Argentina - Water Supply and Sewerage Sector Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 21403 IMPLEMENTATION COMPLETION REPORT (CPL-32810; SCL-3281A; SCPD-3281S) ON A LOAN IN THE AMOUNT OF US$ 100.0 MILLION TO THE REPUBLIC OF ARGENTINA FOR A WATER SUPPLY AND SEWERAGE SECTOR PROJECT January 26, 2001 Finance, Private Sector and Infrastructure Department Argentina, Chile, Paraguay, Uruguay Country Management Unit Latin America and The Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective November 2000) Currency Unit = Argentine Pesos 1 AP = US$ 1.00 US$ = AP 1.00 FISCAL YEAR ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy COFAPYS Consejo Federal de Agua Potable y Saneamiento Federal Council of Potable Water and Sanitation ENOHSA Ente Nacional de Obras Hidricas y Saneamiento National Agency of Water and Sanitation Works ETOSS Ente Tripartito de Obras y Servicios Sanitarios ICR Implementation Completion Report Regulatory Agency of the Buenos Aires Water Concession IDB Interamerican Development Bank NPV Net Present Value PSP Private Sector Participation SME Small- and Medium-size Enterprises SPIDES National Water and Sanitation Information System WBI World Bank Institute Vice President: David de Ferranti Country Manager/Director: Myma Alexander Sector Manager/Director: Danny Leipziger Task Team Leader/Task Manager: Yoko Katakura  FOR OFFICIAL USE ONLY CONTENTS Page No. 1. Project Data 2. Principal Performance Ratings 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 6 6. Sustainability 7 7. Bank and Borrower Performance 8 8. Lessons Learned 10 9. Partner Comments 11 10. Additional Information Annex 1. Key Performance Indicators/Log Frame Matrix 13 Annex 2. Project Costs and Financing 16 Annex 3. Economic Costs and Benefits 18 Annex 4. Bank Inputs 19 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 20 Annex 6. Ratings of Bank and Borrower Performance 21 Annex 7. List of Supporting Documents 22 Annex 8. Borrower Contribution to ICR (Unofficial Translation) 23 Annex 9. Borrower's Comments to ICR (Original and Translation) 33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   Project ID: P005977 Project Name: WTR SUPPLY II Team Leader: Yoko Katakura TL Unit: LCSFW ICR Type: Core ICR Report Date: January 29, 2001 1. Project Data Name: WTR SUPPLY 11 I/C/TFNumber: CPL-32810; SCL-3281 A; SCPD-3281S Country/Department: ARGENTINA Region: Latin America and Caribbean Region Sector/subsector: WU - Urban Water Supply KEY DATES Original Revised/Actual PCD: 09/02/86 Effective: 01/11/92 Appraisal: 11/26/90 MTR: 09/15/94 Approval: 12/18/90 Closing: 06/30/98 04/30/2000 Borrower/lmplementing Agency: ARGENTINE REPUBLIC/ENOHSA Other Partners: STAFF Current At Appraisal Vice President: David de Ferranti Shahid Javed Burki Country Manager: Myrna L. Alexander Pieter Bottelier Sector Manager: Danny Leipzeger Alain Thys Team Leader at ICR: Yoko Katakura Bernardo Gomez ICR Primary Author: Yoko Katakura; Ventura Bengoechea 2. Principal Performance Ratings (HS=Highly Satisfactory, S-Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Overall project objectives, in line with Government policies, 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. 3.2 Revised Objective: Although there were no revisions of the project development objective, the strategy to achieve those objectives was modified to reflect the changes in Government policy. The initial emphasis of the project was to strengthen the decentralized public utilities so they would become more efficient and financially viable. As discussed in the Staff Appraisal Report, the decentralization of water and sanitation services in 1980 after 50 years of centralized service provision was hastily carried out, and resulted in weak provincial utilities and declining service coverage. Although promotion of private sector participation (PSP) was one of the project objectives, the degree of PSP expected to be achieved under this project was modest, limited to outsourcing of meter reading, billing and collection, and system maintenance. Since in the early 90s, after years of declining investments and deteriorating service quality, a new paradigm emerged. The policy was increasingly one with a greater reliance on the private provision of infrastructure services and strengthening of the regulatory function of the public sector. This first took hold at the federal level, and has gradually spread to the provinces. Today, more than half of the country's population receive water and sanitation services from the private operators. In response to the changing priorities, and encouraged by the success of the Buenos Aires water concession, the project shifted its support to that of providing direct technical and financial assistance to the privatization of public utilities, while building public sector capacity to formulate policy and regulate privatized utilities. 3.3 Original Components: The project consisted of five components to be managed by COFAPyS, a Federal water sector agency, which would make sub-loans to provincial and other local water utilities that fulfill the eligibility criteria. The components were: a) improvement of existing operations of water utilities through institutional development, commercialization of services, operational imnprovements, and training (US$74.6 million); b) rehabilitation and upgrading of water and sewerage systems (US$56 million; c) expansion of water and sewerage systems (US$46.6 million); d) preparation of other studies and preparation of engineering designs by the water utilities (US$7.5 million); and e) improvement of COFAPyS' operations (US$1.9 million). 3.4 Revised Components: The components were revised several times in response to the changing priorities of the Government. During project implementation, five out of the seven sub-borrowers decided to privatize their water utilities in the form of long-term concession agreement with private operators. Many more provincial and municipal governments expressed their interest in pursuing private concessions or other forms of private sector participation in their water and sewerage utilities and requested technical support from the Federal Government. In the meantime, some of the earlier water concessions started to have trouble and required some backstopping capacity at the Federal level. Reflecting such events, in 1995, the loan allocation to the improvement of existing operations was drastically reduced. Then, in 1997, through a loan amendment that was approved by the Board of Executive Directors, a new technical assistance component to strengthen the capacity of the Borrower (Federal Government) for policy formulation and implementation was added. The main activities to be financed by the new component were: (i) preparation of a sectoral strategy; (ii) development of a - 2 -  country-wide water and sanitation sector data base and information system; (iii) strengthening the regulatory framework for the provision of water and sanitation services; (iv) assisting provincial and municipal governments in the privatization of their water utilities; and (v) supporting the development and enforcement of water related environmental policies and regulations. 3.5 Quality at Entry: Quality at Entry is rated marginally satisfactory. The project's objective was consistent with the Country Assistance Strategy (CAS), which was to support the Government in: (i) strengthening public finance at the national and provincial levels; (ii) improving the allocation of public spending; and (iii) increase private sector participation in providing public services. The project design reflected the Government's policy in the late 1980s, which was to strengthen the decentralized public institutions. The Appraisal report rightly identified the project's institutional and political risks. Indeed the project suffered from COFAPyS' inability to lend under agreed economic, financial, institutional, and environmental criteria. As a result, the project remained practically undisbursed until the end of 1994. Although the consultant team hired by COFAPyS (a risk mitigation measure identified at Appraisal) was of high quality, COFAPyS as an institution found it difficult to apply many of the loan conditions to the sub-borrowers. The weak capacity of provincial utilities, also foreseen at Appraisal as risk, contributed significantly to the delays in project implementation and eventual partial cancellation of the Loan. The project was innovative at that time, as it required sub-borrowers to comply with various efficiency and financial criteria. These criteria, however, faced resistance from the provincial utilities which had been accustomed to the culture of expand and spend, with little emphasis on efficiency or financial self-sufficiency. Such resistance from the provincial utilities were underestimated when project was designed, and lead to the overdimensioning and eventual partial cancellation of the Loan. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project's outcomes are considered satisfactory. The project achieved its principal objectives to: (i) promote greater sector efficiency and financial viability; (ii) expand service coverage, (iii) improve the quality of water and sewerage services while protecting the environment, and (iv) encourage private sector participation. The fourth objective of "encouraging private sector participation" in fact became the primary vehicle to achieve the first three objectives. During project implementation and supported by the project funding, five out of seven sub-borrowers (Santa Fe, Santiago del Estero, Formosa, Misiones, La Rioja) were privatized in the form of long-term concessions. As a result, sector efficiency and financial viability have improved and are expected to improve further (see Annex 3, Table 1). Some of the recently privatized utilities such as Misiones and La Rioja have only seen a modest positive impact of privatization. In terms of service coverage, all utilities substantially expanded the coverage as shown in Annex 1, Table 2-4. Quality of water and sewerage services as well as environmental standards are now more closely monitored by the provincial regulatory agencies that were established in conjunction with privatization. Many of the service quality and environmental indicators constitute a part of the concession contracts. In the case of the two cooperatives financed under the loan (Puerto Madryn, Chubut, and San Martin de Los Andes, Neuquen), institutional development programs were implemented and regulatory frameworks were established to clarify the responsibilities of the cooperatives vis-a-vis the municipalities. - 3 -  By loan closing, there was a significant improvement of the financial condition of the participating water companies, as reflected by the indicators in Annex 1. 