Cambodia - Urban Water Supply Project

Document of The International Development Association Report No. 17026 - KH STAFF APPRAISAL REPORT KINGDOM OF CAMBODIA URBAN WATER SUPPLY PROJECT January 12, 1998 Urban Development Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (as of November, 1997) Currency Unit = Riels Riels I = US$0.0002941 US$1.00 - Riels 3,400 WEIGHTS AND MEASURES ha. = hectare MLD = - Million Liters Per Day cu. m = Cubic meters ABBREVIATIONS AND ACRONYMS CDC Council for the Development of Cambodia CC Coordinating Committee for the Water and Sanitation Sector UPWS Unit of Potable Water Supply MIME Ministry of Industry, Mines and Minerals MOE Ministry of Environment MOI Ministry of the Interior MPP Municipality of Phnom Penh MPW Ministry of Public Works MRD Ministry of Rural Development PPWSA Phnom Penh Water Supply Authority RGC Royal Government of Cambodia SWSA Sihanoukville Water Supply Authority UFW Unaccounted for Water FISCAL YEAR January I to December 31 Vice President: Mr. Jean-Michel Severino, EAP Country Director: Ms. Ngozi Okonjo-lweala, EACSM Sector Manager: Mr. Keshav Varma, EASUR Task Manager: Mr. N. Vijay Jagannathan, EASUR  i KINGDOM OF CAMBODIA URBAN WATER SUPPLY PROJECT CREDIT AND PROJECT SUMMARY Borrower: Kingdom of Cambodia Implementing Agencies: (i) PPWSA, (ii) MIME, and (iii) CC Beneficiaries PPWSA Poverty: Not applicable Amount: SDR 22.70 million (US$30.96 million equivalent) Terms: 40 years, including 10 years of grace, at the IDA standard terrns Commitment Fee: Not to exceed 0.5 % on undisbursed credit balances, beginning 60 days after signing, less any waiver Net Present Value: US$22.2 million at 10% discount rate on total project cost excluding price contingencies, taxes and duties. Economic internal rate of return of 17.2% in aggregate for Phnom Penh and Sihanoukville components Financing Plan: See paragraph 2.33 On-lending terms: Not to exceed 17 years, including a grace period not to exceed 5 years, at 8.5 per cent per annum for the subsidiary loan between RGC and PPWSA Staff Appraisal Report: No. 17026 - KH Map: IDA No. 28934 Project ID No.: 45629   iii KINGDOM OF CAMBODIA URBAN WATER SUPPLY PROJECT CONTENTS CREDIT AND PROJECT SUMMARY ...................................i I. INTRODUCTION ..................................1I A. Water and sanitation sector background ..................................1l B. Recent improvement in the water sector ....................................... - . 2 C. Government programs and policy .4 D. Key issues to address .6 E. Lessons from experience .7 F. Rationale for IDA involvement .8 G. Rationale for project .9 II THE PROJECT ..10 A Project objectives .10 B. Project description .10 C. Costs and financing .16 D. Procurement .18 E. Disbursements .20 F. Project management and implementation .22 III. FINANCIAL ANALYSIS ..24 A. Introduction .24 B. Overview of current financial performance .24 C. Future financial performance .26 IV. PROJECT BENEFITS AND ECONOMIC ANALYSIS . .29 A. Project benefits .29 B. Project costs .32 C. Other assumptions .32 D. Economic rate of return and sensitivity .33 E. Environmental and social impact .33 D. Project risks .34 V. AGREEMENTS TO BE REACHED AND RECOMMENDATION .36 This report was prepared by Messrs./Mmes.: N. Vijay Jagannathan (Sr. Water & Sanitation Specialist/Task Manager), A. Baietti (Sr. PSP/Finance Specialist), T.V. Somanathan (Young Professional), H. Hayashi (Operations Officer), M. El-E,rian (Sr. Counsel), A. Ordu (Sr. Economist), E. Pancaroglu (Sr. Sanitary Engineer). C. del Castillo (Resettlement ,1ecialist), 1. Cameron (Financial Economist, Consultant), J. Bucknall (Young Professional). D. Hughes (l.Anvironmental Specialist), E. Haythome (Legal Specialist), Barbara Koeppel (Editor), and M. Ochieng (Task Assistant). Mmes./Messrs. A. Dianderas and G. Tschannerl are the peer reviewers. Mr. Keshav Varmna is the Sector Manager, and Ms. Ngozi Okonjo-lweala is the Country Director.  iv ANNEXES 1. Commercial Practices In The Cambodian Water Sector ...................................... 38 2. Cambodian Public Enterprise Legislation ....................................... 49 3. Letter Of Sector Objectives ................................. 51 4. Terms Of Reference For Twinning Arrangement ................................. 57 5. Project Costs Estimate .................................. 64 6. Phnom Penh Water Supply Improvements ............................. 71 7. Sihanoukville Water Supply Improvements ............................. 76 8. Terms Of Reference For Water Policy and Institutional Consultants .79 9. Terms Of Reference For Sanitation and Waste Management Study ............................. 83 10. Outline Organization Charts ............................. 89 11. Summary Of Project Implementation Plans ............................. 91 12. Detailed Disbursement Categories and Estimated Schedule Of Disbursements ................................. 99 13. Project Performance Monitoring and Evaluation ................................. 101 14. Supervision Plan ................................. 105 15. Financial Statements of PPWSA and SWSA ................................. 109 16. Financial Analysis ................................. 113 17. Economic Analysis Tables ................................. 128 18. Documents In Project Files ................................. 131  CAMBODIA: URBAN WATER SUPPLY PROJECT 1. INTRODUCTION A. WATER SUPPLY AND SANITATION SECTOR BACKGROUND 1.1 Cambodia has abundant natural fresh water sources--the Mekong and Tonle Sap Rivers, rainfall of up to 3,000 mm in the highlands, and plentiful groundwater--yet at the most, only 32 percent of the population have access to clean water. Water coverage in Phnom Penh, though better than rest of the country, is low by international standards. This is particularly troubling, because until the late 1960s, Cambodia's water supply infrastructure was better than many of its neighbors and provided residents with 24 hour service. Today, even where piped water is available, its quality is questionable and service is intermittent. 1.2 Access to sanitation is even worse, with just 16 percent of the population covered, since only those in the built-up areas of the largest cities and towns are connected to wastewater systems. Moreover, these are nothing more than open drains that collect rainwater and wastewater, which are then discharged untreated into open watercourses and lagoons. 1.3 As a result, diarrheal disease is endemic. Further, infant mortality rates at 115 per 1,000 live births and morbidity statistics are among the worst in the world. It is estimated that water-related diseases account for an estimated 30 percent of all hospitalizations. 1.4 These conditions are largely the result of nearly 25 years of political strife, when the water infrastructure was completely neglected: No investment was made or maintenance carried out from the 1970s through the early 1990s. At the same time, the number of skilled manpower dramatically declined, along with institutional capacity, and water utility records were destroyed, which made it nearly impossible for the utilities to deliver sustainable services. 1.5 Phnom Penh Water Supply Authority (PPWSA), which draws its water from the Mekong and Tonle Sap Rivers, has two water treatment plants. Both were rehabilitated after 1991, have a combined capacity of 110,000 cubic meters a day, and produce water that meets WHO standards. The distribution system extends for 307 km, with pipes of varying condition. While there are currently 39,000 legal connections, which covers about half the population, consumers only receive water for an average of 12 hours a day. The other half of the population must purchase water from vendors or neighbors--at far higher prices.  2 1.6 In the provincial cities, coverage is considerably lower and distribution is inequitable. In the port city of Sihanoukville, for example, an estimated 11 percent have access to piped water provided by the Sihanoukville Water Supply Authority (SWSA): The system has just 750 working connections, and another 250, which do not operate due to lack of water supply. Tankers deliver untreated water from a freshwater lake to another 6 percent and the rest of the residents get water from shallow wells, vendors and rainwater. 1.7 Responsibility for different services is fragmented among various organizations and ministries: PPWSA is under the Ministry of the Interior, while SWSA and other provincial water utilities are within the Unit of Potable Water Supply (UPWS) in the Ministry of Industry, Mines and Energy (MIME). The Municipality of Phnom Penh (MPP) and the Ministry of Public Works and Transport (MPWT) are responsible for sanitation and wastewater infrastructure, while the Ministry of Rural Development is responsible for rural water. The Ministry of Environment is also involved, and the Department of Hydrology of the Ministry of Agriculture collects hydrological data, but has no authority to manage the country's water resources (see Table 1.1). Table 1.1: Institutional Responsibilities Water Sanitation Urban Phnom Penh MPP/PPWSA MPP Other areas UPWS of MIME MPWT Rural MRD MRD 1.8 This complex structure further weakens an already limited institutional capacity. Thus, intervention is urgently needed in two areas: First, targeted investments must be made into water supply facilities; second, policies must be designed to introduce best practices in order to assure the projects can be completed satisfactorily and sustained, once operational. B. RECENT IMPROVEMENTS IN THE WATER SECTOR 1.9 Despite severe shortages of qualified and experienced staff, water utilities in Phnom Penh and the provinces have progressed remarkably in the past three years. Since 1993, PPWSA received $61 million, principally in grants, from France and Japan, to rehabilitate the city's water supply infrastructure, while a UNDP/ World Bank Technical Assistance Project (CMB /91/007) helped finance TA, training, skill development, and studies, along with essential spare parts and equipment. At present, the Asian Development Bank (ADB) is funding a water supply project that complements the proposed IDA credit.  3 1.10 Assistance from the international community was also responsible for launching PPWSA on the road to commercialization. However, it must still improve its operational and financial management before it can function as a commercial water utility. For example, PPWSA continues to have one of the highest ratios of unaccounted for water (UFW) in Asia (about 57 percent), although the ratio is profoundly better than in 1993, when it topped 80 percent. 1.11 Another $6.7 million of donor assistance financed the rehabilitation of the basic water supply in provincial towns. For example, in Sihanoukville, SWSA rehabilitated its collapsed system with UNDP/World Bank technical assistance, and basic service has been restored. Besides installing meters on all its connections and rehabilitating its water treatment plant and pumping stations, it improved its accounting and billing/collections systems. At present, the utility covers its operating costs, although it still cannot finance new source developments to meet current demand. However, before the utility can move to this stage, it needs to reorganize its structure in ways that will promote financial sustainability, commercial practices and staff accountability. 1.12 IDA's 1994 Emergency Rehabilitation Project (Credit 2550-KH) along with Dutch assistance helped rehabilitate systems in five other provincial towns (Kampot, Kampong Chain, Svay Rieng, Prey Veng and Takhmao), which have doubled the population with access to piped water--from an average of 15 percent to 33 percent--and generally improved water quality and hours of service. But they still only operate eight or less hours a day and produce water quality below WHO standards (see Annex 1 for a description of progress at the Phnom Penh and Sihanoukville utilities). 1. .13 Although the physical rehabilitation of the water systems completed to date has been essential, the key element in the utilities' dramatic progress has been the motivation of dedicated staff to acquire skills and information. Before 1993, PPWSA had only five engineers, while the other water utilities did not even have staff who could read meters. By 1994, PPWSA had 21 engineers and 28 trained technicians, completed the computerization of its billing and collections, and created a program to address distribution problems. 1.14 The progress is especially impressive given the country's severe constraints. First, the trade embargo of the 1980s restricted Cambodia's access to materials and equipment (such as good quality pipes) that were needed to maintain the infrastructure. Second, years of centralized managerial and administrative practices had emphasized conformity, discouraged individual initiative and separated the incentives to perform from productivity. Moreover, until recently, the water utilities were run as government departments with no financial or operational autonomy: PPWSA was an arm of the Municipality of Phnom Penh, under the Governor's control, its revenues were pooled with general municipal funds, and municipal authorization was needed for all operational  4 expenditures. Third, and more fundamentally, no legal or regulatory framework existed to guide policy and practice.' C. GOVERNMENT PROGRAMS AND POLICY 1.15 The Government approach to the sector is presented in its First Socio-Economic Development Plan, 1996-2000, which accords water and sanitation a high priority, both to tackle one of the root causes of poverty and to improve public health. It allots US$160 million to the sector over the period (see Table 1.2). Table 1.2: Plan Outlay for Water & Sanitation (US$ million) Water Sanitation Total Phnom Penh 83.2 12.4 95.6 Other urban areas 25.4 0.6 26.0 Rural areas 30.9 7.5 38.4 Total 139.5 20.5 160.0 Source: First Socio-Economic Development Plan, 1996-2000 1.16 According to the document, PPWSA will become a self-sustaining commercial entity, based on full cost recovery, and meet WHO standards for water quality. For their part, provincial water utilities will develop technical expertise and become financially self-sustaining. The strategy is to transform these utilities into autonomous, commercial institutions that will serve at least 70 percent of residential consumers and the majority of industrial and commercial consumers. 1.17 The Plan also describes long-term objectives for sanitation and wastewater disposal, which will be increasingly important as water supply in the towns increases. For Phnom Penh, it proposes to develop a strategy for collecting and treating sewage, septage and surface run-off from low-lying areas, so that new infrastructure can be both financed and maintained in a cost-effective and sustainable manner. However, before an investment program can be developed, sanitation policies must be devised that designate' the roles and responsibilities of PPWSA, the municipality, households and neighborhoods in terms of choosing service levels, financing investments and operating and maintaining the systems. The strategy for the provincial towns will be developed after experience is gained from Phnom Penh. 1.18 During the Plan period, the Government aims to rehabilitate and expand water supply in Phnom Penh, develop technical and operational expertise, and establish a legal basis for converting PPWSA into a fully commercial, financially self-supporting water For example, there is no overall water law; all that exists are some normative standards for providing service.  5 utility. The goal is similar for the 22 provincial towns, which would ultimately be expected to supply water to at least 75 percent of the population. 1.19 With respect to policy, the Government passed an irnportant law on the General Status of Public Enterprises, in June 1996; it affects their operation, governance and supervision, and grants them independent legal status and a degree of financial autonomy. However, these entities were still subject to various State controls and placed under a 'tutelle' Ministry (see Annex 2). Then, in December 1996, the Government approved Decree No. 52, which established PPWSA as a public enterprise and obliged it to operate according to commercial practices and prepare annual business plans. Specifically, the Decree was designed to: (a) End the pooling of PPWSA's revenues and expenditures with the municipality, which was a major disincentive to the utility; (b) Make Government financial support to the utility more transparent, as PPWSA would now be a specific item in the national budget; (c) Empower the utility to cut off all public and private customers for non- payment; (d) Enable PPWSA to charge Government/administrative consumers prevailing tariffs; and (e) Empower it to develop its own personnel policies, including incentives for higher productivity. 1.20 Although the law only provided limited autonomy and fell short of the ideal (as discussed in Annex 2), given the country's administrative, regulatory, and political constraints, it was an important first step. More important, by transforming PPWSA into a commercial enterprise that will respond to consumer demand, the Government has signaled its commitment to reforming the sector. Further, the lessons from PPWSA's current projects will be invaluable when the Government restructures the other urban water utilities. 1.21 At present, senior policy-makers agree the country needs a national strategy for sustainable and cost-effective urban water supply and sanitation services. Also, they recognize the institutions need to be rationalized so consumer preferences and willingness to pay form the basis of service. To this end, the Government has moved to simplify the daunting maze of sectoral responsibilities by creating a Coordinating Committee of senior representatives from the ministries involved (MIME, Rural Development, Public Works and Transport, Environment, Economy and Finance), and from the Council for the Development of Cambodia and the Phnom Penh Municipality. Its task is to recommend a medium-long term sectoral strategy. 1.22 Chaired by MIME's senior representative, the Committee will identify the best course to streamline the sector institutions and prepare a statement on:  6 (a) The responsibilities of principal stakeholders, including government agencies, water utilities, the private sector and consumers with respect to the urban water supply; (b) Ways to administer the utilities at the lowest level possible; (c) Legal and regulatory structures that delineate roles and responsibilities of national sectoral agencies, and support the new sector policies; (d) The manner in which PPWSA and other urban utilities will become self- financing and operate according to commercial principles; (e) Ways for the national budget to assist low-income consumers; (f) Mechanisms to coordinate donor support to the sector; (g) Mechanisms to set and regulate tariffs; and (h) The sector's overall investment strategy. 1.23 As a first step, the Government sent a letter to IDA in April 1997 (Annex 3) which confirmed its goal to increase the availability of water and sanitation services, according to user demand; also, that it endorsed the principle that water should be treated as an economic good, and should be managed at the lowest administrative level appropriate. Assurances were obtained during negotiations that the Goverrnent will (a) present a strategy for the development of water supply and sanitation services in Cambodia by December 31, 1999, and furnish a formal statement of sector policy acceptable to IDA by December 31, 2000; and (b) furnish IDA, at mid-term review, a report on the progress achieved in applying its provisions. D. KEY ISSUES 1.24 The sector currently faces four related issues: * Inadequate service. Water supply is inadequate throughout the country, and sanitation coverage is even lower. This presents enormous obstacles to improving public health and expanding industrial activity. * Inadequate response to consumer demand. With more stable political conditions, demand for water has increased. But, because coverage is inadequate, users have turned to expensive private alternatives: Vendor- supplied water in Phnom Penh is about 10 times PPWSA's average tariffs.2 2 2 In the provincial towns of Kompong Speu, Bantey Menchey and Takeo, demand is so great that private investors are currently negotiating with MIME to supply water services at substantially higher tariffs than the public sector rates.  