Senegal - Eleven Centers Water Supply Project

Do y_ of The World Bank FOR OMCIAL USE ONLY Rept No. P-3850-SE REPORT AND RECOMMENDATION OF TME PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 24.1 MILLION TO THE REPUBLIC OF SENEGAL FOR A WATER SUPPLY PROJECT IN ELEVEN CENTERS February 8, 1985 ITh docane hw a retited dis sbuii am_ d many be wed by reits madly in the perforumace of thder official dute Its cote_ts nay n otdrwise be disdosed -wi World Bak StioaL  CURRENCY EQUIVALETS Currency Unir - CFA Franc (CFAF) US$1.00 - CFAF 435 CFAF 1 - US$0.0023 CFAF 1,000 - US$2.30 WEIGHrS AND MEASURES I meter (m) - 3.28 feet 1 kilometer (km) - 0.62 miles 1 liter (1) - 0.26 US gallons 1 cubic meter (W3) - 264 US gallons 1 cubic meter/second (=3Is) - 31.5 million cubic meters per year or 22.8 million US gallons per day I liter per capita per dav (lcd) - 0.26 US gallons per capita per day ABBREVIAIIONS AND ACRONYMS AfDB African Development Bank BADEA Banque Arabe de Developpement Economique pour l'Afrique BCEAO Banque Centrale des Etats de l'Afrique de l'Ouest CCCE Caisse Centrale de Cooperation Economi:que, France CEAO Communaute Economiaue des Etats de l'Afrique de l'Ouest CGES Compagnie GEnerale des Eaux du Senegal CAA Caisse Autonome d'Amortissement EEC European Economic Comumanitv FAC Fonds d'Aide et de Cooperation, France ICS Industries Chimiques du Senegal IGIP Ingenieur-Gesellschaft fur Internationale Planungsaufgaben ibH Kfw Kreditanstalt fur Wiederaufbau, FRG ME Ministere de l'Hydraulique OCAM Organisation Commune Africaine et Malgache SmIG Salaire Minimum Interprofessionnel Garanti SOME Service des Operations et de la Maintenance Hydraulique (MH) SO-EES Societe Nationale d'Exploitation des Eaux du Senegal FISCAL YEAR Government: July 1 - June 30 SON-EES: January 1 - December 31  FOR OFFICIAL USE ONLY REPUBLIC OF SENEGAL ELEVEN CENTERS WATER SUPPLY PROJECT CREDIT AND PROJECT SUNMKARY Borrower: Republic of Senegal_ Beneficiarv: Societe Nationale d'Exploitation des Eaux du Senegal (SONEES); 14inistere de l'Hydraulique (ME). Amount: IDA Credit of SDR 24.1 million (US$24 million equivalent) Terms: Standard_ Relending Terms: US$9.5 million equivalent of the IDA Credit would be onleut to SONEES on IBRD terms (20 years, including 5 years of grace). SONEES would bear the risks related to exchange rate and interest rate variations. US$9.5 million equivalent would be passed on by the State as contribution to SONEES' equity. Project In line with the Government's policy to redress and Description: restructure the parapublic sector, the objectives of the proposed project would be to assist the Government in strengthening the urban water and sanitation sector by transforming SONEES into an entity with a capacity to develop and operate the sector without recourse to Governx2ent subsidies. The project would also aim at assisting the Goverment in defining the best solution for the expansion of the Dakar/Cap Vert water supply system, in developing sound investment planning, maintenance and cost recovery in the rural water supply sector, as well as in promotin- appropriate technologies in the urban sanitation subsector. In support of these objectives, the project would include: (i) a rehabilitation component for SONEES, including technical assistance, consultancy services, office space, training, as well as additional working capital; (ii) construction and rehabilitation of boreholes, water treatment, storage, transmission and distribution facilities, house crnnections and standpipes in eleven secondary centers; (iii) feasibility studies for the Dakar/Cap Vert water supply system, (iv) rural water supply technical assistance and institutional/policy studies; and (v) urban sanitati'on studies. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Project Benefits: The proposed project would support the Government's objective of enhancing the economic performance of the sector through improved investment planning, programming, project design and cost recovery. By 1991, it would benefit an additional 280.000 people in the eleven centers covered by the project (an increase of 66%) through domestic connections or access to standpipes, half of the additional population served belonging to the urban poor. Proiect Risks: Project risks relate to possible cost overruns caused by delays ia procurement and construction, to improper operation and maintenance by SONEES, and to the general ability of the latter to meet the demanding challenges of institutional development. The risks relating to cost overruns have been minimized by basing projections on actual cost of similar works being undertaken in the country and by using the regional profile for the project implementation schedule and sufficient contingencies for foreign and local currency expenditures. Operational and maintenance risks are being reduced by technology which takes into account local technical capabilities and by a substantial technical assistance program to strengthen SONEES's operations. The institutional development risk, while real, is mitigated by the Government's determination to redress the parapublic sector and its commitment to this investment; moreover, SONEES's performance would be closely monitored.  -i- Estimated Cost: Local Foreign Total (Excluding Taxes) US$ million Water Supply Systems in Eleven Centers 4.0 6.5 10.5 Rehabilitation of SONEES' Operations 1.0 8.3 9.3 Water Supply and Sanitation Studies 0.3 1.3 1.6 Base Cost 5.3 16.1 21.4 Physical Contingencies 0.8 1.5 2.3 Price Contingencies 3.2 4.1 7.3 Project Cost 9.3 21.7 31.0 Refinancing of IDA Engineering Credit 0.5 2.0 2.5 (Cr. S-23-SE) Interest during Construction 1.8 0.7 2.5 Total Financing Requirements 11.6 24.4 36.0 Financing Plan: IDA 5.1 18.9 24.0 CCCE 2.8 4.8 7.6 SONEES 3.7 0.7 4.4 Total Financing 11.6 24.4 36.0 Estimated Disbursements: FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 3ibrem s _ US$ million Annual 8.5 3.4 2.5 2.6 2.4 2.0 1.4 1.2 Cumulative 8.5 11.9 14.4 17.0 19.4 21.4 22.8 24.0 Internal Economic Rate of Return: 9%, using agreed water tariffs as a proxy for benefits. Staf' Appraisal Report: No. 4119 of Februarv 1, 1985 Man: IBRD No. 16700R  IbTERNATIONAL DEVELOPHENT ASSOCIATION REPORT AND RECOMMEDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLTC OF SENEGAL FOR THE ELEVEN CENTERS WATER SUPPLY PROJECT 1. I submit the following report and recommendat.on on a proposed Development Credit to the Republic of Senegal for SDR 24.1 million (US$24.0 million equivalent) on standard IDA terms to help finance the Eleven Centers Vater Supply Project. The Caisse Centrale de Cooperation Economique (CCCE) of France has provided a loan of FF 66 million (USS7.6 million equivalent) to Societe Nationale d'Exploitation des Eaux du Senegal (SONEES) for 16 years, including six years of grace, at 5% per annum with a guarantee fee of 1 imposed by the Republic of Senegal. PART I - THE ECONOMY 2. A report entitled "Senegal: Country Economic Memorandum" (5243-SE) was distributed to the Executive Directors on November 5, 1984. Country date :opear in Annex I. Economic Structure and Past De-zelopments 3. Three-quarters of Senegal's territory lies in the Sahel zone, wbich suffers from low rainfall and periodic droughts. The mainstays of the tradi- tional economy are millet cultivation and nomadic cattle-raising for domestic consumption, and groundnut cultivation for export. The modern sector of the economy is concentrated in Dakar, the capital, a city of over one million inhabitants, the economic base of which consists of excellent port facilities. an important industrial sector, and a small but fast-growing tourism industry. With a population of 6.2 million in mid-1983, Senegal's per capita GNP for 1983 is estimated at US$440. 4. At Independence in 1960, Senegal lost its privileged position as the center oF French West Africa. and subsequeatlv had to adapt to reduced economic, administrative and political circumstances. In the latter part of the 1960s, income from groundnuts (the principal export) fell due to ur.favorable weather and lower export prices resulting from the loss of EEC special preferences. Over the decade, the Senegalese economy marked time as real output increased at a rate estimated at 2.5% per annum, hardly more than the rate of population growth. 