Mozambique - Water Services and Institutional Support Project

Documentof The World Bank FOR OFFICIAL USEONLY ReportNo: 39307 - MZ PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDCREDIT INTHEAMOUNT OF SDR9.9 MILLION (US$15 MILLIONEQUIVALENT) TO THE REPUBLICOF MOZAMBIQUE FORA WATER SERVICES AND INSTITUTIONALSUPPORT PROJECT August 7,2007 Water andUrbanUnit 1(AFTU1) MozambiqueCountry Department AfricaRegion This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bankauthorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective June 21,2007) Currency Unit = New Meticais (Mtn) 26.02Mtn = US$1 US$1.51 = SDR1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AAP Africa Action Plan ACGF Africa Catalytic Growth Fund AdeM Aguas de MoFambique (Water o fMozambique) AfDB African Development Bank AMU Asset Management Unit CAS Country Assistance Strategy CEM Country Economic Memorandum CFAA Country Financial Accountability Assessment CPS Country Partnership Strategy CQS Consultant Qualifications Selection CRA Conselho de RegulaF6o doAbastecimento deAgua (Water Regulatory Council) DAU DepartmentofUrbanWater DHS Demographic andHealth Survey DMF DelegatedManagement Framework DNA Direcq6o Nacional deAguas (National Directorate for Water Affairs) EIB European Investment Bank EU EuropeanUnion FIPAG Fundo deInvestimento e Patrimdnio do Abastecimento deAgua (Water Supply InvestmentFund) FMR Financial Management Report GAPASU Gabinete de Gest6o do Patrimdnio do Abastecimento deAgua e Saneamento (Office of UrbanWater Supply and Sanitation) GoM Government of Mozambique IAF Inque'rito aos Agregados Familiares sobre OrGamentoFamiliar (Household Survey) ICA Investment Climate Assessment ICR Implementation Completion Review IDA InternationalDevelopment Association IFAC International Federation o fAccountants IRA1 IDAResourceAllocation Index JICA JapanInternational Cooperation Agency JSAN Joint StaffAssessment Note  FOROFFICIAL USE ONLY LCS Least Cost Selection MAE Ministe`rio du Administrucqio Estutul (Ministry of State Administration) MCC MillenniumChallenge Corporation MDG MillenniumDevelopment Goal MDRI MultilateralDebt ReliefInitiative MOPH Ministdrio dus ObrusPliblicus e Hubituqio (Ministryof Public Works and Housing) M O U Memorandum ofUnderstanding NWDP NationalWater Development Project PARPA Poverty ReductionAction Plan PEFA Public Expenditure and FinancialAccountability PFM Public Finance Management PRSC Poverty Reduction Support Credit PWB ProvincialWater Board QCBS Quality and Cost Based Selection RPF Resettlement Policy Framework SBD StandardBidding Documents SIL Sector Investment Loan SWAP Sector Wide Approach T A Technical Assistance UNICEF UnitedNations Children's Fund WSP wss Water and SanitationProgram Water Supply and Sanitation VAT Value Added Tax Vice President: Obiageli KatrynEzekwesili Country Director: MichaelBaxter Sector Manager: Jaime Biderman Task Team Leader: N.JaneWalker This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   MOZAMBIQUE Water Services andInstitutionalSupport Project CONTENTS Page I CONTEXTANDRATIONALE . .......................................................................................... 5 A . Country and sector issues ................................................................................................. 5 B Rationalefor Bankinvolvement ...................................................................................... 8 C .. Higher level objectivesto which the projectcontributes ............................................ 10 I1. PROJECTDESCRIPTION ........................................................................................... 14 A . Lendinginstrument ........................................................................................................ 14 B Programdevelopmentobjective and key indicators ................................................... 15 C .. Projectdevelopmentobjectiveand key indicators ...................................................... 15 D Projectcomponents 15 E Lessonslearnedand reflectedintheprojectdesign .. ......................................................................................................... .................................................... 19 I11 IMPLEMENTATION .................................................................................................... 20 A.. Partnershiparrangements ............................................................................................. 20 B . Institutionalandimplementationarrangements ......................................................... 20 C Monitoringandevaluationof outcomes/results 20 D Sustainability ................................................................................................................... 21 E .......................................................... 22 F Creditconditionsandcovenants .... ........................................................... Criticalrisksandpossiblecontroversialaspects .................................................................................... 23 I V APPRAISAL SUMMARY ............................................................................................. 24 A .. Economicand FinancialAnalyses ................................................................................. 24 B Technical .......................................................................................................................... 27 C Fiduciary .......................................................................................................................... 28 D ... Social: Stakeholdersconsultation .................................................................................. 29 E 29 F Safeguardpolicies 30 G PolicyExceptionsandReadiness ... Environment .................................................................................................................... ........................................................................................................... ................................................................................... 30 Annex 1: Country and Sector or ProgramBackground ......................................................... 31 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .................34  Annex 3: ResultsFramework andMonitoring ........................................................................ 35 Annex 4: DetailedProject Description ...................................................................................... 38 Annex 5: Project Costs............................................................................................................... 44 Annex 6: ImplementationArrangements ................................................................................. 45 Annex 7: FinancialManagementand DisbursementArrangements ..................................... 47 Annex 8: ProcurementArrangements ...................................................................................... 56 Annex 9: Economicand FinancialAnalyses ............................................................................. 63 Annex 10: Safeguard PolicyIssues ............................................................................................ 69 Annex 11: ProjectPreparationand Supervision ..................................................................... 71 Annex 12: Statementof Loansand Credits .............................................................................. 72 Annex 13: Country at a Glance ................................................................................................. 74 Annex 14: HIV/AIDS Policy of ImplementingAgencies ......................................................... 76 Annex 15: Africa CatalyticGrowth FundRequest ................................................................. 78 Annex 16: Maps .IBRD 35608 ................................................................................................. 86  MOZAMBIQUE WATER SERVICES AND INSTITUTIONAL SUPPORT PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTUl Date: August 7,2007 Team Leader: N.Jane Walker Country Director: Michael Baxter Sectors: Water supply (100%) Sector ManagedDirector: Jaime M.Biderman Themes: Access to urban services andhousing (PI Project ID: P104566 Environmental screening category: Partial Assessment Lending Instrument: Specific Investment Loan Project FinancingData [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: Source Local Foreign Total BORROWEWRECIPIENT 0.00 0.00 0.00 InternationalDevelopment Association 8.1 6.9 15.00 (IDA) Africa Catalytic GrowthFund(ACGF) 8.1 6.9 15.00 Total: 16.2 13.8 30.00 Borrower: Republic of Mozambique Responsible Agency: FIPAG RuaGeneralPereirad'Eca N.241 WC, PO Box 917 Maputo, Mozambique www.fipag.co.mz DNA 942 Av 25 de Setembro, 3'h Floor, PO Box 611 Maputo, Mozambique CRA Avenida Amilcar Cabral, No. 757, PO Box 235 Maputo, Mozambique 1  I Expected closing date October 31,2012 GrantImplementationPeriod: Start October 31,2007 31,2007, EndOctober 31,2011 Expected effectiveness date: October 31,2007 Expectedclosing date October 31,2011 Does the project depart from the CAS incontent or other significant respects? Ref: PAD A.3 [ [x No Does the project require any exceptions from Bankpolicies? Ref: PAD D.7 [ ]Yes [XIN o Have these been approvedby Bankmanagement? [[ ]Yes [XIN o ]Yes [ IN0 I s approval for any policy exception sought from the Board? Does the project include any critical risks rated "substantial" or "high"? Ref: PAD III.E [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? [ X ]Yes [ ] Ref: PAD D.7 N o Project development objective Ref: PAD B.2, TechnicalAnnex 3 The development objective o fthe project is to increase water service coverage inthe cities of Beira, Nampula, Quelimane, and Pemba under the delegated management framework and to establish an institutional and regulatory framework for water supply insmaller cities andtowns. Project description [one-sentence summary of each component] Ref:PAD B.3.a, Technical Annex 4 The project will finance the following three components: (A) Investmentsandcontinuing support inthe 4 cities o fBeira, Nampula, Quelimane, and Pembaunder the responsibility o f FIPAG: The project will support an improvement o fwater supply access from the construction o fapproximate 370 kilometerso fnetwork resultingin 10,000 new connections inthe 4 cities. (B) Capacitybuilding,institutional andoperationalsupport to DNA:The projectwill establish and operationalize the Asset Management Unit (AMU)and provincial water boards (PWBs). Under this component, the project will also support the preparationo f the SWAP for the rural water sub-sector. (C) Operational support to CRA with respect to expanded regulatory responsibility for smaller towns and cities: The project will support the development o fregulatory frameworks to cover the smaller towns and cities as AMU i s set-up and expanded via the Provincial Water Boards. 2  Which safeguard policies are triggered, ifany? Ref: PAD D.6, Technical Annex 10 EnvironmentalAssessment Involuntaryresettlement Significant, non-standard conditions, if any, for: Ref: PAD C.7 Boardpresentation: September 4,2007 Loadcredit effectiveness: Effectiveness conditions for IDA Credit: Satisfactory legal opinions on the FinancingAgreement, Project Agreements and Subsidiary Agreements are made available. 0 FIPAGandCRA have caused that the existing financial management systems be adjusted for the purposes o f the Project, satisfactory to the Association inform and substance. 0 FIPAGandCRA have each adopted the relevant Project ProcurementManual adjusted for the purposes o f the Project, satisfactory to the Association inform and substance. 0 The execution and delivery of the African Catalytic Growth Fund Agreement has been dulyauthorized. Effectiveness conditions for ACGF Grant: 0 Satisfactory legal opinions on the Grant Agreement, Project Agreements and Subsidiary Agreements are made available. 0 FIPAGandCRA have caused that the existing financial management systems be adjusted for the purposes o f the Project, satisfactory to the Association inform and substance. 0 FIPAG and CRA have each adopted the relevant Project Procurement Manual adjusted for the purposes of the Project, satisfactory to the Association inform and substance. Financial and Other Covenants applicable to project implementation: 0 Duringthe 12monthafter the Mid-TermReview, the financing gap inthe operational cost support to the Asset Management Unit inthe years 2013-2015 will be quantified and the GoMwill make provisions to cover these costs. 0 Within twelve months o fthe Effective Date o fthe Project, the AMU shall be established by decree. The CRA and FIPAGwill maintain financial management systems inaccordance with international accounting standards, andhave their entity financial statements and the project financial statements audited inaccordance with international auditing standards. These audits shall cover the period o f one Fiscal Year. The audits for each such period shall be finished to the Association not later than six months after the end o f such period. 0 The tariffs for the systems under the responsibility o f FIPAGshall reflect the principles o f full cost recovery andbe sufficient to cover operating expenses, depreciation, and cost o f capital ina reasonable time horizon for all said systems. The tariffs will be assessed duringthe Mid-Term Review. 3  Within eighteenmonths after the Effective Date, all outstanding public sector arrears to FIPAGare settled andensure that a mechanism to pay future public sector water bills be put inplace. 0FIPAGshall ensure that it: (i) 1.2times its debt services requirements through its covers net revenues; and (ii) does not incur any additional debt unless a reasonable forecast of its revenues and expenditures show that its projected net revenues for each Fiscal Year duringthe term o fthe debt to be incurred shall be at least 1.5 times the projected debt service reauirements. 4  I. CONTEXTANDRATIONALE 1. The proposed Water Sector Services and Institutional Support (WASIS) Project is a 5- year US$30 millionproject funded by the Afiica Catalytic GrowthFund(ACGF) and the International Development Association (IDA). It i s designed as a repeater project for the National Water Development Project I1(NWDP 11) and will continue long term support provided to the water sector inMozambique. WASIS will facilitate access andimproved water services to an additional 137,000' households inBeira, Nampula, Quelimane, andPemba, four o f the cities whose water supplies improved under NWDP 11. It will continue the use o f private sector participation with a second generation o fprivate sector contracts inthese cities. The project will also widen the successful implementationmodels developed underNWDP I1to include smaller cities andtowns. It will also provide institutional support for the development o f a sector wide approach (SWAP) for the rural water sub-sector. It will attract other donor resources and encourage local private sector partners to scale up andreplicate the successful approach under NWDP 11. 2. NWDP I1is considered a flagship project for the use o fprivate sector participation inthe water sector inSouthern and East Afiica. The legal establishment o fFundo deInvestimento e Patrimbnio do Abastecimento dekgua - FIPAG(the asset holding company) and Conselho de RegulapTo do Abastecimento de kgua - CRA (Water Regulatory Council) at the end o f 1998 providedthe basis for remarkableprogress. Water services inthe five cities, supported under NWDP I1andunder FIPAG's mandate, improved reliability, quality, andsustainability o fwater services. The project was cited inthe mid-term Country Assistance Strategy (CAS) review as one of the five key successful CAS results. NWDP 11is scheduled to close on March 30,2008. The project was approved on June 17, 1999 andbecame effective on March 8,2000. The original credit amount was SDR55.4 million (US$75 millionequivalent). A supplementary credit o f SDR 10.2 million (US$15 million equivalent) was approved on February26,2004. About 63 percent o fthe credit was disbursed and 95 percent o f the remaining credit has been committed as o f June, 2007. A. Country and sector issues 3, Poverty reduction and the role of efficient service delivery. Mozambique, a country o f 20 million people with more than 70 percent o f the population inrural areas, i s located inthe southern tip o f the African continent. Coming out o f a devastating three-decade civil war in 1992, Mozambique grew rapidly. Since 2000, its growth rate has stabilized at between 7 and 8 percent. As the Country Partnership Strategy (2007) notes, Mozambique has achieved the highest average growth rate inthe past 10 years among the non-oil producing countries inAfrica. Concurrent with growth, Mozambique also succeeded incontainingpoverty and enhancing access to social services. The rate o fpro-poor growth at 3.9 percent inthe past decade implies that poverty reduction inMozambique was equitable, with all groups including the bottom quintile o fpopulation, benefiting from economic growth. Although poverty is concentrated in the rural areas, this reduction was unique inAfiica because rural poverty fell faster thanurban poverty (Country Economic Memorandum, 2005). At the current rate o f growth, Mozambique is 1Basedon the maximum connections possible fiom the productioncapacity (volume of water) builtunder NWDP I1(elaborated inTable 1). 5  on track to meet the MDGo f halving the population livinginpoverty by 2015. Inspite o f impressive progress, 10 million Mozambicans still live inabsolute poverty (PARPA I12). 4. The Government o f Mozambique (GoM)'s actionplanfor poverty reduction inthe past decade - PARPA I(2001-2005) and PARPA I1(2006-2009) are based on the premise that broad- based economic growth is critical to poverty reduction. InPARPA I, lack o fbasic infrastructure3 services was identified as one o f the major determinants o f rural poverty inMozambique andthe G o M focused on infrastructure investments to meet its ambitious growth objectives. Buildingon the lessons learnt from PARPA I, the GoMoutlines investment inhumancapital, including water and sanitationservices, as one o fthe three pillars to meet its sustained growth agenda inPARPA 11.As PARPAI1notes, investinginwater services contributes to meetingnot only the short-term objectives o fthe MDGs, but also Mozambique's long-term growth andpoverty reduction plans. 5. Provision o fpotable andreliable water supplyis a critical element o f infrastructure expansioninMozambique. Access to potable water significantly affects the overall well-being o f people through its impact on health, education, gender equality, andproductivity. Provision o f water is particularly important for ago-industrial enterprises, on which the bulk o f the rural economy depends. Reliability o f services has been identified as one o f the key constraints to the business environment inthe 2002 Investment Climate Assessment (ICA) for Mozambique. The water and sanitation services insmaller cities andmarket towns inMozambique are particularly low incoverage, reliability, and quality. Under WASIS, these services would be improved in several keyport cities andmarket centers, alleviating some o f the key constraints to growth in Mozambique. An increase inthe number o f "livable" cities andmarket centers would also help establish focal points for surrounding agriculture areas which can serve as a central location for post-harvesting facilities, aggregation o fproducts, diversification o f crops, andpromotion of business development. 6. Water reforms have madeprogress but gaps remain. The results o f the 1995 National Water Policy and subsequent sector reform inMozambique are positive. The sector has made significant progress, both institutionally and on the ground, especially inthe larger cities with the policy o f delegated management coupled with a robust regulatory framework. FIPAGand CRA are functioning well and achieving results according to their mandate (see Box 1). For the rural areas, characterized by small piped village systems andpoint source (boreholes with hand pumps), a demand driven community managedmodelwas developedinthe early 2000s and piloted ina number o f communities. The pilots havebeen successful but, as over 70 percent o f the population lives inrural areas, the challenge remains enormous. A neglectedarea o f sector strategy i s addressing the needs o f smaller cities and towns. There are over 33 municipalities in Mozambique and the urbangrowth rate on average is approaching 4 percent indicating that the pressure on these developing urban areas will increase significantly. 2Poverty ReductionAction Plan(PARPA) is equivalent to the Poverty Reduction Strategy Paper (PRSP). 3Infrastructure, through its impact onproductivity and investment, has a multiplier effect on growth, thereby making a dent onpoverty. As recent empirical literature notes (Agenor and Dodson, 2006), infrastructure affects growth through various direct and indirect channels. Inaddition to the conventional effects onproductivity and market expansion, infrastructure has long-term effects on well-being through health and educationbenefits. Inrecent years, developing countries have focused on growth to meet their social objectives. 6  Box 1: The success of the Delegated Management Framework (DMF) FIPAG and CRA - The organizational principle adopted for future urban water supply systems, anchored inthe National Water Policy and the National Water Development Program o f 1995, was the Delegated Management Framework (DMF), which enabled the transfer o f operational responsibilities for water supply to private companies, and introduced changes in the public sector institutions, created new institutions, and strengthened the oversight o f the sector. A key foundation stone inthis reform was a new Water Tariff Policy. This far reaching policy aimed at a more rational and commercially-oriented tariff regime that would support cost recovery and long-term financial sustainability o f the water supply system. For the provision o f water services inurban areas, a mechanism o f delegated management was put inplace for the large systems covering the five main cities in 1999 supported under the NWDP 11. As part o f this, two public institutions were created, independent from the Ministry o f Public Works and Housing (MOPH) and from each other, namely, FIPAG - Fundo de Investmento e Patrimonio do Abastecimento de Agua, which i s the asset holding company and the CRA - Conselho de RegulaqZo do Abastecimento de Aguas, which i s the regulating body for the water systems. Bothinstitutions were created inDecember 1998. FIPAG is a public entity and acts as an Investment and Asset Management institution. FIPAG's responsibilities include: investment and financial management for rehabilitation and expansion o f water supply assets; maximization o f efficiency and return on its assets; contract management, monitoring and enforcement of the contractual obligations o fthe operators. By 2007, FIPAG had grown to be responsible for 14 cities and towns from the original five. It had contracted a private operator, Aguas de Mogambique (a local operator 70% owned by Aguas de Portugal), for the 4-year management contract for the water systems in Beira, Nampula, Pemba and Quelimane. The same operator holds a 15-year lease contract for the water supply system o f Maputo. In the remaining cities, FIPAG is establishing autonomous water companies inpartnership with Vitens (a Dutch Operator) under loans from the AfDB and Dutch trust funds. OverallFIPAG manages an investment portfolio o f over US$350 million. CRA is an independent regulatory agency which i s responsible for balancing the interests o f consumers with commercial principles to ensure a viable and sustainable sector under the delegated management framework. CRA regulates the tariff regime and sets tariffs annually to ensure commercial viability and consumer affordability. CRA reports directly to the Council o f Ministers. 7. National Directorate for Water Affairs (DNA) has the responsibility for the entire water sector. It manages the majority o fthe potable water sector schemes inthe rural areas, as well as insmallertowns andcities, Overall its capacityto undertake this largemandate is stretched. A major consequence i s a fragmented approach and projects are undertakenby various donors with inadequate coordination provided byDNA. Further, systems that are built suffer from inadequate implementation and follow-up support andup to 35 percent ofrural systems are not working and inneed o f repair at any one time, Limited institutional capacity leads to weak absorptive capacity as donor fundedprojects have generally experienced under-spending as a result o fDNA's weak internal procurement and financial management skills. This i s further exacerbated by payment difficulties with respect to counterpart funds, taxes, andvalue added tax (VAT). The GoMandsector donors haverecognizedthese shortcomings andDNA andthe major donors4have recently agreed to move towards a comprehensive SWAP for the rural water sector. This approach harmonizes sector planningandmonitoring, andprovides for more effective aid modalities, inline with the ParisDeclaration. SIDA, CIDA, UNICEF, Dutch, AfDB, WSP, JICA, IrishAid 7  B. Rationale for Bank involvement 8. Building on Bank's experience in Mozambique. The rationale for Bank involvement in WASIS i s built on the implementation success o fNWDP 11. NWDP I1began implementationin 2000 and concentrated on considerable investments inimprovingthe productioncapacity o f water systems. Capital investment inthe four cities (Beira, Nampula, Quelimane, andPemba) has now secured a supply o fpotable water insufficient quantityto dramatically increase their service coverage. There is potential to serve about 137,000 households with more investment in distribution (see Table 1below). mrease in water available 9. Building on Bank Experience in the Region. The proposedproject i s inline with the latest draft o f the Water Supply and Sanitation Flagship for the Africa Action Plan. The lessons learned inthe last two decades have been instrumental inidentifying the critical inputs for sustainable water supply and sanitation. This experience, based on a number o f examples inthe region, provides practical ways to reachthe MDGs. Insummary, sustainable village water supplies depend upon decentralized, demand-responsive, and community-managed approaches. Town andcity water supplies need autonomous water boards andprofessional operators. Experience has shown that the Bank'smost important role i s infacilitating dialogue on sector reform and buildingnational programs that donors can support via SWAPS. 