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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT KENYA THIRD NAIROBI WATER SUPPLY PROJECT JULY 6, 1989 Infrastructure Operations Division Eastern Africa Department Report No KE 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.

2 KENYA THIRD NAIROBI WATER SUPPLY PROJECT CURRENCY EQUIVALENTS Currency Unitl/ = Kenya Shilling (Ksh) Ksh = US$0.059 US$1.00 = Ksh 17.0 SDR 1.00 = US$ US$1.00 = SDR WEIGHTS AND MEASURES (Kenya uses the metric system) 1 cubic meter (m 3 ) = 220 Imperial Gallons, US gallons or 1000 liters (1 kiloliter - kl) 1 meter (m) = 3.28 feet (39.37 inches) 1 millimeter (mm) = 0.39 inches 1 Kilometer (km) = 0.62 miles) 1 square kilometer (km 2 ) = square miles = 247 acres 1 liter per capita per day = 1 l.p.c.d. 1 m 3 /d = 1 cubic meter per day ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank AfDF - African Development Fund EIB - European Investment Bank FY - Fiscal Year GOK - Government of Kenya IBRD - International Bank for Reconstruction and Development (the Bank) IDA - International Development Association (the Association) MLGPP - Ministry of Local Government and Physical Planning MWD - Ministry of Water Development NCC - Nairobi City Commission OECF - Overseas Economic and Cooperation Fund PIU - Project Implementation Unit PPF - Project Preparation Facility ROK - Republic of Kenya WAB - Water Apportionment Board WD - Water Department of the Ministry of Water Development WSD - Water and Sewerage Department of the Nairobi City Commission FISCAL YEAR July 1 to June 30 1/ The Kenya Pound (KE = 20 Ksh) is traditionally used as accounting unit in financial statements and budgets.

3 (i) KENYA FOR OFFICIAL USE ONLY THIRD NAIROBI WATER SUPPLY PROJECT TABLE OF CONTENTS Page No. CREDIT AND PROJECT SUMMARY I. THE WATER SUPPLY SECTOR Country Background... 1 Water Resources Access to Water in Urban Areas... 3 Access to Water in Rural Areas... 3 Sewerage and Sanitation Sector Legislation... 3 Sector Organization Sector Development Program... 5 Development Constraints and Problem Areas... 5 Cost-Recovery/Tariffs Previous Bank Group Projects... 6 II. THE PROJECT AREA - NAIROBI Location and Features Existing Water Supply Systems Existing Sewerage and Sanitation Systems III. THE PROJECT Genesis Population Projections... oo Water Demand Projections Project Objectives Water Resource Development Project Components Cost Estimates Project Financing.. o..... o Implementation Procurement Disbursement Dam and Tunnel Safety Aspects Environmental Aspects... oo IV. THE BORROWER AND THE IMPLEMENTING AGENCY The Borrower Nairobi City Commission... o Water and Sewerage Department Staffing, Manpower Development and Training Accounts and Audit Billing and Collection... o 38 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.

4 (ii) V. FINANCIAL ASPECTS Past Performance of WSD Water and Sewerage Tariffs Future Financial Performance Affordability for Low Income Group VI. PROJECT JUSTIFICATION Project Benefits Least Cost Solution Economic Rate of Return (ERR) Project Risks Project Monitoring System VII. AGREEMENTS REACHED AND RECOMMENDATION Agreements Reached during Negotiations Condition of Effectiveness Recommendation LIST OF ANNEXES ANNEX DESCRIPTION 1 Prerequisites for Project Appraisal 2 Population Projections (Graph) 3 Water Demand Projections 4 Water Demand Projections (Graph) 5 Project Cost Estimate 6 Financing Plan 7 Estimated Schedule of IDA Disbursements 8 Withdrawals of Proceeds of the Credit 9 Environmental Action Program 10 Nairobi City Commission (NCC) - Organizational Structure 11 NCC/Water and Sewerage Department - Present Organization 12 NCC/Water and Sewerage Department - Recommended Organization 13 WSD's Past and Projected Financial Performance 14 Economic Rate of Return Calculation and Sensitivity Analysis 15 Project Monitoring Guidelines 16 Project Implementation Schedule MAP IBRD 21208

5 (iii) KENYA THIRD NAIROBI WATER SUPPLY PROJECT Credit and Project Summary Borrower: Implementing Agency and Beneficiary: Credit Amount: Terms: On-Lending Terms: The Republic of Kenya. Nairobi City Commission (NCC). SDR 49.1 million (US$64.8 million equivalent). Standard IDA terms with a maturity of 35 years. As a loan to NCC at the IBRD interest rate (currently 7.65X) to be repaid over 21 years including 6 years of grace. Project Description: The Project would expand Nairobi's water supply system to cater for increased demand up to about , improve the basic needs provision and health conditions of the urban poor, assist in maintaining the sanitation standards in the city, preventing pollution in the recipient rivers, and improving the efficiency of NCC's Water and Sewerage Department (WSD) with the aim of supporting its transition, at a later date, into an autonomous body. The Project includes support for (a) source works, including construction of a new dam and raw water transmission tunnels and main; (b) extension of the water supply system, including extension of a water treatment plant, construction of treated water transmission main, distribution system extensions, instrumentation control and automation, and staff housing and offices; (c) extension of the sewage treatment plant, including provision of staff housing, offices and amenity building; (d) improvement of water supply and waste disposal facilities in low-income residential areas, including construction of infill mains, public water points, water selling kiosks, improvement to sanitation facilities, and provision of vehicles, water meters and other equipment; (e) consultancy services for engineering, construction supervision and preparation of a sewerage and sanitation master plan; and (f) technical assistance for management staff support and implementation of a training program, self-accounting system and environmental action program. Proiect Risks: Based on NCC/WSD's performance in carrying out three previous Bank and IDA-supported projects, the risks of this Project are expected to be small. Delays in Project start-up and implementation may result in cost overruns, but technical assistance, training and management support

6 (iv) would reduce this risk. NCC may continue to utilize the Water Fund for payment of its expenditures, but introduction of a new source of revenue would reduce this risk and make it possible for NCC to repay its remaining obligation to WSD. Introduction of tariff increases on a regular annual basis may face political difficulties, but in view of Government's commitment to the Project as demonstrated by recent increases, this risk is expected to be minimized. Monitoring WSD's performance in these areas would be a focus of IDA supervision. Estimated Costs: Local Foreign Total (US$ million) ---- Land Water Supply Sewerage Construction Supervision Technical Assistance Base Cost Physical contingencies Price contingencies Total Proiect Cost la Interest during construction Total Financing Required Financing Plan: IDA OECF AfDB/AfDF EIB NCC/WSD Government Total Estimated Disbursements: Bank FY (US$ million) Annual Cumulative Economic Rate of Return: 12.6% -- Iclde- lca-txe-etiatd-t ilio-euialnt la Includes local taxes estimated at US$ 10.7 million equivalent.

7 KENYA THIRD NAIROBI WATER SUPPLY PROJECT I. THE WATER SUPPLY SECTOR Country Background 1.01 The Republic of Kenya, stretching inland from the Indian Ocean to Lake Victoria, covers 583,000 km 2 and straddles the equator. Along the Indian Ocean coastline lies a narrow tropical belt, behind which an arid plain extends to the north. Toward the northwest, the land rises to a high plateau, the Kenya Highlands, at about 1,500 m with a temperate climate and subtropical vegetation. The Highlands are bisected from north to south by the Rift Valley Kenya's population is now nearly 21 million, with one of the highest population growth rates (about 3.8% per annum) in the world. The rural population is estimated at 18 million, while 3 million people live in the rapidly growing urban areas. The capital city, Nairobi, has a population of about 1.3 million. About 85% of the total population and the majority of economic enterprises are concentrated on the Highlands plateau During the first half of the 1980's, Kenya's annual GDP growth slowed to 2.4%, compared to 4.5% recorded during the period The later period also included political disturbances (1982) and an exceptionally severe drought (1984). The Government recognized the need for stabilization of the economy to reverse the erosion of fiscal discipline following the coffee boom of the late 1970's and the subsequent deterioration in the external terms of trade arising from the second oil shock in In 1982, a major devaluation restored the real effective exchange rate to the level of 1976, and periodic adjustments have since resulted in a real effective depreciation of more than 20%. Real interest rates became positive, and real wages fell in the private and public sectors. In agriculture, administered producer prices for maize and wheat were raised substantially. The overall budget deficit was reduced from 10% of GDP in 1981 to 4% in 1985, mainly through curtailment of development expenditures. These measures resulted in a reduction in inflation from more than 20% in 1981 to 10.5% in The current account deficit also declined from 13% of GDP in 1981 to 4% in 1985, despite a 25% deterioration in Kenya's terms of trade The stabilization effort was accompanied by a comprehensive structural adjustment program supported by the Bank. Although less successful than anticipated, important achievements included further adjustments in agricultural producer prices, improvements in agricultural extension, progress toward budget rationalization, a clearer system of classifying imports for purposes of import licensing, and initial steps

8 - 2 - toward a more uniform tariff structure. In other areas, including trade liberalization, export promotion, and reform of agricultural marketing, little progress was made. The Bank is continuing to support policy reforms in these areas through ongoing and planned sector adjustment operations in agriculture and industry Following the recovery in 1985, the economy grew by 5.7% in 1986, aided by favorable weather, a major improvement in Kenya's terms of trade, and improvements in the macroeconomic environment. The external current account deficit as a share of GDP decreased to 2.7%. All key sectors of the economy performed well, especially agriculture and industry, which grew by 4.8 and 5.2%, respectively. Real income per capita increased by 7% (adjusted for terms of trade effects ) -- the first real increase this decade -- and inflation decreased further to 4.3%. Gross domestic investment increased by about 27%, largely due to a large accumulation of stocks and a rise in public investment Although most aspects of Kenya's economy appeared encouraging in 1986, the fiscal and monetary positions were deteriorating. In the two fiscal years ending FY86, macroeconomic management was more expansionary in order to assist in drought relief efforts. Rapid increases in public expenditures led to rising budget deficits in these two years. There was no crowding out of the private sector since the larger deficit was accompanied by a major expansion in domestic credit, especially in FY In 1987, the combination of previous expansionary policies and a 25% fall in Kenya's terms of trade, produced a substantial deterioration in economic conditions. Financial policies in FY87 continued to be expansionary. The budget deficit (including grants) increased to 8.1% of GDP, while domestic credit and broad money expanded by 28 and 22%, respectively. Inflation also increased, reaching 7.3% during the year. Balance of payments pressures were exacerbated in 1987, with the current account deficit rising fourfold. The Government reacted to the external pressures by curtailing imports Kenya's foreign capital inflows have decreased substantially in recent years. Net capital inflows (including grants), which averaged 7% of GDP during , fell to an average of 3% of GDP during Inflows increased in 1987, but they were largely associated with commercial financing of defense imports. Given Kenya's debt service ratio of 32%, the Government should not consider borrowing from commercial sources to meet future external financing needs. Bridging of projected financing gaps will need to rely on increased levels of official development assistance. There are good prospects that these would be forthcoming provided the Kenyan Government takes the appropriate policy measures to address medium-term adjustment issues and the long-term constraints to development. Water Resources 1.09 Kenya experiences wide differences in climate caused mainly by variations in altitude. Average rainfall is about 450 mm per annum, but the actual distribution means that vast areas receive 250 mm or less per annum. As a result of the rainfall pattern, stream-flows are highly seasonal and vary widely. Perennial rivers are concentrated in the