5. Economic management became even more difficult during the 1970s as a result of the growing unreliabi-lity of agricultural production and its linked effects on fiscal and export revenues. During the 1970s, Senegal's groundnut production was again hit by sharp climatic fluctuations, and even with higher rates of private and public investment, average CDP growth did not rise abeve the level of the previous decade. Buoyed bv a series of good harvests and relatively high international prices, real CDP increased at about 5% a year  - 2 - between 1973 and 1977, but then declined by 2% a year between 1977 and 1981, reflecting the effect of three severe droughts. A marked recovery occurred in 1982 with an estimated 10% real growth in GDP. Results of the 1982/83 agricultural season were also good, leading to an estimated 6% growth of GDP in 1983. A 40Z decline in the 1983/84 groundnut and cereal harvest due to another severe drought in the Sahel region has been followed by a mediocre, but somewhat improved, harvest in 1984/85. 6. Fluctuations in physical output are aggravated by the price volatility of Senegal's major exports and imports. For example, in 1974, the terms of trade improved by over 21% in one year, due to exceptionally high prices for phosphate rock, Senegal's second export commodity; however, in 1975, export prices for groundnuts declined sharply, followed by a decline in phosphate prices. Increases in imported oil and rice prices brought a further deterioration in the terms of trade, causing a total loss in income of roughly 6% of GDP between 1974 and 1982. This deterioration in terms of trade, along with the unsatisfactory performance of the economy as a whole, led the Govern- ment to launch an economic and financial stabilization program in 1980. The main objectives of the Government's five-year program were to stabilize the economy during the first two years and to achieve an economic growth rate of 4% per annum in the following three years. This program was supported by an Extended Fund Facility (EFF) of US$243 million equivalent, approved by the IMF in August 1980, and a Structural Adjustment Loan/Credit (SAL) of US$60 million equivalent approved by the Bank in December 1980. 7. The structural adjustment program consisted of an economic stabili- zation plan (agreed with and monitored by the IMF), introduction of new produ- cer incentives, reorientation of the public investment program, a change in the national policy on parastatal enterprises, and a package of structural reforms in the agricultural sector. Despite delays caused by a record low 1980/81 groundnut crop and by the change of presidents in early 1981, the Government achieved significant progress in financial arrears reduction, parapublic sector marnagement and industrial incentive policies. However, in other areas, and especially in the reform of agricultural policies and institutions and in reduction of the current account and fiscal deficits, action was disappointing. The SAL second tranche of US$16.2 million was cancelled on July 1, 1983. Recent Economic Developments 8. The overlay of acute structural and financial problems which Senegal had suffered for seven years was compounded in 1983/84 by the return of severe drought conditions. These reduced by almost 40 percent the volumes of agricultural crop production available both for export (groundnuts) and for domestic consumption (mainly cereals). The drought, probably the second most severe since 1972-73, had a negative impact on the level of economic activity in 1984, on Senegal's balance of payments and, indirectly, on its public finances. Despite these difficulties, the current account deficit was reduced in 1984, according to preliminary estimates. 9. While there are signs that the secondary sector may have been relatively unaffected by the impact of the latest drought, prospects for a sustained recovery in output and employment are still uncertain not only because of climatic aberrations, but also as a direct result of the persistent financial crisis. Although the economy appreared to have recovered strongly in 1982 and 1983 from the effects of the two preceding drought-affected years, restoring  - 3 - real per capita income to its 1979 level, GDP probably fell by about 4.0 percent in 1984; it would have been even lower without the growth in fisheries, petroleum refining and other export-based industries, notably fertilizers, for which a 200,000 tpy phosphoric acid plant came on stream at mid-year. 10. In August 1983, following the announcement of measures to eliminate subsidies on petroleum and imported food products, an IMF standby was agreed for 1983/84, with commitments to observe strict public employment limits and domestic credit ceilings. This program, which aimed at reducing the current account deficit by more than three percentage points of GDP and reducing the overall fiscal deficit from 9 to 4.8 percent of GDP on a commitment basis, was successfully completed. A new standbv covering an 18-month period to June 1986 was approved by the IMF Board in January, 1985. It is clear, however, that in future years Senegal's drawings on further IMF resources would largely be offset by its repurchase a-ad interest obligations due on outstanding credit, requiring an increase in budgetary assistance from other sources. Producer and Export Incentives 11. The structural adjustment program addressed the need to improve Senegal's trade balance by increasing the basic rate of import duties from 10I to 15% of f.o.b. value and by introducing an export premium system for certain manufactured goods. The export premium system has had a positive impact on export and employment levels in some of the five industries to which it was applied, especially fish processing. An extension to 20 other product lines, as well as a change in the payment system to a value-added basis, was introduced in 1983. In February 1982 the Government announced a 31% increase in the official consumer price for rice, which was again raised substantially (24%) in August 1983 and (by another 23%) in January 1985, in order to reflect higher import costs and to provide a measure of protection for domestic cereal production. The net producer price for groundnuts was increased substantially in 1981, then lowe-:ed in 1982 when export prices for groundnut oil fell sharply and was subsequently (December 1984) restored to its 1981 level. Cereals are marketed mostly through private channels but the official floor prices were raised by about 10% in late 1984. 12. A major constraint on the Goverrment's finances and the balance of payments is the serious and growing burden represented by service of the external foreign debt. This has now been rescheduled four times with the Paris Club, as well as with the banks, and is projected to average around $250 million per year over the next four vears, without further reschedulings. At the last Paris Club meeting, in January 1985, creditors agreed to a significant softening of the terms for rescheduling of Senegal's repayments due this year. Investment Program 13. The outlook for investment has deteriorated since the establishment of the structural adjustment program in 1980. While the latter imposed ceilings on the investment program to reestablish macroeconomic equilibrium, implementation  -4- of even the reduced program has become problematic because of financing problems. In the present climate, a careful screening of new investment projects is particularly needed, together with increased attention to rehabilitation and maintenance needs of existing assets. In view of the difficult public finance situation, the Government's ability to generate public savings for financing the investment program will remain very constrained during the next four-year development plan covering fiscal years 1986-89, and the investment level itself will be largely determined by the availability of concLssional foreign resources. Parastatal Sector 14. Reform of the large parastatal sector in Senegal continues to be a high priority. Over the last three years the Government has taken significant steps to reduce the budgetary burden presented by non-viable enterprises (through the liquidation of about 20 companies) and has transferred ownership of several other companies to the private sector. For some of the remaining public enterprises, the Government has moved to improve performance by negotiating multi-year contrats-plan which set financial objectives for company operations and spell out the reciprocal obligations of the Government and enterprise managers. 