Argentina - Water Supply Project

Document of The World Bank FOR OmCIAL USE ONLY Report No. 5783-AR STAFF APPRAISAL REPORT ARGENTI NA WATER SUPPLY PROJECT November 11, 1985 Projects Department Latin America and the Caribbean Region This doument 1e a resiid lshuo md my be 1ed by ncipients eoly in the pesfonnce of ther olda dde Its couters may not dorise be dikosed wthout Woi Bak sutboration.  ARGENTINA WATER SUPPLY PROJECT STAFF APPRAISAL REPORT CURRENCY EQUIVALENTS Currency Unit = Austral (A) USS 1 = AO.80 A 1 = USS1.25 (September, 1985) WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BH - Banco Hipotecario (National Mortgage Bank) DIPOS - Direccion Provincial de Obras Sanitarias de Santa Fe (Santa Fe Water Utility) EPOS - Empresa Provincial de Obras Sanitarias de Cordoba (Cordoba Water Utility) IDB - Inter-American Development Bank MOSP - Ministerio de Obras y Servicios Publicos (Xinistry of Puiblic Works and Services) MSAS - Ministerio de Salud Publica y Accion Social (Ministry of Health and Social Welfare) OSN - Obras Sanitarias de la Nacion (National Water Works) PNSB - Plan Nacional de Saneamiento Basico (National Water and Sanitation Development Plan) SIGEP - Sindicatura de Empresas Publicas (Comptroller of Public Enterprises) SNAP - Servicio Nacional de Agua Potable Rural (National Rural Water Service) SRH - Secretaria de Recursos Hidricos (Secretariat of Hydraulic Resources) UC - Unidad Coordinadora para el Financiamiento Programas Inversion en Saneamiento Urbano (Coordinating Unit for Sector Investment) UE - Unidad Ejecutora del Plan Nacional de Saneamiento (Executing Unit of the National Sanitation Plan)  FOR OMCIAL USE ONLY ARGENTINA WATER SUPPLY PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. LOAN AND PROJECT SUMMARY ..................................... iii I. THE SECTOR .. ......... . ..... ................. ..... ..... 1 Sector Organization ..................................... .. 1 Population, Service Levels, and Quality ............ ....... 2 Sector Performance, Policies, and Constraints ............. 2 Sector Objectives and Strategy ........................... . 3 II. THE PROJECT .... ..... ... ................ 4 Background ................. ..... 4 Project Objectives and Rationale for Bank Involvement ..... 4 Project Description .... 5 Project Implementation .........................4...... .... 5 Project Executing Agencies ..... 0 .......... 6 Project Monitoring 1. ........................ 7 Project Cost .............. .. 7 Project Financing Plan .................................... 8 Past and Current Financial Performance .........4.......... 8 Future Operational Performance and Covenants .............. 9 Future Financial Performance and Financial Covenants ...... 10 Audit ... .................. .........4.. . 10 Procurement .............................................4444 11 Disbursements ........... ........................ 11 Status of Project Preparation ............ ............ 12 Project Justification and Economic Benefits .......... 12 Project Sensitivitv, Risks and Safeguards ... .............. 14 III. AGREEMENTS REACHED AND RECOMMENDATIONS ................. 15 This report is based on the findings of an appraisal mission which visited Argentina from February 23 to March 21, 1985. The mission was comprised of Messrs. Emilio Rodriguez, Engineer; Bernardo Gomez, Financial Analyst; and Emmanuel Mbi, Economist. hi document has a rsricted distribution and may be used by epents only in the perfornume of their ofriual duties. Its contents mny not otherwis be diWosed without World Bank authorization.  - ii - Page No. LIST OF ANNEXES 1. Institutional Arrangement in the Provinces . . ............. 17 2. Population and Service Level ....18 3. Levels of Supply and Sewerage Services in Provinces 19 4. Project Description.. . .... 20 5. Project Implementation Schedule.... 23 6. Organization Charts ............. ... 24 7. Institutional Overview .....28 8. Terms of Reference for Technical Assistance.. 30 9. Monitoring Indicators ....36 10. Project Cost Estimates .... 37 11. Project Executing Agencies Financial Da t ...40 12. Project Cost by Procurement Method ....47 13. Loan Disbursement Schdule .... 48 14. Economic and Social Analysis.. ... 49 15. Selected Reference Documents and Data Available in Project File... 57 MAp IBRD No. 19128  - iii - ARGENTINA WATER SUPPLY PROJECT STAFF APPRAISAL REPORT Loan and Project Summary Borrower: The Republic of Argentina Beneficiaries: Ministry of Public Works and Services (MOSP), National Water Works (OSN) and the water utilities of the Provinces of Cordoba (EPOS) and Santa Fe (DIPOS). Amount: US$60.0 million equivalent (includes US$8.0 million for interest during project execution). Terms: Repayment in 15 years, including 3 years of grace, with interest at the Rank's standard variable rate. Relending The Borrower will make available proceeds of the Loan to Terms: OSN, EPOS and DIPOS on the same terms as those -of the loan. Both foreign exchange and interest risk will be assumed by the project executing agencies. Project Description: The project will assist the Government to rehabilitate old, poorly maintained water and sewerage installations, extend water services to new urban areas; and strengthen sector planning, management and finances. The project includes th- following components: (a) national water and sanitation plan preparation; (b) operational improvements program in Metropolitan Buenos Aires and the cities of Cordoba and Rosario, consisting of the first stage of a national program including, inter-alia, consumption and production metering, rehabilitation of distribution networks, and strengthening of the water utilities, distribution management and commercial operations; (c) rehabilitation and extension of the city of Cordoba's water system consisting of the construction of a water treatment plant to replace a rundown plant, upgrading of another plant, and water mains and secondary pipes; and (d) technical assistance to improve the financial planning, accounting and purchasing systems of OSN and EPOS. The project will directly benefit about 1.4 million people in the three project cities. This includes about 0.35 million in Cordoba, 0.80 million in Buenos Aires and 0.25 million in Rosario.  - iv - Risks The multiplicity of activities to be undertaken under the project will require close cooperation of several entities. To some extent, the risk associated with the multiplicity will be mini- mized by the agreed upon institutional arrangements for project implementation which includes clearly defined responsibilities for project participants, and by the services of an international organization to undertake administration and contracting of the technical assistance program. These measures will be supple- mented by intensive supervision by Bank staff and by project reporting and monitoring provisions which will allow the Bank to check frequently on project progress and to detect problems early. The federal and provincial governments commitment to ensure the funds required by the project, and the strengthening of the utilities' management systems and efficiency, minimize risks of delays related to the availability of counterpart funds. Project Costs: Local Foreign Total -=U bS$ Million---- National Water and Sanitation Plan 0.42 0.41 0.83 Technical Assistance Buenos Aires 0.52 0.52 1.04 Cordoba 0.10 0.11 0.21 Operational 'mprovements Buenos Aires 8.30 i2.45 20.75 Cordoba 2.78 4.17 6.95 Rosario 3.03 4.54 7.57 Cordoba Water System Rehabilitation and Extension -Los Molinos Channel-, 5.59 2.50 8.09 Water Production, and Distribution 25.35 12.49 37.84 Engineering and administration (7% of US$45.93 Million) 2.16 1.06 3.22 Base Cost (09/85 Prices) 48.25 38.25 86.50 Tech. Contingencies 10% 4.83 3.82 8.65 Price Contingencies 15.36 9.93 25.29 Total Project Costs 68.44 52.00 120.44  -v- Financing Plan: Local Foreign Total -- US$ million Bank - 52.00 52.00 Government 11.07 - 11.07 Domestic Loans 43.30 - 43.30 OSN 14.07 - 14.07 TOTAL 68.44 52.00 120.44 Bank (interest during project execution) - 8.00 8.00 Estimated Disbursements: 1986 1987 1988 1989 1990 1991 1992 1993 1994 Bank Fiscal Year US$ million Annual 6.00 8.80 13.10 8.00 7.30 7.50 4.80 2.80 1.70 Cumulative 6.00 14.80 27.90 35.90 43.20 50.70 55.50 58.30 60.00 Rate of Return: About 15Z.  