Tanzania - Urban Water Supply Project

* !ac-l.d a Xe.v-1ciR e I ent i tion For consideration on -_ _ _ _ __=--_June 24, 1982 <7w; . ; =SPECIAL PROCEDURE -i IDA/R82-81 3 FROM: Vice President and Secretary June 7, 1982 TANZANIA Proposed Amendment to the Urban Water Supply Project (Loan No. 1354-TA of January 5, 1977) Proposed Supplemental Credit 1. Attached is a memorandum entitled "Tanzania - Proposed Amendment to the Urban Water Supply Project (Loan No. 1354-TA of January 5, 1977)- Proposed Supplemental Credit" dated June 7, 1982, from the Presidant. 2. The Statutory Committee Recommendation will be distributed separately. 3. Questions on this document should be referred to Mr. W4are (ext. 73454). Distribution: Executive Directors and Alternates President Senior Vice Presidents Senior Management Council Vice Presidents, IFC Directors and Department Heads, Bank and IFC a -; *;1Pffi i'@ anind vi' h:: recipients 'II', in .w -'; ,,; . .. w1; , :. s 1^: -S. ,1t 2 ^1-. - be mt ........s ze ;t} !. :i.,l' lt-- ................. ;;:.  FROM: The President June 7, 1982 TANZANIA - Proposed Amendment to the Urban Water Supply Project (Loan No. 1354-TA of January 5, 1977) Proposed Supplemental Credit 1. I submit the following proposal for a supplemental credit of SDR3.6 million (US$4.0 million equivalent) on standard terms to the United Republic of Tanzania to help complete the Urban Water Supply Project in Morogoro, for which the Bank made a loan of US$15.0 million (Loan 1354-TA) on January 5, 1977. The Project 2. The project consists of the construction of a 1,650 meter long, 12 meter high earth dam across the Ngerengere River near Morogoro with a tower intake, culvert and spillway, sufficient to retain 10 million m3 of water at full capacity; the construction of production facilities, including transmission pipelines, treatment and pumping stations, storage reservoirs and reticulation extensions in Morogoro; provision of management advisory services and vehicles to the Ministry of Water and Energy (MWE); and a contribution to MWE's training program for the whole urban water sector, consisting mainly of the expansion of training facilities at the Water Resources Institute (WRI). The project is intended to satisfy domestic water demand in Morogoro up to 1986 and to supply water to a newly established industrial complex. 3. The Borrower's performance under the project has generally been good. The construction of water treatment facilities, pumping stations, transmission pipelines and storage reservoirs has been substantially completed. Establishment of a National Urban Water Authority (NUWA) which is to own and operate major urban water supply systems in the country, as an autonomous and financially self-sustaining entity, was approved by the Parliament in April 1981. The Chairman and most of the directors of the Board of NUWA have been appointed. The Government met the water tariff tvvenant (which required maintenance of urban water rates at their July 1976 level in real terms) up to January 1981. Since then, the Government has argued that further increases in water prices should be based on a systematic nationwide study of the actual costs of producing and distributing treated water in the urban areas. NUWA was established primarily to permit improvements in urban water management (including more efficient revenue collection at existing water prices), and the Government regards these as more important in the next twelve months than adjustments to water tariffs. Costs of supplying water may also have been over- estimated. Various steps have been taken already to improve billing and  -2- collection. Metering facilities are to be upgraded, financial deposits will be required for major consumers and services will be disconnected more systematically, when accounts are seriously overdue. As a result, the Association has now agreed that a national study of urban water custs should be carried out. The Government would commission consultants to complete a water tariff study by April 30, 1983, in accordance with terms of reference acceptable to the Association. The study would make specific recommendations on the structure and levels of water charges to be borne by various users, rnd these would be, implemented before June 30, 1983; the new tariffs would be maintained at levels sufficient to cover at least the maintenance and operating costs of urban water services, debt service on borrowed funds and an adequate contribution to development costs in the sector (Paragraph 4 of the draft Letter Amending the Loan Agreement). The study would also recommend longer term econlomic and financial objectives for water pricing and reassess the current uniform national pricing system. The study is being financed by SIDA. 4. Implementation of the project, however, has been dominated by the poor performance of the main civil works contractor. After being given several opportunities to improve his performance, the contractor