Mozambique - National Water Development I Project

Document of The World Bank Report No. 17274 -MOZ PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 26.2 MILLION TO THE REPUBLIC OF MOZAMBIQUE FOR A NATIONAL WATER DEVELOPMENT I PROJECT January 20, 1998 Water & Urban 1 Africa Region  CURRENCY EQUIVALENT (as of December 31, 1997) Currency Unit Mozambican Meticais US$1.00 Mt 11,604 FISCAL YEAR Government & Public Enterprises = January I to December 31 WEIGHTS AND MEASURES I meter (m) 3.2808 feet (ft) I kilometer (km) 0.6214 miles (mi) GLOSSARY OF ACRONYMS ARA Sul = Administra,cao Regional de Aguas do Sul (Southern Regional Water Administration) CIDA = Canadian International Development Agency COGEA = Commissao de Gestao de Empresas de Agua (Commission for the Management of Water Services) GOM = Government of Mozambique DNA = Direc,cao Nacional de Aguas (National Directorate of Water) GRI = Gabinete dos Rios Intemacionais (Office of International Rivers) HRD = Human Resources Development MOPH = Ministerio das Obras P6blicas e Habita,ao (Ministry of Public Works and Housing) ND National Director of Water NDF = Nordic Development Fund NWD I = National Water Development I NWD II = National Water Development II NWP = National Water Policy PL = Project Leader PRONAR = Programa Nacional de Agua Rural (National Rural Water Program) PSM = Private Sector Management RWSS = Rural Water Supply and Sanitation SDC = Swiss Development Cooperation SIDA = Swedish International Development Authority SPS = Small Piped Systems WRM = Water Resources Management Vice President: Callisto Madavo Country Director: Phyllis Pomerantz Sector Manager: Jeffrey Racki Task Leader: John Shepherd  Republic of Mozambique National Water Development I Project Project Appraisal Document Table of Contents Project Financing Data I Block 1: Project Description I 1. Project development objectives 1 2. Project components 2 3. Benefits and target population 3 4. Institutional and implementation arrangements 3 Block 2: Project Rationale 4 5. CAS objectives supported by the project 4 6. Main sector issues and Government strategy 4 7. Sector issues to be addressed by the project and strategic choices 5 8. Project alternatives considered and reasons for rejection 7 9. Major related projects financed by the Bank and/or other development agencies 7 10. Lessons learned and reflected in project design 8 11. Indications of borrower commitment and ownership 8 12. Value added of Bank support 9 Block 3: Summary Project Assessments 9 13. Economic assessment 9 14. Financial assessment 9 15. Technical assessment 10 16. Institutional assessment 10 17. Social assessment I 1 18. Environmental assessment 11 19. Participatory approach 11 20. Sustainability 11 21. Critical risks 12 22. Possible controversial aspects 13 Block 4: Main Loan Conditions 14 23. Effectiveness and Disbursement Conditions 14 24. Assurances 14 Block 5: Compliance with Bank Policies 15 List of Annexes Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Economic Analysis Annex 5: Procurement and Disbursement Arrangements Annex 6: Project Processing Budget and Schedule Annex 7: Documents in the Project File Annex 8: Status of Bank Group Operations in Mozambique Annex 9: Country at a Glance   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Africa Regional Office Country Departnent 2 Project Appraisal Document Mozambique National Water Development I Date: December 12, 1997 [] Draft [x] Final Task Manager: K. John Shepherd Country Manager: Phyllis R. Pomerantz Project ID: MZ-PE-39015 Sector: Water Supply & Sanitation Lending Instrument: Sector Investment Credit PTI: [] Yes [X] No Project Financing Data [ Loan [X] Credit [ Guarantee [I Other [Specifyl For Loans/Credits/Others: Amount (USSm/SDRm): US$36.0 million/SDR 26.2 million ................................................................................................................. .......... ........................................................................................................................ ............................................................. Proposed Terns: [X1 Multicurrency [1 Single currency Grace period (years): 10 years [] Standard Variable [] Fixed [] LIBOR-based Years to maturity: 40 years Commitment fee: not exceeding 1/2 of 1% Service charge: 0.75% .... i~........................ ........................................... .....", ............ ..................... ....... ................................ ............... Financing plan (US$m): Source Local Foreign Total Government 2.5 0.0 2.5 Cofinanciers 4.6 13.8 18.4 IDA 10.0 26.0 36.0 Total 17.1 39.8 56.9 Borrower: Government of Mozambique Guarantor: Government of Mozambique Responsible agency: National Directorate of Water (Direc9ao Nacional de Aguas, DNA) of the Ministry of Public Works and Housing (Ministerio das Obras Puiblicas e Habitacao, MOPH). Estimated disbursements (Bank FY/US$m): 1998 1999 2000 2001 2002 2003 2004 Annual 1.1 4.0 7.0 8.0 8.5 5.5 1.9 Cumulative 1.1 5.1 12.1 20.1 28.6 34.1 36.0 Expected effectiveness date: May 15, 1998 Closing date: Oct. 31,2003 Block 1: Project Description 1. Project development objectives (see Annex I for key performance indicators): ............ ........................................................................................................ ......................................................................................... The project will reorient the institutions of the sector in line with the strategic vision set out in the National Water Policy (NWP), increase their capacities, prepare for the private sector management of the urban water supply systems of the cities Maputo, Beira, Quelimane, Nampula and Pemba ("the five cities"), and reorient and reform the management and implementation of rural water supply and sanitation, so that sector organizations can provide sustainable water supply and sanitation services to an increasing proportion of the community, and can manage Mozambique's water resources. The project will have an initiating and integrating role within the Government's National Water Development Program, which will consist of a set of sector reforms, studies and investments implementing the NWP and will be supported by the Government and several donors. As the first IDA water project to be undertaken in Mozambique, it would implement key preparatory steps for the proposed second such project, National Water Development II (NWD-II), FY99. NWD-II  Project Appraisal Document Page 2 Country: Mozambique Project Title: National Water Development - Sector Support would improve water supply coverage and service to communities of the five cities through private sector management of the city water supply systems, and investments in the water supply infrastructure. The proposed Urban Environment Project, FY01, would implement the plans for sanitation infrastructure prepared under this project, NWD-I. ................................................................................................................................................................................................... 2. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Component Category Costs % of Bank % of US$m Total financ'g Bank US$m financ'g A. Institution Building and Policy Development Institution 6.2 11 5.1 14 * build capacity in planning and management, particularly in building/ finance; policy/ * develop a regulatory and monitoring framework and capacity; physical * undertake studies for development of water sector policy. B. Preparation for Private Sector Management of Urban Institution 8.5 15 8.1 23 Water Supply building/ * support the bidding process for the private sector management studies/ of the water supply systems of the five cities; physical * design and construct emergency works to ensure more secure operation of the headworks systems of city water supplies including Beira and Pemba; * prepare a strategy and plans for the provision of sanitation services in the five cities, required because of increasing wastewater generation, and to improve public health. C. Rural Water Supply and Sanitation (RWSS) Institution 18.2 32 10.3 29 * reorient and reform the management and implementation of building/ RWSS and build capacities at central and provincial levels; studies/ * in Inhambane Province, mobilize stakeholders, rehabilitate pilot social works for small piped systems and prepare for investment in devel./ point source water supplies and sanitation. physical D. Water Resources Management (WRM) Institution 14.6 26 6.6 18 * strengthen ARA-Sul (Administra,ao Regional de Aguas do Sul, building/ Southern Water Resources Administration) to provide self studies/ supporting bulk water supply service, and GRI (Gabinete dos physical Rios Internacionais, Office of International Rivers) to undertake international joint studies and negotiations. * develop a national water resources management strategy; * undertake studies of options for development and management of key international rivers, in line with the priorities of the national water resources strategy and including the Incomati and Pungue Rivers, and carried out jointly with upstream riparian states; * safety-related rehabilitation works at Corumana Dam and feasibility and design studies for a future increase in capacity. E. Human Resources Development Capacity 5.2 9 1.8 5 Training and human resources development with initial emphasis building on HRD planning and on management training and development. F. Project Management Proj. mgt. 2.2 4 2.1 6 G. PPF Refinancing PPF 2.0 4 2.0 5 Total 56.9 100 36.0 100  Project Appraisal Document Page 3 Country: Mozambique Project Title: National Water Development - Sector Support 3. Benefits and target population: The main benefit of the project will be provision of a sound foundation for GOM to proceed with its planned program of reformed management of, and investment in, the water sector, such that all management reforms and investments can result in sustained benefits to the people of Mozambique. The project's institution building, policy and human resources development components would enable the National Directorate of Water (Direccao Nacional de Aguas, DNA) to provide strong strategic leadership to the sector, and would enable other organizations of the sector to manage efficiently and sustainably their physical assets and other resources entrusted to them, and to provide improved and more sustainable services throughout the country. The project's support of the bidding process for engaging private sector operators for the five city water supply systems, and the associated investments in water supply infrastructure, would constitute the primary preparatory steps for the proposed NWD-II project. Similarly, its sanitation planning component would prepare for the Urban Environment Project. While some benefits, including greater supply reliability, would accrue immediately to an estimated 750,000 people as a result of the emergency works, most of the potential benefits would result from and depend upon the success of the two subsequent projects. The RWSS component would help ensure the widespread adoption of principles and practices based on decentralization and community demand. This should result in future RWSS investments providing rural water services that are more reliable and better matched to community needs. The water resources management component would help GOM to secure equitable allocations of water on the international rivers, ensure more efficient and sustainable management of intemally available water resources, and rehabilitate Corumana Dam to eliminate safety risks. These measures are aimed at ensuring that future national development will not be unduly constrained by the cost or availability of water. ........................... ....................................................................................................................................................................................................................... 4. Institutional and implementation arrangements: Implementation period: Five years. Executing agency: DNA, MOPH. Project coordination: The project will be implemented under the direction of the National Director of Water Affairs (ND). The ND will be supported by a Project Leader (PL) who will be responsible for planning and coordinating project activities, and who will be assisted by a team of administrative staff including an accountant, an engineer and, for the first two years, a procurement specialist. A financial management specialist will be appointed with responsibility for the establishment and development of financial management functions. In addition, a manager of human resources will be appointed to plan and manage the human resource development component. The Minister of MOPH will chair a Project Steering Committee consisting of scnior representatives of the ministries of Finance, Foreign Affairs, Health, Agriculture, Local Administration and Environment, and the Bank of Mozambique. Task Forces chaired by the ND will be established to supervise the implementation of the Transition Plan for rural water supply, and the reform of other units of DNA. A small implementation unit will be established in Inhambane Province to manage implementation locally, and this will hand over progressively to the permanent team as it is recruited and trained. Project oversight and policy guidance will be provided by the Minister and the ND. The Government has established an interministerial Commission, COGEA (Commission for the Management of Water Services), chaired by the ND, to direct the reform of the urban water companies, and this body will give policy guidance in regard to the bidding, evaluation and award of contracts for private sector management of urban water supplies, and associated studies. Accounting, financial reporting and auditing arrangements: DNA, through its project unit, will be responsible for project financial management, reporting and auditing, following systems and procedures acceptable to IDA. An auditor acceptable to IDA will be appointed. Each implementing agency will submit quarterly progress reports, with copies going to the PL, who will immediately provide copies to IDA and to the other co-financiers. The format of these progress reports was agreed at negotiations, and will be included in the Project Implementation Manual. For the purposes of project supervision, a "Project Supervision Team" will be assembled with representatives from the Bank, NDF, CIDA, SDC and GOM, and this team will participate in the annual reviews of the project. The team will also include consultants contracted to assist in the implementation of the RWSS and WRM components. A mid-term review will be conducted by the project supervision team. Project accounts will be externally audited yearly. Yearly audits will be conducted for all components. These audits will feed into the audit of the project accounts. For ARA-Sul, audits will include in addition to the financial audit, a technical audit.  Project Appraisal Document Page 4 Country: Mozambique Project Tite: National Water Development - Sector Support Monitoring and evaluation (MIE) arrangements: Under the direction of the ND, and coordinated by the PL, project MIE will be the shared responsibility of the implementing units within the Ministry of Public Works and Housing (MOPH): DNA, (including PRONAR), ARA-Sul, Office of International Rivers (Gabinete dos Rios Internacionais, GRI), and the Provincial Directorate of Public Works and Housing, Inhambane Province. M/E will be guided by the Project Design Summary (see Annex 1), and the Implementation Plan, a draft of which has been provided by GOM to IDA, and which will be included in the Project Implementation Manual. M/E will be conducted through (1) regular meetings of the Project Steering Committee, chaired by the National Director, which will be open to IDA and other participating donors; (2) IDA supervision missions; (3) annual progress review during IDA missions before the end of the first quarter of each fiscal year and the annual audit report within six months of the end of the fiscal year; (4) midterm review (MTR) of project implementation jointly with IDA and other donors no later than 30 months after effectiveness; and (5) beneficiary assessments at implementation milestones as provided in the implementation plan. By July 31 and January 31 each year, the PL will provide IDA with