ARGENTINA WATER SUPPLY PROJECT PART I - THE SECTOR Sector Organization 1.01 Until 1980, nation-wide responsibilities for most of the water and sewerage systems in urban areas were concentrated in the National Water Works Company (Obras Sanitarias de la Nacion - OSN). At that time, the Government initiated a series of changes to decentralize most of these responsibilities to the provinces. The Government's action was part of an overall strategy to improve quality of services by inducing efficiency and dynamism in a stag- nated, overcentralized sector (paras. 1.10 and 1.11). 1.02 The sector was decentralized by Decree 258 of 1980. Under this ap- proach, the Ministry of Public Works and Services (MOSP), through the Secreta- riat of Hydraulic Resources (SRH) was made responsible for planning, and over- all supervision of sector activities. Other responsibilities were given to: Ci) OSN for water and sewerage services in the Buenos Aires Metropolitan Area; (ii) a water utility in each of the twenty-three provinces; and (iii) the National Rural Water Services (Servicio Nacional de Agua Potable Rural - SNAP), created in 1966, for services in rural areas and urban communities with less than 10,000 inhabitants. Other agencies active in the sector include the Ministry of Health and Social Welfare (Ministerio de Salud Publica y Accion Social) and the National Mortgage Bank (Banco Hipotecario). 1.03 SRH, in addition to coordinating water resources management, over- sees the activities of OSN, SNAP, and a research and training institute. SRH is responsible also for making the decentralized arrangements operative. To this end, SRH created in 1980 the Executing Unit (UE) of the National Sanit- ation Plan for developing sector technical, financial, and managerial policies and assisting the provincial utilities develop their capabilities; and in 1985, the Coordinating Unit for Sector Investment (UC) for coordinating investment projects which require Government funds and external financing. 1.04 OSN, a national government enterprise, in addition to providing water and sewerage services to fourteen municipalities of the Buenos Aires Metropolitan Area with an aggregate population of 10 million provides tech- nical assistance to the provincial entities in coordination with UE. 1.05 The provincial entities created under the decentralization process, received from OSN, on a grant basis, the existing infrastructure and the current assets, including accounts receivable. Organizationally, these enti- ties vary from provincial enterprises to departments of provincial governments (Annex 1). The responsibility for setting tariffs rests with Provincial governments. The provincial utilities under the proiect are: Cordoba Provin- cial Water Works (Empresa Provincial de Obras Sanitarias - EPOS) and Santa Fe Provincial Water Works (Direccion Provincial de Obras Sanitarias - DIPOS).  - 2- Population, Service Levels, and Quality 1.06 Argentina has become increasingly urbanized. During the 1970s, the urban population grew at a rate of 2.5% per annum, from 18 to 23 million, while total population grew at 1.6% per annum, from 24 to 28 million. The 1980 census showed that 83% of the population lived in urban areas, 75% lived in 198 communities with populations greater than 10,000, and 35% was concen- trated in the Buenos Aires Metropolitan Area (Annex 2). 1.07 The percentage of total population connected to public water supply systems increased from 45% in 1970 to 60Z in 1980. In urban areas, the increase was from 56% to 69%. Population service coverage for sewerage in urban areas is lower than that for water supply: 31% in 1970 and 37% in 1980 (Annex 3). In rural areas, 71% of the population living in communities bet- ween 100 to 2000 inhabitants received water services through house connec- tions. About 38% of the rural population had excreta disposal systems. Water supply and sewerage service coverage is not in line with the per capita income rank of Argentina in Latin America (6th). The country ranks 9th in service levels. 1.08 Public water supplies throughout the country are chlorinated and quality is controlled by routine testing and analyses. A large portion of the population not connected to public systems, however, relies on individual water sources which often are contaminated. In parts of the Buenos Aires Metropolitan Area and in provinces especially in the northeast and north, where services have not been extended and bad sanitary conditions are prev- alent, infant mortality rates are more than twice the national average. 1.09 Population and public service coverage in the proposed project area are as follows: (a) Metropolitan Buenos Aires has a population of 10.0 million in a vast urban area and water and sewerage service coverages of 64% and 40% respectively. These low coverages result from some distant municipalities lacking connections to the public system; (b) the city of Cordoba has 1.0 million inhabitants and service coverages of 78% and 25%; and (c) the city of Rosario has 1.0 million population and service coverages of 89% and 45%. Sector Performance, Policies, and Constraints 1.10 OSN led the development of the water supply and sewerage sector in Argentina for more than a century, building and operating systems which were mostly financed and subsidized by the Government. This institution operated in periods of rapid growth when Argentina attained a leading position with regard to sector activities in the region. Installed water production and main distribution capacity were often designed to meet overestimated demands. Buenos Aires was situated near an unlimited supply of fresh water. As long as the real cost of capital was low OSN found it more effective to build large infrastructure rather than operate sophisticated systems which could reduce demand. The deterioration of the economic conditions in the country prevented the Government from continuing to provide large subsidies for sector  - 3 - activities, and OSN was unable to adjust to the resulting financial con- straints. Until 1976, OSN was not generating enough revenues to cover evfn operating expenses. In 1977, newly adopted economic policies stressed greater financial self-reliance of public enterprises and required OSN to generate its first operating surplus. Government subsidies were curtailed, and OSN was directed to borrow on the internal and external credit markets. Grant financ- ing of investment was reduced to limited funds obtained from provincial and municipal budgets. The combined effect was a sharp reduction in investment and an increasing inability to satisfy demand for services and to properly maintain existing installations. 