Malawi - Second Lilongwe Water Supply Project

Doemen of The World Bank FOR OMCIAL USE ONLY Ciq. /)$'-4W2 Report No. 6212-MAI STAFF APPRAISAL REPORT MALAWI SECOND LILONGWE WATER SUPPLY PROJECT October 24, 1986 Water Supply and Urban Development Division Eastern and Southern Africa Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their offlcial duties. Its contents may not otherwise be disclosed without Wotid Bank authorization.  MALAWI APPRAISAL OF LILONGWE SECOND WATER SUPPLY PROJECT Currency Equivalents Currency Unit - Kwacha (MK) 1 Kwacha - 100 Tambala US$0.5556 US$1 - M 1.8 Weights and Measures 1 Imperial Gallon (Ig) - 1.2 US Gallons - 4.55 liters (1) 1 cubic meter (m3) 220 Ig, 264.2 US gallons, or 1 kiloliter (kl) 1 liter per capita per day 1 lcd 1 million Imperial Gallon per day (Imgd) - 4,546 m3/day 1 meter (m) 3.28 feet (39.37 inches) 1 millimeter (mm) - 0.039 inches 1 kilometer (km) 0.62 miles 1 square kilometer (km2) - 0.386 square miles - 247 acres (ac) Abbreviations and Acronyms BWB Blantyre Water Board DLV = Department of Land and Valuation DLVW Department of Land, Valuation and Water DOW Department of Water DSB Department of Statutory Bodies ERR - Economic Rate of Return GDP Gross Domestic Product GNP = Gross National Product Government (GOM) Government of Malawi IDA = International Development Association IDC Interest During Construction IMF - International Monetary Fund LCC Lilongwe City Council LCS - Low Cost Sanitation LWB = Lilongwe Water Board MHC Malawi Housing Corporation MLG 8 Ministry of Local Government MWS Ministry of Works and Supplies ODA - Overseas Development Administration SIDA - Swedish International Development Authority TA Technical Assistance UK - United Kingdom of Great Britain and Northern Treland UNDP United Nations Development Program WHO World Health Organisation Fiscal Year (FY) April 1 to March 31  FOR OMCIAL USE ONLY MALAWI STAFF APPRAISAL REPORT LILONGWE SECOND WATER SUPPLY PROJECT Table of Contents Page No. CREDIT AND PROJECT SUMMARY i-ii I. THE WATER SUPPLY SECTOR Country Background 1 Water Resources 3 Sector Legislation and Institutions 3 Water Supply and Sewerage Systems 5 Cost Recovery 6 Manpower and Training f Previous Bank Group Projects 7 Sector Developments and Possible Constraints 7 II. TEE PROJECT AREA Location and Features 8 Existing Water Supply and Waste Disposal Systems 8 Population Served and Standards of Service 10 Population and Demand Projections 11 III. THE PROJECT Genesis 12 Objectives 13 Technical Alternatives 13 Description of the Project Components 14 Cost Estimates 15 Project Financing 18 Imp lementat ion 18 Land Acquisition and Relocation 1Q Procurement 19 Disbursement ?1 Water Resource Aspects 22 Environmental and Pealth Aspects 21 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.  IV, THE BORROWER AND THE IMPLEMENTING AGENCY The Borrower 23 Organization of LWB 24 Institution Building and Localization 26 Training 27 Accounting and Audit 27 Billing and Collection 28 V. FINANCIAL ASPECTS LWB's Past Operating Results and Financial Position 29 Financial Performance of LWB 33 Financing Plan for LWB as an Entity 33 Future Operations and Financial Position of LWB 35 Tariffs 36 Revaluation of Assets 37 Rate of Return 38 Alternative Project Phasing 38 Affordability for Low Income Groups 39 VI. PROJECT JUSTIFICATION Project Benefits 40 Least Cost Solution 40 Economic Rate of Return and Pricing Considerations 40 Project Risks 41 Project Monitoring System 41 VII. AGREEENTS REACHED AND RECOMMENDATION Agreements Reached 42 Recommendations 44  LIST OF ANNEXES Annex Description 1. Population/Water Demand Growth 2. Description of the Proposed Water Supply Facilities 3. Project Cost Estimates 4. Project Implementation Schedule 5. Estimated Schedule of Bank Disbursements 6. Schedule for Withdrowal of Proceeds of the Credit 7. Average Water Dev.AnA for Lilongwe 8. LWB - Organization Chart 9. Balance Sheet Income Statement Source and Aprlication of Funds Revaluation of Fixed Assets Schedule of Long Term Debt 10. Project Cost Summary and Financing Plan 11. Economic Rate of Return Calculations 12. Technical Assistance and Training Program (ODA assisted) 13. Proposed Monitoring Guidelines 14. Selected Data and Documents Available in the Project File MAPS I_RD 19698 - Project Area IBRD 19697 - Supply Area  MALAWI SECOND LILONGWE WATER SUPPLY PROJECT Credit and Project Summary Borrower: Republic of Malawi Beneficiaries: Lilongwe Water Board, Ministry of Local Government, and Lilongwe City Council Amount: SDR 16.6 million (US$20.0 million equivalent) Terms: Standard IDA terms Relending Terms: The Government will onlend US$19.4 million equivalent to the Lilongwe Water Board (LWB) at a rate of interest of 11 percent per annum, for a period of 25 years, including six years grace, during which period the interest due to the Malawi Government would be capitalized. The Government would bear the exchange rate risk. The onlending rate is expected to be positive in real terms over the life of the project. Project Description: The objectives of the project are to extend and improve the water supply system of Lilongwe, Malawi's capital city, to strengthen LWB's management and operational efficiency, and to study future options for Lilongwe's water disposal and sanitation systems. The project includes construction of a new earthfill dam, remedial works on an existing dam, extension of the water treatment plant and of the water distribution system, training and management staff support for LWB, and feasibility sWudies on Lilongwe's sanitation and sewerage systems. The project would provide safe water for an additional 110,000 inhabitants of Lilongwe. Risks: The main risk is that LWB would not generate enough revenue to ensure its financial viability. To minimize this risk, the project is based on conservative demand forecasts. The Government, in line with its overall policy regarding financial self-sufficiency of parastatals, has agreed to permit LWB to increase water charges as needed so as to be financially self-supporting.  - il - Estimated Cost: Local Foreign Total - ml ton) -- Water Supply Extension 7.1 11.8 18.9 Management Staff Support and Training 0.0 1.0 1.0 Sanitation Pilot Project and Study 0.1 0.4 0M5 Total Base Costs 7.2 13.2 20.4 Physical Contingencies 0.9 1.4 2.3 Price Contingencies 3.5 4.3 7.8 TOTAL COSTS 11.6 18.9 30.31/ Financing Plan: Local Foreign Total ----(US$ million)- IDA 4.5 15.5 20.0 European Investment Bank 3.7 2.8 6.5 Overseas Development Administration - 0.7 0.7 LAB 2.2 - 2.2 Government of Malawi 1.1 - 1.1 TOTAL 11.6 18.9 30.5 Estimated Disbursement of IDA Credit: IDA FY 1987 1988 1989 1990 1991 1992 1993 - _ _- (US$ million)- Annual 0.6 2.6 4.7 4.9 4.4 2.3 0.5 Cumulative 0.6 3.2 7.9 12.8 17.2 19.5 20.0 Rate of Return: Important non-quantifiable benefits would accrue from improved health, improved environmental conditions, and increased labor productivity. Based on incremental water sales and increaased tariff levels the economic rate of return is 5.5 percent. I/ Taxes are negligible since virtually all items would be exempt from import duties and sales taxes.  MALAWI LILONGWE SECOND WATFR SUPPLY PROJECT I. THE WATER SUPPLY SECTOR Country Background 1/ 1.01 Malawi is a small, landlocked country in Southeastern Africa that covers an area of 118,500 square kilometers with a population of 7.06 million in 1985. The country's major assets are moderately fertile soils, substantial water resources and a climate that is ideal for crop production. Three quarters of the land area of Malawi form plateau zones (the southern extension of the Gxeat Rift Valley system) with altitudes varying between 800 meters and 1,400 meters. Unlike its reighbors, Malawi has no substantial explored mineral resources. 1.02 Although one of the world's poorest countries, Malawi, with a per capita GNP of US$210 (1983), recorded significant achievements over the last two decades. Between 1967 and 1979, the Malawi economy displayed vigorous growth. Real GDP grew at an average rate of 5.5 percent per annum, corresponding to a per capita income growth rate of nearly 3.0 percent per annum. During the same period, gross dorestic investment (GDI) increased at an annual rate of 12.5 percent, raising investment's share of GDP to 29 percent in 1979 from below 15 percent in lQ67. Meanwhile, domestic savings rate rose from 4 percent of GDP in 1967 to 17 percent in 1979, increasing the share of investment financed from domestic rescurces to about 60 percent. Over the 1967-79 period, export volume grew at an annual rate of 4.5 percent, while import volume grew at 3.5 percent. The impressive growth was achieved, despite limited natural and human resources, through a realistic Government economic policy that encouraged export-oriented agricultural and agro-industrial growth. The overall policies of the Government provided an attractive environment for investments by foreign capital and private entreprises. 1.03 However, in recent years the growth of the economy has been checked by: (a) a rapid rise in import prices (particularly fuel, capital goods, and intermediate goods) and swings in export prices of tobacco, tea and sugar, resulting in a 40% fall in Malawi's terms of trade between 1977-1980; (b) droughts in 1980 and 1981 which caused a decline in export volume and forced the country to import maize in large quantities; and (c) the rising external transport costs dte to increasing ocean freight charges, port congestion in Mozambique and Tanzania and disruption of rail 1/ The Bark's country economic memoranda of February 8, 1982 "Growth and Structural Change: A Basic Economic Report (No. 3082a-MAI), and of October 4, 1985 "Economic Recovery: Resource and Policy Needs, An Economic Memorandum (report No. 5801-MAI) give a detailed analysis of Malawi's economy and its future prospects. The following summary country background Is drawn from both reports.  