progress reports on project implementation and outcomes, using the format agreed at negotiations. An Implementation Completion Report will be prepared within six months after credit closing. GOM will contribute to the ICR its own evaluation of the project and an operational plan. Block 2: Project Rationale 5. CAS objective(s) supported by the project Document number and date of latest CAS discussion: Report No. 171 80-MOZ dated November 21, 1997, discussed by the Executive Directors on December 18, 1997. The overarching CAS objective is to support GOM's program for poverty reduction through sustainable economic growth. In support of this, there are three strategic priorities: * promoting rapid, broad-based private sector-led growth, . capacity building and development of human resources, and . strengthening development partnerships. The project is consistent with the Country Assistance Strategy, and contains actions that support each of the above strategic priorities. In regard to the first priority, the objective of the project is to address one of the major constraints to growth, access to safe water. To do so, the project is supporting the introduction of private sector management to the urban subsector, and reform of the provision of rural water supply. New and improved infrastructure and services, in both urban and rural settings, would be supported both directly as part of the project, and through preparations leading to provision of sustainable water and sanitation infrastructure on a larger scale in subsequent projects. Under the second priority, the project contains substantial efforts in capacity building and human resources development, covering the sector comprehensively, and especially in DNA. Concerning the third priority, development partnerships, the project, together with GOM's larger National Water Development Program of which it is a part, is providing a framework within which donors are for the first time working closely together and in a coordinated manner to support GOM in its efforts to plan and implement a program of development for the sector. The project also supports action by Mozambique and neighboring riparian countries working together to evolve partnerships for the joint development and management of transboundary rivers. ..............................................................................................................................I. ............................................................................................................................ 6. Main sector issues and Government strategy: Sector Issues: Water supply and sanitation services in Mozambique are characterized by extremely low coverage, poor service quality and weak sustainability. Only some 30% of the population has convenient access to safe water, a significant cause of Mozambique's health statistics being amongst the worst in the world. The sector's poor performance is due to (1) nearly 20 years of war, which resulted in the neglect or damage and destruction of most of the country's infrastructure; (2) until 1995, poor policies, such as extremely low tariffs, inadequate financial and human resources management and excessive centralization, which made it impossible for the Government-owned urban water companies and the provincial and district administrations to operate and maintain facilities effectively and sustainably; and (3) the influx of several hundred  Project Appraisal Document Page 5 Country: Mozambique Project Tdte: Natonal Water Development - Sector Support thousand refugees. Much of the water resources on which Mozamnbique must rely are those of its major rivers, almost all of which arise in other countries. Over the last three decades, upstream riparians have diverted much of the yield of several of these rivers for irrigation and other consumptive uses. From 1991 to 1996, Mozambique faced severe water shortages, with insufficient water for irrigation requirements, saline water intrusion into estuaries, and water supply interruptions in different parts of the country. Unless satisfactory arrangements can be made for the more equitable sharing of water between the riparian countries, Mozambique will face increasing economic constraints on development, and recurring crises due to water shortages. Mozambique has little capacity to support the technically challenging negotiations that will be required to reach such agreements, and its water resources management capacities are at this stage rudimentary, and non-existent in much of the country. Policy: In August 1995, the GOM adopted a National Water Policy (NWP). The policies to which GOM committed itself include: increased beneficiary participation, recognition of water as an economic as well as a social good; decentralized autonomous and financially self sustaining provision of water supply and sanitation services; a direction setting role for Government, which will withdraw from direct service provision; integrated water resources management taking environmental impacts into account; multi-objective investment planning, greater focus on capacity building; and an increased role for the private sector. Strategy: With support from the Bank, GOM has decided to: (a) reorient central management arrangements for the sector, away from direct service delivery, and towards strategic sector direction-setting, regulation and financial planning and management, and continue the evolution of national water policy by further developing subsector policies and strategies; (b) reform the management of the water companies of the cities of Maputo, Beira, Quelimane, Nampula, and Pemba by arranging for them to be placed under private sector management; (c) reform tariffs, aiming at full cost recovery - the average tariffs for Maputo and the other four cities have already been increased from about 7 US c per cubic meter to 30 and 20 US c per cubic meter respectively; (d) embark on a program of investment to bring water services in the five cities to an acceptable level of service and coverage; (e) reform the provision of rural water supply services with the objective of implementing a demand oriented approach; (f) develop a strategy for water resources management and the management of bulk water for irrigation and other purposes; and (g) develop human resource capacities - with the assistance of SDC, the Dutch Government and the Bank, GOM has completed a human resources development strategy study. Program/project strategy: GOM has prepared and approved a proposed National Water Development Program, under which it will implement all of (a) to (g), its highest priorities for the sector, at an estimated cost of US$155 million over the next five years. The first component of the Program to proceed is proposed to be this project. A subsequent component of the Program, a proposed IDA-supported Project NWD-II, (MZ-PE-52240, FY99), is proposed to support the urban water supply components (b) to (d) above of the strategy. This project is under preparation. Bids will shortly be called for proposals from private sector organizations and consortia to operate these companies. The remainder of the Program, most of it investment associated with urban water supply, will be supported by other donors. The proposed IDA-supported Urban Environment Project will be external to the National Water Development Program. It is, however, consistent both with the CAS and the GOM's strategy for the development of urban infrastructure, including sanitation, and upgrading the capacity of local government. 7. Sector issues to be addressed by the project and strategic choices: Consistent with its concept as a project supporting sector integration and preparations for subsequent projects, this project will support each of the elements of GOM's strategy outlined above. Its support of investments in urban water supply would be limited to small scale emergency works sufficient to provide security of supply to cities where present supply arrangements are subject to high failure risks, and, in addition, planning and design studies of sanitation and drainage infrastructure to deal with the increasing volumes of wastewater in urban areas that will be generated by the planned investments in urban water supplies.  