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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 IMPLEMENTATION COMPLETION REPORT HONDURAS WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) MAY 24, 1996 Central America Department Latin America and the Caribbean Region Report No 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 CURRENCY EQUIVALENTS (Source: IMF) Currency Unit = Lempira (L) Year Official Market Year Official Market FISCAL YEAR OF BORROWER January 1 to December 31 WEIGHTS AND MEASURES m = Meter (39.37 inches) km = Kilometer ( mile) I - Liter ( US gallons) lps = Liters per second (15.85 gallons per minute) m = Cubic Meter (264.2 US gallons) Ipcd = Liters per capita per day ha = Hectare (2.471 acres) ABBREVIATIONS AND ACRONYMS CDC DIMA IBRD ICB ICR IDB IFEP JICA PAHO PIFR SAR SANAA UCPM USAID ZMVS Commonwealth Development Corporation Municipal Water Division of San Pedro Sula International Bank for Reconstruction and Development International Competitive Bidding Implementation Completion Report Inter-American Development Bank Informe Final de Ejecuci6n del Proyecto (same as PIFR) Japanese International Cooperation Agency Pan American Health Organization DIMA's Project Implementation Final Report Staff Appraisal Report National Autonomous Water and Sewerage Service DIMA's Master Plan Coordinating Unit US Agency for International Development Great Metropolitan Area of the Sula Valley

3 FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT HONDURAS WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table of Contents Page Preface Evaluation Summary... i Part I Project Implementation Assessment A. Project Objectives and Description.1 B. Achievement of Project Objectives.2 C. Major Factors Influencing the Achievement of Project Objectives. 5 D. Project Sustainability.5 E. Bank Performance.6 F. Borrower Perforance.7 G. Assessment of Project Outcome.8 H. Future Operations.8 I. Key Lessons Leaned.8 Part II Statistical Tables i Summary of Assessments.10 2 Related Bank Loans/Credits.11 3A Project Timetable.11 3B Project Restructuring by Component.12 4 Loan Disbursement: Cumulative Estimated and Actual.13 5 Key Implementation Indicators.14 6 Key Indicators for Project Operations.16 7 Studies Included in Project.17 8A Project Costs.18 8B Project Financing.18 9 Economic Costs and Benefits Status of Legal Covenants Bank Resources: Staff Inputs Bank Resources: Missions.23 dhis document has a restricted distribution and may be used by recipients only in the performance of their of0cial duties. Its contents may not otherwise be disclosed wilhout World Bank authorization.

4 Appendixes A. Mission Aide-Memoire: December 8, 1995 B. Borrower Contribution to the ICR: DIMA's Project Implementation Final Report, December 22, 1995 C. Letters from DIMA and CDC, respectively, acknowledging receipt and review of Implementation Completion Report D. IBRD Map No (as presented in the SAR)

5 IMPLEMENTATION COMPLETION REPORT HONDURAS WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) PREFACE This is the Implementation Completion Report (ICR) for the Water Supply and Drainage Project in Honduras, for which Loan 2421-HO in the amount of US$19.6 million equivalent was approved on May 22, 1984, the Loan Agreement signed on December 7, 1984 and made effective July 8, The loan was closed on June 30, 1995 as compared to the original closing date of June 30, Final disbursement took place on November 28, 1995, at which time a balance of US$1,160, was canceled. Cofinancing was provided by the Commonwealth Development Corporation of the United Kingdom (CDC) in the equivalent amount of US$14.2 million. The ICR was prepared by Ventura Bengoechea (Task Manager, SLGIN), Alfonso Zavala (Consultant) and Albert Amos (Consultant) and reviewed by Martin Staab, Infrastructure Sector Leader of the Central America Country Department. Preparation of the ICR began during the project's final supervision mission, June 19-24, 1995, and was followed by a mission which took place between December 4-8, The Borrower contributed to the ICR by preparing its own evaluation of the project's execution, Informe Final de Ejecucidn del Proyecto (IFEP), included as Appendix B, and reviewed the draft ICR, which it found satisfactory (Appendix C.1). CDC also reviewed the draft ICR and found that it satisfactorily reflected the project's outcome. CDC's letter also provided a revised figure for the equivalent US dollar amount of their disbursements, which is now reflected in this document. (Appendix C.2)

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7 IMPLEMENTATION COMPLETION REPORT HONDURAS WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) EVALUATION SUMMARY A. Introduction i. This project was the Bank's first water sector operation in Honduras. It was prepared in response to a request to finance the implementation of San Pedro Sula's Water Master Plan. DIMA, the Municipal Water Division of San Pedro Sula, was created as part of this project. The project had a lengthy implementation period of 1 1 years, which resulted from two general disbursement suspensions imposed upon the Borrower due to non-compliance with external debt payments (1.01). In August 1990, the project subcomponents were revised to meet smaller actual population figures, different urban growth patterns and larger groundwater resources, which differed from appraisal estimates (1.06). The loan, extended on four occasions, was closed on June 30, B. Project Objectives ii. The main two project objectives were to: (i) meet water service needs by increasing water production and storage capacity and extend water and sewerage networks to poor urban neighborhoods; and (ii) strengthen DIMA to make it an autonomous and financially sustainable water utility (1.02). Nearly 99% of project cost was directed toward achieving these two objectives. The remainder of the project was directed to SANAA, the national water company, with the objective of improving its institutional, economic and financial areas. C. Implementation Experience and Results iii. Overall project outcome is considered unsatisfactory. Although the project was successful in installing capacity sufficient to provide continuous 24 hours/day water coverage to 96% of the estimated population in greater San Pedro Sula through the year 2005 and DIMA is considered the best water utility in Honduras, the project did not achieve most of its institutional objectives, bringing into question its long-term sustainability. DIMA experienced financial difficulties due to low tariffs, excessive unaccounted-for-water losses and the need to service a loan extended in IBRD terms. The delayed implementation period impacted negatively on the economic rate of return, recalculated at 9.4%. (1.18) iv. The project was cofinanced by the Bank and CDC with contributions from the Government of Honduras and the Municipality of San Pedro Sula. The project was completed in 11 years, which is an unusually long implementation period. However, without the 4 years of inactivity, resulting from the delay in effectiveness and 2 general suspensions of loan disbursements to Honduras, the project would have had an implementation period of about 7 years, average for projects in this

