Document of The World Bank

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION REPORT (IDA PPFI-P7630 PPFI-P7631 IDA-27531) ON A CREDIT IN THE AMOUNT OF SDR 50.3 MILLION (US$ 79.2 MILLION EQUIVALENT) AND SDR 2.38 MILLION SUPPLEMENTAL (US$ 3.0 MILLION EQUIVALENT) Water and Urban I Malawi Country Department Africa Regional Office TO THE REPUBLIC OF MALAWI FOR THE NATIONAL WATER DEVELOPMENT PROJECT June 15, 2004 Report No: 29336

2 CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 1994 and December 31, 2003)) Currency Unit = Malawi Kwacha 15.4 = US$ 1 US$ 1 = FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS BWB CAS CIDA CRWB DCT DCA EIB EIRR EWT GCU GoM HYDATA IDA IFMIS LWB MoIWD MoWD MoWS M&E MASAF MSO MIS MTR NDF NGOs NORAD NRWB NWDP O&M PCD PIP PMU PPF PS QAG RWBs RWSS SAR SDR SRWB Blantyre Water Board Country Assistance Strategy Canadian International Development Agency Central Region Water Board District Coordinating Team Development Credit Agreement European Investment Bank Economic Internal Rate of Return Extension Workers Team Government Contracting-out Unit Government of Malawi Hydrological Database System of Institute of Hydrology, UK International Development Association Integrated Financial Management Information System Lilongwe Water Board Ministry of Irrigation and Water Development Ministry of Water Development Ministry of Works and Supplies Monitoring and Evaluation Malawi Social Action Fund Management Services Organization Management Information System Mid-Term Review Nordic Development Fund Non Government Organizations Norwegian Aid Agency Northern Regional Water Board National Water Development Project Operation and Maintenance Project Concept Document Project Implementation Plan Project Management Unit Project Preparation Facility Principal Secretary Quality Assurance Group Regional Water Boards Rural Water Supply and Sanitation Staff Appraisal Report Special Drawing Rights Southern Regional Water Board

3 TA UFW VHWC WD WR WRB WRM WRMPS Technical Assistance Unaccounted-for Water Village Health and Water Committee Water Department Water Resources Water Resources Board Water Resources Management Water Resources Management Policy and Strategies Vice President: Country Director Sector Manager Task Team Leader/Task Manager: Callisto E. Madavo Hartwig Schafer Jaime M. Biderman Robert J. Roche

4 MALAWI NATIONAL WATER DEVELOPMENT PROJECT CONTENTS 1. Project Data 2. Principal Performance Ratings 3. Assessment of Development Objective and Design, and of Quality at Entry 4. Achievement of Objective and Outputs 5. Major Factors Affecting Implementation and Outcome 6. Sustainability 7. Bank and Borrower Performance 8. Lessons Learned 9. Partner Comments 10. Additional Information Annex 1. Key Performance Indicators/Log Frame Matrix Annex 2. Project Costs and Financing Annex 3. Economic Costs and Benefits Annex 4. Bank Inputs Annex 5. Ratings for Achievement of Objectives/Outputs of Components Annex 6. Ratings of Bank and Borrower Performance Annex 7. List of Supporting Documents Page No.

5 Project ID: P Team Leader: Robert J. Roche Project Name: NAT WATER DEV TL Unit: AFTU1 ICR Type: Core ICR Report Date: June 15, Project Data Name: NAT WATER DEV L/C/TF Number: IDA-27530; PPFI-P7630; PPFI-P7631; IDA Country/Department: MALAWI Region: Africa Regional Office Sector/subsector: Water supply (93%); Sewerage (7%) Theme: Pollution management and environmental health (P); Water resource management (P) KEY DATES Original Revised/Actual PCD: 02/17/1992 Effective: 05/01/ /01/1996 Appraisal: 06/13/1994 MTR: 10/31/ /31/1997 Approval: 06/28/1995 Closing: 06/30/ /31/2003 Borrower/Implementing Agency: Other Partners: Ministry of Water Development, Lilongwe Water Board, Blantyre Water Board, Northern Region Water Board, Central Region Water Board, Southern Region Water Board/GOM Nordic Development Fund, European Investment Bank STAFF Current At Appraisal Vice President: Callisto E. Madavo E.V.K. Jaycox Country Director: Hartwig Schafer Katherine Marshall Sector Manager: Jaime M. Biderman Jeffrey Racki Team Leader at ICR: Robert J. Roche Ebenezer Aikins-Afful ICR Primary Author: K. John Shepherd 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: Sustainability: Institutional Development Impact: Bank Performance: Borrower Performance: S L SU S S QAG (if available) Quality at Entry: Project at Risk at Any Time: Yes ICR