9 - 3 - Highlandc area (including Nairobi) and the coastal zones. Kenya's groundwater potential, except in the eastern part of the country, appears to be limited and inadequate for large scale water supply projects. However, considerably more investigation is required to identify and develop this potential source which may be significant for the water supply of smaller communities in the rural areas. Unfortunately, in some areas, groundwater is saline and in others, including Nairobi and the Rift Valley, groundwater contains high levels of flourides. Access to Water in Urban Areas 1.10 While most of the urban population in Kenya have access to piped water, the urban population growth rate of about 7% strains the existing capacity of the systems. At present, water is supplied through metered individual connections to about 70% of the urban population and to about 8% through communal water points or kiosks. The remaining 22% of the population is not serviced directly and has only limited access to potable water. Overall urban water usage (excluding Nairobi) ranges from 70 l.p.c.d. to about 160 l.p.c.d. (including industrial, commercial and institutional consumption). Nairobi's average is about 180 l.p.c.d., which is normal for this environment. Access to Water in Rural Areas 1.11 Only 2.6 million people (about 15% of the rural population) are supplied with safe drinking water. The rest of the rural population has to carry water over considerable distances from natural sources which are usually polluted, inadequate or dry for several weeks each year. Water usage ranges from 50 l.p.c.d. for individual connections (about 47,000 to serve 600,000 people) down to about 10 l.p.c.d. where water is carried. Although a large number of water supply schemes have been and are being constructed under the Rural Water Supply Programme, many with external donor assistance, the level of operation and maintenance has been inadequate and many schemes are in need of rehabilitation (see also para 1.19). Sewerage and Sanitation 1.12 There are 22 public sewerage systems in Kenya, servicing about 6% of the total population. Another 4% have septic tanks and 40% make use of pit latrines. The remaining 50% have no proper sanitation facilities. In Nairobi, about 60% of the population is served by public sewer systems, and 20% by septic tanks. The Ministry of Local Government and Physical Planning (MLGPP) and the Ministry of Water Development (MWD) have undertaken improvements in other municipalities and smaller towns. Operation and maintenance by local authorities, except in Nairobi, are often to very low standards. Sector Legislation 1.13 The Water Act, revised in 1986, together with its subsidiary legislation, covers the broad field of conservation, control, apportionment and use of water resources. The Water Apportionment Board (WAB) is responsible for issuing all water abstraction licences in Kenya. It is

10 able to vary and revoke awards of water permits. MWD provides the Board with technical advice, manpower for the Board's Secretariat and water bailiffs who are the Board's field workers. The chairman of WAB is customarily the Minister of Water Development Complementary to the Water Act is the Public Health Act which includes many provisions relating to water and sewerage from the health point of view. The Local Government Act, Cap. 265, gives power to local authorities in urban areas to undertake water supply, sewerage and drainage works, to maintain waterworks and to make appropriate by-laws. Sector Organization 1.15 Reflecting the growing importance which the Government attaches to the water sector and to rural water supply in particular, over the past two decades responsibility for water supplies has passed from the Ministry of Works to the Ministry of Natural Resources, to the Ministry of Agriculture, and finally to the MWD, which was established in 1974 to concentrate on the development of the water sector. In addition, three river basin development authorities under the Ministry of Energy and Regional Development (the Tana and Athi Rivers, Lake Basin, and Kerio Valley) were established as independent statutory bodies. They are responsible for integrated, multi-disciplinary planning and implementation of development projects and orderly water exploitation in their respective areas. Major irrigation developments are the responsibility of the National Irrigation Board under the Ministry of Regional Development Since its establishment, the MWD has concentrated on the rural water sector by constructing and operating several hundred schemes under the first four phases of its Rural Water Development Program with varying degrees of success. In addition to these rural MWD schemes, other ministries and bodies have made rural water investments. The County Councils operate with limited success several hundred small schemes which are scheduled to be gradually taken over by MWD as funding permits. The Kenya Railways also operates about a hundred schemes which supply water to adjacent villages in addition to their own requirements. The Ministry of Lands and Settlement plans and finances water supply for new settlement areas, usually with MWD's Water Department as the executing agency. The Ministry of Culture and Social Services administers government grants to the "self-help" schemes in rural areas, again with WD's technical assistance In the urban sector, the Nairobi water supply and sanitation system is owned and operated by the Nairobi City Commission (NCC); the Mombasa and coastal province water supply system is owned and operated directly by MWD, with bulk water supplied by the MWD-controlled Mombasa Pipeline Board; and the five other major municipalities operate their own water supply systems under the direction of MLGPP with technical guidance from MWD.

11 -5- Sector Development Program 1.18 Kenya's water sector objective is to supply water to its entire population by the year In the early 1970's, Government launched a Rural Water Supply Program to speed rural development, which is now in its fourth phase. The Government also endorsed the targets of the International Drinking Water Supply and Sanitation Decade and, in October 1980, created a National Action Committee to coordinate Decade planning. Annual development expenditure by MWD in the water supply and sanitation sector grew very rapidly in the 1970's, to about US$25 million by Since then, actual expenditure has dropped below this figure due to financial constraints, but emphasis is still given to the rural areas, especially to those projects which have attracted substantial amounts of concessional donor finance. Sewerage and sanitation development expenditures amount to only 10% of sector expenditures The rural water sector has benefited substantially from both grants and technical assistance provided by various international donor agencies. Over 60% of MWD's Rural Water Supply Program has been financed by the Nordic donor agencies (SIDA, NORAD, DANIDA and FINNIDA), the Netherlands, CIDA and KFW. In the past, this funding was concentrated on new projects to benefit the unserved rural population. While this program was largely successful, because of rapid expansion MWD was unable to provide the necessary back-up services and finance to operate and maintain these new facilities. Recognizing these constraints, the donors are now focussing their assistance on rehabilitation, strengthening of operations and maintenance, and technical assistance for MWD. The recent trend in rural water supply strategy focusses were on village based operations, community participation and appropriate technology. Development Constraints and Problem Areas 1.20 The country's deteriorating economic situation and financial constraints have also effectively slowed and reduced the implementation of the ambitious rural water supply development program. To conserve scarce resources, overall financial control of development projects has been assumed by the Ministry of Finance. The need to improve operational efficiency and cost recovery, especially in the rural sector has been recognized by the Government, together with the need for systematic manpower development and training programs in the sector. To overcome some of the perceived shortcomings, Government has introduced the "district focus" concept to decentralize responsibility and authority for planning and operations and to some extent also revenue generation to district administration. To support this program in the rural water sector, MWD has begun to post HQ staff to field locations. Cost Recovery/Tariffs 1.21 Government policy on cost recovery is that, in rural areas, water charges should cover operation and maintenance costs, and in urban centers water charges should, in addition, contribute to capital costs. In most of the rural schemes, water is supplied to the consumers through kiosks at a rate of Ksh 2.50/m 3. The tariff for unmetered connections is Ksh 15.0 per

12 - 6 - month, while for metered connections the charge is Ksh 1.5/m 3 for the first 9 m 3 and Ksh 2.65/m 3 for additional consum tion. The tariffs in the urban and town council schemes average Ksh 2.0/m, although variations are substantial. In the Mombasa coastal region, which is operated by MWD, the flat rate charge is Ksh 26.1 for the first 9 m 3 and Ksh 5.75/m 3 thereafter. The Nairobi water tariffs are described in paras and Total revenues collected in the rural water schemes operated by MWD (excluding Mombasa) are only about 20% of the operating and maintenance cost of Ksh 120 million. The low level of cost recovery is due both to inadequate tariff levels and to poor billing and collection practices. In 1983/84, SIDA financed the preparation of a Water Use Study, which recommends that rural tariffs should be raised by about 30%, with crosssubsidy among the various schemes. Government has not yet decided on rural tariff changes, but the recently introduced 'district focus' concept is designed to improve operation of the schemes and water revenue collection at the district level. Previous Bank Group Projects 1.23 The Bank has been involved in the urban and water sector since During this period the Bank has financed three urban projects and five water supply projects. The Nairobi Sites and Services Project (Loan 1205-KE/Credit 543-KE) included funds for a substantial sanitation and sewerage component to benefit the urban poor in Nairobi. The Second Urban Project (Loan 1550-KE/Credit 791-KE) undertook to finance site and service developments and urban upgrading in Nairobi, Mombasa and Kisumu. The Secondary Towns Project (Loan 2319-KE/Credit 1390-KE) assisted the development in Kitale, Eldoret, Nyeri, Thika and Nakuru, with the aim of developing an integrated urban network to support economic growth in the rural areas and improving the urban employment base of secondary towns. The proposed Fourth Urban Project aimed at improving the management and financial practices of local government authorities is presently under preparation The Nairobi Water Supply Project (Loan 714-KE) implemented during assisted by the Bank was the first phase of a long-range program to develop the Chania-Kimakia-Thika river system for the purpose of meeting Nairobi's water supply requirements. This was followed by the Second Nairobi Water Supply Project (Loan 1520-KE), implemented during , to provide the necessary extensions for Nairobi's water supply up to The presently still ongoing Third Nairobi Water Supply Engineering Project (Credit 1566-KE) has been assisting the Government and the Nairobi City Commission (NCC) and its Water and Sewerage Department (WSD) in the preparation of the next extension phase (proposed project) and to strengthen the institutional and financial capacity of the implementing agency (NCC/WSD). The Bank also financed the Mombasa and Coastal Water Supply Project (Loan 1167-KE), which was implemented by MWD. These projects have been physically completed successfully albeit with cost overruns of varying degrees. The key lesson learned from these projects is the need for strong autonomous organizations capable of making sound economic decisions within an established policy framework acceptable to Government.

13 1.25 The Bank has made one loan to the rural water sector, namely the Rural Water Supply Project (Loan 1637-KE) in Due to the problems of implementation and operation which MWD was experiencing with the Rural Water Supply Programme, the Bank-financed project got off to a very slow start. In 1983, the project was restructured and reduced at Government's request. Since then, Government's continuing financial constraints have adversely affected MWD's financial and physical capacity to absorb any further responsibilities, and the project was finally cancelled on mutual agreement in February, The Bank Group supports Government's effort to achieve its targets in water sector development by providing financial assistance for high priority, long-term water supply projects with continuing assistance for institution building, emphasizing manpower development and training and improvement in administrative and financial management. To assist Government focus on the development and issues of the water sector, both rural and urban, the Bank financed the preparation of a water sector review under the Rural Water Supply Project. Although this work remained unfinished (due to cancellation of the project), the Bank will continue the dialogue with Government on sectoral objectives and future policies in the rural water supply sector in Kenya in the face of a rapidly changing ecological and economic environment. The Bank also continues to assist the expansion of the water supply and sewerage systems in Nairobi, the nation's capital and center of tourism, to which the Government attaches high priority.