Project Appraisal Document Page 6 Country: Mozambique Project Title: National Water Development - Sector Support (a) Institution building and policy, and preparationfor privatization of Urban Water Supply: Without policy and management reform and a program of investment, the overall level and quality of urban water supply services would continue to deteriorate. GOM, having decided to take action, was faced with some important strategic choices concerning the form of management of the urban water supply systems, the cities to be targeted, the investment priorities, and the role of central sector management. (1) Form of management. To achieve improvement of the performance of the water supply companies, the possible options ranged from technical assistance, through commercialization, with or without twinning, to the various forms of private sector management (PSM). The PSM options included management contracts with or without performance incentives, affermage/lease options, and full concessions. Evaluations of the relative effectiveness of this range of options, in Africa and worldwide, suggested that the options involving technical assistance and commercialization only are unlikely to result in rapid performance improvement, especially for water utilities whose performance indicators are relatively unsatisfactory. It was therefore agreed that PSM provided the best prospect for Mozambique. The PSM options to be used would be decided upon city by city, having regard to the scale and condition of the systems, and of the scale and financial viability of the businesses that would result. (2) Cities to be targeted. The second strategic choice was how many and which cities should be included in the ambit of privatization of management. Options ranged from Maputo only, through to Maputo plus all 12 provincial cities. At one extreme, Maputo, with the country's largest urban water supply system, appeared to offer an attractive opportunity for private sector management and associated investment to benefit a large number of people. However, investing in this water supply system alone would leave the water supplies of several other important cities continuing to degrade, cities whose improved viability is important to the growth and development of much of the rest of the country. At the other extreme, an attempt could be made to place all 13 city water systems at once under private sector management. This would result in high risks of project failure, due to difficulties of communication, coordination, regulation, and the limited capacities available to manage a project of such scale and complexity. It would be preferable to choose cities in which work was under way or planned on the strengthening of local government, the upgrading of other municipal services, and the development of structure plans. It was therefore agreed that the cities to be included in the PSM initiative would be Maputo, Beira, Quelimane, Nampula and Pemba, the same cities whose planning and development is supported by the Local Government Reform and Engineering Project (PROL, Cr. 2530). (3) Investment priorities. This set of decisions also led to the choices of investments in urban water supply systems to be included in this project. While all five of the water supply systems will require continuing investment over many years, especially in rehabilitation of existing networks and construction of extensions into new service areas, most of this investment should be undertaken within an environment of policies and management that will assure sustainability, and should thus only be commenced when this environment is fully in place as the proposed NWD-II project commences. However, some facilities in the headworks of some of the city water supply systems are in poor condition, with significant risks of failure. It was agreed that NWD-I should include such works for Beira, Nampula and Pemba as are necessary to secure reliable supplies into the cities, and the planning and design of the larger scale works that are likely to be required for Quelimane. This should reduce the risks faced by bidders for the PSM contracts and reduce the costs of those contracts. (4) Central management. These decisions and those in relation to RWSS and WRM indicated below, enabled the role, scale of work and organization of DNA to be clarified, transitioning, in line with the NWP, towards a direction-setting, supervisory and regulating role, and moving out of direct service provision. (b) RWSS: In the past, GOM, donors and NGOs have in a number of cases undertaken physical replacement of failed rural water supply facilities, in a supply-driven manner, without use of a demand or community-driven approach. This approach was generally, and understandably, used because of war emergency conditions. The result often was that the rehabilitated/replaced system failed within a short time, resulting in hardship to the community served, particularly to women, on whom usually falls the burden of collecting water and performing water-using chores. These experiences, and lessons learned in other countries indicate that significant sustainable progress in RWSS coverage would be better attained through the demand-driven approach, supported by decentralized institutional arrangements. It was agreed that this methodology would be adopted for this component. The choices faced in seeking to implement a program in line with these principles, are concerned with (1) choice of the province or provinces in which the RWSS component would be operated (a single province, Inhambane, to focus effort and control costs), and (2) community eligibility criteria to ensure community "ownership" of the system to be installed or upgraded, and ongoing financial viability (principles  Project Appraisal Document Page 7 Country: Mozambique Project Title: National Water Development - Sector Support adopted as part of GOM's Rural Water Supply Transition Plan). (c) WRM. Limited availability and declining quality of water resources available from the international rivers, and periodic crises due to shortages of water, becoming more severe in risk level year by year, are increasingly likely to place economic constraints on development. The Govermment of the Republic of South Africa has launched a new water policy which, among other things, leaves room for allocations on South African rivers both for the environment and for downstream nations including Mozambique. The South African Government, in promulgating this far-sighted position, has also indicated that the determination of such allocations places an onus on the downstream countries to ensure that the water from such allocations is used legally and efficiently. Development of an operational regime within Mozambique to manage the water within its boundaries is therefore strategically important. While there is adequate primary legislation to support this, subordinate legislation will be developed and proclaimed during the first year of the project to support the water resources management organizations in their development of these systems and capacities. Corumana Dam, the key regulating storage in the Incomati river basin, is subject to an increasing risk of failure due to successive spills from the reservoir eroding the streambed at the toe of the spillway. Rehabilitation is necessary to secure the safety of the structure, and avert possible failure of power generation at the dam, and of water supply to 18,000 hectares of irrigated agriculture. This is also a medium and long term strategic choice, as the Incomati River is likely to be the optimum source of water for urban and major new industrial requirements in the Maputo area within 6 or 7 years. 