a condition of effectiveness. As noted (para 2.19), short-term technical assistance will be provided under the project to help DISS develop the internal systems and procedures related to procurement, disbursements and accounting/auditing. 2.24 As a major objective of the project is to begin the process of decentralizing the decision-making process surrounding the provision of urban services, most of the project implementation will be carried out at the local level by local and community authorities. Therefore, in addition to the customary Development Credit Agreement (DCA) signed between the Association and the Government, subsidiary legal agreements between the Government and lower levels of Government will be required. At the first level, MOF/MLGH will sign subsidiary agreements with the local councils which outline their responsibilities in regard to the three components of the project. In regards to the community-based subprojects where the local councils have first line responsibility for implementation (likely to be the case for smaller subprojects such as borehole drilling, where total costs are low), a legal agreement will be signed between the local council and the contractor who will carry out the works. In all cases, however, the community will be responsible for the conceptualization of the subprojects, underscoring the demand-driven aspect of the component. 2.25 Project supervision will consist of structured reviews undertaken at key decision points, not less than on an annual basis. All elements of the project other than the crucial Level I rehabilitation water treatment and sanitation facilities, the requirements for which have been thoroughly studied through two NORAD-financed consultancies and three IDA missions, will be designed and implemented in accordance with this process. The supervision plan, included in Annex 2.8 along with the Table of Contents of the Project Implementation Plan, shows the approximate timing of missions, key issues to be addressed, and the required skills mix. The most critical events in project supervision will be the project launch workshop, the policy seminar, and the mid-term review. 2.26 In addition to the usual activities, the project launch workshop will include an expanded discussion of fundamental design and management issues. Many of these issues will, by the time of credit effectiveness, have been defined and examined in detail through the three project design and technical activities (NORAD and IDA PPF-financed), PCU activities and the LOGOS project. The completion of the manual, which describes in detail the Project Implementation Plan, a draft of which was discussed during negotiations, will be a condition of effectiveness. 2.27 The policy seminar is scheduled to be held in July 1996. At this time, the initial results of the demonstration projects and management options for meeting water supply and sanitation needs will be reviewed. Specifically, the following items and issues will be discussed and agreed upon during this seminar: (i) approval of institutional structures for the water sector; (ii) detailed review of the business plan related to (i); (iii) approval of the tariff structure; (iv) decision on Phase II of the financial strengthening support to the local governments; and (v) initial assessment of the demonstration component. 2.28 By December 1997, the time proposed for the mid-term review, the project will have acquired key information for future urban policy in Zambia, completed key water supply and sanitation investments, and set in place management structures for commercially viable water and sanitation  - 19 - utilities. The mid-term review will provide an opportunity to take stock of the water and urban policy framework, to redefine the remaining investments in the capacity building technical assistance, and assist GRZ in formulating details of its future investment programs so that local councils take responsibility for the provision of infrastructural services. At a minimum, the mid-term review will cover the following: (i) Project monitoring system: an evaluation of the M&E system and each participating council's performance against the established M&E benchmarks; (ii) Water supply and sanitation investments: an assessment of the completed works and the efficacy of the MT contracts, including timing and transition arrangements for handing over to the entities in (iii) below; (iii) Water sector institutional reform: the decisions made and progress achieved in establishing commercially-oriented water supply and sanitation organization(s) in the Copperbelt and elsewhere, and implications for overall municipal management; (iv) Demonstration projects: an assessment of completed and ongoing projects, including a decision on whether to expand the program to additional settlements and/or cities, and how to incorporate lessons learned vis-a-vis demand-based planning and participatory processes into a wider range of municipal planning management activities; (v) Environment: the status of legislative reform and procedures to date for incorporating environmental concerns and procedures for review into municipal planning and management; (vi) Water resource management: the status of the development of a water resource strategy and development of baseline data for monitoring water quality and use; (vii) Urban legislative reform: a progress report on reforms identified and status of implementation; (viii) Municipal capital investment plans: a review of these plans and an assessment of their suitability for a follow-on project.  - 20 - Chapter 3: PROJECT COST 3.1 The total project cost is estimated at ZK30.8 billion (the equivalent of US$46.6 million), including physical and price contingencies. The foreign exchange component is estimated to comprise 77 percent. A summary of estimated project costs is provided in Table 3.1 and a detailed cost table in Annex 3.1. Cost estimates are based on preliminary designs of facilities, local and regional construction experience, and recent quotations for equipment and vehicles. Base prices are based on price levels at the time of appraisal in June 1994. Physical contingencies have been included for equipment and related installation under the water and sanitation component, and are estimated at US$1.9 million or about 10 percent of base costs. Price contingencies of US$2.6 million are estimated in US dollar terms, based on international inflation rates estimated at 2.2 percent for the project period. The foreign component of project costs is exempt from taxes; it is estimated that 50 percent of the local works component (i.e. the non-labor expenditures) will be subject to taxes of 10 percent. Table 3.1 Summary of Project Cost Estimates (US$ million) LOCAL FOREIGN TOTAL A. Water Supply and Sanitation Rehabilitation Water Supply 2.8 8.7 11.5 Sanitation 2.8 2.8 5.6 TA for water and sewer system management, including 0.9 10.3 11.2 (i) Design of rehabilitation requirements, and (ii) Construction supervision, management and training contracts Sub-total 6.5 21.8 28.3 B. Community-based Demonstration Projects Community-based projects 1.1 3.9 5.0 Institutional Support 0.5 0.1 0.6 Sub-total 1.6 4.0 5.6 C. Reform and Capacity-Building Water Sector: (i) Study water system management options (ii) Water Sector Policy Studies 0.4 1.6 2.0 Water and urban sectors for planning, programming and sectoral reform (iii) Local government capacity strengthening (iv) Planning, management and capital programming 0.7 4.1 4.8 Project-related TA (accounting support, audit fees, and 0.2 0.2 0.4 procurement) Sub-Total 1.3 5.9 7.2 D. PPF Refinancing (related to C (iii) above) 0.2 0.8 1.0 Total Base Cost 9.5 32.5 42.0 Physical Contingencies 0.6 1.3 1.9 Price Contingencies 0.6 2.0 2.6 TOTAL PROJECT COST 10.8 35.8 46.6 Taxes 0.6 - 0.6 Project Cost, net of taxes 10.2 35.8 46.0  - 21 - A Financing Plan 3.2 The project financing plan is presented below: Table 3.2 Project Finance Plan IDA NORA) GRZ TOTAL (US$ Million) A. Civil Works 23.7 - 2.4 26.1 B. Consultancies (technical assistance, training, supervision of works) Sub-Total 9.3 11.2 - 20.5 TOTAL 33.0 11.2 2.4 46.6 3.3 The proposed IDA credit of US$33 million would finance about 71 percent of the total project costs, net of duties and taxes except as noted (para 3.1), or the equivalent of 92 percent of the estimated foreign exchange cost of the project. Financing for the remaining total project costs would be provided by Government (US$2.4 million or five percent) and NORAD (US$11.2 million or 24 percent). While local governments are not required to make a specific monetary contribution to project costs, their contribution "in kind" is expected to be considerable in the form of human resources, overheads, and related labor in the case of the community based projects. During negotiations, assurances were obtained that Government would make adequate budgetary provisions for its share of project costs. Government has agreed to open a project account in a local commercial bank with an initial amount of US$100,000 (see para 3.7 for details). B Flow of Funds 3.4 The proceeds of the IDA credit would be made available to Government on standard IDA terms, for a period of 40 years, including 10 years grace. US$23.7 million or about 51 percent of the credit will be passed on by the central Government to the participating local govermnents for rehabilitation of the water and sanitation systems, and for the community-based demonstration projects. These funds will be passed on as grants, in recognition that the expenditures to be financed under the project are of a deferred-maintenance nature, which should have been undertaken and financed by central Government much earlier. It is also recognized that until certain sectoral policies and practices have been addressed (including tariff practices, systematic nonpayment by Government and parastatals of water bills) and weak financial systems and procedures at the local government level have been strengthened, it would be imprudent to saddle local governments with debt repayments which they most likely would be unable to undertake while the restructuring process is under way. However, it has been made clear to local governments, and will be underscored during project launch discussions, that grant funds will be a one-off injection of resources. Signed subsidiary agreements will be required for each participating local government. Signed subsidiary agreements between GRZ and two participating local councils will be a condition of credit effectiveness. A signed subsidiary agreement between GRZ  - 22 - and the local council will be a condition of disbursement to that local council. The remaining IDA funds, for local government reform and capacity building, will be allocated to MLGH. C Disbursements 3.5 Management of the disbursement process, including periodic reports, will be the responsibility of MLGH, through the newly established DISS (para 1.15). The proceeds of the credit will be disbursed by category as shown in Table 3.3 over six years. The longer disbursement period is consistent with Bank experience with urban projects in Africa. Table 3.3. Disbursement Allocations (US$ millions) CATEGORY CREDIT AMOUNT % EXPENDITURE TO BE FINANCED I. Civil Works 20.0 90% 2. Consultants, TA, Training 7.6 100% 3. PPF Refund 0.965 100% 4. Unallocated 4.4 TOTAL 33.0 The closing date for disbursements will be December 31, 2001. A detailed disbursement schedule is provided in Annex 3.2. Specific conditions of credit effectiveness include staffing of the DISS as agreed at negotiations. 3.6 Statements of Expenditure. For civil works contracts and for goods and services valued at less than US$100,000 equivalent, disbursements will be made against statements of expenditures (SOEs). Supporting documentation for these expenditures will be forwarded by implementing agencies and localities to MLGH, which will retain them and make them available for review as requested by IDA supervision missions. 3.7 Special Accounts. To facilitate disbursements, a special account will be opened in a commercial bank acceptable to IDA. The authorized allocation for deposits into the special account of US$1.5 million represents an estimated average of four months' disbursements under each component. In addition to the IDA special account, and as noted in para 3.3, the Government will also open a project account of the equivalent of US$100,000 in local currency to facilitate disbursements of the Government's contribution to project costs. This amount is expected to cover about three to four months of Government expenditures. The Government project account will be handled according to the same procedures as the IDA special account: it will be reconciled monthly and replenished quarterly or more if disbursements are more than a quarter of the special account; its use will be monitored along with the IDA funds and audited on an annual basis. 3.8 Commitment and Disbursement Reporting. DISS will compile and submit to IDA quarterly reports on the status of commitments and disbursements. An initial format for these reports was discussed and agreed upon at negotiations.  - 23 - 3.9 Because of the need to improve the financial management capacity and other aspect of municipal operations in advance of significant investments in rehabilitation under the project, a Project Preparation Facility (No. P909) for US$965,000 was provided. The PPF is being used to finance a package of training, technical assistance, and computer hardware and software for nine local governments. The expected date for refinancing is December 30, 1995. D Procurement 3.10 A summary of project procurement arrangements is provided in Table 3.4 below. Table 3.4 Project Procurement Arrangements (US$ '000) Procurement Method Project Element International National Competitive Other Not IDA Total Competitive Bidding Bidding Financed Civil Works Water Sector Rehab 11.8 1.3 0.9 14.0 (10.7) (1.2) (0.8) (12.7) Sanitation Rehab. 5.0 1.0 1.1 7.1 (4.5) (0.9) (1.0) (6.4) Community-based 2.5 2.5 5.0 Projects (2.3) (2.3) (4.6) Consultant Services and Training: Policy Support 2.3 2.3 (2.3)(b) (2.3) Project Preparation and Implementation Support 11. 2(a) 11.2 Institutional Development (a) Institutional Reform 4.6 4.6 (4.6)(b) (4.6) (b) Studies 0.8 0.8 (0. 8)(b) (0.8) (c) Demonstration 0.6 0.6 Project (0.6)(b) (0.6) PPF (Institutional 1.0(c) 1.0 Development) (1.0)(b) (1.0) Total COST 16.8 4.8 13.8 11.2 46.6 (15.2) (4.4) (13.4) (33.0) Note: Figures in parentheses are the respective amounts financed by the IDA credit, including contingenices but net of duties and taxes. (a) Items will be financed by NORAD under NORAD procurement procedures. (b) Services will be procured in accordance with World Bank, Guidelines: Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (Washington, D.C., August 1981). (c) The actual PPF amount was $0.965 million. During negotiations, it was agreed that procurement under the project would be carried out in accordance with the arrangements summarized in the following paragraphs. Agreement was reached that the Bank's Standard Bidding Documents (SBD) for International Competitive Bidding (ICB) would be used, and in particular that the SBD-Supply and Installation (soon to be issued) would be used when relevant  - 24 - E Civil Works 3.11 Procurement under the project for all IDA-financed civil works will be in accordance with the Guidelines for IBRD loans and IDA credits (January 1995); the IDA credit will not separately finance any expenditures for moveable equipment. IDA's SBD will be used for ICB. SBD will also be developed under the project for National Competitive Bidding (NCB). Bid packages (with the exception of those related to the community-based projects) will be defined during the detailed project design phase. 