traffic from Beira and Nacala in Mozambique, Malawi's traditional entry ports. As a result of these difficulties, between 1978 and 1981, the country experienced a period of: rising current account deficits in the balance of payments; a rising debt service ratio; a sharp decline in GDP growth rates that reached a low of -5.2 percent in 1981; declining GDS and GDI rates; and rising Government budgetary deficits. 1.04 The crisis revealed important structural weaknesses in the Malawi economy. First, there was an acute lack of export diversification with a high dependence on tobacco, tea and sugar whose prices on the international markets are subject to wide fluctuations. Second, low producer prices slowed down the growth in smallholder agricultural production. Third, the finances and management of key parastatals and quasi-public institutions deteriorated thereby placing an added financial burden on the Government. Fourth, as tne fiscal position weakened, the Government encountered difficulties in meeting recurrent costs of projects financed by external assistance. Fifth, price controls weakened production incentives in the manufacturing, service and agricultura', sectors. Finally, public administration needed to be strengthened if it was to deal efficiently and effectively with a crisis on this scale. 1.05 Tb cope with these problems, the Government prepared a structural adjustment program in consultation with the Bank and the IMF, covering the period 1981/82-1985/86. The progrc was supported by a series of structural adjustment loans from the Bank and stand-by arrangements by the Fund and was designed to: encourage diversification of production and exports; improve performance of the productive sectors through the formulation of appropriate policies and incentives; rehabilitate, restructure and strengthen key institutions to achieve improvements in planning and coordination; and, improve resource mobilization in the public sector. 1.06 Malawi carried out the structural adjustment ptogram under SAL I and SAL II with considerable success, and implementation of SAL III is well under way. As a result of the improved policy environment, more favorable climatic conditions and better export prices, the Malawian economy began to recover in 1983/84. The balance of payments deficits on the current account was steadily reduced, despite rising interest charges, increased transportation costs, and declines in external capital flows. The Government's budget as a percentage of GDP was also reduced significantly with healthy revenue increases and fiscal discipline. Although estimates indicate that Malawi's economic recovery eltwed in 1985, it is expected that with continued implementation of the Government's SAL program, growth of per capita income can resume and financial equilibrium restored. Prospects over the next five years are for modest growth rates of per capita income as the economy continues to face serious constraints whicb include: scarcity of trained manpower; a fast rate of population growth relative to GDP growth; very high transportation costs, and a very low per capita income that limits the levels of domestic saving and investments.  -3- Water Resources 1.07 Malawi has substantial water resources. About one quarter of the country is covered by lakes, with Lake Malawi being by far, the largest. Seventy percent of the country drains into Lake Malawi or the Shire River (the lake's only outlet). Malawi has distinct wet and dry seasons. The wet season lasts from November to May with slight regional variations. Average annual rainfall is about 1,200 mm but varies widely, ranging from around 600 mm to about 3,000 mm. Because of the variations in altitude (from about 200 m to about 2,500 m above sea level), Malawi experiences a wide range of climatic conditions from tropical to temperate, producing conditions that are ideal for the production of a wide range of agricultural crops. 1.08 There is ample surface water in the lakes (Malawi, Chilwa and others), the Shire River system and other minor rivers. However, supply to a great extent is dependent on the rainfall which has marked seasonality and wide variation in total annual precipitation from year to year. Apart from the lakes and rivers, surface water in Malawi is stored in reservoirs of dams built for water supply and conservation purposes. These include the water supply dams at Blantyre, Kamuzu Dam on the Lilongwe River, small reservoirs at Kasungu, Zomba (Mulungushi), Lifupa, Tedzani barrage and many other small dams in the tea growing areas. However, total storage capacity is not significant relative to the available water resources. 1.09 Groundwater is widely available from dug wells and boreholes in three hydrogeological zones: Plateau-Highland, Escarpment and the Rift Valley alluvial Plains. Over most of the plateau areas, the geological formation is basement complex that is largely drained by "dambos" (broad, grass-covered, swampy areas with no defined channels). The highlands have little potential for groundwater supplies due to the steep slopes. A study "The Ground Water Resources of Malawi" was carried out in 1983 by ODA and the Department of Water (then Department of Lands, Valuation and Water) to assess Malawi's water resources. The study indicated that the available groundwater resources in Malawi have sufficient recharge to support the relatively low level of groundwater abstraction needed to meet present and future medium-term domestic water requirements of smaller settlements. The development of groundwater resources in Malawi has in the past been primarily for rural domestic use and fringe irrigation from boreholes and dug wells. By i982 there were, altogether, 5,500 boreholes (with about 10 percent having been abandoned), the majority of which were equipped with handpumps (about 10 percent motorpumps). According to the report, groundwater development in the immediate future will continue to be principally for rural domestic supplies because due to a widely dispersed population and the consequent high cost of distribution, only 25 percent of the rural population can be served by the rural piped-water supply program from surface sources. Sector Legislation and Institutions 1.10 The provision of piped water in Malawi is governed by the Waterworks Act of 28 April 1q26, The Act has, since then, undergone  - 4 - several amendments, the latest having been made in 1971. Supplemental legislative instruments, the Blantyre Waterworks Act and the Lilongwe Waterworks Proclamation of 1984, provide guidance for the provision of water in the cities of Blantyre and Lilongwe, respectively. The objective of tb-i Blantyre Waterworks Act and the Lilongwe Waterworks Proclamation is to strengthen the mandate of both Water Boards and provide them with autonomy to be financially self-supporting organizations,operating on sound commercial basis and be able to efficiently supply water to users in both cities. Overall, the legislative instruments provide an adequate framework within which the agencies responsible for water supply can operate effectively, even though their budget and appointment of senior staff are still subject to Ministerial approval. 1.11 The organization of the water supply and sanitation sector in Malawi was until recently fragmented. Until about 1972, the low level of activity hid the duplication of effort by the various Government of Malawi agencies involved in the sector. However, the increase in the level of activity during the 1970s highlighted the need to rationalize activities. In 1979, the first comprehensive reorganization of the management of activities in the sector was undertaken leading to the creation of the Department of Lands, Valuations and Water (DLVW) in the Ministry of Works and supplies (M4WS). DLVW later split up to the Department of Water (DOW), and the Department of Lands and t'aluation (DLV) to become a separate department within the MMWS. Currently, there are three major institutions dealing with water supply in Malawi: the Department of Water; the Blantyre Water Board (BWB) and the Lilongwe Water Board (LWB). The Ministry of Health and the Office of the President and Cabinet have minor, mainly supervisory, roles in the sector. 1.12 The Department of Water has primary responsibility for developing and managing water resources throughout Malawi, except in the municipalities of Blantyre and Lilongwe. The Department plans and implements rural and urban water systems in other urban centers besides providing untreated but protected piped water to rural areas wherever and whenever feasible. The Department currently operates more than 59 urban and institutionl water supply systems in the country and has constructed more than 40 rural piped water supply schemes. The Department works closely with the 24 District Development Committees in its rural water supply schemes. Besides water supply, the DOW is r,sponsible for water resource planning and water pollution control, provides training for its lower level staff and technical assistance to the Lilongwe Water 'Roard. The latter service to LWB is in the process of being phased-out. The Department uses its own staff to plan and implement water supply projects in the smaller towns and the rural areas, but needs to retain consultants and/or external assistance at times, to do more extensive, complex works in the larger cities. Currently, UNDP is assisting DOW draw-up a Water Resources Master Plan for Malawi, while ODA in 1982 helped DOW carry out a groundwater study. 