8 - ii - sector. The expected closing date of June 30, 1991 was extended on four occasions with the final project closing date taking place on June 30, The estimated cost of the project at appraisal, including physical and price contingencies net of interest and fees was US$33.4 million. The total project cost, including interest and fees, was estimated at US$42.3 million during appraisal. v. At the end of the second and last suspension of disbursements, the Bank found that the GoH, the municipality of San Pedro Sula and DIMA were committed to completing the project. The Bank's project team and management decided to reactivate the project despite macroeconomic difficulties existing in Honduras. The rationale for this decision was based on the fact that: (i) project design remained a viable mechanism to increase capacity to meet longterm service needs, extend water and sewerage networks to poor urban neighborhoods and complete the project's institutional objectives; and (ii) the municipality would not have access to other sources of funding. Following this decision, the project was revised to meet smaller actual population, different urban growth patterns and incorporate larger than expected underground water yields from the Sunceri and Chamelec6n wells. vi. Without changing the objectives, key revisions made to the project components in 1990, included: (i) incorporation of newly identified and more reliable well fields (1.06A); (ii) installation of a larger number of primary water distribution mains, which increased subcomponent B from 20.8% to 40.2% of project cost (1.06B); (iii) extension of the secondary water and sewerage pipe network to low income neighborhoods (1.06C); (iv) construction of 3 km of storm drainage interceptors (subcomponent D) was incorporated into an IDB drainage project (1.06D); and (v) elimination of the sugarcane irrigation study, since irrigation no longer was used in the identified areas (1.06G). The revision of the DIMA component in August 1990 resulted in an 8.0% increase in project cost, from US$42.3 million to US$45.5 million, including physical and price contingencies as well as interest and fees (Table 8A). At the closing date, total project cost was US$48.3 million, 6% higher than the revised project cost, which can be attributed to inflation adjustments and delays associated with the early termination of a large civil works contract. vii. Although the Bank accepted arguably high population estimates, the Bank's performance during preparation is judged to have been satisfactory as the overall project design was wellconceived and flexible enough to allow for future adaptation to different growth patterns and quantities of water resources. (1.12) The Bank's performance during supervision is also rated as satisfactory due to its flexibility and responsiveness in the reactivation of the project following the suspensions and close supervision from , which allowed DIMA to achieve the physical objectives of the project (1.14). However, the efforts by the Bank's project team to improve the institutional capacity of DIMA were impeded by excessive political interference, personnel limitations to hire and retain good technical staff and the long implementation period. viii. In regard to Borrower performance, its non-compliance with external debt payments, which prompted the two suspensions of loan disbursements, and the unsuccessful completion of the project's institutional objectives warrant an unsatisfactory rating. (1.17) Nevertheless, DIMA's Master Plan Coordinating Unit (UCPM), was instrumental in the successful execution of physical works, the processing of procurement documentation and the preparation of project implementation progress reports, while providing effective links between the Bank and DIMA. The Unit, however,

9 - III - was not adequately integrated within the rest of the institution, despite the plans to do so, which limited the achievement of the project's institutional strengthening initiatives. D. Summary of Findings, Future Operations and Key Lessons Learned ix. The project was successful in installing capacity sufficient to provide continuous 24 hours/day water coverage to 96% of the estimated population in San Pedro Sula through the year 2005, extending service provision to low-income neighborhoods and contributing toward poverty alleviation. The importance of this objective cannot be overstated as coverage levels in Honduras average 60%. (1.10). Nevertheless, the project failed to develop DIMA as an institutionally and financially independent enterprise. From , DIMA's net income was insufficient to cover investment and operational costs and DIMA required financial assistance from the GoH, which serviced its debt payments to the Bank (1.11). x. To improve its financial performance, DIMA has prepared a 2-year Operational Plan ( ), intended to optimize new infrastructure, increase sustainability, provide efficient service provision, reduce unaccounted-for-water levels, upgrade the commercial and administrative units, improve the financial stability and raise human resources quality. The municipality of San Pedro Sula is also considering the transformation of DIMA into an Empresa Mixta' with the participation of the private sector, which would assist DIMA in reducing political interference, provide management stability and improve financial performance. (1.19) Another project under consideration is the gravity-fed Rio Lindo Regional Water System, with the participation of the private sector, which would provide raw water to the Metropolitan Communities of the Sula Valley (ZMVS) beyond the year 2020 as well as reduce underground water use and high pumping energy costs. xi. The lessons learned from this project are the following: (a) political interference, frequent turnover in higher management and recruitment constraints limit the independent operations of institutions like DIMA. These difficulties could be addressed through a long term concession, or some other arrangement with the private sector, which permits the agency to operate on a more business-like basis (1.21); (b) an automatic mechanism free from political interference needs to be established to adjust tariffs to inflation, meet cost-recovery levels and ensure the financial sustainability of DIMA (1.22); (c) a competent coordinating unit is instrumental for project implementation success, but it needs to be well integrated within the entire institution to achieve financial sustainability (1.23); (d) Bank project preparation missions need to be more careful in reviewing basic data and assumptions that determine project size and scope (1.24). An Empresa Mixta is a long-term concession with a private operator in which the municipality holds approximately 50% of the water company's stock. The private operator is responsible for the operation and management of the facilities and shares the cost of new capital investments with the municipality.