6 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objective of the National Water Development Project was to support the implementation of GOM s Water Resources Management Policy by reforming and upgrading the management of water resources and the provision of water-related services in order to: (i) ensure convenient access to safe water supplies for domestic use for a progressively larger proportion of the community, (ii) provide water infrastructure capable of underpinning economic development, and (iii) assure protection and management of water resources and of aquatic and riparian environments. Improved sector sustainability and upgraded physical and financial performance were subordinate objectives, considered vital to the attainment of the primary objective. The project addressed CAS priorities including infrastructure provision, reduction of erosion and sedimentation, and enhancement of the role of women. A special feature of the project was its aim of improving water supply services in towns, a sub-sector which up to that time was relatively neglected. 3.2 Revised Objective: At mid-term review (MTR), in March 1999, the scope of the project and targets were refined/clarified through a log frame retrofit, but were not changed. The objective of each component was stated as follows: Central Services and Water Resources Management Sustainable and environmentally sound water development and conservation through (i) strengthening of central services and water resources management; (ii) strengthening of evaluation capabilities in the water resources sector; and (iii) improved catchment management. Rural Water Supply and Sanitation To sustainably enhance the health status of communities through provision of potable water and improved sanitation by (i) increasing the capacity of sector actors to sustainably deliver potable water and (ii) improved sanitation facilities to rural communities in ten districts of Malawi. Urban Water Supply Improved water supply services in small urban centers, and Lilongwe by (i) establishing three financially viable Regional Water Boards, (ii) increasing water supply coverage, and (iii) improving water supply services. Systems were expanded or rehabilitated in 16 towns plus Lilongwe and Zomba as planned, but minor extensions in 25 other small towns were dropped. 3.3 Original Components: Project components included Institutional Restructuring and Capacity Building, Studies and Water Supply Investment Program. To facilitate implementation and supervision, these were grouped as follows: Central Services and Water Resources Management (SDR 7.48m) Central Services: Strengthen the Water Department (WD) through TA, staff training, and provision of materials, plant and equipment for the range of WD functions. Strengthen the PMU. Water Resources Management: Reconstitute the Water Resources Board (WRB) as a high level body with stakeholder representation, to provide leadership in water resources management and policy advice to GoM. Upgrade the Water Resources Act. Assess the key threats to water resources and propose action. Take action to protect up to 10 catchment areas supplying raw water for water supply schemes. Rural Water Supply and Sanitation (SDR 9.47) Prepare rules and guidelines for community-led planning, design, construction and operation of rural water - 2 -

7 services, and promulgate widely. The rules are to specify the principle that rural water services are to be provided only in response to locally initiated proposals, and that the local community will pay a share of the cost of the facilities. The project aimed to support the provision of 750 new and 5,500 rehabilitated boreholes, plus 6 new and 5 rehabilitated gravity-fed schemes. Urban Water Supply (SDR 37.49m) Establish the three Regional Water Boards (RWBs) pursuant to the new legislation, prepare organizational structures, corporate charters, asset registers, and business plans, implement programs leading to financial viability, and transfer responsibility for water borne sanitation to the water boards. Provide new and expanded water supply services in about 30 towns, and some sewerage system rehabilitation works. The largest of these investments were the Zomba Dam and Water Supply Scheme, and part of the Third Lilongwe Water Supply Project. 3.4 Revised Components: At the time of the mid term review in March 1999, the RWBs had been established and were operating, and good progress had been made on the two major works, the Zomba dam and water supply facilities, and the Third Lilongwe Water Supply Project. However, there had been almost no progress on RWSS, water resources management, or the design of small town water supply schemes, due primarily to limited capacity in the MoWD and PMU. The cost overrun for the Zomba dam and related supervision was US$9.5m, where the contract prices for construction and supervision were increased from US$27.2m to US$36.7m. (see page 15 for details). The budget deficit was further affected by a drop in US Dollar/SDR exchange rate from 1.57 at negotiations to 1.35 shortly after Board approval, effectively reducing the project budget by US$11.0m. The GoM and the Bank accordingly agreed that the project should be re-focused to emphasize policy formulation and capacity building as the first priority, with investment in infrastructure subordinate to these. At the MTR the physical outputs of the project were scaled back taking account of progress to date and implementation capacity. There were two DCA amendments: (i) Nov 6, 1997 that refined the definition of goods and consultants in Schedule 1 and added BWB as an implementing agency for the purposes of water resources management; and (ii) June 24, 1999 that reallocated financing according to the MTR agreements added BWB as an implementing agency for project preparation. There was also a supplemental credit, for the reasons stated above, dated Sept 4, 2002 that increased the IDA credit by US$3m equivalent. The revised activities by component were as follows. Central Services and Water Resources Management (SDR 6.97m) Central Services. The scope of this encompassed the entire Ministry of Water Development, after its 1997 establishment, with the following subcomponents: Technical Assistance: (i) Establishment of RWBs (Phase I) by preparing business plans, corporate charters, etc., (ii) Central Services Phase I Study to propose organization and establishment for the MoWD, and facilitate initial capacity building; (iii) Strengthening of the Water Resources Board by increasing its capacity to manage water use and waste discharges, and to use regulation, pricing, participation, and public information as tools to conserve water resources; (iv) Establishment of Financial Management Systems including establishing a computer based accounting system; (v) Establishment of Management Information Systems including computerizing and networking of all water resources management units, installing the HYDATA system for recording and archiving of hydrological data, and establishing a database to record boreholes and water permits; (vi) Transfer of water borne sanitation by preparing plans for the transfer of water borne sanitation to the Water Boards. Training for the entire cadre of Ministry personnel and the Water Boards