3.12 Civil Works. Civil works estimated to cost more than US$500,000 per contract will be awarded under ICB procedures. ICB is expected to account for US$16.8 million, or about 67 percent of the IDA allocation for civil works. Civil works for contracts estimated to cost US$500,000 or less will be awarded under NCB procedures acceptable to IDA. Total value of work to be awarded under NCB procedures will not exceed US$4.8 million. Civil works valued at less than US$30,000, up to an aggregate of US$4.5 million, such as leak repairs, will be procured under lump sum, fixed-price contracts awarded on the basis of quotations from three qualified domestic contractors in response to a written invitation. Such an invitation would include a detailed description of the works, including basic specifications, the required completion date, a basic form of agreement (acceptable to IDA), and, as applicable, relevant drawings. These small works may also be carried out under force account with IDA's prior agreement. Community-based demonstration projects will be implemented on the basis of procedures which will be designed in the early stage of project implementation. Although some of the work may be contracted according to NCB procedures, it is expected that most will be under special procedures requiring community participation. 3.13 Contracts for works related to water and sanitation rehabilitation will be packaged in the two levels of priorities discussed in paras 2.8-2.10. Rehabilitation contracts will be prepared separately for each municipality. Separate contracts will be issued for the repair of treatment plants and for other works required, such as the installation of water distribution or sewage collection mains because of the different nature of the work and the different contractor qualifications required. To encourage both small and large contractors to submit proposals, bids will be accepted for individual contracts and jointly for two or more contracts. Each treatment plant repair and rehabilitation contract, whether bid and awarded separately or in groups, will include two years' operation and maintenance of the treatment facilities constructed. The training of local staff to be hired to operate the treatment plants will be undertaken under the MT contract (para 2. 10(c)). Separate bids shall be submitted for repair and rehabilitation and for operation, maintenance and training contracts. Awards will be made for the lowest combined cost of construction and operation in accordance with the evaluation procedure specified in the contract documents. However, the owners reserve the right not to award the operation and maintenance along with the construction contracts. Forty-eight percent of the civil works contracts (by value) will be implemented during the first phase. Detailed estimates of the costs of Level I and II packages are tabulated in Annex 3.1. Detailed description of the components are contained in the consultant's report available in the project file. 3.14 The design and construction supervision will be undertaken by consultants financed under parallel financing arrangements by NORAD. These contracts will be awarded in accordance with NORAD procedures and include, in addition to engineering work, the supply of equipment and  - 25 - vehicles necessary to undertake the work and the training of leak detection technicians, and include materials (pipes, valves and other fittings) to repair the leaks identified. 3.15 Supply and Installation of Plant and Equipment. Treatment plant repairs and rehabilitation work will be by means of lump sum contracts. The work will consist basically of removal and, to a limited extent, rehabilitation of existing equipment; the supply and installation of new equipment in the existing treatment plant facilities that are in good structural condition; and the subsequent operation of the rehabilitated facilities for two years during which local staff to be hired by the contractor will be trained in the operation and maintenance of the rebuilt facilities. Only minor civil works will be required as part of these contracts. Sixty-five percent of the supply and installation contracts (by value) will be implemented as Level I activities. The management and training phase following the construction is estimated to cost US$3.0 million. The funds for this component will be provided under parallel financing arrangements by NORAD. Equipment and materials not included in the supply and installation contracts consist of portable equipment for leak detection and system maintenance work, including vehicles, and materials required for the repair of water distribution and sewage collection mains, water distribution reservoirs and other malfunctioning distribution and collection facilities. Total value of these categories is estimated at US$5.4 million, of which US$2.5 million will be provided during the first phase as part of the design and construction supervision contracts financed by NORAD. 3.16 Domestic Preference. Eligible domestic contractors bidding for civil works contracts under ICB would receive a margin of preference of 7.5 percent when comparing bids with those from foreign contractors. A margin of preference of 15 percent, or taxes or duties, whichever is smaller, would be given under ICB for goods manufactured in Zambia when comparing domestic with foreign bids. F Equipment 3.17 As noted in the previous paragraphs, all equipment to be financed under the IDA credit will be procured as part of the civil works or consultants contracts. Other equipment to be financed as part of the project will be financed by NORAD. G Consulting Services and Training 3.18 Consulting services and training packages are described in paras 2. 10(b)-2. 19. There are five aspects of consultant services and training to be provided under the project. The project preparation and implementation support related to the rehabilitation component has already been described in paras 3.13 - 3.15. In addition, IDA financing will be provided for four activities related to policy support and institutional development. The former includes studies on the water sector policy framework; the latter includes a study of the management options for the water system, capacity building of local governments and strengthening of planning, management and capital programming. In addition, the PPF is financing consultants and training (which will include a small allocation for acquisition of computer hardware and software) related to the immediate strengthening of the local government finance function. Consultant services for IDA-financed technical assistance and studies will be provided under tenns and conditions acceptable to IDA and in accordance with the Bank's Guidelines for the Use of Consultants (August 1981). Consultants providing services related to project preparation  - 26 - and implementation support under parallel financing by NORAD would be selected following procedures established by NORAD. H Procurement Management 3.19 Management of the procurement process, which will be monitored through progress reports on implementation, disbursements and auditing, will be the responsibility of the DISS in MLGH. The DISS will develop and agree with local authorities on the procedures to be used in the management of procurement and disbursement. For this purpose, a small allocation of technical assistance (three person months) will be provided under the project. 3.20 Prior Review. During project supervision, all ICB contracts and the first three NCB contracts for IDA-financed civil works will be subject to the Bank's prior review procedures. The review process will cover about 80 percent of the total value of IDA-financed contracts for civil works. Regarding consultant services, prior review by IDA or approval of budgets, short lists, selection procedures, letters of invitation, proposals, evaluation reports, and contracts will be required only for contracts expected to cost US$100,000 or more each in the case of consulting firms, and US$50,000 for individual consultants. This exception to prior IDA review shall, however, not apply to the terms of reference of such contracts for the employment of individuals; to single source selection of firms; to assignments of a critical nature as reasonably determined by IDA; and to amendments of contracts with consulting firms or individuals raising the contract value above US$100,000 or US$50,000 equivalent, respectively. I Accounting and Auditing 3.21 Audit requirements are detailed in Annex 3.3. The DISS in MLGH will have overall responsibility for maintaining project accounts and ensuring that the project is properly audited. MOF will be responsible for organizing and submitting audits of the annual project accounts, audits of the special accounts (one per component), and audits of statements of expenditures. Agreement was reached at negotiations that the Borrower will prepare annual project accounts on a timely basis, that these accounts, including the special accounts and statements of expenditure, will be audited by auditors satisfactory to the Association, and that audits will be submitted to IDA within six months of the end of the financial year. 3.22 While it is not required for the audit of the IDA credit, each local government involved in any of the three components of the project will be required to submit audited annual accounts to MLGH. These audits will be submitted to IDA as part of the periodic progress reporting undertaken by the DISS. At the current time, most if not all of the local governments lack the capacity to prepare accurate and auditable accounts on a timely basis; most are several years behind in preparation and even further behind in auditing. The technical assistance and training provided under the institution and capacity building component, and the complementary assistance being provided by ODA, should enable the preparation of these accounts by the end of the first year of the project. 3.23 Under the project, a small allocation for technical assistance related to accounting and auditing has been made to assist MLGH meet the accounting and auditing requirements. Because of limited  - 27 - capacity at the local level, participating local governments will submit all relevant disbursement information to MLGH for the audits of SOEs and special accounts. J Bank Supervision and Reporting Requirements 3.24 Reports detailing the progress of project implementation will be submitted to the Bank on a quarterly basis. During negotiations, agreement was reached that Government will adopt project reporting procedures satisfactory to the Bank, along agreed upon reporting formats. A schedule of supervision missions and indication of expertise required for each mission is provided in Annex 2.8.  - 28 - Chapter 4: PROJECT BENEFITS AND RISKS A Primary Project Justification 4.1 The rehabilitation component of the project is expected to benefit directly almost 1,600,000 people who currently have access to the formal water and sewerage systems in Chingola, Luanshya, Kitwe, Ndola, Mufulira, Kalulushi, Livingstone, Kafue and Mazabuka. Rehabilitation work will improve the supply and quality of water and mitigate health risks to the general population through improvements in sewage treatment capacity. The community-based demonstration project component is expected to improve water supply and access to sanitary means of human waste disposal to more than 250,000 individuals in informal settlements in Lusaka and the Copperbelt councils. The strengthening of water supply agencies will improve this capacity to serve existing customers and extend services to poorer communities, with guidance from the demonstration projects which will test and develop demand-based participatory processes for the provision of water supply. The project's policy reform component overall seeks to improve local government capacity to deliver and sustain services and to mobilize of community organizations to participate in the planning, construction and operation of basic infrastructure. 4.2 The community-based demonstration projects are expected to have a generally beneficial impact on health in the selected informal settlements. Project beneficiaries should also realize savings in terms of time and actual cash outlays now required either to haul water from distant supply points or purchase water from vendors. Benefits from improved proximity to supply will accrue particularly to women and children who are primarily responsible for transporting water to their homes. These direct benefits will be augmented by the building of capacity within communities to identify means by which local resources can be utilized to address local problems. 4.3 The introduction of improved technologies, as well as efficient pricing strategies, both for formal system improvements and demonstration projects, will have wider benefits in terms of enhanced revenue collection and better utilization of scarce financial resources. Labor-intensive solutions will provide employment opportunities and skills, and regularization of land tenure will create assets which can appreciate in value over time. The promotion of consultative processes directly involving the low income majority population will contribute to the emergence of representative local governments within Zambia's newly democratic environment. 4.4 The benefits resulting from the project's policy reform component will be discernible over the medium term. Improvements in local government operations will support GRZ's overall goal of decreasing central government intervention in the national economy. Revised local development plans will promote more efficient utilization of resources, and divestiture of council-owned assets will stimulate market activity particularly in housing. In general, the project seeks to support broad economic gains by improving the efficiency with which Zambia's urban sector contributes to national economic growth.  - 29 - B Key Indicators of Success 4.5 The near term indicators of success for the rehabilitation component of the project will vary among the targeted cities depending upon the specific interventions to be financed. In general, improvements will be achieved in the quality, and in most cities, the quantity of water delivered and in the capacity of sewage disposal systems. Participating local governments will be assisted to establish, where lacking, effective monitoring systems that will document the efficacy of project investments in terms of quality and quantity, as applicable. The overall monitoring and evaluation effort will be coordinated by DISS within MLGH and provide local councils, for the first time, with an integrated method of presenting consolidated capital investment requirements for funding. 4.6 Indicators of success for the community-based demonstration project component will be both qualitative and quantitative in nature. Progress in establishing appropriate community-based systems will be the subject of regular reporting including numbers and types of water supply facilities installed and families benefited, numbers and types of sewage disposal systems installed, etc. Equally as important, however, will be qualitative indicators describing community participation in the planning and implementation of demonstration projects. A monitoring system for this qualitative aspect of the demonstration component will be designed in consultation with government officials and community representatives, once targeted communities have been identified. 4.7 Indicators of success for the policy reform component of the project will be susceptible to near term measurement only at the level of specific reforms accomplished. The real impact of these reforms, the implementation of which will occur throughout the project, will become evident over the medium term, largely beyond the duration of this project. Monitoring systems to be established under this project for reform component success would include, for example, improvements in local government revenue generation generally and growth in capital budgets in particular; and corresponding diminution of recurrent expenditures as a proportion of total local government revenues. c Environmental Impact 4.8 Environmental analyses during preparation concluded that the overall environmental impact of project investments would be positive (see Annex 4.1). The emergency phase measures being supported by the project are designed to restore community access to clean water and adequate sanitation and to reduce surface and ground water pollution. Negative impacts will be mitigated and managed during project design and implementation. 4.9 Environmental concerns are addressed in all three components of the project: First, while implementing the emergency phase measures, as an essential component of design and construction contracts (para 2.10(a)): second, while implementing the demonstration component, through the consultative processes in which peri-urban communities define their local environmental priorities (Annex 2.2); and third, as an integral part of the process of participatory planning recommended under the capacity building component of the project (para 2.17(b)). 