1.13 The Blantyre Water Board (BWB) is an autonomous statutory body responsible for water supply in the city of Blantyre. BWB has a reputation for good management. It uses local staff, with a few expatriate managers,  to plan, design, supervise minor construction, operate and maintain a large and fairly sophisticated water eupply system. BWB appoints or awards contracts to consultants for larger engineering designs and supervision of construction. BWB is responsible to DOW for the technical review of development plans and to the Controller of Statutory Bodies in the Office of the President and Cabinet for the review of financial planning, budgets and expenditure. 1.14 The Lilongwe Water Board (LWB) has responsibilities for Lilongwe, similar to BWB, except that DOW still provides some technical assis.ance in planning, design, and construction supervision. The organization of LWB, the executing agency of the project's water supply component, is described under paras. 4.02-4.06. LWB's management has considerably imprived since the beginning of the Water Supply Engineering Project. To further Improve the situation, substantial management staff support and training components will be included in the proposed project. Water Supply and Sewerage Systems 1.15 Malawi's population is estimated at 7.06 million (in 1985), with a population growth of about 3.2 percent per annum. The urban population, contributing about 12 percent of the total population is growing at a rate of about 6 percent. About A3 percent of the urban population has access to safe water. In Blantyre, the Blantyre Water Board (BW`B) serven ahout 360,000 people through some 14,000 connections and 50 kiosks, produclng an average of about 45,000 m3 per day water. Piped water supply was made available in about 50 smaller urban centers in the last decade. 1.16 About 42 percent of the rural population estimated at h.iq mill :n has access to safe water from piped gravity systems, boreholes and dug oells, and private or institutional supplies. Self-help. schemes are making a significar,t contribution to the improved wattr supplies in the rural area. District development committees initiate a varie.y of small scale projects, including gravity systems, wells and hand pump schemes. While the committees rely on go ernment for advise and trainings, the key to the success of the projects has been the active contr4butlon of the community, providing labor, part of the funds and ma,ntenance of the components, allocating responsibilities among villagers. Such projects have been attracting substsntial external support from both go-vernment and volunteer agencies. 1.17 About 15 percent of the urban population are connected to community waste water systems, the remainder generally using septic tar.ks and pit latrines. The Federal Republic of Germany has helpel to finance Phase I and II of the Blantyre Sewerage Project. The city councils of Blantyre and Lilongwe are responsible for providing sewer servicee to their populations. In general, expansion of sewerage facil'ties has not kept pace with urban development in Malawi. To improve nd expanLd alterrativJ, low-cost sanitation (LCS) technologies, an LCS demonstration project has been carried out under the Lilongwe Water Supply Engineering Projert (Co 1272-MAI). Preparation of a Sanitation Feasibility Study for Lilongwe and continuation of the LCS program is included in the proposed project, with the full support of the government.  Cost Recovery 1.18 In accordance with Government's stated policy, the Blantyre and Lilongwe Water Boards should be self supporting, including recovery of capital costs. In order to achieve this goal, annual tariff increases were introduced in Blantyre, coupled with measures to increase the operational efficiency of the BWB. However, at an average tariff level of MK 0.62 per m3, water sales grew only marginally in 1984 and 1985 in Blantyre. It was, therefore, .eecded that no tariff increase would take place in 1985. The rate of return on revalued net fixed assets varied between 3 and 5 percent in the last three years. The recovery of construction and recurrent costs in the rural areas has usually been limited to the provisioni of self-help contribution. To improve cost recovery of groundwater based supplies, the Government is modifying design and construction standards to minimize investment and maintenance costs, supported by several externally financed projects, including the Bank executed UNDP-financed Hand Pump Test Project. Cost recovery for sewerage and sanitation is limited to Blantyre, Lilongwe and Zomba, where costs are partially covered by direct charges on households. Manpower, and Training 1.19 The Government has, since independence, made considerable progress in the provision of safe drinking water throughout rural and urban Malawi. However, these developments have placed a severe strain on the administrative and technical capabilities of the DOW, LWB, BWB and the district water supply units, most of which are still heavily dependent on expatriate staff and consultants. The strain is bound to increase when the Government drafts an !.nvestment plan for the next decade based on the proposals of the National Water Resourcts Master Plan that is being compiled by DOW with assistance from the UNDP's Department of Technical Cooperation for Development (final draft is expected in September, 1986). The DOW does not have the administrative and technical capabilities to coordinate with donor agencies for funding, and to supervise the implementation of such a national water supply investment plan. There is an urgent need to address at the national level the issue of manpower training for the sector. Although several manpower and training studies of the sector have been conducted in recent years, little follow-up action has been taken by central agencies to develop sector training capacity and introduce needed local programs. However, the training program, developed under the recently completed Blantyre Water Supply Project, has been successfully implemented as part of a twinning arramgement with a U.K. Waterwork Company, and assists, indirectly, the sector as a whole. To strengthen LWB, the Lilongwe Water Supply Engineering Project(CR 1272-MAI) included a technical assistance component aimed at improving management, assist the Government to assess the sector's organizat!on, manpower and training needs. The training component was a continuation of training started under the credit for the Blantyre Water Supply 'roject (CR 711-MAI) which also included an institutional development component. DOW and the comptroller of statutory bodies, who also has supervisorr responsibilities  -7- on budgetary and recruitment matters, carry co-ordinating functions for training in the sector. The evolution and content of the training component of the proposed project is described in more detail under paras. 4.11 through 4.13. Previous Bank Group Projects 1.20 The Bank Group has, to date, financed a total of three water supply and urban sector development projects. The first was in 1971, a US$7.0 million Blantyre Water Supply Project (CR 711-MAI) for the augmentation of water supply to Blantyre and strengthening BWB's management and technical capabilities. The project 's primary objectives have been achieved and the credit was closed on September 30, 1984. However, as highlighted in the Project Completion Report, due to the slower than expected consumption growth, BWB's financial performance has been below expectation. The financial rate of return for the years 1981-84 has averaged 4.4% per annum and the economic rate of return 2.0% per annum as compared with the projected 9.7% and 7.2% respectively. BWB's financial viability was maintained through tightened management, and increased operational efficiency, which were significant achievements during the project implementation period. Average tariffs were raised from MK 0.20 per m3 in 1976 to MK 0.62 per m3 in 1986, which appears to be at the price elasticity level. The Lilongwe Water Supply Engineering Project (CR 1272-MAI), which is currently under implementation, was designed to assist the Government and LWB to formulate a long-range water supply, sewerage and sanitation program for Lilongwe, prepare a feasibility study and detailed engineering designs for the water supply extension, strengthen LWB through improvements in management, financial and cost recovery capabilities, help the Government develop low-cost technologies for sewerage and sanitation, and assess the sector's organizational, manpower and training needs. The First Urban Project (CR 1528-MAI) of November 27, 1984 focuses on sectoral policy issues and provided for: development of market-based housing alternatives; establishment of a financially viable basis for replicability of the market-based program; strengthening of ancilliary functions in the housing market; and assisting the Government to carry out a Housing Subsidies and Wage Policy Study as a first step toward the phased resolution of the issue of housing subsidies. The proposed Lilongwe Water Supply Project is a demonstration of the Bank Group's continued support of the water supply and urban sector in Malawi and will help provide the water supply infrastructure necessary for Lilongwe's growth, and will assist to lay the foundation of improved sanitation in Lilongwe and other urban centers through the project's sanitation component. The Bank's further role in the sector is discussed in paras. 