was dismissed in August 1981. The Government has since completed negotiations, and signed a contract, with the bidder evaluated as second lowest at the time of the original award (see paragraph 10 below). Original Financing Plan 5. The estimated total cost of the project when it was approved was TSh160 million (US$19.2 million) including estimated duties and taxes of US$0.7 million. Approximately TSh78.5 million (US$9.5 million) or 49% of the cost was to be in foreign exchange. Physical contingencies of 15% were added, except for the construction costs of the Morogoro dam where con- tingencies of 20% were added because rock excavation costs were more uncertain. Price contingencies totalled about 19%. The Bank loan of US$15.0 million was to finance 81% of total project costs net of taxes - 100% (US$9.5 million) of the foreign exchange costs and, 61% (US$5.5 million) of local costs. The Government was to provide the remaining US$4.2 million which included the US$0.7 million in taxes. The project was expected to be completed on June 30, 1980 and the Loan Closing Date was June 30, 1981. Revised Project Costs 6. The current project cost is now estimated at US$34.5 million, 80% over the appraisal estimate of US$19.2 million, which reflects the new civil works contractor's bid price for completing the dam and assumes deletion of the WRI component of the loan (see paragraph 7). About half of this cost increase is due to the poor performance of the original dam contractor and the extended implementation period for the project. The other half of the increase results from a substantial underestimation of dam construction costs at appraisal. The appraisal team based its estimates on recent contract awards for similar work in Tanzania and neighboring countries at the time. However, an unforeseen escalation in construction costs and the small number of bids received, led to a contract  -3- price in 1978 which was more than twice the appraisal estimate. A breakdown of the cost overrun by item is given below. (Further details are provided in Annex I.) Reasons for Cost Overrun ----------US$ million------- Cost items, Increased (Decreased) Local Foreign Total Dam 4.91 11.38 16.29 Other Civil Works 0.25 0.53 0.78 Materials and Equipment 0.64 0.97 1.61 Management Advisory Services (0.30) 0OO4 (0.26) Training Institute Expansion (2.18) (0.97) (3.15) 3.32 11.95 15.27 Proposed Financing Plan 7. Owing to the cost increase, the foreign exchange component of completing the dam is now estimated at about US$11.0 million. About US$3.8 million undisbursed under the loan would be utilized for the dam'; an additional US$7.2 million in foreign exchange is, therefore, required. The Government sought additional financing for the project during annual consultations with bilateral agencies over the period November 1981 - April 1982 and through specific approaches to donors with a previous involvement in the water sector. Attempts were also made to reallocate external funds, already earmarked for the sector, to completing investments at Morogoro. These efforts, assisted by the Association, have not yet proved successful; however, they will be continued during the second half of 1982e To permit work on the project to be resumed, the Government has requested that the Association provide supplemental funds to cover US$4.0 million (about 55%) of the foreign exchange shortfall on the project. The Government would provide the remaining US$3.2 million in foreign exchange, if necessary, and meet the full local costs of the project from its own resources. The burden of the financing plan on the Government will be substantial, especially if it is unable to identify additional foreign funds; however, further delays in civil works would add to total costs and complicate project completion. It is hence considered necessary to proceed on the basis of the current financing plan, despite the difficulties which this implies for the Government. 1/ Part of this amount, allocated for training and expansion of the Water Resources Institute (WRI) would be reallocated for completion of the dam. Major disbursements for the training component have not yet started, and the urgency of the original investments in WRI has now been reduced by provision of training assistance from other sources.  -4- Justification 8. We have advised the Government in the past that it is not the policy of the Association to finance cost increases in projects, except in very special circumstances. We have also reminded the Tanzanians of their obligation unider the Loan Agreement to complete the Urban Water Supply Project. However, following unsuccessful efforts to identify alternative financing for the project, the Government has requested that an exception be made to Association policy regarding supplementary financing, for the following reasons. First, with our encouragament, the Government has been consolidating its public investment program; in particular, it is now emphasizing the completion of existing projects and the rehabilitation of existing productive facilities and infrastructure. We support the Government's revised strategy and have attempted to focus new Bank Group lending on restructuring and rehabilitation work necessary for general economic recovery. The Ministry of Finance and the Ministry of Planning and Economic Affairs have examined the case for cancelling or completing the Morogoro project and have concluded firmly that it deserves high priority, even in a much constrained development budget. We agree with this conclusion. Second, the Government's foreign exchange position remains very strained. While lower oil prices have brought some relief during the last six months, export earnings remain depressed and import allocations ar; well below the minimum necessary for adequate maintenance and operation of key facilities in the economy. Without supplementary ftnancing from external sources, the Morogoro Project would almost certainly not be completed. Third, the consequences of not completing the project would be most damaging. The new Morogoro water system is now operating at about 20% of design capacity and, without completion of the dam, water supply to the town as well as to the newly established industrial complex would continue to be severely curtailed. Investments of approximately US$250 million have been made in the Morogoro area on the assumption that water supply would be substantially increased. These investments include three other Bank loans (1385-TA, 1386-TA and 1607-TA) and one IDA credit (833-TA) amounting to US$68 million. The industries most affected by water shortages would be a tannery, canvas mill and textile plant. While these industries currently face other constraints, such as scarce imported suipplies, they would be permanently handicapped without access to additional water. Completion of the project is hence essential for ensuring adequate infrastructure for these enterprises. 9. In the light of these considerations, and Tanzania's particular circumstances, we believe the Government's request for supplementary financing should be granted, on an exceptional basis. Procurement and Disbursement 10. The proceeds of the proposed credit would be used exclusively to finance completion of the dam. The new contractor is a Canadian firm (MBL International Contractors Inc.), based in Windsor, Ontario, with previous experience in major civil works in Tanzania. MBL was the second lowest evaluated bidder at the time of the original contract award in Decem1er 1978. The contract between the Government and MBL has been reviewed and  -5- approved by the Bank. The credit would be fully disbursed by December 31, 1984 and applied to 50 percent of total expenditures for civil works. The Closing Date of the existing Loan will be postponed to permit completion of disbursements and closure of the loan account prior to withdrawing the proceeds of the proposed credit. Legal Instruments and Authority 11. The draft Amendments to the Loan Agreement dated January 5, 1977 between the United Republic of Tanzania and the Bank, the draft Development Credit Agreement (Urban Water Supply Project - Supplementary Financing) and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 12. I am satisfied that the proposed supplemental credit would comply with the Articles of Agreement of the Association. Recommendation 13. I recommend that the Executive Directors approve the proposed supplemental credit in the amount of SDR3.6 Million (US$4.0 million equivalent) . A.W. Clausen President Attachments Washington, D.C. June 7, 1982  TANZANIA ANNE_ I Urban Water Supply Project (IN 1354-TA) Current (Cst Estimate (March 1982) U`S$ millicn Local Foreign Total Local Foreign Total Appraism, Estinate (brrent Estinate 1. Dam Base Cost 2.56 2.05 4.61 7.16 11.79 18.95 Physical Contingencies 0.46 0.36 0.82 0.61 1.10 1.71 i-ice Contingencies 0.70 0.64 1.34 0.86 1.54 2.40 Total 3.72 3.05 6.77 8.63 14.43 23.06 2. Other Civil Works Base Cost 1.68 1.51 3.19 2.70 2.78 5.48 Physical Contingencies 0.30 0.27 0.57 - - - Price Contingencies 0.47 0.47 0.94 - - - Total 2.45 2.25 4.70 2.70 2.78 5.48 3. Materials & Equipment Pipes & Fittings 0.24 0.57 0.81 - - - Puming Plant 0.05 0.24 0.29 0.10 0.80 0.90 Treatennt plant 0.10 0.51 0.61 0.24 1.50 1.74 Vebicles 0.05 0.05 0.10 0.05 0.05 0.10 Engineering Consultant 0.40 0.66 1.06 1.34 1.27 2.61 Base Cost 0.84 2.03 2.87 1.73 3.62 5.35 Physical Contingencies 0.13 0.30 0.43 - - - Price Contingencies 0.12 0.32 0.44 - - - Total 1.09 2.65 3,74 1.73 3.62 5.35 4. Management Advisory Services Base Cost 0.26 0.40 0.66 0.04 0.57 0.61 Physical Contingencies 0.04 0.06 O1 - - - Price Contingencies 0.04 0.07 0.11 - - - Total 0.34 0.53 0.87 0.04 0.57 0.61 5. Training Program Base Cost 1.45 0.63 2.08 - Physical Contingencies 0.22 0.09 0.31 - Price Cortingencies 0.51 0.25 0.76 - Total 2.18 0.97 3.15 - - Total Cost of the Project 9.78 9.45 19.23 13.10 21.40 34.50