8. Project alternatives considered and reasons for rejection: During most of the preparation phase, this project and the NWD-II Project dealing with the privatization of the five city water supply systems, were being prepared as a single large and complex project. In July 1997, GOM and the Bank agreed to split the project into two. This resulted not only in simpler, more manageable projects, but in the components of this project being able to proceed without awaiting the bidding and award process for the contracts for operation of the city water companies. The project level options are the choices of component size and scale, and the inclusion/exclusion of subcomponent items. (a) Institutional development and policy: Based on comparison of provisions of the existing NWP against assessment of policy framework needs in areas proposed for action under this project, further policy development was shown to be needed in RWSS and WRM to support decision making in relation to community driven options for rural water supply provision, and bulk water operations. (b) Preparation for privatization of urban water supply: The continuing experiences of the communities, and the studies preparing for private sector management of the water companies, both indicate urgent requirements for more secure headworks systems for Beira, Quelimane and Pemba. The requirement for the planning and later provision of sanitation infrastructure was identified through the environmental assessment. The choices of locations will be dependent on the choices of new neighborhoods for water supplies, which will be based on community and local government consultation. (c) RWSS: The plan for transition at central Government level and for capacity building at provincial and district levels was prepared under the Rural Rehabilitation Project (MZ-PA-1796). (d) WRM: A tentative order of priorities and groupings of international river basin studies was determined from a preliminary assessment of the risks faced by the communities dependent on those resources, and of the feasibility of options for development and management. Key basins include those of the Umbeluzi and Incomati Rivers, which could be operated as sources of water for Maputo and water-using industries to be associated with the Maputo corridor, but are subject to further reduction of flow and releases to Mozambique, due to dam construction and irrigation diversions upstream. However these assessments are incomplete and preliminary, and a more complete determination of problems, opportunities and priorities will be undertaken as part of the development of the water resources strategy. (e) HRD: Scale and design of this component is based on planned and projected growth and development of the sector. 9. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). There have been no previous IDA water projects in Mozambique. However, the Rural Rehabilitation Project (Cr. 2479), and the Urban Rehabilitation Project (PRU, Cr. 1949) each supported water studies and infrastructure provision. PRU disbursed US$4.8 million from the IDA credit for water and sewerage infrastructure in Maputo and Beira, and, together  Project Appraisal Document Page 8 Country: Mozambique Project Title: National Water Development - Sector Support with the Dutch Government, supported the main engineering studies on urban water supplies in Maputo and 12 provincial towns for the proposed NWD II Project. Preparation of the NWD II Project is continuing, and preparation of the Urban Environment Project (which will include the provision of sanitation infrastructure) is expected to begin soon. The sector has been and is being assisted by the Netherlands, Swiss Development Cooperation (SDC), Caisse Francaise de Developpement (CFD), Italy, UNDP, Denmark, the European Union (EU), and Portugal. Most of these projects concentrated on works and/or technical assistance for the water supplies of individual towns, or rural water supplies in specific provinces. The Dutch Government and the UNDP have supported, and are continuing to support, water resources and hydrology, and strengthening central sector management. Smaller projects have been supported by KfW, FINNIDA, and Austria. UNICEF is active in rural water supply. The donors cofinancing the NWD-I Project include SDC, NDF, SIDA and CIDA. Those planning to support the construction of urban water supply infrastructure as participants in GOM's National Water Development Program include the Netherlands, the African Development Bank, EU, CFD, KfW and the European Investment Bank. Austria will be supporting the establishment of the water resources management body for the central region, and the African Development Bank will be supporting the rehabilitation of Massingir Dam. 10. Lessons learned and reflected in the project design: The project design draws on lessons from projects of the Bank and other development agencies in the sector and in other infrastructure and natural resources management areas. First, community consultation, mobilization and leadership are essential prerequisites for sustainability in water supply and sanitation services, particularly in rural services and the management of public standpipes in periurban areas. Second, water infrastructure development should be accompanied by effective water resources management. Third, development of a workforce with relevant skills and qualifications, and ongoing self-sustained programs of skill enhancement, are important prerequisites of service improvement and sustainability. The ICR for the recently completed PRU project reported several lessons from the experience of that project which have been drawn upon in designing this project. They are: * In a complex and uncertain environment, marked by weak capacity in the country, project design has to be well focused on the key issues and constraints. Design should be clear and preferably simple, and above all, built on the capacity of the involved agencies. Key issues include weak or non-existent capacity in financial and human resource management, and in the management of the three major subsectors: urban water supply, rural water supply and sanitation, water resources management. Strengthening these is a major emphasis of the project. * Implementors must be diligent in enforcing appropriate policy measures. Without such, the sustainability of physical improvements is undermined. The project would establish an environment which would encourage long term sustainability of the present sound policy framework, in particular by means of the proposed private sector management contracts for the urban water supply systems of the five cities, and through improved donor coordination. . More emphasis needs to be put on creating strong information systems and insisting on regular and timely progress reporting, throughout the life of the project. In the case of a ministry or similar government implementing agency, such systems should be applicable to general operations as well as to the project. The monitoring and reporting arrangements are being designed to achieve this. ............................................................................................................................................................................................................................................................. 11. Indications of borrower commitment and ownership: In August 1995, GOM approved the NWP, in which it committed itself to the strategies discussed previously, and to private sector management of the five water companies of Maputo, Beira, Quelimane, Nampula, and Pemba. GOM has approved the RWSS transition plan, has implemented increases and improvements to urban tariffs in two major steps, and is completing its consideration of a new tariff policy, which builds on the NWP and proposes further steps in tariff reform for urban water services. Bulk water supply tariffs for the southern region, covering urban water companies, irrigation, and industrial uses were recently increased substantially, and charges for water used for power generation at Corumana Dam were introduced. GOM has confirmed its commitment to the project in consultations with IDA, and through representations by delegations to the Bank in July and November 1997, led by the Minister. GOM has also confirmed its commitment to the principle of community consultation and participation essential to success in this project. Consistent with this, it has: (1) approved the RWSS reform; (2) displayed and presented the draft Environmental Assessment  Project Appraisal Document Page 9 Country: Mozambique Project Tite: National Water Development - Sector Support throughout the country and invited and accepted comment; (3) demonstrated its support for the beneficiary assessment