4.2 Outputts by components: The project substantially achieved its sector, institutional, and financial objectives. The project directly and indirectly contributed to a significant increase in the quantity and quality of the services provided and in the number of people served (see tables 2, 3, and 4, of Annex 1). Nearly in all provinces and municipalities that the project worked on, the results achieved by the end of the project exceeded the pre-established targets in sub-loan agreements. 4.2.1 Improvement of Existing Operations (US$44.5 million original loan allocation; US$5.8 million disbursed) This component is rated satisfactory, despite the fact that only US$5.8 million of the US$44.5 million original loan allocation was expensed. The difference is largely explained by the shift in project strategy as described above. In 1995, at the request of the Borrower, loan allocation to this component was substantially reduced. The new strategy was to focus on the institutional and regulatory reform efforts, and leave the institutional development programs to the incoming private operators. The expected outcomes of the component included commercialization of services, operational improvements, and well trained utility staff. The expected outcomes were thus achieved not by investing in the existing public utilities but by supporting the privatization process. As mentioned before, five utilities (sub-borrowers) were privatized under the project. In most cases, one of the first things that the private operators did after they took over the services was to retain and/or hire capable staff and improve the commercial operation, as demonstrated in the marked improvements in collection rates and accounts receivables (see Annex 3). 4.2.2 Rehabilitation and Expansion of systems (US$50 million original loan allocation; US$37.6 million disbursed) These components are rated satisfactory. The expected outputs were to increase the service coverage and improve service quality. The project financed works in seven provinces and municipalities. The project's physical objectives in most cases were substantially met or exceeded the original targets, except for the Misiones subcomponent in which many of the planned works were not implemented during the project execution period. As a result as shown in Tables 2-4, of Annex 1, all sub-borrowers increased their water and sewerage services substantially during the project implementation period. Most of the subprojects suffered start-up delays because of the weak execution capacity at the local level. However, when the utilities were privatized mid-way through project implementation, about US$25 mnillion of the loan proceeds were transferred to the private operators which, in most cases, successfully completed the planned works. In the case of la Rioja and Misiones subcomponents, subloan allocation for works were partially or fully canceled, while the project focused its effort to support the privatization of the water utilities. Most of the unfinished works constitute a part of the concession contracts, and will be implemented regardless of Bank financing. Furthermore, with legally binding concession contracts and sector regulatory frameworks put in place as a result of the project, we expect that the service quality and efficiency will be much better controlled. 4.2.3 Preparation of other studies and preparation of engineering designs by the water utilities (US$4 million original loan allocation; US$9.4 million disbursed) - 4 -  This component is rated highly satisfactory. The expected outcomes of this component went beyond what was envisaged at appraisal. Instead of financing master plans, feasibility studies, and carrying out research studies to be used by the existing public utilities, the project financed consulting services to prepare technical and financial background studies, bidding documents, concession contracts, and regulatory frameworks for the privatization of the provincial utilities. The component also financed setting up an appropriate regulatory framework for the cooperatives. Such shift in project implementation strategy resulted in a more lasting institutional change. The specific outcomes achieved by this component in beneficiary provinces and municipalities are summarized in Annex I Table 1. 4.2.5 Improvement of COFAPyS (later ENOHSA) operations (US$1.5 million loan allocation; US$0.2 million disbursed) This component is rated unsatisfactory. The component aimed at strengthening the executing agency, initially COFAPyS and later ENOHSA which replaced COFAPyS. With frequent changes in the management of COFAPyS and ENOHSA, and lack of clarity regarding its mission, this component was not implemented fully. The project focused more on providing financial and technical assistance to the provincial and municipal governments by hiring extemal consultants, rather than strengthening COFAPyS/ENOHSA's role in providing such assistance. Since most of the consultants have left ENOHSA since then, ENOHSA is left with limited intemal capacity for providing such support. It is important to note, however, that the project did contribute to developing the sector capacity indirectly, as many of the consultants who worked under the project became top executives of the private water utilities. 4.2.6 Strengthening the Capacity of the Borrower for Policy Formulation and Implementation (no allocation originally; US$3.1 million disbursed) This component is rated highly satisfactory. As discussed in Section 3.4, this component was added in 1997 to reflect the changing priorities of the Government, and in an effort to develop the Borrower's capacity to formulate and implement sector policies. The activities financed by this component included: (i) National Plan for Water and Sanitation; (ii) National Information System of Water and Sanitation Sector (SPIDES); (iii) technical assistance for privatization; (iv) technical assistance to resolve post-privatization problems; and (v) technical assistance and training to strengthen the water sector regulatory agencies. By 1999, more than half of the urban population in Argentina was receiving water supply and sewerage services from utilities with some form of private sector participation. The National Government needed further development of its capacity not only to provide technical assistance to the privatization process in the provinces, but also to support emerging post-privatization issues, which included weak regulatory capacity, difficult contract renegotiation, premature termination of the concession contracts. This component was pivotal for the National Government to develop and exercise such a capacity. One example is the technical assistance to ETOSS, the regulatory agency of the Buenos Aires Concession, in preparation for the first five year review of the concession contract. Another example is the technical support the project provided in an effort to resolve problems with the Tucuman water concession, and later through financing of the interim management team of the Tucuman water company after the early termination of the concession contract. The project also funded the training seminars for the sector regulators, organized jointly with UADE, an Argentine University of Business, and WBI. The seminars were successful with four hundred people in attendance, and received high evaluation rating on course materials and instructors. The course materials developed for these seminars are now being used in other Latin American countries. - 5 -  4.3 Net Present Value/Economic rate of return: No specific economic rates of return were calculated at the time of Appraisal. Instead, all investment projects to be financed out of the line of credit were expected to have the internal rates of return of more than 12% to become eligible. Other expected economic benefits included higher water sales and cost savings resulting from the investmnents to promote efficiency, a more rational tariff policy, lower consumption, and reduced water loses thanks to metering. The project's economic benefits were substantial, especially when we consider the economic benefits from the utility privatization. In all utilities privatized under the project, a more rational tariff structure based on metered consumption was introduced. Consumers also benefited from lower tariffs in the provinces of Santa Fe, Formosa, and Misiones, because concessions were awarded based on tariff discounts. In the case of Misiones, a detailed cost-benefit analysis to measure the economic impact of the reforrn (privatization via concession and the establishment of a provincial regulatory entity) was prepared as a part of the preparation of a follow-up project. According to the analysis, economic value of the reform was estimated at US$16 million with an internal rate of return of 17%. The fiscal impact of the reform was estimated to be even larger with a NPV of US$28 million. 4.4 Financial rate of return: No specific financial rates of return were calculated at the time of Appraisal. Instead, selected financial indicators were used as eligibility criteria. The indicators included operational ratio, debt service coverage ratio, collection rates and return on assets. Table 1 of Annex 3 shows the financial indicators before and after the project/utility reform. Most financial indicators improved, except for the debt ratios in Santa Fe private utility which obtained a large sum of external credits to finance the investment program. 4.5 Institutional development impact: Institutional development impact was substantial. The project contributed significantly in helping the local governments in changing their roles from that of service providers to policy setters. Under the project, five provincial utilities were privatized in the form of long-term concession. These concessions cover an aggregate population of 2.8 million. Two additional utilities which received the project's technical assistance, covering an aggregate population of 230,000 were subsequently privatized in the form of long-term concessions. In addition, 11 provincial and municipal regulatory frameworks were drafted under the project of which eight were approved and are in effect. A summary of the institutional and regulatory reform programs financed under the project is presented in Annex 1. Furthermore, the project also helped develop the policy formulation and backstopping capacity at the Federal level, through establishment of the National Water Sector Information System (SPIDES), development of guidelines and standard documents for regulatory frameworks, tariff regime, concession contracts, concession bidding documents, and a poverty strategy for the sector. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: There were no major factors outside the control of government or implementation agency that affected the project's outcome. 5.2 Factors generally subject to government control: The project suffered major delays mainly due to the following factors: (a) institutional, operational and commercial difficulties of several agencies that hindered their eligibility; (b) lack of interest by several sub-borrowers in making changes in the institution; (c) sub-borrowers' lack of managerial/administrative capacity to execute projects; (d) different policies in different borrower provinces both in general terms and specifically at sectoral level; (e) the fact that nearly half of the loan (44%) proceeds were allocated to a - 6 -  single province which faced major implementation problems. Many of these difficulties were overcome by the shift in the project strategy from that of public utility strengthening to private sector participation, combined with reallocation of loan proceeds, and a more intense technical support by the project executing unit. 5.3 Factors generally subject to implementing agency control: The implementing agency's capacity was evaluated during project preparation and found to be weak, in terms of project management, financial management, project evaluation, and other administrative procedures. The weaknesses were to be overcome through staff training and the hiring of experts financed by the project. With the help of experts, COFAPyS/ENOHSA has established the standard procedures for project evaluation. The agency, however, continued to suffer from frequent changes in management and occasional political interference, which often hindered timely execution of the subprojects and prevented the long-term capacity building of the agency. 5.4 Costs and financing: The cost changes were significant. Actual cost was 56% of the figure estimated at appraisal, due mainly to the partial loan cancellation of US$36 million in 1998. The major part of the US$36 million corresponded to the amount allocated to the provincial water utility of Misiones. The US$50 million Misiones water and sewerage project was requested by the National Government to mitigate the negative environmental impact to be caused by the construction of Yacyreta hydroelectric dam, and was appraised in 1994 by the Bank as an independent project. Considering the fact that more than half of the Water Supply and Sewerage Sector loan remained uncommnitted at the time, the Government and the Bank agreed to finance the Misiones works through the ongoing loan. Although the engineering design of the works worth US$50 million and a master plan were prepared, the implementation of the works faced major delays. During a supervision mission in 1997, the Bank found the provincial water utility financially, technically and operationally not capable of implementing the works in a timely manner, and communicated the findings to the provincial and the Federal govemment authorities. After an intensive discussion among the Provincial government, Federal government, and the Bank, it was agreed that the best solution would be for the provincial government to accelerate the privatization of the public utility in the form of a 30 year concession. At the request of the government, therefore, US$36 million of the loan was canceled, with an understanding that once the utility is privatized, the works will be implemented by the private operator with a grant financing from the National Government. 6. Sustainability 6.1 Rationalefor sustainability rating: The sustainability of the project is rated likely. At the provincial level, the sustainability of the institutional and regulatory reforms supported by the project is highly likely. The water utilities were privatized in the form of long-term concession (mostly 30 years). Continued performance improvements of the utilities are also likely, given the autonomy and financial health of the concessioned services, and the regulatory frameworks and contracts that ensure service quality and standards. By project closing, more than 60% (nearly 70%, if we include cooperatives) of Argentina's urban population were being served by private operators. Provinces will most likely continue with the institutional and regulatory reform, as evidence by the interests shown by provinces in seeking technical assistance support of the newly approved Water Sector Reform Loan (Loan 4484-AR, a US$70 million Adaptable Program Lending approved by the Board in June 1999). - 7 -  At the national level, in addition to continuing to support sector reform at the provincial and municipal level, the Government will likely focus its effort in improving the existing PSP models, and solving the emerging post-privatization issues, including the weak regulatory capacity, slow extension of services to the poor (urban and rural) and unclear environmental standards. 6.2 Transition arrangement to regular operations: Not applicable. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank's performance during project preparation stage is rated less than satisfactory. The project was prepared by a multi-disciplinary team with additional inputs from sector experts. The project preparation team conducted a detailed analysis of the financial and administrative capacity COFAPyS, the implementing agency, and an ambitious plan to turn it into a self-sustaining and independent sector financing agency. It also developed the comprehensive credit regulations which specified eligibility criteria and other rules for the Bank financed line of credit to be administered by COFAPyS. In hindsight, however, the project team could have spent more time in developing a sector strategy and a more adequate financing model, and in assessing the sub-borrower capacity and demand. When the project was prepared and appraised, the country was going through an economic crisis (hyperinflation, etc) and a rather dramatic change in government. The new Menem administration during 1989-90 was struggling with its battle against inflation, and had embarked on a program to privatize some of the federal public enterprises. At that time, water companies had not yet been targeted for privatization, and the sector strategy was not clear. In addition, some federal authorities did not support the institutional arrangements for the project, i.e., to make COFAPyS an independent financial agency responsible for financing public urban water and sanitation utilities, in light of the obvious failure of similar institutions, such as the public mortgage bank and the SME development bank. The institutional capacity of the provincial utilities and thus demand for the loan was significantly overestimated. Although the Bank was working with some of the larger provinces -- Buenos Aires, Santa Fe, and Cordoba -- through an ongoing loan (Loan 2461-AR), there was very little information of the state of other smaller provincial utilities. The participation of IDB in the program, which doubled the size of it (from a US$200 million program to a US$400 million program), also contributed to the over-dimensioning of the programn. As a result, the loan had very limited disbursements until late 1995, almost four years after signing of the loan. 7.2 Supervision: The Bank's supervision performance is considered mixed. As discussed earlier, the project suffered major startup delays. Nonetheless, the Bank supervision missions were less frequent in the earlier years (1993-1994), and Bank task managers changed several times during the period. In hindsight, a more frequent mission, a more stable supervision team, combined with a more proactive stance could have accelerated the project implementation. Starting in late 1994 and 1995, the Bank intensified its supervision efforts in order to accelerate the pace of project implementation. In 1995 five supervision missions were carried out, compared with an average of two missions per year before that. At the recommendation of the Bank supervision team, the project - 8 -  executing unit was strengthened with a new coordinator supported by a group of expert consultants. The decision was made to focus on a selected number of water companies, instead of diverting efforts on potential participants. Around the same time, faced with severe fiscal deficits exacerbated by the Tequila crisis, many provincial governments started to consider concessioning of water utilities, one of the actions included in a series of Fiscal Pacts signed between the federal and provincial governments during 1992-1994. Reflecting such a trend, the Bank supervision team shifted its emphasis away from the traditional institutional strengthening program, to the support for privatization of the public utilities. The Bank supervision team acted proactively in the later years of project implementation, as demonstrated by the shift in strategy as mentioned above, the cancellation of a substantial amount of loan allocated to the province of Misiones (described more in detail under section 5.4), immediate support to the province of Tucuman, when it faced early termination of concession, support to ETOSS, the regulatory agency for the Buenos Aires water concession, with the first five-year review of the contract, and the organization of a training course for the sector regulators. 7.3 Overall Bank performance: Overall Bank performance is rated marginally satisfactory, despite less-than-satisfactory performance during preparation and early years of supervision. The Bank responded well to the changing Government priorities, and in the end, achieved the project objectives with less financing. Borrower 7.4 Preparation: The Borrower perfornance during project preparation is considered mixed. Although the Borrower was committed to the project, the Borrower's executing agency (then COFAPyS), which had mainly worked on rural water projects, had a very limited experience in dealing with the urban water supply and sanitation projects. Although such weakness was somewhat overcome by the hiring of external consultants, it contributed to the eventual delays in the project start-up. 7.5 Government implementation performance: The Government's implementation performance was also mixed. During the course of the project implementation, the line Ministry responsible for water and sanitation sector (and thus for COFAPyS and ENOHSA) changed several times. At appraisal, it was the Ministry of Public Works that was responsible for the sector. The responsibilities were then changed several times to Secretariat of Public Works under the Ministry of Economy, and then to the Secretariat of Natural Resources, then to the Secretariat of Public Works under the Ministry of Infrastructure. Reflecting such changes in the Government, COFAPyS and later ENOHSA suffered frequent changes in top management. Needless to say, such frequent changes were highly disruptive to the Project's performance. 