14 -8- II. THE PROJECT AREA - NAIROBI Location and Features 2.01 Nairobi is the capital and largest city in the Republic of Kenya. It is located close to the Central Highlands region at an average elevation of 1,500 m above sea level, some 500 km from Mombasa on the coast to the East and 300 km from Kisumu on Lake Victoria to the West. The city of Nairobi now encompasses some 600,000 hectares. The area slopes gently down from west to east with an approximate change in elevation of 300 meters across the city area, drained in the main by the Nairobi River and its many tributaries. The exceptions are the Karen-Langata area and the airport area at Embakasi which are drained by tributaries of the Athi river. Nairobi's current population is near to 1.3 million with an annual growth rate of about 5.3% Nairobi is not only the capital city of Kenya but is also the hub of all business, economic, communication and cultural activities, and the centre of tourism. There are no major secondary centers beside the city center within Nairobi's boundary, but outside the boundary Thika, Athi River, Machakos and Kiambu are now urban centers to the north, south, east and west, respectively. The urbanized area to be provided with infrastructure now covers an area of approximately 30 km by 15 km The climate in the Nairobi area is predominantly controlled by its equatorial position and the large scale pressure systems of the African continent and Indian Ocean. However, topography strongly influences the magnitude of the climatic elements and to a lesser extent their seasonal distribution. Nairobi has two distinct wet seasons during April/June and October/December. The average rainfall in the Nairobi area is about 900 mm and the average annual temperature about 200C Nairobi receives its water supply from catchment areas some 50 to 60 km to the north, in the high rainfall area of the Aberdare Mountains. This water is conveyed to Nairobi through pipelines which traverse densely populated rural areas, some of which have inadequate water supplies. In addition, the urban centers around Nairobi (some of which are already supplied from Nairobi's system) will require additional facilities and extended supply. The need to safeguard the interest of the other water users outside the Nairobi area has been evident. With this in mind, the water demand and the water supply facilities required for an integrated utilization of the region's water resources to the benefit of Nairobi and the other potential consumers have also been studied as part of Project preparation under the Engineering Credit. This study area covers approximately 7,500 km2 and comprises the whole of the upper Athi catchment and the Thika catchment of the Upper Tana System. The present population within the area is estimated to be about 2.5 million, half of which live in Nairobi. The growth rate in the rural areas is expected to decline during the planning period up to 2010 from the present estimated 3.9% per annum. The long-term development plan is intended to eventually provide water to this wider region. Priority of supply in the short-term, however, remains for Nairobi.

15 - 9- Existing Water Supply Systems 2.05 The water supply to Nairobi is derived from four sources: (i) (ii) (iii) (iv) The first water supply to Nairobi was provided by a railway authority. The source of potable water was Kikuyu Springs, developed in the early 1900s. In 1921 the water undertaking was bought by NCC from the railway authority, and it is still in operation. In 1939, an intake on the upper reaches of the Ruiru River with pipeline and treatment work at Kabete were constructed. This source was progressively developed up to 1950 by adding a dam and two further pipelines. Between 1952 and 1956 the Sasumua River was developed by building a dam, treatment works and transmission main. This was further developed between 1960 and 1966 by raising the dam, diverting the flow from other rivers into the reservoir and extending the treatment works twice. It was apparent in the early 1960's that additional sources would be required and investigations were carried out leading to the implementation of Phase I of the Chania-Kimakia-Thika Project. The works, comprising a diversion weir across the Chania River, pumping station and raw water main, treatment plant at Ngethu and treated water transmission mains, were commissioned in 1974 (financed in part by IBRD Loan 714-KE) increased the water supply capacity to about 130,000 m 3 /day. This scheme was followed by Phase II of the Chamia-Kimakia- Thika Project completed in 1985 (financed in part by IBRD Loan 1520-KE). It employs a gravity feed to Ngethu from a weir intake further upstream at Mwagu, through a tunnel and new raw water main The available yields from these sources are as follows: SOURCE M 3 /DAY Kikuyu Springs 4,800 Ruiru Dam 21,400 Sasumua Dam 46,000 Chania (Phases I and II) 122,000 TOTAL 194,200 It should be noted, that with the present sources on the Chania River (and the Sasumua Dam operated in regulating mode) are basically run-of-river abstractions. The yields above are given at 98% reliability levels About 90% of the water supplied and distributed in Nairobi is conveyed by gravity. The total storage reservoir capacity in the distribution system is 180,900 m 3. While total supply presently approximates total demand, the demand of the city is not fully met due to

16 an imbalance in the distribution zones; the western part of the city (upper zones) which receives water from the first developed sources, is supplied independently from the eastern part (lower zones), which receives water from the later developed Chania source. Due to the demand growth in the upper zones, especially in drought situations, urgent measures are required for the interzonal transfer. The physical losses in the system (primarily in the lower zones), which approximated 40-50% of the total supply after the completion of the Second Water Supply Project in , have been considerably reduced through improved pressure control and rehabilitation of the network under the immediate improvement measures, to about 30% at present. Existing Sewerage and Sanitation Systems 2.08 Presently about 700,000 people are served by the Nairobi sewerage system, covering a sewered area of about 35 km 2, out of which about 125 hectares in the city center are sewered with combined sewers. The trunk sewers (with a total length of about 115 kin) follow the Nairobi River, the Matari and Ruiruaka Rivers, and the Ngong River. There are presently 14 sewage treatment works in operation in Nairobi, the two largest being the Dandora Plant (Dry Weather Design Flow: 30,000 m 3 /day) and the Karioabangi Plant (32,000 m 3 /day). The Industrial Area Treatment Ponds treats 4,500 m 3 /day and the Kahawa West Ponds about 1,750 m 3 /day. The capacity of the rest of the treatment works which are serving mostly individual institutions and industries vary between 75 and 455 m 3 /day The Dandora Sewage Treatment Works (Phase 1), owned and operated by NCC/WSD, is situated about 17 km west of Nairobi, on gently sloping land adjacent to the Nairobi River. An extensive area of adjacent land is available for expansion. The works are the largest waste stabilization pond installation in Kenya. Sewage reaches the works from Nairobi via the Dandora Estate Trunk Sewer and the treated effluent is discharged into the Nairobi River. The ponds are overloaded both organically and hydraulically, but despite this the treatment process still provides an acceptable degree of treatment. However, rehabilitation and extension of the work is urgently needed to cope with the rapidly growing sewage flow The Kariobangi Treatment Works, owned and operated by NCC/WSD, receives sewage flow via the Nairobi River Trunk Sewer. Flows in excess of the works capacity overflow to the Dandora Treatment Works via the Dandora Trunk Sewer. The works is designed to produce an effluent better than 20 mg/l BOD and 30 mg/l SS using percolating biological filters. Sludge is settled in the primary and humus tanks and is pumped to heated digesters after which it is dried in open beds. Treated water effluent is discharged to the Nairobi River Residents in the areas not served by NCC/WSD sewers use septic tanks, conservancy tanks, cesspools, bucket latrines and pit latrines. A few small communities and some factories have individual treatment facilities usually in form of small waste stabilization ponds.

17 III. THE PROJECT Genesis 3.01 Nairobi has had piped water supply since the turn of the century and the development of the water supply system has generally kept pace with effective demand. The population of Nairobi has grown from 4,000 in 1900 to 835,000 in 1979 (actual census figure), and to about 1.3 million in Based on the expected growth rates, Nairobi's population may reach 2.5 million by 2000, while effective water demand is expected to grow from the present level of about 170,000 m 3 /day (just barely met) to about 350,000 m 3 /day The Bank has been involved in Nairobi's water supply development since 1970 (see para. 1.24), through the Nairobi First and Second Water Supply Projects. The need for the third expansion phase of Nairobi's water supply was already clearly identified during the appraisal of the Second Project in At that time, following a redesign and rephasing of the project, it proved economical to defer construction of an expensive dam and storage reservoir for about 10 years. Notwithstanding the full benefits of the Second Project and achievement of a reasonable level of operational efficiency, the city was expected to experience water shortages beyond 1987/88. NCC, in consultation with MLGPP and MWD, decided in 1984 that a short-term plan (to meet the demand up to 1995) and a long-term plan had to be prepared for the expansion of water supply to Nairobi and its environs, followed by a phased implementation of these development plans. As the extraction from the present water sources in the Chania-Kimakia-Thika River system will approach the upper extraction limit to satisfy the short-term demands by about 2005, the necessity to plan for an integrated utilization of all the regional water resources to satisfy the longer-term needs of Nairobi City and all other regional users was recognized The Government requested IDA assistance for the financing of the studies for a phased development of Nairobi's water supply and for the preparation of the engineering designs of the short-term expansion in May, 1984, preceded by a PPF advance to facilitate the timely commencement of the consultancy work. The PPF advance of US$1.0 million was approved on July 31, 1984 and the Nairobi Third Water Supply Engineering Credit (1566- KE) of SDR 6.2 million was approved on April 15, The Engineering Credit provided for the preparation of the Third Nairobi Water Supply Project including feasibility studies for the shortterm expansion of the water supply system and also for the development of a long-term regional water resource management program, detailed engineering designs, preparation of bid documents and evaluation of bids, assistance to NCC/WSD in the improvement of the Nairobi City distribution system and for the assessment of Nairobi's sewerage and sanitation needs. In addition, it included support for the institutional development and strengthening of NCC/WSD's operational and financial performance through technical assistance, training, and improvement to NCC's computer installation. The implementation of a tariff increase of 40% for water and sewerage services, covenanted under the Development Credit Agreement significantly improved WSD's financial position.