10. Rationalefor ACGF Funding. The ACGF' is a multi-donor trust fundprogramrecently initiated to provide funds for countries that have good growth potential and a positive track record for implementation. A key outcome o fACGF financing i s the opportunity to leverage wider donor support andprivate sector participation to achieve a scaled up development impact. The ACGF provides rapidtargeted support to countries with credible programs to accelerate growth, poverty reduction, and attainment o f MDGs. Mozambique qualifies under the ACGF as a highperforming country based on its satisfactory country record and its proven results on the ground. The project is eligible for ACGF funds, as it tackles a hardto reachMDG, crowds in other donors andits demonstrated ability to scale up results and contribute to accelerated economic growth. 11. Satisfactory Country Record. Mozambique has a soundpolicy framework inplace, as reflectedinthe country's overall IDA Resource Allocation Index6o f 3.2 inFY 2005 comparedto 5 The ACCF Grant is programmed for 4 years. It i s expected to be fully disbursed by October 31,2011. The World Bank's IDA Resource Allocation Index (IRAI) i s based on the results of the annual CPIA exercise that covers the IDA eligible countries. The CPIA rates countries against a set o f 16 criteria grouped infour clusters: (a) 8  an average o f 3.1 inIDA countries. More specifically, Mozambique scores highly on economic management which includes macroeconomic management, fiscal policy, and debt policy. The debt sustainability analysis conductedbyIDA andIMFin2006 under the MultilateralDebt ReliefInitiative (MDRI) confirmed that current debt i s sustainable. Mozambique also has in place a credible national strategy for shared growth. The government has been implementing its Action Planfor reducing absolute poverty (PARPA) for the period 2001 - 2005 andhas prepared a new PARPA for the period 2006 - 2009. The latest Joint Staff Assessment (JSAN) o f PARPA implementation was completed in2005 and found that the Government had implementedthe PARPA successfilly by allocating incrementalresources to the priority areas andby linking program implementation with the budget cycle. 12. Good Results on the Ground. The quality o f the portfolio i s satisfactory overall, with only one operation ratedmarginally unsatisfactory. The Second Poverty Reduction Support Credit (PRSC) recently disbursed the second US$60 million tranche, and a thirdPRSC has been approved. A C E M has recently been completed andongoing non-lending services include a poverty assessment, a sub-regional growth study and two pieces o f PSIA. A joint World Bank Group CAS Progress Report was completed and discussed at the BoardinMarch, 2006. The new Country Partnership Strategy (CPS) has been approvedby the BoardinMay 2007. 13. Sector Harmonization. Mozambique has made considerable progress inimplementing the Paris Declaration. Realistic andwell articulated development priorities, with ownership from the GoM, accompanied the harmonization process which developed from the 2004 Memorandum o fUnderstandingbetween Government anddonors. Government chose Joint and Mid-year Reviews as the chiefvehicle o f donor support, replacing the traditional pledging approach o f Consultative Group meetings. Donor assistance continued to contribute for about 50 percent o f total spending, although aid modalities changed substantially, rapidly shiftingfrom sector andproject fundingto direct budget support. Increased harmonization has helped focus on the PARPAobjectives, moving Government and donor resources increasingly toward the priority sectors o f the PARPA. While coordination o f the budget support donors increased predictability o f resource flows, andmonitoring o f long-term objectives andmedium-term targets, budget support still only accounts for 30 percent o f total aid. 14. Crowding in and Scaling-up. Mozambique has demonstrated a credible strategy to achieve progress inmeetingthe MDGs inthe water supply sector for the largest cities through its policy o f delegated management coupled with a robust regulatory framework. Inscaling up this model inurbanareas, Mozambique has so far attracted various other fundingpartners, including the AfDB, the European Union(EU), the European Investment Bank (EIB), the French Development Agency, and the Government o f the Netherlands. 15. The proposedproject will continue to consolidate gains inurbanareas and scale up the DMFto smaller markettowns andcities, as well as catalyze funding from the United States' Government's MillenniumChallenge Corporation (MCC). The M C C is strongly committedto partneringwith the IDAto integrate andbuildon IDA'Sextensive knowledge and experience in buildinginstitutional capacity, particularly with the successful DMF. Grant funding from MCC inthe order ofUS$361.5 million for infrastructure investments inthe water andsanitation sector has beenrequested by the G o M (See Box 2). economic management; (b) structuralpolicies; (c) policies for social inclusion and equity; and (d) public sector management and institutions (World Bank, 2007). 9  Box 2: GoM'sproposalto MCC for scaling up inthe Water Sector The GoM'sproposalto MCC for scaling up services inthe Water Sector is US$ 361.5 m.This covers the four NorthernProvinces ofZambezia, Cab0 Delgado, Niassa andNampula. The overall investment activities are proposedas follows: 0 US$40 m 1500 new rural water points inNampula and Cab0 Delgado. - 0 US$72 m- Water Supply in 10 small towns. US$108 m Water Supply and Sanitation inseven larger municipalities. - US$126 m- Water Supply and SanitationInvestments inQuelimane, Pemba andNampula. US$15.5 m Capacity Building andTraining. - 16. The key result expected from the proposedACGF/IDA project over five years would be scaled up access to water invarious parts o f Mozambique. This would be achieved by enabling: (i) topartnerwithMCCandbringcriticalinstitutionalandcapacitybuildingexperienceand IDA knowledge to a well-performing but still emerging sector; (ii) expand good practices and extend prudent financial discipline infuture operations within the sector to assure financial sustainability; and (iii)establish new regional models for smaller cites and market towns as well as sanitationhewer options usingthe DMFmodel. C. Higher level objectives to which the project contributes 17. Meeting the MDGs in Water Supply. Inspite o f enhancing Mozambique's growth potential andprogressing on a number ofhumandevelopment goals, providing sustainable basic service delivery remains a challenge. For instance, inwater supply and sanitation (WSS), Mozambique i s among the 24 least developed countries that need to double its 1990 - 2004 rate o f increase to reach the MDGtarget by 2015. It is also one o f the few countries where urban service coverage from improvedsources is declining - there has been an 11percentage point decline inurbanservice coverage during 1990-2004. This i s due to a significant increase in urbanpopulation, mainly from immigration, which grew from 21 to 32 percent o fthe total population since 1990 (World Population Prospects, 2006). This trend is likely to continue. Statistics on coverage of water supply inMozambique vary widely, even for the same year (see Box 3). For instance, urbanhouse connections in 1997 are 23.4 percent o f urbanpopulation as reported inDemographic and Health Survey (DHS) and 34.7 percent according to the GoM Census. Similarly, in2003, DHSreported higherproportion o fresidents coveredby improved water supply compared to the 2003 national household survey Inqukrito aos Agregados Familiares sobre o Orqamento Familiar (IAF). 10  Box 3: Who has water and sanitation coverage inMozambique? What does an "improved source" (officially) mean? Water is critical for survival and everyone living has access to some form o f drinking water. The key questions are; (i) what type o f access people have, (ii) whether this is sufficient, and (iii) it means. According to the WHOAJNICEF Joint Monitoring Program (JMP)', improved what sources are household connections, public standpipes, boreholes, protected dug wells, protected springs, and rainwater collection while unimproved sources are unprotected wells, unprotected springs, vendor provided water, bottled water, and tanker truck water. In2004, 43% o f Mozambicans had access to improved water sources. There are significant differences in coverage among urban and rural residents - 72% o f urban dwellers and 26% o f rural dwellers have access to safe water. Lack o f consistency inurbanand rural definitions exacerbatesthe differences. What does the GoM report? GoM official figures on water access and investment needs to meet the coverage deficit show that overall access to water supply is reported to be 40% (37% in urban and 41% in rural) in 2005; Mozambique needs to cover 70% o f its population with safe water supply by 2015 to meet its MDG targets. The GoM figures are different from JMP figures where urban dwellers have higher access to safe water than rural residents. The GoM's view i s that "improved" sources are not sufficient to be ''safe" sources. The GoM's numbers for urban areas are derived from the number o f urban connections - standposts and yard taps - thatare installed via utility companies or municipalities and are regulated or overseen either by CRA or DNA. For example these statistics would not include the 9,000 consumers served in Maputo by small scale private companies that sell borehole water through metered connections. The water quality is seldom tested. Similarly, for rural areas, as DNA only consider "officially" mandated boreholes and small piped systems intheir estimate o f coverage. There are two factors that affect on the calculation o f water coverage inrural areas 1) the rule o f thumb o f 500 people accessing - each rural water point while true for densely populated areas may not hold true for the sparsely populated areas; and 2) among the rural water points, not all o f them are inworking order at any time. According to DNA estimates, 30- 35% are not functional at any given time. Therefore, rural access figures can be overstated unless these two factors are taken into account in estimating population covered by rural water points. DNA has now switched to quoting coverage figures innumber o fboreholes and not per capita service. What does the World Bank report? These GOM figures are very different fiom those reported in the World Bank's Country Economic Memorandum (CEM, 2005) that derives its access figures from household surveys (IAF) that measure the outcome, according to the MDG definition, From 1996197 to 2002103, the access to safe water sources improved fiom 12 to 27% inrural areas and 54 to 64% inurban areas (CEM, 2005). The reason for the anomalies with the GoM data i s due to the definition o f improved water adopted by different agencies. What do the householdsurveys report?As part o f the Africa Infrastructure Country Diagnostic Study (World Bank, forthcoming) that aims to present a Pan-African snapshot o f the health o f water and sanitation sector, household surveys (DHS 1997 and 2003, IAF 200213) were analyzed for Mozambique. The majority o f the population of Mozambique - 60% depend on well and boreholes to meet their water needs. For rural areas inMozambique (63% o f the population in 2004), the DHS 2003 reports that about 22% o f the population do not have access to an improved source, and depend on surface water and other sources. Tlus also means that 80% o f rural households have access to an "improved" source. Significant questions related to this access are the level o f service o f these improved sources and the socio-economic attributes of the inhabitants. For example, are they working, how far are these sources fiom their house, are they seasonal etc. For urban households, there is less choice of water sources than in rural areas. All water in urban areas comes from an improved source as urban areas do not have the opportunity for uncontaminated springs and rivers due to population density. The percentage o f households depending on piped water declined from 50% to 19% between 1997 and 2003 while the population depending on public taps and wells or boreholes increased. This is also reported inthe MDG Status Report (JMP, 2006). It is one o f the few countries where urban service coverage from improved sources i s declining - there has been an 11 percentage point decline in urban service coverage from 83 to 72% during 1990-2004. This is mainly due to an increase inurbanpopulation which grew fiom 21 to 32% since 1990 (World PopulationProspects, 2006). JMP primarily collects data from two sources: assessment questionnaires and household surveys (DHS/MICSlCensuses/WHO).For more informationon JMP, please refer to www.wssinfo.org 11  18. Harmonization and Partnerships. InMozambique, the Bankis moving away from project lending towards a programmatic approach inthe sector. ACGF support is also being usedto help facilitate this more programmatic approach. This fits well with DNA's approach, in cooperation with the major donors, to shift towards a comprehensive SWAP, plannedfor the ruralwater sub-sector. This approach harmonizes sector planningandmonitoring, andprovides for more effective aid modalities, inline with the Paris Declaration. Box 4 sets out the major sub-sector strategies inthe water sector andmain donor interest. Box 4: Subsector StrategiesinMozambiqueandDonor Interest UrbanWater Supply:WorldBank, AfricanDevelopmentBank,EU,EIB, French,Dutch,MCC 0 Delegatedmanagement via split inasset management from operators; maximize use o fprivate operators Strategic investments to increase access and maximize coverage to all consumers 0 Strong independent economic regulation to assure balance between consumer equity and commercial viability 0 Graduate utilities and operations to full cost recovery and eliminate subsides Water and seweragelsanitation providers maximize coordination between the two systems Smaller Towns and Cities Water Supply: WorldBank,AfricanDevelopmentBank, Dutch, MCC, Swiss, Portuguese 0 Delegatedmanagement approach via split inasset management from operators with Asset ManagementUnit (AMU)andProvincialWater Boards (PWBs); maximize use oflocalprivate operations for routine technical and financial operations 0 Strong local input via municipalities inplanning expansions of water and sanitation systems to make sure that designs match demands and to provide access and increased coverage at appropriate service levels - stand post vs. individual connections 0 Coordinated and simplifiedregulatory oversight to assure sustainability and cost recovery o f systems via indirect regulation fiom CRA Village and PointSource Water Supplyand Sanitation: African DevelopmentBank,Dutch, Danida, Swiss, JICA, Canada, UNICEF,IrelandAid, India 0 Demand ledpolicy with inkindand cashpayments upfiont to assure sustainability 0 Capacity building at local level to empower community management and support sustainability o f systems for water and sanitation 0 Supply chain informationon spare parts and repairs so appropriate level of service canbe provided and maintained 0 Decentralized andprogrammatic approach via SWAP 19. Links to theAction Planfor the Reduction ofAbsolute Poverty (PARPA) It Country Partnership StrategV (CPS), and theAfrica Action Plan (`P). The PARPA I1linkspoverty withpoor environmental conditions andlack o fbasic infrastructure services. Inparticular, it includes the lack o fpotable drinkingwater and sanitation as a critical area for improvement. The CPS objectives support the growth pillars outlined inPARPAI1andhas set an outcome indicator o f "Improved access, reliability and quality o fwater intargeted areas o f highdemographic growth" to meet its goals inPillar 2 - Equitable access to public services. 20. The Africa Action Plan (AAP)has also been put forward as a response to meeting Africa's immediate development challenges and its focus i s to achieve the MDGs through sustainable service expansion. One o f the major actions inthe AAP is ``meeting the infrastructure gap" to support growth, not only for capital requirements but also for operations and maintenance. The AAP Flagship for WSS emphasizes the achievement o f the MDGs for WSS in 17 o f the largest countries (representing 75 percent o fthe population o f Africa). The flagship will focus on strengthening the public sector's ability to manage expanding sector programs and the private sector's role inproviding the goods, works and services. The Bankwill 12  work with the AfDB and other donors to support the establishment o f national water supply and sanitation programs inthe 17 countries. IDA investment inindividual countries will complement that o f other donors to ensure that investments inrural communities, towns andurbancenters are balanced, andcapacity-building needs are addressed. The Bank Group will replicate successful experiences with public-private provision o f infrastructure. InMozambique, ACGF bding will be usedto scale up a DMFto improve service levels, efficiency, and consumer satisfaction and to crowd indevelopment partners, such as the MCC, to support a broader program to reach over two million people with access to safe water. Eligibility for repeater status: 21. The WASIS complies with all the requirements for repeater projects inthe Bank guidelines. These requirements are elaborated below: 22. Borrower ownership and interest. There is strong ownership o fthe delegated management framework (DMF)that was created under the policy reforms o f 1995 and enacted in December 1998 for urban water supply by the Ministryo f Public Works andHousing (MOPH) andthe GoM. These reforms were catalyzed andimplementedunder the NWDP I1and continued when the private sector underwentsignificant changes due to change o f ownership in the original private sector operating company. The momentum created by FIPAGandCRA resulted inexpanding the DMF from the five original cities to 14 cites with assets under FIPAG management increasing almost four-fold from US$90 million to US$350 million. NWDP I1 concentrated on increasingproduction while the funds for the scale-up investments under WASIS will be directed to network expansion and increased connections. An additional component under WASIS will support DNA inrepeatingthe institutional andregulatory model o f an asset holdingcompany and delegated management that worked successfullywith FIPAGin larger cities andto apply this framework for smaller cities and towns. The project will also support capacity buildingunder DNAto move forward with a SWAPfor rural water supply. DNAwas the project implementation agency for NWDP Iwhich closedinOctober 2005 with a satisfactory rating inthe Implementation Completion Report (ICR). 23. Project status report ratingsfor NWDP II. The Implementation Status andResults (ISR) ratings for NWDP 11's implementation progress anddevelopment objectives havebeen consistently satisfactory for the last three years o f implementation. The rating for development objective was downgraded inthe very early years o fthe project when the ownership o fthe private sector operating company was changed and the project operated under a Memorandum o f Understanding (MOU). However, once a new lease agreement was negotiatedwith the new operating company, the performance o f the project improved andthe ISR ratings became satisfactory again. At the beginning o f M a y2007, about 62 percent o f the IDA credit had been disbursed, but 95 percent was committed. While heavy rains during the 2005 and 2006 constructionperiod slowed completion o f key contracts, the remainingworks are scheduled to be completed by the end of 2007. 24. Impact. The impact o fNWDP I1has been fully consistent with the expectations set out inthe Project Appraisal Document (WorldBankReport 19131MOZ, 1999). The on-going NWDP I1was cited inthe mid-term CAS review as responsible for one o fthe five key successful CAS results. The project development objective was to improve the quality, reliability, and sustainability o f water services for the cities o f Maputo, Beira, Quelimane, Nampula, andPemba through promoting greater private sector participation inthe provision o f services. 13  The results include: a a a a a City Baseline (thousand m') per year 2007 (thousand m') per year Maputo 49,027 68,000 Beira 9,297 21,900 Quelimane 953 4,600 Pemba 2,234 5,500 Nampula 4,438 7,300 25. Fiduciary, environment and safeguard issues. There are no unresolved fiduciary, environmental, social or safeguard problems. Procurement and financial management are rated as satisfactory for the project with respect to the ISR ratings for the two executing agencies o f FIPAGand CRA. DNAwill be anadditional executing agency for the new project, however, C R 4 will act as the procurement and fiduciary agent for DNA andwill manage the flow o f funds underthe credit for DNA. DNAwas the executing agency for NWDPI(which closed in October 1997) and its performance was rated satisfactory inthese areas o f the ICR. 11. PROJECT DESCRIPTION A. Lendinginstrument 26. The total project size is US$30 million andit will beprovidedinthe form o f anACGF Grant o fUS$15 million and an IDA Credit o fUS$15 million via a Specific Investment Loan (SIL). The ACGF will crowd inresources from M C C (US$361.5 million) andthe Global Partnership for Output BasedAid (GPOBA) o f US$6 million to expand access to water. The project i s processed as a repeater. 14  B. Programdevelopmentobjectiveand key indicators 27. ACGF scaled upprogram objective and key indicators: The ACGF scaled up development objective, which includes the M C C contribution, will make a significant contribution towards attainment o fthe MDGs for water and sanitation inthe four northern provinces o f Zambezia, Niassa, Cab0 Delgado, Nampula (including the three major cities o f Nampula, QuelimaneandPemba). The key indicator to meet this objective is: increased access o f served urbanpopulation to 52% andincreased access o f served ruralpopulation to 33% inthe four Northernprovinces by 2012. Other donor (primarilyMCC) andprivate sector support to help Mozambique to meet its PARPA MDGgoal (both rural andurbanwater supply) is expected to be triggered. The technical outputs o f the ACGF will be measured by six indicators that are periodically reported under the reporting requirements o f FIPAG(See Table A3-1 inAnnex 3). C. Projectdevelopmentobjectiveandkey indicators 28. Project developmentobjective and key indicators: The development objective o fthe project is to increase water service coverage inthe cities o f Beira, Nampula, Quelimane, and Pembaunder the delegated management framework and to establish an institutional and regulatory framework for water supply insmaller cities andtowns. 29. The following outputs are expected: Component A:(a) Expansion o f 370 kmo fwater supply distribution networks; Component B: (a) Legal establishment o fAMU; (b) Establishmento ftwo Pilot Provincial Water Boards; (c) Signing o f rural water sub-sector SWAP Memorandum o f Understanding; and Component C: (a) Implementation o f regulatory arrangements insmall towns andcities byCRA. D. Projectcomponents 30. The project will finance the following three components: (A) investments and continuing support inthe four cities under the responsibility o f FIPAG; (B) capacity building,institutional and operational support to DNA for AMU, PWBs, and SWAP; and, (C) operational support to CRA with respect to expanded regulatory responsibility for smaller towns and cities. ComponentA: Investmentsand continuingsupportin Pemba,Nampula,Quelimane, and Beira, the 4 Citiesunder the responsibilityof FIPAG (US$22 million)*. 31. Under component A, the project will support an improvement o f water supply access from the construction o f approximately 370 kilometers' o fnetwork resulting in 10,000 new connections inthe four cities. These investments will take advantage o f the increased production capacity achieved under NWDP I1and improve service coverage inthe four cities. Increased numbero fconsumers which contributes to improvements inoperationalperfonnancewill also create improved business opportunities for the private sector operators, key players inthe 8For Component A US$ 15 million is sourced from the ACGF and US$7 mfrom IDA. 9GlobalPartnership for Output BasedAid (GPOBA) i s expected to contribute up to US$ 6 million to facilitate new connections to lower income consumers with connection subsides. This is expected to triple the number of connections to about 30,000 for the four cities. Maputo i s also included under the GPOBA inaddition to the four cities. 