15. To date, the Government has signed seven contrats-plan, including one for SONEES, and several others are well advanced. The objectives of the Second Parapublic Technical Assistance Project, approved by the Board in July 1983, were to provide technical assistance to 12 public enterprises for the development of rehabilitation programs, which can serve as the basis for realistic contrats-plan, and to strengthen the institutional framework for performance monitoring. The proposed Eleven Centers Water Supply Project clearly supports these objectives. Long-term Prospects 16. The Government's long-range development strategy continues to be based partly on the promotion and diversification of agricultural and export-oriented activities. The agricultural program calls for the development of areas less susceptible to drought (Casamance and Eastern Senegal) where rainfed cash crops other than groundnuts can be grown, and increased incentives for domestic millet and maize production to replace imported rice. Agricultural research is being oriented more to farming systems than to individual crops, with the objective of lowering the costs of yield-raising agricultural techniques and better adapting them to farmers' constraints. Irrigated cereal production is being developed in the arid northern part o' the country along the Senegal River. Construction has started on the two large dams planned for the Senegal River by the Organisation pour la Mise en Valeur de la Vallee du Senegal (OMVS), and the first (Diama) should be completed by 1986. The Government's new agriculture policy aims to reduce the present high level of state subsidies required on irrigated rice, which otherwise will severely constrain the pace of new irrigation development.  17. The $250 million ICS phosphoric acid/fertilizer project started commercial operations during 1984, and the combination of export subsidy/import duty increase and Senegal's attractive investment code should help to attract more light export industries, once the international economy has improved. Export diversification is necessary to offset the uncertain prospects for groundauts, still Senegal's main export commodity in terms of domestic value-added (fish exports from Senegal have a verv high import component). Senegal's groundnut oil exports suffer fron irregular production and from an increased supply to EEC markets of competing vegetable oils, which has tended to narrow the price premium previously enjoyed by groundnut oil. 18. The assistance provided to Senegal in support of the Government's 1980-85 stabilization program has helped the country survive a period of extraordinary economic difficulty and to start to address some of its most difficult problems. However, the overextended public sector, as well as heavy domestic arrears and external debt service charges, continue to impose serious burdens on public finance and on the current account of the balance of payments. The Treasury will not be able for a few years to absorb additional recurrent cost charges from development projects and will continue to need exceptionally high shares of foreign financing for the investment program and for budgetary assistance. MIoreover, a much more stringent policy is being applied with respect to Government guarantees for private borrowing. The persistence of the financial crisis has helped persuade the Country's planners of the necessity for a reassessment of longer term development strategy and for the establishment of a new program of action to achieve the required structural adiustments. Such a program was presented to the Consultative Group meeting in December 1984 and endorsed by the donors. The Bank aims to strengthen its support for the Government's efforts to stabilize and restructure the economy, in coordination with the IMF and other donors and within the limits of availab'lity of funds on IDA terms. PAR. II - BANK GROUP OPERATIONS IN SENEGAL 19. As of June 30, 1984, the Bank Group had approved 57 operations in Senegal for a total of US$544.6 million, including 32 IDA Credits, 12 Bank loans, five blends of Bank and IDA funds, five IFC operations, two blends of Bank and IFC funds, and one blend of Bank, IDA and IFC funds. Physical execu- tion of projects is progressing reasonably well, although some operations are affected by the shortage of counterpart funds due to the Government's continu- ing difficult public finance situation. Annex II contains the Status of World Bank Operations in Senegal. 20. Until a few years ago, our assistance was mostlv project-oriented with a strong emphasis on diversification of the economy and improvement and expansion of basic infrastructure. The acuitv of the financial crisis of the past several years has led to a major shift in our strategy, which now has the following three main objectives: (a) to promote the long-tern development of the country by supporting well-prepared investment and rehabilitation projects within a framework of appropriate sectoral policies and institutional reforms;  (b) to pursue an economic policy dialogue with the government, supported where appropriate through technical assistance and non-project lending operations, aimed at restoring in the medium-term a sound financial basis for development efforts; and (c) to contribute to improved aid effectiveness in Senegal by acting as the focal point for greatly increased aid coordination between donors and government, at the same time assisting the latter to strengthen its own planning and aid coordination ability. 21. In agriculture, operations have aimed at fmproving the productivity of traditional food and cash crops, supporting diversification into new crops and regions, and enhancing forestry outputs and agricultural research. Most recently, the Board approved a cotton/food crop project for the rainfed regions of Eastern Senegal and Upper Casamance. Prospects for developing irrigated rice farming in the Senegal River Valley along the northern border of the country are being examined for a possible future project. 22. Diversification has also been supported by lending to the growing industrial sector through the Societe Financiare Senegalaise pour le D6veloppement de l'Industrie et du Tourisme (SOFISEDIT), a development finance company established with Bank assistance in 1974, in which IFC is a shareholder and for which three lines of credit have been approved. The Bank has also financed the rail infrastructure component for the ICS phosphoric acid/fertilizer complex and an engineering credit to promote development of Senegal's phosphate industry. In response to the effects of the 1979 oil crisis, the Bank has also financed a petroleum exploration promotion project, and a study of the possible uses of peat reserves, to assist the Government in its search for economical new energy resources. 23. Past projects have strongly supported modernization and expansion of the country's infrastructure in all modes of transport: highways, rail, port and airport. But with the stagnant economy and heavy past investments, emphasis is now being placed on better utilization and maintenance of existing facilities. To this end, three projects were approved during FY84: a Fifth Highway Project addresses the Government's limited capacity to provide funds for road maintenance; the Dakar Container Port Project includes rehabilitation and maintenance of the Port of Dakar; and the Technical Assistance Project for Urban Management and Rehabilitation emphasizes maintenance and rehabilitation of urban infrastructure in support of industrial development. 24. As in infrastructure, the Bank is supporting the rehabilitation, modernization and expansion of the major public utilities. In tele-communications, preparation is underway on a project which would restructure and reequip the sector entity. In electric power, an engineering credit approved in 1980 led to sector reorganization, and a follow-up investment project aimed at rehabilitation and expansion of generating capacity and at energy conservation is now under preparation. Finally, in the urban water supply and sanitation sector, an engineering credit, approved in 1979, laid the groundwork for the preparation of the project described in this report.  - 7 - 25. While Bank strategy has supported the emphaais on financing produc- tive projects and rehabilitation needs, it also recognizes the need to support the social sectors, with due consideration to the capacity of both the Government and users to bear the recurrent costs involved. In education, efforts have been directed at primary education and at technical and vocation- al training to support activities in the productive sectors, and in health, efforts have been directed at primary care in the rural regions. 