process under way with IDA and SDC support, and has used the results to enrich and support the submissions to the National Council of Ministers on urban tariff reform; and (4) used consultative approaches in all of its policy and planning initiatives on this project, including approval and promulgation of the NWP, its preparation and acceptance of the RWSS transition plan, and preparation of the HRD strategy document. GOM will urgently upgrade financial budgeting and management within DNA. 12. Value added of Bank support: Several bilateral and multilateral development agencies and a number of NGOs have been providing Mozambique with assistance for many years, with European bilateral agencies dominant in urban water supply, and most of the bilateral and multilateral agencies and NGOs active in rural water supply and sanitation. While there have been limited local successes, much of this assistance has not resulted in sustainable benefits. This has been due to a combination of factors: requirements to respond to war emergency situations, the lack of a national policy (until 1995), poor management, institutional arrangements that contained incentives favoring failure rather than success, and fragmented approaches by donors. With assistance from IDA and other donors, particularly the Netherlands, SDC and UNDP, GOM has completed the development of its NWP framework for sustainable action in the sector. The proposed project would assist and enable GOM to carry these strategies into action. .............................................................................................................................................................. ................................................................................. ............. Block 3: Summary Project Assessments [x] Cost-Benefit Analysis for the Maputo Water Supply [I Cost [ Other 13. Economic assessment: System, considering relevant components of this project Effectiveness (See Annex 4 for Economic jointly with relevant components of the proposed NWD- Analysis: Analysis.) II Project: NPV=US$84.9 million; ERR = 26% The components of this project are in each case preparatory for other projects, or in the nature of sector reform. The project as a whole is thus not amenable to economic analysis. However, a preliminary assessment of the likely economic rate of return of the Maputo water supply system has been made and has shown a strong economic rate of return (Annex 4). Similar water supply privatizations have in most cases resulted in substantial improvement in economic and financial performance. Preliminary analysis indicates the same for ARA-Sul. The RWSS pilot schemes will be designed and implemented in a beneficiary-led demand driven manner, and under rules which will require that as conditions of eligibility, communities agree to contribute in cash and/or kind to the capital costs of the physical facilities, to cover all operations and maintenance costs, and to make satisfactory arrangements for system operation and the collection and safekeeping of funds. Demonstrations of willingness to pay in line with these provisions will contribute towards ensuring that economic benefits exceed costs. .......................................................................................................... .................................................................... ...................................................I........................ 14. Financial assessment: This project has the characteristics of a technical assistance project in that it is oriented to sector reformn. The objectives o the investments proposed are primarily to create conditions for the reform of the subsectors. It is thus not possible to calculate a financial rate of return for this project. However, the positive impacts of this project, in terms of the financial health and sustainability of the sector, are expected to be great. Perhaps as a result of Mozambique's history of central planning, knowledge and application of sound financial practices within the water sector are virtually non-existent. At the sector level, for example, to date there has been no person or section whose mandate is to monitor the sector's financial flows, whether from the Government budget or generated by the individual water authorities; this is particularly problematic in regard to disbursements of the sector investment budget, which have been dropping in real terms and reached their lowest level in six years in 1996. At the level of the water providers, including the five city water companies to be assisted under this project and ARA-Sul, accounts are not kept adequately; only Agua de Maputo (once) and Aguas da Beira (twice) have been audited, and the auditors were unable to make a judgment because of poor quality.  Project Appraisal Document Page 10 Country: Mozambique Project Tile: National Water Development - Sector Support This project will initiate the introduction of sound financial management to the sector, built on the principles of accountability, cost recovery, efficiency and transparency. One of the most important results of this project will be the hiring of a financial management specialist for DNA whose mandate will be to design and develop a financial planning function for the sector, including liaising with and assisting water providers, and the implementation of accounting and budgeting systems. At the level of the water companies, Government and the Bank have agreed that the most effective way to initiate sound financial processes is through the privatization of the management function. The operations of ARA-Sul will be strengthened through the consultancies to be financed under this project. The human resource development component will complement and overlap this work, through its financial training activities. The follow-on project to this project, National Water Development II, will, for the five city water supply services, build on and solidify the financial strengthening begun under this project. Fiscal impact: The development of the sector planning and budgeting function is expected to have a strong positive impact on the fiscal situation. In the short term, the development of this function should enable DNA to work with Ministry of Planning and Finance to improve the volume and timeliness of disbursements of the sector budget. In the longer term, the results of this project, combined with the follow-on project, will result in more autonomous and financially self-sufficient water providers, including ARA-Sul and the water companies of the five cities, thereby reducing their demands on central Government resources and enabling these resources to be used for other productive purposes in the sector. 15. Technical assessment: The physical works components of this project are small to medium scale, and consist of design and construction of (1) new and rehabilitated demonstration small piped systems and point source water supplies, (2) restoration of urban water supply headworks and transmission systems, and (3) safety-related rehabilitation of Corumana Dam. The technical need for the urban works was established in studies by international consultants financed through projects jointly funded by IDA and the Netherlands, and accepted by GOM. The process of selection of the demonstration rural water supply projects will take place through community consultation in line with the agreed demand oriented processes, assisted by qualified technical advice where required. The small restoration works for urban water supply were identified in the course of the above studies and subsequently reconfirmed during the investigations by the international consultancy on private sector management of the water companies. All design and construction work will be subject to normal inspection, acceptance and handover procedures, except that in case of the RWSS works, the benefiting community will also be involved in this process. Corumana Dam: The need for rehabilitation at Corumana Dam became increasingly apparent after the flood of February, 1996, during which the spillway discharged and caused further erosion at the toe of the spillway. A subsequent inspection and report by a dam engineering specialist (Annex 7, reference 10) reconfirmed the need for rehabilitation works. The works will not change the operating level and storage capacity of the reservoir or the release, spill or water quality characteristics, and thus there would be no resettlement, and no adverse riparian or aquatic environmental effects. GOM will employ an independent panel of experts to review investigations, design, and construction. ............................................................................................................I............................................................................................................................................... 16. Institutional assessment: a. Executing agencies: By developing the NWP and using it effectively to support implementation of the first steps of tariff reform and private sector management of the urban water sector, and initiating a reform path for the RWSS and WRM subsectors, MOPH and DNA have demonstrated strong abilities to formulate and implement a reform-oriented policy agenda. All sector agencies are, however, weak in technical skills in their key specialties, and extremely weak in financial and human resources management capacities. The project incorporates measures to redress these weaknesses in the subsectors addressed by this project. b. Project management: DNA has had experience in the management of projects consisting of individual works but not of an integrated project supporting reform of subsectors or of sector-wide functions like HRD. Accordingly GOM has  Project Appraisal Document Page 11 Country: Mozambique Project Title: National Water Development - Sector Support assembled a team for the leadership and coordination of the program, under a PL who reports directly to the ND. ............................................................... ................................................................................................................... ......................................... 17. Social assessment: Experience in Mozambique and elsewhere has demonstrated that beneficiary preferences as to the types, location, and management of water sources, and existing informal vendors, all influence project sustainability via the willingness of residents to accept "ownership" of assets, pay the costs of operations and maintenance, refrain from vandalism, or to contribute time to maintain investments. Preparations therefore included beneficiary assessments of the communities of the five cities to gain an understanding of these issues. Implementation of the RWSS and WRM components will also include beneficiary assessments, to assist in the identification of demand, and the social characterization of communities and stakeholder groups to assist in the design of involvement and consultation mechanisms, to ensure that decision making is well structured, fully informed and soundly based. Beneficiary assessments and consultations so far have highlighted the diversity of communities, the effects of past dislocation due to war, widely varying levels of income, and high levels of willingness to pay for improved water services. ...... ........I.............................................I................................... . ........ .......... .......................................................... 18. Environmental assessment: Environmnental Category [ A [X] B [ ] C An environmental assessment (EA) has been undertaken for this project and the NWD-II Project (MZ-PE-52240) jointly. The EA was subject to display and public discussion and comment in five towns and cities, and relevant comments have been incorporated in the final document. No adverse comments were received about the components of this project. No cases of resettlement as a result of works in this project were identified during project preparation. Nevertheless, should a requirement for any resettlement be identified for any works under this project, resettlement plans acceptable to IDA will be prepared and furnished to IDA for agreement, and funding identified for their implementation, before the works commence. Through the EA, the beneficiary assessments and other consultations and studies, concerns were expressed about improved water supplies generating more wastewater in the cities. This project responds by incorporating a planning and design study for the provision of upgraded sanitation and drainage, in preparation for implementation under the proposed Urban Environment Project. Environmental monitoring will be provided for in the terms of reference of studies which would result in works or management programs where environmental effects or management are issues, including the studies of international rivers and the sanitation planning studies, and will be coordinated through the Ministry of the Environment with other environmental programs. A requirement to undertake environmental assessments will be included in terms of reference for studies on the planning and design of works and for changes in the operation of river systems. The design review work preparing for the safety-related works for Corumana Dam (which will not result in any change in reservoir operating levels or release rules, and will involve no resettlement) will be accompanied by an EA to ensure effective identification, management and minimization of any environmental impacts. International Rivers: The project supports joint studies of the water resources of several international rivers. In compliance with the Bank's policies in regard to international waterways, GOM has provided IDA with copies of letters written to the upstream riparian countries (South Africa, Swaziland, Zimbabwe and Zambia) advising them of GOM's intention to undertake such joint studies. ...............................................................................................................................I........................................................ .................................................................. 19. Participatory approach: Identification/Preparation Implementation Operation Beneficiaries/community groups CON CON and COL COL Intermediary NGOs CON CON and COL COL Academic institutions COL (WRM) COL (WRM) COL (WRM) Local government IS IS IS Other donors CON and COL CON and COL CON and COL Public sector agencies participating in reforms CON and COL CON and COL COL IS: Informnation Sharing. CON: Consultation. COL: Collaboration 20. Sustainability: The creation of conditions for sustainability is a primary focus of this project. Each component is designed to incorporate  Project Appraisal Document Page 12 Country: Mozambique Project Title: National Water Development - Sector Support the sustainability principles contained in the NWP: (1) Institutional Reform and Policy Development: Supports development of policies and consequent institutional reform that will enhance sustainability in water services and resource management. (2) Preparation for Private Sector Management of Water Companies: Takes early steps towards sustainability of urban water supply services, the main vehicle for which will be IDA's NWD-II Project. (3) RWSS: This component will re-orient institutional arrangements and practices to promote a demand driven approach. (4) WRM: Supports ARA-Sul to become self sufficient in the management of releases and diversions; (5) HRD: Sustainability requires an adequately skilled workforce, the aim of this component. .........................................................................I................................................................... .............................................................................................................. 