15  delegated management framework. The improved level o f essential water services will also promoteproductivity andmarket expansion withinthe cities. 32. Specifically, this component will: (a) expand and extend the networks anddistribution through limitedinvestments insmall works inPemba, Nampula, Quelimane, andBeira, operated andmanaged by a private operator; (b) provide physical investmentsto improve the operational efficiency inthe urban cities currently under the responsibility o f FIPAG; and (c) support follow- on private operator contracts inthe four cities to consolidate gains under NWDPII.Overall, support to FIPAGwill include goods, works, and consultant services, consumables including electricity and fuel, and training (See Table 3). ComponentB: Capacitybuilding,institutional,andoperationalsupportto DNA (US$5.5 million) 33. Component B is divided into 2 sub-components- Component B1andB2. Under Component B1, an Asset Management Unit(AMU)under DNA for small towns and cities will be piloted. The AMU i s modeled on the delegated management model inthat it will be empoweredto manage assets, planand oversee the execution o f investments, and engage third partyoperators insmaller cities andtowns. The AMU will facilitate the creationo fProvincial Water Boards (PWBs) which will be responsible for managing the water assets ofthe participating cities and towns at the provincial level. Boththe AMU andthe pilot PWBs will be supported under the project with capacity building, institutional support, andoperational costs. The AMU will be closely linkedwith investment fundingunder the proposedMCC project and therefore will be piloted inthe four Northernprovinces. The pilot provinces will be selected from Zambezia, Cab0 Delgado, Niassa andNampula. Eventually it i s expected that the model will berolledout nationwide once the new institutions are well established. 34. Specifically, sub-component B1will establish and operationalize the AMU and PWBs. This component will: (a) adapt the proven sustainable institutional and regulatorymodalities for secondary cities under an Ah4U based on the delegated management modelproven inthe experience from FIPAGcities where FIPAGcan act as mentor; (b) ensure that the appropriate regulatory, policy, andinstitutional framework will be developed andtested as the delegated management model is scaled up via pilot projects; (c) build the capacity o f the sector players, includingDNA, district andlocal governments, municipalities, public andprivate sector, and small scale providers; (d) promote small scale private sector participation inservice delivery; and (e) provide operational subsidies duringthe transition period to support O&M. 35. Component B2 will support DNA inthe preparation ofthe SWAP inthe rural water sub- sector. The-project will co-ordinate with other donors to provide capacity buildingand institutional support with respect to development o fthe SWAP approach for rural areas - small pipedandnon-piped systems. The African Development Bank, among other donors, is supporting this effort substantially. The Bank'svalue added will be to provide support in preparingthe medium-term expenditure framework to facilitate the implementation o f the sector policy and, to the extent possible, support the preparation o f common guidelines for all future investments inthe sector regardless o f the source o f financing. 36. Sub-component B 2 will provide for the implementation o f Sector Policyvia support to the preparationo f the SWAP.This will: (a) provide resources to complement a donor-wide initiative ledbyDNAto develop a strategy to scale up the demand driven community participatory model for village piped systems and non-piped systems; and (b) complement, as necessary, measures already underway to mitigate the risks from HIV/AIDS inDNA (see Annex 14for further 16  elaboration on DNA andFIPAGHIV/AIDS Policy). Overall support to DNA for Component B includes goods, technical assistance, training, and operational cost support for the AMU and PWBs. This breakdown is further defined inTable 3. ComponentC: Capacitybuilding,institutional,andoperationalsupport to CRA (US$2.5 million)- 37. Under component Cythe project will support the development o f regulatory fiameworks to cover the smaller towns andcities as the AMU i s set-up and expanded via the PWBs. The project will continue operating cost support to CRA as well as TA, and additional operating support at provincial level as the new regulatory models are rolled-out to meet the needs ofthese new agencies. This component will: provide resources to complement CRA's expanding work on extending regulatory frameworks and oversight to smaller cities andtowns. The project will provide goods operational support, capacity buildingandtraining, and technical assistance to CRA as set out inTable 3. 17  Components and ImplementingAgencies US%('000) US%('000) ComponentA: FIPAG Water supply systeminvestments 17,000 DesignandConstruction ofnetworkfor PembaandNampula 6,800 DesignandConstruction ofnetworkfor BeiraandQuelimane 10,200 Supportto operationalefficiency, operationalmanagement, andconsumables 2,500 Purchaseofvehicles 200 Supply ofchemicals,consumables includingfuel andutilities 1,200 Supply of equipmentandspareparts 600 Supply ofmeters 500 FIPAG- TA, Capacitybuilding,training 2,500 TA for Supervisionofworks 1,500 TA for constructionmanagement for FIPAGfor 2 years 350 TA for procurementand contractmgmt for FIPAGfor 2 years 225 lo alignmentwiththeMozambiqueCountryFinancingParametersdatedAugust In 25,2004, taxes and duties (includingVAT) willbe includedwithinthe Credit andGrant funding. 18  E. Lessonslearnedandreflectedinthe projectdesign 38. Capacity building takes time. The fragmentation o f the sector, particularly with respect to donors and the lack o f attention to smaller cities andtowns, is inpart a result o f the limited absorptive capacity o fDNA andits inability to process projects inan efficient manner. DNA will be supported under the project through capacitybuildingandtechnical assistance specifically with respect to the creation o f the AMU and support o f the SWAP. Lessons from the support o fFIPAGinNWDP I1showed that capacity buildingandmaturing o f a new institutional framework can take a long time to develop. The creation o f a similar institution - AMU, and resultingregulatory arrangements will need an equally longtime and strong capacitybuilding andinstitutional support bothfrom CRA andDNA. 39 There is no substitutefor strong government commitment. The key to the success o f the NWDP 11project was the strong commitment to the sector reforms andDMF. The NWDP Iand I1projectswere inherentlyriskyandcomplicated as they were predicatedonuntriedreforms, including the use o f the private sector ina highprofilepublic service - water supply. The reform agenda was owned by the G o M andwas strongly backed by the sector ministry. This support was tested inthe early roll out o f the DMF when the main private operator changed international partners. However the ultimate success o fthe policy is witness to the GoM's steadfast commitment. Continued strong commitment to the sector reforms is expected to ensure the success o f WASIS. 40. Includingpayments of VATin thefunding arrangements. The donor-funded projects in the sector have generally under-spent. While inpart this has to do with capacity o f sector institutions, there have also beenpayment difficulties with respect to VAT which is 17percent of all contracts. These payment difficulties have been experienced by FIPAGwith respect to civil works projects. As set out inthe Country Financing Parameters (August 25,2004), the new Credit will allow for disbursements to cover taxes andduties, including value added tax (VAT) onworks and goods, andconsultation services". 41. Coordinated support tofillfinancing gaps to meet the water MDG. To scale up and accelerate water coverage inMozambique, development must occur ina coordinatedway. This program has taken this into considerationbyhelping to accelerate the programmatic sector approach. Opportunities will be identified duringimplementation to continue to scale up. There are also financing gaps, identified bythe government that remains ifthe MDGsare to be met. The identification o fother sources o f financing to helpthe GoMmeet its financing gap andhow these funds should be phased into implementation o f the broader PARPA water sector program are important to achieving programresults. Alternativesconsideredandreasons for rejection 42. Choice of a repeater over a new project. A new project would be required ifthere were significant changes to the institutional or regulatory arrangements for the proposedinvestments. The new investments are extensions based on the production capacity developedunderthe NWDP I1andwill consolidate gains made underthat current project. The new project will strengthenthe delegated management framework by supporting new private sector arrangements l1Usually, taxes and duties are coveredby counterpart finds. Inthe WASIS Project, taxes and duties are below the counterpart funding of $3 million or 10%ofproject cost. 19  for the four cities via expected lease contracts. An increase inthe number o f consumers connected can result inincreased revenue generation andmore financially sustainable systems. The consolidation o f gains through the repeater project will also help secure the strategy o f delegated management as a policy to be rolled-out to smaller cities andtowns. 43. SupplementaryPnancing. An alternative could be the use o f supplementary financing. However, this would require that additional activities be completed within three years o f the current closing date. Completion o fthe works androll-out ofthe extensions to the systems being proposedwould not be feasible within a 3-year time frame. There are no project cost savings from the current project to undertake the proposed activities. 111. IMPLEMENTATION A. Partnershiparrangements 44. WASIS is 50 percent fundedby the ACGF grant and 50 percent by an IDA credit. The project is designed to work closely with and complement the MCC's investment in small towns andcities inthe north o fMozambique. The preparationwork o fthe MCC is expected to be completed inJune 2007 with M C C funds available inlate this year. Inaddition, the Global Partnership for Output-based-aid (GPOBA) is contributing up to US$10million to provide connection subsidies to low income areas inthe five cities o f Maputo, Quelimane, Beira, Pemba andNampula. The grant contribution from GPOBAwould provide the cities covered under WASIS with an additional 20,000 connections. With respect to the support to establish a rural water sub-sector SWAP, the project will coordinate closely with the other active donors through the sector working group. B. Institutionalandimplementationarrangements 45. Giventhe repeater status o fthe project, the implementation agencies for financial management andprocurement remain the same as inNWDP 11. Component A will be implementedby FIPAGand it will administer two designated accounts for processing o f Credit andGrant funds. Components B andC will beimplementedbyCRA withregardto procurement andfinancial management aspects. There will be one designated account that will be administeredby CRA for both components. Technical matters with respect to drafting o f terms of reference, review of documents prepared under Component B, andquality control will be the responsibility o f and supervised byDNA.Inestablishingthe AMU andthe PWBs, municipalities andthe provincial governments will be consultedto ensure a smoothtransition increatingthe asset holding institutions. C. Monitoringand evaluationof outcomes/results 46. FIPAGand CRA will eachreport quarterlyto IDAvia the Quarterly Financial Management Reports (FMR). These reports will cover three main areas andinclude: progress on the outcome indicators, progress ofprocurement, and review o f financial management aspects (see Annex 6 for further elaboration). IDA, intandem with the clients, will undertake six monthlyreviews to report on progress. Specific processes and indicators for Components A and B are discussed below. 20  47. Component A: The reporting requirements for the technical outputs for WASIS will be the responsibility o f FIPAG. The outputs will be measuredby a set o fperformance indicators which form a sub-set o f the present indicators reported under NWDP 11.These will buildon the extensive data base already established by FIPAGandmonitor the progress o fthe network expansion and service connections as well as other important indicators. The total set o f indicators will be set out inthe contract with the private operators for the four cities. These indicators will include, but will not be limitedto, the following: Indicator Unit Production Cubic meters quarterly Reliability o f service Hours per day Water Quality No. of tests for residual chlorine indistribution system not meeting agreed standards. No. o fkmo fnetwork Km No. o f connections New connections per quarter Billcollection ratio % 48. As is usual inprivate sector contracts for operations, monthly reports will be prepared by the operator and submittedto the client. Progress will be assessedagainst the target indicators andcorrective action taken, as appropriate, to ensure that the project goals are achieved. At the end o f each year, annual performance will be reported to and assessedby FIPAG. Reporting o f the indictors will be included inthe quarterly FMRsto IDA. 49. Components B and C. The output indicators will be the responsibility o fbothDNA and CRA. Implementation o f the proposedinstitutional reform and introduction o fthe delegated management framework for operation o f non-FIPAG urbanwater supply services would bekept on track andmonitoredby establishing a work plan for completing key activities. Annex 3 sets out the arrangements for results monitoring and lists the key activities and a timeframe o f completionbyproject years. The AMU would be expected to establish andmaintain a detailed rolling 12-monthwork planfor implementing the key activities under its mandate and submit a briefreport on progress and anupdated work planto the Director of DNA every three months. DNAwould also berequiredto report onthe progress o fthe SWAp. Reportso fthe Joint Sector Review, bi-annually, should be included inthe FMRunder progress on outcome indicators. 50. Likewise, CRA would be expected to maintain a work planfor implementation o f its components andreport quarterly on progress inthe FMR.CRA's outcome indicators by year of the project are also set out inAnnex 3 andprogress on these indictors will be reported quarterly inthe FMR. Notethat CRA willbe fully responsible for the procurementandfinancial management aspects o fthe FMRs. 5 1. Monitoringand evaluation o fthe PARPA will provide information on the broader sector results achieved through the SWAp. Through coordinationwith MCC, the Bank will continue regular dialogue onprogress inMozambique and opportunities to accelerate this progress. D. Sustainability 52. The GoM has shown strong commitment to the reforms inthe water sector andthere is continued momentum and drive bythe major institutions inthe sector to deepen the reform processes by buildingon NWDP 11's lessons andpositive performance. One o f the main goals 21  underpinning the successful policy o fthe delegated management framework i s to improve the financial viability and efficiency o fthe service providers inthe urbanandtown water sector. Achieving long-term financial sustainability entails reducing the dependence on government subsidies andincreasing reliance on tariffs fiom the customers as the main source o f internally generated financing. Through this process, the service providers are expected to gain financial autonomy to tap other sources of funding from international and domestic financiers and the capital markets. Overall, the sustainability o fthe project i s grounded inthe Government's strong ownership o f the reforms. 53. The proposedproject envisages supporting the G o M inattaining this long-term financial goal for the urbanandtown water sector by: (i) providing funds to FIPAGfor its investments in the four Northern cities that leadto expanded customer base and increased revenue; (ii) providing institutional, technical, and short-term O&M support to AMU, the new asset holding company that would be established to serve the smaller towns untilit is able to cover its O&M costs through user tariffs; and (iii) supporting CRA to expand its areas for regulation to include the AMU towns. E. Criticalrisks andpossiblecontroversialaspects Table $ Potentialrisks andrisk mitigation measures Potential Risks RiskMitigationMeasures RiskRating Second generation o fprivate The preparation o fbiddingdocuments for the next set Low sector contracts for the four o f private sector contracts for the four cities has been cities is delayed. advanced under NWDP 11.The extensiono f the current management contracts i s possible until September 2007. Requests for expression o f interest for the new contracts are ready for publicationin Development Business. Government's capacity to Reforms have beensuccessfully camed out inlarge Medium carry out reforms for small urban centers with good results. This track record can cities and towns i s uncertain be applied to smaller cities and towns. A technical assistance component will support DNA to manage the process and buildcapacity to enable themto be in the driver's seat for reform and implementation o f sector policy. Sustainability o f the DMF The creation o fthe AMU and the ProvincialWater High with respect to smaller cities Boards to oversee the operations o fthe smaller cities and towns fails due to lack o f andtowns are undertaken as pilot projects as this capacity or interest o f local model is untried at provincial level. Experience and private sector direct support from FIPAG will be providedto mitigate the risk, as well as TA and operational support providedinthe Credit and other donors. MCC does not follow through Whenthe SWAP mechanismi s inplace, it willbe Medium with its commitment to fund able to funnel resources to water development inrural investments inwater sector or areas. However, the coverage would grow at a slower funding i s significantly scaled rate and MDGs for water and sanitationmight not be back from the original metontarget. The Bank will continue to look for estimate provided alternative financing mechanisms to help the government meet its financing needs. Average Risk Medium 22  F. Creditconditionsandcovenants 54. Effectiveness conditions: e Satisfactory legal opinions on the Financing Agreement, Project Agreements and ... Subsidiary Agreements are made available. o Subsidiary agreements between GoM andthe Implementing agencies include: On-lending arrangements betweenFIPAGand G o M Pass through grant agreements between CRA and G o M Statement o froles andresponsibilitiesbetween CRA andDNAwith respect to procurement and financial management procedures. e FIPAGandCRA have caused that the existing financial management systems beadjusted for the purposes o f the Project, satisfactory to the Association inform and substance. e FIPAGandCRA have each adopted the relevant Project Procurement Manualadjusted for the purposes o f the Project, satisfactory to the Association inform and substance. e The execution and delivery o f the African Catalytic GrowthFundAgreement has been duly authorized. 55. Effectiveness conditions for the ACGF Grant: e Satisfactory legal opinions on the Grant Agreement, Project Agreement with FIPAG, and the Subsidiary Agreement between FIPAGand GoM. The latter indicates funds are passed through as a grant. e FIPAGandCRA have caused that the existing financial management systemsbe adjusted for the purposes o f the Project, satisfactory to the Association inform and substance. e FIPAGandCRA have each adopted the relevantProject Procurement Manualadjusted for the purposes o f the Project, satisfactory to the Association inform and substance. 56. Financial and Other Covenants: e Duringthe 12monthafter the Mid-Term Review, the financing gap inthe operational cost support to the Asset Management Unit inthe years 2013-2015 will be quantified and the G o M will makeprovisions to cover these costs. e Withintwelve months ofthe Effective Date ofthe Project, the AMU shall be establishedby decree e The CRA andFIPAGwill maintain financial management systems inaccordance with international accounting standards, and have their entity financial statements andproject financial statements audited inaccordance with international auditing standards. These audits shall cover the period o f one Fiscal Year. The audits for each such period shall be furnished to the Association not later than six months after the end o f suchperiod. e The tariffs for the systems under the responsibility ofFPAGshallreflect the principlesof full cost recovery and be sufficient to cover operating expenses, depreciation, and cost of capital ina reasonable time horizon for all said systems. The tariffs will be assessedduringthe Mid-Term Review e Within eighteen months after the Effective Date, all outstandingpublic sector arrears to FIPAGare settled and ensure that amechanismto pay future public sector water billsbe putinplace. e FIPAGshall ensure that it: (i) 1.2 times its debt services requirements through its covers net revenues; and (ii) not incur any additional debt unless a reasonable forecast o f its does revenues andexpenditures show that its projected net revenues for each FiscalYear duringthe term o fthe debt to be incurred shall be at least 1.5 times the projecteddebt service requirements. 23  IV. APPRAISAL SUMMARY A. EconomicandFinancialAnalyses EconomicAnalysis (see Annex 9) 57. The WASIS Project is a repeater to the NWDP I1that aimed to increase the safe water production capacity o f five biggest towns o f Mozambique and to support a robust institutional structure inthe water sector. WASIS proposes to: (1) create the networks that deliver the new production capacity to consumers; and (2) increase institutional capacity to implement a smaller cities and towns framework. A total o f US$30 million, equally contributed by IDA andACGF i s earmarked for this project. Ofthe total, US$22 million is allocated for buildingdistribution networks (Component A) and the rest to Components B & C. For the purposes o f economic analysis, there are many non-easily quantifiable benefits to Components B & C associated with capacity buildingandcreating new institutional structure. Therefore, for the purposes o fthis analysis, only Component A will be analyzed indetail. 58. A cost-benefit analysis usinga `with andwithout project' methodologyhas beenusedto calculate the EIRRandNPV o f Component A o fthe project to which the project directly contributes with physical investments. The incremental economic benefits are projectedover a 15 year period to arrive at the EIRRandNPVbased on a 10%(the hurdle rate IDA uses inWSS projects) discount rate. This methodology projects how behavior o f beneficiaries will change following the project intervention inthe `with project' scenario. Inthe `without project' scenario, the current situation is assumed to continue into the future. 59. For Component A, new networks that stretch up to 370 K m s will be installed in four project towns Beira, Nampula, Pemba, and Quelimane - which provides opportunities for new - consumers to connect to the network. Conservative estimates suggest that 10,000 new consumers will join the formal network following project implementation, with 80% o fthe connections occurring inthe latter halfo fproject implementation after the pipelines are laid. The 10,000 new connections are expected to be inthe form o f individual yard taps, which will add approximately 53,000 new consumers to the AdeM's formal network (assuming an average household size o f 5.3). 