8 Procurement of Goods including laboratory and office equipment, laboratory chemicals, furniture, computers, motor vehicles, motor cycles, boats, hydrological measuring equipment, and audio-visual equipment. Strengthening MoWD Water Resources evaluation capabilities. Two of the originally planned water resources studies were dropped at the MTR. Those that proceeded were the Water Resources Development Plan Study, Lake Level Control and Shire River Flow Augmentation (a sequence of studies), and Songwe River Study. Strengthening Catchment Management. The component was reduced in scope to four catchments (3 RWBs and 1 BWB), balancing the process of stakeholder consultation with works. Rural Water Supply and Sanitation (SDR 4.30m) At the mid term review it was agreed that the focus of the RWSS component would be on increasing the capacity of sector actors to deliver sustainable potable water and improved sanitation facilities to rural communities in ten Districts in Malawi. Before moving to construction, MoWD concentrated on completion and approval of a revised Sector Implementation Manual; refining implementation arrangements at the district level; making manuals, guidelines and training materials more user friendly; training districts and communities; and decentralized procurement of handpumps and spare parts. Five hundred boreholes were to be constructed. Also one rural piped scheme was to be constructed and a second one rehabilitated after management arrangements were agreed. Urban Water Supply (SDR 42.75m) The program of support to the RWBs continued with the Phase II capacity building program, and the construction/rehabilitation of 16 systems as originally envisioned was to continue (i.e. two towns in the Northern Region, six in the Central Region, and eight in the Southern Region). Minor extensions to fifteen other systems was dropped. 3.5 Quality at Entry: The concept, objectives and component design of the project accurately addressed the needs of the sector. However, the project was ambitious in its reform agenda and in the number of the works programs, compared to the capacity of the MWD and RWBs to refine policy and manage implementation. In such a circumstance, the project implementation plan (PIP) should have been more fully detailed, and the Project Implementation Unit should have had the capacity at effectiveness to move ahead with implementation at full speed. In September 1994, GoM formed a Ministry of Irrigation and Water Development, demonstrating its recognition of the importance of the water sector, and its commitment to the planned reforms. The WD was transferred to the new ministry from MoWS. About half of the positions of the transferred WD were vacant. Shortly after, GoM put a freeze on civil service staff recruitment. An agreement between GoM and the Bank, February 1996, phased out Project Implementation Units. All project management, planning and supervision functions were to be housed within the mainstream operations of relevant ministries and agencies. This was unworkable, so a compromise Project Management Unit (PMU), much more integrated within the MoWD than the usual implementation unit, was negotiated, but was resourced at only a fraction of the needed level. In these circumstances, quality at entry is judged unsatisfactory due to (i) an inadequate PIP, (ii) the works program too ambitious, and (iii) effective project management arrangements put in place late and at too low a capacity

9 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The intended outcomes and objectives of the project were achieved. The project was instrumental in improving the capacity and performance of both the public and private sector service providers in Malawi, initiating sector reforms, and extending service coverage and quality. - At the central level, it has strengthened the capacities of the Ministry of Water Development in overall sector management, including in policy development, planning, procurement, regulation, monitoring and evaluation, project management, and water resources management. A reconstituted, strengthened and better supported Water Resources Board now exercises more effective leadership of water resources management. - At the city and town level, the three new Regional Water Boards that were established under the project have improved water services in the towns they serve and have taken a major step towards financial sustainability. Major works have eliminated supply shortages in Lilongwe and Zomba. - For rural water supply and sanitation, the project facilitated consensus building and provided the resources the MWD needed to demonstrate a district-based, community-driven approach to rural water supply and sanitation services, supplied through boreholes and rural piped systems. Levels of sustainability not hitherto achieved in Malawi were achieved. The methodology is now established as the modus operandi for all such projects in the country. The impacts of the project include: - GoM has much improved policies and capacity to ensure access to water supply services in urban and rural communities. - Sustainability is improved at all levels - The works constructed under the project have provided new or substantially upgraded service to some 1,150,000 people. A further estimated 350,000 people have received improved services through more responsive operations provided by the trained and equipped employees of the RWBs. Despite the high cost of the works in Zomba and the need to refocus the project on policy formulation and capacity building, the project substantially met the objective at appraisal of providing an estimated 1.5 million people in urban, peri-urban and rural communities with convenient access to safe water for domestic purposes, on a sustained basis. (SAR 2.3 (g)) The project was instrumental in moving the water sector ahead on all fronts: village, town and urban water supply; water resources management; and catchment protection. The overall project outcome is satisfactory. 4.2 Outputs by components: Component 1. Central Services and Water Resources Management Objective: Sustainable and environmentally sound water development and conservation. Specific objective (1) Strengthening of central services and water resources management Central Services Phase I Study. The output of this, completed in September 1996, included recommendations for the restructuring of the MoWD, including proposed organizational structures, and proposals for management information systems. This output was a major contribution to the Functional Review of the Ministry carried out in 1997, and is judged to be successful. Strengthening of the Water Resources Board. The output, completed November 2002, included: (i) review of the role and mandate of the WRB, (ii) strategies and plans for (a) reinstating the water resources - 5 -