18 The preparation of the technical project components, based on the design horizon of 1995 for the Nairobi Third Water Supply Project, was carried out satisfactorily and with only minor delays. However, NCC/WSD's institutional development stagnated in the period until the present management of WSD took over in January, WSD's financial base also deteriorated until the approval and effective implementation of the new water and sewerage tariffs. The implementation of the proposed changes in WSD's organizational structure, the filling of the vacant higher level posts in the WSD and the updating of NCC/WSD's accounts did not take place on time due to indecision by NCC/WSD and lack of adequate Government support. In order to avoid further slippage of the Project which would have caused serious water shortages in Nairobi from the early 1990s, Government gave priority to the Project from mid The Bank preparation mission in December 1987 prepared an action program and a list of requirements and prerequisites for the Project appraisal (see Annex 1). Since then, significant improvement took place (some of the most important vacancies have been filled, efforts were made to strengthen WSD's Project Implementation Unit (PIU), and accounting consultants were employed to update NCC/WSD's accounts and to prepare WSD's financial projections). Due to an immediate improvement program implemented under the Engineering Credit a dramatic improvement took place in reducing the unaccounted for water through leak detection, rehabilitation of distribution network, improve pressure zoning and improving the meter reading, billing and collection system. The Project was preappraised in April The formal appraisal of the Project (jointly with the prospective cofinanciers) took place during June/July During the December 1987 preparation mission NCC/WSD proposed to change the planning horizon of the Project from 1995 to Due to the delays in the preparation of the Project, commencement of implementation was likely to slip from 1987 to 1989, and considering a four to five year construction period, substantial completion of the project (i.e. availability of additional water for Nairobi) was to be expected by This would imply that demand would exceed supply within one year, and construction for a next extension should start almost immediately after the completion of the third extension phase. The Bank (and the cofinanciers) agreed to the proposal, and the work to redesign some parts of the Project (notably to increase the capacity of the Ngethu Water Treatment Plant and the transmission mains) started in early 1988, together with the reassessment of the environmental impact of the project and preparation of an environmental action plan. The design modifications (substantially completed by end-march 1988) increased the Project cost by about 10%, in spite of deferring the proposed distribution network extension in the not yet developed areas in Nairobi The need for the extension to the Dandora Sewage Treatment Plant, simultaneously or before the proposed extension to the water supply system, was recognized already in NCC/WSD's efforts to secure the financing for this work failed and finally Government and NCC/WSD requested the inclusion of the Dandora Plant extension under the proposed Project. The Bank (and the co-financiers) have agreed and the approximately US$30 million component is now part of the proposed Project.

19 Population Proiections 3.08 In terms of future development, the rapid growth of overall population and the need for balanced rural-urban growth are among Kenya's most pressing problems, which in turn generate an ever increasing demand for food, housing, employment and social infrastructure facilities. The analysis of the present and future population patterns in Nairobi is extremely important for the definition of urban infrastructure needs Population forecasts for Nairobi have been based on: (a) Interpretation of historic trends, with particular reference to the 1962, 1969 and 1979 census data; (b) "Population Projections for Kenya " published by the Central Bureau of Statistics in March This is accepted as the official national plan. It provides projections by districts, including Nairobi, up to 1990, assuming constant fertility and mortality. The report also projects national population up to 2000 under three alternative scenarios: a decline in fertility and mortality (low), constant fertility and mortality (medium), and fertility remaining constant with mortality continuing to decline (high). In the medium term, the district projections up to 1990 offer the most comprehensive set of projections currently available; and (c) Analysis of future urban development of Nairobi; using urban planning and land use data and plans, comparing them with actual development, and analyzing and producing population forecast by residential categories. In 1985, Nairobi had a population of 1.2 million with a growth rate of 5.3% a year and accounting for 5.7% of the national population. Population density in Nairobi has more than doubled in the last 20 years from 744 persons per km 2 in 1969 to 1699 persons per km 2 in The end-1987 population is estimated at 1.3 million The following table shows the medium population projections in Nairobi. For comparison, the total urban population and the total population of Kenya are also shown:

20 Medium Population Projections (1000's) YEAR NAIROBI URBAN KENYA Census , ,080 10, ,420 16,141 Projections ,162 3,600 20, ,505 4,900 24, ,950 6,800 30, ,490 8,900 37, ,100 11,600 44, ,860 15,500 51,900 Growth Rates (% per annum) Nairobi is projected to increase to about 2 million in 1995 and 3.9 million in 2010, at an average growth rate of 5.3% per annum to 1995, then falling to 4.7% per annum to In comparison to the national population projection, Nairobi's proportion to the total will continue to increase from 5.7% in 1985 to 6.4% in 1995 and 7.4% in However, as a proportion of the indicative national urban projections, Nairobi is expected to decline from 32% in 1985 to 29% in 1995 and 25% in These projections are in line with the Government's policy of developing secondary urban centers and relieving some of the pressure on Nairobi. This policy is supported by the Bank and is complemented by the Government's District Focus Policy which seeks to encourage the development of rural areas The low, medium and high population projections for Nairobi are given in the following table (and presented graphically in Annex 2).

21 NAIROBI Population Projections (1000's) YEAR LOW MEDIUM HIGH ,145 1,162 1, ,460 1,505 1, ,820 1,950 2, ,270 2,490 2, ,760 3,100 3, ,360 3,860 4,580 Growth Rates (% per annum) While by 1995, the range of projections show the population closely around the 2 million mark, the spread widens to 3.4 to 4.6 million by the year In this report the medium projection is used and represents a reduction in the expected size of the city compared to projections presented in other reports before the 1979 census. For example, the Nairobi Metropolitan Growth Strategy (NMGS) (1973) projected the city's population at 2.9 to 4.2 million by the year Urban planning in Nairobi is still largely guided by the NMGS. However, the progress of implementation has not kept pace with the proposed program because: Mi) Population growth has been slower than predicted in the 1973 Urban Master Plan; (ii) (iii) (iv) (v) Population densities have increased in well established areas; The city has lacked sufficient financial resources and organizational capacity; The city boundary has not been extended; and Housing construction has not been able to keep pace with demand which in turn has led to increasing growth of shanty areas like Kibera and Mathare Valley. In order to assess water requirements, water demand in Nairobi needed to be analyzed in more detail, with breakdown by area and household income level. As a current land use map was not available for Nairobi, the engineering consultants prepared one. In general terms, the growth of the city is expected to follow the historic lines of development, in close proximity to major infrastructure (e.g. roads and water supply) and centers of employment. In the low to medium income groups, population growth will accelerate in the west (Dagoretti), the east (Dandora and beyond), and the

22 - 16 _ north east (along the road to Thika). In the medium to high income groups, the main growth points will be in the south west (Karen-Langata), in the north (Kitisuru), and the coffee estates within the city boundary which are gradually making way for residential development. The population projections by residential category are presented below (medium projection): Residential Category Population (1000's) Distribution (%) Rl - High Income R2 - Medium Income R3 - Low Income , R4 - Poor Settlements and shanty areas TOTAL 1,162 1,950 3, The projections indicate that as Nairobi continues to grow, an increasing proportion of the population will be in the R3 low income group, and a significant decline will occur in the R4 category. The above projections are based on the assumption that substantial urban upgrading projects will take place, especially in Dagoretti in the medium- and long-term in line with the developments specified in the Structure Plan for the area. If this does not happen, there is a possibility that a significant proportion of Dagoretti's future population will still be accommodated in R4 type housing. This would in turn have an impact on the water demand projections, as substandard housing does not qualify for individual plot connections, and consumption per capita per day remains lower Since it is highly doubtful that the dramatic improvement in the housing situation, as implied in the table above, is realistic, it is necessary to consider other, less optimistic scenarios, and their impact on the water demand projections. This will be discussed under the following section on water demand projections. Water Demand Projections 3.14 According to 1984 meter records, the water consumption pattern in Nairobi is as follows: Category Percentage Domestic 63 Commercial 16 Industrial 8 Institutional 11 NCC/WSD 2 TOTAL 100 These figures refer to billed consumption. In order to match demand with production, allowances for unaccounted-for water have to be made in any water supply system.

23 _ In the analysis of current water consumption and the projection of future consumption, several important adjustments have been made by the engineering consultants to the basic data, together with certain critical assumptions. Firstly, a certain proportion of domestic consumption is concealed in the commercial, industrial and public categories. This has been separated out through an examination of available billing records. Secondly, 1984 was a year in which there were water production cutbacks because of drought and supply constraints within the distribution system. Therefore, 1984 was a year in which real demand was constrained, despite the fact that additional water from the Nairobi Second Water Supply Project was available. Thirdly, unaccounted-for-water had risen to an unacceptably high 40% of normal production in 1985/86. Since then, losses have been considerably reduced due to the immediate improvement program under the engineering credit (presently to about 30%). In the projections it has been assumed that unaccounted-for-water will be reduced to 25% by FY92/93 and to 20-22% by Fourthly, it is estimated that about 90% of the current population in Nairobi is served by the mains systems. By 1995 it is assumed that this will rise to 95% and remains constant thereafter Domestic Consumption. The population served by the mains water supply system is projected in the following table, in five yearly steps for each residential category up to year However, as mentioned in para. 3.12, the consultant's assumption about urban upgrading may be overly optimistic (i.e. the ratio R3/R4 too high), and therefore a sensitivity analysis was carried out comparing the following assumptions: (i) (ii) (iii) Worst scenario: no low cost housing development will take place, i.e. R3 = constant and R3/R4 decreasing over time. No change in relative poverty, i.e. R3/R4 = constant. Major housing development (Consultants' projection ): R3/R4 increasing over time Total population (1000) (Medium projection) 1,162 1,505 1,950 2,490 3,100 3,860 Total Population Served (1000) 1,035 1,385 1,853 2,365 2,946 3,667 Total Domestic Demand (1000 m 3 /day) (i) R3 = constant (ii) R3/R4 = constant (iii) Consultants' Projection Case (i) is probably overly pessimistic, since private sector response to housing demand is expected to cover at least part of the slum upgrading requirements. Case (ii) implies that the low-cost housing development in Nairobi will at least be adequate to maintain the current relative housing

24 situation. However, in absolute terms, the poor settlements and slum areas will still be growing, accommodating 3 1/2 times the present population by 2010, and the population of the low-cost housing areas will likewise be over 3 1/2 times the 1985 population. This would require a robust but less unrealistic housing program: assuming an average of 6 persons per housing unit, about 6,000 housing units in the R3 category will have to be built annually in Nairobi in the next 10 years and over 10,000 units per annum after the year Case (ii) has been adopted as somewhat more realistic in calculating the demand (and financial) projections. Since the per capita consumption in R4 is projected to be substantially lower than in R3, this adjustment reduces the water demand from the consultants' somewhat high projections. In terms of variations in total demand, if case (i) rather than case (ii) would occur, demand would be 8.8% less in 2000 and 11.8% less in In case the consultants' projections materialized, case (ii) would require 2.3% more water in 2000 and 3.5% more in Details are shown in Annex In addition, it has to be noted that the present per capita consumption in the poor settlements (and slum areas) are unacceptably low, only about 15 l.p.c.d. In the projections this is assumed to increase to 20 l.p.c.d. by 1990, 25 l.p.c.d. by 1995, 30 l.p.c.d. by 2000 and after. This rate of increase should be accelerated to improve the basic needs provision and the health situation (see para 5.15) Commercial Demand. Present commercial consumption is concentrated in the Central Business District, the Industrial Area, the hotel area to the east of Uhuru Highway and parts of Eastleigh. It has been assumed (like in the previous projections: World Bank (1976), WSD (1977)) that the demand will grow in line with Nairobi's economic activities. On this basis 5.5% and 6.0% growth rates per annum have been adopted for and , respectively (medium projection). Details are shown in Annex Industrial Water Demand. In the absence of an up-to-date industrial census, the conventional method of measuring industrial consumption in terms of m 3 per hectare has been adopted by the engineering consultants with some adjustments to reflect the existence of known large consumers. The present consumption (m 3 /hectare) varies considerably between the various industrial areas. In the City Industrial Area water consumption is low at about 7 m 3 /ha/day, which illustrates the fact that many of the industries can be classified as dry. In contrast, the Ruaraka Industrial Area uses up to 27 m 3 /ha/day, due largely to the Breweries' consumption; because the area is not yet fully developed, unit consumption is likely to rise as more industries become established in the area. The other industrial areas are in the early stages of development and therefore current water consumption is relatively low. The projections reflect the general trend of employment in each area. In the City Industrial Area the rate of increase in water consumption is assumed to decrease from 1995 as greater emphasis is given to the development of areas like Dandora, Ruaraka and Kassarani for medium and heavy industries, away from the Old City and the already congested City Industrial Area. Annex 3 shows the detailed projected industrial demand.

