Argentina - Water Supply II

 ICRR 10842 Report Number : ICRR10842 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 03/07/2001 PROJ ID : P005977 Appraisal Actual Project Name : Water Supply II Project Costs 250 71.8 US$M ) (US$M) Country : Argentina Loan/ US$M ) 100 Loan /Credit (US$M) 56.2 Sector (s): Urban Water Supply Cofinancing na na US$M ) (US$M) L/C Number : L3281 Board Approval 91 FY ) (FY) Partners involved : na Closing Date 06/30/1998 04/30/2000 Prepared by : Reviewed by : Group Manager : Group : 2. Project Objectives and Components a. Objectives In line with Government policies at the time of appraisal, they were to : (a) promote greater sector efficiency and financial viability; (b) expand service coverage; (c) improve the quality of the water supply and sewerage services while protecting the environment; and (d) encourage private sector participation in the water and sanitation sector . (Although the objectives themselves were not formally revised, the strategy to achieve them embraced a new paradigm of greater reliance on private provision of infrastructure services following a shift of Government policy, first at the federal level and then in the provinces .) b. Components The Federal Water Sector Agency (COFAPyS) made sub-loans to eligible provincial and other local water utilities, for the following (with final costs): (i) improvement of existing operations of water utilities through institutional development, commercialization of services, operational improvements, and training (US$6.2m. or 8.6% of total); (ii) rehabilitation and upgrading of water and sewerage systems (US$26.6m. or 37.1% of total); (iii) expansion of water and sewerage systems (US$26.9m. or 37.5% of total); (iv) studies and engineering designs by the water utilities (US$8.9m. or 12.4% of total); and (v) Improvements in COFAPyS operations (US$3.0m. or 4.2% of total). Increasing local priorities for privatization --taken up by five of the seven eligible provincial sub -borrowers--led to modifications of some components . Component (i) for improving existing (public sector) operations, was drastically cut in 1995. A Loan Amendment, approved by the Board of Directors in 1997, introduced a new policy support technical assistance component (v), which included: (a) preparing a sectoral strategy; (b) developing a country-wide water and sanitation sector data base and information system; (c) strengthening the regulatory framework for water and sanitation services; (d) assisting provincial and municipal governments in the privatizing their water utilities; and (e) supporting the development and enforcement of water related environmental policies and regulations . c. Comments on Project Cost, Financing and Dates Final costs were only 28.7% of those forecast at appraisal . The shift toward privatization and weak capacity of provincial utilities--especially in Misiones where a US$ 50m. sub-project was cancelled--help explain the shortfall. By completion, Bank disbursements of US$ 56.2m. (56% of the original loan commitment) financed 78% of total costs. By completion, government counterpart was US$ 15.6m. only 31% of the total US$50 million expected. The project was approved on 12/18/90 and it was closed on 04/30/00 almost two years later than planned . 3. Achievement of Relevant Objectives: Objective (a) of improving sector efficiency and financial viability was partially achieved . For three provinces--Santa Fe, Santiago del Estero and Formosa --indicators of operating and financial performance reported in the ICR show significant improvements. For two provinces, accounts payable fell sharply and financial rates of return --which had been negative--reached +13% or more. Similar improvements were not reported for Misiones, however, where the intended project investment was cancelled . Objective (b) of expanding service coverage was partially achieved, through the greater population served by piped water and sewerage services (51-87% more at the provincial level) and number of connections to networks (40-68% more at the provincial level). In many cases targets agreed at appraisal were exceeded . There are no reported improvements for Misiones, the province which was to have received the largest project investment . Objective (c) of improving service quality while protecting the environment cannot yet be assessed . The ICR informs that service quality and environmental standards are now more closely monitored, but does not report details of the actual results observed. Objective (d), which became the most important, of encouraging private sector participation, was the most substantially achieved. Following the project, most new service delivery was through the private sector, and private concessions for water and sanitation services were introduced in five of the seven participating provinces . 4. Significant Outcomes/Impacts: Today, more than half the country's population receives water and sanitation services from private operators . The successful mid-stream shift of focus toward the privatization of water and sanitation services in response to the Borrower's new. Significant practical assistance for privatization provided by the project through financing master plans and preparing feasibility studies for the public sector to technical support for financial background studies, bidding documents, concession contracts and regulatory frameworks for the privatization of provincial facilities . Use of seminar training materials developed under this project in other Latin American countries . 5. Significant Shortcomings (including non-compliance with safeguard policies): Inability to bring purposeful assistance to the the federal sector financing agency COFAPyS (subsequently replaced by the National Agency of Water and Sanitation Works - ENHOSA). Not keeping fully on-board the water utility of Misiones, the province that was intended to be the principal beneficiary of this project. The Bank is helping to finance more works there, however, under the follow -on Water Sector Reform Loan (Loan 4484-AR). 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. NOTE: 7. Lessons of Broad Applicability: on sub-project identification and selection : Detailed preparatory work should ensure that a project is front-loaded with a significant pipeline of sub -projects at loan effectiveness . Grant financed technical assistance to prepare the engineering projects helps accelerate this process . on sub-loan allocation: Mechanisms should not be too rigid, allowing investment choices to be driven by demand. If a sub-loan remains unused for a period of time, it should be possible to readily reallocate unused amounts. Risks need to be spread (not allocating one half of a loan to a single sub -project that could be cancelled, as happened in this case ). on monitoring indicators: A change of strategy--toward privatization during this project --represents a significant challenge for monitoring and requires supervision missions and Borrower executing agencies to track agreed monitoring indicators closely on project executing agencies : Staffing them with a qualified team of external consultants helps project execution and continuity as management changes, but fails to transfer project knowledge to local staff . on institutional strengthening and reform : Major institutional reform is needed for improved efficiency of public utilities that lack incentives and are set in a culture of 'expand and spend' . on private sector participation : Strong political commitment at the top to reform and a clear government strategy are necessary . Necessary conditions for success include : a sound regulatory framework, capable regulators, credible dispute resolution mechanisms, standard clauses on arbitration in concession contracts, and advice on all these matters to local governments involved . 8. Assessment Recommended? Yes No Why? To review in more depth the rich lessons of the experience of expediting a major shift in project emphasis--toward privatization in this case --in response to a substantial change in borrower policy that occurred after appraisal. 9. Comments on Quality of ICR: Satisfactory overall, with good summary of key lessons . Two key items are missing from the Bank ICR, however : (i) the Project Financing table; and (ii) performance indicators of the largest (albeit) failed component for the Province of Misiones. The Borrower ICR provides a useful and candid evaluation of performance, although it does not draw any explicit lessons from the experience .