10 monitoring networks (b) the Board s MIS, (c) systems and data bases for water rights and discharge permits, (d) the WRB s operations becoming financially autonomous; (e) training and capacity building programs; (f) promoting stakeholder involvement; (g) decentralizing water resources management. Recommendations already implemented include: (a) procurement of computers, equipment and vehicle; (b) appointment of a qualified head of the WRB s Secretariat, and filling other WRB support positions; (c) completion of a National Water Policy superseding the WRMPS of 1994 and its revision of 2000, and a Water Bill to be presented to Parliament by October 2004 to replace the Water Resources Act of 1969, and (d) training program. The achievement of this subcomponent is judged successful in regard to policy, legislation, training and staffing, but various elements of the program must now be implemented. Establishment of Financial Management Systems. After NWDP started, the Government commenced another project financed by IDA to establish an Integrated Financial Management Information System (IFMIS) for four core Ministries. To be compatible with the Government s wider plans, it made sense for NWDP funds to be used to extend the proposed IFMIS system to MWD. The Ministry acquired the computers, internal networking and security environment in timely fashion, but after more than four years of delay, IFMIS has not been successfully installed in any of the Ministries and the computers acquired in 2000 have become outdated. The training given to Ministry staff in accounting systems operation has nevertheless been valuable in improving accounting and financial management of the Ministry, albeit using manual systems. As an interim measure the PMU procured an accounting system of its own to fulfill its obligations. This subcomponent was partially successful. Establishment of Management Information Systems. Computerizing and networking of the water resources management units within the MWD has been completed, although problems with the Government Wide Area Network have affected access to external sites. Hydrological data collection remains a problem due to the poor state of the network and lack of resources for monitoring. A water point management system and borehole numbering system have been designed, and previous records are being entered into the system. It still needs to be rolled out as a national information system for all new boreholes. Transfer of water borne sanitation. With the appreciation that the transference of water borne sanitation to the water boards required further consideration, this subcomponent supported a written evaluation and a number of stakeholder workshops and other consultations. CIDA has agreed to support development of a National Sanitation Policy, from May Outcome partially successful. Training for Sector Personnel. This program, which reached over 800 employees through some 300 training activities, achieved its aim of effective training through the whole Ministry and the five water boards, benefiting most employees. The training upgraded the effectiveness of the employees of the sector over the whole range of disciplines and activities. It is judged as a very successful outcome. Procurement of Goods. The goods required for effective operation of the Ministry, financed by NDF and IDA, were successfully procured. While most of the goods appear to continue in effective use, normal budgetary allocations are insufficient to properly maintain them, and to use them for the intended purpose, highlighting again the challenge of financial sustainability. Nevertheless, the subcomponent is judged as successful. Specific objective (2) Strengthening of evaluation capability in water resources management This subcomponent, financed by NDF, consisted of a number of important studies. (i) The Water Resources Development Plan Study investigated alternative sources of water for 11 town centers, to meet demand up to (ii) The Songwe River Course Stabilization Study, a joint undertaking with the United Republic of Tanzania, carried out in two phases, prepared a development plan for the Songwe River Basin. The recommended plan included options for dams for hydropower and irrigation, and channel stabilization