1.21-1.22. Sector Developments and Possible Constraints 1.21 In Malawi, domestic water supply is of primary importance in the development and use of water resources. The Government made considerable progress over the past 20 years in supplying water within reasonable distance to the rural population. Current developments are expected to extend water supply to nearly all the population of Blantyre and Lilongwe by about 1990. However, due to rapid population growth new investment will  - 8 - be required in the late 1990s. Recently completed and proposed water supply projects will serve most of the population of the smaller urban centers by the early 1990s. While it will be more difficult to provide safe water in all the rural areas by the end of the decade the development momentum of recent years is expected to continue. Progress will, however, depend on adequate external financing and the ability of the Government to allocate sufficient funds for recurrent expenditure. In spite of serious budgetary constraints, the Government intends to ensure that essential services are funded. The Bank will provide financial assistance for high-priority, long-term water. supply projects, while increasing its support for institutional development and for initiatives in low-cost, low-maintenance technology. Assistance for institution building, which began with the IDA-financed Blantyre Water Supply Project, and the Lilongwe Water Supply Engineering Credit, will be extented in future Bank Group operations, emphasizing manpower development, training and improvement in administrative and financial management. The Bank will continue to encourage the authorities to focus on cost-recovery issues. II. THE PROJECT ARFA Location and Features 2.01 The City of Lilongwe is situated at an elevation of 1100 m above sea level in the central region of Malawi, some 130 km to the west of Lake Malawi. In the early 1960's Lilongwe was a relatively small regional center with a population of less than 20,000 people. A decision was made in 1964/65 to relocate the Capital of Malawi from the Southern town of Zomba to the more central town of Lilogwe. The decade following this decision saw the population of Lilongwe rise to nearly 100,000 people and current estimates put the 1986 population at 169,000. The City has been planned as a fully integrated urban unit with provision being made for government, commerce, industry, education, recreation etc. for a population which it is projected, will approach 500,000 in the early years of the next century. Physically the City is large covering 35 km from north to south and 19 km from east to west. In 1983 a large, modern international airport was opened in the northern suburbs and the steadily increasing volume of air traffic has tended to accelerate the City's growth particularly in the commercial sector. 2.02 The climate in Lilongwe is generally pleasant being without extremes in the temperature and having two distinct seasons. The wet season runs from October/November to March/April with an annual average rainfall of 860 mm. Severe droughts are rare events and in 65 years of records no year has had less than half the averge rainfall. Existing Water Supply and Waste Disposal Systems 2.03 Lilongwe's principal source of water is an impounding reservoir on the Lilongwe river some 26 km to the south west of the City. A number of wells, boreholes and small streams providr some domestic water but in terms of volume, though not, to their users, -heir contribution is insignificant compared to that of the river. The reservoir was formed by  - 9 - the construction of the Kamuzu dam in 1966 which is a composite structure comprising a 15 m high central, free overfall, concrete gravity spillway flanked by earthfill embankments. Concerns have been expressed over many years as to the stability of the concrete section and the concerns have been vindicated by investigations carried out in 1984/85. To achieve an acceptable level of risk of structural failure the dam requires to be strengthened and the crest level raised. The reservoir has an active capacity of 4.5 million m3 and at the 1985 level of withdrawal (9.8 million m3/annum for water supply and 5.3 million m3/annum for downstream users) the frequency of failure to meet demand is about 1 in 4 years. The drainage area upstream of the Kamuzu dam is about 760 kmZ and the river system has a mean annual discharge of 4.8 m3/sec or 150 million m3/annum. Thus with adequate regulation the river could satisfy water demands greatly in excess of those currently being met. 2.04 Releases from the Kamuzu dam augment the river during times of low natural flow and water is captured at the existing waterworks which is situated in the Southern part of the town on the left bank of the river. The works have a capacity (at overload) of 30,000 m3/day, which was approximately the peak demand in 1985. The raw river water is treated by conventional coagulation, upward flow clarification and rapid gravity filtration followed by chlorine disinfection. The works were extended by 10,000 m3/day in 1984 and in 1985 the supply was virtually unrestricted for the first time since 1978. Restrictions are likely to be necessary again in 1986. 2.05 From the treatment works water is pumped east and west to two distribution centers, Dedza and Livingstone. Each of these centers supply local demand areas but in addition Livigstone despatches water by gravity to the Northern booster station located near the new City Center. In turn the Northern Booster station pumps water to Kanengo, the main distribution center of the northern suburbs. 2.06 Part of the water received at Kanengo is again pumped northward to a ground level service at Sandula which provides a gravity supply to a ground level reservoir at the international airport and to a booster station in the most northerly suburb of Lumbadzi. This recently commissioned booster station pumps water to an elevated service tank which then supplies Lumbadzi. 2.07 The existing and projected future service levels for sanitation are shown below:  - 10 - Current (1986) Projected (1993) Population _ Population % Sewerage 26,000 15 38,000 14 Septic Tanks 29,000 17 32,000 12 Pit Latrines 114,000 67 202,000 74 169,000 100 272,000 100 2.08 The Lilongwe City Council (LCC) is responsible for overall development, operation and maintenance of the sewerage system and for providing an emptying service for septic tanks and pit latrines. It is also responsible in broad terms for ensuring that the city develops adequate sanitation services to meet growth requirements. Construction of latrines and septic tanks in the extensive Traditional Housing Areas are the responsibility of the developer. There are LCC maintained separate sewerage treatment plants currently in operation: three extended aeration plants, two oxidation ditches and four stabilisation ponds serving about 26,000 people. There are also two privately operated extended aeration plants. 2.09 The three major mechanical plants are in a poor state of repair largely due to a lack of spare parts. This causes major pollution problems: the Lilongwe river receives virtually untreated effluent from these plants, which represents a major health hazard to many inhabitants downstream who use the river water for washing and drinking. The septic tank emptying fleet is not able to fully meet the demand due to insufficient equipment. Many of the existing latrines are full or in an unhygienic state due to poor maintenance. 2.10 Government is presently undertaking the first phase of an urban cn-site sanitation demonstration program, funded partially from IDA Credit 1272-MAI, as part of the Master Plan activities. Support is provided by the World Bank executed UNIP Project INT/81/047. The first phase is expected to finish by mid-1987 and would be followed by a second phase under the proposed project. Population Served and Standards of Service 2.11 Of Lilongwe's estimated population of 169,000 in 1986 about 100,000 people receive full water service from 9,000 metered private connections. A further 50,000 purchase an average of 20 lcd from public sales kiosks and some 20,000 rely upon wells and streams. Specific consumption among the consumers with private connections varies widely with garden irrigation in the dry season causing very high demands among the more affluent. The overall annual average consumption for those using piped water in 1985 was 136 lcd based upon sales recorded by the LW1.  - 11 - 2.12 The water quality is good and the incidence of water related disease among those using pij.'d water is low. Since the completion of the Kamuzu dam there has been no itOications of an increase in the incidence of either bilharzia or malaria in th? Project area. Population and Demand Projections 2.13 The Government Department of Toum and Country Planning and Stanley International have conducted extensive studies of both current and projected populations and the officially accepred figures are as follows: Annual Year Population Increase % 1982 134,000 6.0 1983 142,000 5.6 1984 150,000 6.7 1985 160,000 5.6 1986 169,000 4.8 1990 213,000 5.0 1995 272,000 5.0 2000 348,000 5.0 2005 444,000 5.0 The future water requirements of Lilongwe have been the subject of detailed investigation by the engineering consultants (Stanley International, Canada) and several scerarios were developed. The projections adopted for the project (see also Annexes 1 and 7) are as follows in terms of raw water abstraction from the Lilongwe river: Average Peak Average Year day x 103 m3 day x 103 m3 Z Loss lcd 1985 21.8 30.5 29 153 1986 22.7 31.8 26 149 1987 23.4 32.8 23 144 1988 24.16 33.8 20 140 1989 24.9 34.9 17 135 1990 26.0 36.4 15 132 1995 38.7 54.2 15 142 1997 47.7 66.7 15 158 2000 61.1 85.5 15 175 2005 85.8 120.1 15 193 Important assumptions in the above projections are that average per capita consumptions remain at their present levels untii 1990,.and that ratio of peak to average demand is 1.4. The LWB was able to provide an unrestricted supply in 1985 for the first time since 1978 and recorded sales averaged 19,400 m3/day with raw water abstraction averaging 26,900 m3/day and peaking at 32,000 m3/day. (These two figures are less accurate than the first which is well substantiated.) This leads to the conclusion  - 12 - that the averge demand for treated water in 1985 was corsiderably more than projected in the above table. The peak factor, on the other hand was only 1.2. III. THE PROJECT Genesis 3.01 Malawi has made substantial progress since independence in the provision of safe water but has given priority to Blantyre, to smaller urban areas and to rural locations. The need for additional water supplies for Lilongwe was first identified in 1978 through the Bank's Cooperative Program with the World Health Organization (WHO) and a Cooperative Project of the Swedish International Development Authority (SIDA) and WHO. As a result, a number of short-term water supply extensions were implemented, while the Government began to explore means of meeting Lilongwe's long-range needs. Under the aegis of the International Drinking Water Supply and Sanitation Decade, the UNDP in 1980 provided financing to carry out prefeasibility studies for the long range development of Lilongwe's water supply system and to prepare draft terms of reference for the associated water supply master plan and feasibility studies. The Government requested IDA assistance for the financing of the master plan and feasibility studies and during a Bank mission to Malawi in September 1981, agrement was reached with the Government on an engineering project to prepare a program for meeting Lilongw'~ 's long range water needs that IDA would consider financing. The Lilongwe Water Supply Engineering Project (CR 1271-MAI, of SDR 3.6 million) was approved in June 1982, and became effective February 3, 1983. 