7.6 Implementing Agency: Implementing agency's performance is considered marginally satisfactory. COFAPyS, a relatively new institution at the time of appraisal (created in 1988), overtime became an overstaffed institution that did not function well. COFAPyS suffered political interference in its day-to-day operations, including staffing and lending policy. The main problem was its institutional structure, with its board of directors comprising provincial government representatives with different interests. In 1995, to correct the problem, the Govemment decided to abolish COFAPyS and replaced it by ENOHSA. ENOHSA was subject to less political interference, as the new institutional model separated the policy formulation and the sector financing functions, by creating a separate entity, COFESA for policy setting. It also reduced the number of employees substantially through voluntary retirement plans and not renewing contracts for consultants. -9-  Today, ENOHSA is a much slimmer and more technical organization with much less political interference. Much of the difficulties faced by COFAPyS and ENOHSA were also due to resistance and weak capacity of the provincial utilities. The fact that COFAPyS initially had only limited experience in dealing with urban water and sanitation projects (the predecessor of COFAPyS focused on rural water supply) did not help its interface with the provincial utilities. Such difficulties were somewhat overcome with the hiring of external consultants with such experiences, which provided semi-annual and annual project progress reports to the Bank. 7.7 Overall Borrower performance: Overall Borrower performance is rated marginally satisfactory. Although Borrower performance in the last years of project implementation improved, the frequent political interference and inexperienced executing agency during project preparation stage and in the earlier stage of project implementation made it difficult for the project to be implemented smoothly. 8. Lessons Learned Project Design Subproject identification and selection. The project suffered major delays because: (i) the demand for the Loan was overestimated, (ii) incentives for the provincial utilities to carry out institutional reform was not clear; and (iii) the project faced various administrative difficulties in processing the subloan agreements with provincial utilities. The project was designed as a demand driven line of credit. However, an assessment of demand for the loan was not sufficiently carried out, and subprojects were not well identified during project preparation. Partly because of the lack of efforts by the project executing unit to create demand (promote the project concept, disseminate the project objectives and rules, etc.), and partly because of the lack of interest and incentive of the provincial utilities to strengthen its capacity and to become more efficient, demand for the project was much lower than expected. Furthermore, once identified, public utilities had limited capacity in identifying and implementing investment projects. A detailed preparatory work could have ensured that the project is front-loaded with a significant pipeline of subprojects at loan effectiveness. Provision of technical assistance to prepare the engineering projects on grant basis also could have helped accelerate project implementation. Subloan allocation. Subloan allocation and reallocation mechanisms were too rigid. The investments to be financed by the loan could have been competitively allocated, driven by demand. The project could have had a mechanism where if a subloan remains unused for a certain period, it can be reallocated to other subprojects. In addition, a supply driven approach to loan allocation resulted in strong initial resistance by the public utilities for any kind of institutional reform. Furthermore, the allocation of nearly half of the loan in a single subproject resulted in a large cancellation of the loan. The risk, including the capacity of the local executing agency could have been analyzed better. Project Implementation Local govenmuent procurement process. Local governments interfered frequently in procurement, thereby paralyzing the processes. A clear understanding about the Bank's procurement process should be achieved prior to subloan allocation. This was overcome once private operator started implementing the subprojects. Monitoring indicators. Although detailed monitoring indicators were designed at appraisal, and were - 10-  included in the subloan agreements, these were not well collected or followed closely. The privatization process made it hard for the executing agency and the Bank supervision team to collect and follow these indicators. More effort should have been made to follow the indicators more closely. Project Execution Unit. The project execution unit at COFAPyS and later at ENOHSA consisted mainly of external consultants. The qualified team of consultants helped the project execution, and ensured the continuity of the project through several changes in the management of these institutions. Such an arrangement, however, failed to transfer project knowledge, administrative know-how's to the permanent staff of COFAPyS and ENOHSA. Sector Policy Lessons Institutional strengthening programs. Institutional strengthening programs for public utilities has proved to be ineffective. Due mainly to the lack of incentive mechanism and/or culture of expand and spend, public utilities showed little interest in improving their operational efficiency. A major institutional reform - in the case of the project, privatization - was needed to reform these utilities. Private Sector Participation * Strong political commitment to reform from the top level of the government is important * Hasty PSP with poor preparation and lack of competition may make things worse (Tucuman, Argentina). Proactive action and support by the National Government to solve the problems and to promote PSP processes in general could be key to establishing investor confidence in the sector. * PSP without a sound regulatory framework and capable regulators can jeopardize its success. Major efforts to train and develop regulators are required, preferably before PSP transactions are completed. * Where politically feasible and economically efficient, multi-sector regulatory agency at the provincial level is encouraged, instead of a single sector regulatory agency for every water concession. * Credible dispute resolution mechanisms, including arbitration, must be included in the PSP contracts. * A study to review and develop efficient dispute resolution mechanisms that work in Argentina's judicial system will be financed through the recently signed follow-up project (Loan 4484-AR). * Standard clauses on arbitration should be included in the concession contracts. * The gradual approach to privatization, combined with targeted subsidies for service connections for the poor, may work well, where there is a clear strategy by the government as in the case of Chile and a strong institutional base on which to build. * The Federal Govermment's support (with Bank financing and technical assistance) to the local governments during transition -- on regulation, public policy formulation, training, initial investment support, strategy for the poor, issues regarding environment -- proved to be essential for the sustainability of the institutional and regulatory reform. 9. Partner Comments (a) Borrower/implementing agency: See Annex 8. (b) Cofinanciers: IDB financed a part of the sector Program, called "PRONAPAC" by the Borrower, which included the IBRD-financed Water Supply and Sewerage Sector Project. The IDB and IBRD projects were executed in parallel with separate project execution units. In no case IDB and IBRD financed a same sub-project - 11 -  jointly. The IDB portion of the Loan was fully disbursed to 16 water utilities. Except for a few cases, IDB portion mainly financed municipal utilities and cooperatives of smaller cities. Although IDB portion also supported private sector participation and regulatory reform at the local government level, it had much less emphasis on sector policy reform at the Federal level. The two institutions occasionally exchanged information, but rarely performed supervision missions together. Although collaboration between the two institutions improved towards the end of the project, a closer collaboration from the outset could have been beneficial in aligning the program strategies and overcoming implementation difficulties. (c) Other partners (NGOs/private sector): Not applicable. 10. Additional Information Not applicable - 12 -  Annex 1. Key Performance Indicators/Log Frame Matrix Subproject Inputs (activities financed by Outputs (physical, institutional, financial) project) Province of * TA for PSP * Establishment of a provincial multi-sector Formosa * Expansion of water supply regulatory agency (1995) network * Privatization (concession) of the capital city and * Expansion of potable water Clorinda (1995) treatment plant * Increase in service coverage (see table 2, 3) * Environmental studies to * A part of the project financed works was define sewage treatment plant implemented by the private concessionaire. and disposal system * Better financial ratios (see Table 1, Annex 3) * US$2.7 million disbursed (of * A tariff framework based on metered consumption US$4.5 million initial was established. allocation) Province of * Rehabilitation and optimization * Improved water supply Santa Fe of potable water plants in the * A part of the project financed works was cities of Rosario and Santa Fe. implemented by the private concessionaire. * Rehabilitation of networks in * Establishment of a provincial water regulatory Rosario. agency (1995) * TA for PSP * Privatization (concession) of the capital city and * US$27.4 million disbursed (of Rosario (1995) US$29.4 million initial * Better financial ratios (see Table 1, Annex 3) allocation) * A tariff framework based on metered consumption was established. Province of * Optimization of sewage * Improved sewerage service, though only 75% works Santiago del collection system completed. Estero * Environmental studies to define 0 A part of the project financed works was a sewage treatment and implemented by the private concessionaire. disposal system * Establishment of a provincial water regulatory * TA for PSP agency (1995) * US$5.3 million disbursed(of * Privatization (concession) of 11 localities, including $7.5 million initial allocation) the capital city (1995) * Better financial ratios (see Table 1, Annex 3) * A tariff framework based on metered consumption .