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11 IMPLEMENTATION COMPLETION REPORT HONDURAS WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Part I PROJECT IMPLEMENTATION ASSESSMENT 1.01 Background. The Water Supply and Drainage Project (2421-HO) was the first Bank operation in the sector in Honduras, following the request by the GoH and the Municipality of San Pedro Sula to finance improvements to its water and sewerage services recommended in its Master Plan. Additional project objectives included the institutional strengthening of DIMA, created as a separate administrative division within the municipality of San Pedro Sula as part of this project, and SANAA, the national water company. The Bank signed a Loan Agreement with the Republic of Honduras, Project Agreements with SANAA and the Municipality of San Pedro Sula, and Memoranda of Agreement with CDC, the project cofinancier, and the Republic of France, which supported the SANAA component. A limited number of project activities had been completed when the Bank suspended general disbursements to Honduras in November 1987 due to noncompliance with external debt payments. A second Bank suspension followed, which was lifted in June CDC also suspended disbursements to the Borrower. For all practical purposes, the project remained at a standstill from November 1987 until June 1990 and did not return to full implementation until January 1992 when CDC resumed disbursements. In August 1990, the project was restructured to adjust to smaller actual population growth and urban trends. Most of the purchase of equipment and construction activities began in the second half of 1992 and were completed by June 30, Civil works could not be fully completed by the loan's closing date due to excessive delays by a contractor ending in the termination of its contract. The remaining works, which amount to less than 1% of project cost, are in execution and are expected to be completed by June 30, These works are being financed by DIMA, with the support of CDC, which agreed to extend its participation through June 30, A. Project Objectives and Description 1.02 Project Objectives. For the greater San Pedro Sula area, two primary project objectives existed: (1) meet water service needs by increasing water production and storage capacity and extend water and sewerage networks to poor urban neighborhoods; (2) strengthen DIMA, by improving technical operations and managerial ability, train personnel and ensure financial sustainability Before the project's restructuring, the San Pedro Sula component involved the following subcomponents: (a) Water supply improvements. Increase water production by constructing and/or 2 These works include: (i) installation of about 950 m of transmission and distribution mains; (ii) street paving, projects; (iii) installation of roughly 20 connection points from the new mains to the old distribution network; and (iv) installation of water pumping, disinfecting equipment, transmission mains and storage tanks

12 rehabilitating 25 wells and constructing 3 water chlorination stations; (b) Water transmission, distribution and storage extensions. Rehabilitate 2 water intakes and corresponding transmission mains and build nearly 46 km of primary distribution system, 2 booster pump stations and 2 storage reservoirs with a combined capacity of 30,000m 3 ; (c) Secondary water and sewerage pipes network. Install about 15 km of secondary water distribution mains and 10 km of sewerage collectors and provide 5,000 water and 4,000 sewerage house connections in low income areas, repair/replace defective secondary water mains, install 25 water standpipes, and install 24,000 consumption water meters and 6 master meters; (d) Storm water drainage improvements. Build 3 km of storm drainage interceptors; (e) Leak detection and mapping of water distribution system. Prepare water distribution maps, acquisition of leak detection equipment, establish a leak detection program and train DIMA staff in leak detection, (f) Institutional strengthening of DIMA. Implement an action plan for the institutional and operational commercial, financial and administrative improvement of DIMA; and (g) Sugarcane irrigation study. Undertake study on the health and environmental risks associated with the use of the polluted Rio Sauce waters to irrigate a sugarcane The SANAA institutional strengthening component, accounting for about 1% of project cost, was only partially implemented through late This component required SANAA to: (i) develop an action plan to improve managerial, operating, accounting and commercial procedures; (ii) formulate financial policies for the water supply and sewerage sector at the national level; (iii) assess national water supply and sewerage sector investment needs and priorities; (iv) prepare an investment program to address identified investment needs and priorities; (iv) evaluate and implement training programs for SANAA staff; and (v) implement a program to reduce water losses in Tegucigalpa. B. Achievement of Project Objectives 1.05 Achievement of Objectives. The project objectives regarding service improvements were substantially achieved and nearly all of the physical works have been completed. The importance of this objective cannot be overstated as coverage levels are at 96%, compared to the average coverage rate in Honduras which is around 60%. Nevertheless, most of the institutional strengthening objectives were not achieved and DIMA's managerial capacity remains weak. In addition, DIMA recorded financial deficits from and required financial assistance from the GoH, which serviced DIMA's debt payments to the Bank. The weak record of the institutional strengthening subcomponent can be attributed to the lengthy implementation period, excessive political interference, frequent turnover at upper management levels and recruitment constraints Following the 1988 national census, population figures for San Pedro Sula were drastically revised downward, compared to the estimates listed in the SAR. Project studies also found larger than expected underground water yields in the Sunceri and Chamelec6n wells. In August 1990, the Bank and DIMA agreed to modify the San Pedro Sula component and these changes, introduced at different stages of implementation, were evaluated carefully to ensure that these modifications would better achieve the physical objectives of the project. (Table 5). These results induced changes in the design, length and diameter of some transmission and distribution mains (Stage I) and construction of surface water intakes, corresponding transmission mains, water storage tanks,