25 Institutional Water Consumption. It has been assumed that increases in institutional (public) water consumption will reflect the rate of growth in population. It is to be noted that some Government departments and establishments will be dispersed to areas outside the capital, in line with the strategy of encouraging the development of secondary urban centers in other regions. A summary of projected water consumption by institutions is shown in Annex Summary of the projected water demand (medium projection) for the Nairobi area is as follows: Year Water Demand at source (1000 m3/day)l Annex 4 presents the demand projections graphically and in comparison with previous World Bank and NCC projections. Project Objectives 3.22 The objectives of the proposed Project are to augment and secure the water supply to Nairobi, through the expansion of source works by the construction of a new dam/reservoir and to expand Nairobi's water supply system to cater for the increased demand. The additional capacity would meet Nairobi's demands up to about , and will improve the basic needs provision and health conditions of the urban poor by expanding the coverage of the piped water supply to low income groups. The extension of the Dandora sewage treatment plant will assist in maintaining the sanitation standards in the city and to decrease the pollution in the recipient rivers. The Project provides for environmental control and mitigating measures in the relocation of the affected population The Project also provides for training and technical assistance to improve the operational and financial efficiency of NCC/WSD. Water Resource Development 3.24 As presented in para and Annex 4, the water demand at source is presently (1988) about 240,000 to 245,000 m 3 /day, compared to source availability of 194,200 m 3 /day at 98 percent reliability and 217,200 m 3 /day at 90 percent reliability. The last major water shortages in Nairobi occurred in 1984/85 (in spite of the completion of Phase II of the Chania Scheme under the Second Nairobi Water Supply Project) due to severe drought and extremely high unaccounted-for-water (physical losses) in the system. There is still a considerable suppressed demand in Nairobi, but 1/ Assuming that the ratio of the population in low cost residential areas and in the poor settlements (R3/R4) remains constant (water demand projection, case (ii)).

26 with the return of average or above average annual rainfall, water availability at the (run-of-river) sources was above average. In addition, the Dagoretti area is not fully served by the city's water distribution system (about 50,000 to 60,000 people may be dependent on well water). Also, the demand in Kitisuri is mostly met by private sources, together with a considerable part of the industrial demand In spite of the better than expected supply situation in the past two years, it is apparent that Nairobi is at the beginning of a period when water shortages with growing severity and frequency are likely to occur unless a further expansion in the system takes place (see graph in Annex 4) The total demand in the study area of greater Nairobi will be about 11 m 3 /sec by 1995, which exceeds the estimated capacity of all runof-river flows (about 8.2 m 3 /sec in total) but could be satisfied by 30% of mean annual runoff provided more storage is introduced into the system. Storage already exists at Sasumua and Ruiru Dams, but together these yield only 0.9 m 3 /sec. The local demand in most sub-areas of the study area can just about be satisfied by run-of-river flows until , with the exception of Nairobi itself. To ensure satisfactory supply, major storage should be provided to supplement the present sources Since the late 1970s several studies were carried out on the selection of the best possible dam site(s) and combination of sources for an optimized and integrated system. On the basis of the previous studies of 26 sites (and source combinations), seven alternatives were selected for more detailed studies as part of the preparation of the Project. Since none of the seven sites could supply water up to 2010 (the long-term planning horizon), fifteen different combination of dams on these sites were examined. Inter-catchment transfers were allowed for where appropriate. Of the best seven combinations, three had Thika 6 Dam as the first stage (giving priority to the supply of Nairobi), and four had Ndaguru 1 as the first stage. The best two alternatives both commenced with Thika 6. The comparisons were based on technical and cost comparisons (including capital and operating costs). Sensitivity tests confirmed that the order of ranking was unchanged over a wide range of variation of capital cost, discount rates, etc. The result of the studies confirmed that the Thika 6 Dam was the optimum next source development. The utilization of this source (water extraction right) was approved by WAB. Proiect Components 3.28 The Project would consist of the following parts: A. Water Supply Component 1. Source Works (i) Construction of a new dam on the Thika River at Ndakaini, about 50 km north of Nairobi (rolled earthfill dam of 63 m maximum height and volume of 2.34 million m 3, impounding a reservoir volume of 70 million m 3 ).

27 (ii) Construction of access roads, raw water intakes, transmission tunnels and main, comprising:. Thika-Kiama Tunnel, of 1.1 km length and 2.5 m diameter;,. Kiama diversion weir to collect the Thika and Kiama waters and divert them into the next tunnel section;. Kiama-Chania Tunnel of 3.6 km and 2.5 m diameter;. Kimakia weir and shaft to divert and drop Kimakia water into the tunnel passing below. The Chania-Mataare Tunnel, constructed under the Second Project is of adequate size to pass the waters diverted from the Thika-Kiama-Kimakia system with only minor modifications at the existing Mwagu weir intake.. Mataara-Ngethu new pipeline (10 km, dia 1100 mm) to increase the capacity of the existing 1400 mm dia main to the treatment plant. 2. Extension of the Water Supply System (i) (ii) (iii) (iv) (v) Extension of the water treatment plant at Ngethu to increase its total capacity from about 180,000 m 3 /day to 460,000 m 3 /day; Construction of treated water transmission main of approximately 36 km length and of 1300 to 1400 mm diameter from Ngethu to the Kiambu and Gigiri terminal reservoirs; Distribution system extensions, including additional reservoirs (increasing the storage capacity by 46,000 m 3 to a total of 224,000 m 3 or 50% of the average daily consumption in 2005) and the construction of the Gigiri-pumping station; Instrumentation, control and automation; Staff housing and offices. B. Sewage Treatment Plant Extension 1. Rehabilitation and extension of the Dandora Sewage Treatment Plant (Phase II extension) to a total capacity of about 90,000 m 3 /day dry weather flow; 2. Staff housing, offices and amenity building. C. Improvement of Water Supply and Waste Disposal Facilities in Low Income (R3 and R4) Residential Areas 1. Vehicles, water meters and miscellaneous equipment. 2. Construction of infilling mains, public water points, water selling kiosks, and improvements to sanitation facilities.

28 D. Engineering and Construction Supervision: 1. Provision of consultancy services for detailed engineering designs, construction supervision and for the Dam and Tunnel Safety Panel. 2. Provision of consultancy services for the updating and preparation of a Sewerage and Sanitation Master Plan. E. Technical Assistance and Training for NCC/WSD including: 1. Provision for management staff support (salaries and benefits). 2. Provision for implementation of a training program, including: (i) (ii) (iii) (iv) training consultancy services; purchase of training materials and equipment; technical, financial and managerial training courses in Kenya and abroad; and purchase of office technology equipment. 3. Implementation of an appropriate "self accounting" system including asset valuation for WSD (consultancy services, materials and equipment); and 4. Implementation of an environmental action program (consultancy services and equipment). Location of the various sites are shown on Map (IBRD 21208). Cost Estimates 3.29 The total Project cost is estimated at Ksh 3,683.9 million (US$216.7 million equivalent), of which Ksh 2,107.7 million (US$124.0 million) or about 57% is the foreign exchange component. Local taxes are estimated at about Ksh million and are included in the cost estimates. However, all taxes and duties on imported goods are to be exempted by Government from payment by NCC/WSD and are therefore not included in the cost estimates. Base costs are expressed in January 1989 prices. Summary project cost estimates are shown in Table 3.1 and detailed cost estimates are given in Annex Project costs were estimated by WSD and its engineering consultants on the basis of detailed engineering designs for civil works and recent quotations for equipment purchases. The land cost is the estimated purchase price for land proposed to be acquired including compensation costs for crops and structures. The engineering and supervision costs are estimated at about 4% and 6% of civil works for water

29 and sewerage components, respectively. Technical assistance, training and management staff support cost estimates are based on recent actual costs for similar activities. The consultant and advisory services to be provided by individual specialists are estimated to require about 240 manmonths in total, including 120 man-months of foreign and 120 man-months of local consultants. Physical contingencies are estimated at 20% for the dam and tunnel construction, at 15% for the other civil works and equipment for the water supply component and at 10% for the civil works and equipment for the sewage treatment plant extension. Price contingencies for local currency costs are based on expected increases in construction costs of 8% in 1988 and 5% per annum thereafter. The corresponding rates for foreign costs are 3% per annum in and 4% per annum thereafter. In total, physical contingencies are estimated at about 15% of base cost, and price contingencies are estimated at about 14% of base cost plus physical contingencies.

30 Table 3.1 PROJECT COST SUMMARY Foreign KSh million USS million as X of Z of Local Foreign Total Local Foreign Total Total Total ITtakes, Tunne;, Access Roads Thika Dam ; Ngethu(elect.imech.) S gethu@civi i Raw Water pain 52.4B Treated Water Main 198.B Reservoirs r '1 Distribution Network ;igiri (electr./uech.) Gigiri (civil works) r instr.control & autocation HousinQ & offices i73 Landora (Civil) Dandora (Electr./lMech.) i Dandora (Building) Construction Supervision (Water) Construction Supervision (Dandora) T.A., Training, Mgmt. Staff Support 'Land Acquisition Rase Cost (January 1989 prices) B Physical Contingencies Price Contingencies Total Project Cost Interest During Construction: WSD financed 7B Total Financing Required Note: Identifiable taxes are about KSh nillion 1US$ 10.7 million equivalent), and the total Droject cost net of taxes is KSh 3,502 million (US$ million equivalent).

31 The Project cost estimate prepared by the engineering consultants was originally based on a four-year Project implementation period and totalled US$202 million equivalent. As this program did not allow for any slippage in project start-up and implementation, the project cost was recalculated on the basis of a six-year implementation period totalling US$216.7 million equivalent. It should be noted that one donor, OECF, recalculated the cost of the raw and treated water mains (which they intend to finance) in accordance with their own regulations and the result was 2.6% lower than the Bank's estimate. This was considered negligible and the Bank's estimate was accepted for the purposes of the Project financing plan. Project Financing 3.32 The proposed IDA Credit of US$64.8 million (Ksh 1,101.6 million equivalent) would finance about 30% of the total Project cost (equivalent to about 32% of total Project cost net of local taxes). The remaining 70% of total project cost would be provided by NCC/WSD from internal cash generation (Ksh million or 25%), by the Kenyan Government as a budgetary allocation for land acquisition (Ksh 57.8 million or 2%), and the balance (Ksh 1,594.6 million or 43%) by other cofinancing sources including the African Development Bank/Fund (AfDB/AfDF), the European Investment Bank (EIB), and the Japanese Overseas Economic Cooperation Fund (OECF). NCC/WSD would finance interest during construction amounting to Ksh million and any loan shortfalls. The financing plan for the Project is summarized below in Table 3.2 and detailed by component in Annex 6. Submission of satisfactory evidence that all conditions precedent to the effectiveness of the loans from the co-financiers have been fulfilled would be a condition of effectiveness of the IDA Credit. Since NCC/WSD has already paid Ksh 50 million to the Commissioner of Lands to expedite land acquisition, agreement was obtained during negotiations that Government would reimburse NCC/WSD for land acquisition/compensation costs associated with the Project by June 30, 1991.