7 Limited institutional capacity. This profoundly affects all aspects of the water systems. The country has few water supply/sanitary engineers3 or staff trained in management, finance and accounting. Further, water utilities do not have enough staff with basic skills, such as the ability to read water meters or repair plumbing equipment. Thus, those with skills and experience are severely stretched. * Inefficient, fragmented institutions. As mentioned earlier, responsibilities stretch across various agencies, which delays decision-making and leads to high transaction costs, duplicated efforts, and perverse incentives. E. LESSONS LEARNED 1.25 The proposed project is IDA's first investment in Cambodia's water sector. However, previous and on-going IDA-financed projects in the country, which include the Emergency Rehabilitation Project (Credit 2550-KH), the UNDP/World Bank TA Project for Water Utilities (CMB/91/007), the Phnom Penh Power Rehabilitation Project (Credit 2782-KH) and the Social Fund (Credit KH-PE-37088), offer important insights into problem areas. These include: (a) a lack of familiarity with IDA procurement procedures; (b) delayed and inadequate counterpart funds; (c) weak implementation capacity; and (d) weak coordination among the principal donors (especially Japan, France, the Netherlands, Germany, the EU and the ADB). Further, the Final Report of the Joint Ex-Post Evaluation Mission of the Water Utilities TA Project identified PPWSA's lack of financial and management autonomy as the most important constraint and stressed that projects should not be based on promises of reform. Thus, the issue of PPWSA's autonomy was addressed during project preparation. 1.26 Issues described in the Bank's Water Resources Policy Framework, which is based on Bank experience in the sector, were addressed during project design. For example, the Framework suggests that services will most likely be sustained if they are consistent with what consumers want and are willing to pay for, and managed at the lowest administrative level possible. More detailed lessons were summarized in the Bank's 1992 OED report on water and sanitation, which stressed the need for environmentally sustainable strategies, improved economic analysis, managerial autonomy and arms-length regulations; also, that covenants requiring critical actions should be included sparingly in loan/credit agreements. Instead, it noted that key institutional and organizational changes need to be made before a project begins. Further, a 1994 OED study on the Operation and Maintenance of Urban Water and Sanitation identified three instruments to improve effectiveness and instill commercial discipline in public agencies: corporatization, explicit contracts, and effective regulatory arrangements to ensure that water pricing policies result in full cost recovery. These issues apply to the 3 It is estimated that there are no more than 30.  8 proposed project, and the policy component will develop the best course through which to address them, based on the project experience and global best practices. 1.27 The main lesson from project preparation was that technical assistance for transferring knowledge and skills must be offered at a level and gradual pace that fits with staff capacities. Indeed, it was found that because of PPWSA staffs high level of motivation, the pace has been steady and predictable. Thus, the project has included a combination of hardware and software investments that can leverage fundamental changes in the sector. 1.28 The decision to focus on PPWSA and SWSA grew out of lessons from both project preparation and other technical assistance efforts in the Cambodian water sector. By first promoting changes in the relatively sophisticated PPWSA and SWSA, policy makers can get a sense of what will work in terms of conditionalities and policy reforms. Experiences from these two will form the basis for reforming sector policies and institutions; the statement of sector policy will not be due until 18 months after the credit becomes effective. F. RATIONALE FOR IDA INVOLVEMENT 1.29 In general, the proposed project is consistent with the objectives of the Country Assistance Strategy (CAS), approved by the Board in February 1997, which identifies rehabilitation of infrastructure as a priority area for IDA assistance to Cambodia. 1.30 Also, the Bank's Water Resources Management Policy states it "will give priority to countries where water is scarce or where the problems of water allocation, service efficiency or environmental degradation are serious." While water allocation is not yet a major issue in Cambodia, the country clearly fits the other criteria. 1.31 Specifically, the rationale for IDA involvement is that while the sector has received sizable external assistance--far more than what IDA has given or proposes in this project--the sector still needs more investment capital. Indeed, unless Phnom Penh's water supply is expanded immediately, other transmission and distribution projects in different parts of the city, assisted by the ADB and Japan, will not be sustainable. 1.32 Equally important, authorities must work out and fine-tune the sector policies, before the water utilities can respond to the pent-up demand for service:4 It was only with a recently approved ADB project that the issue of tariff hikes for Phnom Penh was tackled as a condition of the loan. However, other issues have not been adequately addressed and IDA's global experience in the sector can make the crucial difference between success and failure of Cambodia's policy reforms. The unresolved issues are how best to: 4 So far, the largest inflow of external assistance in the sector has been from bilateral sources, and these have focused on specific investments, technical and training support to the water utilities.  9 (a) Expand and sustain water supply in Phnom Penh and provincial cities; (b) Reduce the water utilities' dependence on donor and Government assistance; (c) Involve consumers in decision-making; and (d) Expand sanitation services in a cost-effective and environmentally sustainable manner. G. RATIONALE FOR THE PROJECT 1.33 The project focuses on Phnom Penh and Sihanoukville, the country's two largest cities, because a significant share of the urban population lives there and, in the case of Phnom Penh, its water utility is more capable than those in the provincial towns. Thus, it has the best chance of demonstrating that service can be sustained when appropriate policies are adopted and investments are well funded. Also, the city accounts for a twelfth of Cambodia's population, and the number is rising with in-migration. Also, from a low base, PPWSA has improved coverage and efficiency (see Annex 1), is the country's best-run water utility, and has enough capacity to implement and sustain the proposed investments. However, far more of the residents need to be covered, service must be sustainable and the utility's capacity must be profoundly improved. Besides having the second largest population, Sihanoukville is Cambodia's major port, has the greatest potential for industrial, touristic and commercial growth, and faces problems typical of provincial towns. Thus, the lessons learned will provide important examples on how to expand service and commercialize operations along the lines described in the First Socio-Economic Development Plan. 1.34 During project preparation, three alternative strategies were considered with respect to sequencing. One was to delay physical investments until the institutional and policy framework had been worked out. However, this was rejected because: (a) water supply conditions in urban areas are critical and delaying investments would harm the urban population, especially the poorest; (b) since the IDA credit, designed to finance investments at Phnom Penh's water treatment plant, will complement the ADB and Japanese investments in distribution systems in other parts of the city, delays would threaten the sustainability of these on-going projects. 1.35 A second was to develop institutional and regulatory measures, together with the Government, that would facilitate private sector participation. However, this was considered premature because the economic, legal and regulatory environment5 must be clarified before private firms will be interested in participating. A third was to expand the project scope to include sanitation investments, but this was rejected because it would entail complex project design and financing arrangements. Instead, the project will help the Government guide sanitation investments in a cost effective manner once the institutional foundations have been laid. It is thought that private sector interest in the Cambodian water sector will increase once the project's institutional objectives are accomplished.  10 2. THE PROJECT A. PROJECT OBJECTIVES 2.1 The objectives of the proposed project are to: a) Improve drinking water coverage and quality in Cambodia's two largest cities on the basis of effective demand; b) Improve the water utilities' technical and economic performance; c) Widen the availability of (non-drinking) water for commercial and industrial purposes so as to spur economic growth and ensure the utilities' viability; d) Help the Government develop a long-term investment program based on well- articulated water and sanitation policies. 2.2 To achieve these objectives, the credit will finance a first phase of investment in much needed physical infrastructure, and provide technical assistance for strengthening sector institutions and water utility management in Phnom Penh and Sihanoukville. B. PROJECT DESCRIPTION 2.3 The proposed Urban Water Supply Project will be implemented over the five- year period, 1998-2002, in three components. It will: (a) expand water supply in Phnom Penh and strengthen PPWSA; (b) expand water supply in Sihanoukville and strengthen SWSA, and thus provide a model for other provincial towns; and (c) develop and implement water and sanitation policies for the whole sector. Component 1: Expansion of Phnom Penh's Water Supply (base cost US$ 29.17 million). 2.4 This component includes five sub-components and will increase the quantity of treated water in Phnom Penh by expanding the facilities' physical capacity and improving efficiency. The city's water system has a distribution network of about 307 km of pipes (80 percent are over 40 years old), two pumping stations, five reservoirs with a total capacity of 24,500 cu. m/day, and two treatment plants: Phum Prek and Chamcar Mom, rehabilitated with Japanese and French assistance, can produce 100,000 cu. m/day and 10,000 cu. in/day, respectively. The total of 110,000 cu. m/day is completely utilized. A third treatment plant--the Chruoy Chang War--on the bank of the Mekong River, has not operated since 1983 due to damaged raw water mains and deteriorated facilities.  11 2.5 Subcomponent 1: Water treatment plant. In 1996, the city needed over 190,000 cu. m/day for its population of about 1 million--which was 80,000 cu. m/day more fian what was available. At prevailing tariffs, demand is expected to rise to 245,000 cu. m/day by 2000, which means capacity needs to expand by more than 130,000 cu. m/day. Although these projections do not consider the price elasticity of demand, when combined with the current low coverage, they suggest the system urgently needs to be enlarged. To this end, PPWSA proposes to rehabilitate and extend the Chruoy Chang War water treatment plant, which will be able to produce another 65,000 cu. m/day. Obviously, this will not meet the city's needs; rather, it will only satisfy immediate demand. However, capacity will not be expanded further until the effect of increased tariffs on demand is understood. 2.6 The feasibility study for the treatment process at the Chruoy Chang War plant evaluated three alternatives: (a) rehabilitating/replacing the existing facility; (b) rehabilitating/replacing most of the structures; and (c) constructing a new treatment plant elsewhere. It concluded that alternative "b" offered the most cost-efficient course, and possibilities for future expansion. 2.7 Prelirninary engineering designs, prepared by consultants and reviewed by PPWSA and independent consultants, analyzed soil, topographical and hydrological conditions, characteristics of the raw water, and the existing structures. IDA has also reviewed them and found them satisfactory. Detailed designs for this subcomponent will form part of a turnkey contract for design, supply, construction, installation and testing. The subcomponents also provide for consultants to supervise construction. This sub- component will finance: a) Construction of new sedimentation tanks, rapid gravity sand filters and a clear water reservoir as well as mechanical and electrical equipment to produce 65,000 cu. m of potable water per day; b) Rehabilitation of other existing structures, including all connecting pipes, drains and roads, fencing and lighting; c) Construction of a new accommodation block and flow meter house; d) Rehabilitation of two high-level reservoirs; e) Laying of 2.5 km of 800 mm diameter transmission mains to the city network; and f) A crossing of the Tonle Sap River by attaching pipes to an existing bridge. 2.8 Subcomponent 2: Pipes, ancillary and leak detection equipment. The component includes about 85 km of pipes and fittings to provide water in the southern district of Chamcar Morn. The pipes will form the secondary and tertiary network. IDA has reviewed PPWSA's bidding documents to procure pipes and ancillary equipment and found them satisfactory. The component will also help finance leak detection equipment  12 to tackle the problem of UFW. Specifications and quantities will be finalized during execution, in consultation with technical assistance personnel. 2.9 Subcomponent 3: Pilot program for financing domestic connections. Phnom Penh's water distribution system is characterized by single connections that serve several households. This can be difficult for the poor, since neighbors often charge a high price, well above the official tariff, also, the practice creates public health hazards, because the receptacles used to store water are usually unclean. Surveys have found that a main reason for the relatively small number of individual house connections is the amount of the connection fee, which is large when compared to household income. Thus, the project will include a pilot program whereby funds would be offered at market interest rates to partially finance the connections and would be repaid through the water bill . If the pilot succeeds, repayments could feed into a revolving fund for additional connections, as PPWSA expands coverage. 2.10 Subcomponent 4: Technical assistance to improve operational and financial performance. PPWSA has already made impressive gains in reducing the level of unaccounted for water (UFW), through bilateral assistance from France. However, the project will finance a specialist to help the utility lower the level even more. Another consultant will be funded to help PPWSA improve its financial management, billing, collections, cost control and general accounting system. Similarly, the project will finance a computer technician/training specialist, and a water quality expert. This component has been designed so as to avoid overlap with the TA provided by ADB and the Japanese government. 2.11 Subcomponent 5: Twinning arrangements to develop PPWSA capacity. Although PPWSA staff are extremely motivated and have dramatically improved the utility's performance in the last couple years, their effort has been largely individualistic and ad-hoc. The absence of a corporate culture has been because of the destruction of virtually the entire institutional memory during the civil war years, when all records were destroyed. In addition, during the years of civil war, while water supply was erratic and of uncertain quality, consumers were given free access through the 1900 public underground tanks constructed during the Khmer Rouge era. The significant weakness of capacity is the absence of a working environment that promotes professional growth and encourages transparency. Instead, progress has been entirely due to the dedicated work by a few committed staff, which has introduced basic organizational and maintenance procedures in an essentially ad-hoc fashion. To remedy this, the project includes a twinning arrangement with an Australian water utility with a proven track record of serving its customers efficiently; staff will be able to work with counterparts from this commercial utility--both in Australia and in Phnom Penh--that uses state-of-the-art management practices, and learn on what it takes to operate a water utility based on sound commercial practices. Funding for the initial phase (US$250,000) has been provided by the Australian Aid for the Mekong Basin Financing Facility. Areas of particular interest will be in developing organizational incentives for tackling the UFW problem, improving  13 billing and collections systems, responding quickly to consumer complaints, and publishing an Annual report on utility performance. 2.12 The effectiveness of the twinning will be evaluated at the end of the first year, when it will be decided if it should be continued or expanded. If the decision is to continue, choice of the twin will be made according to World Bank procurement procedures. At this stage, the arrangement could be widened to include SWSA. 2.13 The project will also support the establishment and operation of a training center for the water and sanitation sector. The center will provide courses using PPWSA/UPWS staff and visiting experts, rather than retain a team of trainers. Courses that are not specific to the water sector (such as English, bookkeeping, etc.) will be outsourced through service contracts. It will also finance some equipment and the services of visiting experts. Component 2: Expansion of Sihanoukville Water Supply (base cost US$3.50 million) 2.14 Until now, provincial utilities have focused on rehabilitating their facilities, and Sihanoukville has completed this stage: Refurbished under the UNDP/World Bank project, the SWSA now meets WHO quality standards of treatment. However, the supply still falls far short of demand during the dry season and in general, serves only 11 percent of the city's 47,000 residents. To make matters worse, trends indicate the population will grow rapidly by the early part of the next century. Thus, the component will enable SWSA to increase the quantity of treated water by 400 percent, and adopt sensible pricing policies to reduce UFW even more. Further, technical assistance will help the utility restructure into a commercial enterprise. 2.15 The city's water supply source is a small shallow lake held in place by a small weir with a crest about 3.5 m above sea level. It can meet existing demand during the wet season (May to October), but the level drops by as much as three meters during the dry season, at which point the supply is just half of what is needed. And, while the city's water treatment plant, built in the 1950s, has a capacity of 8,000 cubic meters a day, the distribution system only extends for 27km. As a result, most residents obtain water from a local delivery service that draws and supplies it--untreated--from the lake. 2.16 Water supply is critical, since Sihanoukville has a great potential for growth and employment in the industrial and service sector (including tourism), and is key to the country's economy. To meet this potential, investments under the project would be made in several areas, so as to increase the daily supply to 5,200 cubic meters. This would involve raising the reservoir's level to allow a draft of 2,100 cubic meters a day, to cover losses incurred during treatment and transmission. 