3.02 Implementation of the engineering project (i.e preparation of the proposed project) commenr.ed with the mobilisation of the consultants (Stanley International Limited, Canada) early March, 1983 and was carried out on schedule, except the low-cost sanitation (LCS) component of the project. The start-up of the LCS component was delayed by about one year, due to difficulties in finding a sanitation advisor acceptable both to GOM and the Bank. In order to successfully complete this component and allow for the tendering and evaluation of tenders by the engineering consultants and to continue providing management staff support to LWB the closing date of the credit was extended on GOM's request by one year to June 30, 1987. 3.03 The draft Master Plan was submitted on October 31, 1983, reviewed by end-December and the revision was issued on February 24, 1984. The consultants submitted the draft Feasibility Study Report to the Lilongwe Water Board in August 1984. After the review of the Study the Bank expressed concern that the cost of the proposed project identified in the feasisility study (estimated at US$47 million) could exceed the Government's investment capability. Concern was also expressed that the projected annual tariff increases in the financing plan required to support the proposed investment (40% in 1985 and decreasing to 11% in 1991) might be beyond the affordability of a large segment of the population and would not be politically acceptable to the Government. Based on these comments  - 13 - the consultants were requested to investigate further alternatives adopting the low demand projection and analysing the impact of these alternatives on future levels of service. 3.04 As a result of the above request, a scaled down project proposal was prepared and submitted by the Consultants on November 30, 1984 In form of an addendum to the feasibility study report. The proposed project was finally approved in early May 1985 by GOM and LWB was authorized to issue a letter of intent to the consultants to commence work on the preparation of the detailed engineering designs and bid documents. This work was completed by early 1986 and field appraisal of the proposed project took place in February, 1986. Objectives 3.05 The principal objectives of the proposed project are to augment and secure the water supply to Lilongwe, Malawi's rapidly developing capital, through the construction of a new dam/reservoir and to expand Lilongwe's water supply system to cater for the increased demand. The additional capacity would meet Lilongwe's water demands up to about 1995-1997. The project also provides for management staff support and training for LWB. The sanitation component provides for the continuation of the on-site sanitation program currently being implemented under the engineering project, and for a sanitation/sewerage feasibility study in order to prepare a long-term sanitation investment program essential to meet the waste water and excreta disposal requirements as the City grows. Technical Alternatives 3.06 In preparing the project, the consultant examined some 16 potential dam-sites, run of the river abstractions, ground-water resources and the Lake Malawi as a water source. The last three options were eliminated respectively on grounds of being impractical, inadequate or uneconomic. Cost and adequacy considerations eliminated all but four of the damaites all of which are located within the Lilongwe river basin. These four damsites were subjected to detailed examination and costed as one and two stage constructlon programs. The two-stage construction of a dam 6 km downstream of the existing dam was found to be most cost effective with the first stage serving 1997 and the second until 2005. Tised in conjunction with the existing dam which will be strengthened and raised by about 1 a, the proposed dam will assure a virtually zero risk of source failure until the demand exceeds that projected for 1997. The design of the new dam and the proposed remedial works of the existing dam were reviewed by a panel of dam experts, whose recommendations were incorporated in the final designs. It was also agreed during negotiations that a dam expert, preferably the one who had reviewed the design of the dam, would be invited from time to time to review progress in implementation and to review the completed dam, as and when agreed by the Borrower and the Association. Details of the proposed dam are given in Annex 2.  - 14 - 3.07 The bid documents for the construction of the Water Treatment Plant were based on performance specification, in agreement with Bank's policy. Detailed civil engineering and structural designs will be prepared by the consultants after the evaluation of bids and final selection of the treatment process and equipment. Description of the Project Components 3.08 The project, which is more fully described in Annex 2, consists of the following parts: A. Source Works (1) Construction of a new dam on the Lllongwe river near Masula. This is mainly a civil works contract and consists of: a) site clearance, drilling and grouting works; b) earthworks for the dam construction; c) concrete works for the spillway and outlet works; d) instrumentation, pipework and fencing; e) road and water pipeline diversions; and f) land acquisition. (2) Remedial works on the existing dam, consisting of: a) drilling and grouting works; b) post tensioning of the dam's concrete overflow section; c) civil wotks for modifying spillway and outlet works; and d) raising of crest, Including concrete and earthfill. B. Extension of water supply facilities in Lilongwe. This will comprise clvll works and supply contracts covering: (1) Extension of the water treatment plant with an additIonal capacity of 32,no l m-5/ay, including: a) civil works for the extension of river intake, and treated water storage tanks and for the' treatment plant extension; b) supply and installation of water treatment process equipment (based upon a performance specification); c) supply and installation of mechanical and electrical equipment for the raw and treated water pumping stations and for the booster pumping stations.  - 15 - (2) Extension of the Transmission and Distribution System, including: a) supply of pipes, valves and fittings - steel or ductile iron - for transmission mains , approximate total length of 23 km with diameters from 300 mm up to 500 mm; b) supply of PVC pipes, valves and fittingd for distribution mains, 100 and 150 mm diameters; c) laying steel and/or ductile iron transmission mains; d) construction of three reinforced concrete service reservoirs, two of 2,000 m3 and one of 7,500 m3 capacity and two elevated storage tanks each of 650 m3 capacity and 24 meter high together with four booster pumping stations. C. Supply of vehicles, water meters and miscellaneous equipments for strengthening the metering and the direct labor departments of LWB. D. Consultancy Services for engineering and construction supervision. E. Technical Assistance (1) for management staff support; and (2) for the implementation of a training program. F. Sanitation Component (1) Consultancy Services for the preparation of a feasibility study for Lilongwe's sanitation and sewerage. (2) Implementaticn of on-site sanitation systems (as a continuatiot, of the low-cost sanitation pilot project of the Lilongwe Water Supply Engineering Project, Credit 1272-MAI). Location of the various sites are shown on IBRD Maps 19697 and 19698. Cost Estimates 3.09 Total project cost (exclusive of interest during construction) is estimated at MK 55.00 million (US$30.56 million). Goods and services purchased outside of Malawi would not be subject to duties and taxes. No exemption of local taxes would apply, however, to goods and services purchased within the country. Estimated costs of the proposed project are shown below and a more detailed breakdown is given in Annex 3. Physical contingencies were calculated at  - 16 - 15X for the dam construction, 5% for supply of pipes and equipment, and 102 for civil works and other miscellaneous items, and were applied as a weighted average to the base line costs given in mid-1986 prices. Price contingencies reflect current international and Malawi price trends. 2, Cost for expansion of the distribution system (except minor works for infilling mains in the existing system, and for providing piped water supply in the unplanned areas) has been excluded from the project components and cost estimate. Under legislation currently in force, such as the Malawi Housing Corporation Act and the Town and Country Planning Act, developers of all new planned areas are required to pay for all water reticulation and connections. In addition, all Government departments and Ministries are required to pay charges for water connections. 