32 Table 3.2: PROJECT FINANCING PLAN Ksh million US$ million % Total Cost Total Project Costa/ 3, of which: IDA 1, OECF AfDB/AfDF EIB NCC/WSD Gov't a/ Excluding interest during construction estimated at KSh million (US$46.3 million) to be financed by NCC/WSD The IDA Credit and loans from other cofinanciers would be made to the Republic of Kenya (ROK) and on-lent to NCC/WSD. The IDA credit would be made for a period of 35 years, including 10 years grace, at the standard IDA service charge. The OECF loan would be made at an interest rate of 2.5% for a period of 30 years, including 10 years grace. About half the contribution from the AfDB would be made on concessional terms, at 0.75% service charge for a period of 50 years, including 10 years grace, and the other half would be made on AfDB terms, at the standard variable interest rate (currently 7.4%) for a period of 21 years, including 6 years grace. The EIB loan would be made at an interest rate of 5% for a period of 20 years, including 5 years grace. All loans from cofinanciers were negotiated prior to negotiations of the proposed IDA Credit. The terms of the loans from other cofinanciers were confirmed during negotiations The IDA Credit would be on-lent to NCC/WSD at the IBRD interest rate prevailing at the time of negotiations (7.65%) for a period of 21 years, including 6 years grace. The proposed interest rate is in accordance with terms of the prior IDA Credit and with normal government practice which currently requires loans to be provided to local government authorities and parastatals at interest rates of 6-10%. The maturity of 21 years allows for a 6 year grace period corresponding to the construction period of the Project and a repayment period of 15 years. The foreign exchange risk of the IDA credit would be borne directly by ROK (indirectly by NCC through the differential between the service charge to ROK and the on-lending interest rate). The on-lending terms of the IDA credit were agreed during negotiations. The on-lending terms of other cofinanciers would be available upon finalization of their respective subsidiary loan agreements, and are expected to include an average interest rate of about 10-11% with a maturity of about years, including a grace period of about 5-6 years.

33 Retroactive financing of the order of about SDR 3.0 million (US$4.0 million equivalent) would be permitted for expenditures incurred from April 1, 1989 for construction supervision associated with the intakes, tunnels and access roads (financed by EIB) and civil works associated with extension of the water and sewage treatment plants and construction of treated water reservoirs. This would facilitate construction of major works before the onset of the peak rainy season and thus expedite Project implementation. Implementation 3.36 The Water and Sewerage Department (WSD) of the Nairobi City Commission would be responsible for implementation of the Project, and would retain engineering consultants for construction supervision and for the detailed civil engineering and structural design of the water treatment plant extension Engineering consultants would also be retained for the updating/preparation of the sewerage and sanitation master plan, and specialized consultants would be employed to assist in the preparation and implementation of a training program, environmental action program, management information system and valuation of fixed assets The Project Implementation Unit (PIU) of WSD has been improved (see para 4.09). Further strengthening of this unit through appropriate training would be provided under the Project. The Project would also provide staff support for NCC's Computer Manager during the project implementation period Project implementation would begin in mid-1989, with priority to the development of the new run-of-the-river abstractions and the tunnel to ensure early increase of source availability. The project implementation schedule is shown on Annex 16. Procurement 3.40 Procurement of the IDA financed construction and supply contracts with a value exceeding US$1.0 million equivalent 2 would be on the basis of international competitive bidding (ICB). Contracts for vehicles and equipment to cost less than the equivalent of US$200,000 each up to an aggregate value of US$600,000 equivalent may be awarded on the basis of local competitive bidding (LCB). Contracts for goods (office technology 2/ S209 -Ngethu Water Treatment Plant Extension (Electrical and Mechanical Equipment) C210 -Ngethu Water Treatment Plant Extension (Civil Works) C212 -Reservoirs SC213 -Distribution Network Extension S214 -Gigiri Pumping Station (Electrical and Mechanical Equipment) S216 -Instrumentation, Control and Automation WSD/3/85-Dandora Sewage Treatment Plant Extension (Civil Works) WSD/4/85-Dandora Sewage Treatment Plant Extension (Electrical and Mechanical Equipment)

34 and training materials and equipment) estimated to cost less than the equivalent of US$20,000 each up to an aggregate amount not to exceed of US$300,000 may be procured under contracts awarded on the basis of local shopping or contracting. All contracts with a value above US$100,000 equivalent should be subject to review by the Association Construction supervision will be carried out by consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Association. Such consultants shall be selected in accordance with principles and procedures satisfactory to the Association on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" published by the Bank in August NCC/WSD and the cofinanciers have requested the Bank that the engineering consultants who carried out the feasibility studies and detailed engineering designs, Howard Humphreys (water supply component for a total of US$6.5 million equivalent) and Sir Alexander Gibb (sewage treatment plant extension component for a total of US$2.5 million equivalent) should be retained for the supervision of construction, to facilitate the timely commencement and execution of the works. The cost of construction supervision of the respective components are estimated at US$9.3 million and US$1.7 million equivalent. This request seems justified. Both consultants were employed by NCC/WSD since the mid 1970s, during the previous extension phases of Nairobi's water supply and sewerage system and carried out their assignments satisfactorily In order to assist in carrying out the training component and the environmental action program, and for the introduction of the self accounting system for WSD, NCC will employ specialists and consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Association. Such consultants shall be selected in accordance with principles and procedures satisfactory to the Association on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" published by the Bank in August The General Procurement and Prequalification Notice was published in October 1987 which called for prequalification for 13 contracts. The response was substantial: a total of 127 companies from 22 countries submitted applications. Sixty applicants prequalified for the eight, Bankfinanced contracts (their number varying between 9 and 18 for each contract). The bid period has been scheduled for May through November, 1989.

35 Procurement under the Project is summarized below: Table 3.3: PROJECT PROCUREMENT ARRANGEMENTS a/ (US$ million) PROCUREMENT METHOD TOTAL Proiect Element ICB LCB OTHER N/A VALUE Major Civil Works and Supply Contracts (52.2) (52.2) Vehicles and Miscellaneous Equipment. (0.6) (0.6) Construction Supervision b/ (9.0) (9.0) Office Technology and Training Materials and Equipment c/ (0.3) (0.3) Consultancies (Engineering, Environmental, Financial) (1.4) (1.4) Training a) Consultancy (0.5) (0.5) b) Postgraduate Studies and Selected Overseas (0.5) (0.5) Courses Management Staff Support d/ (0.3) (0.3) Land Acquisition and Resettlement Costs (0) (0) Totals (52.2) (0.6) (11.2) (0.8) (64.8) a/ Figures in parentheses are the respective amounts financed by IDA. b/ Engineering Consultants would be retained by NCC for construction supervision on the basis of continuity. c/ Local shopping or contracting. d/ Salaries and benefits.

36 Disbursement 3.45 The proceeds of the IDA Credit would be disbursed as follows: (i) (ii) (iii) (iv) (v) (vi) 100% of foreign and 30% of local expenditures on all major civil works and supply contracts; 100% of total expenditures for instrumentation, control and automation; 100% of foreign and 90% of local expenditures for training materials and equipment, and office technology equipment; 100% of foreign and 70% of local expenditures for vehicles, water meters and other equipment, and infilling mains, public water points and improvement to sanitation facilities; and 100% of foreign and 60% of local expenditures for consultants' and advisory services. 100% of total expenditures for training costs and management staff support. The Disbursement Schedule is given in Annex 7 and the Schedule of Withdrawal of Proceeds of the Credit by category in Annex 8. It is expected that disbursements would be completed by the Credit Closing Date of June 30, Disbursements would be made against standard IDA documentation. Disbursements for goods and services would be made against Statements of Expenditure for each contract and purchase order with a value not exceeding US$50,000 equivalent. All items costing less than US$50,000 equivalent would be prefinanced by the Borrower and the minimum size of withdrawal applications to be submitted to the Association would have to be in excess of US$50,000 equivalent. In order to ensure quick processing of disbursement requests from all cofinanciers, NCC/WSD reached agreement with the Ministry of Finance and MLGPP on the disbursement procedures and information requirements for the Project. During negotiations confirmation was obtained from Government and NCC/WSD regarding the disbursement procedures and information requirements for the Project Disbursements by the cofinanciers would be on a parallel basis and would be carried out as follows: AfDB/AfDF 100% of foreign cost and 22% of local cost (Construction of Thika Dam)

37 EIB OECF 100% of foreign and local cost (Construction of Intakes, Tunnels and Access Roads) 100% of foreign cost and 59% of local cost. (Supply and construction of raw and treated water mains). Dam and Tunnel Safety Aspects 3.48 An independent panel of experts reviewed the design of the dam and the tunnel in December 1987 and found it acceptable with minor modifications. The Panel would inspect the dam during construction and also after completion, as required. Environmental Aspects 3.49 The environmental aspects of the Project (including relocation and socio-economic aspects) were reviewed during the December 1987 preparation mission by a Bank environmentalist and an ecologist consultant. The mission reviewed the consultant's report on environmental considerations and discussed its findings with the relevant Kenyan authorities. It has been concluded that the proposed Project will present no major environmental problems during the Project's lifetime if all the necessary controls are implemented The present policy of the Government of Kenya is to limit compensatory measures to cash payments connected with land acquisition. The policy of the Bank is that borrowers should be assisted to ensure that the population affected by the Project will regain at least their previous standard of living after the Project, that environmental costs are avoided or mitigated wherever possible, and that the project includes compensation measures for unavoidable impacts. To comply with the Bank's policy and Government's requirements, WSD prepared an appropriate environmental action program which was discussed during negotiations The environmental action program was prepared on the basis of mutually acceptable guidelines. Additional data collection has been carried out in the following areas: (a) (b) Socio-economic characteristics of the population directly and indirectly affected by the Project, and Additional data on the physical environment both upstream and downstream of the proposed dam (in addition to the consultants' report of June 1986) The directly affected population includes about 150 households, most of whom reside in the reservoir area. The directly affected population has been enumerated by NCC/WSD in collaboration with the Commissioner of Lands (Ministry of Lands and Settlement) as part of the land acquisition process. It includes all households which will lose all or part of their land. Only about 50 families will actually be displaced from their homes.