__________ was established. Province of La 0 TA for PSP * Establishment of a provincial water regulatory Rioja * Planned works and services agency (1995) were largely canceled. * The attempt to concession the service failed because * US$0.5 million disbursed (of the winning bidder could not comply with its US$5.2 million initial financial obligations. The province subsequently allocation) negotiated a management contract with the second bidder, a local private operator. Province of * Works components largely * Capital city concessioned to a Spanish operator Misiones canceled, except for limited (1999) investments in Villa Sarita and * Establishment of a provincial water regulatory Candelaria potable water plant. agency (1999) * TA for privatization * A tariff framework based on metered consumption * US$6.6 million disbursed (of was established. US$44.5 million initial * Detailed engineering and Master Plan allocation) - 13 -  San Martin de * Cadaster of users; stormwater * Sector regulatory framework established. los Andes, drainage master plan, * Sewer service concessioned to the existing water Neuquen * Water system rehabilitation supply cooperative. * Sewage collection system. * A tariff framework based on metered consumption * TA for regulatory framework was established. * US$3.0 million disbursed (of US$3.7 million initial allocation) SERVICOOP * Commnercial system * Management information system, telemetering , Puerto * Rehabilitation and system, micro metering. Madryn, optimization of water and * Improved service thanks to rehabilitated water and Chubut sewerage installations sewer systems. * Sewerage master plan * Management and financial problems. * US$4.3 million disbursed (of US$4.9 million initial allocation) Table 2. Population Served. Piped Water (in thousands) M'ater Sub-loan Localities At project Established As of Percentage start-up tarcets 31-12-99 variation Misiones Province 122 228 87% Santiago del Estero 26rovince 29 308 414 54% Formosa Formosa 138 189 37% Clorinda 2 28 37% San Martin de los Andes Mncpltv 1 5 20 1 9 26% Santa Fe Province 1.334 1.541 2.319 74% Fuerto Madrn City 41 59 56 37% La Rioia Province 140 220 57% Totals 2,079 3,473 67% - 14 -  Table 3. Population Served. Wastewater Collection (in thousands) Wastewater Sub-loan Localities At project Established As of Percentage start-up targets 31-12-99 variation Misiones Province 51 77 51% Santiago de] Estero Province 104 144 176 68% Formosa Formosa 54 130 142% Clorinda 13 __________114 8% San Martin de los Andes Municipality 4 17 18 300% Santa Fe Province 781 915 1.186 52% Puerto Madrvn Citv 25 28 39 57% La Rioia Province 63 88 40 Totals 1,094 1,726 58% Table 4: Connections (in thousands) Water Wastewater Sub-loan Localities At project As of Percentage At project As of Percentage start-up 31-12-99 variation start-up 31-12-99 variation Misiones Province 28 54 87% 11 17 51% Santiago del Estero Province 47 72 54 18 31 68% Formnosa Formosa 32 44 37% 13 31 142% Clorinda 5 7 37% 3 3 8% San Martin de los Andes Municipality 5 6 26% 1 6 299% Santa Fe Province 314 546 74% 184 279 52% Puerto Madryn City 11 15 37% 7 1 1 58% La Rioja Province 34 53 57% 15 21 40% Totals 476 797 67% 252 398 58% -15-  Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) F Appraisal ActuaULatest Percentage of Estimate Estlmate Appraisal Project Cost By Component US$ million USS million Operational Improvement 74.60 6.20 0.14 Rehabilitation of Systems 56.00 26.60 0.92 Expansion of Systems 46.60 26.90 1.28 Preparation of Studies and Designs 7.50 8.90 2.25 Strengthening of Executing Agency 1.90 0.20 0.2 National Sanitation Plan 3.00 Total Baseline Cost 186.60 71.80 Physical Contingencies 18.60 Price Contingencies 44.80 0.00 Total Project Costs 250.00 71.80 Total Financing Required 250.00 71.80 Note: Appraisal Estimates include IDB Loan of US$100 million, as per Staff Appraisal Report. Actual/Latest Estimates does not include IDB portion. "Percentage of Appraisal" is a comparison between Appraisal Estimates for the Bank portion and actual for the Bank portion of the project. Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalenl) Procurement Method Expenditure Category ICB NCB Other N.B.F. Total Cost 1. Works I 1 r,00 il.50 5.00 (.00 h7.'I) (3.50) (18.50) (0.00) (0.00) (22.00) 2. Goods 90.50 45.50 6.50 0.00 142.50 (38.30) (17.50) (3.20) (0.00) (59.00) 3. Services 0.00 0.00 40.00 0.00 40.00 (0.00) (0.00) (19.00) (0.00) (19.00) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 102.50 96.00 51.50 0.00 250.00 (41.80) (36.00) (22.20) (0.00) (100.00) Note: Appraisal Estimates include IDB Loan of US$ 100 million, as per Staff Appraisal Report. Project Costs by Procurement Arrangements (ActuallLatest Estimate) (US$ million equivalent) Procurement Method1 Expenditure Category ICB NCB Onthe N.B.F. Total Cost 1. Works 0.00 53.40 0.00 0.00 53.40 (0.00) (38.09) (0.00) (0.00) (38.09) 2. Goods 0.07 1.56 0.00 0.00 1.63 - 16-  (0.07) (1.17) (0.00) (0.00) (1.24) 3. Services 0.00 0.00 16.77 0.00 16.77 (0.00) (0.00) (16.77) (0.00) (16.77) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 0.07 54.96 16.77 0.00 71.80 (0.07) (39.26) (16.77) (0.00) (56.10) Note: Actual/Latest Estimates does not include IDB Portion. Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 21 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. - 17-  Annex 3: Economic Costs and Benefits Table 1. Financial Indicators of Several Sub-loans SUB-LOANS Santa Fe Santiago del Formosa Index Definition Est ro At project At project At project At project At project At start-up comple- start-up* comple- start-up* project tion tion comple- tion Operation Oper. Expenses.+ Ratio Depreciation 0.91 0.88 1.10 0.93 1.37 0.97 Operational Income Financial Oper. Income - Depreciation rate of return Goods of Average Net Use 2.33% 14.16% - 16.40% 20.69% -110.43% 13.04% Debt service Internal Generation No coverage Total debt services 5.40 0.96 -5.11 5.77 financial 1.54 debt recorded Number of Accounts payable x 365 collection Operational Income 237.00 137.22 659.00 167.85 630.00 518.19 davs Percentage Value of collection x 100 collected Operational Income 81% 88% 52% 54% 39% 43% -18 -  Annex 4. Bank Inputs (a) M issions: -__ ___ __ -__ __ _ - - _-_---_-- SL:e olf Prolect CNcl e No of Persons and Specialh PerFormance Ratinu te.g 2 Economists. I FMS. etc Impkmeniation De%clopmen M1onth Ver Count Specialt) ProgTs'. C ObJeCiie: Identification/Preparation 01/25/91 S S 09/13/91 S HS Appraisal/Negotiation 07/02/92 01 F.A. S HS 08/21/92 02 San. Eng., F. A. S S 02/25/92 02 San. Eng., F.A. S S Supervision 06/23/93 02 Sr. San. Eng., Adv. U U 12/09/93 01 F. A. U U 03/22/94 01 San. Eng. U U 09/09/94 01 San. Eng. U U 02/01/95 02 F.A., San. Eng. S U 05/10/95 02 F.A., San. Eng. S S 06/20/95 01 TM U S 08/07/95 03 Env. Eng., F. A., W Eng. U S 12/15/95 02 San. Eng. , F. A. U S 04/09/96 04 2F.A., San. Eng., W Eng., U U 01/16/97 01 W Eng. U S 02/24/97 01 W. Eng. U S 03/27/98 01 W. Eng. S S 05/01/98 01 W. Eng. S s ICR 08/30/99 02 F. A., LS S S 04/17/00 01 W. S. S S F.A= Financial Analyst; San. Eng.=Sanitary Engineer; TM= Task Manager; W Eng= Water Engineer; WS= Water Specialist; LS= Lead Specialist fb) Staff: Sujge ol Proiect C%cle I Aciual-l.atest Estimate No. Sta3fTeeks ES5 hiKJO Identification/Preparation 37.83 63 Appraisal/Negotiation 61.5 130.2 Supervision 149.9 290.6 ICR 18.97 68 Total 268.2 551.8 - 19-  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating iA Macro policies O H OSUOM O N * NA M Sector Policies O H * SU O M O N O NA N Physical O H OSUOM O N O NA N Financial O H * SU O M O N O NA Z Institutional Development 0 H * SU O M 0 N 0 NA Z Environmental O H OSUOM O N O NA Social I Poverty Reduction O H OSUOM O N * NA C Gender O H OSUOM O N * NA E Other (Please specify) O H O SU O M 0 N * NA 2 Private sector development * H O SU O M 0 N 0 NA N Public sector management 0 H O SU O M 0 N 0 NA E Other (Please specify) 0 H O SU O M 0 N 0 NA - 20 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating E Lending OHS OS *U OHU O Supervision OHS OS Ou OHU O Overall OHS S s O U O HU 6.2 Borrowerperformance Rating O Preparation O HS * s O U O HU O Government implementation performance 0 HS * S 0 U 0 HU O Implementation agency performance 0 HS 0 s 0 U 0 HU E Overall OHS OS O U O HU - 21 -  Annex 7. List of Supporting Documents Contribuci6n del Prestatario al Informe Final de Cierre, Programa Nacional de Optimizaci6n, Rehabilitaci6n y Arnpliaci6n de los Servicios de Agua Potable y Alcantarillado Cloacal (Prestamo BIRF 3281-AR), Ente Nacional de Obras Hidricas de Saneamiento, Ministerio de Infraestructura y Vivienda, July 2000. Informe de Indicadores de Gesti6n de Saneamiento, Tomo 1, Resumen por Provincias y Areas Claves, January 1997, Sistema Permanente de Informaci6n de Saneamiento (SPIDES), Subsecretaria de Gesti6n de los Recursos Hidricos, Ministerio de Economia Plan Nacional de Saneamiento, Sistema Permanente de Informaci6n de Saneamiento, January 1998, Subsecretaria de Programaci6n Regional, Ministerio de Economia Plan Quinquenal de Inversion Sectorial, Capitulo Nacional, Programacion Regional, Ministerio de Economia, January 1998 Argentina: La Cooperativa como Empresa, Dr. Juan Antonio Zapata, December 1997 Nota Sobre Algunos Aspectos de la Pobreza y del Saneamiento en la Argentina, October 1995, Subsecretaria de Gesti6n de los Recursos Hidricos, Ministerio de Economia Project Progress Reports prepared by COFAPyS/ENOHSA Project Appraisal Document No. 19258, Loan 4484-AR, Argentina Water Sector Reform Project, May 1999 Preliminary Draft ICR, Marcial Abreu, Consultant, July 2000 - 22 -  Additional Annex 8. Borrower Contribution to ICR (Unofficial Translation) Presidencia de La Nacion Ministerio de Infraestructura y Vivienda ENOHSA Ente Nacional de Obras Hidricas de Saneaniento National Program for the Optimization, Rehabilitation and Expansion of Drinking Water and Sewerage Services PRONAPAC IBRD Loan 3281-AR BORROWER'S CONTRIBUTION TO IMPLEMENTATION COMPLETION REPORT Partially Financed by the World Bank July 2000 1- Background The National Program for the Optimization, Rehabilitation and Expansion of Drinking Water and Sewerage Services (PRONAPAC) was a Global Credit Program cofinanced by the World Bank and the Interamerican Development Bank. The contribution promised by the World Bank was equivalent to US$100 million. The Loan Agreement was signed on August 13, 1991, and effectiveness conditions were fulfilled on March 12, 1993. On March 3, 1998 a US$36 million reduction was made, so that the total Loan was set at US$64 million. The closing date was January 31, 2000 -approximately 8-1/2 years after the signing date and 6 years and 10 months after the Credit became effective- for the subloans financed by funds from Loan 328 1-AR, and April 30 of the same year for investments under Category 9 of the Project, with the objective of financing until that date a number of expenses related to the preparation of Loan 4484-AR. Total disbursements requested from the Bank were US$56,200,000. The preparation of the ICR is based upon the Staff Appraisal Report, correspondence and the Bank's Aide-Memoires, and working information in ENOHSA. ENHOSA's current administration took office on December 16, 1999, and therefore the entire management of PRONAPAC corresponded to the previous administration. Therefore, the observations expressed in this report respond to documentary references representative of the previous administration. 