26. As it became increasingly clear that many of Senegal's economic and financial problems run across the board and could not be addressed exclusively through project lending, the Bank program began to shift in the late 1970s towards multi-sectoral technical assistance and structural adjustment lending. Two operations in support of this effort are currently being implemented: in the parapublic sector, a second parapublic technical assistance project was approved in Julv 1983 to help consolidate results already achieved under the first project and to begin rehabilitation of some kev public enterprises through detailed action plans; and a technical assistance project for economic and financial planning was approved in August 1980 to help the Ministry of Planning evaluate priority projects and monitor the investment program and the Finance MIinistry to strengthen its debt management capability. 27. Given the need to focus Senegal's public investment program on high- priority rehabilitation and maintenance needs and developmental recurrent costs, improved donor coordination is now assuming increased importance. The Bank is pursuing its economic dialogue with Senegal in close coordination with the IMF and bilateral and multilateral donors. In this connection, the Bank convened a first meeting of the Consultative Group in December 1984 at which agreement was reached on the policy measures and assistance levels and aid coordination mecharisms needed to enable Senegal to overcome its economic and financial difficulties. The Bank is following up on this meeting by examining the possibility of a structural adjustment operation and by organizing of sector meetings of interested donors on the power, water and agriculture sectors. A second CG meeting is planned for mid-1986 to consider the Government's new investment program. 28. The Bank Group's share in total external aid disbursements to Sene- gal over 1980-83 averaged approximately 20%, of which roughly two-thirds was IDA-financed. The Bank Group's share in outstanding disbursed debt was 18% at end-1983 and may approach 20% by 1985. The Bank Group's share in external debt service is expected to increase from 3.7% in 1980 to about 7.5Z in 1985. PART III - TIIE WATER SUPPLY AND SANITATION SECTOR Water Resources 29. Water resources in Senegal are unevenly distributed, scanty and only partly assessed. Three perennial rivers border or cross the country: the Senegal in the north and east, and the Gambia and the Casamance in the south. Although generally limited in both quantity and quality, groundwater is the  - a - country's principal water supply source. A firm assessment of the existing capacity and potential yields of the aquefers, especially the deep maestrichtian acquifer which underlays 75% of the nation, is still lacking but will be undertaken with French bilateral aid. Water Supply 30. By mid-1982, Senegal's 37 urban centers accounted for 2.2 million inhabitants out of the country's total population of 6.0 million. Of these, 1.2 million lived in the Dakar area. About 752 of the urban population have access to piped water supply systems, 28Z through domestic connections and 4.-7 through public standpipes. The remaining 25X are supplied by shallow wells and vendors. Average water production is 115 liters per capita per day (lcd) in the Dakar area, and 37 lcd in the secondary centers. Uuaccounted for water is estimated at about 25% oF total water production, which is not excessive. 31. Water consumed in the Dakar area is obtained from groundwater resources (total capacity of 108,000 =31d) and from the N'Goith treatment pLant at the Lac de Guiers. located 250 km northeast of Dakar (capacity of 50,000 m3Id). Aquifer extraction is approaching safe yield levels, and the quantity of water delivered to Dakar by the Lac de Guiers transmission line has been reduced over the past years bv en route tapping for irrigation of small farming plots. Prelim=nary studies have already been cocpleted to determine additional water resources for the Dakar area; the first phase, including an extension of the N'Gnitn plant and the transmission capacity to Dakar, would probably be financed by the Federal Republic of Germany (KfW). The proposed project would provide additiontl feasibility studies to consider alternative solutions, particularly a multipurpose canal to be built between the Lac de Guiers and the Dakar area as well as a preliminary assessment of the possibilities for re-use of the Dakar area sewage effluent for irrigation in order to reduce the use of drinking water for irrigation. About 75Z of the water production of the other 36 urban centers is obtained from groundwater sources, a significant part of which is from the deep maestrichtian aquifer. 32. Under the proposed project. the water supply systems of eleven secondary centers would be rehabilitated and expanded. These centers represent 25% of Senegal's urban population and include eight of the ter. regional capitals. Rehabilitation and expansion of the Sairt Louis system in northern Senegal is already underway with financing from the Federal Republic of Germany. Most of the installations of the eleven centers are old and have become inadequate due to piecemeal development, extension delays, poor standpipe spacing, decreased well productivity, and poor reservoir locations. At present, ouly 75% of the population of about 420,000 in these centers is being served by domestic connections (27%) and by standpipes (48%). Under the project. coverage would increase to 38% by connections and 51% bv standpipes. The project would benefit an additional 280,000 people, of whom 55% belong to the urban poverty group. 33. The rural population, located in about 13,000 villages, derive their water mostly from some 40,000 traditional dug wells, of which 10,000 onlv yield water during part of the wet season. Additional supplies are obtained from  - 9 - about 1.000 modern dug vells or rural boreholes which are equipped with band or powered pumps. This sub-sector is characterized by poor planning and investments, inadequate operations and maintenace, and by the absence of cost recovery policies. To help the Government improve and better manage this subsector, the proposed project would provide for technical assistance and finance institutional and policy studies for rural water supplies and sanitatIon. Sanitation 34. Public sewerage systems exist only in the larger cities of Dakar, Saint Louis, Kaolack. Thias and Louga. Services provided are restricted, however, to the central areas. The remainder of the urban population has individual disposal systems. Expensive sewerage and draiage systems recentlv constructed in Kaolack, Thias, and Louga were designed without adequate consideration of appropriate technology and do not function effectively; furthermore, there has been little interest so far on the part of potential customers to pay for the connection to the system, in view of the high cost. Also. these expensive systems are often blocked by sand deposits fro roads without bitumen surfaces. Collection and disposal of solid wastes are grossly inadequate and present a threat to public health. The proposed project would finnce a study aimed at assessing existing investments to make then more efficient or operational and to elaborate conditioas under which appropriate technology can be introduced in other secondary urban centers. Public Health 35. There are few reliable statistical data on specific water-borne and sanitation-associated diseases, although morbidity due to common enteric and parasitic diseases is known to be high throughout the country. The more commonly observed of the important water-related diseases are: malaria, various types of diarrhea, dysentery and parasitic infections directly attributable to environmental deficiencies. Riverblindness remains prevalent in areas bordering the rivers of southern and eastern Senegal. The Ministry of H.ealth is responsible for monitoring the water quality of public svstems and the reliability of waste disposal installations, but the shortage of qualified staff prevents it from routinely fulfilling its role; therefore, the Ministry has limited its intervention to urban areas at critical periods of epidemics. Sector Objectives and Investments 36. The Government's declared policy is to provide access to potable water and adequate sanitation facilities to as manv inhabitants as possible- However, in the past, this policy and the planning process for its implementation have been poorly articulated, resulting in incoherent or overambitious investments (such as those in the urban sewerage sub-sector), inadequate tariff policies, and relatively poor maintenance. This unsatisfactory situation has been perpetuated by a poor and unclear demarcation of responsibilities between the Ministry of Hydraulics and SONEES, the operating entitvy The financial  - 10 - difficulties which have faced Senegal during the last few years and the obviously inadequate sector organization have led the Government to redefine iti sector priorities. Objectives in urban water supply are to plan and implement a coherent development program based on an autonomous and financially sound SOIEES. In urban sanitation, the Government has recognized the need to discontinue investments based on expensive traditional technology, namly water-borne sewerage systems, and is now committed to developing lover cost - investments based on appropriate technology. In rural water supply, a sector which is critical in a Sahelian country affected by recurrent droughts, the Government has become increasingly aware of the shift in emphasis needed from investing in an ever larger number of wells and boreholes to establishing viable maintenance institutions and improving planning and cost recovery (para. 33). 