38 The socio-economic survey also included an inventory of the public and commercial facilities (shops, schools, health posts, government offices, processing plants, other local industries, etc.) in the five small centers in the vicinity of the construction area. The purpose of this inventory was to assess probable short-term and long-term impacts on community development deriving from the planned construction activity and from future uses of the dam and reservoir Based on the Terms of Reference and the additional studies (para 5.21) NCC/WSD submitted an Environmental Action Program (EAP) during negotiations (Annex 9). This was discussed in detail and agreement was reached regarding the principles and activities under the program. Agreement was reached that NCC/WSD will submit detailed annexes to this document by May 15, 1989 for review and shall commence the implementation of an EAP, satisfactory to the Association, by January 1, The final EAP, supplemented with the Annexes, was submitted for Bank review on May 2, 1989 and it was found to be fully satisfactory.

39 IV. THE BORROWER AND THE IMPLEMENTING AGENCY The Borrower 4.01 The Borrower would be the Republic of Kenya which would pass on the proceeds of the IDA Credit to the Nairobi City Commission (NCC), the implementing agency on the terms stated in para The implementing unit within NCC would be the Water and Sewerage Department (WSD). NCC/WSD was the recipient of two prior IBRD loans and an IDA credit for the First and Second Nairobi Water Supply Engineering Projects (Loans 714-KE and 1520-KE) and the Third Nairobi Water Supply Engineering Project (Credit 1566-KE), respectively. NCC has demonstrated satisfactory administrative capacity in completing these projects successfully. Nairobi City Commission (NCC) 4.02 Nairobi City was incorporated in Under local government regulations, the MLGPP has broad control powers over NCC including approval of budgets, appointment and dismissal of senior officers, approval of award of contracts, etc. The Town Clerk is the Chief Executive of NCC. The organizational structure of NCC is presented in Annex The NCC was appointed Water Undertaker for the Nairobi area on February 25, 1959, the area of supply being subsequently extended during the 1960s and again in The Water Act enables local authorities who are water undertakers to make Water By-Laws. NCC produced by-laws in 1974, updated recently in 1987, with detailed provisions related to water supply and sewerage activities of the city including levying of fees and charges for services provided. The responsibility for sewerage and sewage disposal within the Nairobi City boundary was conferred on NCC by the Public Health Act of 1921 and the Local Government Act of Water and Sewerage Department (WSD) Background and Organization 4.04 WSD was established in 1970 as a precondition for Loan 714-KE. Previous to that, water supply and sewerage were the responsibility of separate divisions of the City Engineering Department. WSD is headed by the General Manager, who has two Deputy General Managers. The Deputy General Manager (Commercial) is responsible for meter readings, billing and all accounting and finance matters. The Deputy General Manager (Engineering) is responsible for the preparation, planning, design and construction of projects and for the operation and maintenance of the water and sewerage systems. Some support services to WSD are provided by the City Engineer (i.e. transport maintenance) and the City Treasurer (i.e. financial, treasury and computer services). WSD's present organizational chart is shown as Annex 11.

40 An Organization, Management and Finance (OMF) Study was carried out under the Engineering Credit 1566-KE, with the aims of preparing (i) a program of immediate corrective measures, and (ii) proposals for a proper organizational structure, financial framework and tariff structure to ensure a viable institution capable of providing water and sewerage services to Nairobi and the wider study area up to the short-term planning horizon (defined as 1995 at the time of the OMF Study). The report revealed the current deficiencies in the organization, identifying areas that need developing over the next five to ten years. Some of the deficiencies identified are not constrained to organizational needs but relate to institutional problems, e.g. inadequate salary scales, cash flow problems, bureaucratic decision-making processes, poor financial control, low staff morale, inflexible purchasing procedures and hence poor management The recommended Action Program is presently being implemented in a number of areas. For one, the proposed new organizational structure (Annex 12) has been accepted, with some minor changes which reflect the concerns both by the Bank (and cofinanciers) and WSD about the importance of the Project Implementation Unit (PIU) and its place in the structure. Other recommendations concerning financial and management improvements are also being implemented For the long-term, the establishment of a single, autonomous water and sewerage undertaking for Nairobi (Stage I) and for the wider study area (Stage II) has been recommended in the OMF Study. It has been decided in consultation with NCC/WSD and Government that the transformation of WSD into a separate entity which would require tremendous additional effort in many fields - political, legal, managerial, financial, etc. - would be premature and counterproductive during the implementation of the proposed Project. The technical assistance provided under the Project, however, would strengthen WSD to achieve the operational and financial efficiency and autonomy required prior to its establishment as a separate and fully autonomous public corporation. Staffing, Manpower Development and Training 4.08 Ever since its establishment, WSD has experienced serious difficulty in recruiting qualified personnel to staff its organization. In the early 1980s, the situation became very critical, mainly due to the noncompetitiveness of NCC's salary structure and general government freeze on recruitment. The number of professional staff decreased steadily following local staff resignations and departure of contract expatriate staff when there has been a real need to increase both the number and calibre of staff to cope with the increasing responsibilities. The responsibility for recruitment, appointment, dismissal and promotion of staff alternated between NCC and MLGPP. The recruitment freeze was relaxed early in 1984, and the situation slightly improved at the lower management level. Since August 1984, responsibility for the appointment of senior staff is now vested in the Public Service Commission (a government body responsible for all staff in the Civil Service). Since January 1987, the position of the General Manager has been filled by secondment from MWD.

41 As a result of the slow progress in filling the most important vacancies (at senior management level) and the consequent doubts about WSD's ability to manage the implementationi of the proposed Project and to devise the necessary financial and administrative control systems, the joint Bank/donors mission in December 1987 set minimum staffing requirements as prerequisites for the formal appraisal of the project (see Annex 1). These requirements have now been largely met. The posts of the Deputy General Manager (Commercial) and the Computer Manager were filled and the staffing of the PIU is now adequate The OMF Study also identified immediate and long-term training needs for WSD. However, further efforts were needed to identify and match the needs with suitable training institutions both within the country and abroad. NCC/WSD contracted with the Industrial Consultancy and Research Unit (IRCU) of the University of Nairobi to prepare a detailed training program. The training program which was reviewed and agreed upon during negotiations is an expansion of the ongoing training activities which include on-the-job and in-house training for mid- and lower level professionals, workshops, seminars and refresher courses for mid- and toplevel managers. The core of the training program will be carried out using IRCU's services, the Kenya Water Institute of the Ministry of Water Development and the Kenya Polytechnic. In addition, to facilitate overseas training the project will provide for the financing of graduate and postgraduate courses in engineering, computer studies, accountancy, law, and social studies, and specialized diploma courses in electronics, telecommunication and instrumentation. The training program summarized in Table 4.1 is designed as an integral part of WSD's long term institutional building strategy, and provides a flexible framework for the training activities. As a continuation of the present practice under the engineering project NCC/WSD will submit quarterly progress reports during the project implementation period for review by the Association. The project will also provide for training materials and equipment to improve the in-house training facilities.

42 Table 4.1: SUMMARY OF THE TRAINING PROGRAM For the period FY88/89-FY92/93 ESTIMATED DESCRIPTION MAN-YEARS COST (US$ equivalent) 1. Postgraduate courses in Engineering, Scientific Subjects, Computer studies, Accountancy, Law and Social Studies. (Kenya and Overseas) , Diploma and Higher National Diploma Courses (Engineering, Management/ Administration, Accounting) (Kenya) 40 24, Diploma courses in Electronics, Telecommunication and Instrumentation (Kenya and Overseas) 8 68, CPA, ACCA courses in Accounting, Auditing and Administration (Kenya) 20 60, Selected Workshops, seminars and short courses (Engineering, Water Resources Management, Management and Administration) (Overseas) 88,000 TOTAL 500,000 Accounts and Audit 4.11 The Controller and Auditor-General is designated by legislation as the auditor of the accounts of NCC, of which WSD is an integral part. As a result of severe overloading of his limited staff, the audits of NCC and WSD have been sub-contracted to a local firm of professional accountants which prepares the interim audit reports. The private auditor reports to the Controller and Auditor-General, who retains overall responsibility for the audits and issues the final audit reports Audited financial statements for WSD/NCC required under prior Bank and IDA-supported projects have been received consistently late by the Association, due in recent years in part to delays within NCC/WSD in processing financial information, to the departure of the WSD's Deputy General Manager (Commercial) and other vacancies in WSD's accounting department, to the requirement to report WSD's accounts on a commercial basis, and to a change in reporting periods after The vacancies within WSD have now largely been filled with competent staff, and the slowdown in processing of financial information is currently being

43 addressed through improvements to the Computer Department (see para 5.13) and instructions to WSD's accounting staff. Separate accounts for WSD are currently maintained, prepared on an accrual basis and reported in a commercial accounting format, in addition to the required local government accounting format. Fixed assets have been revalued on an annual basis using inflation indices as required under prior Bank-supported projects for commercial rate of return calculations but have never been professionally revalued at current replacement costs. In addition, no depreciation is charged for the major portion of capital expenditure, since it is assumed that the majority of fixed assets are externally funded and repayments of principal are the equivalent of depreciation. In order to develop an upto-date inventory of WSD's gross and net fixed assets valued at current replacement costs to permit WSD to prepare its accounts on a proper commercial basis, consultancy assistance would be provided under the Project to establish the current value of its gross and net fixed assets and a method for annually revaluing its fixed assets. The first year that WSD's accounts would be prepared utilizing the current value of its fixed assets would be FY90/91. During negotiations agreement was obtained that NCC/WSD retain consultants to carry out a valuation of WSD's gross and net fixed assets by not later than end-fy89/90 and WSD would annually thereafter revalue its fixed assets, using methods acceptable to the Association The last audit of NCC/WSD's financial accounts was for FY84 (calendar year) and was heavily qualified. In particular, NCC was in arrears in repayment of various loans, both local and foreign. NCC has indicated that it has paid the overdue amounts on its foreign borrowings but the payments on its local borrowings (primarily from the Ministry of Local Government and Physical Planning (MLGPP)) are not being made because MLGPP, as well as other government agencies, owe NCC even larger amounts for their contributions in lieu of rates and water and sewerage charges. In order to eliminate this serious qualification from future audit reports of NCC, it will be necessary to formally offset or repay the intergovernmental balances due. During negotiations agreement was obtained from NCC and MLGPP that a plan of action for resolving this qualification to the audit reports of NCC would be agreed with the Association NCC and WSD audit reports for FY85/86 (18 months) and FY86/87 (12 months) were overdue at the time of appraisal. Consultants were retained by WSD to assist in preparation of final accounts, which are now complete and have been audited by a private auditing firm, and NCC's accounts are now also audited. The FY85/86 and FY86/87 NCC and WSD interim audit reports of the private auditors were received by the Association prior to negotiations of the proposed IDA Credit. NCC and WSD FY87/88 audit reports, not yet overdue, would be expected to be received according to the current covenanted requirements Although not required under past projects, a separate project account would be prepared by WSD's PIU, and it would show all sources and uses of funds for carrying out the Project. The project account would be included in the audit of WSD's financial statements. During negotiations, agreement was obtained that, beginning with the FY88/89 accounts, NCC and