1.11 The decentralization of the sector reflected the Government's belief that most of the above constraints could be more effectively removed by pro- vincial governments. The decision to decentralize was taken, however, without taking into consideration the limited institutional capabilities at the pro- vincial level, and it was not accompanied by the necessary assistance to pre- pare the provinces for the full assumption of responsibilities. The Govern- ment is now attempting to overcome these deficiencies by defining and imple- menting a set of policies and assistance programs which would be included in a national water and sanitation developmeat plan, to be prepared under the pro- posed project (para. 1.13). Sector Objectives and Strategy 1.12 At the end of 1983, the Government established service goals for 1990. The goals were to provide 80% of the population with water supply and 70% with sewerage or alternative excreta disposal systems. The attainment of these goals represented serving an additional 6.1 million population through public water supplies at a cost estimated by Argentinian authorities at about US$1.6 billion, and 10.4 million persons with sewerage at a cost of about US$2.4 billion. Annual investment required (US$700 million) is several times the annual investment levels of the 1970s and the 1980s (US$114 million and US$78 million in current prices). This level of investment is highly unlikely to be achieved since: (a) the country's public investment programs continue being sharply curtailed; (b) the financial intermediaries and financial resources for the sector have yet to be determined; and (cj the water entities would need sufficient lead time to implement operational and financial poli- cies which allow them to internally generate sufficient funds for investments and for serving debts. The emphasis in sector development will have, there- fore, to be placed on maximizing service coverage and quality under a severely limited investment budget. This approach entails the rehabilitation and expanded use of existing infrastructure, reduction of per capita investment costs, water conservation, and improvement of operational and commercial practices. 1.13 The Government has now agreed to this approach which will feature the National Water and Sanitation Plan (PNSB) to be prepared under the project. The plan will update the demand for services and evaluate required investments. It will review the setting up of an investment financing system and propose tariff policy and levels to reflect the economic cost of services,  -4- the users' capacity to pay, and the need to enhance the water utilities' self-financing capacity. Other areas to be covered are the least cost analysis of projects, which take into account rehabilitation of existing infrastructure, and the promotion of water conservation measures consistent with the efficient use of sector resources. The plan will be in line with general economic policies for the country, inter alia, to alleviate federal and provincial governments budgetary requirements by financially strengthening government enterprises and improving public sector management. 1.14 The Bank's strategy is to act as a catalyst to speed the formulation and implementation of new sector policies and practices conducive to more efficient operation and less capital intensive sector investments. An import- ant element of this strategy is to help the Argentinian authorities in the preparation of the PNSB plan, while at the same time focusing Bank assistance on the rehabilitation of existing installations, to prevent a collapse of services in major cities and improvement of the operational, managerial, and financial capabilities of.the provincial utilities. With this assistance, the provincial utilities would be prepared to introduce improved cost recovery policies and to undertake the necessary expansion of the systems. PART II - THE PROJECT Background 2.01 In late 1983, the newly elected authorities requested the Bank to discuss sector issues, assess progress made in sector reorganization, and to assist with project preparation. The project was appraised in February-March, 1985 and negotiations were held in Washington in October, 1985. The Argentinian delegation was led by Carlos Rivas Roche, Undersecretary of Hydraulic Resources, MOSP. Project Objectives and Rationale for Bank Involvement 2.02 The main objectLves of the project, which is the first in the sector, are to: (i) rehabilitate deteriorating infrastructure, replace rundown facilities and extend water services to new urban areas; (ii) prepare a national plan to provide the necessary institutional framework to permit the newly decentralized system to function in a more efficient manner; and (iii) initiate a national operational improvements program which promotes water conservation through physical rehabilitation of water systems, production and consumption metering, and institutional strengthening of the water utilities. The operational improvements program covers in this first stage the Buenos Aires Metropolitan Area, and the cities of Cordoba and Rosario de Santa Fe that represent 60% of the urban population of the country, and where che water utilities are prepared to introduce new technologies which could be replicated in other areas of Argentina. 2.03 The above objectives are corsistent with the Bank's strategy to assist the Government in the improvement of public sector management both at the national and provincial levels; the inducement of greater efficiency in the use of resources; and the rehabilitaLion of the nation's valuable social infrastructure.  -5- Project Description 2.04 The project includes the preparation of a national water supply and sanitation plan (US$1.1 million or 1% of the project cost), an operational improvements component (US$47.0 million or 392), and rehabilitation and exten- sion of the water system in the city of Cordoba (USS70.7 million or 59%). The projec- would be complemented by technical assistance to OSN and EPOS (US$1.6 million or 1% of the project cost). 2.05 The preparation of the national water supply and sanitation plan will include: (a) formulation of Government objectives in the sector, service targets ard investment alternatives for the decade; (b) development of project evaluation criteria to foster adequate technical standards for project design with special emphasis on least cost analysis; (c) preparation of financial policies, including definition of financial criteria for setting investment priorities; (d) definition of tariff structures and levels to achieve reason- able rates of return on sector assets and enable the sector to contribute sig- nificantly to new investments; (e) evaluation of the existing organizational framework and responsibilities at federal and provincial levels; (f) recom- mendations for the establishment of the organizational and institutional structures to effectively implement the sanitation plan; (g) recommendations on strategies directed at improving the efficiency of the present sector organization; (h) definition of responsibilities in sector financing and alternative flow of funds; (i) identification of manpower resources and staff training needs; and (j) evaluation of existing research facilities and their funding, and recommendations for further development. Preparation work will be carried out by consultants assisting SRH (paras. 