2.17 Construction Works. The lake presents several problems that project works will resolve. First, the level will be raised through the construction of a new weir crest against the existing bridge abutments; this will increase the storage by around 100,000 cu. m, allowing an extra 500 cu. m per day of dry season off-take. Second, the weir (which is a  14 low-cost intervention) will reduce the current outflow of groundwater that geological investigations have identified to be an amount even greater than the daily withdrawal (2,100 cu. m). Afterwards, the draft could be increased (and sustained) by about 1,100 cu. rn/day. 2.18 Besides work on the lake, the project will construct new wells that will provide an extra 1,500 cu. m/day. Finally, it will expand access to water through the construction of tanker filling stations and water selling points. This component, which includes consulting services for design and construction supervision, will involve: a) Increasing the storage volume of the raw water lake by raising the outlet weir and sealing off the sand spit; b) Constructing four new groundwater wells and related works, including a deferrination plant; c) Connecting wells to the distribution network, including the supply and laying of pipes; d) Improving the distribution system, including procuring and laying pipes and fittings, and establishing tanker filling and water selling points; e) Improving the treatment plant and raw water pumping station; and f) Building another high-level reservoir within the distribution system. 2.19 Technical assistance for Sihanoukville. The component will finance technical assistance and studies for the UPWS, including: (a) a project engineer to help with overall planning and management; (b) accounting and computer experts; (c) a procurement specialist; (d) a training specialist; (e) a socio-economic survey to establish the customer base and level of effective demand for water service; (f) engineering advice to check the design of the groundwater deferrination plant and expansion of the reticulation system; and (g) studies on long-term water sources. 2.20 The primary purpose of the TA consultants, who will be based in Sihanoukville, will be to help SWSA improve its operations. However, the SWSA effort will be a model for other provincial water utilities to move from rehabilitating facilities to introducing commercial operations. Thus the TA consultants will help MIME's UPWS strengthen other provincial utilities (see Annex 7 for details of the Sihanoukville component). Component 3: Developing Water Supply and Sanitation Policy (base cost US$2.08 million) 2.21 In general, the project attempts to address both sector-wide and utility-specific institutional issues, which are highly connected. In this report, interventions aimed at improving institutional capacity and efficiency within the entire sector are covered under this component; those specifically directed to PPWSA and MIME/SWSA are described under the technical assistance components and the respective annexes.  15 2.22 This component will help the Government create institutions that can maintain and expand service in an efficient, equitable, and sustainable manner, consistent with public demands. However, it is the most important and difficult component in terms of design and implementation. Cambodia is a post-Communist transition economy, and attempts at sector reform to date have faced ideological positions that are changing, but only gradually. Thus, the component has to balance what is optimal from IDA's point of view, and what is possible. Excessive emphasis on the former could well lead to the whole reform package being shelved, at high cost to the economy, while too much attention to the latter would make the project unsustainable. Another obstacle is the limited policy-making capacity at the national agencies. While staff at utilities like PPWSA have acquired considerable knowledge through practical experience, those at most ministries are not yet capable of integrating technical, financial, institutional and economic aspects into a coherent sector policy. Thus, technical assistance will provide consultants to the Government and help defray the costs of seminars (organized through EDI). 2.23 The interventions proposed will help the Government develop the policy framework for water supply and sanitation, and identify future investment priorities and possible sources of financing. Consultant Support to RGC 2.24 Water policy consultant. The project will finance a water policy consultant to help the Government prepare a draft sector policy paper for water and sanitation (see Annex 8 for outline terms of reference). The consultant will build on the results of the first EDI serninar and the April 1997 letter of sector objectives. The Government has requested that, once the paper is completed, another EDI seminar will be organized in Phnom Penh to discuss the document. During negotiations, assurance was obtained from the Government by December 31, 1999, it will develop a national strategy for water and sanitation service provisioning, and that it will enunciate by December 31, 2000, a formal statement of sector policy acceptable to IDA, which will form the basis of future sector investments. 2.25 A key element in the proposed sector policy will be defining an approach to set and revise tariffs in Phnom Penh and the provincial towns. The Government has committed itself to the goals of setting tariffs that recover costs, helping water utilities become commercially viable and respond to consumer demand, and developing institutional/regulatory arrangements by which tariffs can be revised on the basis of transparent criteria. The sector policy statement will set out the criteria in detail. It will also describe institutional arrangements that are transparent and sound, and consider the incentives needed for agencies to act in an economically efficient manner. 2.26 Institutional consultant. As a follow up to the EDI seminar and the policy formulation, the project will finance an institutional consultant to help translate the sector policy into specific actions (see Annex 8 for terms of reference). The aim is to produce a  16 rational, well-defined policy-making structure, establish clear rules for operational autonomy within the legal framework, and create mechanisms for utilities' accountability to consumers and other stakeholders. 2.27 Sanitation and wastewater management study. The project will finance a study for Phnom Penh and Sihanoukville that will focus on providing services based on what consumers want and will pay for, and managing operations at the lowest administrative level possible. The study will recommend a cost-effective solution to urban pollution caused by untreated human waste, which could form the basis of national policy on sanitation and wastewater management (see Annex 9 for terms of reference). 2.28 EDI Seminars. As part of project preparation, the World Bank's Economic Development Institute held a seminar on water sector policy in Phnom Penh in March 1997 that exposed policy makers to current thinking, successful models from the rest of the world, and various options. It also helped policy makers develop a consensus about a vision for the future. As a result, the Government asked EDI to hold further seminars where professionals could share information and discuss the draft policy document to be prepared under the credit. Summary 2.29 The issues described above were based on discussions during project preparation. However, as other issues will surface during implementation, the assistance package needs to be flexible. Emphasis will be on learning by doing and incorporating lessons as the project progresses. Already, the Government took two important steps, which demonstrate its commitment to the project's goals. First, it passed a decree that granted PPWSA autonomy. Second, it established an inter-ministerial mechanism to coordinate the sector (the Coordinating Committee for Water and Sanitation), which will oversee the component. 2.30 The approach will involve a two-fold strategy. First, it will engage key stakeholders in a continuing dialogue on policy (such as setting water tariffs, commercializing utilities and financing operations), while learning about what works in the PPWSA and SWSA components. Second, it will ensure that dialogue occurs at the same time that a framework of rules and institutions is developed that can provide sustainable water and sanitation services. C. COSTS AND FINANCING Project Cost 2.31 The total project cost, including taxes, duties and contingencies, is estimated at Riels 154,565 million or US$41.64 million equivalent. Physical contingencies of 15 percent were added to works, equipment, and various other items. Price contingencies as shown in Table 2.1 were applied to base costs, including physical contingencies. A  17 constant purchasing parity exchange rate was used to convert US dollar amounts to Riel equivalents. Table 2.2 summarizes the estimated cost of each component (see Annex 5 for detailed cost tables). Table 2.1: Price Contingencies and Exchange Rate 1998 1999 2000 2001 2002 Contingency Local costs 9% 6% 5% 5% 5% Foreign costs 2.8% 2.8% 2.8% 2.8% 2.8% Table 2.2: Project Cost Summary Components: Local Foreign Total Local Foreign Total % % of (Riels Million) (US$ Million) Foreign Base Costs Phnom Penh water supply 35,745 63,434 99,179 10.51 18.66 29.17 64.0 84.0 Sihanoukville water supply 2,270 9,640 11,910 0.67 2.84 3.50 81.0 10.0 Assistance to develop a 1,444 5,615 7,060 0.42 1.65 2.08 80.0 6.0 W&S policy framework Total Base Costs* 39,459 78,690 118,149 11.61 23.14 34.75 67.0 100.0 Physical contingencies 5,472 10,007 15,479 1.61 2.94 4.55 65.0 13.0 Price contingencies 7,666 13,271 20,938 0.88 1.45 2.33 62.0 7.0 Total Project Costs 52,597 101,968 154,565 14.10 27.54 41.64 66.0 120.0 * Including taxes and duties of about US$ 5.16 million equivalent Financing Plan 2.32 The IDA credit would be lent to the RGC at standard terms, including a 40-year maturity period, 10-years grace, standard commitment charge and at a 0.75 percent service fee. Funds for the Phnom Penh component will be on-lent to PPWSA in local currency at 8.5 percent fixed per annum, 17-years maturity, and 5-years grace on the repayment of principal. The RGC would assume the foreign exchange risk. Assurances were obtained that it will enter into a subsidiary loan agreement with PPWSA, on terms and conditions satisfactory to IDA. SWSA's loan will be assumed by MIME, but will be recorded on SWSA's books, as if it were an autonomous, commercial enterprise. 2.33 Table 2.3 summarizes the project's net investment requirements and financing plan after import taxes and levies have been deducted (waived by the RGC) and the estimated interest during construction included in total project costs. Total net investment requirements are estimated at US$39.79 million, of which the IDA credit will finance approximately 77.8 percent or US$30.96 million. PPWSA will essentially finance the remaining net investment through its existing cash balances and internal cash flow projected for the 5-year implementation period. SWSA will assume a small share of the investment requirements-the interest during construction--on its portion of the credit.  18 Table 2.3: Financing Plan (US$ million): 1998 1999 2000 2001 2002 Total Percent Investment Requirements Project costs 2.23 20.10 13.15 3.98 2.18 41.64 104.7% Less import taxes and duties 0.33 2.68 1.77 0.55 0.31 5.64 14.2% Net Project Costs 1.90 17.42 11.38 3.43 1.87 36.00 90.5% Interest during construction 0.06 0.66 1.51 1.04 0.52 3.79 9.5% Total Requirements 1.96 18.08 12.89 4.47 2.39 39.79 100.0% Financing Plan IDA 1.70 16.64 9.96 2.53 0.13 30.96 77.8% PPWSA 0.26 1.43 2.89 1.91 2.26 8.75 22.0% SWSA 0.00 0.02 0.03 0.03 - 0.08 0.2% Total Financing Sources 1.96 18.08 12.89 4.47 2.39 39.79 100.0% D. PROCUREMENT 2.34 Procurement would be carried out according to the Guidelines for Procurement under IBRD Loans and IDA Credits, dated January 1995, revised in January and August 1996 (see Table 2.4 and Annex 11 for procurement arrangements). The total cost of items described includes their share of physical and price contingencies and taxes and duties. Standard bidding documents and a standard bid evaluation report will be used for procurement of works and goods under international competitive bidding (ICB). 2.35 The largest contract (estimated at $23.73 million) will be for the turnkey detailed design, supply, installation, construction, and commissioning of the Chruoy Chang War Water Treatment Plant, which includes mechanical and electrical equipment. This contract will follow ICB procedures and bidders were pre-qualified under Bank pre- qualification procedures; pre-qualification and bidding documents for the turnkey contract were prepared by PPWSA and cleared by IDA. ICB procedures will also be used for certain works and supply-and-installation activities ($2.86 million) on the Sihanoukville water supply component, and for the supply and delivery of pipes and fittings for the works ($2.71 million) in the Chamcar Mom District of Phnom Penh; bidding documents for pipes and fittings were prepared by PPWSA and cleared by IDA. For procurement under ICB procedures, domestic goods, plant and equipment would be allowed a preference margin of 15 percent of CIF or the amount of customs duties, whichever is lower, for bid evaluation. PPWSA will finance US$5.08 million equivalent to install the pipes and related works in the secondary and tertiary network, which will be procured under PPWSA procedures. 2.36 A general procurement notice was published on August 16, 1996 in Development Business. A pre-qualification notice for rehabilitation and extension of the water treatment plant and a specific procurement notice for the supply and delivery of pipes and fittings were issued on June 16, 1997 in Development Business. In addition, specific  19 procurement notices will be posted for all consultant contracts exceeding $200,000. No mandatory associations between foreign and local consultants will be permitted. Table 2.4: Procurement Arrangements (US$ million) Procurement Method NIF2 Total ICB Other' 1. Turnkey contract for Chruoy 23.73 - 23.73 Chang War WTP rehabilitation (20.61) - - (20.61) 2. Other civil works3 2.86 - 5.375 8.23 (2.45) (2.45) 3. Equipment 2.71 0.63 0.046 3.38 (2.39) (0.56) (2.95) 4. Consultants A. Construction supervision - 1.21 - 1.21 - ((1.10) (1.10) B. TA - 3.40 0.227 3.62 - (3.08) (3.08) 5. Revolving funds for the pilot - 0.30 - 0.30 domestic-connection program - (0.26) - (0.26) (0.26) 6. Training - 0.58 - 0.58 (0.51) (0.51) 7. Incremental operating costs4 0.299 0.29 6. Land acquisition 0.30 0.30 Total 29.30 6.12 6.22 41.64 _ (25.45) (5.51) (30.96) Figures in parentheses represent amount financed by the IDA Credit Procurement arrangement by each component is presented in Annex 11. 'Includes national shopping, intemational shopping and engagement of consultants 2 Not-IDA financed Includes supply & installation contracts of Sihanoukville component and PPWSA's contribution for the installation of pipes for the secondary and tertiary network in the southem district of Chamcar Mom. 4 Includes maintenance and insurance costs for computer equipment, reallocation compensation, communication costs, and local staff costs. 5 PPWSA will finance USS5.08 million equivalent to instaul pipes for the secondary and tertiary network in the southem district of Chamcar Mom, US$160,000 equivalent to construct the training center and US$120,000 to clean the site at Chruoy Chang War WTP. MIME/SWSA will finance US$13,200 equivalent to improve the access road. 6 PPWSA will finance US$36,000 equivalent for equipment for the training center. ' PPWSA will finance about US$220,000 equivalent for costs of local staff (training expert, computer expert and water quality expert). ' PPWSA will finance about US$200,000 equivalent for reallocation compensation, computer maintenance & insurance and local staff (administration staft). MIME/SWSA will finance USS54,600 equivalent for local staff (administration staff). RGC will finance US$44,000 equivalent for local staff of the Coordinating Committee's secretariat. 2.37 Some urgently needed miscellaneous equipment (e.g. computers and computer software) will be procured on the basis of national or international shopping as appropriate on the basis of a minimum of three quotes for individual contracts of less than US$50,000, with an aggregate value not exceeding US$200,000.  20 2.38 Since PPWSA and SWSA/MIME do not have experience with procurement procedures acceptable to IDA, the project provides assistance in procurement. 2.39 Cost estimates also contain an allowance for consultants to supervise the construction of all major works financed under this project. It was agreed at negotiations that PPWSA and SWSA/MIME will retain consultants for all TA activities under the credit according to terms of reference and selection procedures acceptable to IDA. "Quality Based Selection" is being used to select a firm to supervise construction for the Phnom Penh component (estimated at $930,000); the request for proposals for this consultancy was prepared by PPWSA and cleared by IDA. In view of the highly specialized experience required for these positions, the water policy and institutional consultants would be individual consultants. The technical assistance personnel for strengthening PPWSA and SWSA would also be selected as individual consultants. All consultancy services will be procured according to the Guidelines for Selection and Employment of Consultants by World Bank Borrowers dated January 1997. The Bank's standard contract form will be used for consultancy services. 2.40 IDA-financed contracts above US$200,000 will be subject to its prior review procedures. For consultancy contracts, the threshold for prior review will be US$100,000 for firms and US$50,0C0 for individuals. In any event, all TORs, including sole source selections of consultafrs regardless of the value of contract, will be subject to prior review. In all, about 94 percent of the total project cost will be subject to prior review. The post review of contracts will be carried out on the basis of one in three contracts for goods and works. Procurement information will be collected and recorded from comprehensive quarterly reports to IDA by the project coordinator. These reports will include revised time schedules for procurement actions including advertising, contract awards and completion time for individual contracts. E. DISBURSEMENTS 2.41 The proposed IDA credit would be disbursed against: (a) 100 percent of foreign expenditures and 50 percent of local expenditures for the turnkey detailed design, supply, installation, construction, and commissioning related to the Chruoy Chang War Water Treatment Plant, including mechanical and electrical equipment; (b) 100 percent of foreign expenditures and 30 percent of local expenditures for civil works, including supply and installation contracts, related to the Sihanoukville component; (c) 100 percent of foreign expenditures for imported equipment and materials; (d) 100 percent of expenditures for consulting services; (e) 100 percent of expenditures for the revolving fund of the pilot domestic connection prograrn; and (f) 100 percent of training expenditures. The credit will be disbursed against the categories in Table 2.5 (see Annex 12 for disbursement categories by each component and the estimated schedule).  21 Table 2.5: Disbursement Categories Category Amount (US$ % Expenditure Financed million) Civil works (including supply and installation contracts) A. Phnom Penh component 20.61 100 % of Foreign, 50% of Local B. Sihanoukville component 2.45 100 % of Foreign, 30% of Local Equipment A. Phnom Penh component 2.72 100 % of Foreign B. Sihanoukville component 0.05 100 % of Foreign C. Policy component 0.18 100 % of Foreign Consultants A. Phnom Penh component 1.90 100% B. Sihanoukville component 0.95 100% C. Policy component 1.33 100% Connection fees for pilot revolving 0.26 100% fund Training A. Phnom Penh component 0.38 100% B. Sihanoukville component 0.13 100% Total 30.96 2.42 Full documentation will be required for all contracts for equipment and works valued at US$200,000 equivalent or more. Disbursements for equipment, works and costs for implementation support valued at under US$200,000 would be made on the basis of itemized Statements of Expenditure (SOE). The SOE limit for consultant services would be US$100,000 for firms and US$50,000 for individuals. The records of SOE-supported expenditures would be retained and made available to IDA supervision missions and regularly audited by external auditors acceptable to IDA. For the Sihanoukville component, the condition for disbursement is that average tariffs should have been raised to a level that ensures the financial viability of SWSA. 2.43 To facilitate disbursement from the credit, PPWSA and SWSA/MIME will each open and maintain an IDA Special Account in the National Bank of Cambodia authorized for this purpose, on terms and conditions satisfactory to IDA, including appropriate protection against set-off, seizure or attachment. The accounts that cover the IDA share of eligible expenditures in all disbursement categories would each have an authorized allocation of US$700,000 and US$400,000 equivalent, for PPWSA and SWSA/MIME, respectively, to be withdrawn from the IDA credit and deposited in the Special Account.  