44 WSD interim audit reports, including WSD's project account and financial statements prepared in a commercial format, would be received by the Association within nine months of the end of the financial year and the final audit reports would be received within a further three months of the submission of the interim reports. The Auditor's report would also express a separate opinion on the use of SOE submitted during each fiscal year, indicating that the procedure and internal controls involved are satisfactory. Billing and Collection 4.16 Meter readings are currently done monthly by WSD's meter readers (about 80) and sent to the Computer Department for processing of bills. Payments of bills are received at three cash offices of WSD. In order to further expedite the collection process, WSD plans to establish an additional six cash offices in the near future. Over 120,000 customers are presently being billed, of which about 90,000 customers receive both water and sewerage services WSD's billing is now up-to-date but has experienced a number of problems in the recent past which contributed to deterioration of WSD's collection performance. Critical staff and vehicle shortages in the meter reading section, reduction of the work week from six to five days and lack of flexibility to permit overtime for meter readers resulted in a meter reading cycle of 60 days by December Together with delays in billing, the lack of follow-up for customers (primarily government ministries and parastatals) in arrears resulted in WSD's total accounts receivable increasing to Ksh million or 243 days of total billings as of end FY86/87. WSD's newly (March 1988) installed Deputy General Manager (Commercial) has focused on improving meter reading and collection performance since his appointment. Thirty-three more meter readers have been employed and four additional vehicles have been purchased which permitted a reduction of the meter reading cycle to 34 days by mid-1988 and is targetted to improve to 30 days shortly. Introduction of a new computerized billing program (currently being installed and tested) is also expected to contribute to faster processing. In addition, water supply for a number of government ministries in arrears was disconnected mid-year, and arrangements for payment are currently underway. The above improvements in meter reading and billing and closer attention to follow-up of customers in arrears is expected to reduce arrears to 90 days of total billings by the end of the project period. During negotiations agreement was obtained that WSD take actions necessary to reduce it water and sewerage accounts in arrears to 210 days by end-fy90/91, 180 days by end-fy91/92, 150 days by end-fy92/93, 120 days by end-fy93/94 and 90 days by end-fy94/95.

45 V. FINANCIAL ASPECTS Past Financial Performance of WSD 5.01 WSD's income statements and balance sheets for consolidated water supply and sewerage operations for the past two reporting periods is shown in detail in Annex 13 and summarized below: Summary Income Statements for Years Ending June (KL thousand) Unaudited FY85/86 FY86/87 (18 months) Operating Revenue 23,861 19,378 Operating Expenses before Depreciation 5,775 4,072 Operating Income before Depreciation 18,086 15,306 and Interest Average Revalued Gross Fixed Assets 240, ,847 Rate of Return on Gross Fixed Assets a/ Summary Balance Sheets at June 30 Assets Fixed Assets b/ Gross Plant in Operation 94, ,125 Less: Accumulated Depreciation 16,509 19,505 Total Net Fixed Assets 78,190 80,620 Current Assets Cash and Investments 3,213 5,968 Other Current Assets 14,514 19,219 Total Current Assets 17,727 25,187 Other Assets 12,731 11,088 Total Assets 108, ,895 Reserves and Liabilities Reserves 58,052 66,926 Long-term Debt 48,082 47,419 Current Liabilities 2,514 2,550 Total Reserves and Liabilities 108, ,895 a/ Defined as net operating income (before depreciation and interest) divided by average gross fixed assets in operation at beginning and end of the fiscal year revalued annually using government indices. b/ Reported on historical cost basis for FY85/86 and FY86/ WSD's FY85/86 and FY86/87 financial statements demonstrate its continued underlying viability. Consolidated water and sewerage net operating income (before depreciation and interest) in FY85/86 (18 months) amounted to KL 18.1 million and in FY86/87 (12 months) amounted to KL 15.3 million, representing an increase of 21% when equivalent 12-month periods

46 are compared. Operating expenses have been kept reasonably well under control as demonstrated by the operating ratio (operating expenses divided by operating revenues) which has declined to 43% in FY85/86 and to a further 37% in FY86/87. Debt service coverage has been adequately high at 2.3 in FY85/86 and 3.1 in FY86/87 and was in excess of the prior covenanted requirement of 1.5. WSD's consolidated debt/reserve ratio of 47/67 at June 30, 1987 indicated a satisfactory capital structure. However, the consolidated rate of return on gross revalued fixed assets in operation, amounting to 5.6% in FY86/87, fell below the prior covenanted required annual rate of 7.5%, due primarily to the lack of an increase in water and sewerage tariffs since The recent water and sewerage tariff increases introduced during FY87/88 (paras 5.05 and 5.06) are estimated to restore rate of return performance to a satisfactory level beginning in FY87/ WSD's main financial problem stems from cash flow problems experienced by NCC. By law, NCC is responsible for making payments on behalf of WSD. Because of the failure of a number of government agencies to pay NCC rates and other charges and particularly to the non-receipt of loans due from the Ministry of Finance for expenditures incurred in respect of earlier projects, NCC's cash flow situation deteriorated during recent years. As a result, NCC continued to borrow from the Water Fund, which was established by law to account exclusively for all water and sewerage revenues and expenditures, and the remaining cash in the Water Fund was insufficient to pay all of WSD's suppliers and loan payments on time. Furthermore, delays in reporting by NCC of WSD's payments made it impossible for WSD to properly monitor its cash and expenditure performance NCC's financial position is now improving as a result of an increase in May 1988 in the property tax rate from 8% to 9% (the property tax is NCC's primary source of revenue) and increases in the charges for fees, fines and other revenues. Furthermore, introduction of an additional source of revenue, the service charge, is expected to be approved shortly which is estimated to provide revenues to NCC of a similar magnitude as the property tax. NCC has already reduced its outstanding obligation to WSD for monies borrowed from the Water Fund previously, from a high of Ksh 240 million as of end-1982 to about Ksh 50 million as of June 30, With the recent increases in NCC's property tax rate and other charges, NCC is not expected to borrow from the Water Fund in the future and to repay its outstanding obligation. As a result, WSD's cash flow difficulties are expected to be eliminated. During negotiations, agreement was obtained that revenues deposited in WSD's Water Fund would be utilized solely for recurrent and capital expenditures associated with water and sewerage activities and that NCC repay half its outstanding obligation to WSD's Water Fund by June 30, 1992 with the remainder by June 30, Water and Sewerage Tariffs 5.05 Since the late 1970s, water and sewerage tariffs have been increased from time to time to meet inflation and other cost increases and have moved towards achieving prior covenanted rate of return obligations. Since 1977, average water tariffs have increased from Ksh 2.60 per m3 to Ksh 4.16 per m3 in 1982, representing an increase of about 60%, and to Ksh 5.55 per m 3 in 1984, representing an increase of about 35%. During the

47 same period, sewerage charges (which are based on 75% of water consumption billing for connected customers) have increased from Ksh 1.04 per m3 to Ksh 1.33 per m3 and again to Ksh 2.65 per m 3. More recently, Government approved average increases of 40% for both water and sewerage tariffs, with a greater impact on larger customers, both industrial and residential, due to concern about the low-income group. The increases were introduced in August 1987 and March 1988 for the water and sewerage tariffs, respectively The new tariff rates are summarized below: Water consumption per month Ksh/m3 0-9 m m m m3 and above 10 Sewerage: 75% of water consumption at the rate of Ksh3.71 per m NCC/WSD and Government are aware that further water and sewerage tariff increases will be required regularly to generate sufficient internal funds to finance essential capital works, avoid cash-flow problems, provide adequate debt service coverage and avoid large, lumpy tariff increases later. During negotiations agreement was obtained that Government approve regular tariff increases to ensure that WSD earns an annual rate of return of 7.5% on consolidated gross fixed water supply and sewerage assets in operation except for FY88/89 through FY91/92 for which a rate of return of 7.0% would be required. The impact of the tariff increases would be analyzed at the end of each fiscal year to determine the rate and structure of the next increase as well as the effect on the low-income group. It is estimated that water and sewerage tariffs would only have to be increased by the expected inflation rate, except for FY91/92 when a 5% real increase is estimated to be required, in order to meet this requirement. Future Financial Performance 5.08 Projections of WSD's financial performance over the period FY87/88-FY97/98, including income statements, sources and applications of funds statements and balance sheets, are shown in Annex 13. The projections have been prepared on a conservative basis assuming that (a) WSD would reduce its water and sewerage accounts receivables from about 240 days as of June 30, 1987 to about 90 days by the end of the project period; (b) WSD would introduce, beginning in FY90/91, regular water and sewerage tariff increases which will at least keep pace with inflation; (c) WSD would reduce its unaccounted-for-water from an estimated 29% presently to about 25% by the end of the project period; and (d) demand for water will exceed the supply until the end of the project period when the available water supply would increase to 455,200 cubic meters per day. Furthermore, gross and net fixed assets would be valued according to current replacement cost by end-fy89/90 and revalued annually using methods acceptable to the

48 Association. For the purposes of the projections, gross fixed assets have been revalued annually using a domestic inflation index. In addition, it has been assumed that the terms of all borrowed funds for the Project would not exceed an average interest rate of 10%, with a maturity of 21 years including a 6-year grace period The financial projections indicate that WSD's financial position is expected to remain sound over the period. Interest coverage and the current ratio would be maintained above adequate levels of 1.5 and 2.0, respectively. Net operating income (before depreciation and interest) would be sufficient to permit a rate of return on revalued gross fixed assets averaging 7.9% for FY88/89 through FY97/98. Significant cash balances would accumulate during the early project years which would be required later on to support WSD's contribution of about US$54.7 million or about 25% of the capital cost of the Project as well as the costs of its other capital works. The operating ratio would increase to an average of 48% during project implementation, primarily as a result of introducing proper depreciation of capital assets, but would decrease to a more acceptable level of about 36% by end FY97/98. To protect WSD's financial position, agreement was obtained during negotiations that WSD maintain a debt service ratio of at least 1.5 over the project period. To properly monitor financial performance, agreement was obtained during negotiations that WSD prepare a report annually containing ten-year financial projections, beginning with FY89/90, to be reviewed by the Association on a annual basis and which would contain an analysis of the impact of the revised tariffs on water sales by category of customer. To ensure that WSD's total investment program remains within its financial capacity, agreement was obtained during negotiations that WSD/NCC would submit a description of additional investment projects with an estimated cost in excess of US$2 million (other than its on-going and planned capital works) and analysis of the financial impact of the proposal on the implementation of the IDA-supported project, for review and comment by IDA In order to continue the development and improvement of WSD's financial management and controls to move it towards a system of "selfaccounting" (greater financial autonomy), a number of other areas need to be improved including: (a) provision of more timely information on payment of WSD's expenditures, which is managed by NCC, in order to permit proper monitoring of WSD's cash and expenditure performance; (b) establishment of a management information system within WSD to ensure proper monitoring of its financial and operational performance; and (c) improvement of the computer service operated by NCC in order to permit WSD to obtain regular information, to prepare financial accounts and for customer inquiries.