Guinea - Second Water Supply Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4891-GUI MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 29.3 MILLION (US$40 MILLION EQUIVALENT) TO THE REPUBLIC OF GUINEA FOR A SECOND WATER SUPPLY PROJECT JANUARY 9, 1989 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.  CURRENCY AND EQUIVALENT JNITS Currency Unit = Guinean Franc (CF) Nov. 1988 US$1.00 C CF 500 WEIGHTS AND MEASURES 1 meter (m) 3.28 feet 1 kilometer (km) = 0.62 miles 1 liter (1) = G.26 US gallons 1 cubic meter (m3) - 35.3 cubic feet or 1,000 liters ABBREVIATIONS AfDB Afric-n Development Bank CCCE Caisse Centrale de Coop6ration Economique (France) DEG National Water Company EIB European Investment Bank SEEG Water Management Company SNAPE Rural Water Supply Agency SONEG National Water Authority  FOR OMCIAL USE ONLY REPUBLIC OF GUINEA SECOND WATER SUPPLY PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of the Republic of Guinea Beneficiary: SONEG Amount: SDR 29.3 (US$40 M) Terms: Standard, with 40 years' maturity Onlending Terms: US$33 M equivalent would be onlent to SONEG for 30 years, including 6 years of grace and an interest rate of 2% per annum. US$7 M equivalent would be contributed by the Government to SONEG's equity. Financing Plan: IDA US$ 40.0 M Cofinarcing US$ 50.9 M Private Sector US$ 1.3 M Government US$ 1.4 M SONEG US$ 7.3 M Beneficiaries US$ 1.7 M Total US$102.6 M Economic Rate of Return: 11% Staff Appraisal Report: Report No. 7304-GUI M*p ~IBRD 20944 I'-his 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 authodzation.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE FXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 29.3 MILLION (US$40 MILLION EQUIVALENT) TO THE REPUBLIC OF GUINEA FOR A SECOND WATER SUPPLY PROJECT 1. The following memorandum and recommendation on a proposed develop- ment credit to the Republic of Guinea for SDR 29.3 million (US$40 M equiva- lent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years' maturity and would help finance a Second Water Supplv Project. US$33 M equivalent would be onlent to SONEG on terms of 30 years, including six years of grace and a 2% interest rate and US$7 M equivalent would be contributed by the Government to SONEG's equity. The project would be cofinanced for US$51 M equivalent by the African Development Bank (AfDB), the European Investment Bank (EIB), and Caisse Centrale de Cooperation Econo- mique (CCCE) of France. 2. Background. Guinea has one of the least developed urban water supply sectors in West Africa, with ten urban centers only, out of 33, equipped with piped systems. Less than half of the urban pordlation of about 2.3 million, of which 1.0 million live in the capital city of Conakry, have access to piped water, while the remainder rely on unsafe sources for their water needs. The First Conakry Water Supply and Sanitation Project (Cred- it 870-GUI), completed in 1985, helped increase the quantity of water supplied to Conakry, as well as the drainage conditions through a program of selected expansion. However, the existing facilities remain in poor condition, and there is still a need for an extensive rehabilitation program. The political interference and the adverse economic environment which prevailed throughout project implementation under the previous political regime ultimately resulted in sub-standard operations. Moreover, the progress of institutional reforms was disappointing; the water utility (DEG), recently abolished, became bank- rupt as a result of inadequate tariffs, billing and collection, and relied almost exclusively on Government subsidies. 3. Rationale for IDA Involvement. Adequate supply of safe water is a priority social objective of the Government, which, at the same time, wants to ensure that the urban water sector is financially self-supporting. While the project would finance key investments to help the sector take off, it has been designed as an integral part of the ongoing structural adjustment process and would primarily focus on implementation of needed institutional reforms and adequate cost recovery procedures, as well as rehabilitation of operations and facilities. Improved donor coordination is another important feature of the proposed project. 4. Project Objectives. The proposed project would aim at establishing an autonomous and self-financing urban water sector by (a) creating an appro- priate legal and institutional framework; (b) strengthening its planning capability; (c) rehabilitating its technical, commercial and financial opera- tions; (d) financing key investments; and (e) gradually raising the currently very low water rates to meet long-term marginal costs. Assistance to imple- mentation of appropriate policies for rural water supply is envisaged as part of a rural infrastructure project, currently under preparation, which would also finance part of the emergency program recently prepared by the agency responsible for that sub-sector (SNAPE). Urgent urban sanitation and drainage needs are being addressed by an Urban Development Project under implementation (Credit 1466-GUI of 1984 amended in 1987). A Second Urban Project, under  preparation, would also address the issue of appropriate technoloties and financing mechanisms for sanitation in the poorest areas. 5. Sector Reorganization. The Government Initiated a major sector reorganization by creating, in October 1988, the National Water Authority, SONEG. SONEG would be the owner of the facilities, and be responsible for sector planning, construction of new facilities and financial management of the sector, including its debt service, thus taking over responsibilities previously scattered among several ministry departments. SONEG would contract out, under a ten-year lease agreement, operation and maintenance of the facilities, as well as billing and collection, to a water management company, SEEG, partially owned by the State, but with a majority share held by a private professional partner, selected according to procedures acceptable to the Bank. The legal documents related to SEEG's creation and operations are also acceptable to the Bank. It. the long run, SEEG would get its revenues from the rate it would collect from the customers and pay back to SONEG a rental fee, for each cubic meter of water collected, intended to cover SONEG's operating