2/ Price Increase,% 1986 1987 1988 1989 1990 1991-95 International: 7.2 6.8 6.8 7.0 7.1 4.0 Malawi: 11.00 10.0 9.0 9.0 9.0 9.0  - 17 - Sutmary of Project Cost Foreign MilLim wwiac MMion US$ asZ of %of a/ tcal w Total local Em4m Total lotal TOWal Water Supply CVarent 1. %ter Supply fxtension (Part A, B, C aiid D of the Project) 12.70 21.29 33.99 7.05 11.83 18.89 63 62 2. 3naenent Staff Support (Part E(1) of the Project) - 1.26 1.26 - 0.70 0.70 100 2 3. Trainirg (Part E(2) of the Project) 0.08 0.45 0.53 0.04 0.25 0.29 86 1 Water Supply Omponent, Base Line Cost: 12.78 23.00 35.78 7.10 12.78 19.88 64 65 Physical (bntirgecles 1.53 2.53 4.06 0.85 1.41 2.26 62 7 Price Cbntirgencies 6.32 7.62 13.94 3.51 4.23 7.74 55 25 Total Water upply Qinpornt 20.63 33.15 53.78 11.46 18.42 29.88 62 98 Sanitation C onit 4. (Part F(1) and F(2) of the Project) Base Line Cost 0.23 0.72 0.95 0.13 0.40 0.53 76 2 Physical (bntirgencies 0.02 0.07 0.09 0.01 0.04 0.05 78 - Price Contigencies 0.06 0.12 0.18 0.03 0.07 0.10 67 - Tbtal Sanitation Omponet 0.31 0.91 1.22 0.17 0.51 0.68 75 2 1btal oost of Project: (1+2+344) 20.94 34.06 55.00 11.63 18.93 30.56 62 100 interest 1wirig i(strurtion IUC): 16.13 16.13 &96 a/ FKcludirg interest duriig contructiin.  - 18 - Project Financing 3.10 The proposed IDA credit of 1T1M20.n million would cover 65.42 of the total project cost. The remaining financing requirement of US$10.56 million would he provided through cofinancing of ahout TISSn.67 million equivalent from the Overseas Development Administration (ODA), about US$6.5 million equivalent from the European Investment Bank (EIR), about tS9A2.23 million equivalent from LWR self-generated funds; and the balance of US$1.16 million equivalent from GOM. 3.11 The IDA credit would be on-lent to the LWB at an interest rate of liz (i.e. equivalent to 2% In real terms if inflation assumptions are correct), for 25 years including 6 yaars grace during which period the interest due to the Malawi government would be capitalised. The ODA contribution (which would finance the training program and part of the management staff support component of the project) would be 60% on grant basis and 402 on-lent to LWB on terms similar to the on-lending of the IDA credit to LWB, The EIB contribution would also be on-lent to LWB at 11% interest rate. Out of the GOM contribution US$1.11 million equivalent will be made as loan to LWB at 112 interest paid annually, and US$0.05 million equivalent would be made available on grant basis to assist financing of the sanitation component. The project financing is as follows: US$ Million Total IDA ODA EIB LWD GO0 Local 11.63 4.54 - 3.70 2.23 1.16 Foreign Exchange Cost 18.93 15.46 0.67 2.80 - Total (Excluding Financial Costs) 0.5S6 20.00 0.67 6.SA 2.23 1.16 2 of Total 100% 65.4% 2.2% 21.32 7.32 1.81 IDC 8.96 8.96 Details are provided in Annex 10. 3.12 The IDA Credit of US$20.0 million together with the ODA and EIB contribution would finance about 90% of the total costs (excluding IDC) or 1002 of foreign cost and 70% of local costs. Implementation 3.13 LWB would be responsible for the implementation of the water supply component of the project, and would retain engineering consultants for construction supervision and for the detailed civil engineering and structural design of the water treatment plant extension. 3.14 Project Implementation would begin with the construction of the new dam and the remedial works of the existing dam in early 1987, thus providing an adequate source of water by mid-I990. Other extension works are planned to comence in 1990 and would be commissioned by end 1992. An implementation schedule is included as Annex 4.  - 19 - 3.15 Implementation of the sanitation component would be carried out by the Lilongwe City Council (LCC) under the supervision of the Ministry of Local Government (tMW) over the 1987-1989 period. Land Acquisltion aud Relocation 3.16 The construction of the dam at Masula and a new water treatment plant, 25 km downstream, will involve a maximm area of 302 ha, affecting 30-40 families. Under iesign flood conditions, the inundation area would cover 370 ha. Approximately 502 of the land to be inundated is currently used for suallholder fallow farming. Acquisition of the land will be carried out as prescribed by the Land Acqulsition Act, Chapter 58.04 of the Laws of Malawi. The Act empowers the Minister whose portfolio covers land matters, to acquire land within Malawi for public use and also provides for valuation and ctapensation of such land. LWB will be required to pay for 21.5 ha which Is the proposed site (25 km. downstream from Nasula) for the new water treatment plant. The Government has indicated that it does not foresee difficulties of acquisition and relocation of the families. The people affected and their traditional chiefs were consulted and agreed to move away from the land needed for the project. Customary land for the relocated people is available in the vicinity of the recent settlement and they would continue to live under circumstances similar to their current situation and under the same traditional Chief. However, to ensure the Government's full commitment to the satisfactory handling of the land acquisition, compensation and resettlement matters, Rorrower presented on the Bank's request a resettlement plan during negotiations which was found acceptable to the Bank. Current estimates by the consultants and the Bank mission put the value of the land and the developments at no more than MK 200,000 (US$111,000), or approximately X3,700 (USA2,100) per hectare. Assurances were also sought from Government that guarantees of indemnity will be given to LWB for future land value litigations in excess of the agreed compensation sum. Procurement 3.17 Procurement would follow Bank guidelines for international competitive bidding except for purchase of vehicles and minor miscellaneous equipment. These items, whose total value would not exceed US$300,000 could be procured through local competitive bidding. Construction of individual waste disposal units included in the sanitation component would be carried out by force account. Construction materials for these individual waste disposal units that cannot be purchased as stock items from the Ministry of Works and Supply would be procured under local procedures acceptable to the Association. 3.18 A General Procurement Notice for the Lilongwe water supply expansion works was published in the Business Edition of the Development Forum on August 31, 1985, which called for prequalification for the following major contracts: (A) Construction of an earth dam, 24 m high, 750 m long with a free overfall concrete spillway, requiring approximately 500,000 cubic meters of fill, with remedial works to an existing dam; (B) Construction of a water treatment plent with a first phase capaeity of 32,000 cubic meters per day;  - 20 - (C) Supply and installation of water treatment process equipment based upon a performance specification; (D) Supply and installation of pumps, motors and associated equipment; (E) Construction of three reinforced concrete service reservoirs, two of 2,000 cubic meters and one of 7.500 cubic meters capacity; and two elevated storage tanks each of 650 cubic meters and 24 meters high, with four booster pumping stations; (F) Supply of pipes, valves and fittings (steel or ductile iron) for transmission mains, approximate total length 23 km with dia. from 300 mm up to 500 mm; (G) Supply of pipes, valves and fittings - UPVC for distribution mains; (H) Laying steel and/or ductile iron transmission mains. The response to the General Procurement Notice was substantial. A total of 113 companies from 24 different countries submitted applications. Most contractors expressed interest in more than one contract and in all a total of 350 applications were received for the eight contracts. Invitations for bids for the dam construction (Contract A) were issued end-May, 1986 and the tenders will be submitted by end-August, with six months validity of the quoted prices. 3.19 Procurement under the Project is summarized below: Procurement Method (US$ 1000') a/ Total Project Element ICB LCB Other NA Cost Dam Construction and 18.329 18.32 Civil Works (9.700) (9.70 Supply of Water Treatment, 6.136 6.13 Mechanical and ELectrical (5.530) (5.53 Equipment and Pipes Vehicles and Minor 0.189 0.18 Miscellaneous Equipment (0.170) (0.17 Construction Material for 0.167 0.16 the Sanitation Component (0.150) (0.15 Consultancy, Training, and 4.560 4.56 Technical Assistance (3.500) (3.50 Land Acquisition and 0.167 0.16 Resettlement Costs (-) (-) Management Staff Support 1.009 1.00 (0.950) (.95 Total 24.465 0.189 4.727 1.i76 30.55 (15.230) (0.170) (3.650) (0.950) (20.00 a/ Figures in parentheses are the respective amounts financed by IDA.  - 21 - Disbursement 3.20 The credit would be disbursed as follows: (i) 70% .2 foreign and 60% of local expenditure of the dam construction contract; (ii) 100% of foreign and 70% of local expenditure of civil works and supply contracts; (iii) 100% of total expenditure for all consultancy and advisory services; (iv) 100% of foreign expenditure for Management Staff Support (foreign cost of engineer/manager and financial controller). Disbursement schedule is given in Annex 6 and Schedule of Withdrawal of Proceeds of the Credit in Annex 7. In order to expedite the fleo of funds for disbursement of small payments, a Special Account would be established in US dollars with a commercial bank for the water supply component (executing agency: LWB). 