21. Critical risks (see fourth column of Annex 1): Project outputs to development objectives: Risk Risk Rating Risk Minimization Measure Macroeconomic and political instability. Modest Lack of political will to invite private Modest Preparation includes full evaluation of the benefits participation in private sector management of PSM and dialogue on the proposal with (PSM) of water companies, with good market stakeholders in Mozambique. Bidding and award based entry. of contacts will be competitive and based on World Bank procurement guidelines Backtracking on tariff policy for water Risk of delay may Continued policy dialogue between the Bank and companies and water resources management be high. GOM. Once a PSM contract for the water supply bodies. systems of the five cities is in place, contractual penalties and other adverse effects on customers and governments tend to discourage tariff backtracking. GOM's well structured internal dialogue on tariffs, which has built a succession of decisions on the NWP, has increased commitment. Lack of commitment to policies for Modest Project supports (1) preparation of detailed change decentralizing service delivery, stakeholder program, and (2) MOPH's planned consultation participation in decision making, and demand- with potential beneficiaries and advocacy of their driven implementation and operation of rural interests with other stakeholders. water supplies and sanitation. International goodwill and cooperation decline to Varies with The participants in the Global Water Partnership the point where there is no cooperation in country from low including the World Bank are making moving towards equitable allocations of the to high arrangements to support SADC Water Unit, based waters of international rivers. in Lesotho, and the SADC countries, to create an environment supportive of constructive dialogue between upstream and downstream riparians. Budget allocations lower than agreed levels, and High At negotiations, GOM committed to: adequate and disbursements to DNA from MPF are delayed or timely provision counterpart funding requirements; lower than the approved budget. and appointment of a finance manager in DNA. Preparations have supported new efforts by DNA in budgeting, and dialogue with Ministry of Planning and Finance. Inadequate management capacity on the part of Modest At negotiations, GOM committed to the DNA to implement the project successfully. appointment of managers for finance and HRD functions. Project supports extensive HRD. Project components to outputs: Risk - Risk Rating Risk Minimization Measures  Project Appraisal Document Page 13 Country: Mozambique Project Title: National Water Development - Sector Support Institution Building and Policy Development. Modest Clear designation of leadership responsibility and As in almost every organization subject to authority and a fully consultative approach change, some of the central units undoubtedly supported by detailed planning and scheduling contain some individuals personally reluctant to should control these risks. contribute actively to GOM's change agenda. There is a risk that such opposition could slow down reforms such as decentralisation. Preparations for PSM of urban water supply. Modest PSM: GOM is publicly advocating the benefits of Controversy over PSM could affect political this proposal and its characteristic as contracted commitment. The generally poor condition of management with GOM retaining asset ownership. the transmission systems and trunk distribution System risks: The proposed works address the mains and tanks could result in system failure most serious known of these risks. Support and consequent cessation of all or part of planned under the NWD-II project would enable revenue until supply is restored. For some the PSM operators to assess and remedy other risk works, flooding could delay completion. areas. RWSS: Low level of skills to support this major Modest The RWSS component is designed support the change. The stakeholders may not have the change processes through stakeholder involvement commitment to stay with the time consuming in more detailed planning and design, continued process of community consultation that is information dissemination, responsive to required. stakeholder feedback. Project supports extensive stakeholder consultation. WRM: ARA-Sul has few of the skills to Modest For both ARA-Sul and GRI, the project supports transform itself to a commercial-customer- skill development; for ARA-Sul, evolution of oriented organization. GRI has only limited business plans and administrative systems; for access to skilled experienced water resources GRI, supporting water resources studies. professionals, and little knowledge of development and management options. Negotiations on international rivers will require SADC water sector initiative supports a each party to adopt a consistent approach to multilateral approach which should strengthen the confidence building. Departure of either party incentives of the parties to maintain positive from this could set back progress. negotiating relationships. HRD: Hitherto DNA has had insufficient Modest Appointment of qualified HR Manager, and management capacity to implement such a creation of HR unit, and development of HR program. strategy. Overall project risk rating: Risk Risk Rating The overall risk that the project could fail to Modest Risks are mitigated in particular by the MOPH's achieve its development outcome is moderate. strong management of the policy dialogue within The risk of it failing to achieve a satisfactory Government and the public sector. preparation for the two IDA projects for which it supports preparatory studies and works is also moderate. ~ ~ ~~~~~; i....................................................................................................................................................................................................................................... 22. Possible controversial aspects: The Government's program of privatization has become controversial in Mozambique. This increases the scrutiny which the public is likely to give to the proposal for private sector management of the water companies, and the sensitivity of the public to concern which may be expressed about it. The Minister has emphasized publicly that (1) the water sector proposals are receiving very thorough and careful preparation, and the operator(s) will be subject to strong regulatory  Project Appraisal Document Page 14 Country: Mozambique Project ridle: National Water Development - Sector Support oversight; and (2) the proposal differs from most previous privatizations in Mozambique in that the Government will retain ownership of the assets, and the Operators will be contracted managers. Public exposure of the components of this project during the Environmental Assessment process, discussion of the RWSS component among stakeholders, and reporting in the media concerning the international rivers issue, did not bring to light serious adverse concern on the part of the public, although some were concerned about the influx of foreigners that PSM would bring, and the likely increase in tariffs. Controversy, if any, other than about PSM, may be generated by (1) stakeholders within the public sector who may see themselves adversely affected by the reforms proposed, and (2) illegal users of water, as water resources management and urban water supply management improve and prevent or penalize illegal use. Block 4: Main Loan Conditions 23. Effectiveness and Disbursement Conditions: As conditions of effectiveness the Government would: * appoint the project accountant and the Manager Finance; * furnish a completed Project Implementation Plan satisfactory to IDA. As conditions of disbursement, the Government would: * on works that contain or result in resettlement, provide resettlement plans acceptable to IDA and identify funding for their implementation; * on HRD, appoint of the Human Resources Manager. 24. Assurances: During negotiations, GOM gave assurances on the following: Project Implementation: * GOM would maintain within DNA, through the duration of the project, (a) a Project Leader who would report to the National Director and be responsible for planning and coordinating project activities. The Project Leader would be assisted by a team of administrative staff, including an accountant, an engineer, and for the first two years a procurement specialist, in accordance with TORs and qualifications acceptable to IDA, and (b) a financial management specialist with responsibility for the establishment and development of financial management functions. * GOM will monitor the implementation and progress of the project in accordance with performance indicators agreed upon in the DCA.