expenses, service the sectoral debt and finance part of the invest- ment program. Until the 150% tariff increase of early 1989, the consumer rate of GF 60/m' (US$0.12/m9) was not even sufficient to cover the variable cost of water, and sectoral expenses were subsidized at least by 85%. However, the new consumer rate of GF 150/ms (US$0.30/m9) is expected to be insufficient to cover the full cost of distributing water and servicing the sectoral debt during the initial years of existence of the new institutions. Therefore, external funding would still have to cover the foreign expenditures of the lease contract and the National Budget would still have to service the debt, both on a declining basis during the six years of the project implementation period. Provisions are made in an "enterprise contract," to be entered into by the Government and SONEG, regarding subsequent and regular tariff increas- es. This pragmatic and entirely transparent subsidization scheme is deemed effective and appropriate, since the subsidies would be conveyed through budgetary channels, they would be fully financed, and the arrangement would exist for a limited period of time on a gradually decreasing basis. 6. ProJect Description. To support these reforms, the project would finance (a) a management support program to SONEG, including technical assis- tance, consultant and legal counsel services, training activities, office space and supply of equipment, (b) the rehabilitation of sector operations through the lease contract between SONEG and SEEG; (c) the rehabilitation of existing facilities; (d) the partial doubling of the 80 km transmission line and of the Yessoulou treatment plant supplying Conakry with water from the Grandes Chutes reservoir, as well as expansion of the distribution system; (e) studies for water supply in secondary centers; and (f) a training program to assist DEG's former staff who will be laid off as a result of the reorgan- ization, and who would be willing to develop their own business in fields related to plumbing, air conditioning and electricity, where there is a lack of skills and a sizeable market. The latter assistance comes in addition to the severance payments and financial assistance already available to all redundant staff as part of the overall reorganization of the civil service. Cofinancing is expected from AfDB, EIB, and CCCE. The project would be implemented over a period of seven years. The total cost of the project is estimated at US$102.6 M with a foreign exchange component of US$87.8 M (862). A breakdown of costs and financing plan are shown in Schedule A. Amount and methods of procurement and of disbursements, and the disbursement scbedule are shown in Schedule B. A timetable of key project processing events and the  Status of Bank Group operations in the Republic of Guinea are given in Sched- ules C and D, respectively. 7. Actions to be Agreed Upon. Effectiveness of the proposed credit would be declared after two thirds of the initial contributions to SEEG's equity have been paid in by the State and its private professional partner, and after SONEG has selected its staff. Effectiveness of all other cofinanc- ing arrangements needed for the expansion of the Conakry water supply would be a condition for disbursement of the categories of the proposed credit allocat- ed to this specific project element. During negotiations, assurances were obtained on the following: (a) all financing for the expansion of the Conakry water supply would be effective before June 30, 1990; (b) DEG staff of about 500 would be partially split between SONEG and SEEG and a gradual phasing out program, including training and financial assistance, would be completed by December 31, 1989, in line with Government agreements and practices for the entire public sector; (c) SONEG would prepare annual revisions of the enter- prise contract including financial forecasts for the next three years; (d) SO- NEG would, in addition to the annual audit reports on its accounts, submit regular audit repDorts on the volume of water collected by SEEG to document the disbursement applications for financing of the foreign exchange of the lease contract; (e) the National Budget would support the sectoral debt service until 1994 on a declining basis; (f) proper procedures would be implemented for commitment and appropriation of funds for public water consumption; (g) the water rates would be regularly aijusted to generate rates of return on annually revalued net assets in operaticon of 1.5% from 1991 to 1993 and 2.5% from 1994 onwards; and (h) SONEG would consult with IDA prior to any invest- ment of more than US$1.0 M equivalent, and would not enter into any borrowing arrangements unless its internal cash generation is at least equal to the projected sectoral debt service not reimbursed by the National Budget. 8. Benefits. The primary benefits of the project would be the restora- tion of the water supply service in urban areas, the improved use of water re- sources, now largely wasted, and the gradual introduction of efficient pric- ing. In addition, the proposed project would expand the availability of water supply in Conakry, and would allow to meet demand through, at least, 1997. 9. Risks. Risks pertai.' to the political and social opposition to the actual implementation of the agreed upon institutional reforms and to the regular water tariffs adjustment required to ensure sound overall sector development. The financial viability of the sector could also be jeopardized by uncontrolled expansion of water operations in secondary centers. However, the convincing commitment of the Government towards the far reaching sector reforms, the technical assistance and training to be provided to strengthen SONEG's planning and managerial capabilities and the recourse to a water management company, SEEG, partially owned by an experienced private profes- sional partner, which would actually be operational at the time the proposed credit becomes effective, would help minimize the project risks. 10. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the International Development Associ- ation and. recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D. C., January 9, 1989  -4- Schedule A REPUBLIC OF GUINEA SECoND WATER SU m Y PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Costs /a