22 Unless IDA agrees otherwise, the authorized allocation will be limited to the equivalent of US$350,000 and US$200,000 for PPWSA and MIME, respectively, until disbursement and outstanding commitments against the credit allocated to each component equal or exceed the SDR equivalent of US$2 million. Applications to replenish the Account, supported by appropriate documentation, would be submitted regularly (not less than quarterly) or when the amount withdrawn equaled 30 percent of the initial deposit. 2.44 The project is expected to be completed by June 30, 2002 and the closing date for the credit would be December 31, 2002. The estimated disbursement schedule is based on detailed project implementation schedules in various PIPs (as no Bank disbursement profile exists for water supply projects in Cambodia, the comparison shows the Bank Standard Disbursement Profile (1995) for water supply and sanitation projects in the East Asia and Pacific Region'). F. PROJECT MANAGEMENT AND IMPLEMENTATION Project Implementation 2.45 As the project seeks to build institutional, financial and technical capacity in each of the implementing agencies, no new project unit will be established. Instead, existing structures in each agency will be strengthened to implement their respective components with the help of consultants. In the case of Phnom Penh (see organization chart - Annex 10), PPWSA already has established a project management unit (PMU) under the managing director, supported by three deputy directors and a team of qualified staff. The PMU's primary responsibility is to implement three projects: the proposed IDA-financed project, and the on-going ADB and Japan Government financed projects. In Sihanoukville, SWSA will implement the project, with support from MIME's UPWS (also see the organization chart in Annex 10). 2.46 The policy framework for the water and sanitation sector will be based on lessons from the PPWSA and SWSA components and implemented by the Coordinating Committee, with secretariat assistance from MIME (see para. 1.21). Additional back-up support, if required, will be provided by the IDA-financed PMU/Financial Services Unit in the Ministry of Economy and Finance, where local staff gained experience in project implementation, including procurement, performance monitoring, and reporting to the Bank, under the Emergency Rehabilitation Project. Details of the organization and management of the project are in the project implementation plan, summarized in Annex 11. The bulk of disbursements will take place through PPWSA, which has a better implementation capacity than water utilities in provincial towns.  23 Supervision and Monitoring 2.47 Each agency has prepared a set of the performance monitoring indicators for its respective components, which were agreed upon during negotiations (see Annex 13). The key indicators cover each component's objectives, major activities and inputs required, expected outputs, and results/impacts to be monitored during project implementation. The implementing agencies will submit semi-annual and annual reports to IDA on the progress of each component. A mid-term review would be carried out after the project's second year, estimated to be in June 2000, in conjunction with the RGC, the implementing agencies, and IDA. Its purpose will be to assess progress, particularly with the policy framework component. Financial Management 2.48 PPWSA and SWSA accounting, financial management, and cost control capacity will be strengthened by the project with consultant support. The technical assistance provided will help the two agencies accomplish their medium-term goal of establishing commercial operations. Within nine months after the end of each fiscal year, the implementing agencies will submit to IDA an auditor's report, management report and audited financial statements for the Special Accounts, Project Accounts and SOEs for the preceding calendar year, audited by an external auditor acceptable to IDA. The audit will ensure that: (a) proper accounting and audit procedures were maintained by both organizations throughout the year; (b) a sufficient flow of funds contributed to the utilities' investment programs throughout the year; (c) the utilities' profit and loss accounts fairly assess the year's trading results; (d) the balance sheet provides a fair assessment of the current value of their assets and liabilities; and (e) both will be able to meet their commitments over the ensuing year. 2.49 After PPWSA and Phnom Penh Municipality agree on the composition of PPWSA's assets and liabilities, the latest balance sheets, and profit and loss accounts, it will be audited by an independent auditor acceptable to IDA, financed under the credit. The purpose will be to prepare a base assessment of the utility's financial position and determine its capacity to meet commitments under the project. This audit will probably necessitate a revaluation of the assets held by each organization. The same exercise will be performed for SWSA. 2.50 During negotiations, the ROC agreed that by December 31, 1998, it would cause a revaluation of the assets of PPWSA and SWSA to be carried out, along with the initial audits of each entity. An understanding was reached that independent auditors will be appointed for this purpose. Agreement was also reached that the RGC would monitor the progress of the project according to the agreed performance indicators, and fiumish IDA semi-annual progress reports.  24 3. FINANCIAL ANALYSIS A. INTRODUCTION 3.1 The financial analysis of the Project involved: (1) a review of PPWSA and SWSA operations and (2) a review of the project and debt service of the two stand-alone investment components. A fully integrated financial model was developed to support the analyses, particularly for projecting and assessing financial outcomes. Emphasis was given to ascertaining the adequacy of tariff levels in order to fully recover costs as well as evaluating the ability of the water authorities to meet performance improvement targets. Special attention was given to PPWSA's ability to achieve targets for reducing UFW. 3.2 The Phnom Penh component forms part of PPWSA's much larger program to expand the supply and efficiently distribute water. Besides the proposed Bank-funded project to renovate the Chruoy Chang War water treatment plant, the program involves expanding and rehabilitating the transmission and distribution system in other parts of the city as well as expanding the Chamcar Mom and Phum Prek water treatment plants. Financing for these investments have, or are currently being, finalized with the ADB, the Japanese agency JICA, and French aid agencies. Altogether, investments are estimated to be US$120 million, for the 1996-2002 period. 3.3 Because of the close relationship of these other projects and their benefits to the project proposed by PPWSA, the financial assessment focused on the combined returns of the entire investment program by including all the estimated costs, assumed debt and expected returns in order to evaluate the financial and economic attractiveness of the planned investments as well as PPWSA's ability to meet current and future debt servicing requirements. Compared to the Phnom Penh component, the Sihanoukville component is relatively small and does not rely on the implementation of other projects to achieve its expected benefits; however, the component is significant, as it will help improve public health and general living standards, and increase industrial output. B. OVERVIEW OF CURRENT FINANCIAL PERFORMANCE 3.4 Financial and operating highlights for 1996 for PPWSA and SWSA are as follows:  25 Table 3.1: Financial and Operation Performance of PPWSA and SWSA Indicator Phnom Penh Sihanoukvillel Total revenues Riels 13.5 billion Riels 393 million Net income (loss) before Riels 2.5 billion (Riels 33 million) depreciation Net income (loss) (Riels 724.4 million) NA Total assets Riels 264 billion2 Riels 997 million Total debt Riles 11.6 billion Total capital Riels 251 billion Riels 846 million Water supply capacity 110,000 M3 per day 8,000 M3 per day Water losses 57% 28% Average tariff rate 895 Riels/cm 868 Riels/cm Connections 35,986 886 Collection efficiency 85% 95% 3.5 Phnom Penh Water Supply Authority. PPWSA follows conventional accrual accounting principles. Standard commercial procedures are applied for the accounting of revenues and expenses as well as fixed assets and debt obligations. PPWSA has computerized most of its accounting, including the general ledger, billings and receivables; however, the balance sheet opening positions for the new autonomous corporation have not yet been finalized pending the reconciliation of the inter- governmental trade accounts such as trade receivables and payables and outstanding debt. While some of the debt may be affected by the reconciliation, it is not anticipated to have a material effect on the financial assessment. 3.6 PPWSA past profit performance has been poor, due to high levels of UFW and inadequate tariffs. For 1997, the Authority is estimating a net loss of approximately Riels 724 million (US$200,000 equivalent) on revenues of Riels 13.5 billion. However, total cash flow was positive before depreciation charges. Electricity, maintenance and labor charges combined made up almost 50 percent of estimated expenses for 1997, while chemicals accounted for only 5.9 percent. This operating performance is a significant improvement over 1996, when losses were about $2.0 million; in 1998, it is expected to improve significantly with the introduction of new tariffs designed to recover all costs. PPWSA's unaudited financial statements for December 31, 1996 are presented in Annex 15. 3.7 PPWSA's corporatized opening balance sheet position is relatively strong, with minimal debt to the total level of assets. Total equity at Riels 251 billion comprises approximately 95 percent of total assets, yielding a debt-to-equity ratio substantially less than 1. However, it has experienced difficulties in managing its working capital. For example, inventories, liquid funds and receivables are excessive as are the accounts payable, particularly to the power supplier, Electricite' de Cambodge. Payments to other government agencies are also being delayed. These practices have developed partly from I Figures are for 10 months in 1997. Asset, debt and capital balances are for 1996. 2 Fixed assets were revalued in 1997.  26 the utility's lack of financial autonomy, and the related uncertainties of not having full control of its financial flows. Now that it has gained corporate autonomy, PPWSA management assures that commercial practices will be strictly followed, including prompt disconnection of delinquent accounts. 3.8 Its other major operating obstacle stems from UFW, which historically has been as high as 80 percent, one of the poorest records in the region. However, during the past few years, it has made impressive gains by introducing an intensive program to reduce these losses (see Annex 1): Technical and commercial losses have dropped to approximately 57 percent. Much higher gains have been demonstrated in PPWSA pilot areas and even more are expected in the near future, as new investments to rehabilitate the distribution network, financed by the ADB and Japan, come on-streamn. Technical assistance is also being made available through existing donor programs and by the proposed project to further strengthen accounting, financial management and commercial practices through metering and improved billings and collections. 3.9 Sihanoukville Water Supply Authority. SWSA's operational performance is similar to that of PPWSA's, although it is a much smaller and more manageable system. It is expected to incur a net loss in 1997 despite breaking even on a cash flow basis in 1996, as tariffs have not been sufficient to recover depreciation charges. However, tariffs were raised to ensure full cost recovery as well as meet projected debt servicing requirements. Water losses have been kept at respectable levels, averaging about 28 percent or less. Unaudited financial statements for the SWSA for 1996 are summarized in Annex 15. 3.10 In 1996, fuel and electricity made up 76 percent of expenses, while labor accounted for 4 percent. Like PPWSA, SWSA holds an excessive level of working capital, particularly in inventories. Also, it delays its payments to suppliers, which produces an account that is almost twice that of its receivables. Its balance sheet position is sound, with no long-term debt on the books; however, its equity position, at $300,000, particularly the retained earnings, are greatly overstated, since depreciation charges have not been counted. Its fixed assets could be revalued, based on current prices. While this would substantially increase SWSA's total value, it would also place added pressure on management to achieve returns on a more realistically valued asset base. Given the lack of completeness of SWSA's accounts, its management has assured the Bank it will assess its assets and liabilities as of December 31, 1997 no latter than December 31, 1998 in order to ensure more reliable opening positions. These findings will then be used to monitor project and financial performance targets during project implementation. C. FuTuRE FINANCIAL PERFORMANCE 3.11 Financial projections for both components for the 10-year period 1998-2007 are presented in Annex 16 along with a description of the underlying assumptions and input variables. Summaries of projected financial and operating performance for PPWSA and SWSA are presented below:  27 Table 3.2: Projected financial and operating performance of PPWSA PPWSA 1998 1999 2000 2001 2002 2003 Total revenues (Riels MM) 16,940 19,861 22,458 31,582 41,598 43,678 Net income (Riels MM) 1,280 2,101 1,829 4,050 6,317 458 Total assets (Riels MM) 319,293 435,314 479,637 497,200 504,756 495,072 Debt/equity ratio (times)3 11. .28 .38 .39 .35 .32 Average tariff (Riels) 868 920 966 1,014 1,065 1,118 Water losses 53% 48% 44% 42% 40% 40% Debt service coverage na na 35.7 4.1 2.8 1.3 (times) Self financing ratio 19.6% 10.2% 25.5% 81.3% 168.3% na Service connections 44,655 49,210 52,753 71,744 90,397 90,397 Operating ratio 54% 53% 49% 41% 40% 44% 3.12 PPWSA is likely to experience two critical periods in terms of its future finances during project implementation. The first will probably surface in 1998 and 1999, immediately after construction begins; the second will probably arise in 2003, once the project is completed and placed in service. In that year, the projected debt service is estimated to reach its highest levels--about Riels 20.5 billion on projected revenues of Riels 43.7 billion. During 1998-1999, the utility will experience significant pressure to produce enough counterpart funding through internal cash generation, so as to sustain its sizable investment program. By contrast, in 2003, the full force of depreciation charges from new investments, in addition to the debt service requirements, will affect the utility's income and cash flow, and seriously challenge its capacity to steer through the financial obstacles. Thus, its future finances will depend on its ability to: (a) maintain adequate tariffs; (b) realize performance targets for reducing water losses from the current 57 percent to about 40 percent, by 2003; and (c) impose strict controls on discretionary spending so the operating ratio can gradually improve as the revenue base expands. 3.13 With respect to water losses, significant improvements are anticipated as the ADB project to rehabilitate the distribution network proceeds. Conversely, tariff levels must remain positive vis-a-vis expected inflationary pressures and, lacking an independent regulatory institution, the Government has assured the Bank that a proper and depoliticized mechanism will be developed to ensure their adequacy in the future. In addition, PPWSA management has assured the Bank it will try to maintain the following financial targets during the five-year investment program: (a) an operating ratio of 50 percent or less; (b) a debt service coverage ratio of 1.3 times or better, beginning in 2003; and (c) an average collection period not exceeding 120 days, up to December 31, 1998, and not exceeding 80 days thereafter 3 A debt-to-equity ratio of 1.0 times equates to a capital structure of 50% to 50% equity. Accordingly, a capital structure of 75% debt to 25% equity equates to a.debt/equity ratio of 3 times.  28 Table 3.3: Projected financial and operating performance of SWSA SWSA 1998 1999 2000 2001 2002 2003 Total revenues (Riels MM) 750 1,708 2,658 2,797 2,941 3,088 Net income (Riels MM) 163 782 1,990 550 [53 243 Total assets (Riels MM) 2,494 16,829 19,958 20,897 21,308 21,614 Debtlequity ratio (times) .67 3.20 2.17 1.98 1.94 1.82 Average tariffs (Riels) 1,353 1,434 1,506 1,581 1,660 1,743 Water losses .23 .20 .18 .17 .17 .17 Debt service coverage 1,206.9 113.7 326.6 21.4 11.5 12.6 (times) Self financing ratio 46.2% 5.6% 232.8% 230.3% 692.4% na Service connections 886 1,176 2,329 2,329 2,329 2,329 Operating ratio 76% 59% 44% 65% 65% 64% 3.14 SWSA's finances are projected to be more manageable, both during construction and once debt service begins on the proposed credit. Partly, this is due to the more lenient lending terms provided to SWSA. Still, the project is large when compared to SWSA's total capitalization; thus, the credit will place added pressure on SWSA management to maintain adequate tariffs and control operating costs. In addition, its debt will increase significantly, particularly in 1999 and 2000, in the early construction period, when its capitalization will essentially be all debt. 3.15 Since SWSA is a unit of MIME and not yet corporatized or autonomous, the project is designed as a pilot, both for it and other provincial water authorities, to test management's capacity to operate as if it were. Accordingly, the Government and SWSA agreed to adopt commercial financial performance targets during the implementation of the credit, as practice for bringing the organization closer to a financially autonomous status. The agreed targets are: (a) an operating ratio (excluding depreciation and interest charges) of 60 percent or less; (b) a collection performance of not less than 90 percent; (c) an average collection period of 60 days or less; and (d) a current ratio of 2:1 or better. 3.16 Given the financial parameters adopted by PPWSA and SWSA and the performance targets agreed with the Bank, both organizations are expected to record respectable financial returns on their proposed investments, with calculated financial rates of return of 13.6 percent and 11.2 percent, respectively.  29 4. PROJECT BENEFITS AND ECONOMIC ANALYSIS A. PROJECT BENEFITS Non quantifiable benefits 4.1 One of the main goals of a water supply project is to improve public health and well-being. Among the most affected by the project will be the poorest, most marginal and vulnerable segments of the population. These are usually women and children, as well as transients and urban squatters who illegally occupy peri-urban areas without public services or live on public land, structures, apartment rooftops, drainage canals, embankments, and boengs. Because water is unavailable, they often purchase small amounts from those with water connections or from vendors. They also rely on polluted streams, rivers and wells to draw water for washing and bathing and are routinely exposed to health and environmental hazards brought about because of a lack of drainage and sanitation. 4.2 The impact of contaminated water is profound, as revealed by hospital morbidity reports. Health problems include not just the diseases associated with lack of clean water, such as gastro-intestinal or infectious diseases, but also dengue fever and malaria, which are widespread due to water storage practices. Infants and children are particularly affected, since exposure to contaminated water has led to one of the highest infant morbidity and mortality rates in the world; gastro-intestinal and infectious skin diseases are problems that can be alleviated by improving the quality of and access to water. Thus, the project will target areas where the poor can benefit the most: schools, hospitals, and squatter settlement areas, through communal water selling points. For example, several Sihanoukville schools have no running water for either drinking or sanitation. A hospital and an orphanage also lack water supply services, and rely on untreated water supplied by tankers. 