37. Investments planned for the future are now in line with these objectives. In the near furure, the emerging priority in the urban water supply sector will be the provision o' additional resources and facilities for the growing population of the Dakar/Cap Vert area, which will suffer from water shortages in the coming years. The first phase of such a major investment is now estimated to cost some US$50 million_ In urban sanitation, investments will be limited to meeting urgent needs in Dakar under concessionary financing. In order to ensure that scarce external resources are channelled into priority investments in the urban water supply and sanitation sector, assurances were obtained at negotiations that the Government and SONEES would present a financing plan and consult with the Association before undertaking any capital expenditure project in excess of US$1.0 million equivalent (Section 4.04 of the draft DCA and Section 4.03 of the draft PA). In rural water supply, planned investments under the current Revised Development Plan (FY82-85) amount to CFAF 31.6 billion (USS72-6 million equivalent), of which 35Z were implemented during the first two vears of the Plan period. In the coming years, emphasis is expected to be placed on rehabilitation and maintenance of existing wells and boreholes. Bank Group Role and Strategy 38. The main objective of the Bank's involvement in the water sector has been to restructure the responsibilities of the sector institutions in order to improve planning, investment decisions, preparation and implementation of projects, as well as the efficiency of operations. A continuing dialogue between the Government, the Bank and CCCE over institutional reforms and sector reorganization took place during the 1970s, resulting in the first Bank Group involvement in this sector, an IDA Engineering Credit (Cr. S-23-SE) approved in April 1979. The Engineering Credit, which was closed on December 31, 1984, provided funds for studies on sector reorganization, training, finances, tariff, and technical aspects of the proposed project. This led to a major sector reform, including a change in SONEES's legal status in July 1983. The proposed project includes additional technical assistance, consultants and trainin: necessary for SONEES to implement the recommendations of those studies anc to enhance project implementation. The Bank was further involved in a sector survey completed in Februarv 1985, the purpose o' which was to review the sector investment program and to analyze the financial and economic viability of planned investments.  - 11 -. Sector Organization 39. Until July 1983, all assets in the urban water and sewerage sector belonged to the State, which serviced debt related to those assets. SOIEES, whose legal status as a joint public-private company was invalidated when its private shareholders sold all their shares to the State in 1972, was only responsible for operations and maintenance. In July 1983, SONEES was transformed by law into a Societi Nationale, fully owned by the State and municipalities but organized as a limited liability stock corporation. The law provides that facilities of the State's "private domain" are transferred to SO3EES's property, while for facilities of the state's untransferable "public domain" (mainly underground pipes), SOMEES is entrusted with full physical, accounting, and financial administration. Thus, it is responsible for project preparation, implementation and operation but tariff proposals must be approved by MR. SONEES's obligations as a company responsible for providlig an essential public service and its rights and obligations towards customers are embodied in Regulations agreed between the Government and SOnMES (Cahier des Clauses et Conditions GEnerales). This restructuring still leaves the responsibility for overall development policy in the urban water and sanitation sector to MR. The rural water supply sector remains under the responsibility of MH, which was reorganized in December 1983 to strengthen its role in developing and managing this sector. 40. Such a major and complex sector restructuring requires a transitional period to allow for a full evaluation of assets and debts and a smooth transfer of responsibilities as SONEES's management, financial and operational capacity is progressively increased. The Government and SONEES have agreed on a transitional period of five years ending on December 31, 1988. The transitional arrangements, set forth in detail in the Contrat-Plan (para. 47). allow the Ministry to complete several projects started before the reorganization. By the end of the transition period, SONEES will have full responsibility for all existing assets and related debt obligations and for the initiation and implementation of investment projects, subject to the Government's approval of SONEES's overall investment program (Section 4.05 (a) and (b) of the draft DCA). SONEES' Organization and Finances 41. SONEES has a Governing Council, with functions similar to those of a Shareholders' Assembly, a Board of Directors and a Managing Committee. The Board, composed mainly of Government officials and representatives from private and industrial users, is responsible for developing overall company policy, including the approval of the Contrat-Plan (para. 47). The Maraging Comittee, composed of several members of the Board and the General Manager, meets every month. The General Manager is responsible for daily management. SONEES's present set-up is excessively centralized. An organization study carried out under the EngAneering Credit recommended increased decentralization, especially -or the Dakar/Cap Vert operations. SONEES's management of existing water supply facilities is relatively good, while the efficiency of the sewerage operations is low: absence of preventive maintenance has caused some operating problems and in some cases, premature deterioration. SONEES has staff of about 1,300. Its Ceneral Manager and department heads are all qualified Senegalese professionals.  - 12 - However, the training needs of SONEES's intermediate level staff would be met under a comprehensive training program financed under the Project (para. 49). 42. SONEES's financial procedures and practices, in general, are satisfactory; however, several weaknesses affecting accounting, data processing, budgeting and planning, and billing/collection would be addressed under the project by means of technical assistance and expert services. SONEES's accounts for FY79-81 were audited under the Engineering Credit and accounts for FY82-83 are being audited under a Project Preparation Facility (PPF) advance. Further audits and technical assistance would be provided under the Project to help redress the shortcomings identified by past audits (Section 4.02 of the Draft PA). 43. The major problem plaguing SONEES's finances has been the exceedingly high level of unpaid customer receivables, which amounted to CFAF 10.8 billion (US$24.8 million equivalent) as of June 30, 1984. About 66Z of these arrears were owed by the Government, the Municipalities and the parastatal entities. In order to alleviate the resulting cash shortages, SONEES, for several years, had been retaining funds it had collected from customers or behalf of the State to service the debt relating to sector assets. The Caisse Autonome d'Amortissement CCAA) serviced the sector debt until December 31, 1983. As of June 30, 1984, SONEES owed the Government CFAF 5.9 billion (US$13.6 million equivalent) while the Government and the Municipalities owed SONEES CFAF 6.6 billion (US$ 15.2 million equivalent), leaving a net balance in favor of SON-EES of about CPAF 700 million (US$1.6 million ecuivalent). The settlement of reciprocal debts and claims, as of June 30, I984, between all parties was a condition of Board presentation. 