2.09 and 2.10). 2.06 The operational improvements component which will be carried out in Metropolitan Buenos Aires and the cities of Cordoba and Rosario de Santa Fe, includes the following sub-components: (a) wnter consumption metering; (b) production and main distribution metering; (c) water distribution flow survey; (d) mapping of the water distribution and sewerage systems; (e) water distrib- ution network rehabilitation; (f) distribution system management; and (g) up- grading of commercial systems. The component, mostly equipment (88%), is designed to cut water wastage thus decreasing operating costs and delaying the need for new investment (para. 2.34). 2.07 The rehabilitation and extension of the Cordoba water system includes the following: (a) construction of 'Los Molinos water treatment plant (2 m3/s); (b) upgrading of "Suquia water treatment plant; (c) comple- tion of the multipurpose Los Molinos raw water channel; (d) four booster pumping stations; and (e) construction of mains and distribution pipelines. 2.08 Finally, the project includes: (a) studies, technical assistance and equipment for the improvement of financial planning, accounting, and purchas- ing systems for OSN and EPOS and (b) preparation by OSN, EPOS, and DIPOS of investment, operational and financial recovery plans including annual targets in the areas of water production and sales, service levels and quality.as well as billing, collection and tariff levels (para. 2.22). Project Implementation 2.09 The Borrower will be the Argentine Republic. MOSP will act as terhnical agent for the project, being responsible for overall project  -6- supervision and coordination. To this end, MOSP through SRH, will be the liaison between the Bank, the Government and the project beneficiaries. MOSP, with assistance of consultants, will prepare the national water and sanitation plan. OSN, EPOS, and DIPOS will be responsible for the execution of works and institutional programs in Metropolitan Buenos Aires, Cordoba, and Rosario respectively. Each of these agencies have appointed a coordinator for the project. The project will be executed in the period January 1986 to December 1993. Detailed implementation schedule is in Annex 5. 2.10 Project execution will require extensive use of consultants to help introduce improved managerial praccices in the project executing agencies (para. 2.12-2.15). The project includes 410 man-months of foreign consultants and 300 man-months of local consultants. MOSP and OSN will enter into master contracts with consultants for the preparation of the National Water and Sanitation Plan, and for the operational improvement program in Buenos Aires. EPOS and DIPOS will retain specialized consultants for specific project activities. Agreement was reached during Loan Negotiations on terms of reference for master contracts for consulting services. 2.11 The contractual documents under the project are: (a) a Loan Agree- ment between the Bank and the Government; (b) Project Agreements between: (i) the Bank and OSN; (ii) the Bank, EPOS and the Government of Cordoba; and (ii) the Bank, DIPOS and the Government of Santa Fe; (c) three onlending agreements between the Government and: (i) OSN; Cii) EPOS and the Government of Cordoba, and (iii) DIPOS and the Government of Santa Fe; and (d) Special Account Agree- ment between the Government and the Account Bank. Project Executing Agencies 2.12 OSN, the executing agency for the Metropolitan Buenos Aires project subcomponent, is managed by an administrator appointed by MOSP. The adminis- trator directs the activities of the institution through three departments: operations, engineering, and finances and administration, and twelve second- level units under the department's managers. With 9,400 employees, OSN, pro- vides weter and sewerage services through 1.0 million and 0.5 million house connections respectively. OSN's annual budget is approved by the Congress; cizg;es for services are approved by an interministerial committee comprising Public Works, Economy and Labour. OSN is required to get prior approval from the Ministry of Economy and the Planning Secretariat for major multi-year investment projects. Planning and budgeting at OSN have been weak. Account- ing reports are not issued on time and are often based on unreliable and poor- ly coordinated data. The accounting system is, however, adequate to record project related transactions and expenditures. OSN staff prepares most engineering designs and supervises most works and operations. Operation of systems is an area which needs substantial improvements. With the exceotion of limited areas of Buenos Aires for which services were partially financed by IDB, systems lack production and consumption metering. Most of the instru- mentation in the old production and distribution systems are in disrepair. In addition to these physical deficiencies of the system, water distribution management needs upgrading. The commercial system needs to be strengthened in the areas of installations mapping, customer register, tariff structure, and billing and collection (para. 2.21).  -7- 2.13 EPOS, the executing agency for the Cordoba project subcomponent, is governed by a board composed of a president and four ditictors. There are departments for planning, engineering, operations, finances and administra- tion, and small communities administration. With 2.030 employees, EPOS, prov- ides water and sewerage services through 260,000 and 92,000 house connections respectively. Its budget is approved by the provincial congress and tariffs by the provincial government. Engineering planning is quite adequate to needs and financial planning has improved noticeably during project preparation. Engineering design and project supervision are carried out in most cases by EPOS' staff. Problems in operations, commercial and accounting areas are similar to those of OSN (para. 2.21). 2.14 DIPOS, the executing agency for the Rosario project subcomponent, is managed by an administrator appointed by the provincial Governor. Activities are carried out by five departments: planning, operations, commercial, finances, and administration. With 1,400 employees, DIPOS provides water and sewerage services through 299,000 and 148,000 house connections respectively. Accounting is satisfactory. Engineering is mostly carried out by DIPOS' staff. Problems in operational and commercial areas are similar to those of OSN and EPOS (para. 2.21). 2.15 SRH, the executing agency for the national sanitation plan, is at MOSP directly responsible for overseeing the activities of UC and UE. SRH staff comprises about 30 professionals. SRH to adequately undertake its increasing activities under the project, would rely heavily on the consultants assisting UE and UC (paras. 