4.3 In Phnom Penh, the price of water privately supplied by water tankers and individuals is estimated to be 10 times PPWSA charges, according to a recent ADB survey. In Sihanoukville and other provincial towns, price differentials are even higher. Socio-economic studies reveal that households have an estimated average monthly income of only US$23, but spend as much as 73 percent on water purchases.' Thus, the 'There are no reliable estimates of employment generation in the informal sector, although it appears to be substantial.  30 project will markedly lower their costs, because water will be supplied by the utilities (see Annex 1 on commercial practices in the water supply sector). 4.4 As primary health and food providers for their household, women will benefit from an improved water supply because it will facilitate better hygiene, food preparation, and general cleanliness, at home and in the surrounding environment. Apart from the cost savings, women will also gain through time-savings associated with procuring water. 4.5 Poor drinking water quality is a particularly serious problem in Phnom Penh, where many supply lines are old and allow treated water to be contaminated. Problems are severe in Sihanoukville as well, where many residents dig shallow wells that are contaminated by septage leached through the soil. 4.6 Another major non-quantifiable benefit will be the project's TA impact on Camnbodian water utilities. PPWSA has already generated impressive capacity to understand and grapple with the technical and management problems associated with large water systems, but the project will offer its personnel additional exposure to a well- run, commercial utility. Thus, the investment program will demonstrate that water utilities can be transformed into commercial entities that respond to consumer needs, preferences and willingness to pay. Depending on the experience gained in Phnom Penh and Sihanoukville, the component will probably be replicated in other towns. Quantifiable Benefits 4.7 The benefits described in the above paragraphs are substantial, although difficult to quantify and therefore not included in this analysis. However, even excluding them, the other economic benefits in both cities will be large. In Phnom Penh, revenue producing water is estimated to increase from about 14.9 million cubic meters a year in 1997 to 39.3 million cubic meters in 2002, through this and related projects. Total legal connections are expected to more than double, from about 39,000 to 90,000 by 2002, and water supplied to existing connections will be more reliable, both in terms of supply and quality. To improve access to the poor, it has included a pilot to finance domestic connections. 4.8 In Sihanoukville, the total available water is expected to increase from 0.58 million cubic meters a year to 1.77 million cubic meters by 2002, while connections will nearly triple, from 886 to over 2,300. As in Phnom Penh, the Sihanoukville component will make water supply more reliable in terms of availability and quality. To ensure that those not connected to the system have access, the project will construct water selling points in low income neighborhoods.' 2The water selling points will be located through a process of community consultations, and managed through lease or management contracts in 20 locations, and will serve about 2,800 persons.  31 4.9 The quantifiable benefits from the project arise from domestic consumption, as well as industrial and commercial consumption. No attempt has been made to value externalities or non-quantifiable benefits, such as public health improvements (though these are very substantial) or increased land values for areas covered by piped water. 4.10 Quantification of benefits was handicapped by the lack of reliable data. Only one source of data on willingness to pay was available--a study conducted for the ADB by consultants--which does not cover industrial consumers. The benefit valuation took into account the results of the survey and used information gathered from a recent ADB publication (Asian Water Utilities Handbook, 1997). Data were also gathered informally through discussions with PPWSA and the community on water vending practices by the informal sector. 4.11 Benefits from the project through higher domestic consumption arise from resource cost savings and the incremental consumer surplus. For the Phnom Penh component, the resource cost savings is the difference between the cost of water to PPWSA and that of privately vended water (including private wells). Using a figure of $0.67 per cubic meter, the resource cost saving was calculated to be $0.49 per cubic meter.3 The incremental consumer surplus is estimated at 10 percent of this benefit. 4.12 In Sihanoukville, domestic consumption was broken down into consumption from the reticulation system, water vendors, and the 20 new water selling points to be financed by the project. Water resource savings were applied to the additional water piped through the reticulation network and from that sold at the water selling points. The cost of privately vended water was estimated at US$0.824 per cubic meter, which provided a resource cost saving of US$0.56. 4.13 While the general equilibrium effects of improved water supply on the industrial and commercial sectors are substantially positive, they are difficult to quantify, given the absence of even rudimentary data. However, these consumers would obviously not purchase water unless the incremental revenue was at least equal to the price. From this price, the cost to PPWSA/SWSA is then deducted. An additional amount of consumer surplus is still not captured by the price, since anecdotal evidence points to industries paying far more than even the enlarged PPWSA tariff--which indicates the surplus is large. Evidence also suggests that industry and business start-ups have been retarded by the lack of reliable piped water. Thus, the approach adopted was to avoid sophisticated 3The price of vended water is reported in the Asian Water Utilities Handbook (1997) to be $1.67 per cu.m. in Phnom Penh. Table A 1.4 in Annex I provides consumption pattern data for Phnom Penh, and this was used as a basis for calculating the "without project cost" of water ($0.67). 4Lack of data from Sihanoukville precluded an analysis similar to that for Phnom Penh. For the latter, it was estimated that 62% of vended and water supplied from rivers and wells was collected by consumers without charge. Because Sihanoukville has fewer fresh water sources close to the urban area compared to Phnom Penh, the ratio was reduced to 50%. The price of vended water was assumed to be $1.64 per cu. m., though anecdotal evidence suggests it is closer to $2.0 cu. m. An overall average price for Sihanoukville for vended water was calculated on this basis.  32 analyses and instead use the commercial tariff per cubic meter as a proxy for overall benefits; this method almost certainly undervalues the benefits. 4.14 The aggregate benefit was calculated by applying the unit benefit per cubic meter to: (a) the volume of water consumption diverted from the higher cost supplier (vendor) to the lower cost supplier( PPWSA/ SWSA) and (b) the volume of increase in overall supply due to improved distribution (by reducing UFW). B. PROJECT COSTS 4.15 Project costs, described in the financial analysis section, were transferred to the economic analysis, and conversion factors applied. To determine incremental capital costs, the analysis used a standard conversion factor of 90 percent. For operations and maintenance costs, a conversion factor of 75 percent was used for salaries and wages, given the high level of unemployment in Cambodia. Electricity and chemicals were shadow-priced at 90 percent, to reflect the labor content, maintenance was shadow-priced at 80 percent of the financial price, given the relatively high labor needed to maintain production and distribution systems, and connecting consumers to the delivery network was shadow priced at 80 percent, also to reflect the high labor content. C. OTHER ASSUMPTIONS 4.16 Project analysis. Three analyses were made: one each for Phnom Penh, Sihanoukville, and the overall project. 4.17 Project life. The project was evaluated over 25 years. 4.18 Replacement costs. Post-project replacement costs for the production and distribution systems were included. 4.19 Capital costs. The opportunity cost of capital used was 10 percent. 4.20 Residual values. No residual values were added at the end of the project's economic life. 4.21 Contingencies. Physical contingencies of 15 percent were applied to civil works, mechanical and electrical works and installation, computing equipment and materials. Price contingencies were excluded as were duties and taxes. 4.22 National costs. Costs for the national training center, a study on Sihanoukville's future water needs, a study on sanitation and wastewater, and project coordination were not included in either the Phnom Penh or Sihanoukville component. Instead, US$2.3 million were included in the overall project assessment for these items. 4.23 Other costs. As noted elsewhere, the ADB launched a US$14.6 million water transmission and distribution project in other geographic sections of Phnom Penh. Thus,  33 this capital input had to be included in the analysis (see Annex 18 for tables to support the economic analysis). D. ECONOMIC RATES OF RETURN AND SENSITIVITY Phnom Penh Base case: Internal rate of return 18.8 percent Net present value at 10% $24.05 million Sensitivity: UFW remains at current level (EIRR) 12.8 percent UFW at 50 percent (EIRR) 14.7 percent Operating costs up by 30 percent (EIRR) 18.4 percent Benefits down by 30 percent (EIRR) 12.2 percent Benefits down by 30 percent and operating costs up by 30 percent (EIRR) 11.7 percent Sihanoukville Base case: Internal rate of return 10.1 percent Net present value at 10 percent $0.3 million Sensitivity: Water tariffs remain at current level (EIRR) 6.1 percent Operating costs up by 30 percent (EIRR) 8.6 percent Benefits down by 20 percent (EIRR) 3.9 percent Benefits down by 20 percent and operating costs up by 30 percent (EIRR) 2.1 percent Overall project economic assessment Base case: Internal rate of return 17.2 percent Net present value at 10 percent $22.2 million E. ENVIRONMENTAL AND SOCIAL IMPACTS 4.24 The proposed project was rated a "B" as there are no major environmental problems. The principal environmental irnpact is the larger volume of sewage the increased water supply will generate. In Phnom Penh, sewage outfalls discharge into the Tonle Sap river and a nearby lake. The project includes a study on sanitation policy that will guide investments in Phnom Penh and the provincial cities; the recommendations would be included in an investment program prepared under the project for future funding. In Sihanoukville, the proposed water system includes environmental mitigation measures for the weir design, reservoir expansion, and alum sludge disposal. 4.25 In Phnom Penh, the only direct social impact of the project is the displacement and resettlement of 26 households (144 people) living at the site of the Chrouy Chang  34 War treatment plant that belongs to PPWSA. These are retired and current employees of PPWSA, as well as 18 households of illegal immigrants. The utility had allowed them to live here because the plant was not operating and PPWSA did not need the land. Regardless of tenure issues, PPWSA prepared a Land Acquisition, Compensation and Rehabilitation Plan according to Bank policy (OD 4.30); eventually, many of its provisions were not needed, because the families opted for cash compensation. To ensure that all provisions were met, the Bank suggested and PPWSA agreed that prior to appraisal, an independent external agency evaluate the manner and transparency of the compensation, and the current conditions of the resettled residents. Based on this assessment, which was done in February 1997, all seemed to be in order and no further action is expected by PPWSA. In Sihanoukville, the component was designed so as to avoid resettlement at the present time. If any is needed later, it would be in connection with part of one well, and Sihanoukville authorities would acquire it directly from the owner. F. PROJECT RISKS Financial risks 4.26 The main financial risks would arise if PPWSA cannot achieve the agreed operational targets. a) Reducing UFW. As explained in the financial analysis, UFW bears heavily on the project's viability, reducing it is a complex multi-disciplinary effort (even in the best circumstances), and success cannot be taken for granted. However, the target of 40 percent is not overly ambitious, as it is still above the average for developing countries (37 percent) in the Bank's Water and Wastewater Utilities Indicators sample study. The project design would mitigate these risks by introducing the proposed technical assistance immediately after credit effectiveness, which would include the twinning arrangement. b) Raising tariffs. Between the time the project was appraised and negotiated, estimates of inflation and depreciation of the Riel against the dollar changed significantly because of the region's macroeconomics crisis. Thus, the project's financial sustainability will depend on how quickly water tariffs in PPWSA and SWSA are adjusted to cover the increased operating costs. The risk will be mitigated by an annual review of tariffs during IDA supervision missions. c) Achieving a mix of commercial and domestic consumption. The financial analysis assumed that when the expansion is complete, the shares of overall consumption will change: Domestic consumption will rise; commercial consumption will decline, from the current 45 percent to 38 percent. However, commercial consumption will rise in the aggregate, by 8 percent,  35 which is critical to the utility's financial viability. Thus, the long-term risk does not appear large. d) Increasing the number of revenue-earning connections. Connection costs continue to be high relative to per capita income, and experience elsewhere indicates that this often prevents poor and middle class consumers from becoming connected. This risk will be mitigated by the pilot scheme of assistance to domestic consumers to finance connection fees. Political and other risks 4.27 Cambodia depends on donor support for a considerable part of its budget. Thus, reduced donor support has severely reduced resources for counterpart funding. In the case of the major component, to be implemented by PPWSA, it is expected the water utility will generate enough funds internally to meet not only its counterpart fund requirements, but those of the entire project. This would reduce the burden on the national budget and limit the government's "contribution" to taxes and duties exemptions. However, the risk is serious. Thus, during negotiations, assurances were obtained from the Ministry of Economy and Finance that in the event PPWSA experiences financial difficulties and cannot meet its counterpart funding obligations, it will earmark the required counterpart funds from the Government budget. 428 Political risks remain that could reduce the Government's ability to develop the sector policies and introduce the required institutional reforms. These risks are mitigated by three factors. First, the policy making process will be developed in a participative manner, involving key stakeholders (consumers, utility employees, key political and official representatives). The Government has already signaled its conmnitment by forming an inter-ministerial Coordinating Committee to develop a comprehensive and long-term national policy for water and sanitation services, and to streamline its functions in the sector. Second, the project's approach to policy and institutional development is based on learning by doing, which means lessons can be quickly incorporated, adaptations can be made according to changed economic and political conditions, and the design reworked, if necessary. Third, a series of seminars have been proposed, organized by the Bank's Economic Development Institute (EDI), to inform stakeholders about the benefits of early action and the costs of inaction. 4.29 The lack of staff with experience in externally funded projects is a concern. As this is the first project for the agencies, the risk is that, without enough technical assistance, problems could arise: For example, at the early stages, the agencies' lack of familiarity with Bank procedures could slow procurement and general project implementation. For these reasons, the project will provide capacity building, technical assistance and staff training, especially at the beginning 4.30 Finally, the only risk that could not be reduced through careful preparation was that related to security and the unstable political situation. To mitigate this, activities have been limited to the two major urban areas, which are less likely to be affected.  36 5. AGREEMENTS REACHED AND RECOMMENDATION A. AGREEMENTS 5.1 Principal Agreements reached at negotiations were that RGC will: (a) enter into a subsidiary loan agreement with PPWSA, on terms and conditions satisfactory to IDA (para. 2.32); (b) provide counterpart funding for all project components, in event PPWSA is unable to meet its counterpart funding commitments (para. 4.27); (c) furnish to IDA a comprehensive national strategy for water supply and sanitation by December 31, 1999, and adapt thereafter a formal Statement of Sector Policy by December 31, 2000 (para. 1.23, 2.24 and 4.28); (d) carry out satisfactory procedures for monitoring the progress of the project in accordance with agreed performance indicators, and furnish IDA semi-annual progress reports (para. 2.47); (e) fwunish to IDA at project mid-term review to be held no later than June 2000, a report on the overall accomplishment of the project and progress achieved in carrying out the key elements of the Statement of Sector Policy (para. 1.23). 5.2 Principal Agreements reached at negotiations were that PPWSA and SWSA will: (a) retain consultants according to terms of reference and selection procedures acceptable to IDA for all technical assistance activities financed by the credit, and an action plan and timetable for the carrying out of studies and the implementation of agreed recommendations thereon (para. 2.39); (b) cause a revaluation of PPWSA and SWSA assets and the initial audit of accounts as of December 31, 1997, by an independent auditor acceptable to IDA, no later than December 31, 1998 (para. 2.50 and 3.10); (c) provide annual audited financial statements to IDA no later than nine months after the close of each of its fiscal years, prepared by extermal auditors acceptable  37 to IDA; and provide financial statements two months after the close of the fiscal year (para. 2.48); and 5.3 Principal Agreement reached at negotiations was that PPWSA will: maintain a debt service coverage ratio better than 1.3, an average collection period not exceeding 120 days, up to December 31, 1998, and not exceeding 80 days thereafter, and an operating ratio not exceeding 0.50 (para. 3.13). 5.4 Special Condition for credit effectiveness is that: the RGC and PPWSA shall have signed a subsidiary loan agreement satisfactory to IDA (para 2.32). 5.5 Condition of disbursement against the SWSA project is that: that RGC shall have raised the average tariff to a level acceptable to IDA, which ensures the financial viability of the SWSA (para. 2.42). B. RECOMMENDATION 5.6 On the basis of the above agreements, the proposed project would be suitable for an IDA Credit of SDR 22.70 million (US$30.96 million equivalent) to fte Kingdom of Cambodia for a period of forty years, including a grace period of ten years on standard IDA terms.  