11 The study achieved a successful result in spite of difficulties of data scarcity. (iii) A set of three studies were carried out to minimize the risk of low levels in Lake Malawi and corresponding low flows in the Shire River, which can occur following a series of dry years. The result is a significant adverse effect on the beneficial uses in, around and down stream of the Lake, as happened in the mid 1990s and for more than a decade from Recommendations include rebuilding the deteriorating Kamuzu Barrage which regulates Shire River flow at Liwonde, extending its operating range and improving the release rule, and when conditions require it, a pumping barrage near Samama/Mponda to maintain river flows when lake levels are below a critical elevation. The NDF funded consulting firms which undertook the studies made good use of local partners, increasing local capacities, and consulted widely, with clients and stakeholders gaining a good understanding of the results and the processes used. All of these studies achieved their objectives. Specific objective (3) Improved catchment management. The international consulting firm, financed by NDF, provided acceptable rehabilitation and conservation plans, but did not contribute to stakeholder consultation as expected. The RWBs, assisted by local consultants, carried out extensive consultation with all stakeholders and developed implementation plans that they could support. Core physical improvements were made under the project. Valuable experience was gained by the water boards and local consultants in the process of developing and implementing community-based catchment protection plans. Component 2. Rural Water Supply and Sanitation Objective: Sustainably enhance the health status of communities through provision of potable water and improved sanitation. Specific objective: Increase the capacity of sector actors to sustainably deliver potable water and improved sanitation facilities to rural communities in ten Districts of Malawi. Preparation for implementation aimed at building consensus on the measures necessary to ensure a demand responsive approach to district-based, community-managed rural water supply and sanitation. Materials included an Implementation Manual, Trainers Guide for Extension Workers, Trainers Guide for VHWCs, Design and Technical Specification Manual for the Construction of Groundwater Supply Facilities in Rural Areas, and a Sanitation, Hygiene Education and Community Procedures Manual. Two Management Services Organizations (MSOs) were hired to implement the project, one for Northern and Central Regions and one for Southern Region, responsible for consultation with district officials and training district staff and participating communities. District Coordinating Teams (DCTs) managed activities within the district, and District Extension Workers Teams (EWTs) trained Village Health and Water Committees (VHWCs). Communities wishing to have water and sanitation facilities applied for an improved water supply, subject to conditions including establishment of VHWCs, participation in planning, contribution of a minimum of 5% of the capital cost in cash and in-kind, and self-financing of O&M. For the rural water points subcomponent, 500 boreholes were implemented in 10 Districts, providing 125,000 people with improved access to safe water supplies, and associated education in handpump maintenance, and environmental health. For the rural piped gravity subcomponent, one new scheme was constructed and one rehabilitated, serving altogether an estimated population of 55,400, projected to increase to 68,000 over a 10 year design horizon. Each system is overseen by a Water Association which hires a system manager who is responsible for recruiting a core operators team and contracting most routine operations out to local service providers within the service area. Evaluation by the Borrower suggested that for both the borehole and gravity fed schemes, the 18 month - 7 -

12 time allocated for the software aspects proved insufficient, as not all training activities were completed. On the positive side, for the boreholes, two years after completion, all 500 boreholes have continued to operate successfully, unprecedented for Malawi. Handpump spare parts are available throughout the country, through a chain of rural shops. Participation of women is excellent, with 50-60% on VHWCs. A more user friendly version of the Implementation Manual has been completed to complement the other manuals. MASAF and programs supported by other donors, including the African Development Bank and CIDA (COMWASH Project), are now adopting and using the approach tested in this project, including the improved manuals. The approach and procedures developed have thus become widespread and well established. For the gravity fed schemes, the facilities provided by the project were completed satisfactorily as the project closed, and communities and individual consumers are implementing their own agreed connections, at their own expense, as this report was written. There is no experience yet to judge sustainability, though the procedures used suggest that it is likely. The outcome of the borehole program is judged to be very successful, and the gravity fed schemes likely to be successful. Component 3. Urban Water Supply. Objective: Improved water supply services in small urban centers, and Lilongwe City. Specific objective (1) Three financially viable Regional Water Boards established Waterworks Act. GoM moved with speed and decisiveness to prepare and enact the new Waterworks Act at project commencement. The powers and obligations conferred by the Act have successfully supported the establishment and operation of the Boards as commercial entities. Establishment of Regional Water Boards. In March-April 1996, GoM appointed the Chairmen, Board Members and General Managers of the RWBs, and staffing commenced. Starting in September 1996, consultants assisted with organizational structures, business plans, a corporate charter, asset registers, and human resources plans. Corporate Charters with sound performance indicators and tariff adjustment formula. The Corporate Charters, which are performance agreements between the RWBs and the Government, were signed in September The Charters set out regulations and procedures for tariff adjustment, and a number of annual performance targets aimed at measuring the RWBs progress in operating as efficient, effective and economic businesses. A special study was undertaken by an international consultant to refine the tariff formula before the Charters were approved by the RWBs and Cabinet. It was based on work in other countries which was considered to be best practice. The output was thus satisfactorily delivered. For the most part the RWBs have achieved the performance targets set out in the Corporate Charters, excepting the production cost of water, which is considerably higher than targeted. For all targets, actual performance is comparable to what is typically achieved in other developing countries worldwide. These targets need to be updated periodically based on revised business plans to ensure that the Charters continue to be of value to the RWBs and their customers.. Comparison of Actual Performance to Targets set out in Corporate Charters Operating efficiency (Unaccounted for water): Charter target for 2003 Actual performance SRWB CRWB NWRB 21% 26% 22% 19% 20% 36% Collection efficiency Charter target for % 80% 95% - 8 -