2.09-2.10). Organization charts of SRH, OSN, EPOS and DIPOS are in Annex 6. An instititional overview of the three utilities is in Annex 7. Draft terms of reference for technical assistance to OSN and EPOS are in Annex 8. Project Monitoring 2.16 Monitoring indicators have been prepared as shown in Annex 9. Agreement was reached during negotiations on the monitoring indicators as well as on a plan for project progress reporting. Agreement was also reached during Loan Negotiations that two project implementation reviews will be carried out by June 30, 1987 and December 31, 1989, respectively. These reviews which include discussions with the Bank of the findings and recommend- ations of the water and sanitation plan, operational improvement program, and technical assistance for OSN and EPOS will provide the basis for the required corrective actions on project execution. Project Cost 2.17 The total cost of the project excluding interest during construction is estimated at US$120.4 million equivalent. The foreign exchange component is estimated at US$52.0 million or 43% of the project cost. Costs are based on September 1985 prices and include physical contingencies of 10Z. Price contingencies of US$25.3 million or 27% of 1985 project cost are based on estimated international inflation of 5% in 1985, 7.5% in 1986, and 8%, there- after. Technical assistance and consultant costs (US$5.7 million) are based  - 8 - on those of similar internationally and locally recruited experts in Argentina. Construction costs are based on unit costs developed by OSN and EPOS during implementation of ongoing projects. Costs do not include direct taxes. Detaile& project costs are in Annex 10. Project Financing Plan 2.18 The Bank loan of US$60.0 million to the Government of Argentina finances 100 percent of foreign costs estimated at US$52.0 million. Also, the loan includes US$8.0 million to finance interest during the execution period, to help reduce the financial pressures on the Government and oh t.'e project executing agencies. The l_-al counterpart of US$68.4 million will be financed by OSN internal cash generatlon (US$14.0 million), a combination of provincial grants or loans to and internal cash ge-neration from EPOS and DIPOS (US$39.5 and US$3.8 million respectively), and a federal government contribution to the province of Cordoba for the multipurpose -Los Molinos" channel (US$11.1 million). Assurances from the federal and provincial governments were obtained during loan negotiations on the timely availability of counterpart funds. Bank loan proceeds will be made available by the Government to OSN, EPOS and DIPOS on a loan basis, at the same interest as the Bank loan, and with similar grace and repayment periods. Foreign exchange risk would be assumed by the project executing agencies. The signing of at least two subsi- diary loan agreements between the Government, the executing agencies and the respective provincial governments is a condition of effectiveness of the pro- posed loan. Past and Current Financial Performance 2.19 OSN's financial situation in 1980 was highly satisfactory. In both 1981 and 1982, the company experienced substantial operating surpluses (income before depreciation amounted to US$154 and US$67 million respectively) which resulted in a high liquidity position. OSN's favorable financial performance deteriorated rapidly, however, mostly as a result of declining tariffs which, by the end of 1982 through 1984, were equivalent to 34-40% of early 1981 tariffs in real terms. OSN revenues in 1983 and 1984 were used almost entire- ly to cover oreration and maintenance budgets which lacked programs of pre- ventive maintenance and of replacement and improvement of worn out facili- ties. The 1984 operating deficit was financed by delayed payments to contrac- tors and suppliers and by Government grants. OSN's investments which in 1981 and 1982 amounted to US$68 million and US$85 million respectively, declined to US$28 million and US$38 million in 1983-84. OSN's financial statements for 1982-84 are shown in Annex 11. Financial performance in 1985 is expected to improve as a result of substantial tariff increases during the first semester (22% cumulative in real terms). These increases were approved before the temporary freeze imposed on prices and wages. The Government has indicated its willingness to consider further tariff increases when the wage and price freeze is relaxed in 1986.  - 9 - 2.20 EPOS and DIPOS started operations with a financial position adequate to support the -implementation of policies and practices to gradually improve service coverage and quality in the respective provinces. They received from OSN a large asset base and no debt. Also, tariff levels were sufficient to generate enough revenues to cover operation and maintenance budgets and to finance some investments. Since then the performance of both companies deter- iorated. DIPOS' revenues continued being sufficient to cover its limited operation and maintenance budget and to finance an average annual investment of US$6.0 million during 1982-84. This performance was mainly the result of the implementation in 1983 of a policy of periodic tariff adjustments based on a formula which takes into consideration cost increases. The implementation of this policy allowed the company to rapidly recover its 1981 tariff level in real terms after a sharp decline experienced in 1982. EPOS, which also exper- ienced a tariff deterioration delayed the recovery process until mid-1984. Tariffs during 1982-84 were equivalent to 31-39% of early 1981 tariffs, in real terms. As a result, EPOS' revenues were barely sufficient to finance the already unsatisfactory operations and maintenance budget. EPOS' investments since its creation have therefore been negligible: US$2.0 million in 1983 and US$2.7 million in 1984 (the latter being financed by a provincial grant). This trend is however, being reversed by a recent provincial government and EPOS' management decision to implement a tariff recovery plan. In compliance with this plan, tariffs were increased by 45Z, in real terms, between June 1984 and April 1985. Further tariff increases scheduled for 1985 were indefi- nitely postponed in compliance with Government's recently imposed austerity plan. The net result of this tariff freeze would be a 1985 average tariff 8% above the 1984 tariff level. This tariff level would provide EPOS with a pos- itive income before depreciation despite excessive maintenance expenditures for the water treatment plant to be replaced under the proposed project (about USS1.6-1.8 million for this year). In addition, government and EPOS' authori- ties have agreed to continue gradually increasing tariffs during the proposed project execution period as soon as the price freeze is lifted (para. 2.22). This policy is consistent with EPOS' charter which provides that tariff levels should be sufficient to generate enough revenues to cover current expenditures and debt service, and also to contribute an unspecified amount to finance investments in system expansion and improvement. EPOS and DIPOS financial information is presented in Annex 11. Future Operational Performance and Covenants 2.21 The operational improvements project component is designed to drama- tically change the operations of the three water utilities involved by addres- sing, inter alia, major weaknesses discussed above (paras. 