4.10 The principal environmental issues identified in the environmental review, and how the project plans to deal with them, are discussed below.  - 30 - (a) Issue 1: Increases in water supply. The estimated increases in production per city or town ranges from 17 percent to 150 percent (Kalulushi excluded as there is the issue of replacement of existing supply from ZCCM), with most in the 30-40 percent range. (b) Issue 2: Effects of increased abstraction. The proposed increase in supply would restore the level of abstraction to previously designed levels; abstraction from the rivers would amount to a relatively small fraction of overall flows. (c) Issue 3: The environmental impact of transmission and treatment works. As the proposed measures are mainly rehabilitating existing plant and equipment, they would safeguard existing infrastructure from deteriorating further, and thereby arresting the negative impacts currently faced by urban residents. In addition the design would take into account the local impacts of construction. (d) Issue 4: The environmental impact of additional water supply distribution. While investment in leak detection equipment for the water distribution network is one element of the project, there is the recognition, based on past experiences in Zambia and elsewhere, that the key to proper utilization is the creation of proper incentives. The project proposes to test alternative institutional arrangements (such as subcontracting actual testing for leaks or involving local community groups) to be selected by the participating city and town councils. The project further proposes to develop procedures to ensure that the actual distribution of water is based on demand considerations. This would be effected through revised tariffs based on marginal cost pricing and better utilization of metering for large volume consumers. (e) Issue 5: The local environmental impacts of additional waste water. The project would support investments for emergency rehabilitation of wastewater conveyance infrastructure. Studies further are proposed to review and evaluate: (i) past investments in conveyance and collection systems in Copperbelt towns and Lusaka; and (ii) feasible sanitation solutions for built-up areas currently with house connections/yard taps and inadequate wastewater and sewage disposal arrangements. (f) Issue 6. The environmnental impact of additional wastewater on natural resources. The project is supporting investments in order to mitigate negative impacts of wastewater on natural resources. The option of using treated wastewater for peri-urban farming and pisciculture will also be evaluated. (g) Issue 7. Kafue River Basin water resources management. Most of the project investments are taking place in the industrial and commercial zones along the Kafue River. A water resources component, to be designed in the course of the project, in conjunction with the Environmental Council of Zambia, will include preparation of a water resource management and environmental monitoring program of the Kafue Basin. 4.11 As specified in the design TOR, all engineering studies will follow the principles laid down in OD 4.01 of the World Bank. Further, to strengthen the process of public consultations, the capacity building component provides for a consultative process in which plans, priorities, implementation  - 31 - schedules and potential environmental impacts will be discussed with representatives of key stakeholders (councilors, industrial and commercial establishments, domestic consumers of services in formal and peri-urban areas). Benchmarks appropriate to individual components will be identified, which in turn will facilitate broad participation in the monitoring and evaluation of project performance. D Poverty Alleviation 4.12 With over 60 percent of the country's urban population classified as poor or very poor, one of the fundamental objectives of this project is to ensure that constraints upon the majority population's participation in the urban economy are removed. In the near tern, emphasis will be placed on addressing basic service deficiencies which sap the productivity of the poor through disease and inordinate labor investments in meeting basic needs. In the medium term, the project will support broad improvements in urban management, and thereby address the needs of the urban poor from two perspectives: (i) by developing the institutional capacity for local governments to address the needs of the urban poor; and (ii) by increasing economic opportunities for the urban poor population. Promotion of community participation in consultative processes will redress imbalances in resource allocation and expedite mobilization of sustainable self-help solutions to constraints on productivity. The project will seek to maximize coordination with other projects, such as the IDA-assisted Social Recovery Project (Cr. 2273-ZA), and with NGOs supporting development of micro-enterprises and other economic opportunities among the urban poor. E Sustainability 4.13 Sustainability in the Zambian urban sector has historically been hampered by central government subsidy policies that have undercut incentives for efficient local government management and private investment, and propagated a culture of nonpayment. A key factor in sustainability of rehabilitation investments will be the development and implementation of user fees that reflect the costs of providing water services. Changes to the user fee structure will be accompanied by consumer education campaigns which set out the actual costs of service provision and the relationship of these costs to fees charged. In addition, commercialization of water and sewerage operations will be encouraged; already, all of the project cities are exploring opportunities for commercialization and this project will provide an excellent means for local governments to assess options and receive required technical assistance and training to establish successful commercial operations. At the level of the community, previous experience and the difficult economic conditions that are expected to prevail among the urban poor during the project implementation period, have indicated that sustainability of demonstration project investments will derive mainly from community-based management of installed improvements. Creation of management capacity at the community level will require coordination with NGOs and reorientation of local government structures and human resources to a supportive, rather than prescriptive, role. Recovery of capital costs will, in most cases, be achieved indirectly through rates.  - 32 - F Project Risks 4.14 The key risk to successful project implementation is the limited capacity of local governments and communities to identify, plan, implement and sustain urban infrastructure investments. In view of this, initial investments have been kept to the minimum requirement. With respect to policy, encouragement of local autonomy is essential, but the capacity to establish sustainable growth cannot simply be legislated. Required reforms are both broad and detailed, ranging from virtual creation of land markets to installation of functional budgeting procedures. While the willingness of key actors to address these fundamental challenges is apparent and encouraging, both strengthening of capacity and a reorientation in approach are required. The project tackles these issues directly through studies and training packages that specifically address the appropriate skills and institutional arrangements, including an enhanced role for the private sector for the provision of infrastructure and services. Given the complexity of issues, annual reviews will be held in which key benchmarks will be reviewed and achievable targets set for the coming year. This will ensure a focused but flexible approach to the reform process.  - 33 - Chapter 5: AGREEMENTS REACHED AND RECOMMENDATION A Conditions of Credit Effectiveness 5.1. The conditions of credit effectiveness are as follows: (a) staffing of key positions for the DISS (para 2.23); (b) completion of the Project Implementation Plan (para 2.26); (c) meeting all conditions precedent to the initial disbursement of funds under the NORAD Grant Agreement (para 2.10); and (d) signing of subsidiary agreements between Government and at least two participating local councils (para 3.4). B Conditions of Disbursement: 5.2. The following will be required before disbursements will be made to the local government in question: (a) Signed subsidiary agreements between GRZ and the participating local government (para 3.4); (b) As part of the subsidiary legal agreement, agreement from participating local councils that they will protect dwellings and structures within community compounds and informal settlements from demolition, unless this demolition is required for health and safety reasons or to provide essential urban services. However, such demolition would be subject to prior review by IDA and must be conducted in line with IDA resettlement policies; the council further shall, if necessary, amend its regulations in order to enable the legalization of the settlement beneficiary communities within its jurisdiction (para 1.24); (c) For the demonstration component, review and approval by IDA of settlement technical plans (para 2.14). C Agreements Reached During Negotiations 5.15 Assurances reached at negotiations include: (a) Government will make adequate budgetary provisions for its share of project cost; the amounts to be deposited and maintained in a project account were agreed (para 3.3); (b) Procurement will be carried out in accordance with IDA guidelines (Guidelines for the Procurement of Goods and Services dated January 1995 and Use of Consultants by  - 34 - World Bank Borrowers dated August 1981). It was further agreed that the Bank's SBD for ICB and in particular the SBD-Supply and Installation (soon to be issued) will be used when relevant; (para 3.10); (c) MLGH will prepare annual project accounts on a timely basis, that these accounts, including the special account and statements of expenditure, will be audited by auditors satisfactory to the Association, and that audits will be submitted to IDA within six months of the end of the financial year (para 3.21); (d) GRZ will adopt reporting procedures satisfactory to the Bank along agreed-upon reporting formats (para 3.24). D Recommendation 5.3. On the basis of the above actions, conditions and agreements, the proposed project would be suitable for an IDA Credit of SDR 21.3 million (US$33 million equivalent).  - 35 - Annex) Page I of I ZAMBIA URBAN RESTRUCTURING AND WATER SUPPLY PROJECT ITEMS IN THE PROJECT FILE 1. Aide-Memoires - January/February, June/July, November 1994 2. Zambia Poverty Assessment, 2 Vols. 3. Draft National Housing Policy 4. Local Government Act No. 22 of 1992 5. Proposed Strategy and Institutional Framework for Water Supply Sanitation Sector 6. LOGOS Project Description 7. Draft Urban Issues Framework Paper 8. Municipal Government Finance Paper 9. Interconsult Report on Water Supply and Sewerage Facilities 10. Kafue District Council Water Tariff Study i1. Technical Assistance for Local Government Strengthening (PPF) TOR and Invitation of Proposals 12. Water Supply and Sanitation Rehabilitation - Design of Investment Component - TOR 13. Demonstration Project Design and Facilitation Consultants - TOR 14. Study of Water Management Options in URWS Project Towns - TOR 15. Planning, Management and Capital Programming TOR 16. Project Implementation Manual (pending)  - 36 - Annex 2.1 Page I of 6 ZAMBIA URBAN RESTRUCTURING AND WATER SUPPLY PROJECT Description of Rehabilitation Component OBJECTIVES 1. The objectives of the rehabilitation project are to: (a) Restore water and sewage treatment plants so they produce the quantity and quality of potable water and effluent, respectively, they were originally designed to produce; (b) Increase the productivity and simplicity of operation by process changes which can be implemented without increasing project construction and subsequent operating costs; and (c) Reduce leakage in water transmission and distribution through leak detection and repair, including the training of local staff to ensure that leak detection becomes a continuous activity of water supply management. COMPONENTS Participating Towns 2. The cities and towns selected are amongst those which were affected by serious outbreaks of cholera and enteric diseases from 1991 to 1993. A 1992 report prepared for the Ministry of Local Government and Housing (MLGH) identified the water supply and sanitation measures, principally improving water treatment and reducing discharge of untreated wastewater to receiving waters, considered necessary to reduce the incidence of these diseases (some of the towns draw water from rivers below the point at which they discharge untreated sewage). 3. The towns originally selected for this project included Chingola, Kitwe, Livingstone, Luanshya, and Ndola. Subsequently the towns of Kafue, Kalulushi, Mazabuka and Mufulira were added. In all of these towns, measures to improve both water supply quality and quantity and reduce pollution through improved sewage treatment are required. In Chingola, the town's source of water, the Kafue River, is badly polluted from mine tailing discharges. This pollution needs to be eliminated if permanent improvements in the town's water treatment plant are to be achieved. 4. Table I below lists the estimated total population, population provided with water supply and sewerage services, and the quantity of water delivered. The quality of the water provided is at best highly unreliable, and the estimated quantity is only approximate due to the lack of bulk and retail metering. Nevertheless the numbers provide an indication of the potential improvements which can be achieved by this project.  -37 - Annex 2.1 Page 2 of 6 Table 1 1993 Estimated Population and Population Served in 100,000s Estimated Production and Delivery Capacity in 1000 m3/day Population Treatment Estimated Delivery Town WS WS Actual Leaks 1000 lcd Total hc Stp Design % m3 Chingola 370 207 11 30 22 50 11 51 Kafue 200 120 22 30 22 50 11 108 Kalulushi 150 90 - 18 18 50 9 98 Kitwe 400 127 120 84 56 50 28 192 Livingstone 120 70 18 46 32 50 16 221 Luanshya 200 50 - 28 11 60 6.5 130 Mazabuka 42 11 21 7 6 50 3 229 Mufulira 200 134 20 33 23 50 11.5 80 Ndola 600 348 198 212 147 50 73.5 194 Total 1,157 410 488 337 - 169. - 1 2,282 Consultant's Work 5. Improvement needs for each town were reviewed by a NORAD funded consultant engineer under contract to MLGH. The consultant also prepared estimates for the project components to be included in the project. 6. The consultant's work was examined closely and found to be of acceptable quality. Recommendations for changing the priority of some components and increase the scope of others are well justified. Suggestions for possible alternative designs to improve treatment plant performance appear sound. Preliminary designs and estimates for these alternatives will be prepared during the initial phase of the next phase of technical assistance and, if found financially and technically justified, incorporated into the project. 7. Two of the towns, Kalulushi and Mufulira, are last minute additions and were not included in the consultant's analysis. The project components identified in those towns are similar in nature and scope to those of the other cities, and will thus be included in the final design during the next phase. 8. Existing conditions in the project towns water supply and sanitation facilities and rehabilitation work necessary is described in detail in the "Report on Water Supply and Sewerage Facilities", June 1994, Interconsult A/S, Lusaka (the report can be found in the project file). The following section provides a general overview of the consultants findings and the mission's impressions. Components General Observations 9. The problems the various towns face in their attempts to provide an adequate water supply and wastewater disposal service are very similar. They are described first, and only problems specific to individual towns are mentioned in the subsequent paragraphs. 