13 water pumping and chlorination stations (Stage II). A detailed assessment of what was achieved with respect to each of the project's major components is presented below: (a) Water supply improvements. The project has achieved the principal objectives and the outcome is considered satisfactory. These improvements have provided more than 3.2 m 3 /s of safe water supply, which will suffice beyond year 2005, and has led to the construction of 15 new and 7 rehabilitated wells. 3 The purchase of leak detection and other operational and maintenance equipment in the first 2 years of project implementation were instrumental in obtaining initial successful results. The Sunceri and Chamelec6n wells were incorporated upon project revision; (b) Water transmission, distribution and storage extensions and improvements. DIMA successfully built 54 km of primary water distribution mains (more than the 46 km in the SAR, but below the 64 km agreed after the project was restructured) and provided an additional 15,000 service connections (10,000 more than the appraisal estimate). Through a donation from the Japanese International Cooperation Agency (JICA), DIMA is working to ensure the continuous provision of safe water in the upper levels of the distribution system, substantially improving water quality and reducing well water pumping costs. The water filtration treatment plant at Santa Ana has been completed and construction at the one in Rio Piedras is ready to begin. Two new water storage tanks, currently under construction will provide an additional 7,000m3 in water storage capacity, which is consistent with the revised objectives established during project restructuring. Other modifications include the elimination of a surface water intake and 2 booster-pump stations as well as the remodeling of a surface water intake at Santa Ana; (c) Secondary water and sewerage pipes network. The water supply transmission mains and distribution network have been successfully extended into low-income neighborhoods. The first beneficiaries of about 300 lps from the Sunceri well were the residents of the densely populated areas of Cabanas, Cabanitas, Barandillas and other low-income neighborhoods who, after 20 years of rationing or having lacked a public water system, have enjoyed continuous water supply since April The number of residents with water services through house connections increased from 261,000 persons in 1984 (78% or 26,160 connections) to nearly 390,000 in 1995 (96% or 63,500 connections). Following the restructuring of the project, the construction of 10 km of sewerage network, 4,000 sewerage connections and the installation of 25 public water standpipes were excluded from Bank financing. However, financial assistance provided by the IDB and USAID and the number of total residents with sewerage coverage has increased from 160,000 in 1984 to 260,000 inhabitants with 43,000 domiciliary sewers in 1994 (64.2%); (d) Storm water drainage improvements The installation of 3 km of storm water drainage interceptors to reduce flooding risks to low income dwellers in marginal urban areas was eliminated from the project, but was consolidated under an IDB financed urban sanitation project; Four of these wells and the El Zapotal surface water production and transmission scheme, which has a 3 nominal capacity of 400 Ips, minimum average yield of 165 Ips of chlorinated water and added about I m /sec to existing sources, were built with DIMA resources;

14 - 4 - (e) Leak detection and mapping of water distribution system. The water distribution network mapping and the leak detection and control plan, including a training program for operational personnel, were successfully carried out in Purchase of the foreseen leak detection and other operational and maintenance equipment in the first 2 years of project implementation were instrumental in obtaining initial successful results. Since then, network maps have become obsolete and the Leaks Control Section has been reduced to minimum levels. DIMA needs to reactivate the leak detection and repairs program and reinforce the Leaks Control Section in the Operations Division; (f) Institutional strengthening of DMIA. The implementation of this subcomponent has been the least successful as DIMA has been unable to achieve managerial and financial autonomy. As a result, sustainability is uncertain and project outcome cannot be rated as being satisfactory. DIMA's net income would have been negative in if the GoH (contrary to the terms of the GoH/ Municipality Subsidiary Loan Agreement) had not serviced debt payments to the Bank. DIMA's tariff rates are currently insufficient to meet operational and investment costs. The average tariff for waters and sewerage services/mi 3 was valued at LI.95 (US$0.10/mi 3 ), which in real terms remained positive, but well below the amount (US$0.39/mi 3 ) estimated at appraisal. An automatic mechanism, adjusted for inflation and free from political interference, needs to be established to ensure that tariffs recover operational and investment costs. Although DIMA has complied with most of the financial indicators during much of the implementation period, the financial rate of return on net fixed assets in operation at the project closing date was less than 3%, compared to the 7% mandated in the legal agreements. In addition, water metering, measured at 48% of total connections, remains well below the expected 100% coverage rate in the SAR, but DIMA expects this percentage to increase to 70% with the installation of an additional 9,000 meters by June tjnaccounted-for-water also remains very high, an estimated at 56% as opposed to the 30% predicted at appraisal. 4 The number of employees/1000 water connections has been reduced from 9 at appraisal to less than 6 at the project closing date, but recent limitations in civil service salaries and excessive interference by the municipality has resulted in the departure of several trained personnel to the private sector; (g) Sugarcane irrigation study. The health impact study regarding the contamination of Rio Sauce waters became irrelevant as sugarcane plantations lands were urbanized and consequently, the study was not undertaken; (h) Institutional strengthening of SANAA: This component was only partially implemented and its impact has been virtually non-existent. The elaboration of a national financial policy as well as the preparation of a sector investment program were not implemented due to the lack of a legal framework, which was needed to adequately incorporate these initiatives within the national sector plan. Limited action plans were developed, focusing exclusively on water supply and sewerage needs in Tegucigalpa, witlh the intent to: (i) improve commercial systems for water resources, including the improvement of information systems; (ii) reduce water losses; and (iii) undertake a DIMA estimates unaccounted-for-water at 45% in This amount is considerably lower than the estimate by independent accountants, which placed unaccounted-for-water at 56%. This difference might be explained by a non-revenue producing item for used water volume called "Fixed Services Billed Water/mi 3 " that DIMA accountants labeled as unaccounted-for-water.