60. The primarywater sources for households not connected to the AdeM's network are neighbor's yardtap, public standposts, andwellshandpumps. The economic benefits from the new connections will meanthat households previously dependent onneighbor's yard-tap, public standpipes or wells will move towards accessing water from a formal connection. The economic analysis quantifies the benefits accruing to the project beneficiaries-the newly connected households. The benefits can be quantified inthe form o f incremental expenditure on meeting the householdwater demand, and time savings as a result o f lower collection and wait time. Based on the beneficiary assessment carried out in2003 for the NWDPII, the proportion of households ineach city dependent on each o fthese sources is usedto calculate their current expenditure on water supply. Those dependent on wells do not pay while those dependent on a neighbor's tap pay a higher than formal network tariff. The incremental water expenditure from the new connections will beminimal since households relyingonneighbor's tap are paying more, andhouseholds relyingon public standpipes andhandpumps/wells are paying much less for a 20L bucket thantheir `post project' scenario o f a yardtap connection. The expenditure on 24  water for the newly connected consumers i s valued based on the average tariff for individual connections/yard taps which ranges from US$0.45/m3inNampula to US$0.5l/m3inBeira. Source: Beneficiary Assessment for NWDP 11,2003; WB-FIPAG Financial Model 61. Accessing water from yardtaps andprivate standpipes also means that households will incur time savings that can be quantified by valuing the time inthe form o f wages lost due to the water collection activity. The economic benefits from the new connections primarilyderive from these time savings. For instance, inQuelimane, an average household spends approximately four hours a day collecting water at the public standpost. At the public standpost andwells, the waiting, filling and carrying time for a 20L bucket can range between 17 minutes inPembato 79 minutesinQuelimane. Incomparison, the water collectiontime is 10minutesat the yard tap for a 20L bucket. The time savings are valued at 50% o fbasic industrial wage of 1443 Mtdmonthto account for unemployment and low opportunity cost o f time. The economic benefits from new connections primarilyderive from time savings since household members particularly women and children spend a significant amount o f time daily inwater collection. Beira Nampula Pemba Quelimane Neighbor's tap 9 21 26 44 Public Standpost 35 28 17 79 Wells/Handpumps 31 30 48 78 62. The economic analysis suggests that Component A o f the project has a positive economic NPV o fUS$51 million and an EIRR o f 60%. This implies that the project will be beneficial to the citizens o fthe four cities o fBeira, Nampula, Pemba, and Quelimane inalleviating their water supply concerns. 25  Financial Analysis (see Annex 9) 63. To assess the likelihood o f achieving the sector's financial goals, an analysis has been carried out on the main service provider FIPAG. FIPAGwould implement the majority of the project andits investments. An analysis has also been carried out for the AMU. The AMU and the related P W s benefit from institutional and operational support under the Credit and are designed as pilots. There i s no investment provided for works under the credit for the AMU. 64. Financial Analysis of FIPAG. Since its establishment in 1998, FIPAG's overall financial performance has been improving. As it has taken on the responsibility o f serving additional cities andtowns over time, its revenue base has grown. The delegated management model implemented inMaputo, Beira, Nampula, Quelimane, and Pembahas contributed to operational efficiencies and general improvements inthe service. The financial projections indicate that FIPAG's consolidatednet income in2007 is expected to break even, andcontinue to improve thereafter. The timely implementation o f the investments innetwork extension and new connections plannedunder the project would help FIPAGachieve full cost recovery, including the future debt service payments that will increase inthe next four to five years. Inaddition to meeting the US$7 million debt service obligations for IDA, FIPAG's financial projections demonstrate that the debt service coverage ratio, one o f the key financial covenants, will continue to remain above 1.2 for the next 15 years. 65. FIPAG's financial sustainability can be achieved ifthe following main key assumptions are realized: (i)timely tariff adjustments by CRA according to the principle o f full cost recovery; (ii) networkextensionsandsufficientdemandthatleadtoplannednewconnections timely materializing; (iii)continued improvements incommercial andoperational efficiencies including reduction innon-revenue water; and (iv) timely payment o f the lease fees from the private operators. The main assumptions for the model are summarized inAnnex 9. 66. As FIPAGexpands its operations at avery fast rate, attracting over US$350 million in investments inits 14 towns, it faces a challenge inmaintaining its financial sustainability. Even ifmorethantwo thirdsofFIPAG'scapitalinvestmentsare fundedbygrants, carefulanalysis is requiredto assess the impact on FIPAG's operational expansion because FIPAG's track record and experience show that significant time, technical assistance, andmanagement skills are required to turn around the utilities to improve their efficiency and cost recovery ratios. 67. Financial Analysis of theAMU. To assess the likely operational support that is required to runthe systems inthe small towns, a financial analysis has been carried out on the viability o f the municipalities and small towns that are expected to bepart o f the pilot inthe Northern provinces, including Nacala, Lichinga, Gurue, Angoche, Cuamba, Mocuba, and Ilha de Mozambique. Based on the projections (details are attached inAnnex 9), the net cash deficits for the seven large pipedsystems inthe municipalities for the period 2009-2012 would total about US$2.2 million over the next seven years. The required annual tariff increase would be the rate o f expected inflation (10 percent). Assuming that the growth and operational improvements will follow the similar pattern as the FIPAGtowns, all AMU towns are expected to reach the break- even point in2015. Adding the ten additional small piped systems, the total operational support requiredis expected to be about US$3 million. These operationaldeficit figures, however, are 26  notional as there were very little reliable data available for the AMUtowns at the time o f appraisal. Therefore, duringthe mid-term review, the likely financial gap inthe operational cost support to the AMU andPWBs will be reviewed, and a mechanism will be put inplace for GOM to make provisions to cover these costs beyond the project period. It i s expected that significantly longer time would be required for these towns to reach fillcost recovery, including the administrative and operational costs o f AMU andthe PWBs. B. Technical 68. FIPAGis the assetholder andretains the responsibility for water supplyinthe four project cities, Beira, Nampula, Quelimane and Pemba, as well as ten other cities including Maputo. The four cities are operated under a Management Contract with AdeM, a private operator. The majority o f the investmentsmade duringthe NWDP I1project (2000-2007) have focused on restoring and augmenting supply capacity. This has resulted ina series o f service improvements for the cities. The current performance o f the cities as well as supporting information i s set out inTable 9 set out below. 69. WASIS provides for investments inthe extension o f the networks inBeira, Nampula, Quelimane and Pemba. This is to take advantage o f the additional water available as a result o f the upgrading o fthe sources o f supply under NWDP 11. This will be expected to facilitate about 10,000 new connections andprovide for around 53,000 new consumers. The level o f service will be mostly yard taps. The areas chosen for the new extensions are as follows: 0 Beira-Dondo: Macurungo West, Manga, Inhamizua. Pemba: Ingonane, Natite, Maringanha. 0 Quelimane: Janeiro and Torrone Novo, 17 de Setembro, Sangariveira, 3 de Fevereiro. 0 Namuula: Muahivire Expansilo, Muatala andMutananha, Namicopo, Namutequeliua, Bamboo inNetikiri, Muhala Expansilo. l2The Source document for the data is the KPIreport for the four cities Management Contract, November 2006 l3Quelimane additional source commissioned inNovember 2006 so continuity will rise to 24 hours/day. Beira rehabilitation o f Water Treatment Works due to be commissionedinJuly 2007, and continuity will rise to 24 hourslday. 27  Table 10: Estimated networks and connections infour cities Location Beira Pemba Quelimane Nampula Total Total length o fnew network (km) 132 80 74 84 370 14Estimateo f possible new connections (No.) 3000 2250 2250 2500 10,000 Estimated potential population served (No.) 15900 11925 11925 13250 53,000 Estimated Cost (US$ Million) 5.50 3.10 4.40 4.00 17.00 C. Fiduciary 70. The project will make use o fthe institutional framework o f FIPAGand CRA, as well as arrangements inplace for fiduciary matters (procurement and financial management). The financial units o f FIPAGand CRA will be responsible for handlingfinancial management matters o f the project. Bothinstitutions have experience inmanaging Bank-financed operations. The accounting personnelhandlingfinancial management matters o fthe on-going Bank- financed project will also responsible for financial operations o f the proposedproject. 71. Both implementing agencies have Financial Procedures Manuals that document the accounting systems, policies andprocedures to be employed. The manuals describe the accounting system, internal control procedures, basis o f accounting, standards to be followed, authorization procedures, financial reporting process, budgetingprocedures, financial forecasting procedures, and contract management. Inaddition, the manuals document procedures to be undertaken for the replenishment o f the DesignatedAccounts and auditing arrangements. 72. FIPAGand CRA accounting systems are based on conventional accounting software called "Primavera". This accounting package has proved to be adequate as FIPAGandCRA are able to produce necessary reports required to manage andmonitor their financial operations. The chart o f accounts at both entities will be adjusted to be able to identifyproject activities and disbursement categories. This will be condition o f effectiveness. 73. The project financial statements will be audited by independent auditors inaccordance with International Standards on Auditing as promulgatedbythe InternationalFederationo f Accountants (IFAC) and the audit report will be submitted to IDAwithin six months o fthe financial year-end. The costs incurred for the audit will be borne by the project funded by IDA. Currently, the latest audited financial statements were the 2006 audits andthese were receivedby June 30,2007. Therefore, there are no outstanding audit reports for either implementing agencies. 74. The overall conclusion o fthe financial management assessmentis that the project's financial management arrangements have an overall rating o fmodest risk which satisfies the Bank's minimumrequirements under OP/BP 10.02 (see Annex 7 for further elaboration). l4Estimate o fnew connections is conservative based onpast practice. IfGPOBA funding for connections becomes available, the number o f new connections could double. 28  D. Social: Stakeholders consultation 75. The Municipal and Community Representatives from the four cities o f Beira, Nampula, Quelimane, andPembamet with senior managers and engineers from FIPAGimmediately before pre-appraisalinFebruary 2007. At each meeting the FIPAGrepresentatives described the proposed WASIS Project for water network expansions to facilitate household connections and the complimentary GPOBA fundedproject for providingconnection subsidies to low and medium income households. The municipal representatives were then asked to recommend community areas where network expansion would facilitate new household connections for low andmedium incomehouseholds. After some discussion anddeliberation, several locations were then proposedbythe Municipality representatives. The FIPAGteam then visited each suggested location and had further discussions with community representatives. FIPAGassessedthe technical, socio-economic and environmental viability o f the suggested sites. Suitable areas were then selected and conceptual engineering designs for each network relative to consumer coverage andinterest was then usedto determine notional pipe work lengths and sizes, which resulted inthe estimation o f an indicative project cost. E. Environment 76. Through extending piped water distribution inPemba, Nampula, Quelimane andBeira, andthrough supporting the development o fregulatory frameworks to cover pipedwater supply inthe smaller towns, theproject willreduce environmentalhealthrisks from contaminated water andenhance institutional arrangements for environmentally sustainable growth. 77. The incidence o f water borne diseases such as cholera and diarrhea, indicates that improving urbansanitation i s an important objective inMozambique. Though the G o M has clearly given water supply (andeducation andhealth) a higher priority than sanitation, DNA completed a Strategic Sanitation Plan (SSP) in2004 with fundingfrom NWDP I.The SSP covers Maputo, Matola, Beira, Dondo, Nampula, Pemba and Quelimane, andprovides complementary sanitation developments over a 15-year planninghorizon inthree phases with short, medium and long-term implementation projects. It encompasses storm water drainage, and wastewater andsolid waste management, andconsiders infrastructural, institutional, financial and economic aspects. Some initiatives to implement the SSP have been taken. For example, the EUis implementing a US$27 million sanitation project inBeira, and is making sanitation investments inMaputo. The M C C i s planningsignificant sanitation investments in Quelimane, Pemba, Nampula and seven other larger municipalities. Nonetheless, there remains a considerable sanitation challenge inthe country, especially inpaying for the recurrent costs o f services. With the WASIS Project, the Bank continues its engagement with the water sector in Mozambique, and especiallywith DNA, where opportunities were explored for contributing its extensive country and sector experience to ongoing and future initiatives to effectively address sanitation issues. 29  F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [XI [ I NaturalHabitats (OPBP 4.04) [ I [XI Pest Management (OP 4.09) [ I [XI Physical CulturalResources(OP/BP 4.11) [ I [XI InvoluntaryResettlement (OPBP 4.12) XI [ I Indigenous Peoples (OPBP 4.10) [ I [XI Forests(OP/BP 4.36) [ I [XI Safety o fDams (OPBP 4.37) [ I [XI Projects inDisputedAreas (OP/BP 7.60)* [ I [XI Projects on International Waterways (OP/BP 7.50) [I [XI 78. The WASIS Project is an EA Category Bproject since theremaybeminor construction environmental impacts and, perhaps, some landacquisition or compensation for losses and damages to property. These safeguardconcerns will bereadily managedby implementing FIPAGsEnvironmental Management System(EMS) andthe ResettlementPolicyFramework (RPF)preparedfor the project. FIPAGhas awell-developed capacity, anddemonstrated commitment and track record, for employing these instruments to avoid or minimize adverse safeguards issues. 79. Finaldesign ofthe network extensionswill consider alternative alignments to avoid or minimize adverse environmental and social impacts. The likelihoodo f large scale, significant, cumulative and/or irreversible impacts i s consideredto benil. 80. Key stakeholders are the municipal authorities, andneighborhood leaders andresidents, where the network extensionswill be constructed. The former were consulted inpreparing the RPF. The EMS andRPFwere disclosed through the Infoshopandthrough FIPAGoffices. Finaldesign o fthe extensions, the construction planand schedule, and, as needed, specific Environmental Management Plans andResettlementAction Plans (RAPS)will be discussed and agreedwith stakeholdersbefore they are finalized. RAPSwill be implementedbefore construction begins (see Annex 10 for further elaboration). G. Policy Exceptions andReadiness 81. WASIS does not require any exceptions from Bank'spolicy. The ESMFandRPFwere disclosed on April 2,2007 in-countryandApril 2,2007 in Infoshop. 0 The Procurementplanfor the first year's activities is complete andready for the start of project implementation. * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination of theparties' claims on the disputed areas 30  Annex 1: CountryandSector or ProgramBackground MOZAMBIQUE: Water Services andInstitutionalSupportProject I.Growth,poverty reduction, androle of eflcient servicedelivery 1. Mozambique, a country o f 19 million people with more than 70 percent o f the population is rural areas, is located inthe southern tip o fthe Afr-ican continent. Coming out o f a devastating three-decade civil war in 1992, Mozambique grew rapidly andits growth rate has stabilized around 7-8 percent since 2000. Concurrent with growth, Mozambique also succeeded in containing poverty and enhancing access to social services, though 29 percent o f its population lived below U S $ l a day (PPP terms) in2002. Headcount ratio reducedby 15 percentage points from 69 to 54 percent andpoverty gap reducedby 29.3 percent to 20.5 percent during 1995 to 2005. Mozambique is comfortably placed among its neighbors, while South Africa, Tanzania, Uganda show lower poverty rates, Zambia andMalawi have experienced higherpoverty rates. Sub-Saharan Africa 29.20 I 31.92I 34.27 Source: World Development Indicators, The World Bank 2. The Country Economic Memorandum (CEM, 2005) predicts a long-term growth of 5 percent allowing for 1percent reduction due to the effect of HIV/AIDS. Though it is higher than the regional average, it is still lower than the 8 percent growth that Mozambique has experienced 31  inthe past decade. Structuralreformscurrently underway are aimedto contain growthat these levels, as factors that led to the expansion inpost-war economic activity such as agriculture sector growth and donor assistance are showing a declining trend. Mozambique received 12-15 percent o f GDP inconcessional assistance from the donors after the war that covered 50 percent o f the Government budget (CEM). Inaddition, the HIV/AIDS epidemic and a probable recurrence o f natural disasters can adversely affect Mozambique's growth potential (CAS Progress Report, 2005). FigureA1-1:Movement o f economic variables Mozambique - Movement of Economic Variables 501 40 - a 30 - a A 20 - 1990 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 -20 +Agriculture, value added (77 of GDP) GDP growth (annual %) Official development assistance and official aid (current US$) Source: World Development Indicators,The World Bank 3. At 3.9 percent, the rate o fpro-poor growth inthe past decade was positive which implies that poverty reduction inMozambique was equitable, with all groups including the bottom quintile o f population, benefiting from economic growth. Though poverty still remains a rural phenomenon (population is still overwhelmingly rural), this reduction was unique because rural poverty fell faster than urbanpoverty (CEM, 2005). Further, there has been a convergence in inequality through reduction inregional disparities. However, 10million Mozambicans still live inabsolute poverty (PARPA 11). II,MeetingtheMDGsin WaterSupply 4. Inspiteofachievinganumberofitsgrowthandwelfaregoals, efficientpublic service delivery remains a challenge. For instance, inwater supply and sanitation (WSS), Mozambique i s among the 24 least developed countries that need to double its 1990-2004 rate o f increase to reachthe MDGtarget by 2015. It i s also one o f the few countries where urbanservice coverage from improved sources is declining - there has been an 11percentage point decline inurban service coverage during 1990-2004. It can be due to an increase inurbanpopulationwhich grew from 21to 32 percent since 1990 (World Population Prospects, 2006). 32  5. The G o M has taken active measures inits CAS andPRSC to meet this challenge and make safe water available to its citizens. One o fthe pillars o f Country Assistance Strategy (CAS, 2003) for Mozambique to enhance overall well-being o f its citizens is expanding service delivery that includes sustainable access to safe water sources. The explicit indicator inurban water supply specified the improvement inaccess and service quality infive major towns o f Mozambique. According to the CAS Progress Report (2005), access to water supply improved significantly during 1996-2002 to 2003-2005 -from 24 percent to 42 percent. Inthe PRSC 2005, the G o M clearly outlines enhancing service delivery inrural water supply and sanitation as one o f the three pillars to achieve growth and development. Inwater supply, the PES goal was to achieve 41 percent coverage, andthe actual coverage was 39.8 percent duringthis period. The PARPA I1(2006-2009) aims to ensure broad-based growth andreducepoverty from 54 to 45 percent in2009 through the humancapital pillarthat focuses on efficient public service delivery. 6. Mozambique is on track to achieve the millenniumdevelopment goal (MDG) relatedto water supply that aims to reduce the number o fpeople without sustainable access to safe water supply and sanitationbyhalfin2015. Service delivery inurbanwater supplyhas improved in the Mozambican cities through rehabilitation and improved operational efficiency and MDG targets o f 70 percent coverage inurbanwater supply can be potentially met (CAS Progress Report, 2005). Water access i s recorded at 37 percent which is less even by SSA standards of 58 percent (CEM, 2005). Rural access at 27 percent i s lower than SSA rural access at 46.5 percent. 7. Between 1996/97 to 2002/2003, the access to improved water sources improved from 12 to 27 percent inrural areas and 54 to 64 percent inurbanareas (CEM, 2005). The C E M clearly outlines the role o fwater inpoverty reduction and exhorts the improvement o fregulatory framework for natural resources as a critical inputto growth andpoverty agenda for Mozambique. PER2003 reports that rural access is left behind compared to urbanaccess and the figures are misleading andrural access i s lower andurbanaccess is higher than originally envisaged. The system o f delegated management, with the management o f 5 cities inthe hands o f the private operator, has resulted inincrease inconnections andquality of supply. CEM2005 has cited these improvements as an example o f Mozambique's ability to undertake far-reaching and often painfulreforms. These improvements have also had a leveraging effect with additional private and donor fundingpouring into the sector, C E M 2005 recommendedexpanding standpipe access inurbanareas, licensing privately funded water kiosks, increase co-payment in urbanareas. 8. However, the figures on access are controversial. The G o M uses the water access figures o f 40 percent inthe rural areas and 38 percent inthe urbanareas. The GoM's numbers are derived from number o fboreholes dug and number o f households using an average borehole (adjusting for breakdowns inthe boreholes). Meeting the MDGs means urbanaccess increasing to 78 percent andrural access increasing to 56 percent. 33  Annex 2: Major RelatedProjectsFinancedby the Bankand/or otherAgencies MOZAMBIQUE: Water Services andInstitutionalSupportProject CompletedProjects Activities - Support to Capacity Building for DNA, Water Resources, Rural water supply and Project (NWDP I) satisfactory support to the development o f the Delegated World Bank, NDF, Canada, Swiss Management Framework On-goingProjects Activities - Support to 5 cities - Maputo, Beira, Nampula, Second NationalWater Development Quelimane, and Pemba under the delegated Project (NWDP II) management framework (using private sector World Bank, African Development contracts) managedby FIPAGto improve Bank, Government o f the water supply systems _ _. . . Significant investmentNetherlands onproduction and supplyfacilities. Support to 4 cities - Chokwe, XaiXai, Four cities Project- Inhambane,and Maxixe under the delegated African Development Bank, management framework managedby FIPAG Government o f the Netherlands to improve water supply service levels Support for Maputo upgrade production Maputo Water Supply Project facilities and improve and expand European Investment Bank, EU distribution systems and expandnetworks Water Fund, ADF. under FIPAG Support for the 5 Western Cities - support Government o fthe Netherlands for operations and capital works inManica, Chmoio, Gondola, Tete, and Moatize under FIPAG 34  Annex 3: ResultsFrameworkandMonitoring MOZAMBIQUE: Water Services andInstitutionalSupport Project ts with MCC Results Frar :work on towards attainment o f Increasedaccess of servedurban To measureincreased MDGs for water and sanitationinthe four populationto 52% and increased coverage toward meeting northernprovinces o fZambezia, Niassa, Cab0 access of servedrural population MDGs delgado, Nampula (including the three major to 33% inthe four northern cities o fNampula, Quelimane and Pemba). provincesby 2012. Other donor support triggered to increase urban and rural coveraee Increased access to water inthe cities o fBeira, 10,000 households connected Nampula, Quelimane, and Pemba cites under coverage towards meeting the delegated management framework and 2 Pilot ProvincialWater MDGs establishment o f an institutional and regulatory Boards have capacity to framework for smaller cities and towns. manage service operator contracts IntermediateOutcome Use of Intermediate Indicators OutcomeMonitoring ComponentA: 370 kmo fnew water supply Monitor continued Networks constructedineach o fthe 4 towns, network laid and operational progress o fDMF inthe 4 Beira, Nampula, Quelimane and Pemba cities Impact on productivity and market expansion on 4 cities ComponentB: AMU empowered to manage assets, plan and AMU has deconcentrated the Monitor DMF for smaller oversee the execution o f investments, and management o fprovincial towns and cities engage thirdparty operators insmaller cities water supply to local private Use informationon pilot and towns operators PWBs to scale-up Common guidelines used for all future sector SWAP monitoredannually via Track investments and investments, irrespective o f financing source Joint Review sector lending ComponentC: CRA's capacity to implementDMF expanded 0 legal decree established for Monitor success o f CRA to smaller towns and cities. regulation o f small cities with respect to indirect and towns regulation 0 CRA's provincial representation Expand capacity of CRA operationalized (staffing to carry out indirect plans developed and regulation at provincial implemented, processes level with PWBs. and systems inplace) 35  /I 0 0 N m [I IH 0 r4 em * m 33 - 8* 0 0 .