10. Mechanical equipment in every water treatment plant and pumping station visited is either malfunctioning, not functioning, or in constant danger of failure. Sedimentation facilities are ineffective,  - 38 - Annex 2.1 Page 3 of 6 and filters have defective filter bottoms, inoperative controls and deficient filtermedia. Standby pumping capacity does not exist, and the frequent failures result in a curtailing of service. Generally, equipment and most pumps need to be replaced, while in some cases reconditioning may be possible. Structurally, the facilities are sound, indeed the concrete work is of excellent quality. 11. As a result of all these deficiencies, water is generally delivered during a few hours per day, and the water quality is inadequate. Most treatment plants deliver water little improved from raw water in quality because chemical dosing equipment is faulty, lacking altogether, or funds for the purchase of chemicals are not available. Quality surveillance is impossible because laboratories are not equipped to determine water quality, and vehicles are not available to collect samples in the distribution system to determine delivered water quality. No facilities for testing raw water in order to apply the correct quantity of chemicals are available. For that reason, and the lack of vehicles, river water quality is not monitored. 12. Bulk and retail water meters are not functioning, many due to vandalism, others due to a lack of maintenance (only one functioning bulk water meter was found in all the water and sewage treatment plants visited). The quantity of water produced and delivered is therefore not known, but the lack of maintenance of the distribution system suggests that leakage rates are very high, probably around 50% of water produced. Production is also lower than design values due to reduced pumping capacity. 13. Wastewater treatment and pumping are equally ineffective. Fortunately, some of the towns are served by wastewater stabilization ponds which, although not functioning now, are at least less costly than other systems to repair and, once restored, easier and less costly to operate than mechanical plants. 14. Observations indicate that staff operating these facilities have not been properly trained and, in general, believe that the principle solution to breakdowns is the replacement of whatever failed. Operating manuals are not available, and there is little evidence that operators fully understand processes they are expected to control. Therefore, if improvements are to be sustainable, rehabilitation has to be accompanied by extensive training. At the same time, efforts have to be made to control vandalism which is the cause of many problems, such as the destruction of meters. Even communications between treatment plants and headquarters is interrupted because telephone cables have been stolen. 15. To permit maximum flexibility in the implementation of the rehabilitation program, and in particular, to ensure that councils are not undertaking projects then they are unable to handle before their institutional and training needs are met, the project of each town has been divided into first and second 'levels" of investment. Both are urgently required to at least begin solving existing problems, but second priority components could be delayed without causing further damage. Second priority items consist mostly of sewerage facilities which can be delayed until water supply is well on the way to restoration, and some equipment, the purchase of which can also be delayed. Among other things, a decision on whether to implement in sequence will be made on the basis of progress in the design and implementation of institutional improvements and the necessary training program. Design work will cover both first and second priority components, and contracts will be formulated once the decision is made whether to proceed in two stages. The TOR for the design work follows in Annex 2. Chingola 16. Water is pumped from the Kafue River to the treatment plant located immediately adjacent to the river, some 10 kms from town. The original raw water intake has silted in and has had to be supplemented with floating pumps. The water treatment needs a complete overhaul, with most of the chemical feed and sedimentation equipment not functioning, the filters overloaded and malfunctioning, pumping capacity reduced due to frequent pump breakdowns and a lack of stand-by pumps. The plant laboratory equipment has been either vandalized or malfunctions, with a consequent lack of analysis and water quality control. Water meters at the treatment plant and in the system are damaged beyond repair (vandalism is a major cause of domestic meter damage). The quantity and quality of water abstracted, treated and delivered is  - 39 - Annex 2.1 Page 4 of 6 therefore not known, but constant pipeline breakdowns and visual observation indicates that system leakage are very high. 17. The raw water intake of Chingola is located downstream of major mining operations, and the river carries a major silt load from mine tailings, particularly during the rainy season when the suspended solids rise to over 300 ppm from the more normal 20 ppm. The treatment plant cannot cope with such raw water conditions, which together with inadequate operations, have led to a failure of the plant to produce a water of adequate quality. The mine is introducing remedial measures that will reduce and possibly eliminate future silt spillage, but the accumulated silt in the river will take years to wash away, and until such time, the treatment plant will be affected every rainy season. To protect the investment about to be made in restoring the plant, either a raw water transmission main will have to be constructed to carry uncontaminated water from about 12 kms upstream of the present intake, or two presedimentation ponds will have to be constructed. GRZ and ZCCM must be approached to implement these measures, which are not the responsibility of Chingola. ZCCM appears willing to undertake a survey of river water quality at three sampling points along the river during the next rainy season to determine water quality in the absence of additional spillage from the mining operations. 18. The sewage pumping station needs to be completely rehabilitated, new pumps and auxiliary equipment installed, and the 2 sets of stabilization ponds reconstructed. Kafue 19. The raw water pumping station withdrawing water from the Kafue River has limited pumping capacity because pumps and the entire station and its surroundings are ineffectively maintained. There is no standby capacity to protect against pump failure. 20. The raw water main to the treatment plant is leaking badly and needs to be partially replaced. No chemicals have been used for several years, nor is the water disinfected. Chemical feed pumps and dosing equipment has been vandalized, as has been the laboratory. Flocculation equipment and filter controls are no longer functioning, and the filters themselves are defective. Kalulushi 21. In the past Kitwe supplied water from its treatment plant by means of a 15" pipeline. Unable to provide sufficient water to its own population, Kitwe cut off supply to Kalulushi. Water is now purchased from ZCCM, but the quality is questionable. ZCCM prefers not to continue the supply, which in any event is of insufficient quantity. A wellfield is planned to replace the present supply. 22. Sewage collection is inadequate, and sewage is discharged untreated because an old mechanical treatment facility no longer functions. Stabilization ponds are proposed to replace the plant. Kitwe 23. Both water and sewage treatment plants are deficient, with broken down equipment and pumps which need to be replaced. Both the large (82,000 m3/day) and the very small (1,800 m3/day) water treatment plants are withdrawing water from the Kafue river and need complete rehabilitation. One water distribution reservoir out of three is in danger of collapse due to structural damage, one is leaking and not in use, leaving the third and smallest as the only one safe to use. 24. Major water treatment and distribution system repairs are planned for implementation at some future date with financial support of the African Development Bank (ADB). The project, therefore, includes only urgently needed repairs, such as pump and equipment replacements, and reservoir repairs.  - 40 - Annexv 2.1 Page S of 6 25. The sewage treatment plant (46,000 m3/day) is ineffective and of a complicated design, and efforts will be made during rehabilitation to simplify the process to facilitate future operation and maintenance. One malfunctioning sewage pumping station will be abandoned, with sewage instead carried by gravity to one of two sets of existing stabilization ponds. With that, Kitwe will have an all gravity sewer system. Both sets of ponds are in good condition, requiring only general cleanup. A new set of stabilization ponds will be constructed near the existing treatment plant to provide sewage treatment during rehabilitation. Thereafter, the ponds will serve as the final treatment step, and as insurance in case of future plant breakdown. 26. Sewage is carried across several creeks on pipe bridges which are leaking and in some cases vandalized to obtain sewage for irrigation of gardens below. These bridges have to be repaired to eliminate pollution of the creeks. One of the creeks discharges just above the raw water intake of the water treatment plant. 27. Kitwe is making an attempt to test its raw and treated water, although tests are limited and not very useful due to a lack of equipment and chemicals. Livingstone 28. One of the two water treatment plants is functioning reasonably well, the older non-functioning one will be rehabilitated in the near future with ADB funding. At the same time, the older of two pumping stations located at the Zambesi River will be equipped with new pumps and an additional pump installed in the newer pumping station. The force main connecting the pumping stations with the treatment plants is badly leaking and will be replaced as part of this project. 29. Recently built stabilization ponds not yet in service will provide sewage treatment for Livingstone. Portions of the sewer system which are malfunctioning will be replaced as part of this project. Luanshya 30. Luanshya is undoubtedly suffering from the worst conditions among the several towns included in this project. Its major source of water, the Kafubu River, is located 11 kms from town and the force main is almost constantly failing from pressure breaks. The plastic pipes, purchased after lengthy storage in Nigeria, are very brittle. Leaks occur almost weekly, reducing supply to a minimum because the pipeline carries 76% of Luanshya's water to the treatment plant in town. A new pipeline needs to be constructed using an alignment which avoids the swampy area the present line traverses for part of its length. 31. The water treatment plant suffers from all the same ills of the others already described and needs to be rehabilitated. Pumps and auxiliary equipment in three pumping stations (including the raw water pumping station at the Kafubu) need to be replaced. 32. The existing wastewater stabilization ponds are sufficient for Luanshya's needs, but need to be cleaned up, with piping and vandalized meters restored. Mazabuka 33. The simple slow sand filters are well suited to satisfy Mazbuka's needs, but most of the pumps and bulk meters need to be replaced. Leakage in the distribution system is high. 34. The raw water is supplied from ZSC's irrigation system, and the town is presently using almost three times the negotiated amount. ZSC would prefer not to continue the arrangement, and a study needs to be undertaken to explore alternative supplies.  - 41 - Annex2.1 Page 6 of 6 35. The sewer system and the stabilization ponds are totally unusable and need to be replaced. Mufulira 36. Both the raw water pumping station and treatment plant at the Kafue river are in reasonable condition, although the treatment plant requires several pump replacements to pump treated water to town. Chemical dosing equipment and pumps need to be replaced. Booster pumps in the distribution system also need to be replaced, and leakage in the distribution system is high. Some force main additions are required to increase water delivery capacity. 37. Sewerage is not included in the project because its problems are considered less urgent than those of the water supply system. Ndola 38. Two of the five water sources of Ndola consist of wellfields, one of which was commissioned in 1992. Water production is limited and not all the installed pump capacity is used. Vandalism is a constant problem. A third source is an old mine from which water is pumped, but the yield is rapidly decreasing. Finally, there are two water treatment plants abstracting water from the Kafubu River, both of which require extensive rehabilitation of equipment and replacement of pumps. 39. Two of three sewage treatment plants require rehabilitation, as one has just been commissioned and is still in good condition. Rehabilitation of these plants is important because they are located upstream of the two water treatment plants drawing their water from the Kafubu River. Similar to the Kitwe sewage treatment plant, a stabilization pond will be constructed at one of the Ndola treatment plants to serve first as a temporary treatment while the plant is being rehabilitated and thereafter as a final treatment step and to ensure minimal treatment in case of plant failure. The second mechanical treatment plant is being expanded and will then have two complete and separate treatment units. 40. Three sewage pumping stations require almost complete pump and equipment replacement.  - 42 - Annex 2.2 Page I of 11 ZAMBIA URBAN RESTRUCTURING AND WATER SUPPLY PROJECT DESCRIPTION OF DEMONSTRATION COMPONENT I. OBJECTIVES 1. This component has the dual objectives of (a) developing sustainable water systems in low income urban communities, and (b) strengthening institutional capacity and linkages within and between city councils and participating communities through: (i) promoting community-generated water and sanitation projects that are designed, operated and managed by the community, meeting articulated needs at an affordable price; and (ii) strengthening the capacity within local councils to support the process of community project design and installation, developing and monitoring the institutional mechanisms that will be used for the planning and implementation of future urban development projects. 11. PROJECT BACKGROUND Urban Poverty: Access to Water and Sanitation Services 2. One quarter of the entire Zambian population resides in low income urban areas where the majority live below the poverty line [Zambia Urban Poverty Assessment, 1994]. The urban poor have severe problems with access to water and sanitation services as existing piped water supplies are directed to upper income consumers. Legal low income areas are officially provided with standpipes (1/25 households). However, field visits show that many standpipes are no longer in operation, and those that do still function frequently only have water for only a few hours a day. 3. From the perspective of the urban poor two issues are clear. First, the current level of service delivery is unsatisfactory; some residents faced with either irregular or no water supplies are forced to pay substantial prices' for informal access, while for others additional costs incurred include time spent in water collection and the risks to health and personal safety. These costs are predominantly born by women. Second, there appears to be little sense of community ownership. Public facilities have high breakdown rates and are frequently vandalized because services are not organized through a sustainable system of incentives. 4. In recognition of the above and that the needs of low income urban residents will not be addressed by rehabilitation of formal infrastructure, the URWSP has a "demonstration" component to address the specific needs of low income populations in the short run, while building the institutional mechanisms central to more equitably planned infrastructure in the future. These costs are difficult to ascertain, but appear to vary regionally. Figures quoted in Lusaka ranged from KIOO to K500 for a 20 liter bucket of water. In situations where no monetary transactions take place, residents spend considerable time fetching water.  - 43 - Annex 2.2 Page 2 of 11 Review of Past Experience in the Sector 5. Zambia has a rich experience with urban programs, contributing to some of the most innovative developments in past decades. The experience of large scale "squatter" upgrading in Lusaka during the 1970s is perhaps the best documented. The Lusaka Squatter Upgrading and Sites and Services Project (Loan 1057- ZA), a model of its time, included the provision of water and sanitation infrastructure. Between 1975 and 1980, 20,000 plots were provided with basic services, a considerable achievement. As early as 1978, however, difficulties with operations and maintenance were apparent; services could not be sustained and the problems experienced provide important lessons for future work in the sector. 6. A review of the literature reveals the following key problem areas: (a) Dissatisfaction with the pre-determined level of service Initial project planning was driven by engineers who determined basic service levels (one standpipe with two taps per 25 households). Those in the overspill area, whose higher mean incomes resulted in a preference for yard taps and house connections, were ignored. (b) Limited role of community participation Participation was seen as a means to facilitate speedy project implementation. Community development activities were thus driven by the engineering component. Participation was essentially a briefing process, limiting the scope for questioning and active resident involvement. (c) Failure of the project to develop sustainable rules for cost recovery There was an assumption that groups of households residing around public standposts could "mutually police" cost recovery. Operations and maintenance were often not specifically considered in project design. (d) Perceived unfairness ofpricing rules by community members A flat rate of K1 was charged initially and later raised to K3. Residents complained about the charge for a number of reasons: some services such as refuse collection were included in the consolidated charge but never provided, some consumers considered the level of service inadequate, and for the poorest residents, the charge appeared discriminatory. (e) Failure of the city council to implement incentives for prompt payment No incentives were established under the project for residents to pay promptly. In some cases those who had paid were affected by disconnections, a council response to high levels of non- payment within communities. (f) Lack of attention to institutional arrangements There was an assumption that appropriate technology could be delivered through existing (inappropriate) institutions. In particular no attention was given to linkages among the communities, the project, and the councils who were expected to manage the project after a rapid hand-over by project staff.  - 44 - Annex 2.2 Page 3 of 11 7. For the demonstration project, three key lessons can be drawn: (a) Pricing, cost recovery and choice of service level must be addressed at the earliest stages of project planning. Community participation should be seen as a means to address these issues and ensure that conflicts are revealed at the planning stage, on the basis of which the community could negotiate service levels and organizational arrangements based on what they collectively want and are willing to pay for. (b) Service levels should address articulated preferences with different service options within a community open to consideration, if there are differences in willingness to pay. (c) Community participation, in keeping with the above, should be designed to ensure a wide range of voices within a community are heard in an active process. Ensuring linkages between the resulting community organizations and municipal institutions would be central to the process of participation. A heterogeneity of organizational arrangements and service levels would be expected to be the outcome of the demonstration projects, and could form the basis of multi-sectoral service provision in low income communities in follow up urban projects Current Initiatives in the Urban Sector 8. Urban Water Projects A number of institutions, both government and non-government, are currently involved in water and sanitation projects that target low income communities. The focus of preparatory missions has been to visit a large number of these projects to ensure that current experiences are reflected in project design. A summary of projects visited is presented below and projects are briefly evaluated on the basis of lessons learned above.  - 45 - Annex 2.2 Page 4 of 11 PROJECT APPROACH TO: FIELD OBSERVATIONS Pricing Participation Service Level/ 1 l ______________________ _ ______________________ T ech. JICA Very high Community was Standpost Capital cost levels George, Lusaka investment costs not involved in borehole, elevated do not make this a (US$300/capita). project planning. tank and replicable model. Residents Participation reticulation to No indication that expected only to specialists are public faucets. No community have a contribute towards sensitizing the effort to sense of ownership routine O&M; community with rehabilitate or has incentive to levels and respect to existing system. operate and maintain mechanisms for maintenance. 32 system. cost recovery not guards to be yet worked out. employed to safeguard infrastructure. Irish Aid Residents Community gave Standpost tap Difficulties with Kamanga, Lusaka contributed labor high priority to fitting is designed maintenance to initial water in to be vandal proof payments are construction and participatory needs but is unhygienic. escalating owing to responsible for assessment and Some standpipes local politics. O&M; contribute elected water have broken and Provision of water K300/ month/ committee. replacement parts within community household. Participation was do not appear to before cost recovery Difficulties with not extended to be available. modalities were maintenance choices on service agreed, combined payments; levels and with technical previously as high technology or problems are as 70% but have methods of creating difficulties. now fallen to 30%. maintenance Resentment payments. expressed by those Intensive efforts residents who required by water have paid a year in committee and advance. Irish Aid to ensure O&M payments.  - 46 - Annex 2.2 Page 5 of 11 PROJECT APPROACH TO: FIELD Pricing Participation Service OBSERVATIONS Level/Tech. World Vision No water system Emphasis on No system in Based on past urban Chainda, Lusaka in place. Market participation as place. experience in the committee pays opposed to service Copperbelt WV will for repair of provision has led let PRA process market tap. to extended determine project Frequent change consultations and design and of market no decision to date maintenance. Too committee due on water system. early to draw fund defalcation conclusions. by office holders. KADECO Community pays a Strong indigenous Community Private management Kawama West, guard K50/month community handpumps. of standpipe Mufulira for access to the organization, Technology represents a standpipe and he is originally formed determined by the promising initiative. responsible for by Oxfam which donors that maintenance. left the settlement KADECO has 5 years ago. successfully managed to approach. Maintained through cost recovery and organizational form based on incentives. Resident Residents have Organization is the No system in Existing public Development collected K45,000 responsibility of place. RDC standposts are Committee to date and hope to the RDC formed assumption that missing taps. RDC Racecourse, Kitwe approach the with the assistance standpipe/25 and community Micro Projects of city council households would appeared Unit when they development be installed. unconcerned at the reach their target workers. wastage as taps flow of K2.4 million. continually and have not used collected funds for repair. Lack of initiative raises questions as to viability of future plans.  - 47 - Annex 2.2 Page 6 of 11 PROJECT APPROACH TO: FIELD Pricing Participation Service OBSERVATIONS Level/Tech. Community No existing Shallow wells Chibote has been Chibote, Kalulushi currently has organization, identified by KCC individual shallow Council plans to for a demonstration wells and do not form RDC. project. Community pay water charges. unlikely to pay towards public standpipes given relatively good water quality and quantity obtained from shallow wells. The preferred level of service is likely to be a yard tap if the community should prove willing to pay. Community pays a MMD has One standpipe/25 An interesting Nkwasi, Ndola contribution to a assumed control of households, of example of "private" water guard when the old UNIP which the majority management and of the system is in structures and the are still working. a collection need of repair. water guard is mechanism that responsible for 25 appears to suit the households. The particular church appears community, i.e.,. also to be active funds are collected within the when necessary. community, working within this structure. RDC & Catholic Community has Indigenous Communities have Collection of the Church heard of organization identified funds appears to Kapisha, Chingola demonstration appears to be differentiated suggest keen interest project and strong. service levels; and a willingness to collected yard taps for pay for the service. K200,000 towards affluent residents Articulation by the participation. and community community of the standpipes for the need to incorporate poor. different service levels within the project reflects that choices have been evaluated.  - 48 - Annex 2.2 Page 7 of 11 PROJECT APPROACH TO: FIELD Pricing Participation Service OBSERVATIONS Level/Tech. Chazanga, Lusaka Community Community Community Notable that this members have organization of standpipe. Funds well-functioning organized women formed to collected in working committee themselves into a solve community previous months was the only committee and set difficulties in have been used to committee visited a monthly charge water access (cost change plastic where women make of K500 which and distance). piping to steel up majority or entitles each Only external after 3 entirety of members. household to 8 assistance is breakdowns. Highlights the buckets/day. "moral" support by importance of elected councilor. involvement of System of those who are regulated hours responsible for and volunteer service provision at security guards is the household level. in place. Illustrates the potential of including committed elected representatives. 9. Urban Institutional Initiatives Currently two programs are operating out of MLGH, with the objective of strengthening the institutional capacity of city councils to work in a decentralized participatory manner: the UNCHS Habitat program and the ODA-financed LOGOS project. These are described below: (a) UNCHS Habitat/MLGH Community Participation Program. This program has developed an institutional framework linking MLGH (the coordinators of the program) to municipal councils and, at the community level, Resident Development Committees (RDC). Thirteen councils are currently participating in the project and a number of councils staff (15 per year) have been trained in community leadership, organization and resource mobilization through the Chalimbana Institute. (b) LOGOS Project. This program has the more general objective of strengthening local councils within MLGH's decentralization initiative. A participatory planning component aims to strengthen planning processes within the council. Given that the LOGOS project team are new to Zambia, links to the Habitat program and the forum for participatory planning have not been defined. It was suggested that the World Bank take the lead in developing the structures of a participatory planning forum with the councils.2 Interview with Ms. Janet Gardener, ODA planning coordinator, MLGH, October 20, 1994.  - 49 - Annex 2.2 Page 8 of 11 10. The bottom-up approach taken by the demonstration component complements the above initiatives. Bank project preparation documents have recognized that community-generated initiatives cannot be sustained in a vacuum and that capacity must be built within councils to respond to participation at the community level. The Habitat and LOGOS projects are expected to ensure that this capacity is created. The ability under the URWSP to provide funds directly to community-driven projects will help ensure that council officers trained under the above programs have the opportunity to collaborate on the "doing and learning" approach of the demonstration component. III. PROJECT DESIGN AND PRINCIPLES Demonstration Project Model II. Preparation of the demonstration component has focused on understanding the history of urban upgrading, learning from existing experiences and in turn testing the validity of hypotheses at the community level using PRA methods in a process of systematic client consultation. Two broad conclusions have shaped the demonstration model: (i) it is important that project arrangements are sufficiently flexible to allow for differentiated levels of service delivery should this be "demanded" by the community; and (ii) it is important that the full community participate in the design of the project and the supporting institutional arrangements. 12. Agreed Principles of Project Design (i) projects must be community generated; communities themselves must play the central role in the design, implementation, monitoring and management of the project (ii) projects must be within the technical, financial and managerial capacity of communities; these capacities will vary among communities, but an economic test based on demand considerations, is expected to play a screening role and result in a wide range of technologies and projects. (iii) municipal partners must have access to technical assistance to enable them to respond to processes at the community level; sustainability of the project approach hinges on this principle and the project recognizes the key institutional support through UNCHS and LOGOS projects undertaken within councils. (iv) municipal partners should participate fully in the design of institutional procedures and definition of the council's role; councils should only be expected to provide what is reasonable within resource levels. In keeping with the policy of decentralization, project activities should be delegated to the lowest possible level (within communities where possible). Agreed Criteria for Project Participation 13. In order to be eligible for participation in the demonstration component, communities will have the following characteristics: (i) Poverty Criteria Communities will have an inadequate water supply. i.e., no reliable access to a formal water system and reside in informal peri-urban areas. In urban Zambia, absence of  - 50 - Annex 2.2 Page 9 of 11 water services is a clearer indication of poverty than established income-based poverty lines3 and can thus be used as a simple operational criteria. (ii) Economic Criteria The project proposes to provide a fixed "budget ceiling" of investment support to the communities. This ceiling of US$25 per capita is based on data provided by GRZ and other bilateral projects and represents the average cost for a minimum level of water supply. While communities are encouraged to exercise choice over service levels, anything over and above the US$25 per capita must be provided by the community, as well as all post-investment operaton and maintenance (O&M). The per capita ceiling will be reviewed on a regular basis. (iii) Institutional Criteria Communities must either have formed an existing community organization with the capacity to facilitate a participatory project design process. or be willing to work with appointed project design and training consultants. This process leads to the production of the Settlement Technical Plan (STP) described in the next section. IV. BENCHMARKS DURING IMPLEMENTATION Phase Actor Responsible Partners Benchmarks 1. Organization and RDC/community Design Consultants STP Preparation Project Design (see Annex 2b for details) II. Design Approval Council DISS4 Disbursement of Funds III. Construction Council (through RDC/community Completion of physical Contractor) Design Facilitation infrastructure. Consultant e.g. NGO Finalization of O&M arrangements IV. Operations and RDC/community Council staff / Project Successful maintenance Maintenance Management Advisors of infrastructure 24 months after completion The Settlement Technical Plan (STP) 14. The STP will be the core output of Phase 1. STP components include: (i) the formation of a community organization who will be responsible for the project, (ii) a project design specifying required service levels, and (iii) a financial plan for maintenance. It provides for (i) the exercise of choice by the community on service levels and organizational arrangements; and (ii) modalities to recover costs over US$25 per capita as well as operations and maintenance costs. A series of benchmarks and process indicators will monitor the steps taken in the preparation of the STP and the methods used. Details of the STP are included in the consultancy TOR. Completion of the STP and initial collection of community contributions towards maintenance must precede submission of the project to the council for funding. Zambia Urban Poverty Assessment, World Bank. 1994 Final approval in the initial phase will rest with the DISS.  - 51 - Annex 2.2 Page 10 of 11 15. During all four phases of implementation summarized in the table above. communities will have contractual relations with a number of partners. While it is recognized that communities will need technical assistance in the design and construction of their projects, the community's role is central in each phase and communities will retain primary responsibility throughout the process. 16. The Role of Consultants In phase I Project Design and Facilitation Consultants will be contracted through the DISS with the concurrence of Councils to facilitate a participatory process of community capacity building leading to the preparation of the STP (for TOR, see Annex 2.3b). Consultants will be expected to have expertise in the key project areas including the social (community participation) and technical (pricing, choice of service level and engineering options) During Phase Ill (construction), the continued assistance of the design consultants will be expected to ensure construction is consistent with design. 17. The Role of DISS The DISS will work in partnership with the Councils in approving the Project Design Consultants and the STPs. It will be essential that the monitoring and supervision of this component highlight and maintain linkages to the other two components of the URWSP, to ensure that lessons learned within the demonstration project become operationalized. The linkages established will be an important element in both sustaining the demonstration projects and ensuring the institutional framework for participation of low income communities in future urban development programs. 18. The Role of the Council Councils will be responsible for approving the STPs and disbursing funds for the community organization in order that construction of the water or sanitation system can be started. Councils will appraise the projects in the communities, thus ensuring links and understanding of the project; appraisal must be carried out by a team that will include the minimum of a representative from the Department of Housing and from the Department of Engineering. In this initial phase the DISS will support councils in appraisal and their agreement will be necessary for project approval. 19. Award of Construction Contracts The community organization will concur in the appointment of a contractor for construction of the infrastructure in Phase III of the project. Procurement will take place under recognized GRZ procedures for community-based demand-led projects. Monitoring and Evaluation 20. The demonstration component is a structured learning process; thus the role of monitoring, evaluation and feedback to GRZ and IDA is central. It is intended that the initial demonstration projects will be flexible to incorporate lessons leamed during the project lifetime. Project success will depend on the extent to which critical variables can be isolated and used in the planning of future urban projects. Based on the analysis of past experience outlined above, monitoring of the demonstration component should answer key questions surrounding the incentives for sustained service provision in low income areas. 21. The Monitoring and Evaluation (M&E) system of the URWSP (see Annex 2.10) will provide one of the key elements of the capacity building component and a linkage between the demonstration and rehabilitation activities. For the demonstration component two distinct roles of M&E aspects can be distinguished: the first indications, related to the physical and financial progress of the project, e.g. funding, procurement and technical construction, will be quantitative. The information will be gathered through standard reporting formats developed under the URWSP. The second aspect of the M&E relates to the qualitative and process aspects of the project, e.g.,. organization at the community level and the preparation of the STP. The information will be gathered through qualitative reports submitted by the Project Design Consultants, supplemented by qualitative monitoring undertaken by consultants to the DISS. The process-oriented nature of the project is designed to encourage  - 52 - Annex 2.2 Page 11 of 11 communities and Project Design Consultants to try out different methods of organization and decision-making. Given that information collected is expected to actively influence the progress of project implementation, it will be important to match qualitative indicators to clear project objectives. A summary of indicators expected to be developed within the project is given below. Summary of Qualitative Indicators Qualitative Indicator Project Objective Conflict-resolution mechanism Learn about types of conflicts that arose and how they were resolved Settlement organization structure and composition Learn about who has incentives to participate in project related activities Resource mobilization and sanctions mechanism Evaluate whether demand-based approach is being maintained and the role of participatory mechanisms in decision-making Interactions with Engineering Teams Evaluate whether settlement organization can ensure that technical colleagues listen and respond to demands that result from the participatory process V. PROJECT COSTS 22. The project's investment contribution for the demonstration component will be US$25 per capita (para 13). It is expected that around 10 percent of total project cost will be allocated to software activities of a participatory preparation of the STP using the services of the design consultants. In communities where the service level demanded requires a technology that exceeds the ceiling cost, communities will be expected to contribute in cash to the capital costs.  - 53 - Annex 2.3 Page 1 of 7 ZAMBIA URBAN RESTRUCTURING AND WATER SUPPLY PROJECT LOCAL GOVERNMENT FINANCE' General Financial Condition of Municipalities 1. Levels of municipality expenditure on basic urban facilities, both for operational and maintenance needs and on capital investment, have been severely constrained by their failure to raise sufficient finance from their own revenue resources and the limited availability of central government grants and loans. 2. Municipalities' basic financial problems are compounded by generally very poor financial management practices, which reflect a progressive deterioration in financial professionalism over the latter years of one-party rule. Systems in some of the municipalities visited seemed virtually to have broken down. Symptomatic of the situation is a failure everywhere to prepare final accounts for many years past. The matter is now being redressed in a formal sense, but missing documentation renders the exercise of very doubtful real value. The absence of reliable information on actual financial results for any recent year makes quantitative identification of trends in municipality revenues and expenditures extremely difficult. The mission has been forced to employ budget estimates for much of the analysis, but these are everywhere likely to represent an extremely poor guide to actual reality. Municipality Expenditure Trends. 3. Budget evidence suggests that municipalities' real expenditures on urban services (as distinct from administration) have mostly declined substantially in recent years on both recurrent and capital investment accounts. Municipalities acknowledge that expenditures on staff have been excessive in terms of their proportions of overall totals, and have embarked on ambitious establishment reduction programs. But the pace at which the reductions can be achieved is constrained by their ability to afford termination payments. Promised central government grant support towards the termination costs has not so far materialized. 4. Municipal Government Revenues. For the municipalities visited, such budgetary and actual evidence as can be assembled suggests that their total revenues have in real term declined substantially in recent years. Real term reductions in central government grant support have been particularly severe, but are by no means the principal cause of the overall falls indicated. 5. Local Rates. The main local tax levied by municipalities is the rates (tax on built property). Budget estimates indicate that the real yield of the rates fell substantially in nearly all municipalities in recent years up to 1992. Since then, all have made or are making very substantial increases in their rates poundages (property tax tariffs), but the extent to which the resulting large rises in billings prove actually to be collected remains to be seen. Representative domestic rates bills suggest that, in some municipalities at least, they may now approach affordability limits for a significant proportion of ratepayers. ' This annex is condensed from a working paper prepared by Brian Binder, consultant, during two missions in January and May 1994, on municipal government finance. The full report has been filed in the Africa Information Center in the project file.  - 54 - Annex 2.3 Page 2 of 7 6. Although not wholly one-way, there is evidence to support the conviction in certain central government quarters that municipality administration of the rates is often poor, from budget estimation, through rate poundage fixing, to collection. Aside from increases which might be achievable through improvements to current standards of administration, the yield of the rates would probably be substantially raised by legislative changes to improve coverage and collectability, through removal of a number of exemptions and allowing municipalities the option of rating occupiers instead of owners. Central government contributions in lieu of rates on its own properties are far below the amounts properly payable on the basis of their rateable values (and the government has mostly not paid the contributions in the last year or two). The Ministuy of Finance has said that it now proposes to pay contributions at the same levels as other ratepayers. 7. Presently each local govermment is responsible for its own rating valuations. Consideration should be given to the merits of the alternative of centralizing the work in the Government Valuation Department. 8. Other Local Taxes and License Fees. Local governments also raise revenues from the personal levy (a crude form of earned income tax) and fees for a range of trading licenses. In their present forms, at least, these have fundamental drawbacks on equity considerations. With a few exceptions their present yields appear to be relatively small, owing to collection problems coupled with low tariffs. Local governments also now retain the whole of the vehicle license fees which they collect (formerly the bulk of the revenue was payable to the central government). Again, low tariff levels and collection difficulties result in mostly small receipts; and the fees are said unfairly to benefit a select few municipalities. It would arguably be fairer, and administratively more efficient, to abolish all of these (with the exception of fees for licenses genuinely needed in the public interest) as local government revenue sources, leaving the rates, improved in the respects proposed in paragraph 1.6, as the sole local tax levied. Technical assistance is proposed to evaluate the current administration performance and the real potential of the rates, and of the personal levy, and to examine further the case for a reform of the kind just mentioned. 9. Water and Sewerage Charges. In three of the visited municipalities large increases in water and sewerage service charges were made in 1993. Budget estimates for the year in two cases show revenues recovering to exceed those of a few years ago in real terms. Whether these are actually realizable is open to doubt. Figures provided by one municipality show actual receipts for the year far below their budget estimate, and cumulated outstanding receivables at the year end amounting to more than 80 percent of cumulated billings for the last three years. That municipality's domestic and commercial tariffs are very high compared to elsewhere, and domestic bills there may have reached or exceeded affordability or willingness-to-pay limits. Tariff scales and structures vary greatly between municipalities. Except for Lusaka, where the water and sewerage company attempts to realize an annual profit, there do not seem to be any explicit criteria in use when setting them. There is no evidence in general that any detailed attention was paid to the affordability issue when they were set. 10. Full recovery of service costs from all but the poorest consumer groups is recognized in principle as an appropriate longer term charging objective for water and (perhaps more debatably) sewerage services. But its implications for tariff levels are not quantifiable at present because the water and sewerage accounts do not include all true costs - in particular, realistic depreciation or equivalent capital charges. This should be corrected, and the operations placed on a genuine self-accounting basis; even though most of the budgets seen already show deficits, and there is no real prospect of achieving full cost recovery in present conditions, the true level of public subsidization, or under-financing, of the services would be thereby be exposed, and the measure would anticipate the time when full cost recovery can be set as an operational target.  - 55 - Annex 2.3 Page 3 of 7 11. Public Housing Rents. The visited municipalities have also made recent large increases in their public housing rents, though mostly not sufficient to keep up with general inflation. Rents charged vary between municipalities. Some claim now to be charging market rents for housing tenanted by local employers. The practice followed in all of charging heavily discounted rents to personal tenants is questionable on several grounds, including that it encourages profiteering, is inequitable and tends to distort the general rental housing market. Most of the municipality budgets show surpluses on their public housing fund accounts, but these accounts are not charged with depreciation and in most cases notional charges for rates seem unrealistically low. The (cash) surpluses seem mostly to be used as a source of general revenue rather than for improving present very poor maintenance standards. There is some evidence to suggest that rent collection performance, although perhaps achieving budgeted levels of income, is very poor in relation to totals actually due and billed. As for water and sewerage services, housing ought to be placed on a genuine self-accounting basis. 12. Other Local Fees and Charges. There appears to be scope for substantial further increases in, and/or intensification of, some other fees and charges, notably those for solid waste collection and for markets, both of which seem mostly to raise only minor total sums at present. 13. Revenues Collection Arrangements. The practice of centralizing nearly all revenues collection in municipality finance departments ought to be reviewed. Collection of service-specific revenues would almost certainly be better devolved to the agencies responsible for their management. 