38 ANNEX I CAMBODIA URBAN WATER SUPPLY PROJECT COMMERCIAL PRACTICES IN THE CAMBODIAN WATER SUPPLY SECTOR Background 1. Previous investments in the water supply sector have focused on rehabilitating physical works, on training and on improving cost-recovery. This has built up a core team of staff in PPWSA and in SWSA, although there are still major deficiencies in institutional capacity. The focus on cost recovery needs to continue, but there is now a need to commercialize sector institutions, and increase their accountability to service consumers. 2. Past accomplishments have been fairly significant: utilities in both Phnom Penh and Sihanoukville have made substantial progress both in expanding service coverage and in managing their services more efficiently. However, there is still considerable room for improvement, indicated by the continued high rate of unaccounted for water (UFW) in PPWSA. Unaccounted for water 3. While unaccounted for water (UFW) is currently running at about 57% in Phnom Penh, it has registered consistent declines from 1992 onward: from 80% in 1992 to 73% in 1993, 64.5% in 1994, 64.2% in 1995, and 61% in 1996. UFW figures at even the existing levels indicate that PPWSA operations have substantial room for improvements. 4. The significance of the scale of UFW can be demonstrated by the fact that of the total capacity of about 110,000 cubic meters of the two Phnom Penh water treatment plants daily, in 1996 only about 41,000 cubic meters was paid for, even though PPWSA has incurred the expenditure to produce and distribute a total of about 105,000 cubic meters. Because of the financial strains placed on PPWSA resulting from the UFW problem, increases in water tariffs are not able to cover costs. For example, an average tariffs of KR 800 per cubic meter with the current rate of UFW is equivalent to only KR 310 per cubic meter at zero UFW to retain the same income base. 5. UFW and its associated costs take on fuirther dimensions when new investment programs are implemented. For example, with the proposed PPWSA investment program Approximately $45 million will be spent to increase production capacity to 175,000 cubic meters per day, improve the transmission and distribution network. If the levels of UFW were 60%, this means the total investment for the improvement of the network would be  39 about $640 per cubic meter distributed per day. If UFW were zero the capital cost per cubic meter delivered per day would be lowered to $260. 6. PPWSA recognizes the significance of the UFW problem and included a major section on the problem in its five year development plan (1996 to 2000) dated April 1996. PPWSA identified the following reasons for its high level of UFW: * The distribution network has a high rate of technical losses due to age and lack of maintenance; * The customer file has not been kept up-to-date; * All connections were not metered, and many meters were defective; * Billing by flat rate used a rate which is below the actual quantity taken; - Consumers took advantage of the chaotic situation a few years back to invest in illegal connections; - Supply from public wells managed by PPWSA was free; - Some connections (notably Government employees and organizations) were not billed, and 3 Squatters in low income settlements refused to pay on the grounds that they were too poor (although they continued t pay exorbitant prices for vended water) 7. PPWSA has undertaken a two-pronged strategy to tackle the problem of UFW; both of which will receive support from the project. One part of the strategy is to utilize donor assistance to finance a comprehensive program of general network rehabilitation (i.e. pipe replacement and pipe renovation) in all the districts of Phnom Penh. IDA, together with ADB, Governments of Japan and France are financing a combined program that covers the whole city. The other part of the strategy is to launch a water loss control program aimed at understanding and controlling the high water losses at the retail (consumer) level. The latter program was launched in 1996 with French bilateral assistance, and has intensively investigated in a pilot zone - suitably isolated from the rest of the distribution system - the reasons why UFW is so high. The investigations revealed that losses were caused by a variety of factors, both technical and non-technical. Among the technical factors were poor quality of pipes, fittings and jointing, heavy traffic above areas where water pipes had been laid, and deterioration of the water mains. Among the non-technical factors were unauthorized practices by consumers, such as illegal connections to the distribution system, broken and missing water meters, presence of a number of unmetered public underground tanks from which water was consumed without payment, and non-payment of dues by public agencies. On the non-technical side (i.e. financial and accounting) PPWSA program now includes:  40 * Increasing the per capita consumption billing base for flat rate bills; * Completing the registration of all customers on to the computerized billing system and deleting disused accounts; * Instituting an incentive scheme and procedures for PPWSA staff, collection personnel and meter and pipe connection teams to eliminate illegal connections, * A major program to increase the number of metered connections (in 1993 there were 3,391 metered connections and at the end of November 1997 this had increased to about 39,000 out of a total of 41,735 connections);, and * Phasing out of public underground tanks and public wells'. Progress to date in PPWSA 8. The program for general network rehabilitation has been recently completed for the Dom Penh District of Phnom Penh, with assistance from the Government of France. The results have been quite dramatic: the monthly volume of water billed in the Dom Penh District appears to have increased significantly. In the December 1995 quarter the average volume of water billed was about 300,000 cubic meters per month. For the two months July and August 1996 the average was 450,000 cubic meters per month. Water usage in July and August could be expected to be higher than the period October to December because the latter is the rainy season and tail of the rainy season. Nevertheless, the data does suggest that progress has been made even though there is no macro meter data to confirm this assertion. Data from PPWSA also shows that the number of flat rate bills as a portion of total billed water has declined over the period January/February 1995 to July/August 1996. This decline, in addition to the increase in volume of billed metered water, suggests that users who were billed on a flat rate basis were consuming more than was allowed in the flat rate charge. 9. The issue of UFW has been discussed at length with PPWSA, and senior management is aware that UFW can undermine the viability of this project and the autonomy recently vested by RGC. PPWSA expects to gain significant benefits by expanding the pilot water loss control program through the IDA credit. The twinning arrangement with an Australian water utility is also expected to help maintain the momentum of the UFW program.. 10. As noted above, UFW is the key to financial and economic viability. Because of the effort that is being put into the reduction of the problem, the financial analysis has It should be noted that as of October 1996, there were 1,945 public wells served by PPWSA with each well used by at least 20 families. It is estimated that approximately 10 cubic meters of water is extracted each day from each well which equates to about 19,450 cubic meters per day or about 20% of current plant output. Policing of wells is a difficult task, and PPWSA is attempting to develop neighborhood water selling points, to be managed locally by communities through cost recovery.  41 assumed that UFW will fall from 57% in 1997 to 40% by 2002. In view of the magnitude of the problem in Phnom Penh, and the Bank's experience with similar projects in other countries and UFW in other developing countries, it is perhaps unrealistic to project a much greater improvement in the rates. Revenue collection efficiency 11. PPWSA has undertaken a vigorous program to improve cost recovery. In 1992 and 1993, the authority's receipts were less than half of its operating expenses; however by 1995, receipts exceeded expenses by 30%. To achieve this, the PPWSA acted simultaneously on several fronts. First, in revamping its customer list, PPWSA found that almost 60% of those on the 1993 database did not correspond to actual customers. It has now established an accurate database by eliminating files of non-existent customers and removing duplicate entries. This initiative initially led to a decline in the total number of registered connections, but as illegal connections were cut and new customers registered, the number began to increase. 12. Second, PPWSA embarked on an aggressive metering campaign to ensure that bills sent .out correspond more closely to the amount of water each customer uses. This program has led to a dramatic increase in the proportion of metered connections from only 13% in 1993 to 55% in 1995 and 81% as of September 1996. 13. Third, with a fully computerized customer database and billing system, excessive delays in tariff collections have been reduced. Collection ratios have increased from 41% in 1993, to 51% in 1994, 61% in 1995 and 93% in 1996. Collection ratios are high for all classes of customer except for public institutions. Data from different consumer groups shows that the collection ratio from domestic and commercial consumers is about 100%. However, the major problem is amounts owing from public institutions. In the May 1 to June 30 data, these institutions had paid only 15% of outstanding accounts. During this period public institutions accounted for about 6% of total billed consumption. 14. Even though PPWSA's collection ratio appears in order, an analysis of debtors shows that the average collection period exceeds the periods indicated by the collection ratio. The debtors' data shows that PPWSA's debtors owe PPWSA about four times average monthly sales. This means that, on average, it takes about four months to collect sales revenue. The worst customers are the public institutions which owe about 12 times their average monthly consumption. 15. PPWSA has made considerable progress with the establishment of its computerized billing and accounting system. The billing system uses the Aquarius system which is based on the Orac,i application and it produces all bills (about 30,000) for all PPWSA metered and unmetered customers as well as a range of management reports. The system was installed at PPWSA in late 1994 and it was developed in France. PPWSA has had considerable help from both the French Government and the UNDP/World Bank project in the accounting field. Electricite de Cambodge does not have a computerized billing system and would appear to be several years behind PPWSA on this aspect of its  42 operation. In addition to Aquarius, PPWSA also runs the Accpac 2000 system for general accounting purposes. The major problem is that the two systems cannot be integrated. This issue, and other financial accounting issues, will be addressed as part of the Policy Framework component of the project. 16. During appraisal PPWSA acknowledged the problem associated with length of the average coliection period. It was agreed that PPWSA would develop a plan and institute procedures to recoup the outstanding accounts prior to project effectiveness. Tariffs Phnom Penh 17. Prior to September 1993 the tariff for all consumers in Phnom Penh was KR166 per cubic meter of water. In September 1993 the rate for commercial users was increased to KR 515 per cubic meter. Rates were increased again in November 1993 and again in July 1994 when domestic rates were set at KR 250 per cubic meter and KR 700 for commercial users and some wholesalers. 18. In a report commissioned by the Asian Development Bank, the Consultants, Sogreah Ingenierie, determined that the cost of producing water in 1996 was $0.44 per cubic meter or KR 1144 at an exchange rate of $1=KR 2600. This was significantly higher than the existing tariff of $0.10 for domestic users and $0.27 for commercial users per cubic meter. 19. The Draft Memorandum of Understanding between the Ministry of Economy and Finance and the Municipality of Phnom Penh and the Asian Development Bank Fact Finding Mission of May 1996 identified the critical nature of the water tariffs problem and the need of cost recovery. The Draft Memorandum concluded that the financial performance targets set for PPWSA are to recover operating and maintenance (O&M) costs including depreciation by 2000 and to recover O&M plus debt service expenses by 2005. Sogreah's analysis suggests that to achieve these targets the average tariff would need to be increased to KR 1,100 per cubic meter. New tariffs adopted have consequently been progressive. These will encourage water conservation and allow cross subsidies from high consumption users to low consumption users and from commercial and industrial users to domestic users. 20. In the Loan Agreement between the Government of Cambodia and the ADB, the Borrower and PPWSA agreed to implement the new tariff structure and to reduce the water connection fee by half The new tariff schedule, implemented in June 1997 is shown below.  43 Table A1.1: New Tariff structure for PPWSA Residential Industrial & commerciala m3/month tariff KR/ m3/month tariff KR/ rn nlm3 0-15 400 0-100 900 16-30 600 101-200 1200 31-100 900 201-500 1500 > 100 1200 501- 1800 10000 a For consumption greater than 10,000 M3/month, a 10% discount will be applied 21. The new tariff schedule was utilized in the financial projections for PPWSA. However, since June 1997, the changed macroeconomic scenario in Cambodia, and in the rest of the East Asia region necessitates a periodic review of tariffs. PPWSA is likely to be affected by two types of pressures on the costs side. First, any increases in power rates will affect the costs of water production. As power accounts for about 60 per cent of operations and maintenance costs, the impacts are likely to be substantial. Second, if inflation rates begin to rise, the pressures on the wage bill, as well as materials and equipment will begin increasing. Hence, a tariff adjustment mechanism needs to be instituted, that would be a transparent process, rather than being, as it currently is, a political process requiring cabinet approval. During negotiations RGC agreed that annual reviews with IDA missions could be one way introducing a tariff adjustment mechanism. Vended water in PPWSA 22. The prices consumers pay for water supply outside the public water utilities is a good indicator of the seriousness of the water supply crisis. ADB has recently completed a survey of water utilities across Asia, and its data indicate that the price of vended water in Phnom Penh is approximately ten times the tariffs charged by PPWSA.  44 23. Consultants to the ADB conducted a socio-economic survey in Phnom Penh, while preparing the ADB's Phnom Penh Water Supply and Drainage Project. One of the objectives of the survey was to determine the extent to which the population is affected by water supply and sanitation services and its willingness to participate in the upgrading of these services. The survey identified three consumer profiles. * Consumers already connected to the PPWSA network; * Consumers supplied by neighbors, and * Consumers who obtain their water from vendors, wells or rivers. 24. Even though the survey estimates that 42% of households are connected to the network the quality, rate of flow, pressure and supply of water are low resulting in an inadequate service. As a consequence, even this portion of the population would be significant beneficiaries of the proposed project. The table below summarizes key survey data. Table A1.2: Key socio-economic survey data Description Category 1 Category 2 Category 3 (Connected to piped (supplied by (supplied by vendors water) neighbors) & from rivers/wells) Percentage of households 42 16 42 (16% vendors) Average income (KR/month) 1,375,000 325,000 1,020,000 Av. consumption (M3/mth) 37 14 20 Old Tariffs Av. cost per M3 (KR) 280 2652 2124 Av. cost per M3 (US$) 0.08 0.78 0.62 Weighted av. cost of Category - 0.67 0.67 2 and Category 3 (US$) Total expenditure (KR/mth) 10,360 37,128 42,480 Water cost as % of income 0.8% 11.4% 4.2% New Tariffs and connect to PPWSA network Ave tariff/M3 (KR) (1) 575 400 450 Total expense (KR/mth) (2) 21,275 5,600 9,000 Water cost as % of income 1.5 1.7 0.9% (1) Assumes each category will connect to the network. (2) Assumes consumption remains constant.  45 Source: ADB T.A. No. 2280.CAM Urban Water Supply and Sanitation Project. Volume 2 Present Situation and Development for the Future June 1996 25. The World Health Organization (WHO) considers expenditure on water up to a level of 5% of household income as affordable. With this yardstick, the Category 1 and 3 households in the analysis above are easily within the WHO standard but the category 2 households pay more than double what WHO considers affordable. Further, given the assumptions used in the analysis, the data shows that both the category 2 and 3 consumers will be better off even under the new tariff regime if they connect to the PPWSA network and if they retain their current level of consumption. The major benefit is achieved by the Category 2 consumers who's expenditure on water for the month would decline from KR37,000 to KR5,600. 26. Affordability of domestic water supplies of a number of cities in Asia was estimated in the ADB Water Utilities Data Book published in 1993. The study showed that the average expenditure on water as a portion of household incomes in 19 (of 23 cities surveyed) was 2% or less. The new charges proposed by PPWSA for Phnom Penh domestic users (given estimated consumption levels) are well within the 2% for the majority of the cities in the region as quoted in the ADB publication. 27. As the analysis in paragraphs 23 and 24 shows, connecting to the water supply system results in significant savings for the lower income level of the population. The main. impediment to increasing the number of connections is the cost of connecting to the water supply system. Current information indicates that the average cost of connecting is about US$200 per connection. However, as part of ADB's negotiations, PPWSA agreed to review and eventually lower the connection fees. Nevertheless, even if the fee were to be lowered to US$150, this still exceeds one month's income for the Category 2 households and about 40% of the average monthly income for the Category 3 households. These costs are likely to preclude many poorer families from the connection program. The Economic and Social Commission for Asia and the Pacific of the United Nations has found that the poor often face considerable difficulties in raising the capital required for the initial costs of connecting to a piped water supply system. Studies in India, Pakistan, and Bangladesh have shown that connection rates can be increased substantially if water companies provide financing to poor customers for the cost of connecting to the piped system. 28. Because of the need to increase access of the poor to piped water and because of the financial risks associated with the project it was agreed with PPWSA during final project preparation that the project would include a pilot scheme of financing domestic connections. It was also agreed that agreements to be reached at negotiations will include that the RGC will cause PPWSA to revise its connection fees on the basis of actual cost. Sihanoukville Current tariffs and the water supply pattern in Sihanoukville are shown in the table below.  