15 study for improving primary water distribution systems in Tegucigalpa. The overall results of these initiatives have demonstrated to be poor as SANAA has recorded recurring financial deficits and unaccounted for water rates were estimated at 50% in The principal achievement of this component was the completion of the study on primary water distribution needs in Tegucigalpa, which was incorporated within an IBD-financed project, now in the final stages of construction The revision of the DIMA component in August 1990 resulted in an 8.0% increase in project cost. from US$42.3 million to US$45.5 million, including physical and price contingencies as well as interest and fees. This revision in project scope allowed for the adequate adjustment to smaller actual population and different urban growth patterns, optimize larger than expected water resources and provided greater service coverage, especially in poor urban areas. At the closing date, total project cost was US$48.3 million. 6% higher than the revised project cost, which can be attributed to inflation adjustments and delays associated with the early termination of a large civil works contract Economic Rate of Return. The ERR for this project was recalculated at 9.4%. This figure, although lower than the 13.5% projected at appraisal, is higher than expected for a project with such a long delay in implementation. The reasons for this are the reduced project scope that resulted in cost savings and the fact that the delay also postponed some of the largest investment items to the later years. C. Major Factors Influencing the Achievement of Project Objectives 1.09 The key factors that negatively affected the achievement of project objectives were the disbursement suspensions, low tariff levels, political interference and the devaluation of the national currency. The three years of inactivity due to the suspensions of disbursements to Honduras, plus a one year initial delay in effectiveness, deferred the construction of several physical works and impeded the attainment of institutional strengthening goals. Excessive political interference from the municipality, which caused a high management turnover, and the lack of an automatic mechanism to adjust tariffs rates to inflation, affected implementation of institutional subcomponents and the recovery of costs. Finally, the continued devaluation of the Lempira severely affected the capacity of DIMA to service loan payments which became due while the project was still under implementation. On the positive side, the delays allowed the project team to revise the scope of some of the subcomponents in line with the actual census figures and urban growth patterns, and with newly identified ground water resources. D. Project Sustainability 1.10 At the project's closing date, DIMA's managerial independence remained weak and long term financial sustainability appeared to be uncertain. This weak financial situation could affect the life expectancy and appropriate operation of the physical works completed under this project by limiting the resources available for operation and maintenance DIMA submitted to the Bank a very ambitious Operational Plan that includes: (i) updating water and sewerage networks; (ii) digitizing maps; (iii) developing a pilot programn to

16 - 6 - reduce unaccounted-for-water, especially in industrial and low income neighborhoods; (iv) systematizing operational and maintenance routines; (v) increasing metered water production and consumption; (vi) detecting illegal connections and updating user cadastre; (vii) modernizing operational, commercial, financial information reporting systems; and (viii) developing an institutional training program. Whether DIMA can implement such a plan under present institutional weakness remains uncertain. The project's sustainability could be increased with the participation of the private sector through a long-term concession arrangement which would reduce political interference and provide management stability. E. Bank Performance Preparation and Appraisal 1.12 Satisfactory. Although it could be argued that the Bank used overestimated population figures, at the time this was the only data available until the 1988 census was completed. However, the overall project design was well-conceived and adaptable to different growth patterns and more abundant water resources. For this reason the Bank's performance during preparation and appraisal was judged to be satisfactory. The unsuccessful completion of the project's institutional objectives was largely due to the long implementation period and excessive political interference, rather than a defect in project design. Supervision 1.13 Satisfactory. A total of staff week were devoted toward the supervision of this project or an average amount of 11.9 staff weeks per year, which is considered reasonable considering the long implementation and the two suspensions of disbursements By the end of the most recent suspension of disbursements, the Bank found that the GoH, the municipality of San Pedro Sula and DIMA were committed to reactivating the project. 5 The municipality, which had little to do with the suspension, was interested in completing the proposed physical works and increasing water service coverage to poor urban areas. the Bank's project team and management decided to reactivate the project despite macroeconomic difficulties existing in Honduras. The rationale for this decision was based on the fact that: (i) project design remained a viable mechanism to install sufficient capacity to meet long-term service needs, extend water and sewerage networks to poor urban neighborhoods and complete the project's institutional objectives; and (ii) the municipality would not have access to other sources of funding. Following this decision, the water supply, water distribution and secondary network subcomponents (A-C) were restructured to meet actual population and urban growth trends. In reactivating the project, the Bank demonstrated remarkable flexibility and responsiveness toward a committed client experiencing difficult circumstances. The Bank also assisted the Borrower in expediting procurement, advising on operational issues during supervision missions and providing Only one project in Honduras, the Municipal Development Pilot Project, was canceled after the suspension of disbursements was lifted. That project's physical works were effectively halted as other donors offered a similar loan under softer terms.