13 Actual performance 57% 90% 106% Cost efficiency (cost per m3 produced) Charter target for 2003 Actual performance Staff efficiency (staff per 1000 m3 prod.) Charter target for 2003 Actual performance MK28.4/US$0.33 MK23.78/US$ MK6.3/US$0.07 MK31.63/US$ MK17.0/US$0.20 MK47.71/US$0.45 On tariffs, the tariff adjustment formula has not been as successful as had been hoped in providing a mechanism to secure satisfactory and timely tariff adjustment. In the context of Malawi the expansion provision of the formula proved to be unworkable because it would have amortized investment costs at a very high rate of interest over too short a time period and too few new customers. The formula did not take account of the willingness and ability of customers to pay. The formula has been useful as supporting documentation for Water Board requests for tariff increases and for changes in on-lending terms, but needs to be revised before it can be used as an independent tool for tariff setting. The Charter system was intended to provide Government with a tool to measure the performance of the RWBs to focus their efforts on improving efficiency and effectiveness, and to diminish problems of delay in setting tariffs. The Charters, together with other provisions such as the business planning process, the Tariff Review Committee (did not meet), and the Performance Review Committee (met once), did not provide an environment with sufficient incentive for the RWBs to rapidly improve their performance to the extent set out in the Corporate Charters. The Government is aware of the weaknesses and is in the process of establishing a regulator to oversee water and electricity. In this way, the specialized skills needed to regulate these utilities can be secured. The Charter process is judged to be partially successful. Encouraged by the MoWD, the RWBs have reviewed their performance and identified actions that can be taken to improve it. Many of these are related to decentralizing operations in individual towns or groups of smaller towns, so that local operators have management authority and are accountable for the service that they provide. These units offer middle management opportunities. They are proving to bring improved accountability to customers and improved performance tracking by headquarters against agreed targets tailored to each town. Business plans. Business plans setting out mission statement, policies, functions, investment plans and financial projections were prepared between 1997 and 1999, and were endorsed both by the RWBs and GoM. They were revised in 2003/4. The RWBs made good use of the initial preparation and the revision processes as opportunities for capacity building and as aids to setting of directions and improving performance. However, the RWBs and their business planning consultants failed to provide updated financial models with scheme-by-scheme as well as consolidated projections, that could serve as a basis for recommending a revised tariff formula, revised on-lending arrangements, and revised performance targets. The Business Plans are thus judged to have been partially successful Financial Viability. Financial viability for the RWBs depends on development and execution of business plans that set out a clear expansion program for each town matched to the potential return on these investments, sound borrowing practices, appropriate tariffs, and cost effective operations. In Malawi it also depends on the Water Boards ability to collect bills on a timely basis from Government institutions and other customers. Lack of resolution of long outstanding arrears from Government institutions, lack of an objective and predictable process for adjusting tariffs and reviewing performance, and on-lending terms that have effectively transferred foreign exchange risk to the RWBs together pose a risk to the financial viability of the RWBs. Nevertheless, the RWBs latest financial projections indicate that they can achieve - 9 -

14 financial viability, on the assumptions made, including reasonable bill collection patterns, and revised on-lending terms. This output is judged moderately satisfactory. The three RWBs have a good idea of the expansion requirements in each town, but have not prepared system-by-system financial projections based on an analysis of customer willingness and ability to pay tariffs required to finance the cost of expansion and ongoing operations and maintenance. As a result the overall financial projections for the Boards do not have strong foundations. Except for the Zomba Dam and Water Supply, the financial projections of the RWBs indicate that they would be able to service debt related to funds on-lent from IDA. However, the NRWB and CRWB have also borrowed from the African Development Bank and the Development Bank of South Africa. With the current lending terms, it is not possible for the RWBs to repay their loans and at the same time properly maintain facilities and expand their systems to meet demand. The RWBs suggest that delays in tariff decisions have made it difficult for them to achieve financial viability. The tariff table below suggests that this has been true in some years tariff adjustments have not always been sufficient to compensate for currency devaluation and inflation. However, it should also be noted that tariffs have reached the mid- to upper bracket in real terms when compared with levels in general use in both developing and industrialized countries and are likely near what customers in Malawi can afford or are willing to pay. Financial viability will depend more on the RWBs ability to increase their customer base, improve service, collect bills and achieve operating efficiencies. Table: Water Tariff Trend for the Water Boards in MK/M3 and US$/M BWB LWB CRWB NRWB SRWB MK US$ MK US$ MK US$ MK US$ MK US$ 21.2 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $0.44 Arrears remain an issue. Over the last 14 years, arrears have been at their highest when GoM s fiscal and macro-economic problems have been at their most severe, for example and in over the past few years. Due to weaknesses of GoM fiscal management and of the macro-economy, government institutions and Ministries are often under-funded, or in some months, not funded at all. During the first few years of the project, payment of water bills by government institutions slowed considerably and arrears accumulated. To address the problem, an arrangement was made for bills from the