44. The Government is aware of the serious cash situation a large volume of arrears creates for a public service entity; this situation -s not unique to the water sector but is common to most public utilities. It has worsened in the past few years, as a result of the difficult budgetarv situation faced by the Government, past Government practice to allocate in the budget a lump sum allocations for all public utilities, and the inadequate capacitv of the Municipalities to mobilize resources and levy taxes. To a certain extent, exceptional aid has been provided to Senegal bv some donors to alleviate this problem, provided that the Government takes measures to remedy this situation. The Government has agreed to introduce in its Budget Laws specific allocations for the water, telephone. and electricity consumption of the various ministries and municipalities based on consumption forecasts prepared by the utility companies. Thus, assurances were obtained at negotiations that sufficient and specific allocations for water consumption by the Government and the Municipalities would be incorporated in the Budget Law for TF84/85; accordingly, modification of the 1984/85 budget, which provided for insufficient water consumption allocations in the amount of CFAF 1.1 billior (USS2_5 million equivalent), was approved in January 1985. Similar assurances were obtained for subsequent years (Section 4.02 (a) of the draft DCA). Assistance would be provided to SO0HEES under the Project to reinforce its billing procedures to ensure a better and prompt recovery rate. As a corollary of this assistance and of increased budgetary allocations in the future, assurances were obtaired at negotiations that the Government and the Muricipalities would pav their water bills within four months of billing (Section 4.02 (b) of the draft DCA);  - 13 - similarly, assurances would be sought that SONEES would reduce receivables from parapublic entities and the private sector to below four months of billing by end-December 1985 (Section 4.07 of the draft PA). 45. Rehabilitation of SONEES's operations and strengthening of its finances require improving its working capital, which has deteriorated because r of slow payments for public sector water consumption as well as past postponement of tariff increases. As a result, SONEES has accumulated important arrears towards suppliers, notably the power entity, SENELEC, and has used all its overdraft facilities with local banks. To help alleviate this situation, the project would include a contribution to SONEES's working capital: this component would replenish SONEES's stocks of spare parts and chemicals. At effectiveness of the proposed Credit, retroactive financing for such snare parts and chemicals purchased since January 1, 198&, in a maximum amount of USS2.0 million is also provided under the project. After effectiveness, disbursements against spare parts and chemicals would be subject to approval bv IDA of a list of such items to be purchased annually by SONEES and of their method of procurement (Paragraph 3 of Schedule 1 to the draft DCA). The resulting improved cash position would help SONEES pay off overdue supplier accounts and overdrafts with local banks. More generally, the Bank Group is providing more comprehensive assistance aimed at breaking the chain of illiquidity affecting the central Government finances and the peripheral parapublic entities. For example, the Urban Management and Rehabilitation Technical Assistance Project 'Crs. 1458-SE and SF-13-SE), approved by the Executive Directors in April 1984, addresses the issue of mobilizing increased financial resources by Municipalities to enable them to better cover their operating expenses. Under the ongoing Second Technical Assistance Project for the Parapublic Sector (Cr. 1398-SE). the broader issues of fivercial relations and flows between the Government and the parapublic sector are being studied with a view to simplifying procedures and facilitating settlement of reciprocal debts. Other operations are being prepared in the public utility sector with similar features in mind. Tariffs 46. An extensive tariff study was carried out under the Engineering Credit; based on its recommendations, a new tariff structure, representing an average increase of about 43%, or 13% in real terms, was introduced on September 1, 1983 (the previous tariff had been in effect since July 1980). With the legal reform introduced in July 1983, all revenues generated by the tariff accrue to SOLNEES. The present tariff includes satisfactorv indexation formulae for each component, linking the tariff to the variations in prices of major inputs; it is to be reviewed semiannuallv as part of the mechanism.s embodied in SONEES's Regulations (Cahier des Clauses et Conditions Generales) (para. 39) and Contrat-Plan (para. 47). Assurances were obtained during negotiations that such reviews w-ould be conducted in accordance with the provisions of SONEES's Regulations and Contrat-Plan (Section 4.03 of the draft DCA). The indexation formulae became applicable on January 1, 1984. Furthermore, to ensure SONEES's long-term financial viability and capacity to contribute to the development of the sector, future tariffs should enable SONEES to contribute to capita:. expenditures and workirg capital. Assurances were obtained at negotiations that  - 14 - SONEES would generate a contribution of at least 15Z of its total gross revenues to these two items (Section 4.04 of the draft PA). A rate of return covenant would become feasible for SONEES following inventory and revaluation of sector assets and introduction of a periodical revaluation procedure for these assets (Section 4.10 of the draft PA). Finally, assurances were also obtained that SONEES would maintain a 1.5 debt service coverage ratio, to be achieved, inter alia, through appropriate tariff policies (Section 4.05 of the draft PA). Enterprise Contract 47. In line with its policy of rehabilitating parastatal entities, particularly their finances, and granting them more autonomy, the Government, supported by IDA under the ongoing Technical Assistance Project for the Parapublic Sector (Cr. 1398-SE), requested SONEES to prepare an enterprise contract (Contrat-Plan). The Contrat-Plan is an agreement between the State and SONEES defining mutual commitments to reach agreed targets over a five-year period (January 1, 1984 to December 31, 1988). SONEES's Contrat-Plan covers the modalities of transfer of responsibilities between the Ministry of Hydraulics and SONEES, agreed targets for water production and sales, service levels and quality, improved billings and collection, productivity increases, and periodical tariff reviews and increases to ensure SONEES's financial viability. TDA closely followed the preparation of the Contrat-Plan under the proposed Project and the Parapublic Project. The Contrat-Plan was reviewed by IDA and was signed by Government and SONEES in December 1984. PART IV - THE PROJECT Background 48. Following several vears of dialogue between the Senegalese authorities and IDA on the institutional set-up for the urban water supply and sanitation sector, IDA financed an Engineering Project (Credit S-23-SE of May 23, 1979) to provide a better understanding of issues facing the sector (para. 38). This led to a Government decision to restructure the sector. The proposed project offers an important opportunity to help the Government implement this restructuring and redirect external assistance towards current Government priorities. The proposed project was extensively prepared in the course of the execution of the Engineering Project. Several preparation missions were undertaken in 1980 through 1982 and project appraisal was carried out in February/March 1982 with the active participation of CCCE. The legislative process leading to the reform of SONEES and the preparation of the Contrat-Plan covered much of 1982 and 1983. Pre-negotiations were held in March 1984 and negotiations in October 1984, with a Senegalese delegation led by the Minister of Planning and Cooperation. Staff Appraisal Report No. 4119-SE is being distributed separately to the Executive Directors.  - 15 - Project Objectives and Description 49. In line with the Government's policy to reform the parastatal sector, the main objective of the project would be to help implement the reorganization of the urban water supply and sanitation sector, approved by law in July 1983. To that effect, the project would he'lp develop SONEES into a strong and financially sound national enterprise responsible for planning, preparing and implementing all urban water supply and sewerage projects, as well as for overseeing efficient operation of the systems. In support of this objective, the project would aim at extending access to potable water to 280,000 people in eleven secondary centers through rehabilitation and expansion of water supply facilities. Also, the project would assist the Government in defining the best solution for the expansion of the Dakar/Cap Vert water supply system, and developing sound policies in two related areas which are of particular concern to the authorities, viz., the improvement of the institutional arrangements for planning, implementing and maintaining facilities in the rural water sectro, and the promotion of appropriate sewerage technologies aimed at meeting local needs better. To this end, the project would consist of: gi) rehabilitation of SONEES's operations through technical assistance, consultants in the fields of organization, accounting and consumer information, technical training, an increase in SONEES's working capital, (including supply of spare parts and chemicals) and expansion of office space; (i-) expansion of water supply facilities in eleven centers 1/ including drilling of 12 new wells and rehabilitation of 15 existing wells, supply and installation of 25 chlorination units, one neutralization plant, 13 km of transmission pipes, 6 reservoirs, 328 km of distribution networks, and supplies for 10,000 small domestic connections including meters and 186 standpipes; (iii) feasibility studies for the expansion of the Dakar/Cap Vert water supply system; (iv) technical assistance to the Ministry of Hydraulics as well as inst4tutional and policy studies for rural water supply; and (v) consultants services for urban sewerage studies. Project Implementation 50. The project would be executed over an eight-year period (1985 - 1992). All components would be carried out with the assistance of qualified 1 The Eleven Centers are: Louga, Linguere, Thies, Bambey, Diourbel, M'Backe, Fatick, Kaolack. Tambacounda, Ziguinchor and Kolda.  - 16 - consultants to be employed on terms and conditions acceptable to IDA. In order to firm up data on underground water resources for three of the eleven centers and to undertake other urgent preparatorv tasks (evaluation of sector fixed assets, SONEES's audits for 1982 and 1983, and recruitment of expatriate engineers before beginning construction of the civil works, expected for end-1985), a PPF advance of US$750,000 equivalent was approved in February 1984. Some major construction contract has already been awarded. 51. SONEES would be responsible for implementing the component aimed at rehabilitating its operations and strengthening its finances and the works for the eleven secondary centers. To achieve this aim, technical assistance and consultant services would be provided to strengthen SONEES's management, organizational, operational and financial capacity to assume gradually increased responsibilities. In the area of management, SONEES's General Manager would be assisted by an expatriate advisor in overseeing the transfer of sector responsibilities from the Ministry of Hydraulics and in reinforcing operational and financial control. Consultant services would be provided to implement the decentralization of SONEES's operations in the Dakar/Cap Vert region to respond better to the needs of this densely populated area. The Division of Studies and New Works, recently created by SONEES, would be strengthened by consultant services; it would be responsible for implementing all future investments. Furthermore, the project would include a comprehensive training program to be implemented with the assistance of a foreign entity, preferably a water supplv company. This program which was identified by a specialized water supply training center would create a training department within SONEES, improve management skills of SONEES higher-level staff, and focus on technical training at intermediate-level staff. On the financial side, assistance would be provided to monitor closely progress which SONEES is expected to achieve in streamlining and improving its financial performance, in line with targets embodied in its Contrat-Plan. T-o that effect, assurances were obtained at negotiations that SONEES would (i) prepare annual operating and capital expenditure budgets and submit these to IDA for review (Section 4.08 (i) of the draft PA); (ii) revalue its fixed assets on a pro-forma basis, starting with the December 31, 1985, balance sheet (Section 4.06 of the draft PA); and (iii) furnish to IDA periodical reports on monitoring indicators (Section 4.08 (ii) of the draft PA). All key advisors, consultants, and experts would be selected prior to credit effectiveness. 52. The Ministry of Hydraulics would be responsible for implementing the feasibility studies to determine the additional water resources for the Dakar/Cap Vert area and the institutional ard policv study designed to help reinforce and coordinate the Government's activities in rural water supplies. The Ministrv of Yydraulics would also be responsible for undertaking the urban sanitation component. In this sub-sector, where oversized and costly investments have been made in the past, the transitional modalities embodied in the Contrat-Plan take into account the need not to overburden SONEES with non-operational facilities and the corresponding heavy debt service. For that purpose, a study financed under the Project, to be completed within 18 nonths of Credit effectiveness, would make recommendations on the respective responsibilities between the State and SONEES pertaining to (i) debt service with respect to existing facilities, and (ii) preparation, implementation and financing of any new project initiated prior to December 31, 1988. Assurances  - 17 - were obtained during negotiations that the recommendations of the study would be reviewed with IDA (Section 4.05 (a) of the draft DCA). The Contrat-Plan provides that, until the recommendations of this study are agreed upon by the two parties, the Governmert will not undertake any new investment in the nrban sanitation subsector, will continue to service the debt relating to existing facilities, and will finance renewals and major repairs relating to these facilities. After December 31, 1988, anv new investment initiated in the subsector would be SONEES's sole decision and responsibility, subject to the Government's approval of SONEES's investment program (Section 4.05 (a) of the draft DCA). Project Cost and Financing 53. The estimated cost of the project, net of taxes, duties and financial costs, is US$31 ml'lion equivalent (including physical and price contingencies), with a foreign exchange component of US$21.7 million equivalent, or 70%. The project would be exempt from taxes and duties. Refinancing of the Engineering Credit and interest during construction would each amount to US$2.5 million equivalent. Thus, total financing requirements equal USS36.0 million equivalent, with a foreign exchange component of US$24.4 million equivalent, or 67.8Z. Project costs are based on preliminary designs and quotations obtained for similar works in Senegal and West Africa during recent years; all costs have been adjusted to reflect unit prices at end-1983. The project also includes provision for consultants and advisory services totalling 180 man-months. Physical contingencies for construction work, and for technical assistance, training, and studies have been estimated at 15% and 10%, respectively. Price contingencies have been calculated for local costs at 12% in 1984, and 10% a year thereafter, and for foreign costs at 3.52 in 1984, 8% in 1985, and 9% in 1986, 1987, and 1988, 7.52 in 1989 and 6% a year thereafter. 