17 TA to improve institutional capacity and financial management. At the closing date, the project succeeded in achieving the identified physical objectives. However, despite the significant effort by the Bank's project team to improve the institutional capacity of DIMA, these activities were not sufficient to counteract excessive political interference, the long implementation period and macroeconomic instability. F. Borrower Performance Implementation 1.15 Unsatisfactory. The implementation of the loan was severely impeded by the two suspensions in loan disbursements that occurred from as a result of Borrower noncompliance with external debt payments, including default on payments to the Bank and CDC. Without the occurrence of these suspensions and the one year delay in effectiveness, project implementation period would have likely been closer to the seven year average for projects in this sector. The SANAA project component, which accounted to only 1% of the project cost, was only partially completed due in part to a lack of political will and the lack of resources in spite of the support received through a grant from the Government of France The municipality of San Pedro Sula and DIMA, as the implementing agency, were highly responsive and collaborated satisfactorily with the responsible financing institutions in the execution of the project's physical works. The creation of the Master Plan Coordinating Unit (UCPM) in 1992 was instrumental in the successful revision of project design and led to the successful implementation of the project's physical objectives. The UCPM was extremely efficient in preparing the terms of reference for consultants, executing procurement procedures for goods and services, monitoring consultant and construction contracts as well as administering Bank and CDC loans. Although the UCPM reported directly to DIMA's General Manager and was staffed with well qualified technical and financial personnel, it was not sufficiently integrated within the institution, which limited the adequate achievement of institutional strengthening objectives Although experienced institutional and financial management consultants were hired to provide technical assistance, DIMA was affected by the continued absence of a Financial Manager in the last 4 years of implementation. DIMA was deprived of a critical element in adopting financial policies to overcome liquidity problems and was hindered in the preparation of financial reports. Supervision missions were at times provided with incomplete and inconsistent financial data, which differed from monitoring indicators supplied by UCPM. In general, DIMA had constant difficulties in hiring and retaining competent managerial staff due to the inability to offer competitive salaries and career development prospects. The IFEP attributes the personnel and liquidity problems to a lack of autonomy and political interference at upper decision-making level. Discontinuity at the upper managerial levels has also been a negative factor for project implementation as the General Manager was changed five times between

18 G. Assessment of Project Outcome Unsatisfactory. Although the project was successful in installing sufficient capacity to provide continuous 24-hour water coverage to 96% of the population through 2005 and extending water service coverage to almost 100% of low income neighborhoods in San Pedro Sula, the project cannot receive a satisfactory rating as most of the institutional strengthening and financial objectives were not attained bringing into question the long-term sustainability of the project. DIMA, in spite of being considered the best water utility in Honduras, has encountered financial difficulties due to low tariffs and unaccounted for water losses, experienced a great deal of turnover in upper management levels and is susceptible to political interference by the municipality. The recalculated ERR for the project (9.4%) is below the SAR projections mainly as a result of the limited political will in increasing tariff levels to reflect real economic costs. H. Future Operations 1.19 Water supply in San Pedro Sula appears to be secured through the year However, the dependency of its water system on a costly and often unreliable electric power service, has prompted DIMA to look into the feasibility of a surface gravity water supply system, the Rio Lindo Regional Water System.6 At a cost of approximately US$85.0 million, this proposed project would serve gravity fed raw water to the Metropolitan Communities of the Sula Valley, including the San Pedro Sula area. Project feasibility is still subject to further technical and financial considerations and DIMA is looking with interest at the possibility of utilizing private sector participation under a BOT scheme. In regard to wastewater, DIMA, with the financial support from the IDB, has prepared final engineering designs for the extension of the sewerage network and the construction of sewage interceptors, storm water drainage and wastewater treatment plants to meet service needs until year Additional studies on the impact of upstream pollution on the Chamelec6n and Sunceri wells will be undertaken by the recently created Water Resources Management Division. The municipality of San Pedro Sula has also indicated interest in a long term arrangement between DIMA and a private sector operator. Such an arrangement would provide long term sustainability to DIMA and hence a subcomponent to assist in the preparation of a concession contract has been included as part of the proposed IDA/JIDB Water Sector Technical Assistance Loan, currently under preparation. I. Key Lessons Learned 1.20 The key lessons learned from the implementation of the Water Supply and Drainage Project in Honduras are the following: 1.21 Tle Needfor Independent Management. While the need for DIMA's independence was recognized by Bank Staff from its inception and during project implementation, frequent changes in management, difficulties in recruiting high level technical and financial staff due to low wages and numerous interventions by the Municipal Board were key factors that weakened the ability of DIMA to act as an autonomous institution and achieve financial sustainability. Greater In dry seasons, 70% to 80% of water used is pumped from wells.

19 - 9 - independence for DIMA may be achieved if the Municipality's plans for long term concessioning with the private sector are implemented Impact of Country Macroeconomic Problems on Project. Project implementation under a deteriorating macroeconomic environment is very difficult. Higher than projected inflation rates and currency devaluation represent a great challenge to maintain tariff levels in real terms and avoid a financial crisis. Inappropriate pricing policies will inevitably lead to decapitalization, inability to hire and retain qualified personnel and inadequate maintenance which will eventually increase the vulnerability of the system. An automatic and transparent tariff adjustment mechanism, insulated from political interference, needs to be developed to guarantee that water utilities maintain their financial viability under such conditions Need for an Integrated Project Coordinating Unit. A competent and organized project coordinating unit is a key element in successful project implementation, e.g. procurement and execution of physical works. DIMA's unit, established by the direct contracting of consultants by the Bank, was very efficient and diligent. However, the unit interacted exclusively with the General Manager, and hence was not adequately integrated with the rest of the institution. As a result, the institution was not strengthened with the presence of these high level professionals who were dismissed when the loan was closed Need for Careful Review of Project Sizing. The extended implementation of this project provided a unique opportunity to compare population projections to actual numbers obtained from the 1988 Census. As a result, it was determined that population projections available at appraisal were highly overestimated, which affected practically all design parameters and project cost. In this case, more reliable figures became available at the propitious moment to revise the size and design of the physical works and still achieve the expected water coverage levels. Even though alternative population estimates were not available at the time of appraisal, this problem highlights the need to carefully review the basic data and assumptions which determine project size and scope.