-ua2El 0m - [Im N & 0 2 0 0 0 0 0 0 0 [I m 0 0 0 0  Inadditionto the indicators measuredfor WASISresults monitoring, the following output indicators will beperiodically reported under the reportingrequirements by FIPAG. These indicators will also be usedfor ACGF technical output monitoring. Indicator Unit Production Cubic meters quarterly Hours of service Hours per day Water Quality No. o ftests for residual chlorine indistribution systemnot meeting agreed standards. No. o f kmo fnetwork Km No. o f connections Newconnections per quarter Billcollection ratio % 37  Annex 4: DetailedProjectDescription MOZAMBIQUE: Water Services andInstitutionalSupport Project ComponentA: Investmentsandsupport in4 Citiesunderthe responsibilityof FIPAG(US$ 22 millionwith the ACGF) 1. Background and organization ofFIPAG: The National Water Policy (1995) set the stage for a significant reformo f the urbanwater sector that has resulted inpositive results through the implementation o f a policy o f delegated management. The legal establishment o fFIPAG(the asset holding company) and CRA (the regulatory authority) at the end o f the 1998 provided the basis for remarkable progress. FPAGhas grown into an organization employing 43 staff overseeing a capital investment portfolio o f over US$350 million. The number o f schemes under its responsibility has grown from the original 5 to 13. Water services inthe cities under FIPAG's control have been expanded and inmost cities service quality, measured as hours o f supply, has improved dramatically. Furthermore, there has been significant progress towards financial sustainability inall the cities. 2. FIPAGis organizedas 4 maindepartments headed bythe CEO for day to day control with direct oversight for policy and strategic matters bythe Executive Chairmen. The main departments include investment, operations, financial andplanning andbusiness development. The Investment Department implements the growing capital works program which includes the procurement o f the investments. The Operations Department works proactively with the private operators, both Vitnes andAdeM, to further improve the operations o f the water schemes. The FinancialDepartment i s responsible for accounting management, inventory and asset management, budget control, treasury control and disbursement. The Planning andBusiness Development Department undertakes the responsibility for development and oversight of the financial planningmodel, acts as a strategic "thinktank" for business development andto assure FIPAG's sustainability. Inaddition, FIPAGi s de -concentrated to the main cities where it i s responsible for investmentsincluding Beira, Nampula, Quelimane Pemba, etc. 3. Operations inthe FPAGcities are delegated to private sector operators under a variety o f contracts including lease, management, and service. The second generation o f contracts for the 4 cites are on track to be bid out as enhanced lease contracts. 4. Main Investments: WASIS provides for investments for the extension o f the networks in Beira, Nampula, Quelimane andPemba. This i s to take advantage o f the additional water available as a result o f the upgrading o f the sources o f supply under NWDP 11.This will be expected to facilitate about 10,000 new connections andprovide for around 53,000 new consumers. The level o f service is yard taps. The areas chosen for the new extensions are as follows: 0 Beira-Dondo: Macurungo West, Manga, Inhamizua 0 Pemba: Ingonane, Natite, Maringanha 0 Ouelimane: Janeiro and Torrone NOVO,de Setembro, Sangariveira, 3 de Fevereiro 17 0 Nampula: MuahivireExpansgo, Muatala and Mutananha, Namicopo, Namutequeliua, Bamboo inNetikiri, Muhala Expansgo, 38  Table A4-1: Estimatednetworks and connections infour cities. Location Beira Pemba Quelimane Nampula Total Total length o f new network (km) 132 80 74 84 370 I6Estimateof Possible new connections (No.) I I3000 I 2250 I 2250 I 2500 10,000 I I ~~ Estimated potential population served (No.) 15900 11925 11925 13250 53,000 ~~~~ ~~ Estimated Cost (USDmillion) 5.50 3.10 4.40 4.00 17.00 5. Support to ComponentA would include: (a) Expandand extendthe networks and distribution through limited investments insmall works inPemba, Nampula, Quelimane, andBeira, operated andmanagedby a private operator - US$17 million; (b) Provide support to operational efficiency, management efficiency, andconsumables to the investmentsunder the responsibility o f FPAG - customers' meters, quality control equipment, replacement parts, emergency andmaintenance equipment, vehicles, chemicals, and conswnables (fuel and electricity) - US$2.5 million (c) Support to FIPAGfor training, capacity building, supervision o fworks, andtechnical assistance - US$2.5 million. ComponentB: Capacitybuilding,institutionaland operationalSupportto DNA (US$5.5 million) 6. Development ofthe Asset Manazement Unit : The component supports the adaptation of the proven sustainable institutional andregulatory modalities for secondary cities under an AMU based on the delegated management model proven inthe experience from FIPAGcities. On a pilot basis, the credit will support a proposed Asset Management Unit (AMU)to be developed as a specialized Unit using, as applicable, the existing structure o fthe Department o f UrbanWater (DAU)withinDNA. The unit is intendedto beresponsible for allurbansystems not managed byFIPAG, Le., not currently subject to the Framework for DelegatedManagement. Unlike FIPAG,AMU is expected to be the entity responsible for managingboththe water and wastewater public assets located inMunicipal and District urbancenters. AMU, when legally established, i s expected to have the power to mobilize, plan and manage dedicated hnds, plan and oversee the execution o finvestments, promote public privatepartnerships for the development and delivery o f services and introduce performance contracts with autonomous operators. 7. AMU would beaunit developedbyDAUandDNA. .Although the devolution o f responsibility for the WSWS systems to the Municipalities and the empowering o f the Districts to assume responsibility for commercial management o f the systems i s foreseen (andwould be promoted by the proposed framework), the G o M will continue to bear the ultimate responsibility for assuring that collective needs are met. Given the lack o f locally available financial resources at the local levels, it i s expected that the G o M will continue to finance most investments for the l6Estimate ofnew connections is conservative based onpastpractice. IfGPOBA funding for connections becomes available, the number o f new connections could triple. 39  medium term; however operation andmaintenance will be expected to be fully met for a number o f larger towns andmunicipalities over the project period (See Figure A4-1). Box A4-1: FunctionsandPowers of the AMU AMU would be aDNA'sdedicated unitandwould undertake the following core functions: Direction strategy, planning, budgeting and monitoring - Administration and Finance accounting, administration andhumanresources management, support services - Investments - planning, analysis, procurement andproject supervision Operations Monitoring and Improvement - development o f strategies for improvements inthe operation and management of water supply andwastewater services, economic andfinancial analysis o f services, and tariff analysis and negotiation, performance contracting and monitoringo f PWBs ExternalRelations, Training and TechnicalAssistance -coordinationwith other government entities, consultation and communication with consumers, planningandmanagement o f training andtechnical assistance Legal and Regulatory Matters - legal advice, monitoringregulatory compliance andreporting 8. It is envisaged that FIPAGwill serve as a mentor to the AMU given FIPAGslong history inmanaging the urbanwater supply sector with the delegated management framework. FIPAGandAMU will: Collaborate andcooperate inimplementingthis second generationo f the Framework for the DelegatedManagement Water Supply Collaborate and cooperate ininvestment planning; Work toward a criteria for assigning the systems to FIPAGor to AMU via the MOPH. Provide advice and TA to AMU andoperators o f services within the proposednew framework. 9. Creation of the Provincial WaterBoards (PWBs): The creation o f autonomous Provincial Water Boards (PWBs), inwhich Municipalities andDistricts with urbanWSWS and the Provincial Government o f the Province inwhich they are located would be represented, i s also proposed. AMU would delegate responsibility for contracting and supervising service operators to the PWBs through a performance contract. This arrangement would further the decentralization anddevolution process andpromote local governments' involvement inand "ownership" o f PPP arrangements. It would introduce opportunities to capture economies of scale and would create a mechanism for more transparent and effective consultation between central and local levels regarding the planning and implementation o f investments. 10. Itis envisaged that the diverse stakeholders will be appropriately represented inthe Boardo fDirectors (BOD) o f PWBs. Typically, it will comprise o f 4-6 members - with 1 member fkom provincial government and 3-5 members from municipalities anddistricts. This BOD will represent the interests o fandreport to stakeholders, negotiate and sign Performance Contracts with AMU, monitor andreport on compliance with the Performance Contract, appoint of an Executive Director, approve of budgets andbusiness plans of PWB 11. After the PWBs are set up, the role ofAMU wouldbePerformanceContracting and Monitoringo fProvincial Water Boards. To prepare the AMU to take on this responsibility, they will be providedtechnical assistance that will include 1)Drafting andnegotiationo f initial 40  performance contracts with PwBs and2) Training inthe use o f the indirect regulatory framework for smaller towns and cities developedby CRA. 12. Support to a SWAP: Thegroject will co-ordinate with other donors to provide capacity buildingandinstitutional support with respect to development o fthe SWAP approach for rural areas - small piped andnon-piped systems. The Afiican Development Bank, among other donors, is supporting this effort significantly. The Bank's value added will be to provide support in preparingthe medium-ternexpenditure framework to facilitate the implementationofthe sector policy and, to the extent possible, support the preparation o f common guidelines for all future investmentsinthe sector regardless o f the source of financing. 13. Support for ComponentBwouldinclude: TA, capacity building, andtraining to develop smaller cities andtowns framework, work towards the SWAP, support the MTEF for the sector and an investment framework, and support mitigations strategies with respect to HN/AIDS. - AMU US$l.O million. 0 Operatioanlize AMU andpilot proposed Water Boards intwo provinces to include office equipment, vehicles, operational cost support, and TA. US$ 2.0 million. 0 Management and operational cost support for pilot provincial systems including TA, goods and equipment. US$ 2.5 million. Component C: Capacity, Institutionaland operationalsupport to CFU (US$2.5 million)- 14. This will: (a) provide resources to compliment CRA's expanding work on extending regulatory frameworks and over-sight to smaller cities and towns; (b) provide continuing operational work, capacity building, andtechnical assistance to CRA. 15. The Water Remlatow Council ERA)has the general attribution o fregulating all water supply systems, supervising the performance andquality o f the service and establishing the water tariffs. Currently, it directly regulates only services under thejurisdiction o fFIPAGwhich have beenplacedunder delegated management through contracts with a private firm. To provide effective and appropriate regulation o fthe growing number o f services o f different sizes, technical sophistication and financial capacity, CRA's leadership foresees the needto offer several tiers o f regulatory services. Inaddition to direct regulation the menu could include indirect regulation whereby CRA would supervise decentralizedregulatory agents. Such agents would have decision authority, but CRA would monitor them to ensure that they apply and enforce CRA regulations appropriately. Another tier o f service would be regulatory advice to Municipalities that provide water, wastewater, and sanitation (WSWS) as municipal services and are not expressly included under CR4's jurisdiction. 16. Inorder to accommodate thenew stakeholders inthe water sector (AMUandPwBs), and the integration of sanitation into the water supply service sustainability concept, it is desirable that, inthe context o f the plannedreview o f its role, strategies and structure and the probable revision o f its constitutional articles, CRA propose andbe authorized to develop a regulatory framework anddifferentiatedregulatory approaches that couldbe applied to all urbanWSWS whether publicly or privately operated. 41  17. Support for ComponentC would include: e TA, Capacity buildingandtraining support to expand regulatory framework to smaller towns and cities - US$1.5 million. e Operational support and equipment (including vehicles) to expand CRA to provincial level andto continue highlevel o f operational standards at CRA head office US$1.O million. 42  I ......... -.. -..1 .........!j w I i s g I I ''5. \........ I I ...i . I \ l I I -. .-. .-I I I I ..., I I I I I I I m d I _............. ........I I I i. ! : I ...........I I [3 3 ; I -..-..; I------ I .......... i - I I I I I ............... I I I + i 1 I ! ! .................,  Annex 5: ProjectCosts MOZAMBIQUE: Water Services andInstitutionalSupport Project 44  Annex 6: ImplementationArrangements MOZAMBIQUE: Water ServicesandInstitutionalSupport Project 1. FIPAGandCRA will eachreport quarterlyto IDAvia the Quarterly Financial Management Reports (FMR). These reports will cover three main areas and include: progress on the outcome indicators, advancement o fprocurement, andreview o f financial management aspects (This is more fully discussed inAnnex 7. IDA, intandem with the clients, will undertake six monthlyreviews to report on progress. Specific processes and indicators for Component A andfor Component B are discussed below. 2. Component A: The reporting requirements for the technical outputs for WASIS will be the responsibility o f FIPAG. The outputs will be measured by o f a set o fperformance indicators Which form a sub-set o f the present indicators reportedunder NWDP II? These will buildon the extensive data base already established by FIPAGandmonitor the progress o f the network expansion and service connections as well as other important indicators. The total set of indicators will be set out inthe contract with the private operators for the 4 cities. These indicators will include, but will not be limitedto, the following: Indicator Unit Production Cubic meters quarterly Hours of service Hours per day Water Quality No. o ftests for residual chlorine in Idistribution systemnot meeting agreed standards. No. of kmof network IKm No. of connections New connections per quarter Billcollectionratio % 3. As is usual inprivate sector contracts for operations, monthlyreports will bemadebythe Operator to the client on a monthly basis. Progress will be assessedagainst the target indicators and corrective action taken as appropriate to ensure that the project goals are achieved. At the end o f each year, the annualperformance will be reportedto and assessedbyFIPAG. Reporting o fthe indictors will be included inthe quarterly management reports to IDA. 4. Components B and C: The output indicators will be the responsibility o fbothDNA and CRA. Implementation o f the proposedinstitutional reform andintroduction o fthe delegated management framework for operation o fnon-FIPAG urbanwater supply services would be kept on track andmonitored by establishing a work plan for completingkey activities. Annex 3 set out the arrangements for results monitoring andlist the key activities and a timefkame of completion byproject years. AMU would be expected to establish and maintain a detailed rolling 12-monthwork planfor implementingthe key activities under its mandate andsubmit a brief report on progress and an updated work planto the Director o f DNA every three months. DNA would also be required to report on the progress o f the SWAP. Reports o f the Joint Sector Review, bi-annually, should be includedinthe FMRunder progress on outcome indicators. 5. Likewise CRA would be expected to maintain a work planfor implementationo f its components andreport quarterly on progress inthe FMR. CRA's outcome indicatorsby year of the project are also set out inAnnex 3 andprogress on these indictors will be reported quarterly 45  inthe FMR. Notethat CRA willbe hllyresponsiblefor the procurement andfinancial management aspects ofthe FMRs. 46  Annex 7: FinancialManagementandDisbursementArrangements MOZAMBIQUE: Water Services andInstitutionalSupport Project 1. The financial management assessment was carried out inaccordance with the Financial Management Practices Manual issued bythe Financial Management Boardon 3 November 2005. The objective o f the assessment was to determine whether the implementing agencies (FIPAG andCRA) have acceptable financial management arrangements, which will ensure: (1) the funds are used only for the intended purposes inan efficient and economicalway, (2) the preparation o f accurate, reliable andtimely periodic financial reports, and (3) safeguard the agencies' assets. 2. The overall conclusion o f the financial management assessment i s that the project's financial management arrangements have overall rating o fmodest which satisfy the Bank's minimumrequirements under OP/BP 10.02 expectfor the issues mentionedinthe financial management action plan. 3. Countw Issues: A Public FinancialManagement Assessment conductedinSeptember 2004 {as follow-on to the 2001 Country FinancialAccountability Assessment (CFAA)} concluded that the overall public sector financial management risk inMozambique remained high. Managementofthe economy was quite satisfactory, butcomprehensiveness and transparency o fthe budget needs to be strengthened, the medium-term planning andbudgeting was weak, while budget execution and accounting and reporting presented quite serious weaknesses. 4. At the same time, anumber o freforms were movingahead inavery structured and comprehensive manner. The govenunent has completed a number o f keypreparatory reforms andhas: (i) regulations for the Financial Management law; (ii) issued initiated the introduction o f a new and more-detailed functional classifier into the budget; (iii) started to formulate the budget incurrent prices; (iv) introducedrestrictions onbank accounts heldbypublic institutions; (v) started to incorporate off-budget revenues as well as donor-funded expenditures into the budget; (vi) initiatedtraining for budget staff indouble-entry accounting; and(vii) established a consolidated electronic treasury account to improve control o f treasury operations and cash management. 5. One key reform has beenthe introduction and implementation o f a computerized integratedfinancial management information system, e-SISTAFE. This has been rolled out inall ministries at central andprovincial level, The Bank is part o f a group o f donors which has financed selected components o f the system, andis also part o f a Quality Assurance Group established to provide an independent view o f the management, progress, and achievements o f the SISTAFE project. A report o f this grouping issuedinNovember 2005, noted the satisfactory production o fbudget execution reports for the period Januaryto August 2005. 6. A report on the Assessment o fFinancialManagement for 2004/05 usingthe Public Expenditure andFinancialAccountability (PEFA) methodology concluded that there have been improvements ina number o f important areas which were beginningto have an impact. The budget was a credible document with final out-turns reasonably close to initial approvals; there was also a steady improvement inrevenue collection and administration. Fundamental weaknesses remained inthe quality o f the public financial management systems (PFM) especially ininternal control systems, limitedcoverage o f the external audit, and the high-level o f off-budget spending mainly from externalproject finance. The report noted that the quality o f 47  the PFMwas expected to continue improving as a natural consequence o f ongoing reforms such as e-SISTAFE; however, this would take time. RiskAssessment andMitigation Table A7-1:RiskAssessment andMitigation Risk Risk RiskMitigatingMeasures incorporated intothe Conditions of Rating Project Design Negotiations, Board or Effectiveness (Yes or No) Inherent Risk Country Level S A numberof initiatives andPublic Financial No Managementreforms are taking place including e- STSTAFEroii-out. -- - EntityLevel L FIPAG and CRA are separate legal entity and well No established. It is implementing on-going Bank- financed project. Project Level L This is a repeater project and it will be implemented No by same implementing agencies. I t will involve few spending units. ControlRisk Budgeting M Budget preparation well defined, and there is regular No monitoring on the implementation o fplanned activities and the use o f funds. Whereas FIPAG i s able to properly andbudget for the entity's requirements, the amount allocated inthe approved budget is oftenbelow the requiredamount to implement FIPAG's activities. Accounting M Accounting policies/procedures are documented in Yes Financial Procedures Manuals. However, there still some roomfor improvement, particular for FIPAG Delegations. Internal Control S Accounting policies/procedures are documented in No the Financial Procedures Manuals. However, FIAPG Internal Audit Department i s weak. The Internal AuditDepartment should strengthenedbyhiring additional staff. FundsFlow L Funds flow arrangements are simple with centralized No procurement andpayments for the project activities. Financial M Financial reports are generally preparedon a timely Yes Reporting basis. The formats o f interimunaudited financial reports will be agreedby negotiations. Auditing L The projects implementedbyFIPAG and CRA are No audited annually. FIPAG financial statements are also audited annual. The project will be auditedby independent audit f iannually. 7. Inview ofthe general country financial management issues andthe issuespeculiar to the project, the overall financial management risk rating for the project i s Modest. 8. The supervision missions havebeen reviewing the financial management arrangements of the project interms o fbeing capable o frecording correctly all transactions andbalances, supporting the preparationo f regular andreliable financial statements, safeguarding the entity's assets, and are subject to auditing arrangementsacceptable to the Bank.The financial management issues raised inaudit reports and management letters hadbeen discussed with FIPAGand CRA financial management staff. 48  9. The conclusions o f the missions were that FIPAGand CRA continue to maintain acceptable financial management arrangements for the project including the project's system accounting, reporting, auditing, and internal controls. However, the mission identified two issues requiring attention o f FIPAGmanagement and financial staff. These issues include: availability o f counterpart h d s andmanagement o f the SpecialAccount. Therefore the overall recommendedFMrating inISRwas satisfactoryover the last three years, however, the separate line o f Counterpart funds inISRhas beenrated Unsatisfactory. This rating, however, is a result o f non-payment o f VAT/IVA. The counterpart funds that were allocatedunder the project were provided ina timely manner andthere was never an issue o f the Government withholding counterpart as defined inthe DCA. . 10. ImpZementing entity: The project will be implemented by FIPAGand CRA (the implementing agencies). Fiduciary matters (financial management and procurement) will be handledby FIPAGand CRA staff. FIPAGhas overall responsibility o f implementation o f Component A o f the Project. And, CRA will handle fiduciary matters o f Components B and C. DNAwill be responsible for technical issues o fComponent B. Theproject will makeuse of the institutional framework o f FIPAGand CRA, as well as arrangements inplace for fiduciary matters (procurement and financial management). 11. Budgeting: A project budget has been draw up and is included inboth the PAD. Budget preparation well defined, and there i s regular monitoring on the implementation o fplanned activities and the use o f funds. The annual budget is prepared based on the policy guidelines and regulations issued by the Ministry o f Finance. 