2- General Part- Origin; Benefits and Risks of the Project 2.1 Origin of the Project -23-  The Project originated from conversations that began in 1983 between the National Government and the Bank, aimed at formulating and implementing a reform program for the Sanitation Sector. As a result of this dialogue, the first project financed by the Bank for the drinking water and sewer supply sector was formulated: Loan 2641-AR, approved in December 1985. Based on the experience gained and the data and recommendations of the sector study that was prepared to give continuity to the process of modernizing the sector's activities and extending service coverage- the PRONAPAC Project was formulated. The assistance foreseen in the Project was aimed at strengthening the sector's organizations, increasing efficiency in water use and decentralizing services. All of this was based on the commitment of providers to implement policies that would permit the self-generation of funds for the modernization and expansion of the system, as well attracting funds in capital markets. 2.2 Anticipated benefits It was estimated that the project would have economic, fiscal, social and environmental benefits. Economic benefits are considered as increased income from sales stemming from the expansion of services and cost savings resulting from investments aimed at promoting efficiency. By promoting the metering of water consumption, the Project would facilitate the saving of wasted water at a production cost of around 15% of the marginal costs which would require increasing production capacity. With tariff levels nearing this marginal cost, the investments made for metered service would have a high cost-benefit ratio. It was also foreseen that investments in operational improvements and adequate maintenance systems would make it possible to increase the system's capacity to provide services to more clients, at a cost equivalent to one-fifth of that of constructing new installations. The accumulated fiscal benefits in excess of the funds needed to cover the operating costs of service providers, as well as clients' contributions, would begin to replace income from national taxes allocated to the sector. The most important social benefits were considered the expansion of service coverage to lower-income social groups and the creation ofjobs in project-related activities. Likewise, tariffs would be gradually replaced by others based on metered consumption, making it possible to subsidize low-income users who, it was estimated, would also have new levels of consumption. Environmental benefit would occur as a consequence of the introduction of a discipline for the preparation of environmental impact studies in projects financed by the former CoFAPyS, now ENOHSA. Environmental benefits were also expected, stemming from investments aimed at reducing water consumption and the volume of waste utilized. 2.3 Risks in execution The principal risks anticipated in project execution were of a financial, institutional and political nature. Financial risk was related to the lack of timely availability of local contributions and the risk of changes in the exchange rate. It was estimated that this risk would be diminished by the emphasis on investments in components aimed at increasing the financial viability of the sector's service providers and on the requirement for small local counterpart contributions. In addition, it was recognized that the management - 24 -  of agencies that lacked experience and were subject to tariffs established by provincial authorities, represented a substantial challenge. The institutional risks to the Project's success depended on the capacity of the former CoFAPyS to grant credits according to criteria agreed with the Bank and on the capacity of provincial enterprises to deal with institutional reform, carry out the rehabilitation of existing installations and deal with adequate maintenance plans. Finally, there were the political risks that were expected to be decreased by the National Government's decision to increase the efficiency of the public sector and improve finances at national, provincial and municipal levels. 3- Project Objectives and Description 3.1 Proiect Objectives The Project's general objectives were the following: (i) to improve the efficiency, financial viability, coverage and quality of drinking water and sewerage services in the country's urban centers with over 15,000 inhabitants, while at the same time protecting the environment; (ii) to strengthen the institutional performance of CoFAPyS (now ENOHSA) and of sub-borrowers; and (iii) to encourage the participation of private capital in the water and sanitation sector. 3.2 Proiect Description The Program consisted of an overall line of credit to grant, through the former CoFAPyS, subloans to entities in charge of providing drinking water and sewerage services that were eligible in accordance with the Credit Regulation approved by the international agencies that were financing the Program: the World Bank and the Interamerican Development Bank. Using the Program's resources, subloans were expected to be granted for five types of activities: * Type A: Projects for the operational improvement of the Program's beneficiary entities, including procurement of goods and services for institutional development, marketing of services, operational and physical improvements, staff training and studies for better participation of private capital; * Type B: Projects for the improvement, optimization and rehabilitation of drinking water and sewerage systems; * Type C: Projects for the expansion and execution of new drinking water and sewerage works; * Type D: Preparation of master plans and feasibility studies; designs for drinking water and sewerage works; environmental impact studies and applied research for the improvement of systems; and * Type E: Support to the operational activity of the former CoFAPyS, now ENOHSA, which included training of its staff. - 25 -  The World Bank later authorized the allocation of resources to prepare a National Sanitation Plan for a total of US$9 million, creating a special category for this purpose. 4- Subloans: Description, Objectives and Results. Under World Bank Loan 3281-AR, 8 subloans were financed with the following objectives and results: 4.1 General Administration of Sanitation Works of Formosa- (AGOSF): Initial loan: US$4.5 million Disbursements: US$2.7 million * Objectives a) To provide technical assistance for the transforrnation of the Basic Sanitation Sector in the Province of Formosa, including support for the creation of a Regulatory Agency for the services to be awarded; b) To execute works to improve drinking water services in the city of Formosa; and c) To perform environmental studies aimed at defining the sewage treatment and disposal system. * Evaluation The investment plan foreseen at the beginning of the Project was partially complied with, since some lack of definition in government policy, as well as dissension between the Executive Branch and the Legislature, kept this plan's investments from being completed. Nevertheless, in general, the Project's overall objectives were met, as indicated below: 1. The Province's Regulatory Agency for Public Works and Services was created in 1995. 2. Provincial services were awarded in the cities of Formosa and Clorinda. Later, services in the latter locality were sub-awarded Aguas de Formosa S.A. to the local electrical cooperative. 3. Works were carried out to expand the existing plant's potabilization capacity and to improve the quality of service provided and to obtain greater service coverage. Note should be made of the good performance of the provincial water service in the construction of works in the city of Formosa. 4.2 Municipality of San Martin de los Andes - Province ofNeuquen Initial loan: US$3.6 million Disbursements: US$3.0 million * Objectives a) To carry out a study of alternatives for the design, creation and/or consolidation of a municipal enviromnental sanitation organization and to define the environmental regulatory framework; b) To carry out studies and projects for commercial improvement based on a cadaster of users and definition of the drinking water and sewerage service tariff; c) To carry out studies for the cadaster of networks and for the definition of a network intervention system; - 26 -  d) To formulate the master plan for rainwater-sewer drainage and for solid waste disposal; and e) To rehabilitate and optimize drinking water installations and carry out complementary works in sewerage networks. * Evaluation The objectives stipulated in the Subloan Agreement were met, i.e.: 1. Municipal services were regulated and municipal sewerage services were awarded to the existing cooperative in charge of providing drinking water. 2. A tariff table was established, based upon metered consumption. 3. The cadaster of users and the network intervention system were defined. 4. A Master Plan was prepared. 5. Water system rehabilitation works were executed, and 80% of the sewage collection system in the inner city and surrounding neighborhoods, feeding the existing tertiary treatment plant, the construction of which was financed by Province del Neuquen. Nevertheless, the collection system could not be completed due to the failure of a bid because of abusive prices and the IBRD's denial of a six-month extension to carry out a new public tender. 