46 Table A1.3: Sihanoukville- 1996 consumption profile Consumer group Number of Monthly Average tariff connections consumption (M3) (KRIM3) Domestic 750 10,500 500 Brewery 1 28,500 900 Hotels 15 6,000 500 Factories 4 1,800 500 Port 1 600 500 Subtotal treated water 771 47,400 740 Reticulation loss 12,685 (19%) Backwash loss (10%) 6,676 Plant production 66,761 741 Tankers (untreated) 3,000 Water from lake 69,761 29. The table shows that the average tariff is currently KR741 (US$0.27) per cubic meter and that the brewery, which takes about 60% of the treated water sold by SWSA, pays, on average, KR 900 ($0.33) per cubic meter. Project preparation documents prepared for MIME show a consumption profile for SWSA after the completion of the project. This profile is reproduced below. Table A1.4: Sihanoukville- 1998 consumption profile Consumer group Number of Monthly Average tariff connections consumption (M3) (KR/M3) Domestic 2000 36,000 700 Brewery 1 45,000 1,200 Hotels 20 10,500 700 Factories 5 7,500 700 Port 1 15,000 700 Tanker (treated) 15,000 600 Water points (5) 15,000 500 Subtotal treated water 2033 144,000 825 Retic. losses (20%) 36,226 Backwash loss (0.5%) 906 Plant production 181,132  47 Table A1.5: Sihanoukville- 1998 amended consumption profile and tariffs Consumer group Number of Monthly Average tariff connections consumption (KRIM3) (M13) Domestic 2000 36,000 900 Brewery 1 35,000 1,800 Hotels 20 10,500 1,800 Factories 5 7,500 1,800 Port 1 15,000 1,800 Tanker (treated) 7,000 500 Water points (20) 33,000 500 Subtotal treated water 2033 144,000 1,214 Retic. Losses (20%) 36,226 Backwash loss (0.5%) 906 Plant production 181,132 30. The tariffs in the table above show significant variation between the commercial and domestic tariffs. It may be argued that if similar tariffs to those in Table AA.4 were put in place there would be a significant cross subsidy from the brewery and industrial sector to domestic consumers and consumers buying water at water selling points. This argument is not believed to be valid. In the SWSA project preparation material, a total 101,000 cu. m./month is estimated to be available from the existing water supply source if the level of the weir is raised, the sand spit sealed and the efficiency of the existing water treatment plant is improved. This volume is approximately equal to the sum of the original commercial consumption and the estimated new domestic consumption resulting from improved facilities. The total estimated cost of raising the lake, sealing the sand spit and improving the existing water treatment plant up to the level required to meet these needs is about $0.6 million. Given these works will provide an estimated additional 65,000 cu. m/month this equates to a capital cost of $9.20/month per cu. m of water produced. The estimated marginal cost of improving capacity a further 31,000 cu. m/month to satisfy the anticipated additional commercial needs is $1.3 million or $41.90/month per cu. m of water produced. Because of this apparent significant difference in the cost of supply and the fact that this project is to be funded by IDA, it may not be unreasonable to have a higher commercial tariff of the magnitude discussed in this analysis. Staffing 31. PPWSA has improved human resources management significantly in recent years. One major innovation has been to change the incentives for staff in order to encourage honesty and efficiency. The new incentive system operates effectively even within the  48 rigidities of municipal rules, such as those that limit [certain] salaries to the equivalent of US$10 per month. The most important part of the incentive system gives a bill collector a bonus for each illegal connection he or she reports. At the same time, if someone from another department of PPWSA reports an illegal connection, that person receives the bonus, and the collector responsible for the part of the city in question must pay a penalty to the authority. The bonus is 20% of the fine levied on the illegally connected customer. Since the implementation of this system, the average number of new connections registered per month has doubled to 860 between 1995 and 1996. The number of connections cut off has increased steadily from 262 to 623 during the period January- September 1996. 32. Overall, management of staff has iriiproved over the past three years at PPWSA. Contrary to experience in many low income countries, PPWSA has not been an employer of last resort. The number of staff per thousand connections has dropped from 18 in 1992 to 15 in 1995. The accuracy of meter reading has also improved over time from 83 percent in 1995 to 87 percent by August 1996. In addition, operating as an autonomous entity under the new Decree, PPWSA has wider discretion to reward good performance and penalize poor performance. 33. One key element of the project will be staff training and development. The project budget includes approximately $0.25 million for a national water training center in Phnom Penh. This facility will serve both Phnom Penh and all urban regional water supply utilities. Courses will cover both managerial and technical topics. In addition to this training, the project's budget also includes a significant allowance for both specialized training in Cambodia and abroad. Training will also be a key element in the proposed twinning arrangement.  49 ANNEX 2 CAMBODIA URBAN WATER SUPPLY PROJECT CAMBODIAN PUBLIC ENTERPRISE LEGISLATION 1. Concerned, among other things, with the need for greater clarity regarding the legislative framework in which publicly funded and managed services operate, in June 1996 the Government of Cambodia enacted a Law on the General Status of Public Enterprises2. This Law provides rules for the operation, governance and supervision of all public enterprises. Although granted independent legal personality and ostensible financial autonomy, each public enterprise is placed under a Government Ministry or some other public authority and made subject to various State controls. In all cases, these comprise: (a) control by the "tutelle" Ministry, exercised by its representative(s) on the Board of Directors of the enterprise, with a view to ensuring conformity of Board decisions with Government policy or directives of the "tutelle" Ministry; (b) the "Controle des Inspections ministerielles et services assimiles" which consist of periodic assessments of a technical nature; and (c) control by a "State Controller", namned by the Minister of Economy and Finance from within the ranks of the Ministry's senior officials, so as to ensure: (i) compliance by the enterprise with its legislative and regulatory obligations; (ii) the appropriate application of any decision taken by the enterprise; (iii) all necessary follow-up regarding the operations of the enterprise and their appropriate evolution; and (iv) the appropriateness of any transaction which might have a financial impact on the enterprise. 2. State controllers work under the directives of the MOEF to whom they report regularly. They are required/entitled to attend enterprise Board meetings and shareholders' meetings. They have discretionary power to object to decisions of the Board of Directors if the decision appears to them to be illegal, likely to diminish the "rights and interests" either of the enterprise or the State, or incompatible with the "purposes" of the enterprise. 2 No. 0696/03 of 17 June 1996  50 Such objections must be provided on a timely basis to the Board, the MOEF and the tutelle Ministry, with the Ministries having the power to modify or confirm the decision. The Law is however silent on cases where the two Ministries disagree. PPWSA-specific Legislation 3. It is within this context - applicable to all public enterprises - that RGC, by Decree of 4th December 1996, established PPWSA as a public enterprise under the "tutelle" of the Ministry of the Interior. The enterprise is declared to have separate legal personality and "administrative and financial autonomy"3. 4. PPWSA's purpose is to ensure the production and distribution of water for public consumption within the city of Phnom Penh. Importantly, however, PPWSA is, for the first time, obliged to organize, manage and operate its activities independently in accordance with conmmercial business principles and practices4. In this connection, PPWSA is authorized to cut-off water supply to any customer (whether public or private) in arrears in the payment of the relevant tariff beyond the period stated in the Authority's contract with the customer. 5. Although it is too early to judge the extent to which non-commercial and political objectives may conflict with PPWSA's principal objective to operate on a cost efficient basis (and by the year 2002 without any RGC subsidy), the Decree does reduce bureaucratic controls on managers to the maximum extent possible in the context of the Law on Public Enterprises. 6. Also, although the Decree does not deal directly with the issue of PPWSA's tariff policy and the basis on which its tariffs may be permitted or required to change, the Decree does require PPWSA's Director General to prepare an annual business plan, which will reflect the tariff structure, for approval by PPWSA's Board of Directors, 7. Finally, in terms of its RGC subsidized support, PPWSA operates with a certain financial autonomy and transparency in the sense that, rather than having its accounts merged with those of the Phnom Penh municipal government as was the previous practice since its establishment, PPWSA has now been allocated a separate line item in the national budget. The Authority was formerly a public agency under the Governor of Phnom Penh and, as such, part of the city's municipal administration. 4 See Article 4 of the Authority's Decree.  51 ANNEX 3 CAMBODIA URBAN WATER SUPPLY PROJECT Letter of Sector Objectives    53 ANNEX 3 KINGDOM OF CAMBODIA NATION RELIGION KING ROYAL GOVERNMENT Council for the Development of Cambodia Ref: 5S2 l g;J CDC/CRDB Phnom Penh, o4 April 1997 Mr. JavAd Khalilzadeh-Shirazi Director, East Asia Country Department I The World Bank 1818 H Street, N.W., Washington D.C. 20433 USA Fax No:202 477 6594 Dear Mr. Shirazi, Proposed Water Supply Project - Letter of Sector Objectives 1. As you are aware, the Royal Govemment of Cambodia is committed, and has been working with IDA, to implement the proposed.water project. During the preparation, we have met with various IDA missions, the latest being the mission of March-April 1997. We have also benefted considerably from the Seminar on Water Sector Policy held by the Economic Development Institute of the Bank at the time of this mission.The purpose of this letter is to set out our objectives in the urban water and sanitation sector and indicate our commitment towards their attainment. 2. The Govemment's First Socio-economic Development Plan 1996-2000 enunciates the overall priorities of the Govemment. As emphasised therein, the wider provision of potable water and sanitation in both rural and urban areas, both as a means of tackling one of the root causes of poverty and as a means of improving public health, is a high priordty for the Govemment. In formulating policies for this sector we recognise that water and sanitation need to be managed as economic goods. Our main objective is therefore to increase the availability of all water and sanitation services, and to do so in a manner that is guided by demand for services from users, and encourages economic efficiency and sustainability. To achieve this objective, we recognise that services need to be managed at the lowest appropriate level, by organisations that are accountable to users for good and cost effective service. 3. The Govemment's immediate objective for Phnom Penh is to make the Phnom Penh Water Supply Authority (PPWSA) a financially self-sustaining commercial entity which will supply adequate water meeting WHO standards. Phnom Penh accounts for an estimated 40% of the nation's GDP and the provision of reliable and cost-effective water supply will be important to the nation's prospects for rapid growth. The Govemment is committed to making PPWSA financially and operationally autonomous to contribute to effrient operation and conserve scarce Govemment resources. PPWSA has been already been corporatised as a public enterprise under the Public Enterprise Law, as part of this process.  54 4. The objective for the provincial towns is to develop financially self-sustainable commercial organisations and to transform them into autonomous bodies. As a first step, the water authority in Sihanoukville has been granted a large measure of financial and operational autonomy by Ministerial Decree No.524 dated 02 September 1996. The Sihanoukville Water Supply Authority is empowered to collect its own revenues, incur expenditures and manage ts operations as a commercial undertaking and is no longer subject to the Treasury Law applicable to Government Departments. 5. There are additional current constraints in transforming the water supply units in other towns into autonomous commercial undertakings. These are the acute shortage of skilled manpower to operate these undertakings, the current inter-relationships between the electricity and water operations which are under the same administrative control in most towns, and the absence of adequate accounting and financial systems to ensure accountability for revenues and expenditures. Our objective for these towns is to address these institutional constraints by a concerted programme of actions. These will include training of staff in technical, accountingl and administrative skills, and preparing and implementing a revised institutional structure. The new institutional structure should enable the sector to be managed at the local level, guided by local demand for services. It is expected that the Unit for Potable Water Supply in the Ministry of Mines, Industry and Energy will continue to provide technical support and assistance to the provincial towns. We are now receiving technical assistance from the ADB for the restructuring of the provincial water supply institutions. The proposed IDA project will complement this and assist us through its training and institutional strengthening component. 6. The Government recognises the vital importance of improved sanitation in promoting greater well-being and better public health. The need for sanitation services is acute and will become more so with increased water supplies. Our immediate objective is to develop a Sanitation and Waste Water Management Strategy that is, as far as possible, implementable, guided by demand, and fiscally sound. The Government will utilise components of the proposed IDA Project in attaining this objective. 7. We recognise that the level of tariffs and the manner in which tariffs are set and revised are crucial to the autonomous commercial operation of water utilities. We are committed to setting tariffs at levels that recover costs and assist water undertakings to become commercially viable and cost efficient. Our objective is to develop institutional arrangements which will enable tariffs to be revised periodically on the basis of pre- determined rational commercial criteria. The institutional strengthening component of the proposed World Bank project will assist us in this. 8. Considering the severe resource constraints the nation faces, it is desirable to encourage the participation of the private sector in water supply and sanitation. The Govemment is conscious of the need for a suitable policy framework to attract private participation and will work towards the evolution of an appropriate framework. 9. The Govemment recognises that the attainment of these objectives will require a comprehensive, coherent and long-term national policy for this sector. The Govemment is committed to the preparation and implementation of such a Statement of Policy in consultation with all relevant stakeholders and seeks the assistance of IDA, through the proposed project, in this important endeavour. 10. The First Socio-economic Development Plan recognises that responsibility within the Govemment for urban water and sanitation is dMded not only vertically but horizontally.  55 There is a need for a more streamlined and rational structure for policy-making and regulation in the sector. The evolution of such a rational structure, in consultation with IDA, will form part of the proposed Statement of Policy. In the interim, (as already stated in the CDC's letter 2674/96 CDC/CRDB dated 6th December 1996) a Coordinating Committee has been constituted to co-ordinate policy in the water and sanitation sector. The Coordinating Committee consists of senior representatives of the Ministry of Mines, Industry and Energy, the Ministry of Public Works and Transport, the Ministry of the Environment, the Ministry of Economy and Finance, the Council for the Development of Cambodia and the Phnom Penh Municipality. The Committee , which is chaired by the representative of MIME, will oversee the prepaiation of the Statement of Policy. We request the World Bank to e issing of this important and long- awaited Project, which will go a Ion Govemment in its efforts to achieve the ambitious objectives set oonomic Development Plan. Yours sincerely, h h eatoChhon Sr. Minister in Charge of Rehabilitation and Development Minister of Economy and Finance Vice Chairman, CDC cc: - Ministry of Economy and Finance - Minsitry of Planning - Ministry of Industry, Mine and Energy - Ministry of Public Works and Transport - Phnom Penh Water Supply Authority - CDC/CRDB  I  57 ANNEX 4 CAMBODIA URBAN WATER SUPPLY PROJECT TERMS OF REFERENCE FOR TWINNING ARRANGEMENT BETWEEN PPWSA AND AUSTRALIAN UTILITY Background 1. Twinning arrangements, as an instrument of technology transfer and capacity building have a mixed record. In the water sector in Latin America, they have had a mixed record. In the Philippines energy sector on the other hand recent interventions have been quite a success. These are also successes in the Indonesian petroleum sector and the Fijian telecommunication sector. 2. The Banks Handbook of Technical Assistance defines twinning as "the establishment of an institutional relationship between an organizational entity in a developing country (the 'recipient') and a similar but more mature entity in another country (the 'supplier'). It notes that twinning is mainly aimed at (and best suited to) transfer of managerial, financial and technical skills and systems that involve the numerous functional aspects of the recipient entity. It cites a number of advantages of twinning - opportunities to integrate training with TA, greater flexibility to alter work programs to needs, long-term cooperation, lower expense, encouraging developing country expertise in consulting (where the supplier is from another developing country). It also mentions the possible disadvantages - the supplier may lack consulting experience and developing country experience and twinning could be a hidden form of tied aid. It recommends that more than one TA supplier from the donor countries should tender for twinning contracts. 3. In the design of the twinning arrangement these factors have been borne in mind. The Phnom Penh Water & Sanitation Authority (PPWSA) needs an infusion of a number of multi-functiorial inputs covering the whole spectrum of managerial, financial and technical systems, broader than could be delivered by specific TA. Twinning does therefore fit the context. Among the potential disadvantages, the first two - lack of experience in consulting/lack of developing country experience are unlikely to apply to major suppliers from Australia. The issue of 'tied' supply remains. However, in the context of the urgency of Cambodia's need in preparing for the IDA project, the scarcity of resources and the ready availability of Australian funds, the commencement of a twinning arrangement with an Australian supplier seems the most effective practicable solution.  58 Objective 4. The objective of the twinning will be improve the institutional effectiveness of PPWSA in respect of: (a) improved technical expertise in operations and maintenance; (b) reduction in unaccounted for water; (c) streamlined institutional arrangements within PPWSA for project execution; and (d) operations & maintenance, so as to prepare PPWSA for successful - implementation of the proposed IDA project. Considerations in Design and Adaptive Learning 5. The following factors have been borne in mind in designing the TOR: (a) Experience has shown the importance of institutional factors including cultural settings and social norms in affecting program effectiveness. (b) One way transfers of knowledge from developed to developing country have generally failed or if successfil, not been sustainable because of institutional differences. (c) Adaptive learning, whereby state-of-the-art practices are observed, understood and then adapted to local circumstances, offers a better chance of success. (d) The proposed Project has specific components of TA for procurement and accounting, and these need not be duplicated in the twinning. Description of Work Program Module 1: Australian experts visit to Cambodia 6. (a) The Australian entity (hereinafter referred to as 'the twin') shall depute a team of 2 experts to Phnom Penh to assess the status and needs of PPWSA. The assessment shall be made with PPWSA staff in a coliaborative manner. (b) The team shall comprise:  59 (i) a technical expert with extensive experience of water supply systems especially transmission and distribution, and experience in unaccounted for water reduction including at least 3 years in developing countries; and (ii) a management expert with extensive senior level general management experience in a water utility, preferably including developing country experience, with a sound knowledge of general management issues including personnel, relations with customers and government regulators, billing and collection problems, organization structure and delegation of powers etc. 7. The technical expert shall first arrive in Phnom Penh for a two month stay, followed a month later by the management expert for a period of one month. 