12. Accounting: The project's accounting records will be maintainedusingthe adopt cash basis o f accounting. The project will comply with InternationalPublic Sector Accounting Standards (under the Cash Basis o f Accounting), as promulgatedby the InternationalFederation o fAccountants (IFAC). The accounting policies andprocedures, including chart o f accounts, are documentedinthe FinancialProcedures Manuals 13. FIPAGandCRA accounting system are based on conventional accounting software called "Primavera". This accountingpackage has proved to be adequate as FIPAGand CRA are able to produce necessary reports required to manage and monitor their financial operations. The chart o f accounts at both agencies will be adjusted to able to identify project activities and disbursement categories. And, this activity will be condition o f effectiveness. InternalControlandInternalAuditing 14. ,%#&: Theimplementingagencieshavequalifiedandexperiencedstaffhandling financial management issues. The project i s embedded inthe operations o f both agencies, to be implemented by the relevant staff agencies. Therefore, financial management issues o f the project will be handledby accounting personnel o f FIPAGand CRA, who are implementing on- going Bank-financed project. Both institutions believe that the current number and skills of accounting personnel are adequate to be responsible for financial operations, including o f the proposedproject. 15. Internal controls: The implementing agencies have FinancialProcedures Manuals that document the accounting systems, policies andprocedures to be employed. The manuals describe the accounting system, internal control procedures, basis o f accounting, standards to be 49  followed, authorizationprocedures, financial reportingprocess, budgeting procedures, financial forecasting procedures, and contract management. Inaddition, the manuals document procedures to be undertaken for the replenishment o f the DesignatedAccounts and auditing arrangements. 16. Internal Audit: FIPAGhas an internal audit department which, reports to the chairman. It has only one staff, therefore has limited capacity to cover FIPAGoperations. This department i s being strengthened byhiringan additional internal auditor. The proposedproject will use the existing structures o f FIPAG, including those o f the internal audit. Therefore the increase in audit staff should improve the current situation o f the internal audit fimction for project operations. The frequency and extent o f the internal audit reviews and testing o fthe internal controls should be consistent with the nature, andrisk o f the relevant project activities. 17. There i s no internal audit function at CRA. However, internal auditing across the entire government (including projects) i s the responsibility o f the Inspectorate General o fFinance (Inspecqiio Geral das Finanqas-IGF). The IGFis understaffedandhas limited capacity to oversee project implementation. There will therefore be need for thorough supervision, as well as quality assurance o f the project. 50  FundsFlow and DisbursementArrangements Figure A7-1: funds flow mechanism I I I I I I I I I I I I I I I I I I I I I I T Designated Designated Designated Account C R 4 FPAG Suppliers of Goods and Services Key Flow of funds (USD for IDA andACGF) ------------_--+ Withdrawal applications for IDA and ACGEF Invoices -..-..-..-..-.. + 51  Disbursementarrangements 18. Disbursements from IDA andACGF would bemade on the basis o f incurred eligible expenditures (transaction based disbursements). IDAwould then make advance disbursement from the proceeds o f the Credit and Grant by depositing into the implementing agencies operated Designated Accounts (DAs) to expedite project implementation. The advance to DAs would be usedby the implementing agencies to finance project expenditures under the proposedCredit andGrant. Another acceptable methodo fwithdrawing funds from the Credit and Grant is the direct payment method, involvingdirect payments from the Credit to a thirdparty for works, goods and services upon the implementing agency's request. Payments may also be made to a commercial bank for expenditures against IDA special commitments covering a commercial bank's Letter o f Credit. The Disbursement Letter will stipulate a minimum applicationvalue for direct payment and special commitment procedures to be determined duringnegotiations. 19. Upon Credit andACGF Grant effectiveness, the implementing agencies would submit withdrawal applications for initial advances to the DAs drawn from the IDA Credit and ACGF Grant, inamounts agreed to inthe Disbursement Letter. Additional advances o ffunds from IDA to the DAswill be made upon evidence o f satisfactory utilization o f the previous advances, reflected inSOEs and/or on full documentation for payments above SOEthresholds. Withdrawal applications documenting expenditures would be requiredto be submitted monthly. A disbursement condition for the IDACredit (under Category 3 (a)) is that the AMU hasbeen established by decree. Annex 7: Table AI Disbursementper ExpenditureCategoryto be financedby IDA - (USDmillionand %) Category Amount of the Credit Percentageof Expenditures to be Allocated (expressedin Financed USD) (inclusive of Taxes) (1) CivilWorks for PartA (a) (i)fthe o 1,000,000 100% Project (2) Goods, consultants' services, and training for: (a) Part A(b) except for A(b) (i)(3); and Part A (c) o fthe Project 5,000,000 100% (b)Parts B and C ofthe Project 4,500,000 100% (3) Operating costs for; (a) Parts B (a) and B (b) o f the Project 2,000,000 100% (b) Part C o fthe Project 500,000 100% 4) Consumables (fuel) and electricity for Part 500,000 100% A ofthe Project Unallocated 1,500,000 TOTAL AMOUNT 15,000,000 52  Annex 7: TableAI1 DisbursementperExpenditureCategoryto be financedbyACGF - (USDmillionand YO) Category Amount of the Grant Allocated Percentage of (expressed inUSD) Expenditures to be Financed (inclusive of Taxes) (1) WorksunderPartA (a) (ii),and GoodsunderPartA (b)(i)(3) ofthe project; 15,000,000 100% TOTAL AMOUNT 15,000,000 ~ Bankingarrangements 20. The implementing agencies will open andmaintain three separatebank accounts for the purposes o f implementation o f the project. All three accounts will be held inthe Commercial Banks.Details o fthe accounts are set out below: 0 Desimated Account A: To be managed byFIPAG, and denominated inU S dollars, disbursements from the IDA credit will be deposited inthis account to finance activities under the relevant components; 0 Desimated Account B: To be managed by FIPAG, and denominated inUS dollars, disbursements from the ACGF grant will be deposited inthis account to finance activities under component 3: Capacity Building; and 0 Desimated Account C: To be managed by CRA, and denominated inU S dollars, disbursements from IDA will be deposited inthis account to finance activities under the relevant components; FinancialReporting 21. The implementing agencies will produce on regular basis required financial reports to manage andto monitor the project. Interimunaudited financial reports will be produced on a quarterlybasis. The contents o fthese reports should at least consist o fthe following: (i) financial reports, including a statement o f sources anduses o f funds and a statement o f uses o f funds byproject components and activities; (ii) procurement, andphysical progress reports. The formats o f interim unaudited financial reports will be developedbyproject negotiations. 22. The implementing agencies will also produce annual project entity financial statements, which will comprise of: a. A Statement of Sources and Uses of Funds / CashReceipts and Payments which recognizes all cash receipts, cash payments andcash balances controlled bythe entity for this project; and separately identifies payments bythirdparties onbehalfo fthe agency. 53  b. TheAccounting Policies Adopted and Explanatory Notes. The explanatorynotes shouldbe presented ina systematic manner with items on Statement o f Cash Receipts andPayments being cross referencedto any related information inthe notes. Examples o f this information include a summary o f fixed assetsby category o f assets. c. A Management Assertion that IDA funds havebeen expended inaccordance with the intendedpurposes as specified inthe relevant World Bank legal agreement. d. The entitieswill also produce annual entity financial statements inaccordance with the relevant laws andregulations. Auditing 23. The on-going Bank-financedproject i s auditedbyprivate audit firm annually. The audit reports (for both implementing agencies) for the year ended December 31,2006 together with the management letters were received on time. This continued the trend experienced on the project inthe previous years o f timely submission o f audit reports. The auditors expressed a separate unqualified opinion for FIPAGcomponents andNetherlands Trust Fundon the project financial statement, the special account, andthe statement o f expenditure. However, the auditors expressed a qualified opinion for the CRA-Water Regulatory Council component on the financial statement and special account due to substantial delays on allocation o f counterpart fimds by the GoM. It is noted, however, that the G o M has paid all counterpart funds that were specified in the D C A andother Legal agreements under the NWDP 11. There is a separate unqualified opinion on the statement o f expenditures for CRA. The auditors noted some weaknesses inthe system o f internal control inFIPAGand an additional accountant is beingrecruited for internal audit. This should address the weaknesses identified including that the project accounting system is based on excel spreadsheets, andthat the fixed assets register maintainedby FIPAG does not include identification elements such as asset code, contract number, supplier andthat some items lacked acquisition costs. 24. The project financial statements will be auditedby independent auditors inaccordance with InternationalStandards on Auditing as promulgatedbythe InternationalFederationof Accountants (IFAC) and the audit report will be submitted to IDA within 6 months after the financial year-end. The costs incurred for the audit will be borne by the project funded by IDA. 25. The auditors will be requiredto express a single opinion onthe project financial statements, as per the guidelines "Financial Management Practices in World bank-Financed Investment Operations", o fNovember 3,2005 andthe audit report will be submittedto IDA within6 months after the financial year-end. Inaddition, a detailed management letter containing the auditor's assessment o f the internal controls, accounting system andcompliance with financial covenants inthe IDAFinancing Agreement, andsuggestions for improvementwill be prepared and submitted to management for follow-up. 26. The arrangements for the appointment o fthe external auditors o f the project financial statements shall be communicated to IDAthrough agreed terms ofreference. 27. The CRA andFIPAGwill maintain financial management systems inaccordance with international accounting standards, andhave their entity financial statements and the project financial statements audited inaccordance with international auditing standards. These audits shall cover the period of one Fiscal Year, The audits for each such period shall be furnished to the Association not later than six months after the end o f suchperiod 54  28. The figure below identifies the audit reports that will be required to be submitted bythe project implementing agencies due date for submission. Audit Report Due date 1) Continuing entity financial statement 6 months after the end of the reporting period 2) Project specific financial statements 30" June of each following year 3) Special Opinions Not applicable 0 SOE 0 DesignatedAccount Conditionality 29. By effectiveness - The implementing agencies have adjusted the financial management system, adequate to produce interim unaudited financial reports, inform and substance satisfactory to the Association, to ensure proper accounting andmonitoring o fproject finds. Action Plan 30. Inorder to establish anacceptable control environment andto mitigate financial management risks the following measures should be taken bythe due dates as indicatedinthe financial management actionplanbelow. Table A7-3: Financialmanagement action ~ l a n Action Responsibility Completion date 1 Adjust the financial management and accounting systems, FIPAG and CRA Effectiveness including a Chart of Accounts, to be able to identify project activities, and disbursement categories. SupervisionPlan 31. Financialmanagement supervision will be carried out by the FinancialManagement Specialist (FMS) at least once a year inline with the modest risk rating. The FMS will also: 0 Conduct an FMsupervision before effectiveness/disbursement; 0 Review the financial component o fthe quarterly interim unaudited financial reports; and 0 Review the Audit Reports and Management Letters from the external auditors and follow-up on material accountability issues by engagingwith the TTL, Client, andor Auditors. 55  Annex 8: ProcurementArrangements MOZAMBIQUE: Water ServicesandInstitutionalSupport Project A. General 1. Procurement for the proposedproject would be carried out inaccordance with the World Bank's "Guidelines: ProcurementUnder IBRDLoans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection andEmployment o f Consultants by World Bank Borrowers" dated M a y 2004 revised October 2006, andthe provisions stipulated inthe Legal Agreement. The various items under different expenditure categories are described ingeneral below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower andthe Bankinthe Procurement Plan. The Procurement Planwill be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 2. ProcurementofWorks:Works procuredunder this project would include: Designand construction o f water supply networks, rehabilitation o fnetwork sections, including the replacement o fpipes and fitting, electricity works, etc. The procurement will be done usingthe Bank's Standard BiddingDocuments (SBD) for all ICB andNational SBD agreed with or satisfactory to the Bank. Contracts o f works costing US$l.O million equivalent or more per contract will be procured through ICB. Works estimated to cost more than equivalent US$75,000 but less than US$l.O million will be procured through NCB. Small works estimated to cost US$75,000 per contract may be procured usingthe Shopping methodbyrequestingat least three written quotations form qualified contractors. Direct Contracting may be usedwhen it can bejustified that a competitive method is not advantageous andmeets the requirements under paragraph 3.6 o fthe Procurement Guidelines and after consultation with the Bank. The prior review threshold for works contracts would be US$500,000 equivalent per contract. Pre- qualification o f contractors will be usedonly for large contracts over US$lO.O million or incases where special expertise i s required. 3. Procurementof Goods: Goods procuredunderthis project would include vehicles, motorcycles, chemicals for water treatment, pipes, valves, meters, pumps, information and technology equipment, furniture and office equipment, among others. The procurement will be done usingthe Bank's SBD for all I C B and National SBD agreed with or satisfactory to the Bank. Goods estimated to cost equalto US$250,000 equivalent or moreper contract wouldbe procured through I C B procedures. Good estimated to cost less than US$250,000 equivalent per contract would be procured through N C B procedures. Goods contracts estimated to cost less thanUS$50,000 equivalentper contract maybeprocuredusingthe shoppingmethod. Procurement from IAF'SO and direct contracting may also be considered with the Bank's prior review and approval. The prior review threshold for goods contracts would be US$200,000 equivalent per contract. 4. Selectionof Consultants: Consulting services to be financedwill include: Works supervision and contract management, Technical Assistance inProcurement and Construction Management, Technical assistance for developing smaller cities andtown delegated management framework, small water system management. All consulting service contracts costing equal to US$lOO,OOO or more for firms will be awarded through Quality and Cost Based selection (QCBS) method. Contracts estimated to cost less than US$lOO,OOO equivalent may be 56  contracted through Consultants' Qualification (CQS). Consulting firms for carrying out standard or routine nature assignments such as audits would be selected through Least Cost (LCS). Individual Consultants would be selected on the basis o f their qualifications inaccordance with SectionV of the Consultant Guidelines. Single source may be usedwhere it can bejustified and afier consultationwith the Bank. Short lists o f consultants for services estimated to cost less thanUS$lOO,OOO equivalentper contract maybecomposedentirely ofnational consultants in accordance with the provisions o fparagraph 2.7 o fthe Consultant Guidelines. Consultancy services estimated to cost above US$lOO,OOO equivalent per contract for firms and above US$50,000 equivalent per contract for individual consultants andsingle source selection o f consultants will be subject to prior review by the Bank. 5. OperatingCosts: Operating costs shall consist o f operation andmaintenance costs for vehicles, office supplies, communication charges, equipment, utility charges, travel expenses, per diem andtravel costs, office rental, among others. 6. Training: Training costs includeworkshops, seminar and associated costs. Prior review o f training plans, including proposedbudget, agenda, participants, venue o ftraining and other relevant details, will be required on annual basis. 7. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented inthe Operations Manual to be produces by the Borrower by effectiveness. B. Assessment of the agency's capacityto implementprocurement 8. Procurement activities for Component A will be carried out by FIPAG, while the procurement activities under the Component B and C will be carried by CRA. B1. Assessment of FIPAG's Capacity 9. FIPAGis staffedby a ChiefExecutive Officer supported byvarious Managers, including an Investment Manager (proficient inProcurement). The procurement hnctioni s under the Investment Department and it i s staffed by a procurement officer and a procurement assistant and with a Technical Assistance from a Procurement Advisor. 10. An assessmento fthe capacity o fthe ImplementingAgency to implement procurement actions for the project was carried out and found to be adequate as FIPAGhas been implementing satisfactorily the Bank financed Second National Water Project with the same team. At the meeting heldon March 19,2007 the current performance o f FIPAGandthe organizational structure for implementingthe project was reviewed as well as FIPAGthe relationship with the implementers andbeneficiaries o f the other two components. Itwas agreed that FIPAGwill have a leadingrole inconsolidating the ProcurementPlanon behalf o f all three beneficiariesbefore sending for Bankreview and clearance. This will apply for the original Procurement Planto be agreed duringAppraisal and the subsequent updates duringthe life o f the Project. 11. The key issues andrisks concerningprocurement for implementation o fthe project have been identified and include the need o f improving the recordkeeping. The corrective measures which have been agreed are the establishment o f an acceptable procurement filing andrecord keepingsystem prior to project effectiveness. The actionplangiven below will be followed duringthe implementation o fthe project andsome actions will constitute conditions for negotiations and effectiveness. 57  12. The procurement risk for the FIPAGcomponent is Moderate. B2.Assessment of CRA's Capacity 13. CRA has beenimplementing inthe last three years a US$5.5 million component under the Second National Water Project. The CRA ChiefExecutive Officer has been carrying out satisfactorily the procurement for CRA. 14. Under the present project CRA has agreed to, inaddition to carry out the procurement activities related to its own component, be also incharge o f carrying out the activities underthe National Directorate of Water (DNA) component. For this purpose andto support the CRA Chief Executive Officer, a Procurement Officer will be recruitedunder qualifications and experience acceptable to IDA andwill be full time employedby CRA. 15. Present CRA capacity to carry out procurement was assessedon March 19,2007 and found to be adequate andthe anticipatedprocurement andwork load under the newproject is of similar nature. The organizational structure for implementing the project was also reviewed, particularly the relationship with the National Directorate o f Water (DNA) that has entrusted its procurement to CRA. C R 4 will liaise with the Bank on all procurement related issues under the components B and C, the latter for DNA. The Procurementrisk for the implementation of these components is Average. 16. The action planbelow was developed to ensure that adequate implementation capacity is establishment within project beneficiaries prior to project effectiveness. 17. The overall project risk for procurement i s Average. ake account of the No adequate controls and ontract systemin accurate knowledge of contract Establisha Contract execution process d a execution information monitoring system FIPAG andCR4 C. ProcurementPlan 18. The Borrower, at appraisal, developed a procurementplanfor project implementation which provides the basis for the procurement methods. This planhas been agreedbetweenthe 58  1 2 3 4 5 6 7 9 Ref. Contract Estimated Procurement Domestic Review Expected Comments No. (Description) cost Method Preference by Bank Bid-Opening (US%000) (yedno) (Prior / Post) Date W1 Contractor to Design and 8700 Construct the Network for Beira and Quelimane Package 1 :Beira Package2: Quelimane W2 Contractor to Design and 5400 Construct the Network for Pemba and Nampula Package 1: Pemba Package2: Nampula W3 Constructiono f Water 400 Distribution Centre at Quelimane W4 Constructiono f Water 800 Reservoir at Nampula (1000 Cum capacity) 59  4-4 Spareparts(Suchas valves, pumps, pipes etc) LOT 1 G8 Supply ofEquipment and 150 NCB No Post 24-4-08 Spareparts(Suchas valves, pumps,pipesetc) LOT 2 G9 Supply ofEquipment and 300 ICB No Prior Spareparts (Suchas valves, pumps, pipesetc) LOT 3 G10 Supply ofMeters 500 ICB No Prior 117-11-07 I G11 Purchase of 4 Vehicles 160 NCB No Post 24-8-07 G12 Supply of Office 50 L S No Post 24-08-07 Furniture G13 Supply ofOffice 50 L S No Post 24-09-09 Furniture G14 Supply of Goods - IT 50 L S No Post 25-07-07 equipments G15 Supply of Chemicals - 300 ICB No Prior 17-07-07 For2007 G16 Supply ofChemicals - 300 ICB No Prior 17-12-07 For2008 G17 Purchaseof4 Vehicles 160 NCB No Post 24-9-08 G18 Supply ofGoods - IT 50 L S No Post 25-07-07 equipments G19 Supply ofChemicals for 300 ICB No Prior 17-12-08 2009 G20 Supply ofChemicals for 300 ICB No Prior 17-08-09 2010 G21 Purchase of 2 Vehicles 80 NCB No Post 25-10-09 G22 Supply of 8Vehicles 140 NCB No Post 24-11-08 G23 Supply ofComputersand 50 L S No Post 24-04-08 Equipments G24 Supply ofFurniture's 58 L S No Post I20-10-09 I (b) Contracts estimatedto cost equalto US$200,000 or more for Goods andequalto US$500,000 or more for Works andall direct contractingwill be subject to priorreviewbythe Bank. 60  2. ConsultingServices (a) List o f consulting assignmentswith short-list o f international firms. 1 2 3 4 5 6 7 Ref. No. Descriptionof Assignment Estimated Selection Review Expected Comments cost Method by Bank Proposals (US% 000) (Prior / Post) Submission FIPAG CON 1 Consultants Service for Post Standardization and Compilation of Design CON 2 Consultants Service for Prior Supervisionof Works I for Beira and Quelimane CON 3 Consultants Service for Prior 08-11-07 I Supervision of Works 750 I QcBs for Nampula and Pemba CON4 Technical Assistance for 350 I C Prior 29-9-07 Construction Management for FIPAG for two year CON5 Technical Assistance for Prior 29-9-07 Procurement and Contract Management for FIPAGfor two year CON 6 Consultants Service for 200 QCBS Prior 24-9-2007 Designand Supervision of a Water Reservoir at Nampula and a Water Distribution Centre at Ouelimane CON7 TA to develop small 300 QCBS Prior 24-10-07 cities and towns framework - AMU CON8 TA for RuralWater 500 QCBS Prior 24-10-07 SWAP CON9 Umbrella TA 1450 QCBS Prior 10-01-08 CONl Procurement Specialist 80 IC Prior 09-01-08 0 CONl Financial Assistant 36 IC Post 04-01-08 1 Note: QCBS- Quality and Cost Based Selection CQ - SelectionBased on Consultant's Qualification I C- Individual Consultant 61  (b) Consultancy services estimated to cost equal to US$lOO,OOO equivalent or moreper contract for firms and above US$50,000 equivalent per contract for individual consultants and single source selection o f consultants will be subject to prior review by the Bank (c) Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less thanUS$lOO,OOO equivalent per contract maybe composed entirely of national consultants inaccordance with the provisions o fparagraph2.7 ofthe Consultant Guidelines. F. Arrangements for RetroactiveFinancing 20. Provision has beenmade for retroactive financing under the IDA Credit andunder the ACGF Grant. The table below sets outs the source, amount, activity, andprocurement method andprocurementplanreference. . I Source I ~ m o u n t 1Description o f Assignment IProcurement Procurement I I US$ PlanRef: Method ACGF 3,000,000 Design and Constructiono f W1, W2 ICB Selected Network IDA 250,000 TA Studies to develop small Con 8 QCBS cities andtowns framework 62  Annex 9: Economicand FinancialAnalyses MOZAMBIQUE: Water Services andInstitutionalSupport Project Economic Analysis: 1. WASIS Project is a repeater to the NWDP I1that aimed to increase the production capacity o f five biggest towns o fMozambique and to support a robust institutional structure in the water sector. Productioncapacity, increased from 66 millionm3 in2000 to 87 million m3 2006. WASIS, therefore, proposes to (1) create the networks that deliver the new production capacity to consumers and (2) increase capacity to implement a smaller cities andtowns framework. A total o f 30 million, equally contributed by IDA andAfrica Catalytic GrowthFund (ACGF) i s earmarked for this project, o fthe total, 22 millionis allocated for buildingdistribution networks (Component A) andthe rest to Component B. For the purposes o f economic analysis, there are manynon-easily quantifiable benefits to Component B associated with capacity buildingandcreatingnew institutional structure, therefore, for the purposes o fthis analysis, only Component A will be analyzed indetail. 