2.12-2.15). There would be a tightened control of water produced and sold. Clandestine connec- tions and leakages would be minimized. Metering the largest water consumers (the top 10-25%) which account for the bulk of water consumed (40-60%), would permit the introduction of tariffs structures related to the marginal cost of water and would promote water conservation. Thus, as water demand decreases, large investments could be postponed. The increased efficiency in the water utilities will be closely monitored as follows: (i) by the monitoring indi- cators agreed upon during loan negotiations (Annex 9); (ii) through invest- ment, operational, and financial recovery plans (para. 2.22); and (iii) through project implementation reviews agreed upon during negotiations (para.  - 10 - 2.16). In addition, agreement was reached with OSN, EPOS, and DIPOS during loan negotiations on the following: (i) metered connections as percentage of total connections will increase in Buenos Aires, from 10Z in 1986 to 22% in 1991; in Cordaba, from 6% to 24%; and in Rosario, from 5% to 8%; and (ii) revenues collected to amounts billed by OSN, EPOS and DIPOS will increase from 86% in 1986 to 96% in 1991 and thereafter. Future Financial Performance and Financial Covenants 2.22 There is an increasing awareness at federal and provincial levels in Argentina of the need to improve the self-financing capabilities of the public enterprises, including water and sewerage companies. The provisions in the project which involves the revision and updating of ingrained institutional, financial, and engineering policies and practices will help the project bene- ficiaries in this endeavor (para. 2.08). These revisions combined with the results of the technical assistance, metering and other operational improve- ments to be financed under the loan, will provide the basis for financial recovery, investment and managerial improvement programs. These programs are expected, inter alia, to set specific targets for future financial improvements in the forms of rates of return or internal contribution to investment, which the Bank will review in detail in conjunction with the pre- paration of further operations in the sector. During loan negotiations: (i) agreement was reached on the terms of reference for the above financial recovery plans for OSN, EPOS, and DIPOS, and (ii) assurances were obtained that these plans and schedules for their implementation will be completed by June 30, 1987, and that the Bank will be given an opportunity to comment on the provisions of the plans. Assurances were also obtained during negotia- tions that: (i) beginning in 1986, OSN, EPOS and DIPOS will generate suffi- cient revenues to cover operating expenses, adequate maintenance, taxes, and debt service requirements; (ii) OSN, EPOS and DIPOS will submit to the Bank by September of each fiscal year an update of the financial pLan and projections for the current and the following three years, specifying the measures to be taken to meet the aforementioned financial covenant. Audit 2.23 Audit of the project executing agencie: is carried out as follows: (i) MOSP, by the Comptroller General; (ii) OSN, by tho Comptroller of Public Enterprises (Sindicatura General de Empresas Publicas - SIGEP);. (iii) EPOS by the Contaduria General de la Provincia; and (iv) DIPOS, by the Tribunal de Cuentas de Santa Fe. SIGEP is at present an acceptable independent auditor. The Bank will assess in the next few months the institutional and technical capabilities of the EPOS and DIPOS auditors. During Loan Negotiations, assur- ances were obtained that: (i) OSN, EPOS, and DIPOS will have their financial statements for zacii fiscal year starting with fiscal year 1985 and statement of expenditures, audited by independent auditors satisfactory to the Bank, and in accordance with generally accepted accounting principles; (ii) MOSP will have the accounts of its project component and the project's special account  - 11 - audited by independent auditors satisfactory to the Bank and in accordance with generally accepted accounting principles; and (iii) starting in June 30, 1986, but not later than April 30 of each following years, the project execut- ing agencies will submit to t.ze Bank certified copies of the audited financial statement and reports. Procurement 2.24 Procurement under the project will be carried out following Bank guidelines. The exemption for project-financed procurement from legislation mandating the use of domestic goods and services would be a condition of loan effectiveness. All contracts for equipment and materials exceeding US$100,000 and for civil works exceeding US$1,000,000 will be awarded on the basis of international competitive bidding. Equipment and materials will be grouped to obtain packages in excess of US$100,000 with the exception of contracts amounting to less than US$130,000 under the MOSP water supply and sanitation plan component, US$1,000,000 for OSN's component, US$2,800,000 for EPOS' com- ponent, and US$370,000 for DIPOS' component. The nature of civil works under the operational improvements components precludes the efficient packaging of services to be bid as works will be carried out in operating installations spread over the project cities. These works, amounting to approximately US$9.0 million or 11% of the project cost, will be carried out under proced- ures satisfactory to the Bank by: (i) local contractors: US$2,600,000 under OSN's subproject, US$900,000 under EPOS' subproject, and US$1,000,000 under DIPOS' subproject; and (ii) by force account US$2,600,000 under OSN's subpro- ject, US$900,000 under EPOS' subproject, and US$1,000,000 under DIPOS' subpro- ject. Standard bidding documents and a purchase program for 1986 were agreed upon during Loan Negotiations together with assurances of an updating of the purchase program by October 31, of each year starting in 1986. 2.25 Technical- assistance and consultants' services, will be procured in accordance with Bank's Guidelines for the Use of Consultants. A contract with an international organization under terms and conditions satisfactory to the Bank wil]. be awarded to ease the administrative burden on MOSP for the prep- aration of the water supply and sanitation plan. 2.26 Project costs by procurement method are presented in Annex 12. Prior Bank review of feasibility studies, final designs and prequalifications, bidding documents, awards, and contra:ts procured under ICB will be required. The executing agencies will maintain all relevant documentation for local pro- curement of goods and services. Bank missions will carry out an ex-post review by sampling. Disbursements 2.27 The Bank will disburse as follows: (a) 100% of foreign expenditures for direct imports;  - 12 - (b) 44% of local expenditures for imported equipment and materials procured locally and ex-factory costs of locally manufactured goods; (c) 44% of total expenditures of civil works; (d) 100% of total expenditures for consulting services and training; and (e) against amounts due for interest and other charges on the Bank's loan until the date of the first principal payment to the Bank up to a maximum of US$8 million. Disbursed amounts, excluding interest under (e) above, should not exceed US$1.0 million for MOSP, US$16.0 million for OSN, US$29.0 million for EPOS, and US$6.0 million for DIPOS. Proceeds of the Bank loan will be disbursed upon presentation of standard documentation with the exception of those proceeds financing goods and services procured locally which will be disbursed against statement of expenditures prepared by MOSP. In these cases, detailed documentation will be retained by the executing agencies for inspection during supervision missions. Disbursements, estimated