14. Revenues From Commercial Enterprises. In the visited municipalities it seems clear that their commercial ventures in general are either inexpertly run or intrinsically unviable. Where surpluses are estimated for 1993, they are small compared to gross expenditures, and would probably convert to deficits if proper charges were made to the accounts for depreciation, central administrative overheads and rates. They would be better disposed of, the capital thus realized being used to finance the provision of urban infrastructure. The municipalities seem rather to favor the establishment of wholly-owned but otherwise independent companies to be run as commercial concerns, but experience elsewhere suggests that this would not be successful in practice. Municipality Borrowing 15. Municipalities routinely borrow on bank overdraft, on market terms, to mitigate their cash flow problems. Central government is currently their only source for long term capital expenditure loan finance, mostly representing on-lending of donor-sourced funds, and usually on very soft terms. Other state or private lending institutions now perceive municipalities as poor risks. There are no current central controls over the totality of a municipality's long term or temporary borrowing. Guidance, at least, on the matter, coupled with a central government guarantee facility for those in compliance with it, might help to revive private institutional interest in longer term lending to municipalities, once GRZ's own credit rating in the marketplace is strengthened. Central Government Transfers 16. Central government transfers to local governments are made in the forms of grants towards current expenditure, and grants and loans for capital expenditure. They may be paid by a number of ministries. All local governments, including the municipalities, are theoretically entitled to a "share of national sales tax" current expenditure grant distributed annually by MLGH on a population basis. However in recent years no such population-based grants have been paid to municipalities; instead MLGH seems to have made a few payments on a case by case and ad hoc basis, such as to meet particular local cash crises or in an apparently random attempt to  - 56 - Annex 2.3 Page 4 of 7 redeem promises to finance centrally-imposed salary increases and the cost of staff termination payments. Other ministries may pay service-specific current expenditure grants, but for municipalities, at least, the incidence of such few of these grants as have been paid appears to be haphazard, following no clear criteria. Capital grants and loans, made by MLGH and some other ministries, are financed mainly by donors. Municipalities complain about the unpredictability and apparent arbitrariness of the transfers system, and that promised grants often fail to materialize. 17. The transfers system calls for rationalization. For municipalities new standard arrangements need to be formulated which IBRD and other donors are able to support. They should reflect a coherent urban development financing strategy; embody clear and open eligibility criteria; establish standardized terms for central government loans, designed so as to, in the longer term, lead municipalities back to borrowing in the marketplace; assign responsibilities clearly amongst the relevant ministries; and employ standard funds channeling systems. Technical assistance to develop such arrangements is proposed for inclusion in the UWS Project. Local capital receipts 18. Aside from central government capital transfers, municipalities' main present source of local capital receipts is the development levies chargeable on the allocation of title to undeveloped or under-developed land. There seem to be considerable problems in collecting these levies. Changes to the system presumably have to await major land reform legislation. In that context, options to be considered should include replacement of the development levies with a capital gains tax on real estate sales, or with the allocation to local governments of a major portion of the present central real estate transfer tax (reformed as necessary). 19. Asset disposals are the other principal potential source of local capital receipts. The prime candidates for disposal are the commercial undertakings discussed in paragraph _ and council-owned housing. The municipalities visited either have already begun or are proposing shortly to begin to sell certain parts of their housing stocks. Rent income foregone will be very modest compared with the potential financial or economic returns realizable from investment of the sale proceeds. Consideration should be given to dispensing with the requirement for MLGH approval of real estate disposals, perhaps substituting a restriction that sales may not be made below prices set by an independent valuer, or by the GVD. Municipal Budgeting and Planning 20. There are so many serious defects in the annual budgeting process as to render the exercise almost meaningless. It seems almost wholly to be in the hands of finance departments. Service departments are requested to submit proposals (usually in September/October) but there is no prior strategic review of likely available resources and spending priorities, and the received submissions are often ignored as being wholly unfinanceable. Preparation of the budget document, done on computer in all the visited municipalities, is usually a lengthy process. In only one municipality was the 1994 budget finalized; the remainder did not seem to expect finalization before March - three months into the year. The drafts are submitted direct to the Finance and General Purposes Committees with little prior consultation with their chairmen, or even with Mayors. Services committees are not consulted at all. 21. Budget formats in all municipalities visited are very similar, conforming with central guidance issued many years ago. They consist of a number of summaries, followed by many pages of detail, in technical accounts format. Not even the summaries are of any real use for informed debate on resources allocation, and nobody other than an experienced local government accountant could be expected to be able to interpret the detailed tables. There is no  - 57 - Annex 2.3 Page 5 of 7 supplementary data explaining service levels, etc., which might throw light on the implications of the proposals. Further confusion is caused by liberal use of inter-vote recharges, many of which are not identified in the expenditure analyses, and which lead to summaries including fictitious amounts of revenue and offsetting multiple counting of expenditure. Presentation of the documents in computer printout format add to the comprehension difficulties. 22. Notwithstanding the dominance of the finance departments in budget preparation, the responsible officials mostly show little awareness of the expenditure needs of the services for which they are budgeting, being unable to quote basic operational statistics such as staff numbers, unit costs, and client populations served. 23. The draft budgets presented to the Finance and General Purposes Committees generally show current account deficits. The accompanying brief reports confine themselves to stating the proposed rate poundage and increases in fees and charges estimated to be required to cover the deficit. Once agreed, the summary tables are amended in accordance with the F&GP Committee decision, formally approved by full Council, and submitted to MLGH for approval. The Ministry's approval is given very late; for 1993, in one case it was not received until November of that year. 24. The amendments to the draft budget summary made following F&GP Committee decision are not carried into the detail supporting tables which allocate provisions over services. The latter cannot therefore function for either of the two principal purposes of an annual budget, namely a) as the financial plan allocating resources for the year; and b) as the basis for control of program implementation. Revised budget estimates are only produced concurrently with the preparation of the budgets for the succeeding year. In view of the timing their approval amounts merely to a retrospective endorsement of changes which have already taken place - often, on the expenditure side, mainly reflecting the actions of officials. Yet the variations from the original budgets are frequently very substantial. One is led to the conclusion that for practical purposes there is no effective financial plan governing municipality operations. 25. Coping with Uncertainty. Normal uncertainty in budget-making is greatly compounded in Zambia' s case by the poor economic climate, high level of inflation, and unpredictably of central government decisions on matters such as global pay increases and payment of grants. Budgeting procedures need to be able to cope accordingly. One approach is to incorporate in budgets substantial reserves for contingencies, with proper political level approval procedures governing their use. The alternative is to make regular supplementary budgets to effect adjustments; or, as is the case in some countries, to enact budgets covering a shorter period than a year. However, either of the latter are not practicable without fundamental improvements in the efficiency of current budgeting systems to shorten preparation periods. A change from accruals to cash, or cash and expenditure commitments, as the basis for budgeting and accounting would further serve the interests of greater certainty in planning and managing the allocation of resources. 26. Medium Term Financial Planning. Neither for capital nor for recurrent expenditure do municipal governments presently draw up indicative medium term financial plans. Such plans can provide a valuable discipline forcing proper evaluation of the longer term financial implications of current decisions, including identification of potential shortfalls in revenues and options for correcting them. Arguably, their introduction is not practicable until economic conditions improve and stabilize; but work could begin now on developing a framework for later implementation when feasible.  - 58 - Annex 2.3 Page 6 of 7 27. Budget Implementation and Control. Regulations require that every commitment to expenditure incurred by a spending department must secure the prior authorization of the finance department. Such authorization should be given by reference to budget votes; but in practice decisions appear to be taken rather according to the municipality's cash position, and views on the degree of urgency or priority - confirming the ineffectiveness of the current budgets. In two of the municipalities visited, the expenditure control system appeared virtually to have broken down. Spending departments were incurring commitments on their own, subsequently presenting invoices for payment, usually successfully. 28. Receivables and Payables. Although those visited could not provide comprehensive statements, municipalities everywhere are thought to have large outstanding amounts currently receivable and payable (debtors and creditors). They are believed to include arrears in the settlement of mutual obligations between municipal and central government/parastatal levels in respect of rents, contributions in lieu of rates, water and sewerage charges, electricity charges, and payroll deductions for taxes and superannuation fund contributions. Prompt recognition and settlement of inter-governmental obligations is just as important as for any other. Failure to take them seriously on either side is likely to sour mutual relationships and engender indisciplined "tit-for-tat" approaches to mutual debt problem resolution. The Ministry of Finance has acknowledged the issue and is understood to be about to sponsor a mutual debt offset and net settlement exercise between all public sector organizations. Accounting and Monitoring 29. Internal Financial Reports. Finance directors are expected to report monthly to the F&GP Committee on receipts and payments made. These reports are frequently submitted late, often by several months, owing to delays in computer processing of the accounting records. They are compiled manually from computer printouts or alternative sources. The expenditure report formats are of little use for the purposes of meaningful financial control: expenditure is not cumulated for the year; no comparison is given with budget provisions; and no analysis is given according to service or spending department. The income report formats are better, giving both cumulative figures and comparisons with budgetary estimates for principal sources; but they give insufficient detail, do not follow the same format as that of the budget, and sometimes mix accounting transactions with true receipts figures. No regular statements of the municipality cash position in total or by fund account are provided. 30. Bookkeeping and Accounts. Until recently the municipalities had not prepared final accounts since the mid-1980s. Three have now engaged consultants to prepare them up to date, while the fourth is undertaking the work itself. The exercise is hardly meaningful, however, since many records appear to have gone missing. Like that of the budget, the format of the final accounts presentation is so uninformative as to be almost meaningless. There are no comparisons with budget provisions, no capital accounts, no sensible summaries, and no explanations of balance sheet items. 31. Three of the municipalities visited maintain all billings, personal ledger, payroll and expenditure and income records on mainframe computers. They seemed wedded to the mainframe concept, and unfamiliar with the power, potential flexibility and relative cheapness of modem PC-based networked systems. Municipalities considering systems computerization or upgrades clearly need access to independent expert advice. In two cases (Lusaka and Ndola) the systems, both employing very old technology, were found to be on the verge of total collapse. Urgent replacement is required in each case with modern networked on-line systems, software and printers. It is proposed to include this as a component of the UWSP.  - 59 - Annex 2.3 Page 7 of 7 Internal Audit. 32. An Internal Audit Division is currently located in the finance department of each municipality. The divisions seem often to be understaffed, and the impression gained was that they spend much of their time on the routine checking of transactions within the finance department. Internal Audit should be a service to the whole municipality, charged with the seeking out, not only of malpractice, but also of waste and inefficiency. 33. Effective internal auditors need specialist training. Means of providing an appropriate training facility, to develop a cadre of such expertise, need to be explored. 34. The placing of the local government internal audit service within the finance department deserves to be reviewed. In some other countries the independent status and high ranking of this service is emphasized by making it responsible to the town clerk or equivalent top official, or even directly to the elected Council. Financial Systems Reform 35. There is an evident need for a full scale reform of the municipalities' entire financial systems and procedures to bring them up to modern standards and to achieve effective internal financial control and accountability. The reform must start from fundamentals, that is, review of the governing financial regulations, and then proceed to cover the accounting framework, raising and recording of income, authorization of expenditure, payment systems, budgetary procedures and format, financial reporting procedures and formats, format of final accounts, a framework for the adoption of medium term financial planning, and computerization principles and recommended configurations. Rather than rigid prescription of details, the reform should establish principles accompanied by guidance giving models for municipalities to adapt to their particular needs. Supporting model software would be designed, running on networked systems, to support all transactions, accounting and reporting procedures. Additionally a budgeting module would be developed to allow rapid assembly of information, scenario testing, and expeditious production of budget documents. A major consultancy effort would be needed. Development would need to be carried out in a volunteer municipality, and frequent consultation held with other municipalities to ensure that the systems could adapt to varying detailed local requirements. Consultation would be needed with other donors who may be addressing similar areas before the precise shape of this assistance could be finalized. Training Needs of Finance Staff 36. The need for more formal local government and other public sector finance training facilities, indicated by the municipalities visited, has apparently been recognized by the Lusaka-based Zambia Center for Accountancy Studies. The Center is understood currently to be preparing residential courses leading to professional qualifications at technician and full accountant levels, supported by GRZ with donor-funding from the EU. It would seem desirable to involve the Center in some way with the systems reform exercise proposed in paragraph 1.32, to ensure that the results are properly reflected in its courses.  - 60 - Annex 2.4 Page 1 of 8 ZAMBIA URBAN RESTRUCTURING AND URBAN WATER SUPPLY PROJECT SUGGESTED MAIN TOPICS TO BE INCLUDED IN MODEL INTERIM URBAN LOCAL GOVERNMENT FINANCIAL STANDING ORDERS 1. General fiduciary responsibilities of Director of Finance, Town Clerk, Departmental Chiefs, and, in their absence, their deputies or other stand-ins. 2. Outline of the key features of the annual budget-making process and timetable, including the respective roles of service departments, finance department, town clerk, service committees, F&GP Committee, and the full Council. 3. Minimum provisions regarding the annual budget format and the content of the accompanying report of the F&GP Committee (drafted by the Director of Finance; to include the clear vote-by-vote identification of expenditure provisions which may be committed without further reference to the Council or its committees (a limited set of routine votes), all others requiring the further agreement of the Council or its committees under delegated powers. 4. Requirement for the annual budget to balance. (This in essence implies that: a. no expenditure may be included in the budget for which a financing source is not clearly identified; b. recurrent expenditure may not be financed from borrowing, other than temporary borrowing not exceeding a duly authorized limit; and C. capital expenditure may not be financed by temporary borrowing other than while awaiting its re-finance from a clearly identified and certain financing source.) 5. All borrowing (including from internal funds) to be authorized by resolution of the full Council in plenary session. 6. Provisions concerning the safe custody of cash and other assets; the prompt banking of all receipts; and the prompt recording of, and accounting for, all receipts. 7. Procedures for the remission, rebate and writing-off of debts due to the Council (full Council agreement would normally be required). 8. Prohibition of the incurrment of expenditure commitments which are not covered by an authorized annual budget vote (not to include reserves and provisions, whether for contingencies or for any other purpose) without the agreement of the Council in plenary session, including the passage of a resolution giving effect to the necessary annual budget amendment. 9. Provisions with respect to virement between expenditure votes/sub-votes.  - 61 - Annex 2.4 Page 2 of 8 10. Special procedures governing the appropriation to specified budget votes of amounts from reserves or provisions (full Council approval would normally be required). 11. Clear, quantified, specifications of the extent of delegated financial powers from the full Council to the Mayor, F&GP Committee, service committees, Town Clerk, Director of Finance, and service department chiefs. 12. Limitation of the authority to sign cheques to a very few persons occupying specified posts within the finance department only (including that of Director). 13. Provisions concerning the investment of funds balances (GRF, self-accounting services funds, capital funds, etc.). 14. Responsibility of the Finance Director to ensure the maintenance of all financial records (whether or not within his/her department) in an accurate and up-to-date manner. 15. Reporting requirements: a by Director of Finance to F&GP Committee, to include monthly reports of cumulated revenue and expenditure (accruals basis), and receipts and payments (cash basis) compared with budget provisions (format to be consistent with that of the budget); cash position; outstanding debtors and creditors; detailed arrears reports and actions taken and proposed; b. by Director of Finance concurrently with relevant service department chiefs to each service committee, showing the same information as in a. in relation to the committees' own service areas (cash position reports omitted except in relation to self-accounting services). 16. Director of Finance to submit draft final annual accounts (subject to external audit) to the full Council, through F&GP Committee, by a prescribed latest date; basic content and format of the final accounts document to be specified (inter alia, format must be consistent with that of the budget; comparisons must be given with the latter, and with previous year's actuals; capital accounts to be included; balance sheet items must be analyzed and explained). 17. Director of Finance to report annually to the full Council, through F&GP Committee, on the report on the annual accounts made by the external auditors, within a specified period from its receipt, responding in detail to points raised therein. 18. Rights and responsibilities of the Council's internal financial audit service (currently under the management of the Director of Finance, but should be given an independent status in relation to the conduct of its work and the submission of its reports direct to F&GP Committee and the full Council).  - 62 - Annex 2.4 Page 3 of 8 CENTRAL TRANSFERS TO LOCAL GOVERNMENTS - BACKGROUND Introduction 1. Before 1979, a system of grants to local authorities was in use by the government. Some eleven different types were available including matching grants and those designated for specific services. Over the years this system has been dissolved and currently most grants are allocated at the discretion of the Minister of Local Government and Housing. 2. Analysis of local government fund sources clearly shows the reality of substantial reductions in government transfers to local governments. For example, in 1987 government introduced regulations which committed to provide 35 percent of local sales tax as a central transfer to local governments. This was introduced to provide funds that were needed to cover declining real incomes as a result of inflation. Actual figures' suggest however that the amount released to local governments has not matched the commitment. Only in 1987 and 1988 was the 35 pe--ent target met with a gradual decline to 22 percent in 1991 and falling to 4 percent in 1993. 3. Grants to councils have been authorized under the Local Government Act [Number 22 of 1991], Section 45 which reads: "(1) The Minister may, on such terms and conditions as he may determine, make grants or loans of money to a council for purposes of the discharge by the council of any of its functions. "(2) Any grants or loan made by the Minister under this section shall be paid out of moneys appropriated by Parliament for the purpose. "(3) The Government may make specific grants to the council concerned for: (a) water and sanitation; (b) health services; (c) fire services; (d) road services; (e) police services; (f) primary education; (g) agricultural services." Types of Central Transfers 1. Central transfers to local governments through the Ministry of Local Government and Housing (MLGH) comprise: * recurrent expenditure grants; * capital expenditure grants; and  - 63 - Annex 2.4 Page 4 of 8 loans for infrastructure projects. Most of the latter two transfer categories are foreign funded and all are specifically tied to named projects. 2. There are eight classes of recurrent grants, these are: a. Grants made in lieu of rates -- amounts payable by the central government to all local governments instead of rates on the properties within its ownership (houses, offices and industrial premises). 1994 budget' K74.2 million. b. Share of local sales taxes -- 35 percent of the total collected disbursed to district councils. This replaced the former deficiency grant which funded the difference between the approved expenditure commitments of a council and the amount that could be raised locally. There is no formula for its allocation. 1994 budget Ki ,293.1 million. c. Beer surtax grant -- payable to rural districts and not to the cities and municipalities but is only released when the council has produced its annual accounts. It is apportioned out amongst districts on the basis of population and land area. No for local governments under the 1994 budget. d. Gwembe Special Fund Grant -- paid specifically to three councils within which families displaced as a result of the construction of the Kariba dam live. It covers the cost of providing basic services to them. 1994 budget K4.5 million. e. Grant for the operation of the National Fire Service Training School. 1994 budget K47.1 million. f. Local Authority Superannuation Fund Grant -- grant to assist councils in paying retirement benefits to former employees. 1994 budget K40.3 million. g. Grants for the maintenance of water and sewerage systems. 1994 budget K1,155.O million. h. Grants for the rehabilitation of roads. No specific provision under the 1994 budget. 2. Under the 1994 budget, the total recurrent grants to be provided to the MLGH for local governments are recorded at K2,614.3 million, with capital grants and loans standing at K22,230.1 million. A further K3,463.2 million is provided for the capital outlays of the Ministry itself. 3. Other central government ministries may also pay grants towards local government current expenditures on services such as roads maintenance and personal health.  - 64 - Annex 2.4 Page 5 of 8 Current Policy 1. Government policy is now for city and municipal councils to become self sufficient in financing and for the current level of grants to rural districts to be gradually reduced. The apparent reason for this change in government policy was that the Minister of Finance was no longer prepared to provide block grants without specific commitments to their use. 2. Grants are transfers of central government revenues and enable local governments to draw on revenue sources which are administered at national level. In the past most grants were non-specific and most were used to pay wages and salaries. However evidence shows that many councils have not received grants for recurrent expenditures in recent years. With the reduction of the sales tax grant, capital grants are mainly financed through donor or project aid. Nevertheless councils have complained that transfers, although committed, often are not released. 3. Central government transfers for capital investment appear to follow no rules as to their form, whether grants or loans, and there is no consistency in terms of loans. There is no formula in use at MLGH to determine the allocation of capital grants and it is understood that arbitrary distributions are made. The same criticism appears to apply in the case of grants made by other ministries. Projects are financed on a specific basis which often reflects the wishes of the donors. Recent studies have shown that there is a need for the government to formulate new arrangements for central transfers to local governments. Current Proposals 1. The latest thinking on the status of grant financing is reflected in a study commissioned by the MLGH under the Interim Local Government Project financed by ODA. Preliminary conclusions are contained in a draft report titled Financing Local Government dated April 1994. The coverage of this study and the findings of the report however are to be revised in the light of comments from the government through the consumption of additional consultants input. Clearly the government accepts the need for a review of the necessity of grant financing for local governments and wishes to adopt a methodology for its equitable allocation. 2. Summary recommendations of the report which were based on the discussions held with officers of MLGH, Cabinet Office and Budget Office and the need to maintain consistency with section 45 of the Local Government Act, were that grant distribution should in future be made for specific services. 3. The basis of the recommendations is to relate grants to match funding deficits and to take into account revenue collection efficiency and service provision performance (management efficiency and effectiveness). The methodology suggested was: a. determine the total size of grant for each local government; b. determine the grant required for each service in each council; and c. provide a formula for the distribution of grant money by MLGH to local authorities.  - 65 - Annex 2.4 Page 6 of 8 4. The formula recommended for adoption was: Total proposed grant allocation to each council equals the fund deficit, which is computed as the difference between the calculated base cost of providing a minimum reasonable level of service and the locally generated income comprising service charges, rates, personal levy, local levies, commission on central government licenses collected, profit from commercial enterprises and other income, per head of population multiplied by the population. Its allocation amongst services is based upon a weighted average percentage of deficits for each service within the sampled local authorities as a proportion of the total deficit and applied to the total figure. Recognizing the limitations of this method the study recommends that "because of the weakness of the extrapolation method outlined above, a far more detailed method of grant determination and distribution should be worked out in due course".  - 66 - Annex 2.4 Page 7 of 8 PROVISIONAL FORM OF LOCAL COUNCIL RESOLUTION CONFIRMING AGREEMENT TO PARTICIPATE IN THE PHASE I ASSISTANCE Resolved: I. The Council do receive and welcome the report (on the proposed URWSP investment program and the related technical assistance) as a major initiative to strengthen its ability to finance and manage the provision of essential public services to meet the highest priority needs of all its citizens, including the most deprived. 2. The Council do recognize the crucial importance for the success of the project of its establishing effective, efficient, and accountable financial management systems and practices throughout its organization. 3. Accordingly, the Council do cordially extend its cooperation, and that of all its officials, in the joint examination, with the appointed consultants for the financial management improvement component of the URWSP technical assistance, of the scope for upgrading its basic financial systems and procedures in the near term. 4. The Council do confirm its readiness in principle expeditiously to adopt and implement the financial management improvements recommended under the technical assistance, including adoption of a basic set of Financial Standing Orders, subject to the submission of a further report on the detailed recommendations, when formulated.  - 67 - Annex 2.4 Page 8 of 8 LOCAL GOVERNMENT SUPPORT PROJECT (LOGOS) Background 1. Following support for an Integrated Rural Development Project in Northern Province and subsequently the Central Province District Development Support Project (CPDDP) during the 1980s a GRZ and ODA review team concluded that the benefits achieved would not be sustainable unless the approach was extended nationwide and the MLGH assumed responsibility for strengthening district councils' capacity to manage their own affairs. During 1992 and 1993 the Overseas Development Administration of the British Government (ODA) supported inputs to the formulation of a plan for decentralization. There followed a Finance Training Project (FTP) based in the Ministry of Finance. The LOGOS Project is a natural extension of these earlier efforts. 2. In 1993 ODA in consultation with GRZ agreed to support a nationwide project in capacity building and training support for the Zambian local government system. LOGOS is an institutional development project designed to support Zambia's Public Sector Reform Project (PSRP) through capacity building activities in local government. The project will run from April 1994 until March 1997, in the first instance and is estimated to cost