2. A cost-benefit analysis usinga "with andwithout project" methodology hasbeenusedto calculate the ERR andNPV o f the Component A o f the project to which the project directly contributes with physical investments. The incremental economic benefits are projected over a 15 year period to arrive at the ERR andNPV based on a 10%(the hurdle rate IDAuses inWSS projects) discount rate. This methodology projects how behavior o fbeneficiarieswill change following the project intervention inthe `with project' scenario. Inthe `without project' scenario, the current situation is assumed to continue into the future. 3. For component A, new networks that stretch up to 370 k m s will be installedinfour project towns -Beira, Nampula, Pemba, and Quelimane which provides an opportunity for new consumers to connect to the network. Conservative estimates suggest that 10,000 new consumers will join the formal network following the project implementation, with 80% of the connections occurring inthe latter halfo f the project implementation after the pipelines are laid. The 10,000 new connections are expected to be inthe form o f individual yard taps, which will add approximately 53,000 new consumers to the formal network (assuming average household size o f 5.3). 4. The primarywater sources for households not connected to the formal network are neighbor's yardtap, public standposts, wellsihandpumps. The Beneficiary Assessment notes that ifgivenachoice, households prefertheneighbor's yardtap comparedto the standpipe due to factors such as time spent waiting at the source and aspects linkedto the user's convenience. Households report that they spend almost twice as much time at the standpipe waiting to collect water as they do at the neighbour's tap. This may bebecause there are more people at the standpipe and because low water pressure makes filling recipients a slow process. Many households also prefer to obtain water at their neighbour's tap because they are treated more personally than they are at the standpipe, andthere are fewer conflicts betweenusers. 5. The economic benefits from the new connections will meanthat households previously dependent on neighbor's yard-tap or public standpipes or wells will move towards accessing water from a formal connection. The economic analysis quantifies the benefits accruing to the project beneficiaries -the newly connected households. The benefits can be quantifiedinthe 63  form o f incremental expenditure on meeting the household water demand, andtime savings as a result o f lower collection andwait time. Figure A9-1: Major Sources o fDrinkingWater ajor Sources of Drinki 3c8 v) 100 80 3 I 60 c s 40 20 0 Beira Nampula Pemba Quilimane Domestic connection Neighbours' tap Public standpipe Handpumprnells W Other Sources 6. Based on the beneficiary assessment carried out in2003 for the NWDPII, proportion o f households ineach city dependent on each o f these sources i s used to calculate their current expenditure on water supply. Those dependent on wells do not pay while those dependent on neighbor's tap pay a higher than formal network tariff. The incrementalwater expenditure from the new connections will be minimal since households relying on neighbor's tap are paying more, andhouseholds relying on public standpipes and handpumps/wells are paying much less for a 20L bucket thantheir `post project' scenario o f yardtap connection. The expenditure on water for the newlyconnected consumers i s valued based on the average tariff for individual connections/yardtaps which ranges from $0.45/m3 inNampula and $0.51/m3 inBeira. Source: Beneficiary Assessment for NWDP 11,2003; WB-FIPAG Financial Model 64  7. Accessing water from yard-taps andprivate standpipes also means that households will incur time savings that canbe quantifiedby valuing the time inthe form o fwages lost due to the water collection activity. The economic benefits from the new connections primarilyderive from these time savings. For instance, inQuelimane, an average household spends approximately 4 hours a day collecting water at the public standpost. At the public standpost and wells, the waiting, filling and carrying time for a 20L bucket can range between 17 minutes in Pembato 79 minutes inQuelimane. Incomparison, the water collection time is 10minutes at the yardtap for a 20L bucket. The time savings are valued at 50% o fbasic industrial wage o f 1443 Meticais/month to account for unemployment and low opportunity cost o f time. The economic benefits from new connections primarilyderive from time savings since household members particularly women andchildren spend a significant amount o f time daily inthe water collection activity. Beira Nampula Pemba Quelimane Neighbor's tap 9 21 26 44 Public Standpost 35 28 17 79 WellsEIandpumps 31 30 48 78 8. The economic analysis suggests that the Component A o f the project has a positive economic NPV o f $5 1million and anERR o f 60%. This implies that the project will be beneficial to the citizens o f the four cities o f Beira, Nampula, Pemba, and Quelimane in alleviating their water supply concerns. 1 NPV I EIRR 60% i FinancialAnalysis: 9. Financial Analysis ofFPAG: Analysis has been carried out on the financial viability of FIPAGwhich is the main service provider that would implement the main investments supported under the project. 10. Since its establishment in 1998, FIPAG's overall financial performance has been improving over time. As it has taken on responsibility o f serving additional cities andtowns over time, its revenue base has been growing. The delegated management model implementedin Maputo, Beira, Nampula, Quelimane, and Pembahas contributedto operational efficiencies and general improvements inthe service. The financial projections indicate that FIPAG's consolidated net income in2007 i s expected to achieve a breakevenpoint, andcontinue to improve thereafter. The timely implementation of the investments innetwork extension andnew connections plannedunder the project would help FIPAGachieve fbll cost recovery, including the fbture debt service payments that will increase inthe next 4-5 years. Inaddition to meeting the US$7 million debt service obligations for IDA, FIPAG's financial projections demonstrate that the debt service coverage ratio, one o f the key financial covenants, will continue to remain above 1.2 for the next fifteen years. 11. FIPAG's financial modelassumes that the operatingrevenues, expenses, and assets are recordedinall cities while the assets and debt service payments are centralized. The cash flow projections are based on the followingbaselines and assumptions: 65  Financial Statements: Audited financial statements up to 2005 and 2006 provisional statements for Maputo and four Northern towns supported by IDA (Beira, Quelimane, Nampula, and Pemba). The assumptions for the four Southern towns (Inhambane, Xai Xai, C h o k e , andMaxixe) supported byAfDB andthe Dutch. Tarzfls: Increase at the rate o f expected inflation. Renewal and replacement of old networks: Minor (0.2 percent o f the major assets) renewal and replacement o f old network have been assumed to be funded by FIPAG's consolidated cash flows. Costs of running thefour Northern cities: Management contract fee for the four Northern cities has been assumed to continue at a rate o f US$550K (US$250K for management and US$300K for technical assistance) per year, paid out o f FIPAG's consolidated cash flows beyond year 2007. New Connections: Inadditionto the new connections expected for the new networks funded under the project, it is assumed that Beira will connect 6 per working day (p/wd), Nampula 6 p/wd, Pemba 6 p/wdand Quelimane 4 p/wd for the existing networks. It is further assumed that every month has 22 working days. Figure A9-2: Cash Flow Projections FlPAGCASHFLOW PROJECTIONS (renewalI replacementfrom Internal sources) 150 - 100 -': i*Cash -- CashFlowFromOperations --Cash Flowfrom Financing FlowfmmInvesting CummulaliveCash excl rewWestern citles Year 12. Financial AnaIysis of M U : To assess the likely operational support that i s required to runthe systems inthe small towns, a financial analysis has been carried out on the viability of the municipalities and small towns that are expected to be part o f the pilot in the Northern provinces, including Nacala, Lichinga, Gurue, Angoche, Cuamba, Mocuba, and Ilha Mozambique. A financial model with projections up to year 2029 was developed with the following assumptions: Operational Costs: Operational costs per m3 are broken into three categories: energy, chemicals and other operational costs. The annual total operational cost is the cost per m3 times the water produced. Chemicals: Onthe basis o fpractice o fNampula in2005, andtaking into account the type o f treatment plant in some towns, the dosage media for water treatment are defined as chlorine, lime and alum. The dosage times the volume o f water to be produced in each 66  year times a given cost for each chemical provides the annual chemical cost for each system. Energy: Power cost for each year is calculated assuming that the volume to be pumped i s proportional (at the same rate as in2015) to water produced. 0 Maintenance: Percentage (1.5 percent) o fthe accumulatedvalue (excluding depreciation) o f investments. This cost would begin to be part o f the companies' cost starting in2011 when some o fthe new facilities begin to operate. Staffand Salaries: Two "required staff' functions interms o fnumber o f employees per 1000 connections were developed on the basis o f data for FIPAGcompanies and other medium-sized systems. The functions reflect the economies o f scale andthe range o f connections (between 500 and 30,000 connections) have beenincorporated. To obtain the annual cost o f the personnel, the value given bythe modelhas beenmultiplied bythe units (domestic, standpoints andnon-domestic) servedbythe system andbythe average cost o f staff. RequiredOperationalSupportfor the Seven Large PipedSystems and 10Small Piped Systems 13. Basedon the model, the net cash deficits for the seven large piped systems inthe municipalities under the period 2009 - 2012 would total about US$2.2 million as summarized in the table A9-4. The main parameter here i s the required annual tariff increase at the expected rate o f inflation (10 percent). Without tariff increases, all the companies would have an increasing deficit because the initial tariffs do not cover operational costs andthe costs keep increasing as the coverage expands. All the companies are expected reach the break-even point in2015. 14. For the small pipedsystems, a differentiatedtariffincrease needs to be implemented to ensure all the towns reach cost recovery by 2015. The real tariffs need to increase by 12-16.5% from an initial tariff o f US$O.l6/m3 across the 10 towns to reachthe break-even point by 2015. Insuchascenario, thebalancewouldbeposithe for 2014 and2015 ofUS$160,446. Therewill be a liability o fUS$96,839 for the G o M for 2013 only. For the large piped systems, assuming anuniform rate o f tariffincrease o f 10% over seven years from 2009-2015, all the 7 towns will reachbreak-evenpoint by 2015. Consequently, the liabilities for G o M will primarilybe for 2 years after the WASA project ends is US$621,691 for 2013 and 2014. Inaddition, revenues for the operations o f small and large piped systems show an increasing trend after the initial capital investment is made and as the systems become more self-sustaining andthe incremental cost support i s progressively lower. Overall the net deficit for 2013 -2015 i s US$558,084 for the 17 towns. 15. The incremental operational cost upp port'^ for these systems inthe WASIS project is estimated to be US$2.5 millionbetween 2009 and 2012. The 17 systems to be overseen by AMU are expected to improve services beginning in2009 as the MCC investments are rolled out. The maintenance cost will increase inYear 4 (2011) as the systems are expanded. As i s the case demonstrated inFIPAG, as the capacity o f the system increases new consumers will be able to connect to the systems however there is a lag o f one to two years untilthe networks are fully operational. Consequently, it i s possible that the operational cost support will increase till year "Thissupportwillbelimitedtoconsumbles,utilities, rent,officesupplies,petroletc. 67  2011(PY 4) before declining in2012 (PY5). The tariffs are expected to increase to support the move towards cost recovery since the current rates do not cover operational costs. Currently tariffs only cover about 52% o f operating costs, and tariffs per cubic meter o f about US$O.16 which is low18. There i s also a lag inregularization o f tariffs. Tariffs rise gradually as they are increased to reflect animproved level o f service. By 2015, when all the systems are working, tariffs are expected to cover all operating costs. 16. The time horizon usedinthe financial sustainability model for the systems is 2015 while the incremental operational cost support implementedinthe WASIS project will be effective only till 2012. The model estimates that in2015 all systems will cover costs. There i s however a concern that in2013 and 2014 m e t operational costs will add to the liabilities for the GoM. This is estimated at about US$97,000 in2013 for the small piped systems and about US$600,000 for 2013 and 2014 for the larger 7 cities. In2015, the breakevenpoint is reached andthe systems are self-sustaining. Ifa higherincrease intariffs is assumed at 16% inthe large piped systems, then the breakevenpoint is reached in2014. 18This is compared to Quelimane where average tariff is about US$ 0.50 per cubic meter. 68  Annex 10: SafeguardPolicyIssues MOZAMBIQUE: Water Services andInstitutionalSupportProject 1. WASISP is an EA Category Bproject since there may be minor construction environmental impacts and, perhaps, some landacquisition or compensation for losses and damages to property. WASISP will finance the network extensions, while yard connections will be completedunder separate funding. Project civil works will be comprisedo ftrench excavations, laying o fpipes and accessories, andback-filling including testing and commissioning. 2. The safeguard policies triggered by the project are: Environmental Assessment (Op4.01), and 0 Involuntary Resettlement (Op4.12). 3. These safeguard concerns will be readily managedby implementing FIPAGs Environmental Management System (EMS) andthe Resettlement Policy Framework (RPF) preparedfor the project. Final design o fthe network extensions will consider alternative alignments to avoid or minimize adverse environmental and social impacts. The likelihood of large scale, significant, cumulative and/or irreversible impacts is considered to be nil. 4. The Borrower's responsibilities to implement WASISP according to the requirements o f these safeguards instruments will be documented inthe project legal agreement with IDA. Environmental Assessment 5. To comply with the environmental assessment requirements o fboththe World Bank and the GoM, FIPAGwill prepare an Environmental Management Plan(EMP) for each major works package. The EMPswill bepreparedaccording to FIPAGcorporateprocedures documented in: a) Environmental Management System, EAPOO1(February 2003); b) Guidanceon Environmental Assessment andManagement o fthe NWDP (January 2003); and c) Generic Framework Environmental Management Planfor Construction Works (February 2003). 6. According to these procedures, the EMPswill beprepared, approvedbyboththe G o M andthe World Bank, andpublicly disclosed before finalization o fthe constructiontender documents. The construction contracts will thus include both general and, as needed, site- specific measures for avoiding or mitigating any adverse environmental impacts. Similarly, the construction supervision contracts will empower the Resident Engineer(s) andFIPAG's Environmental Engineer(s) to ensure adequate implementation o f the prescribedmeasures. 7. These procedures also provide for environmental management o f network operations through contract arrangements betweenFIPAGand system operators. Involuntary Resettlement 8. The RPFpreparedfor the WASISP documents procedures for addressing any land acquisition andcompensationissues that the project may encounter. As needed, Resettlement Action Plans (RAPS)will thus be prepared, approvedbyboth the G o M and the World Bank, 69  publicly disclosed, and implementedbefore construction begins. FPAG's Environmental Engineer will be responsible for ensuring adequate implementation o f RAPS. Borrower Capacity to Implement SafewardRequirements 9. FIPAGhas awell-developed capacity, anddemonstrated commitment andtrack record, for employing safeguards instrumentsto avoid or minimize adverse safeguards issues. Stakeholder Consultation and Disclosure o f Safeguard Documents 10. Key stakeholders are the municipal authorities, andneighborhood leaders and residents, where the network extensions will be constructed. The former were consulted inpreparingthe RPF. The EMS andRPFwere disclosedthrough the InfoShop onApril 2,2007 andthrough FPAGoffices onApril 2,2007. Finaldesigno fthe extensions, the constructionplanand schedule, and applicable EMPs andRAPSwill be discussed and agreed with stakeholders before they are finalized. EMPs andRAPSwill also be publicly disclosed through FIPAGoffices. 70  Annex 11: ProjectPreparationand Supervision MOZAMBIQUE: Water Services andInstitutionalSupport Project Planned Actual PCD review Dec 20,2006 Dec 20,2006 InitialPID to PIC InitialISDS to PIC Appraisal April 16,2007 Negotiations May 3,2007 Board/RVP approval June 19,2007 Planned date of effectiveness SeDt 15.2007 Planned date of mid-termreview Sept 15,2010 Planned closing date Sept 15,2012 Key institutions responsible for preparationo fthe project: FIPAG DNA CRA Bankstaff andconsultantswho workedontheproject included: Bank funds expendedto date on project preparation: 1. Bankresources: US$50,000 2. Trust funds: US$91,000 3. Total: US$141,000 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: US$12,000 2. Estimatedannual supervision cost: US$150,000 71  Annex 12: Statementof Loansand Credits MOZAMBIQUE: Water Services andInstitutionalSupportProject Difference between expected and actual Original Amount inUS$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO93165 2006 MZ-MarketLed Smallholder Dev (FY06) 0.00 20.00 0.00 0.00 0.00 20.46 1.65 0.00 PO87347 2006 MZ Tech & Voc Edu & Training (FY06) 0.00 30.00 0.00 0.00 0.00 29.88 2.54 0.00 PO86169 2006 MZ-Financial Sector TA Project 0.00 10.50 0.00 0.00 0.00 9.61 -0.09 0.00 PO76809 2006 MZ-GEF TFCA & TourismDev (FY06) 0.00 0.00 0.00 10.00 0.00 9.73 0.75 0.00 PO71465 2006 TFCA & Tourism Dev(FY06) 0.00 20.00 0.00 0.00 0.00 18.80 -0.37 0.00 PO82618 2005 MZ-BeiraRailway SIL(FY05) 0.00 110.00 0.00 0.00 0.00 71.66 -7.18 0.00 PO01807 2004 MZ-DecentrPlanning&Fin SIL (FY04) 0.00 0.00 0.00 0.00 0.00 22.29 5.28 0.00 PO69183 2004 MZ - EnergyReformand Access SiL 0.00 40.26 0.00 3.09 0.00 42.56 28.71 7.65 (FY04) PO78053 2003 MZ-HIV/AIDS Response SIL (FY03) 0.00 0.00 0.00 0.00 0.00 34.77 0.79 0.00 PO72080 2003 Pub Sec Reform(FY03) 0.00 0.00 0.00 0.00 0.00 22.99 19.79 0.00 PO73479 2002 MZ-Com Sec Reform 0.00 14.90 0.00 0.00 0.00 7.31 4.38 0.00 PO69824 2002 MZ Higher Education S I M (FY02) 0.00 60.00 0.00 0.00 0.00 19.48 6.69 0.00 PO01806 2002 MZ-Municipal Dev SIL (FY02) 0.00 33.60 0.00 0.00 0.00 6.93 10.47 2.01 PO01785 2002 MZ-Roads& Bridges MMP (FY02) 0.00 162.00 0.00 0.00 0.00 29.50 3.74 -22.27 PO01808 2001 MineralNRMCP (FYO1) 0.00 18.00 0.00 0.00 0.00 1.26 -0.68 0.00 PO35919 2000 GEFCoastal& MarineSIL (FYOO) 0.00 0.00 0.00 4.11 0.00 0.89 4.10 3.53 PO70305 2000 MZ-Coastal& Marine Biodiv Mgmt 0.00 5.60 0.00 0.00 0.00 0.57 0.08 -0.75 (FYOO) PO42039 2000 MZ-Railway & Port Restr (FYOO) 0.00 100.00 0.00 0.00 0.00 22.00 16.62 13.11 PO52240 1999 Natl Water 2 (FY99) 0.00 75.00 0.00 0.00 0.00 37.17 16.15 5.01 \ I Total: 0.00 699.86 0.00 17.20 0.00 413.86 113.42 8.29 MOZAMBIQUE STATEMENTOF IFC's HeldandDisbursedPortfolio InMillionsofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2004 ENH 0.00 18.50 0.00 0.00 0.00 13.37 0.00 0.00 GTFP BDC 0.11 0.00 0.00 0.00 0.11 0.00 0.00 0.00 1997 MOZAL 29.70 0.00 58.50 0.00 29.70 0.00 58.50 0.00 2001 MOZAL 10.12 0.00 0.00 0.00 10.12 0.00 0.00 0.00 2000 SEF Ausmoz 0.72 0.00 0.00 0.00 0.72 0.00 0.00 0.00 1997 SEFCPZ 1.oo 0.00 0.00 0.00 1.oo 0.00 0.00 0.00 2000 SEFCab0 Caju 0.58 0.00 0.00 0.00 0.51 0.00 0.00 0.00 2001 SEF GrandPrix 0.33 0.00 0.00 0.00 0.33 0.00 0.00 0.00 2004 SEF Merec 1.02 0.00 0.00 0.00 1.02 0.00 0.00 0.00 Totalportfolio: 43.58 18.50 58.50 0.00 43.51 13.37 58.50 0.00 72  Approvals PendingCommitment FYApproval Company Loan Equity Quasi Partic. Total pendingcommitment: 0.00 0.00 0.00 0.00 73  Annex 13: Country at a Glance MOZAMBIQUE: Water ServicesandInstitutionalSupport Project Sub- POVERTY and SOCIAL Saharan Low- Mozambique Afrlca Income Develo pment dlamond. 2005 Population. midyear (millions) 8 8 741 2,353 GNIpercapita (Atlas method, US$) 3 0 745 560 Life expectancy T GNI(AtIasmethod, US5 billions) 6 1 552 1364 Average annual growth, 1999-05 Population(%J 2.0 2.3 19 Laborforce (W 17 2.3 23 Gross capita t*enroliment "1 prima- Most recent estlmste (latest year avallable, l999-OS) Poverty (%of populationbelownationalpo vertyline) Urbanpopulation (Koftotaipopuiation) 35 37 31 Lifeexpectancyat birth(pars) 42 46 59 Infant mortaltty(per 1OOOllvebiiihs) 04 00 80 Chiidmalnutrition (Kofchildmn under5) 24 29 39 Access to improvedwatersource Access to animprovedwtersource (%ofpopulation) 43 56 75 Literacy(%ofpopulation age 69 62 Gross primaryenrollment (Kofschool-agepopulation) 95 93 04 -Mozambique Male 0 4 99 10 Lowlncome group ~ Female 66 87 99 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 1995 2004 2005 Economic ratlo.' GDP (US$ bil/ions) 4 5 2 2 5 9 6 6 Gross capitalformation/GDP 3 5 305 226 204 Eqwrtsof goods andservices/GDP 2 9 6 8 309 326 Trade Grossdomestic savlngs/GDP -51 5 0 143 0 7 Gross national savings/GDP -50 4 8 8 5 4 4 T Currentaccount biancdGDP -99 -301 -141 - 6 9 interestpaynentslGDP 0 5 3 3 0 5 savingsDomestic I+ formationCapital Total debt/GDP 644 3320 787 Total debt servicelexports 345 348 4 4 Present value of debt/GDP t36 Present valueof debt/exports 43 0 Indebtedness 1985-95 1995-05 2004 2005 2005-09 (average annualgrovdh) GDP 3 6 84 7 5 7 7 7 3 -Mozambique GDP percapita 19 6 1 5 4 5 7 5 8 - Lowlncomegmup Exports Of goods andSeNICBS 9 0 8 0 s 9 8 3 0 8 STRUCTURE of the ECONOMY IS85 I995 2004 2005 (%of GDP) Growth of capltal and GDP (%I Agriculture 47.5 36.9 23.3 22.3 lWT Industry 0.2 6.4 292 29.8 Manufacturing 8.1 14.8 14.2 Services 39.3 47.7 47.5 47.9 Householdfinal consumption expenditure 92.2 65.2 75.3 79.1 Genera gov't final consumption expenditure P.9 9.6 0.4 0.3 imports of goods andservices 115 410 392 42.3 1985-95 1995-05 2004 2005 (average annualgmtdh) Growth of exports and Imports (%I +G2eF?% Agriculture 2.7 5.2 6.3 18 BO industry -12 6.7 5.1 9.9 Manufacturing .. 17.5 02 0.7 Services 4.4 6.9 8.9 0.0 Householdfinal consumptionexpenditure 17 4.4 0.9 0.8 -20 Generalgov't final consumption expenditure 4.7 P.1 5.0 8.0 Gross capitalformation 8.7 0.6 -111 0.7 Imports of goods andservices 2.5 9.8 4.1 7.3 Note:2005data are preliminaryestimates. This tablews producedfrom the Development Economics LDB database. 'Thediamonds showfourkeyindicators Inthecountry(in bo1d)comparedwithits income-groupaverage. lfdataare missing,thediamondwill be incomplete. 