in line with the 8 1/2 year profile for water supply projects in the Region, would be completed by June 30, 1994 (Annex 13). A special account for the project in the amount of US$5.0 million (estimated four month's peak disbursements) will be established in the Central or other bank. Status of Project Preparatior 2.28 Project preparatior^ conforms to the agreed implementation schedule. The project coordinating unit in MOSP (UC) has been created and staffed. UC has prepared and submitted to the Bank model onlending contracts between MOSP and OSN, EPOS, and DIPOS. UC has also prepared draft terms of reference for a master contract for consulting serviczs under the preparation of the national plan. -Los Molinos treatment plant design preparation is com- pleted. The land for the plant is already in the expropriation process and the law allows EPOS to take immediate possession of it. OSN, EPOS, and DIPOS have created and staffed units for the execution of the operational improve- ments components. Terms of reference for most of the activities in the oper- ational improvement and for the technical assistance to OSN and EPOS have been prepared. During Loan Negotiations agreements were reached between: the Bank and MOSP and the execut'ng agencies on onlending contracts; and between the Bank and MOSP on terms of reference for a master contract for the preparation of a national water and sanitation plan. Project Justification and Economic Benefits 2.29 General. The project will enable OSN and DIPOS to satisfy short- to-medium-term demand from existing faZilities and to prepare them to adequa- tely undertake system expansions which k1ill be needed in the future. The pro- ject yields satisfactory returns and has a high social impact. In Cordoba for instance, nearly 30% of the beneficiaries are the urban poor who would be pro- vided a dependable water supply at affordable rates. Given the advanced state  - 13 - of deterioration of water production facilities in Cordoba, large levels of unaccounted-for water in all three cities comprising the project and the existing inefficient financial and operational practices among the entities, failure to execute the project would invite the risks that: (i) in the near future EPOS (Cordoba) would become incapable of providing even a minimal level of services to Cordoba's population; and (ii) all three entities would also continue to experience ever increasing losses with the consequent need for larger subsidies and investments. Furthermore, the project will be instru- mental for assuring major sector-wide institutional, financial and operational policy adjustments. 2.30 Least-Cost Solution. The project finances only items of high prior- ity and immediate impact which are consistent with long-term objectives. Pro- ject components represent the least-cost solution for achieving the project's objectives (para. 2.02) and do not involve the use of unusual or unproven technologies. The most significant physical component (the construction of water production, transmission and distribution facilities to replace rundown facilities in Cordoba) was selected on the basis of the analyses of eight alternatives and it is consistent with the future reorientation of Cordoba's water system (study of alternatives available in project file). 2.31 Economic Analysis. Internal rates of return (IRRs) have been calc- ulated for the two key components of the Cordoba subproject (65Z of total pro- ject cost). The estimated IRR for the plant construction and expansion compo- nent is 10Z, and for the operational improvement component 44%, yielding a weighted IRR of 15%. The Buenos Aires and Rasario operational improvement components (24% and 9% of total project cost) possess similar characteristics to this component in Cordoba and c.uld be expected to yield similar high results. A detailed description of the benefits of these components is in project files. An IRR was not computed for the institutional development com- ponent because its benefits cannot be quantified reliably. Assumptions and details of the analyses are described in Annex 14. 2.32 The IRRs were calculated using revenues from consumer charges as the minimum measure for economic benefits of the project. As in all twater supply and sewerage projects, the full economic impact of the proposed project cannot be captured solely in a rate of return measure since many benefits such as improvement of public health and hygiene, enhanced property values, employment generation, greater well being of tie population, cannot be quantified reli- ably and therefore, are excluded from the calculations. The consumer surplus is excluded from the calculations also. As a result, the IRRs are under- stated. Revenues were calculated using projected 1987 tariffs in Cordoba held constant in September 1985 prices. The calculated IRRs indicate that the project is fully justified in economic terms. 2.33 Long-run marginal costs for the Cordoba subproject were calculated using the Average Incremental Cost (AIC) method with a 12% discount rate. All costs are expressed in September 1985 prices. The AIC for the subproject is US$0.17/r3 which is higher than present (1985) tariff expressed in September  - 14 - 1985 prices of about US$0.14/m3. Tariffs projected for Cordoba in 1989 slightly exceed the AIC. While the AIC for the subproject as a whole is US$0.17/m3, the AIC for the components of the subproject were estimated as follows: for the plant construction and expansion compoaent, US$0.25/m3, and for the operational improvement component at US$0.06/m3. This clearly demonstrates the need to execute the operational improvements under which water can be provided at least-cost. 2.34 Beneficiaries, Urban Poverty Impact and Affordability. Benefits of the Cordoba subproject would accrue to virtually the entire population served by EPOS in the city of Cordoba as a result of the replacement of rundown pro- duction facilities which breakdown with increasing frequency and that could become inoperative at any moment. Direct beneficiaries of the Cordoba con- struction and expansion component include about 0.4 million people who would have either lost or had the volume of their water supply curtailed if the new facilities were not constructed. The operational improvement component directly benefits 0.35 million new users through more reliable services. This project component also benefits the entire population presently served by EPOS through more reliable and fair billings and safer and less expensive supply. The immediate savings of water through the operational improvement component in Buenos Aires will make it possible to supply 0.80 million additional people by 1990 at a per capita cost of about US$30. This is appreciably more econo- mic than supplying water to this population through construction of new facil- ities which would require investments of about US$80 to US$100 per capita. The Rosario component benefits about 0.25 million people whose services will be upgraded in quality and quantity. In addition, the entire population served by DIPOS would benefit through more accurate and timely billings. Totally, the operational improvements in the three cities will benefit 1.40 million people. 