20 10 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) PART II STATISTICAL TABLES Table 1: Summary of Assessments A. Achievement of objectives Substantial Partial Negligible Not applicable Macro policies F F: I m Sector policies LI L I Financial objectives L L 1Z 0 Institutional development LI I x I Physical objectives mi L LI Poverty reduction mi L L I Gender issues I I LI m Other social objectives EL nn I I Environmental objectives FI L L-I Public sector management L LI m LI Private sector development LI LI E x Other (specify) LI L ni mx B. Project sustainability liklvl Unlikely Uncertain xiic C. Bank erfornance Highly Satisfactory Satisfactory Deficient Identification C] m L Preparation assistance LI m L Appraisal IE LI Supervision L EI D. Borrower Performance Highly Satisfactory Satisfactor Deficient Preparation LI E L Implementation L XI Covenant compliance El D Operation L LIE Highly HIY E. Assessment of outcome satisfactory Satisfactory Unsatisfactory Unsatisfactory LI LI LI

21 11 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of Status l.a pproval l Preceding operations N/A N/A N/A Following operations l 1. Municipal (1) TA to strengthen municipal financial management; 1985 Closed Development Pilot (2) Credits for pilot investment in 4 municipalities; and Project (L2583-HO) (3) pre-investment fund for feasibility studies Table 3A: Project Timetable Steps in project cycle Date planned Date actual/ latest estimate Identification (Executive Project Summary) N/A 6/83 Preparation Appraisal 6/83 6/83 Negotiations 1/9/84 3/12/84 Board presentation 5/1/84 5/22/84 Signing 9/84 12/7/84 Effectiveness 9/84 7/8/85 Project Restructuring N/A 8/90 Loan Closing 6/30/91 6/30/95

22 12 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 3B: Project Restructuring by Component Component Estimated At Appraisal Restructured in August 1990 Modified in 1992 and 1994 A. Water Supply Construction of 18 wells 15 wells constructed Improvements Rehabilitation of 7 wells 7 wells rehabilitated' Construction of 3 Chlorination stations Construction of 3 chlorination stations. TA to evaluate acquifer Chamelec6n and Sunceri wells capacity and design deep wells incorporated into project. B. Water Rehabilitation of 2 water Rehabilitation of 2 water Transmission, intakes and transmission mains intakes and transmission mains Distribution and were remodeled. Storage Construction of 46 km of Construction of 64 km of Construction of 54 km of primary water distribution primary water distribution primary water distribution mains mains. mains Construction of 2 booster-pump stations Eliminated from project. Construction of 2 distribution Eliminated construction of the Reduced to four tanks with storage reservoirs with total tank at Sunceri (13,200m 3 ) 7,000m 3 capacity. capacity of 30,000 m 3 Added construction of storage tank at Santa Ana (1,800m 3 )) C. Secondary Construction of 15 km of Construction of 18 km of Construction of 27.5 km of Water and secondary water distribution secondary water distribution secondary water distribution Sewerage mains. mains Networks and Service Construction of 10 km of Eliminated from project Connection secondary sewerage connections in low income areas. Repair or replacement of defective secondary water distribution mains. Install 25 standpipes Install 5000 water service connections Install 4000 sewerage service connections Eliminated from project Eliminated from project 15,000 water service connections Eliminated from the project. Install 24,000 meters and 6 Install 24,000 meters and 52 master meters master meters. D. Storm water Construction of 3 km of a Eliminated from the project but Drainage storm water drainage completed under IBD financing l interceptor.

23 13 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 3B: Project Restructuring by Component (Cont'd) Component Estimate at Appraisal Restructuring in August 1990 Modified in 1992 and 1994 E. Leak Acquisition and utilization of Completed before project Detection and leak detection equipment restructuring Mapping of Distribution Provision of technical assistance Completed before project System to prepare water distribution restructuring. maps, to set up a leak detection program and train DIMA staff in leak detection. F. Institutional Institutional improvement of Institutional improvement of and Operational DIMA through TA provision. DIMA through TA provision. Improvement of Acquisition and utilization of Acquisition and utilization of DIMA operation and maintenance operation and maintenance equipment for water supply, equipment for water supply, sewerage, drainage. sewerage, drainage. G. Sugarcane Preparation of a study on health Study became irrelevant as Irrigation Study hazards resulting from the use sugarcane lands were urbanized. for sugarcane irrigation for Rio Sauce polluted waters. H. SANAA Develop Action plan to improve Completed before project Strengthening management, operations, restructuring. accounting and commercial procedures. Formulation of Financial policies for the national water supply and sewerage sector. Assessment by SANAA of national water supply and sewerage investment needs. Evaluation and implementation of SANAA's training program. Preparation and implementation of program to reduce water losses in Tegucigalpa. Preparation of investment project to address infrastructure needs Table 4: Loan Disbursement: Cumulative Estimated and Actual (US$ millions) FY 85 FY 86 FY 87 FY 88 FY 89 FY 90 Appraisal estimate Actual Actual as % of estimate 0.0% 27% 60% 58% 55% 51% Date of final disbursement 11/28/95 FY 91 FY 92 FY 93 FY 94 FY 95 FY 96 Appraisal estimate 19.6 N/A N/A N/A N/A N/A Actual Actual as % of estimate 50% N/A N/A N/A N/A N/A Date of final disbursement 11/28/95