74  Mozambique PRICES andGOVERNMENT FINANCE 1985 1995 2004 2005 Domestic prices (%change) Consumerprices 54.4 P.7 ImplicitGDP deflator 33.1 50.3 9 0 6 4 Government finance (%of GDP,includescurrenfgrantsj Current revenue 13.3 25.5 155 773 Current budgetbalance 6.6 4.9 23 3 5 Overallsurplusldeficit -13.3 -9.5 -9.1 -5 6 ---GDPdeflator --o-CPI TRADE I985 1995 2004 2005 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 77 774 1504 1745 T Cashewnuts, rawcashewandcashewoil a 0 3.0W 29 23 Prawn 33 73 93 72 Manufactures 5 8 22 2 OM) Total imports (cif) 424 727 2,035 2,467 Food 44 164 8 2 1ow Fuel andenergy 68 290 341 I I Capital goods 166 703 872 0 Eport priceindex(2000=QOj P 4 177 P 9 `62 00 00 01 02 03 04 Import price index(2000=QO) It3 P 3 a5 0 4 @Exports 8~lrnports Terms of trade (2000-100) 11) 96 134 10 O5 BALANCE of PAYMENTS 1985 1995 2004 2005 (US$ mlliionsj Current account balance to GDP (Oh) Exports of goods andservices 143 407 1828 2.164 Imports of goods andservices 481 899 2,320 2,805 Resource balance -339 -492 -492 -642 Net income -1)2 -185 -340 -4n Net currenttransfers 0 0 Current account balance -440 -677 -832 -1058 Financingitems (net) 420 736 1044 1003 Changes in net reserves 21 -60 -2P 55 Memo: Reserves includinggold (US$ miiiions) 46 8 5 1159 1133 Conversion rate (DEC,locai/US$) 43.2 9,203.4 22,5813 23.0610 EXTERNAL DEBT and RESOURCE FLOWS 1985 1995 2004 2005 (US$ mdhonsj Composltlon of 2004 debt (US$ mlll.) Total debt outstanding anddisbursed 2.871 7,458 4,651 iBRD 0 0 0 0 G 345 IDA 5 890 1,475 1575 I Totaldebt sewice 63 82 83 1475 IBRD 0 0 1 1 IDA 0 6 15 27 Compositionof net resourceflows Official grants 774 770 815 Official creditors 377 772 290 Privatecreditors 54 24 -23 c 197 Foreign direct investment (net inflows) 0 45 245 Portfolio equity(net inflows) 0 0 0 I D.683 World Bank program Commitments 46 99 0 5 A IBRD E Bilaterd Disbursements 5 160 8 0 227 B IDA -- D Otherrmltilaterd - F Private -- Principal repayments 0 0 4 14 C-IMF G . Short-tern Net flows 5 160 186 2 0 Interestpayments 0 6 P 14 Net transfers 5 154 774 199 i Note This tablewas producedfrom the Development Economics LDB database 9/15/06 75  Annex 14: HIV/AIDS Policyof ImplementingAgencies MOZAMBIQUE: Water Services andInstitutionalSupport Project NationalLevel: At the National levelthere is the National Council for the Preventionand Care o f HIV/AIDS inthe workplace. CabinetLevel: The Ministryo fPublic Works andHousinghas a Cabinet Office for the Prevention and Care o f HN/Aids inthe workplace. FIPAG: FIPAGhas apolicy on HIV/AIDS with the aim o fdevelopingactions for a prevention andcare program. FIPAG: HIV/AIDS Work Plan Annual seminars with all FIPAGstaff to inform all employees o fthe prevention and care o f HIV/AIDS. The seminars are deliveredby experienced NGO's dealing with all aspects o f HIV/AIDS. The seminars are structured to raise awareness o f the magnitude and seriousness o f the threat posed by the disease inour societies and educate employees on available preventive measures. Distribution o f awareness materials, posters, brochures etc, to provide further information on preventionandcare o f HIV/AIDS. Encouragement for voluntary testing amongst employees. Affected employees are provided with free medical treatment and counseling Affected employees are provided with monthlybasic food packages through a program o f the Cabinet Office for the Prevention and Care o f HIV/AIDS. FIPAGwill continue to update the development planwith clear targets andresponsibilities with each employee inorder to generate positive attitudes inthe workplace to prevent and manage HIV/AIDSand ensure that the mutual interests o fboth managements and employees are met. Giventhe highcosts associatedwith the fight against HIV/AIDS,FIPAGsees the way forward is to develop a strategy to establish future partnerships with other organizations to share the costs. DNA: HIV/AIDS Work Plan The program to prevent the spreading o f HIV/AIDS has the following three categories: Prevention, Treatment and Care, andMitigation and information gathering. Prevention e Distribution o f awareness materials, posters, brochures etc. to provide hrther information on prevention and care o fHIV/AIDS Inform the population the magnitude and seriousness o fthe threat posedby the disease in our societies and educate employees on available preventive measures Promote andinform the population to use masculine and feminine preservatives incase theyhavemore thanone partner 0 Encourage the population to do voluntary testing and counseling DNAis planningto provide training to technicians inlocal andprovincial level so that adequate information and support i s provided to the population. 76  Treatmentand Care Provide to affectedpeople the adequate information andcare on HIV/AIDS issues 0 Assigned (change) different tasks to reduce the stress to the infected people 0 Inform the affected people where they can get the proper treatment andcounseling, including diseases related with tuberculosis Provide information to the affected family members Mitigationandinformationgathering 0 Update the development planwith clear targets andresponsibilities with each employee inorderto generate positive attitudes inworkplace to prevent andmanageHIV/AIDS Adjust the workforce as aresult o floss o fpersonalinworkplace 0 Provide to affected employees basic food packages to reduce the impact fiom the medication 0 Provide information to employees and families about the benefit planand any changes that have been done 77  Annex 15: Africa CatalyticGrowthFundRequest MOZAMBIQUE: Water Services andInstitutionalSupportProject 1. BasicProjectInformation Sector Manager/ Director: Jaime Biderman/ Michel Country Director: Michael Baxter 2. CountryJustification This sectionaddressesthe eligibility criteria for highperforming category o fACGF projects. Provide one-paragraph showing evidence for each o f the following: a. A soundpolicyframework is inplace as reflected in the country's CPIA rating, disaggregated. Mozambique has a soundpolicy framework inplace, as reflected inthe country's overall CPIA rating o f 3.4 inFY 2004 and 3.6 inFY 2005. Details o f each CPIA rating for economic management (on average 4.2 inbothFY2004 and2005), structural policy (on average 3.2 and 3.3 for FY 2004 and 2005), policy for social inclusion and equity (on average 3.3 and 3.4 for FY 2004 and2005), andpublic sector management andinstitution(on average 3.2 and 3.3 for FY 2004 and2005) are detailed inthe CPIA 2005 Benchmarking: Country worksheet for Mozambique. b. A credible national strategyfor shared growth is inplace. Provide evidence from the JSAN o f the countries PRS or a similar analysis bythe donor community Mozambique has inplace a credible national strategy for shared growth. The government has been implementing its Action Planfor reducing absolute poverty (PARPA; the Mozambican Poverty Reduction Strategy Paper) for the period 2001-05 andhas prepared a new PARPA for the period 2006-10. The latest Joint Staff Assessment o f PARPA implementationwas completed in2005 andfoundthat the Governmenthadimplementedthe PARPAsuccessfilly byallocating incremental resources to the priority areas andby linkingprogram implementationwith the budget cycle. The JSAN also identified increasing revenues as one o f the areas where the Government should concentrate its effort. The JSAN for PARPA I1i s currently under preparation for early FY07. 78  c. Discuss the constraint to growth, the alleviation of which willyield a sharp increase in growth While international experience attests that an educated workforce, domestic andinternational investors are attracted to "livable" cities with appropriate basic urban services, the water and sanitation service insmaller cities and market towns inMozambique are very low incoverage and o fpoor quality. The proposedproject would improve the basic urbanservices insmaller towns andmarket centers and alleviate some o f the key constraints for growth inMozambique. Increase inthe number o f "livable" cities andmarket centers would also help establish focal points for surrounding agriculture areas which can serve as a central location for post harvesting facilities, aggregation o fproducts, diversification o f crops, andpromotion o fbusiness development etc. Reliability of services has been identified as one o fthe key constraints to the business environment inthe 2002 Investment Climate Assessment (ICA). d. Utilization of aid in the country, as reflected in thejudgment of the donor community in the country. 0 % o fproblemprojects andthe number o fprojects inthe portfolio The quality o f the portfolio is satisfactory overall, with only one operationratedmarginally unsatisfactory. The Second Poverty Reduction Support Credit (PRSC) recently disbursed the second US$60million tranche, and a thirdPRSC is under preparation. A C E M has recently been completed andongoing non-lending services include a poverty assessment, a sub-regional growth study andtwo pieces o f PSIA. A joint World Bank Group CAS Progress Report was recently completed and discussed at the BoardinMarch 2006. Dialogue on a new CAS, to be preparedjointly with other development partners, has started. 0 This could be derived from a mutual assessment o fthe donor community (as part o f commitments under Paris Declaration), or otherjoint analysis (such as a budget support group or reflectedinagreement on the JSAN) Mozambique has made considerable progress inimplementingthe ParisDeclaration Increased ownership andbetter articulated, realistic development priorities accompanied the harmonization process which developed from the 2004 Memorandum o f Understanding between Government and donors providing budget support. Government chose Joint andMid- year Reviews as the chief vehicle o f donor support, replacing the traditional pledging approach o f Consultative Group meetings. Donor assistance continued to contribute for about 50 percent o ftotal spending, although aid modalities changed substantially, rapidly shiftingfrom sector and project fbndingto direct budget support. Increased harmonization has helped focus on the PARPAobjectives, catalyzing Government's and donors resources toward the priority sectors o f the PARPA. While coordination o fthe budget support donors increased predictability o f resource flows, andmonitoring o f long-term objectives andmedium-term targets, budget support still only accounts for 30 percent o f total aid. 79  3. Project Definition a. Objectiveand expectedresults Briefly describe how the ACGF is expected to contribute to broader development gains for the citizens inthe country? Specify the expected result(s) to which the ACGF will contribute (for instance this might include raising the rate o f growth from around 5 percent to 8 percent, improved rates o f growth innon-traditional exports, reduction inthe cost o fproduction, or improvements inhardto reachMDGs). Mozambique is facing significant challenges inmeeting the MDGgoal seven, "ensuring environmental sustainability" and its subcomponents o fhalving by 2015 the proportion o fpeople without sustainable access to safe drinkingwater andbasic sanitation. According to the joint review inApril 2006 and other available estimates, the coverage level for water supply i s about 40.4 percent for the country, about 60 percent for the urban areas, andabout 27 percent for the rural areas. These coverage levels represent huge increases o f 17-37 percent over the past ten years due to the various reform initiatives undertakeninthe sector, partlythrough the support provided by the Bank andother donors. Meeting the MDGgoal for sanitation i s a major challenge, as the coverage has to be raised from the current low level o f about 27 percent to 60 percent by year 2015. Cholera is endemic in major urbanareas mainly due to lack o f adequate sanitation and sewerage services, compounded bypoor water supply services. This andother health impacts caused bypoor sanitationcoverage evenrisks meeting the MDGtarget o freducing infant mortality. Despite the improvements that have taken place inthe sector, it is estimated that Mozambique would require at least US$20 million annually for the urbanwater sector alone for the next ten years to meet the MDG goal". The increasing flow o f funds from other financiers catalyzed by the proposedACCF will contribute to meeting the overall MDG goal for Mozambique. Describe how the ACGF will catalyze other funds, programs, or efforts to achieve results, as part of a broader package o f support (i.e. complements roads financed bythe EUtrust fund, or an IDA energy project). Mozambique has, with support from the Bank, funded National Water Development Project (NWDP) 11, demonstrated a credible strategy to achieve progress inmeetingthe MDGs inwater supply sector for the largest cities through its policyo fdelegated management coupledwith a robust regulatory framework, outcomes o f which have been cited inthe recent mid-termCAS review as one of the five key successful CAS results. Therefore, inscaling up this model to other urban areas, Mozambique has so far attracted various other finding partners, including African Development Bank (ADB), EuropeanUnion (EU), and European Investment Bank (EIB). Theproposedproject of scaling upthe provenmodel to smaller market towns andsanitation in urbanareaswill catalyze funding from the Millennium Challenge Corporation (MCC), as it has shown strong interest inpartnering with the Bank to incorporate andbuildon the Bank's extensive knowledge and experience inbuildinginstitutional capacity inthe sector. Grant commitments from M C C inthe order o f US$25 million to the infrastructure investments inthe 19Detailedanalysis of the investmentrequirements for meetingthe MDGs, availablehnding, andthe fundinggap are being carriedout byWater and SanitationProgram. Preliminaryresultswill be collectedf7omthembyMay 2006. 80  water and sanitation sector, and about US$75 million for towns and cities would have a high chance o f being confirmed ifthe ACGF can be tapped. M C C is also eager to helpmitigate sustainability andimplementation risks that the Bank has overcome, as demonstrated by its successful project outcomes. The Bank also brings flexible financial instrumentsthat allow support to operations andmaintenance ina controlled way to complement MCC's advantage o f significant grant funds for capital investments. Since the proposed ACGF andthe M C C funds will be used for investments inurbancenters, this is likely to trigger other donors, including Nordic Development Fund, ADB, CIDA etc. to allocate their resources to the rural areas, contributing to achieving the overall MDGfor the sector. What i s the specific result expected from the ACGF project? H o w will the returns o f investment o f current activities inthe area to be supported by the ACGF increase with this temporary increase inaid? The US$20 millionproposed over 5 years would enable; (i) IDAto partner with MCC andbring essential institutional and capacitybuildingexperience andknowledge to a well-performing but still emerging sector; (ii) good practices and extend prudent financial discipline infuture expand operations within the sector to assure financial sustainability; and (iii) establish newregional models for smaller market towns and sanitationhewer options using the delegated management model. The key result expected from the proposedACGF project is the increased coverage o fwater supply insmaller cities andmarket towns, as well as increased coverage o f sanitation inlarger cities. The returns o f investment o f current activities inthe area to be supported by the ACGF will increase with this temporary increase inaid andcontribute to growth o fthe economy in Mozambique through; (i) enhancing the partnerships with and attracting investments from the domestic private sector; and (ii) establishing focal points for surrounding agriculture areas, as described in section 2. The project would also bringassociated benefits interms o f improved health andwell being especially o f the poor andthe middle class through improvements inthe quality o fbasic urban infrastructure services, namely, adequate water and sanitation. b. Key Features and outputsfor trackingprogress Briefly describe the components o fthe ACGF and associated outputs andintermediate results. Are these intermediateresults deliverable by the ACGF alone, or only as a broader package? The components that ACGF and IDA would support would include the broad categories o f institutional andregulatorypolicy support, operating support for fledgling institutions, and capacity building, inparticular: (i)FinancialMechanismsandInstitutions:Interventionswillincludethedevelopment ofa delegated management approach for smaller towns and for sanitationinlarger cities, takinginto account the successful FIPAGmodel demonstrated under NWDP 11. It is expected that different modalities o f financing will evolve. For example, new arrangements may include the use o f a "second" financing window under FIPAG to allow for grant financing o f infrastructure. Currently FIPAGis responsible for debt service payments. The same model o f delegated management may also be applied to sewerage and sanitation. These new institutions will need to 81  be supported through the initial years o f operations with capacity buildingand operating costs as inthe current Bank operations underNWDP11; (ii)Regulatorypoliciesandinstitutions:Atthepolicy-level, thenewinstitutionswillneedto be supported by a good regulatory framework and institutions to implement the policies. The successful CRA (water regulatory agency) has managed to keep the sector on track with respect to cost recovery andhas ledto its expansionbased on a strong commercial understandingand prudent pro-poor policies. The proposedproject will continue to provide technical support to ensure that the appropriate regulatory, policy, and institutional framework will be implemented as the delegated management model i s scaled up insmaller cities, market towns, and sanitation. The components that will be supported by M C C include the physical infrastructure investments intheparticipating municipalities whose populationsize totals almost one million: (iii)Rehabilitation and expansion o f water supply systems insix municipalities inthe North o f Mozambique - Lichinga, Cuamba, Nacala, Angoche, Ilha de Mozambique, andMocuba. (iv) Rehabilitationandexpansiono f seven municipal sanitationanddrainage systems inprincipal cities inthe North - Pemba, Nampula, Nacala, Angoche, Ilha de Mozambique, andMocuba. The intermediate results that are expected to be deliveredby the ACGF alone would be the strengthened institutional framework for implementing the delegated management model for smaller cities andmarket towns, as well as sanitation inlarger cities. The intermediate results that are expected to be achieved through a broader package o f funding from M C C and other financiers would include improvements inwater supply services inthe project towns andmarket centers, donor harmonization on policy andimplementation aspects, and expanded partnerships with the domestic private sector, decentralized municipal institutions, andcivil society organizations. Are any safeguard policies triggered by the ACGF project? Ifso, are these already addressed? An Environmental Assessment (EA), containing an Environmental Management Framework (EMF)was carried out for NWDP 11.Procedures for addressing the resettlement andother safeguards policies have been incorporated inthe project implementation manual. The only potential environmental issue raisedwas the effect o f improved water supplies generating increased wastewater inthe cities. The proposedproject would address this issue through funding sanitationandsewerage investments. Therefore, itis expected that no major safeguard policies are expected to be triggered for the repeater project. Inaddition, appropriate capacitybuildingactivities have already beencarriedout to ensure proper management andmonitoring o f the EMFby all concerned sector stakeholders, including the National Directorate o f Water (DNA), FIPAG, and CRA. 82  c. Implementation and Risk 0 Describe the implementation arrangements for the ACGF. Are these already part o f an IDA supported operation? The implementation arrangements would be modeled on those o f the ongoingNWDP 11.These innovative institutional arrangements supporting the delegated management approach include: (i) an asset holding organization (FPAG) which contracts with private operators; (ii)strong a regulatory institution (CRA) that has provided financial discipline and a pro-poor approach inthe sector. All major cities included inNWDP I1cover operating costs and some debt service, which is a significant accomplishment, and service standards have improved significantly. This model has proven to be successful inensuring "sustainability" o fthe operation, a key ingredient for meeting the MDG. 0 H o w will the ACGF be monitored (what are the organizationresponsible, etc.)? FIPAGhasbeenvery successful withrespect to monitoring outcomes o fits various projects and sub-projects due to the system o f contracting out andthe records kept o f the outputs o f the contractors. These are part o f the "delegated" management system andthis data i s needed for various contractualpayments andi s mandatory for the contracts. These data include improvements in service levels, quality o f water, efficiency o f the service, etc. These are also trackedby the independent regulator (CRA) with respect to consumer satisfaction. 0 Does the ACGF pose any additional risks andmitigation measures? Ifyes, please describe usingthe table below: Risk RiskMitigationMeasure Risk Ratingwith Mitigation Capacity constraints, both from the institutional IIThorough review and assessment IISince the magnitudeof the new I and financialperspective, by FIPAGto take on would be carriedout with respectto investmentsare similar to the the responsibilityof expandingits operation to the capacityof FIF'AG intaking on disbursementsof the NWDP I1project include additionalcities, market centers, and the additionalinvestmentsand (US90 million) which closes in sanitation sector. responsibilities. October 2007, the riskis expectedto be modest, if combined with the proposed riskmitigationmeasure. Co-financingwith MCC may cause difficulty in Closecoordinationwill be ensured With the proposedmitigation coordination. with MCC, includingjoint missions measures, the riskis consideredas low. (including Bank'sparticipation in MCC's kickoff meetingscheduledto beheld in Maputo onApril 24-25 2006), sharingofprojectdocuments, and frequentcommunication. DateEffective FY07 FY08 FY09 FYlO F Y l l Expected Closing Date EstimatedDisbursementsIDA March 8,2000 Undisbursed March30, operation (NWDP 11) amount as of 2008 September 21,2006 total US$42 million EstimatedDisbursementsIDA TBD 0.5 1.o 1.5 1.5 0.5 TBD operation (NWDP 111) EstimateddisbursementsACGF January 1,2007 0.5 2.5 4 4 4 December31, ACGF MCC IDA Technical Assistancefor 1 5 institutional strengthening, training, and studies 83  water supply systems insix sanitation and drainage systems 1,500 wells and boreholes, rehabilitationand expansion of * This i s apreliminary estimate basedon the actual costs incurred for the ongoing NWDP I1project. 4. Assurance o f Absorptive Capacity. a. Current Project Status for on-going operations only, data generated by system) (Extracted from the ongoing NWI -~ b. Brief discussion of current capacity to absorb and manageACGFfunds 0 Please briefly summarize financial management, procurement arrangements necessary for management o f ACGF funds. FIPAGhas builtupprocurement and financial capacity withinits organization duringthe implementation o fNWDP 11, includingthe establishment o f "in house" capacity with respect to environmental and social safeguard issues. It i s expected that FIPAGwill be able to undertake these functions for the new grant. 0 Brieflysummarize anyissues withproject management (for on-going IDAoperations that the ACGF will complement) andhow they will be addressed to ensure ACGF's efficient implementation and achievement of results. As described inthe risk matrix, there are capacity constraints, both from the institutional and financial perspectiveby FIPAGto take on the responsibility o f expanding its operation to include additional cities, market center, and sanitation. The team's preliminary analysis indicates that the suggested project size, which is similar to the magnitude o f the new investments funded under the NWDP I1project, is an appropriate size for the proposedproject scope andtimeframe. Even ifthere were additional funds available immediately, FIPAGwould not have been able to absorb muchmore than what it already has. It i s suggested that a capacity assessment and future plans for expansionbe carried out under the technical assistance component o fthe project. 84  5. Processing a. Brief explanation of thepreparationphase H o w muchtime will berequired to prepare the operation andwhat are the next steps? The project preparation for the components fundedby ACGF would be carried out duringthe fiscal year 2007 incoordinationwith the supervision o fthe ongoing NWDP 11.The following next steps are proposed; (i) Project Concept Note review by October 30 2006; (ii) Appraisal by February 28 2007; and (iii) Approval by M a y 31,2007. Preparationfor the M C C funded component which will be carried out inparallel is expected to be completedby December 2006. This would enable project implementation starting January June or July, 2007. 0 Who is the proposedteam? The proposedteam will consist o f Jane Walker, MidoriMakino (co-task team leaders), Luiz Tavares (water and sanitation engineer) Devendra Bajgain (safeguards), andRildo Santos (operational support) o f AFTU1 and Slaheddine Ben-Halima (procurement) o fAFTPC and Joao Tinga (financial management) o f AFTFM. Additional technical expertise will be tapped as and when it i s identified to be required duringthe course o fproject preparation. b. Please describe the expectedpreparation costs The expected preparation costs for the proposed M C C investments will be borne by MCC. The Bankwould needto finalize theproject components andimplementationplan,andupdate the fiduciary aspects (financial management andprocurement) as well as the safeguards aspects (environmental and social) o fNWDP 11.The Bankbudget required to undertakethese preparatory activities, including stafftime andtravel are expected to total about US$120K for fiscal year 2006/7 inaddition to the regular supervision budget for the ongoing NWDP 11. 85  Annex 16: Maps MOZAMBIQUE: Water Services andInstitutionalSupport Project 86  MAP SECTION   IBRD 35608 30