4.3 Provincial Sanitation Works Agency of La Rioia - Province of La Rioia Initial loan: US$5.2 million Disbursements: US$0.5 million * Objectives a) To monitor the process of institutional transformation, including private participation in the provision of drinking water and sewerage services under the responsibility of EPOSLAR; b) To update the cadaster of users and present network; c) To increase the capacity of providing services; d) To install micrometers for 100% of drinking water service users in the principal localities served by the company; e) To optimize the drinking water systems of the localities of La Rioja, Chilecito and Chamical; f) To optimize the Province's systems that were not privatized. * Evaluation The Project's objectives were only minimally met since, according to information collected, there was a lack of understanding between the Province's Executive Branch and the Legislature. This produced a reduction in planned investments, reducing them to the financing of studies needed for international bidding on the awarding of EPOSLAR's provincial services in the cities of La Rioja, Chamical and Chilecito. Currently, the company is privately managed, and services are expected to be awarded in the second half of 2000. 4.4 SERVICOOP - Puerto Madrvn - Province of Chubut: - 27 -  Initial loan: US$4.9 million Disbursements: US$4.3 million 0 Objectives a) Commercial and operational improvement of the Cooperative, for the purpose of strengthening its business development; b) Rehabilitation and optimization of drinking water and sewerage installations to expand coverage and meet demand; and c) Formulation of a sewerage and effluent disposal master plan. * Evaluation Most of the investment plan was complied with, i.e.: 1. In terms of commerce, a management information system was developed, a telemetering system and household meters were installed, and various equipment was purchased with the objective of providing the Cooperative with modem management tools in accordance with the entity's needs. 2. Drinking water and sewer rehabilitation and expansion works were carried out, making it possible to improve and expand services. 3. The sewer master plan was formulated. Nevertheless, a certain imbalance in the Cooperative's financial management impeded the proper completion of planned actions. 4.5 Provincial Bureau of Sanitation Works - Province of Santia o del Estero: Initial loan: US$7.5 million Disbursements: US$5.2 million * Objectives a) Technical assistance for the institutional transformation process of the provider-DIPOS- and the awarding of drinking water and sewerage services to a private company. Definition of areas to be awarded, and proposal of policies for the regulation of the future concession and of the provision of services that remain the responsibility of the Province; b) Optimization of installations for conduction of the sewage collection system in the city of Santiago del Estero; c) Carrying out environmental studies aimed at defining a sewage treatment and disposal system for the city of Santiago del Estero. * Evaluation The objectives were only partially met because, according to information collected: (i) there were disagreements between the Province and the Program, and difficulties arose in the international bidding for works, which motivated the extension of deadlines; (ii) conflicts with the Contractor caused the contract to be rescinded; (iii) the closing of the Loan impeded the financing of the balance to be executed. - 28 -  The following were concluded: I. Consultants' studies in support of the concession; 2. Services were awarded in 11 localities of the Province. 3. 73.8% of the sewer work for the city of Santiago del Estero. With this level of progress, the contract cancellation occurred, to the detriment of the population. 4.6 Provincial Bureau of Sanitation Works - Province of Santa Fe Initial credit: US$29.4 million Disbursements: US$27.4 million * Objectives a) Technical assistance for the transformation of the sanitation sector at provincial level and the awarding of services provided by DIPOS. b) Execution of works to optimize and rehabilitate the water purification plant and distribution pipes of Rosario's drinking water networks, as well as works to optimize and rehabilitate the water purification plant of the cities of Rosario and Santa Fe. * Evaluation Objectives were met in accordance with commitments made: 1. The planned works were constructed. 2. The provincial service was awarded to private capital. 3. The design of the regulatory system was financed. 4.7 Provincial Sanitation Works Administration - Posadas - Misiones Initial credit: US$44.4 million Disbursements: US$6.64 million * Objectives First Stage: Preparation of studies and designs for the Second Stage Second Stage: a) Strengthening of the Regulatory Agency. b) Water works: optimization of the water purification plant and expansion of the water distribution system. c) Sewer works: IPRODHA Peninsula Collectors and household collectors . d) Expansion of the drinking water system in Garupa and Candelaria. Installation of the drinking water and sewer system in Villa Sarita. * Evaluation - 29 -  The First Stage was fully completed. With regard to the Second Stage, only the following components were executed: 1. Strengthening of the Regulatory Agency. 2. Expansion of the drinking water system in Garupa and Candelaria. Installation of the drinking water and sewer system in Villa Sarita. Considering that this operation arose as a substitute for the commitment made in the Binational Agreements signed for the construction of the Yacireta Hydroelectric Plan, the Loan's low level of execution is due to the fact that, in light of the commitment made by the Federal Govemnment, the Province of Misiones adopted a passive attitude with respect to the demands of ENOHSA and the World Bank under the Program's framework, adjusting them to its government plans. In this regard, the provincial government delayed the legal transformation of APOS until after the Provincial Bank, the insurance system and the electric company were privatized. In 1998 the Government of Misiones and the National Executive Branch signed an Agreement under which they agreed to request a new loan from IBRD (4484-AR) that would partially finance the sanitation works of the cities of Posadas and Garupa. 4.8 National Sanitation Plan 4.8.1 Tripartite Regulatorv Agency- ETOSS - Initial loan: US$0.56 million Disbursements: US$0.56 million * Objective The loan was granted to finance the "Five-Year Review of Tariffs" called for in the Concession Contract with Aguas Argentinas SA. * Evaluation All of the planned studies were completed. 4.8.20ther Consultancies Disbursements: US$5.9 million * Objective Loan 3281-AR financed consulting firms who, together with the Project Preparation Team in the Secretariat of Public Works and with Bank staff, performed a technical analysis of reform programs for about 23 service providers. This program consisted of defining a strategy for private sector participation, a regulatory framework for water and sanitation services, and bidding documents for the awarding of services. It also included a technical analysis of the service provided by each company, a proposal of service and investment objectives, and a financial and economic feasibility analysis. - 30 -  * Evaluation Consultants presented detailed estimates for 5-year investment programs - and service objectives - that totaled US$382 million for the first 5-year period, and aggregated investments for a 30-year horizon totaling approximately US$1.2 billion. 5- Borrower's Evaluation. 5.1 Evaluation of project obrectives. desizn and implementation. The Project's overall objectives were well presented, even though the design for their implementation in the field lacked sufficient flexibility and supervision that would ensure their full compliance. In particular, the objective of strengthening the institutional performance of the executing agency and of sub-borrowers was not met due to the large relative weight of the work of intemational consultants in the Program's Executing Unit who were not related to the Entity, due to a lack of training of the regular staff ( on-the-job training) of agencies involved. In addition, the encouragement of private capital participation in the water and sanitation sector turned out to be indiscriminate, leading to situations of pressure and lack of foresight concerning undesirable collateral results, such as due attention to deficient areas and to less profitable localities that were left out of the model. 5.2 Evaluation of the borrower's performance and lessons learned. The performance of the executing agency was excessively passive, relying heavily on ad hoc consultants lacking sufficient experience in the sector, and with very limited guidance and supervision with respect to sub-borrowers. These aspects indicate the need to strengthen, during future interventions, the participation of regular staff and intensify supervision efforts and guidance to participants. At the level of the provincial authorities responsible for jurisdictions in which subprojects were implemented, there were -according to information collected- serious misunderstandings among authorities and dissention and lack of definition regarding the implementation of policies -including differences concerning the Program's objectives or passive attitudes - in many cases leading to delays that kept planned investments from being completed. These aspects indicate the need to improve prior political interaction with local authorities, agreeing a priori on the instruments to be applied and expected results. There were also imbalances among sub-borrowers, particularly in financial management and conflicts with contractors, which also contributed to the fact than planned actions were not properly completed. These aspects indicate the need to intensify training efforts and to adjust the supervision of proceedings for the adjudication and contracting of works. 