3/ For major payments for the construction contracts, however, direct payments could be made to the contractors using Procedure III. Reimbursement of expenditures for all items under contracts or purchase orders of less than US$20,000.00 equivalent would be made against statement of expenditure (SOE), documentation for which would be held by the implementing agencies and be made available for inspection by supervision missions. 3.21 ODA would disburse for 100% of the cost of the training component and 100% of the foreign cost of management staff support other than that of the engineer/manager and financial controller. EIB would disburse for 30X of both the local and foreign cost of the dam construction and 100l of the cost for the water treatment plant equipment and for the electrical and mechanical equipment of the pumping stations. 3/ It was noted during negotiations that the Government was having difficulty in utilizing Special Accounts in ongoing projects for foreign expenditures because of the internal procedures currently being utilized. Because of this problem it was agreed that until the Special Account was operating smoothly, the threshold for direct payment for foreign expenditures would be reduced from the normal US$10,000 equivalent to US$5,000 equivalent.  - 22 - Water Resource Aspects 3.22 The ability of the existing Kamuzu reservoir to satisfy Lilongwe's water demands depends on three factors, namely: a) the amount of water required at source; b) the date when the natural river flows from both the Lilongwe and Likuni rivers became less then the amount required and stored water must be drawn upon; c) the date when rainfall (runoff) augments the flows in the rivers, which will exceed the amount required (no further stored water release is required). The worst combinatioin of (b) and (c) is an early end to the rains and a late start of the following wet season. Then depending upon the amount required a shortage or source failure of some degree is likely. To quantify the degree of failure the following criteria have been used in the project: - a minor shortage - only 75% of the demand can he satisfied during a three month peak demand neriod from mid-September to mid-December; - a serious shortage - less than 75% of demand can be satisfied over a period exceeding three months. To assess the reliability of a given volume of stored water to meet a given requirement the following criteria were used. - the frequency of a serious shortage should not exceed once in 100 years; - the frequency of any shortfall should not exceed once in 15 years - in a 60 years period over 99% of the 60 years total requirement should be satisfied.  - 23 - 3.23 Applying these definitions and ceriteria to the existing Kamuzu reservoir's 4.5 million m3 capacity, the probability of shortages are: Requirement Frequency of Frequency of m3/day Minor Shortage Serious Shortage 20,000 1 in 7 years I in 24 years 25,000 1 in 5 years 1 in 10 years 30,000 1 in 4 years 1 in 6 years The amount of water required in Lilongwe in 1986 is estimated to be 26,000 to 27,000 m3/day and the source is therefore at a severe and increasing risk of failure to meet requirements. Examination of records of river flows for the 29 years from 1953 to 1982 shows that at the 19R6 level of water requirement shortages would have occured in 1954, 59, 60, 68, 70 and 73. Of these six years 1954, 60 and 73 would have been years of serious shortage and in 1960 for a period of about 6 months only 60% of the required amount of water would have been available. 3.24 As the frequency of risk of failure substantially exceeds the generally accepted frequency of source failure (i.e. once in 20 years), construction of the new dam should commence without delay. This was taken into account in preparation of the project implementation schedule. In addition, the condition of the existing Kamuzu Dam also requires that the remedial works be carried out urgently. These works have been incorporated in the dam-construction contract. 3.25 The proposed dam will assure a virtually zero risk of source failure until about 1997. By about this time the treatment plant and distribution works will require a second phase extension. The source works can also be expanded, approximately doubling the storage capacity of the reservoir, raising the crest level of the dam by 4 to 5 meters. Environmental and Health Aspects 3.26 The project would contribute to maintain the present high standard of water supply and health conditions. It also includes a sanitation component aimed to improve the on-site sanitation facilities and to assist in preparing a long-term sanitation/sewerage program. The project has no adverse environmental impact. The remedial works on the existing dam which have been included in the project, will eliminate the danger of accidental flooding caased by malor damage or burst of the dam. IV. THE BORROWER AND THE IMPLEMENTING AGENCY The Borrower 4.01 The borrower would be the government of Malawi who would relend the proceeds of the IDA Credit to LWB (the implementing agency) on the terms stated in para. 3.11.  - 24 - Organization of LWB 4.02 In 1959 subsidiary legislation under Sections 3 and 4, the Waterworks Act declared the Lilongwe Municipal Council to be the Lilongwe Water Board "for the time being". The Lilongwe Municipal Council officially ceased to act as LWB on March 31, 1982, and during the following twelve months there were further changes assisting its operation as an independent body. The staff moved to new offices in October, 1982 and in early 1983 au Engineer/Manager and a Financial Controller, both expatriates took up duties as provided for under the Lilongwe Water Supply Engineering Project (CR 1272-MAI). 4.03 Until early 1984 assistance for technical planning, design and construction management was provided by the Department of Lands, Valuation and Water. This arrangement has been gradually phased out with the completion of the water augmentation scheme. Apart from receiving the Board's proposed capital development program each year for coordinating with those of the remainder of the country prior to submission to the Development Office of the President, the now Department of Water (reorganized under the Ministry of Works and Supplies) has no active involvement with the Board's affairs. 4.04. Both the Blantyre and Lilongwe Water Boards are responsihle to government through the Controller of Statutory Bodies (in the Office of the President and Cabinet). Financial plans and budget proposals are not implemented until they have been reviewed by the Controller and a joint presentation by the Controller and the Board is made to the Treasury for its approval. Senior Staff appointments are also subject to the Controller's approval. 4.05. The Board comprises a non-executive Chairman and twelve members (designated by the government) with an observer from the Department of Statutory Bodies. Under the direction cf the Chairman the Board has the responsibility of ensuring that the organization performs its functions effectively to achieve its aims and objectives and that the decision of the Board are compatible and in conformity with government policy at all times. 4.06. The Engineer/Manager is the chief executive officer and reports to the Board and to the Controller of Statutory Bodies on all matters of policy. In addition the Engineer/Manager is responsible for the following: - day-to-day management and supervision of the organization; - coordination and direction of functions in the various departments; and - direction and supervision of the planning and execution of all development projects. 4.07. The organizational structure (shown in Annex 9) recommended in the Master Plan and refined in the Feasibility Study was reviewed and approved both by government and the Board. The recommendation has been prepared to represent the estimated requirement at the time when the proposed project is commissioned. In the organizational structure, both at  - 25 - present and recommended, the Engineer/Manager directs and coordinates through a Deputy Manager the technical department , through a Financial Controller heading the finance department and through the Administrative/ Personnel Manager the administrative department. The Internal Auditor reports directly to the Chief Executive. 4.08. The following are some of the more important changes planned in the organizational structure: (A) Engineering Department. The present arrangements would be basically retained with a new division added to the department: the Projects Division. This will take over the Drawing Office and the Property Maintenance Section (presently in the Distribution Division). The Planning Section of the Division would he responsible for the design and preparation of contract documents for new works including the planning of extensions to the distribution system (mains up to 150 mm diameter to he laid by direct labour and over 150 mm by contract). This section will also have the important function of collating and maintaining records of the systems including the evaluation of performance and recommendation of improvements needed. It would produce a monthly analysis of production and consumption for management, and generally provide the planning input for the engineering department. When consultants are engaged by the board, this section would also provide the necessary liaison on matters related to design, contract documents and the letting of contracts. Another section of the Project Division would be responsible for the supervision of contruction contracts including liaison with consultants in this respect. (B) Finance Department. The present unit handling purchasing and stores will be separated into two as these functions are different and improvement in their operations is needed. Purchasing, in this case, would be responsible for buying materials and chemicals including obtaining quotations and annual tenders to ensure purchases are made at the most