15 institutions with the worst payment records - the Army, Police, State House, and the Ministries of Education and Health - to be paid through the Treasury Central Payments System. This has resulted in considerable improvement, but has not completely solved the problem With old outstanding arrears still on the books of the Water Boards, the average days sales in accounts receivable for government institutions is around 350 days. One of the main indicators for the new Structural Adjustment Loan is the timely payment of bills by government institutions to public utilities. Accordingly both the Government and the Bank are concerned and have agreed to highlight the issue and track progress. It is disturbing to note that while collection from government institutions has improved, collections from other customers has slowed for three of the five Water Boards. The average days in accounts receivable is around 150 days for other customers, whereas a well performing utility would be expected to collect bills within 45 days on average. With such poor collection performance, there is a risk that cash flow will be insufficient to fund adequate maintenance of facilities and debt service. Total Water arrears in MK 000 as at 31st December 2003 Government Dec 31, 2003 Dec 31, 2002 % Inc/(Dec) Avg days Others Dec 31, 2003 Dec 31, 2002 % Inc/(Dec) Avg days Total Arrears Dec 31, 2003 Dec 31, 2002 % Inc/(Dec) Avg days BWB LWB CRWB NRWB SRWB Total 242, ,152 (9%) , ,891 8% , ,043 2% , ,706 3% , ,939 30% , ,646 17% ,054 40,307 24% ,189 24,543 (18%) 85 70,243 64,850 8% ,036 71,366 (28%) ,799 25,620 1% 88 76,825 96,985 (20%) , ,179 41% ,753 31, % , ,570 60% , ,710 10% 884, ,384 17% 1,549,350 1,399,094 11% Specific objective (2) water supply coverage increased Water supply facilities in 16 towns rehabilitated and expanded. Rehabilitation of water supplies for 8 towns, SRWB. Design and construction were successfully completed. For some of the towns, UFW increased due to bursts following increased pressures. This project has achieved improved service reliability and an increase in coverage by 35%. Outcome satisfactory.. Rehabilitation and expansion of water supplies for 6 towns, CRWB. Increased coverage by 35% from 2001 to 2003, revenue more than doubled. Some reliability problems. Outcome satisfactory. Rehabilitation of water supplies for 2 towns, NRWB. Water sales increased by 25%, connections increased from 1664 to 2606, an increase of 5 6%. Outcome satisfactory. Dam, treatment and distribution pipelines at Zomba completed. This was the largest scheme constructed in the project, consisting of a dam, pipeline to the treatment works, new and rehabilitated treatment works, 13 service reservoirs, 42 km of distribution mains, 4 km of access road, and ancillary works.. Construction commenced in June 1997 and was completed in August 2001, at a cost of US$28.9m. The cost overrun for the Zomba dam and related supervision was US$9.5m, where the contract prices for construction and supervision were increased from US$27.2m to US$36.7m. The largest part of the price increase of the dam was due to unexpected ground conditions in the quarry area, the intake tower, and under the dam. There was considerably more soft excavation to reach rock (150,000m3 against the

16 estimated 40,000m3) and the rock did not fragment as suggested by the test drilling carried out during tender preparation at the commencement of the works. Extra foundation work for the dam and spillway was also required. The increased budget for the dam was cleared by the Operation Procurement Review Committee. The scheme has eliminated the dry season water shortages in Zomba Municipality which caused the regular closure of the University and Government Agencies, and much suffering among the local communities. Water sales have accordingly increased by 68%. The cost escalation forced the cancellation of plans to extend mains further to increase coverage, so coverage has increased very little. While completion of the project was a good achievement, conferring substantial benefits, most of the potential benefits that would accrue from increased coverage will be realized as the distribution system is expanded. Outcome successful. Third Lilongwe Water Supply Scheme completed. The NWDP share of this scheme included the consultancy for the supervision of construction, the supply and installation of pumping equipment, and supply and installation of an 8.9 km pipeline of 800mm diameter. The largest contract of the scheme, the raising of the Kamuzu II Dam, which in conjunction with the other works increased supply availability to Lilongwe, was financed by EIB. The works supported by the NWDP were completed successfully at a cost of US$5.9m, slightly under budget. The scheme provides adequate protection of the Lilongwe supply against drought conditions and upgrades treatment and distribution infrastructure. Outcome highly successful. Specific objective (3) water supply services improved. Production, distribution and sales of water in all towns increased. The three Regional Water Boards have achieved the physical targets for increased production and sales of water and reduction of unaccounted for water, but have achieved the financial and operational efficiency targets for improvement of collection efficiency, reduction in production costs and improved staff efficiency in only a few cases. (See Annex 1 Logframe 3 - Urban Water Supply) The cost efficiency results vary from Board to Board. Costs per cubic meter produced, in current terms, are higher than the targets and have increased rather than decreased over the life of the Project. In real terms, that is after allowing for inflation, NRWB came close to achieving its target, while the other two were still well above, due mainly to high staff and administration costs. Performance Indicators Increase in water produced Target CRWB NRWB SRWB increase 8% inc 8% inc 25% inc Increase in water sold increase 5% inc 4% inc 21% inc Unaccounted for water 5% decrease 37% dec 9% inc 19% dec Production cost of water 5% decrease 12% inc 88% inc 40% inc Collection efficiency 25% increase 31% inc 15% inc 0.2% dec Staffing 25% reduction 37% dec 53% inc 0.5% dec