5.3 Evaluation of the performance of the Bank and other participants. The World Bank's performance, in relation to that of the Interamerican Development Bank (cofinancier of - 31 -  PRONAPAC), was inferior. It is felt that it would have been better for the Bank to have a local operating office that could have carried out a more timely, better adjusted supervision of actions. In effect, the Bank's technical assistance and supervision, through missions with multiple objectives and with few members and of short duration, did not make it possible to properly transfer the important know-how required in operations - of the scale, scope and level of innovation - as those proposed. In addition, the passiveness of the above-mentioned local actors was facilitated by the intransigent attitude of the Bank whose unilateral decisions led to several unfortunate interventions. In this regard, mention could be made of the Bank's suggestion to cancel a large part of the works to be implemented in the city of Posadas due to the presumed institutional and technical inabilities of those responsible for these works. Moreover, the lack of flexibility in the final stages of execution -denial of a final extension- did not permit several actions to be properly completed. - 32 -  Additional Annex 9. Borrower's Comments on ICR I NOTA ENOHSA No 137 BUENOS AIRES 17 ENE 2001 Ref: Prestamo BIRF No 3281 - AR Comentarios al Informe Final de Cierre. SENORA DIRECTORA PARA ARGENTINA, CHILE- Y URUGUAY DEL BANCO INTERNACIONAL DE RECONSTRUCCION Y FOMENTO (B.I.R.F.) Myrna ALEXANDER S. D. Me dirijo a Ud. a fin de hacerle Ilegar los comentarios que ha merecido la versi6n final del Informe Final de Cierre del Programa Nacional de Optimizaci6n, Rehabilitaci6n y Ampliaci6n de los Servicios de Agua Potable y Alcantarillado Cloacal (PRONAPAC) Prestarno BIRF No. 3281-AR. Las areas tecnicas y directivas del ENOHSA han analizado el documento y comparten en gran medida las conclusiones del Infonne. Sin embargo, existen algunas observaciones especificas y aclaraciones que se resumen a continuacion: En relaci6n al punto 4. "Cumplimiento de los Objetivos y Resultados", en particular 4.2.1 "Mejora de las Operaciones Existentes", se estima que no resulta satisfactorio el hecho que s6lo fueron desembolsados 5.8 rnillones de los US$44.5 millones de la asignaci6n original del prestamo. El excesivo enfasis dado al objetivo de "promover la participaci6n del sector privado" hizo decaer mas alla de lo conveniente el desarrollo de la componente "mejora de las operaciones existentes de entes de agua a traves de desarrollo institucional, comercializaci6n de servicios, mejoramiento operacional y entrenamiento ". * En relacion a los puntos 4.2.3 "Preparaci6n de otros estudios y preparaci6n de disenios de ingenieria por los entes de agua" y 4.2.6"Refosamiento de la capacidad del prestatario para la formulaci6n e implementaci6n de politicas", los montos desembolsados de US$9.4 millones (frente a US$ 4 millones de asignaci6n original) y US$3.1 millones (sin asignaci6n original) hizo que la proporci6n del prestamo dedicada a consultoria creciera mas alla de lo razonable frente al monto de inversiones, alcanzando mas del 22% del prestamo frente al 5,5 % originalmente previsto. - 33 -  * En relaci6n al punto 4.2.5 "Mejorar las operaciones de COFAPyS (posteriormente ENOHSA)", iltimo parrafo, debe remarcarse que el "desarrollo indirecto" de capacidad en el sector que se menciona se logr6 transfiriendola desde el sector oficial (que debia profundizar su rol de regulaci6n y control) hacia el sector privado operador. Se entiende que esta circunstancia sumada a la falta de enfasis en el desarrollo de esta componente obstaculiz6 mis que favorecer el proceso buscado de mejorar las operaciones del Ente rector sectorial, ya que se capacit6 al sujeto de la regulaci6n y se desguarneci6 al cuerpo regulador. * En relaci6n al punto 4.5 "Impacto sobre el desarrollo institucional" se considera excesiva la calificaci6n de "sustancial" que se asigna al resultado de este item. Al efecto debe tomarse en cuenta la pobre performance que ha revelado la concesi6n llevada a cabo en la Provincia de Formosa. Asimismo, se han magnificado los resultados alcanzados en aspectos tales como la ayuda para el desarrollo de una" estrategia para el sector careciente". * En relaci6n al punto 6.1 "Bases para la Calificaci6n de Sustentabilidad", en el cual se expresa"... Las provincias muyprobablemente contintuen con la reforma institucionaly regulatoria, como se evidencia por el interes mostrado por las provincias en buscar apoyo de asistencia tecnica del nuevo prestamo aprobad... ", se hace notar que la mayoria de las solicitudes de apoyo recibidas hacen referencia a situaciones que no hacen a la voluntad de privatizar nuevos servicios sino a dar soluci6n a problemas emergentes de las privatizaciones ya realizadas. Por otra parte, la aseveraci6n que "En el nivel provincial, la sustentabilidad de las reforrnas institucionales y regulatorias sostenidas por el proyecto es altamente probable" no se ve confirmada por los problemas evidenciados en la concesi6n de la Provincia de Formosa antes mencionada. Como resumen de lo expuesto, y a fin de completar las "lecciones aprendidas" incluyendo el punto de vista del Prestatario, cabe compartir lo expresado en el ultimo parrafo del punto 6.1, en el sentido que "...el Gobiemo focalizara su esfuerzo en mejorar los modelos existentes de participacion del sector privado, en resolver los problemas emergentes de la post-privatizaci6n, incluyendo la debil capacidad regulatoria y la lenta expansion de los servicios a las areas carecientes (urbanas y rurales)..." con la salvedad, que dada las escasas oportunidades de privatizaci6n remanentes en el pais, deberia agregarse enfaticamente la necesidad de retomar durante el transcurso del nuevo Prestamo la estrategia de apoyar a los entes puiblicos de servicios para mejorar su operaci6n, de manera de poder expandir la cobertura del servicio y mejorar la calidad del suministro de agua y servicios cloacales, objetivos primordiales de todo el programa de cooperaci6n entre la Argentina y el Banco Mundial para este sector. Sin otro particular, saludo a Ud. muy atentamente, '-32 - 34 -  Borrower's Comments on ICR - Unofficial Translation ENOHSA Note No. 137 January 17, 2001 Ms. Myrna Alexander Director Argentina, Chile, and Uruguay World Bank Re: Loan 3281-AR Comments to ICR I am writing to provide you our comments on the final draft of the Implementation Completion Report of the Water Supply and Sewerage Project (Programa Nacional de Optimizaci6n, Rehabilitaci6n y Ampliaci6n de los Servicios de Agua Potable y Alcantarillado Cloacal PRONAPAC -- Loan 3281-AR). ENOHSA's management and technical teams analyzed the document and in general share the conclusions of the Report. However, there are some specific observations and clarifications that we would like to make: * In relation to Section 4. "Achievement of Objectives and Outputs", in particular 4.2.1 "Improvements of Existing Operations", we consider that this component was not satisfactory, as only US$5.8 million out of the original allocation of US$44.5 million was disbursed. Excessive emphasis placed on the objective to "promote private sector participation" discouraged, more than necessary, the efforts to "improve existing operations of the water companies through institutional development, commercialization of services, operational improvements, and training". * In relation to Section 4.2.3 "Preparation of other studies and preparation of engineering designs by the water utilities" and Section 4.2.6 "Strengthening the Capacity of the Borrower for Policy Formulation and Implementation", the amount disbursed of US$9.4 million (compared with the US$4 million original allocation) and US$3.1 million (compared with no original allocation), respectively. This made the consulting services component much larger than reasonable, in comparison to the amount of investments, reaching 22% of the Loan, as compared with the 5.5% of the Loan as originally foreseen. * In relation to Section 4.2.5 "Improvement of COFAPyS (later ENOHSA) operations", the last sentence which says that "the project contributed to developing the sector capacity indirectly, as many of the sector officials who worked under the project became top executives of the private water utilities", must be cast in different light. We understand that this circumstance created an impediment, not a favor, to the institutional development of the leading sector agencies, as it created the capacity in the regulated entities, leaving the regulators unprepared. * In relation to Section 4.5 "Institutional Development Impact", we consider that it is too much to say there was "substantial" impact. We must consider the poor performance of the water concessionaire in the province of Formosa. In the same vein, the report exaggerates the results achieved in aspects such as the support it provided to the development of a "sector strategy for low income population". * In relation to Section 6.1 "Rationale for sustainability rating", in which you mention "...Provinces - 35 -  will most likely continue with the institutional and regulatory reform, as evidence by the interests shown by provinces in seeking technical assistance support of the newly approved Water Sector Reform Loan...", the major part of the requests are not for the privatization of services but for providing solutions to the problems emerging from the past privatizations. On the other hand, your statement that "At the provincial level, the sustainability of the institutional and regulatory reforms supported by the project is highly likely", is not substantiated if you consider the problems faced by the Province of Formosa. In summary, and to complement the lessons learned from the point of view of the Borrower, we share what is expressed in the last paragraph of Section 6.1, "...the Government will likely focus its effort in irnproving the existing PSP models, and solving the emerging post-privatization issues, including the weak regulatory capacity, slow extension of services to the poor (urban and rural)..." Given the decreasing opportunities for privatization in the rest of the country, we should, through the new Loan, revisit the strategy to support public utilities to improve its operation, so they can increase service coverage and improve the quality of water supply and sewerage service provision, the primordial objective of all the programs of cooperation between the Government of Argentina and the World Bank for this sector. Ing. Hugo Clausse Interventor Ente Nacional de Obras Hidricas de Saneamiento - 36 -  MAP SECTION   IBRD 20450 ): e ,-, ~L I I I~~~~~~~~~~~~~~~~~~~~~ Io< L L 14 .ll.' _11a t ,-' !,,9? ''''s~~~~~~~~~~~~~~~~I.. -''A. t, (~~~~~~~~~~~~~~~~~~~~- ry I E;f 4 r 1''Av i b"Ai7i ' / ( \ :_Par iqw,,t , j 6 ~ m jor oad IT \ \ / ,,~~~ ~ ~ ~ ~ ~~~~ I. Solo-J e~ ~ ~ 4 ,C_\ \ <t. _. , , llle|;Oc .Cr -0 I Cr bo ,1~~~~~~~~~~~~~~~ L -- A I V E 0 ' t ;. .- 7. 1- z la e F - ~ ~ ~ ~ ~ ~ ~ ~ C- ,, \ i ., . 2, , .-~~~~~~~~~~~~~~~~~~~~~~~~~~0 Z~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~u'S 1 tfl 81.