8. The PPWSA shall identify specific counterparts to work with the twin, for each of the following 6 functional areas: i. Transmission system maintenance and leak detection, operations and maintenance of treatment plants ii. Distribution system maintenance and leak detection. iii. Accounting iv. Metering, Billing and Collection Management. v. Personnel Management and Training. vi. General management and relationship with Government/Regulator and consumers. 9. In carrying out the assessment, the following shall among other things, be considered: reasons for illegal connections and non-detection. existing system of bulk water metering. existing methods of meter installation, configuration, replacement workshop practices including repair, testing, spare parts, meter fitting, meter reading. use of water for operational purposes.  60 review of distribution system, assessing pipe materials used, construction and pipe installation methods, repairs and maintenance methods, soil etc. conditions, traffic loadings, distribution system pressure and variability, system mapping. plans for leak detection, monitoring and rectification including district metering, regular sounding, pressure management, valve inspections, data handling and analysis, equipment and skills availability and needs. 10. The experts shall prior to departure from Cambodia prepare a report setting out a) the findings of the assessment and b) making specific recommendations to remedy the various problems identified. While the report may cover the whole gamut of issues, it shall (in addition to general findings) have specific sections on each of the six functional areas listed in paragraph 4 above. The experts shall discuss, as far as may be practicable, their recommendations with the identified PPWSA counterparts for each functional area. A copy of the Report shall be furnished to the IDA Project Coordinator and to MIME (for information). Module 2: Overseas study tour and hands-on learning 11. This module will comprise two parts. The first will be a long duration study tour to the Australian utility ( 45 days) which will expose the Cambodian team to efficient utility practices and involve hands-on learning by the Cambodians in the context of an actual running utility. The second will be a short duration study tour (1-2 weeks) of one other developed country (to be determined in consultation with IDA). This tour (estimated to cost about $25,000 but in any case not to exceed $30,000) will involve visits to, and interaction with, a public sector utility and an independent regulator, with emphasis on regulatory, tariff-setting and policy aspects. The sequence of the two tours is flexible. The composition of the Cambodian team for the short duration study tour (to be finalized in consultation with IDA) will reflect the emphasis on regulatory issues and may include representatives of concerned Ministries. 12. As soon as the experts return to Australia at the end of Module 1, the twin shall make preparatory arrangements for the visit to Australia of the Cambodian counterparts. 13. Approximately a month after the departure of the experts, the five Cambodian counterparts (other than the counterpart dealing with general management) will proceed to Australia for a 45 day adaptive learning visit. One person among the five (whom PPWSA shall so designate) shall be the team leader and will coordinate the visit. The team shall also be accompanied by a seventh member deputed by MIME. All members of the team shall be Cambodian nationals. The functional counterpart dealing with general management and regulatory issues ( who is expected to be the Executive Director of PPWSA) will join the team for the last 15 days of its visit.  61 14. During their stay in Australia, the twin shall demonstrate and explain to the Cambodian team the prevailing practices of the twin in all functional areas with special emphasis on aspects where PPWSA has major problems. The emphasis shall be on hands-on training and field visits. The 2 Experts who went to Cambodia shall be closely associated with the team as far as practicable. 15. Apart from unaccounted for water, 0 & M and technical and managerial areas identified by the experts, the team -- particularly the functional member on Management' issues from PPWSA and the MIME member -- shall study the: i. Scheme of delegation of powers - the types of matters that are referred to the Board of the twin, the extent to which operational staff can take decisions, financial powers at various levels, personnel hiring/firing powers. ii. Manner in which the twin is regulated; when and how the regulator/ Government. exercises control iii. Twin's procedures for redressing customer complaints, remedies (including legal) available to consumers against the utility. iv. Twin's system of management information and control; how staff who are given more authority, are made accountable. v. Twin's financial rules and procedures, systems for fraud prevention. vi. Twin's tariff structure and the rationale therefor. The above list is inclusive and not a full listing of areas to be covered. 16. Pnor to departure from Australia, each member of the PPWSA team shall prepare a report on his functional area in which he shall cover: (a) what he has seen and learnt during the visit; (b) whether, in the light of his experience, he wishes to accept, modify or reject the recommendations made earlier by the Australian experts; and (c) his own further specific recommendations in his functional area.  62 17. These reports shall be given to the twin before departure. The twin will comment on the report within one month of the Cambodian team's departure 18. The team member from MIME shall prepare a report on his experiences and recommendations applicable to his organization. 19. On return to Cambodia, the reports (along with the comments of the twin) shall be compiled and placed before the Board of PPWSA. Copies of the report (& comments) shall be sent to the IDA / PC I MIME/ Coordinating Committee. Module 3 : Australian experts' second visit to Cambodia 20. At such time as PPWSA and the twin may deem most appropriate, but not more than 5 months after the return of the Cambodian team, the Australian experts shall return to Cambodia for a 45 day stay. This visit shall be used for assessment and problem- solving on the following: (i) how much of the recommended action has been implemented; (ii) problems encountered during implementation; (iii) if any recommendation has not been implemented, reasons therefor; and (iv) further suggestions and plans of action. 21. During the second visit the technical expert shall also, in consultation with the Team Leader in PPWSA, prepare a suggested list of equipment or other items to be procured for reduction of technical losses under the relevant component of the project. 22. At the conclusion of the second visit, the twin shall prepare a completion report setting out its findings and recommendations, based on paragraphs 13 and 14 above. The report shall be submitted to PPWSA with copies to the IDA Project Coordinator, MIME and IDA. General 23. Throughout the duration of the arrangement, the twin shall ensure that technical assistance, advice and inputs given under the arrangement are fully consistent with the technical assistance received by PPWSA under the proposed IDA project and for this purpose shall maintain a close liaison with the IDA Project Coordinator and all IDA Project technical assistance personnel. The aim should be to achieve a consistency of strategy, avoid duplication or contradiction and maximize synergy. Estimated Costs:  63 24. The expected costs are as follows: t ~~~~~~~~~~~~U.S.-$ Module 1 65,000 Module 2 95,000 Module 3 60,000 220,000 Add: Contingencies @ 10% 22,000 Total 242,000 Continuation of twinning arrangement 25. The results of the twinning arrangement will be evaluated. If the arrangement is found to have been a success, funds available under the Reduction of Unaccounted-for Water sub-component of the proposed IDA-financed Cambodia Urban Water Supply project can be used to finance a new, longer term, twinning arrangement, the twin being selected in accordance with World Bank procurement guidelines.  64 ANNEX 5 CAMBODIA URBAN WATER SUPPLY PROJECT Project Cost Estimates Table A 5.1: Cost Summary - Phnom Penh Water Supply Component: Base cost, contingencies and annual requirements (1998-2002) Table A 5.2: Cost Summary - Phnom Penh Water Supply Component: Total cost, contingencies and annual requirements (1998-2002) Table A 5.3: Cost Summary - Sihanoukville Water Supply Component: Base cost, contingencies and annual requirements (1998-2002) Table A 5.4: Cost Summary - Sihanoukville Water Supply Component: Total cost, contingencies and annual requirements (1998-2002) Table A 5.5: Cost Summary - Policy Framework Component: Base cost, contingencies and annual requirements (1998-2002) Table A 5.6: Cost Summary - Policy Framework Component: Total cost, contingencies and annual requirements (1998-2002)  Table A 5.1: Cost Summary - Phnom Penh Water Supply Component: Base cost, contingencies and annual requirements (1998-2002) Breakdown of Totals Ind. Cont. (Fiels 0OD) Base Cost (Piels 000) Local (BEcc. Duties & 1998 1999 20OD 2001 2002 Total For. Exch. Taxes) Taxes Total A. Civilworks 1.Turnkey contract 1,804,543.2 26,352,390.2 27,426,402.6 3,899,200.2 - 59,482,536.2 64,983,828.5 11;544,040.6 11,572,154.9 88,100,024.0 2.Water aistribution Chamcar Morn 637,500.0 1,674,738.0 1,598,238.0 4,207,500.0 4,258,500.0 12,376,476.0 - 17,172,731.9 2,193,715.6 19,366,447.5 3. Ctthers 810,390.0 810,390.0 - 858,049.5 114,414.6 97Z464.1 B.Equipment 1. Pipes and fittings for Chamcar Morn districts 7,004,453.4 - * - 7,004,453.4 8,737,569.9 - 1,179,571.9 9,917,141.8 2. For training center 96,475.0 269,3820 . - 385,857.0 305,527.1 102,148.8 65,165.3 47Z841.1 3. Computing equipment - 322,6722 - - 322,6722 357,326.2 - 78,611.8 435,938.0 4. Others 3,859.0 448,222.0 8,296.0 8,296.0 8,296.0 476,969.0 533,713.9 8,779.5 76,427.6 618,921.0 C. Consultants 1. Construction Supervision 136,000.0 1,224,000.0 1,020,000.0 348,5D0.0 - 2,728,500.0 3,125,925.8 - 312,592.6 3,438,518.3 2. TA 311,100.0 1,396,380.0 924,375.0 798,490.0 555,220.0 3,985,565.0 3,978,730.2 747,664.9 528,964.6 5,255,379.6 D. Revolving funds * 964,750.0 - - - 984,750.0 477,147.5 477,147.5 128,829.8 1,083,124.8 E Training 19,295.0 527,085.0 381,990.0 141,696.0 27,200.0 1,097,265.0 1,425,776.8 - 19Z479.9 1,618,256.6 F. Incremental Operation Costs 258,995.0 90,967.0 79,390.0 75,531.0 71,672.0 576,555.0 - 655,512.8 58,964.1 714,476.9 0. Land Acquisition 771,800.0 - - - - 771,800.0 - 817,190.0 108,966.3 926,156.3 Total 4,849,957.2 40,275,039.8 31,438,691.6 9,479,212.2 4,920,888.0 90,963,788.9 83,925,545.8 32,383,265.4 16,610,878.8 132,919,690.0 C Breakdown of Totals Incl. Cont. (US5 'O0) Local Base Cost (US '00O) (BEd. Duties & 1996 1999 2O00 2001 2002 Total For. Exch. Taxes) Taxes Total A. Chil works 1.Turnkeycontract 530.7 7,750.7 8,066.6 1,146.8 - 17,494.9 17,488.1 3,124.7 3,114.8 23,727.7 2 Wate rastributlon Cham car Morn 187.5 4926 470.1 1,237.5 1,252.5 3,640.1 - 4,494.6 591.5 5,086.2 3. Others 238.4 - - - - 238.4 - 244.9 32.9 277.8 B. Equipment 1. Pipes and fittings for Cham car Morn districts - 2,060.1 - - - 2,060.1 2,386,0 - 3221 2,708.2 2.Fortrainingcenter 28.4 79.2 - - - 1076 83.4 29.2 18.0 130.6 3.Computingequipment * 94.9 - - - 94.9 976 - 21.5 119.0 4. Others 1.1 131.8 2.4 2.4 2.4 140.3 1454 2.4 20.8 168.6 C. Consultants 1. Construction Supervision 40.0 360.0 300.0 102.5 - 8025 641.9 - 84.2 926.,1 2. TA 91.5 41Q7 271.9 234.9 163.3 1,1722 1,004.9 198.4 140.9 1.402 2 D. Revolving funds - 283.8 - - - 283.8 130.3 130.3 35.2 295.8 E Training - 5.7 155.0 112.4 41.7 8.0 3227 382.8 - 51.7 434.5 F. Incemental Operaton Costs 76.2 26.8 23.4 22.2 21.1 169.6 - 178.9 , 16.6 195.5 G. Land Acquislton 227.0 227. - 233.2 31.4 264.6 total 1,428.5 11,845.6 9,248.7 Z788.0 1,447.3 26,754.1 2Z620.6 8,634.6 4,481.6 35,736.6 Due to rounng the las digit in totals may appear difernt then sum of digitL  Table A 5.2: Cost Summary - Phnom Penh Water Supply Component: Total cost, contingencies and annual requirements (1998-2002) Breakdown of Totals Inc. Cont. (Rels '00) Totals Induding Contingendes (Riels 00O) Local (EBcl. Duties & 199B 1999 2C00 2001 2002 Total For. Exch. Taxes) Taxes Total A. Civil works 1. Turnnkeycontract 2414,8180 38,325,010.9 41,677,760.3 5,68Z434.9 - 88.100,0240 64,983,828.5 11,544,040.6 11,572,154.9 88,100,024.0 2. Water Ustrlbutlon Chamcar Morn 868,271.5 2,256,096.9 2,258,4730 6,783,752.0 7,199,854.1 19,366,447.5 - 17,172,731.9 2,193,715i6 19,366,447.5 J, Others 97Z484.1 - - - 972,464.1 - 858,049.5 114,414.6 972,464.1 e. Equipment 1. Plpes and fittngs for Chamcar Morn districts - 9,917,141.8 - - - 9,917,141.8 8,737,589.9 - 1,179,571.9 9,917,141.8 2. For tralning center 115,769.5 357,071.6 - - - 472,841.1 305,527.1 102,148.8 65,165.3 472,841.1 &.Computing equipment 435,938.0 - 435,938.0 357,326.2 - 78,611.8 435,938.0 4. Others 4,637.6 578,664.7 11,298.6 11,863.5 12,456.7 618,921.0 533,713.9 8,779.5 76,427.6 618,921.0 C. Consultants 1. Construction Supervision 156,332.0 1,511,603.3 1,328.767.8 441,815.3 - 3,438,518.3 3,125,925.8 - 312,592.6 3,438,5183 2. TA 357,609.5 1,728,819.9 1,232,759.3 1,118,606.5 817,584.5 5,255,379.6 3,978,730.2 747,664.9 528,984.6 5,255,379.6 D. Revolving funds - 1.083,124.8 - - - 1,083,124.8 477,147.5 477,147.5 128,829.8 1,083,124.8 E Training 20,163.3 752,555.1 576,525.2 22Z658.0 46,355.1 1,618,256.6 1,425,776.8 - 192,479.9 1,618,256.6 F. Incremental Operation Costs 309,528.0 107,099.7 99,234.5 99,356.1 99,258.6 714,476.9 655,512.8 58,964.1 714,476.9 0. Land AcquIsition 926,156.3 - - 926,156.3 - 817,190.0 108,966.3 926,156.3 Total 6,145,749.6 57,053,126.7 47,184,818.5 14,360,486.4 8,175,508.9 132,919,690.0 83,925,545.8 3Z383,265.4 16,610,878.8 132,919,690.0 Breakdown of Totals Incl. Cont. (USSOD00) Local Totals Including Contingencies (USS '0) (EBcl. Outles & 1996 1999 2000 2001 2002 Total For. Exch. Taxes) Taxes Total A. Clvil works 1.Turnkey contract 689.2 10,465.9 11,091.9 1,480.6 - 23,727.7 17,488.1 3,124.7 3,114.8 23,727.7 2. Water Distribution Cham car Morn 248.0 617.5 6029 1,773.8 1,844.0 5,088.2 - 4,494.6 591.5 5,086.2 3. Others 277.8 - - - - 277.8 - 244.9 32.9 277.8 S. Equlpment 1. Pipes and fittings for Cham car Morn districts - 2,708.2 - - - 2,708.2 2,3860 o 3221 2,708 2 2.Fortrainingcenter 33.1 97.5 - - - 130.6 83.4 29.2 18.0 1306 3. Computing equipment - 119.0 - - * 1190 976 215 119.0 4. Others 1.3 158.0 3.0 3.1 3.2 168.6 145.4 2.4 20.8 188.6 C. Consulants 1.Constructlon Supervision 44.6 412.8 3536 115.1 - 926.1 841.9 - 84.2 926.1 2. TA 102.1 472.1 328.1 291.5 208.6 1,4022 1,064.9 196.4 140.9 1,402.2 D. Revoiving funds - 295.8 - - - 295.8 130.3 1303 35.2 295.8 E Training 5.8 205.5 153.4 58.0 11.8 434.5 382 8 - 51.7 434.5 F. Increm ental Operation Costs 68.4 29.3 265 25.9 25.4 195.5 - 178.9 16.6 195.5 0. Land AcquIsition 264.6 8 - - 264.6 233.2 31.4 264.6 TotMl 1,754.9 15.51.7, 12,559.4 3,747.9 2,092.9 35,738.8 2Z620.6 8,634.6 4,481.6 35,736.8 Due to rouding the last digit n totas nay appear differeat than sumn of digits.  Table A 5.3: Cost Summary - Sihanoukville Water Supply Component: Base cost, contingencies and annual requirements (1998-2002) Breakdown of Totals hid. Cont (Eels 'OO) one Cost (Eels '000) Local (Ect. Outies A Is *N 2000 20 2002 Total For. Exch. Teaxs) Taes Total A. Cvi Works . 451,503.0 6,781,608.6 - - 7,233,111.6 8,340,847.3 664,057.2 1,478.650.6 10,483,555.1 L Equipment - 153,085.0 10,200.0 - 163,285.0 202,651.2 27,357.9 230,009.1 C. Consu 1. Construction supervision 283,220.0 351,220.0 214,200.0 - 848,640.0 941,742.4 - 94,174.2 1,035,916.6 2 TA a Socleconomlc study 18,700.0 222,700.0 - - - 241,400.0 265,881.7 - 26,588.2 292,469.9 b. Rnal design - 476,000.0 - - - 476,000.0 534,405.2 53,440.5 587,845.7 c. Future water needs study - 752,913.0 - - 752,913.0 851,4220 - 101,581.8 953,003.8 d. Support to MME 95,200.0 406,300.0 217,600.0 - 719,100.0 813,337.4 - 81,333.7 894,671.2 e. lnalW audit - 19,295.0 - - - 19,295.0 21,948.8 - 2,963.1 24,911.9 a Training 1. Training @ PPWM - 96,475.0 96,475.0 96,475.0 96,475.0 385,900.0 474,689.5 - 64,083.1 538,772.6 2. Others - 19,295.0 - - - 19,295.0 21,948.8 - 2,963.1 24,911.9 E hIcremental Operation Costs 8,160.0 60,095.0 40,800.0 40,800.0 40,800.0 190,655.0 21,948.8 206,658.5 2,963.1 231,570.3 F. Land AcquisIton 96,475.0 - - - - 96,475.0 - 88,825.0 11,844.2 100,669.2 Totai 953,258.0 9,338,986.6 579,275.0 137,275.0 137,275.0 11,146,069.6 12,490,823.1 959,540.7 1,947,943.5 15,398,307.3 Breakdown of Totals Ind. Cont. (USS 'COO) Local Base Cost (US'OO) (pucl. Duties S lse 1909 2000 2001 2002 Total For. ixch. Taxes) Taxes Total A. Civi Works 132.8 1,994.6 - - - 2,127.4 2,282.7 182.2 404.6 2,869.5 S. iquipment - 45.0 3.0 - - 48.0 55.2 - 7.5 62.7 C. Consultants 1. Construction supervision 83.3 103.3 63.0 - 249 6 259 0 25 9 2849 .ZTA a Socl.conomlcstudy 5.5 65.5 - - 71.0 72.8 - 7.3 80.1 b.RnaidesIgn - 140.0 - - - 140.0 145.9 - 14.6 160.5 c, Future water needs study - 221.4 - - 221.4 232.5 - 27.7 260.2 d.Supportto MIME 28.0 119.5 64.0 - 211.5 221.5 - 22.2 243.7 e. lnitl audit - 5.7 5 - 5.7 6.0 - 0.8 6.8 DL Training 1. Training PPWSA - 28.4 28.4 28.4 28.4 113.5 1250 - 16.9 141.9 2 Oters - 5.7 - - - 5.7 6.0 - 0.8 6.8 E Incremental Operation Costs 2.4 17.7 12.0 12.0 12.0 56.1 6.0 54.6 0.8 61.4 F. Land AcquisItIon 28.4 - - * - 28.4 - 25.4 3.4 28.8 Total 280.4 2,746.8 170.4 40.4 40.4 3,278.3 3,412.8 262.2 532.4 4,207.4  Table A 5.4: Cost Summary - Sihanoukville Water Supply Component: Total cost, contingencies and annual requirements (1998-2002) Breakdown of Totals Jncl. Cont. (iels '000) Totals Including Contingencies (Riels '000) Local (Exd. Duties & 199B 1l00 200 2001 2002 Total For. EKch.. Taxes) Taxes Total A. Ciil Works 542,526.0 9,941.029.1 - - - 10,483,555.1 8,340,847.3 664,057.2 1,478,650.6 10,483,555.1 B. Equlpment - 214,242.1 15,767.0 - - 230,009.1 202,651.2 - 27,357.9 230,009.1 C. Consuklnts 1. Construction supervision 324,388.9 432,486.5 279,041.2 - - 1.035,916.6 941,742.4 - 94,174.2 1.035,916.6 2. TA a. Socioeconomic study 19,541.5 272,928.4 - - 292,469.9 265,881.7 - 26,588.2 292,469.9 b. Rnal design - 587,845.7 - - - 587,845.7 534,405.2 - 53,440.5 587,845.7 c. Future water needs study - 953,003.8 - - - 953,003.8 851,422.0 - 101,581.8 953,003.8 d. Supportto MIME 109,432.4 501,768.3 283,470.5 - 894,671.2 813,337.4 - 81,333.7 894,671.2 e. Inlal audIt - 24,911.9 - - - 24,911.9 21,948.8 - 2,963.1 24,911.9 DA Training 1. Training Q PPWSA - 124,559.4 131,392.0 137,961.6 144,859.7 538,772.6 474,689.5 64,083.1 538,772.6 Z Others . 24,011.9 - - - 24,911.9 21,948.8 - 2,963.1 24,911.9 E Incremental Operation Costs 8,527.2 70,718.0 48,318.8 50,734.8 53,271.5 231,570.3 21,948.8 206,658.5 2,963.1 231,570.3 F. Land AcquIsItion 100,669.2 - - - - 100,669.2 - 88,825.0 11,844.2 100,669.2 Total 1,105,W05.2 13,148,405.0 757,989.5 188,696.3 198,131.2 15,398,307.3 12,490,823.1 959,540.7 1,947,943.5 15,398,307.3 0 Breakdown of Totals Incl. Cont. (US$'000) Local Totals Induding Contingencies (tBS '000) (Excl. Duties & 1998 1999 2000 2001 2002 Total For. Bcch. Taxes) Taxes Total A. ChMl Works 154.8 2,714.7 - - - 2,869.5 2,282.7 182.2 404.6 2,869.5 B. Equlpment - 58.5 4.2 - 62.7 55.2 - 7.5 62.7 C. Consultants 1.Construction supervision 92.6 118.1 74.3 - - 284.9 259.0 - 25.9 284.9 2. TA a. Sodo-economic study 5.6 74.5 - - - 80.1 72.8 - 7.3 80.1 b. Rnal design , 160.5 - - - 160.5 145.9 - 14.6 160.5 c. Future water needs study - 260.2 - - - 260.2 232.5 - 27.7 260.2 d. Support to MIME 31.2 137.0 75A - 243.7 221.5 - 22.2 243.7 e. InKital audit 6.8 - - - 6.8 6.0 0.8 6.8 a Training 1.Tralning