economic prices. Stores would be responsible for the receipt, safe keeping and issue of materials including costing of issues and maintenance of stores records. The Internal Audit when strengthened with an audit clerk would report to the Engineer/Manager rather than the Financial Controller as at present. An Internal Audit Manual needs to be produced to formalise procedures. (The Financial Controller has already commenced the preparation of an Accounts Manual for his department.) C. Administration Department. To improve the personnel management a separate personnel section will be formed. At present personnel records in the form of employee files are  - 26 - being maintained for most senior staff. These need to be extended to cover all staff and to include more information (details of first appointment; subsequent actions including promotions, transfers, and salary raises; records pertaining to any disciplinary action; letters of commendation; information regarding training courses attended; health records; copies of certificates of education and subsequent training, leaves requested and taken; and any performance evaluation reports). Recruitment for existing posts that become vacant or for new posts that are created as part of the programme for additional staff will be administrated by the Personnel Section. Another important function of Personnel Section will he to assist management in the formulation and implementation of training programs and their annual updating.4/ Institution Bullding and Localization 4.09. The implementation of the proposed changes in the organizational structure, improvements in the financial viability of the LWB and the systematic planning and implementation of training programs is a continuous process. LWB's management will prepare an action program which will be reviewed and updated quarterly in consultation with the Bank and with the cofinancier of the management staff support and training comportent of the project. 4.10 At the moment, apart from top management, the Board has only one qualified engineer. In recruiting for professional engineering staff, it is unlikely that any local engineers will have experience in urban water supplies. The organisation chart therefore, allows for experienced expatriate engineers to occupy the three divisional engineering posts - Distribution, Operations and Projects - and for relatively inexperienced local engi',eers to be appointed to deputy divisional engineering posts. The intention is that during the 1990s the deputy engineer posts shall be phased out and the incumbents, assuming they have performed satisfactorily, should tale over divisional engineers posts, with the expatriate's departure. A parallel situation exists with the Chief and Deputy Chief Scientific Officers in charge of the laboratories and water quality control. Another temporary post is that of the engineer who will liaise with the consultants during the construction of the new dam. In the Administration Department the two leading accountants assisting the Controller have deputies as shown on the organisational chart. Part of the reasoning behind this is that there is a shortage of qualified accountants in Malawi and the compensation offered in the private sector is often double that which the Board can offer. Hence some turnover at this level can be expected. Also, as their local professional training for accountants has been completed, they will spend more time overseas on training scholarships to complete their qualifications. 4/ The training component of the project is described in paras. 4.11 through 4.13.  - 27 - Training 4.11. In order to develop into a self-supporting organization, as already discussed under the previous paragraphs 4.09 and 4.10, the continuation of expatriate technical assistance (through management staff support) and a substantial training program is required. The institutional section of the Feasibility Study Report prepared by the consultants (Stanley International, Canada) provides a satisfactoryassessment of staffing, recruitment and training needs up to 1Q90. Based on these data and recommendations, and in consultation with the British Development Division of Southern Africa (a regional office of the ODA), LWR had prepared a proposal for technical assistance and training. On the advice of ODA Lilongwe,and with assistance from the Bank's water sector training specialist during project preparation, the proposal was modelled on a similar program prepared by the Blantyre Water Roard (BWB) and approved hy ODA in September, 1983 (see para. 1.19). 4.12. The proposal comprises three separate, but related, packages as follows (described in more detail in Annex 13): (i) Long term institutional strengthening to include the appointment of three expatriate engineers (12 man-years), and provision of overseas professional level accountancy training for two deputies to the Financial Controller; (ii) Short term technical assistance and practical experience programs both in UK and Malawi (twinning arrangements); and (iii) training awards of 3-6 months duration to UK technical and financial diploma level courses, to be administered under the British Council's award scheme. Priority will be given to the recruitment and training of a senior personnel officer (under the twinning arrangement), who will be responsible to the Administrative Manager for the overall coordination and implementation of the Board's training program. 4.13. The technical assistance and training package funded by ODA (Annex 13), under a formal co-financing arrangement has been included as an integral part of the proposed project. Detailed action program, terms of reference for the training programs will be submitted to the Bank for review and comment (see Annex 13, para. 2(d)). Accounting and Audit 4.14 LWB's accounting system is now operating on a commercial basis. It was converted from a municipal accounting basis in 1983. Present accounting practices and procedures are adeQuate for recording transactions, preparing financial statements and annual budgets. However, the Board's management information system has, in the past, proven to be weak, particularly in relation to the availability of statistical data on tariffs which made relevant tariffs analyses very difficult. The need to  - 28 - develop a stronger data base has been more acute since the switch from the uniform tariff system to a block tariff system (para. 5.12). To overcome this shortcoming, a data base on tariffs is currently being developed-a task made easier by the recent computerization of the billing system. 4.15 The project will provide for the employment of an expatriate financial controller until project completion. LWB so far has not heen successful in attracting and retaining qualified Malawian accountants because of the non-competetiveness of public sector remuneration policies. To overcome this difficulty, the training program provides required local and overseas accountancy training. 4.16 LWB has an internal audit unit comprising of three positions, of which only two are presently filled. The main responsibility of this unit is, as of now, to systematically review all recorded transactions foraccuracy. It is expected that the unit's responsibilities will be broadened in the future to include performance of procedural reviews and other usual audit functions as the Board reaches a full staffing stage. 4.17 LWB's external audit is currently conducted by the international firm Coopers and Lybrand. This arrangement is satisfactory. LWB will continue to have its annual accounts audited by independent accountants acceptable to the Association, and the audited accounts will be submitted to the Association within six months of the end of the fiscal year. Auditing of the Project's Special Accounts and Statement of Expenses will be carried out by the same auditors. Billing and Collection 4.18 Meter readings are made monthly and bills sent out by mail. Disconnections are normally made if payment is not made within 3n days of billings. Past collection performance is difficult to evaluate because the capacity of the old electronic accounting machine was inadequate for the existing 9000 customers, leading to a significant lagging of billings (up to four weeks). As a result past average collection periods derived from the financial statements of the past three years (79 days in FY83, 99 days in Fy84, and 88 days in FY85), do not reflect actual collection periods. Collection performance is generally good, total accounts receivable do not exceed on average 60 days. 4.19 A computer has been acquired (under the Engineering Project) and the billing system is now being computerized so that after conversion it will have the capacity to handle up to 25,000 accounts. LWB has also significantly reduced the unaccounted for eater during the implementation period of the Engineering Project.  - 29 - V. FINANCIAL ASPECTS 5.01 As mentioned above, LWB's accounts have been maintained on a commercial basis, only since FY83. To make comparisons between years possible, the accounts for the year ending March 31, 1983 have been reformulated. 5.02 The audited income statements for the last three years, prepared on a historical cost basis, are analyzed below. The estimated future financing plan and the forecast financial statements have been prepared on the basis of assets revalued to March 31, 1985. This revaluation has not been done on a professional engineering basis and should therefore be regarded as indicative only (para. 5.15). LWB's Past Operating Results and Financial Position 5.03 LWB's income statements for the three vears ending March 31, 1985 are:  - 30 - LWB's Income Statements FY1983 through 1985 Year Ending March 31 1983 1984 1985 Population ('000) 135 142 151 Connections ('000) 7.4 7.9 8.4 Water Sales ('000 m3) 4,560 4,840 6,342 Average Tariff-Tanbalas/m3 26.0 29.0 32.6