2.35 The direct impact of the project on the poverty group, defined as families with a monthly monetary income of less than US$160.00 in September 1985 prices (on an annual basis, this corresponds to approximately one fourth of the national per capita income) was estimated for the Cordoba subproject by calculating the proportion of urban poor in the projected 1993 incremental population served by each project component. About 22% of the direct beneficiaries of the construction and expansion component and 37% of the direct beneficiaries of the operational improvements component will be the urban poor. An estimated 23% of the subproject investments will directly benefit the poor. An evaluation of the affordability of services was made based on 1985 tariffs. In 1985, a family with a monthly income at the poverty threshold would pay an acceptable 2.6% of its income for a "lifeline" water supply of 12m3. Project Sensitivity, Risks and Safeguards 2.36 There is a high degree of certainty that the project will provide desired benefits. The effect of variations in costs, benefits and implement- ation delays on the project's rates of returns has been analyzed (Annex 14). The analyses demonstrate that the IRRs are not highly sensitive to changes in costs and benefits. There is little risk regarding the construction compon- ents of the project as the works are of conventional design and- well within  - 15 - the capabilitY of local civil works contractors and consultants to construct and implement. The multiplicity of activities to be undertaken under the pro- ject which includes the introduction of new technologies in Argentina requires the close cooperation of the whole utilities' organization. To some extent, the risk associated with the multiplicity would be minimized by the agreed upon institutional arrangements for project implementation which includes clearly defined responsibilities for project participants and the retaining of an experienced organization to undertake the administration and contracting for the technical assistance and studies. These measures will be supplemented by intensive supervision by Bank staff and by reporting and monitoring provi- sions, which will allow the Bank to regularly check on project progress and to detect problems early. 2.37 The federal and provincial Governments have committed themselves to ensure the funds required by the project. Moreover, by strengthening the utilities' management systems and improving the quality and efficiency of its services, the project would enhance the utilities' finances, their acceptance in the communities and thus their ability to implement tariff increases when necessary. These project features minimize risks of delays related to the availability of local counterpart funds. III. AGREEMENTS REACHED AND RECOMMENDATIONS -3.01 During negotiations of the Loan, agreement was reached on 'the following: (a) with MOSP, on terms of reference for a master contract for the pre- paration of a national water and sanitation plan (para. 2.10); (b) with MOSP, on progress reporting and monitoring indicators (para. 2.16); (c) with the executing agencies that two project implementation reviews will be carried out by June 30, 1987 and December 31, 1989 respect- ively (para. 2.16); (d) with the Government of Argentina, the provinces of Cordoba and Santa Fe, EPOS, DIPOS and OSN, on the timely availability uf counterpart funds (para. 2.18); (e) with OSN, EPOS and DIPOS, on the terms of reference for the prepara- tion of investment, operational and financial recovery plans (para. 2.22); (f) with OSN, EPOS and DIPOS on the targets for improved bill collection and for increased metered connections (para. 2.21); (g) with OSN, EPOS and DIPOS that plans mentioned in (e) above will be completed by June 30, 1987, and that the Bank will be given oppor- tunity to comment (para. 2.22);  - 16 - (h) with OSN, EPOS and DIPOS, on the submission to the Bank by September in each year of updated financial plans and projections for the current and following three years (para. 2.22); (i) with OSN, EPOS and DIPOS, on the annual submission of a plan of action to meet the financial break-even covenant (para. 2.22); (j) with the executing agencies on audit arrangements (para. 2.23); (k) with the executing agencies on standard bidding documents and an annual purchase program for 1986, and its annual updating (para. 2.24); (l) with the executing agencies on model onlending contracts (para. 2.28). 3.02 As a condition of Loan Effectiveness, the Government should enter into subsidiary loan agreements with at least two beneficiaries and the respective province or provinces and enact a resolution declaring that Bank procurement guidelines have precedence over local legislation (para. 2.24). 3.03 With the above assurances, agreements and conditions, the project is suitable for a Bank loan of US$60.0 million to be repaid over a period of 15 years, including three years of grace.  - 17 - ARGEJTINA - WATER SUPPLY PROJECT institutional Arrangement in the Provinces_ Rural Decentral- Provinces Planning Urban Operations Operations ization 3uenos Aires National Warer Works (OSt) OS0 Provincial Serv. Ye Carazarca General Adainia- GAWV GAW Yen tiation of gater Yorks (CAW) Cordoba Cordoba Provincial EPOS EPOS Tes Warer Works (EPOS) Corrientes General AdAniis- GAWV N.A. yen tration Water works (u W) Chaco State 'dater Company (SVC) suc N.A. ye Chubut Direction of Water Corporation and DWG go and Gas (DWG) municipalities Entre Rion Provincial Direction PDG or Nunici- PDWC No of 'ater and Gas (PDWG) palities Formosa Direction of Water DVS or Nunici- DVS la and Sewerage (DWS) palltiee JuJuy Administrazion of AS AS Yee Sanitation (AS) La Parpa Service of Water Nunicipalities SWSS so Supply and Sanitation (Svss) La Rioja Direction of DS N.A. so Sanitation (DS) lendoza Water Company (OSXSE) OsXSB OSNEE ere Nisiones Administration of AW or Nunici- AW Yes 'Waer Works (AYW) palitiee Neuquen Provincial Services PSV or Nunici- N/A No of Water (PSW) paLitiem Rio Negro CGneraL Directiob Provincial Admi- N/A go of Water (GDV) istration of Water Salta Direction of Water WE DWS Yes Supply (DWS) San Juan State Water SWC SVC Yes Company (SVC) San Luis ?rovincial Direction of Wunicipelities PDVS yes Water and Sewerage (PDWS) Santa Cruz Company of Public CPS H/A Yea Services (CPS) Santa Fe Provincial Water 'Works (DIPOS) DIPOS DIPOS Yen Tucumean /A N/A N/A N/A Santiago del Estero N/A S/A N/A N/A Tierra del Fuego N/A /A N/A N/A  - 18 - ANNEX 2 ARGENTINA - WATER SUPPLY PROJECT Population and Service Levels Popul- No. of cities Total pop- Z Service Levels ation with 10000 ulation Water Supply Sewerage size People (1980) (thousands) - (thousands) Greater than 1000 3 10.716 65 42 500 to 1000 3 2.132 79 42 L00 to 500 13 3.040 77 37 50 to 100 24 2.514 60 13 10 to 50 153 3.161 69 34 2 to 10 - 2.100 n/a n/a less than 2 - 4.200 18 n/a TOTAL .196 27.863 58 36  VILKNZ tu w afv Na 41 titu t Samm MU 900 %111 OS INNI1111 sle . Ou ms of n ."51, Imblims votard, il sIt via WA knifed 6431 643 -uN IMIITNIO9 ________________ n h.is n t.m _. S.01 in W.M k . t t w NO" t* - O. | .m 1.4.-_4. 1 m ka uIm - t_ 1. b1l1 I*I agIa bt l'sssIaIl* b d l * baed L.- Waist I rq.t.sim b- Ull tEl w _ me _. 1 Clb 1 Pq.IaIIa b G l - -iI q 1 0fh Sl I 9otaki.O bead ta li head :Fp1%%1 ti . 1" _ _ _ _ _ 1" . I . ftpk i. ."- t_ _ _ . _w I _W I "}wMZ t>}9l cities hp' - - - 411(44 . I 9 I III m. * I bw. - a n.... -. S ,~~~~~~~~ .m _ __- '^ ^| 'a@'"1 - -- - -- - - - 1- - -.z84l-all l ",^." .... D 1wlas s a s.) * s 1.^a.