17 Employ best possible management teams, and build smaller, better trained O&M staff. The RWBs were active in ensuring that their staff benefited from the project training program, and have filled skill gaps by recruiting qualified staff. All three General Managers and several other senior staff of the RWBs obtained MBAs or MSc (Management) through the NWDP training program. More training for technician and trade employees would contribute to improved performance. Staff numbers have reduced, but are still much higher than optimum especially for CRWB and SRWB. Strategically contract private sector to minimize costs. Some initial progress has been made, with communal groups engaged to run communal water points, and motor vehicle maintenance and security partially contracted out.. Improved relations with customers. Trial community liaison groups established, communal water points groups established and functioning, staff trained in customer relations. Improved capability to work with communities to protect catchments. The BWB and the three RWBs involved community stakeholder groups in the planning and implementation of catchment protection measures. Outputs and results included formation of community liaison groups, a new high level of community support for catchment protection, reduction or elimination of inappropriate farming practices near the more important watercourses, and virtual elimination of vandalism. Measurable results in terms of stream flow quality require a longer period than to date. Outcome: highly satisfactory. 4.3 Net Present Value/Economic rate of return: The Staff Appraisal Report provided only an indicative economic analysis of investment components, as specific investments had yet to be selected. For urban and town schemes, primarily rehabilitation, benefits to users were expected to accrue from: (1) arresting the deterioration of service levels and coverage due to system malfunctions and (2) additional service coverage attributable to improvements in production and distribution capacity. For the rural program, the primary benefits were expected to be increased coverage of the population, which would provide for additional consumption, more convenient access (resulting in time savings) and safer water (resulting in health improvement). The average IRR was estimated at about 25% for urban and town schemes and at about 16% for rural schemes. As planned, the project supported preparation of business plans for the RWBs and preparation of economic and financial analysis of proposed urban and town investments. At completion, the economic analysis was updated for each RWB, for the two rural piped systems and for the rural borehole program as a whole. The revised analyses include actual investment costs for the schemes constructed and updated information about population, connections, demand, consumption, production, tariffs and costs. The results are shown in the table below. The project is expected to achieve an Economic IRR well above the hurdle rate of 10%.. Comparison of Estimated Economic IRR at Appraisal and at Completion Description Estimated IRR at appraisal Estimated IRR at completion NRWB 27% 24% CRWB 42% 18% SRWB 26% Zomba 7% 28% Zomba 16% RWSS boreholes 16% 50% RWSS Nkhamanga piped system 16% 29% RWSS Dwambazi piped system 16% 25%

18 4.4 Financial rate of return: At appraisal financial results were projected for the five Water Boards over a sixteen year period from 1995/96 to 2009/10. Blantyre and Lilongwe Water Boards were projected to show an increasing profit trend over the projection period. The three RWBs were all projected to produce a net profit by the fifth year. The financial performance of the Water Boards has not been as positive as projected. Despite increases in water production, volume sold and tariffs, the Water Boards have not yet been able to achieve solid financial viability. This is due primarily to macro-economic instability, which resulted in high inflation, currency devaluation and shortfalls in Government budget transfers to institutions who then were not able to pay their water bills. The Water Boards have also failed to achieve many of the operating efficiency targets, even though they should have taken decisions regarding expenditures and staffing. Annex 3 includes tables showing a comparison of actual to projected financial performance for the most recent three fiscal years. The RWBs have updated their financial projections as part of the business planning process and have identified measures needed to improve financial and operating performance. The projections indicate that the Water Boards can achieve financial viability if collection and operating efficiency are improved. 4.5 Institutional development impact: Water resources management: Water resources management needs to be undertaken in line with principles of integrated catchment management, subsidiarity (that is, management at the lowest appropriate level), and stakeholder involvement, including women. It needs leadership committed to these principles, and the backing of legislation that enshrines them. Malawi faces a number of serious WRM problems. Hitherto, WRM in Malawi was treated as a centralized mid-level administrative task, and attempts to deal with such issues as catchment degradation, pollution in urban environments, and the effects of drought, were accordingly quite ineffective. With the establishment under this project of a Water Resources Board, more representative of stakeholders and more fully empowered and better supported than its predecessors, and the imminent enactment of modern WRM legislation, GoM has taken an important first step towards effective WRM. Rural Water Supply and Sanitation: The very successful RWSS component has been the vehicle for the district-based, community-driven approach to become the accepted methodology for all donor-supported rural water and sanitation programs. MoWD has evolved into an effective leader of policy and practice in this type of service. Policies and methods for the delivery of such programs will continue to evolve as rural community needs and civil society in Malawi evolve. To ensure that the methodology and materials remain current and fully accepted, it would be important for the MoWD to continue to be integrally involved in small to medium scale rural water and sanitation programs. Regional Water Boards: The performance of the Regional Water Boards has not been an unqualified success. However, they have gained the respect of most of the communities they serve as being able to deliver improved and more responsive water services. They have become a stable and valued part of the utility scene in Malawi. The financial sustainability problems they face are of long standing. However, some progress has been made. The problems are a combination of the fiscal management problems that confront the Government, and the need for the RWBs to become more efficient. As the macro-economy improves and as the RWBs decentralize management to more autonomous town water operators with clear business plans, performance targets and incentives to achieve them, the RWBs can achieve their intended objective of being effective, financially viable utilities. Accordingly, it is judged that the institutional development impact of the project has been substantial