54. The proposed IDA Credit of US$24.0 mi'lion equivalent to the Republic of Senegal would be on standard terms. US$9.5 million ecuivalent would be passed on by the State as a contribution to SONEES's equitv under a Subsidiary Financing Agreement satisfactory to IDA (Section 3.01 (b) of the draft DCA and US$9.5 million equivalent would be onlent to SONEES on standard Bank terms, repayable over 20 years including a five-year grace period, under the Subsidiary Financing Agreement. SONEES bearing the foreign exchange risk. The remainder of the IDA Credit would finance the components (urban and rural water supply and sanitation studies) carried out bv the Ministrry of Hvdraulics (US$2.5 million equivalent) and refinance the Engineering Credit (US$2.5 million equivalent). Execution of the Subsidiary Financing Agreement would be a special condition of effectiveness of the IDA Credit (Section 6.01 (a' or the draft DCA). Under a parallel arrangemert, CCCE has already approved a loan of FF 66 million (US$7.6 million equivalent) to SONEES repayable over 16 years, including a six-year grace period, at 5%, with a guarantee fee of 1% imposed by the Republic of Senegal. Cross-effectiveness with the CCCE lean would also be a special condition of effectiveness of the IDA Credit (Section C.01 (b) of the draft DCA). The IDA Credit and CCCE loan would cover 100% of the foreign exchange cost and 79.6% of the local project costs, or 100% of the foreign component and 62.1% of the local component of total financing requirerents.  - 18 - SONEES would contribute USS4.4 million equivalent. The PPF advance of US$0.75 million would be refinanced by the proposed IDA Credit. Procurement and Disbursement 55. The component related to the rehabilitation and expansion of water supplv facilities in the eleven centers would be divided into ten major contracts of which five would be financed by the IDA Credit, and five by the CCCE loan. The contracts financed by IDA, as well as the one for expansion of SONEES's office space, would be awarded through ICR in accordance with Bank Group guidelines; they are expected to be above US$1.0 million equivalent each and prior review of bidding documents bv IDA would be required. Senegal is not eligible for domestic preference regarding civil works contracts. Spare parts and chemicals would be provided either by ICB or by international shopping with the quotation of at least three suppliers, or by the original supplier, in accordance with Bank Group guidelines. Contracts for consultants, technical assistance, and advisory services financed by IDA would be awarded in accordance with Bank Group guidelines. Contracts financed by CCCE would be awarded in accordance with their own procedures. The construction of domestic connections would be carried out by SONEES's own work force and equipment for SONEES's new office space would be purchased by local shopping. The procurement arrangements are summarized below. Figures in brackets represent amounts to be financed by TDA:  - 19 - Procurement Method (US$ million) Project Element ICB LCB Other N.A. Total Cost Civil Works 10.00 - 5.35 - 15.35 (9.25) (-) (-) (-) (9.25) Equipment - .15 3.05 - 3.20 TA, training, consultant - - 6.45 - 6.45 services (-) (-) 6.25 (-) (6.25) increase in Working Capital - Spare parts - - 3.00 - 3.00 (-) (-) (3.00) (-) (3.00) - Chemicals - - 3.00 - 3.00 C-) (_) (3.00) (-) (3.00) Total Project Cost 10.00 .15 20.85 - 31.00 (9.25) (-) (12.25) (-) (21.50) 56. The IDA Credit would be disbursed on the basis of 100% of expenditures for all contracts, except for the construction of SONEES's office space where disbursements would be 64%. Project Benefits and Risks 57. The proposed project would assist the Government in implementing an important restructuring of the urban water and sanitation sector, the most important element of which is to strengthen and develop SONEES into a fully autonomous, financially viable entity, responsible for planning, preparing and executing najor investments, and capable of operating and maintaining sector facilities in an efficient way, without recourse to Government subsidies. Benefits expected from this restructuring cannot be quantified but are considered very important. The project would also assist the Government in better de'ining its strategy in urban and rural water supply and in developing appropriate technologies in the urban sanitation sector meeting the particular needs of urban areas. 58. The water supply systems in the eleven centers would be improved and extended. The project would benefit an additional 280,000 inhabitants by 1990, providing 150,000 with domestic connections and 130,000 with access to standpipes. The project would provide 10,000 small-diameter domestic connections, benefitting mainly the urban poor. By 1990, this category would  - 20 - consume about 35% of domestic consumption in the eleven centers. US$6.5 million, or 37% of the component related to expansion of water supply facilities, would benefit the urban poor. 59. The studies for the additional water resources for the Dakar/Cap Vert area would help ascertain the best technical solution for the major investments to be undertaken in the sector over the next decade. Studies for the rural water supply sector would lay the groundwork for improved project planning and implementation. maintenance and cost recovery; studies for the sanitation subsector would lead to the development of more appropriate and less expensive technologies to be introduced in urban centers, and help avoid the recurrence of large uneconomic investments. 60. Minor cost overruns could be caused by delays during the procurement process and the construction period. However, substantial cost overruns are unlikely since proiections have been estimated on the basis of actual costs of similar works undertaken in the country and disbursement profiles of similar projects in West Africa. 61. Risks pertaining to operation and maintenance should decrease in step with improvements in SONEES's operations and management brought about by the technical assistance, consultants and training included in the project. Tariff adjustments roughly in line with inflation as well as timely payment of the Government's and Municipalities' water bills should ensure SONEES's financial viabilitv. Proiect risks are not higher than those of other ongoiag projects in this sector in the Region; close supervision and monitoring would help control these risks. 62. The economic rate of return (ERR) has been calculated using agreed water tariffs as a proxy for benefits. On that basis, the ERR is 9Z. However, this figure does not reflect the full benefits, which include improved sanitary conditions and health, which are not quantifiable. Taking the ERR and the presumed other benefits together suggests that this investment is suitable for financing. PART V - LEGAL INSTRUMENTS AND AUTHORITY 63. The draft Development Credit Agreement between the Republic of Senegal and the Association, the draft Project Agreement between Societe Nationale d'Exploitation des Eaux du Senegal and the Association. and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association, are being distributed to the Executive Directors separately. 64. The following are conditions of disbursement for the working capital component to be financed under the Credit: submission by SONEES of an annual list of spare parts and chemicals to be purchased with the method of procurement proposed (Para. 3 of Schedule 1 to the draft DCA).  - 21 - 65. Special conditions of the Development Credit are listed in Section III of Annex III. 66. 1 am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMNENDATION 67. I recommend that the Executive Directors approve the proposed Development Credit. A. W. Clausen President Washington D.C. February 8, 1985 Attachments  - 22- ARM I ASLm ? .age I of 6 -~~ ii- ^ m m SLIBCAL Em- inuis C KGMA1U)AG la MD C gTl imm lb usi 19~ S1_ em s. s = sainl u uz - cmin ~~~~~~~~~~~~~~~. Z CC ~ L . 9.MO 10.3 . 4w - CwmC c) io-. no-0 4go.. 1uz9 1249..6 - _ - .~ CX210CAMw OrL G) 30 3f2.0 204.0 5s.0 422_ VOwR7 uzm -cc _OIAZZ.D-IKAI CM_3S3 36.0 439. 4024.0 - can l 0aAM CZ or TAL) 23.0 30.0 34.3 29.7 2 PWca2m Iv Wm 2DW O(IL) *0. - SrATZO P0r0AU0 (CHUM) 35-7 ER SQ. lJ_ S7.8 Z24 29.9 55.8 36.3 PI SQ. EL aml. LAND 35.1 42.0 53.7 121.5 441.7 POICLAIT AG S=MMUE CZZ) 0-14 S 42-7 43.9 44.9 45-4 43.4 1544 uS 54-3 53.2 52-4 51-7 53_1 65 DA 3.0 2_9 2.5 2_9 3.3 2_ _ 2_3 2.* 2.5 2.8 MAN 3.0 4C9 3_7 5-2 4-5 Ce am= M=E CEl M ) 47.9 46.6 47.9 47.0 40.4 CWOE 34ATE I (PER TI0S) 2S_5 Z3.2 20.5 1_2 11.5 coms P=Ocr. aE 3.2 3.2 3.2 3.2 2.8 PANZLZ PLAMK (20 s aaF ilS) ._ _ . 40 Ic _ _ 22_2 ACErOS ANCI CTIM Z9EX OF WM0 urn. FM CAPITA C1969-71-100) 125.Q 330 93.0 91.4 97.3 FM CAPIT SCPKX OF CAIES C!Z OF 3EQCX3flUI) 97.0 92-0 101.0 96.2 110.8 OTeM CCRU6S ER DAY 65.0 42.0 7210 J 657 70.1 OF iICC ASKDA. AM ICLSE 20.0 19.0 19.O /d 17.0 L7.8 GMU CAMS 1-4) DEA= RATE 45.0 40.0 34.0