24 14 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 5: Key Implementation Indicators 1. Key implementation Estimated At Appraisal Estimated At Project Restructuring Actual indicators in the SAR (August 1990) A. Water Supply Construction of 18 wells Construction of 15 wells 15 wells constructed Improvements Rehabilitation of 7 wells No change 7 wells rehabilitated' Construction of 3 Chlorination stations No change 3 chlorination stations are under construction Provision of TA to evaluate acquifer capacity Incorporation of the Chamelec6n and Provision of TA to evaluate acquifer capacity and and design deep wells Sunceri wells into project design deep wells and Chamelec6n and Sunceri wells have been incorporated B. Water Rehabilitation of 2 water intakes and Remodeled the rehabilitation of 2 water Expected to be completed by June 1996 Transmission, transmission mains intakes and transmission mains Distribution and Storage Construction of 46 km of primary water distribution mains Increased to construction of 64 km of primary water distribution mains and km of primary water distribution mains constructed Construction of 2 booster-pump stations km of pumping lines Eliminated upon project restructuring. N/A Construction of 2 distribution storage reservoirs with total capacity of 30,000 m 3 Modified upon project restructuring were Completed construction of four storage tanks reduced to the construction of four storage with 7000m 3 capacity tanks with 7000m 3 capacity C. Secondary Water Construction of 15 km of secondary water Construction of 18 km of secondary water Built 27.5 km of secondary water distribution and Sewerage distribution mains. distribution mains mains Networks and Service Connection Construction of 10 km of secondary sewerage Eliminated from the project connections in low income areas. N/A Repair or replacement of defective secondary water distribution mains. Installation of 25 standpipes Eliminated from the project Eliminated from the project N/A N/A Increased to water service Installation of 5000 water service connections connections water service connections Installation of 4000 sewerage service Eliminated from the project, but will be N/A connections completed with IBD Financing 27,500 meters had been acquired, but only Installation of 24,000 meters and 6 master No change 18,195 have been installed. The remainder meters are expected to be installed by June additional wells and a new surface water production and transmission scheme were built using DIMA resources.

25 15 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 5: Key Implementation Indicators I. Key implementation Estimated At Appraisal Estimated At Project Restructuring indicators in the SAR (August 1990) Actual D. Storm water Construction of 3 km of a storm water Although component was eliminated from N/A Drainage drainage interceptor the project, 3.2 km were completed under Improvements IBD financing E. Leak Detection and Acquisition and utilization of leak detection No change Acquired leak detection equipment Mapping of equipment Distribution System Provision of technical assistance to prepare No change Provided TA to prepare water distribution maps, set up leak detection program and train water distribution maps, to set up a leak DIMA staff. Network maps have become detection program and train D1MA staff in obsolete and the Leaks Control Section has been leak detection. reduced to minimum levels. F. Institutional and Institutional improvement of DIMA through No change Tariff rates are insufficient to meet obligations. Operational TA provision. DIMA's net income would have been negative in Improvement 1994 and 1995 if the GoH had not serviced debt of DIMA payments to the Bank. Acquisition and utilization by DIMA of No change In execution operation and maintenancequipment for water supply, sewerage, drainage. G. Sugarcane Preparation of a study on health hazards The health impact study regarding the N/A Irrigation Study resulting from the use for sugarcane irrigation for Rio Sauce polluted waters contamination of Rio Sauce waters becane irrelevant as sugarcane lands were urbanized H. SANAA Develop Action plan to improve No change Completed Institutional management, operations, accounting and Strengthening commercial procedures Formulation of Financial policies for the No change Not implemented national water supply and sewerage sector Assessment by SANAA of national water No change Not implemented supply and sewerage investment needs and preparation of investment projects to address identified needs Evaluation and implementation of SANAA's No change Completed training program Preparation and implementation of program No change Plan developed and being implemented under to reduce water losses in Tegucigalpa IBB financing.

26 16 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 6: Key Indicators for Project Operations L. Key implementation indicators in Estimated Actual the SAR (Project closing date ) (Project Closing Date ) A. Water Supply Improvements Volume Water Produced: 31.3 million m- /yr Water Produced: 41.3 million m' /yr Volume Water Sold: 21.9 million m 3 /yr Water Sold: 22.8 million m 3 /yr B. Water Transmission, Water Produced/Capita: 145 lpd Water Produced/Capita: 497 Ipd Distribution and Storage Water Consumption/Connection: 44.0 m 3 /mo. Water Consumption/Connection 47.3 m /mo. l Water Consumption: 21.9 million m 3 /yr Water Consumption: 36.0 million m3 /yr C. Secondary Water and Total Population: 500,000 Total Population: 405,000 Sewerage Networks and Residents with Water Connections: 415,000 Residents with Water Connections: 390,000 Service Connection Water Connections: 41,500 Water Connections: 63,500 Inhabitants/Water Connection: 10 Inhabitants/Connection: 6.1 Water Coverage: 83% Water coverage: 96.3% Residents with Sewerage Connections: 340,000 Residents with Sewerage Connections: 260,000 Sewer Connections: 34,000 Sewer Connections: 43,000 Inhabitants/Sewerage Connection: 10 Inhabitants/Sewerage Connection: 6.0 l Sewerage Coverage: 68% Sewerage Coverage: 64.5% D. Storm water Drainage N/A N/A Improvements E. Leak Detection and Mapping N/A N/A of Distribution System F. Institutional and Operational Avg. tariff water and sewerage services': US$0.39/m' Avg. tariff water and sewerage services': US$0.10/m' Improvement of DIMA Unaccounted for water: 30% Unaccounted for water: 56% Meter Coverage: 100% Meter Coverage: 48% Total Employees: 373 Total Employees: 385 Employees/1000 Connections: 9 Employees/1000 Connections: 6 Month Sales in Accounts Receivable: 3 Month Sales in Accounts Receivable: 5 Average Revenues m 3 Sold: 0.80 Average Revenues m 3 Sold: 1.21 Operating Ratio: 66.0% Operating Ratio: 49.7% Debt Service Ratio: 1.82 Debt Service Ratio: 4.73 Rate of Return: 7% Rate of Return: 3% % Contribution to Investment: 23.0% % Contribution to Investment: 29.7% G. Sugarcane Irrigation Study N/A Study became irrelevant as lands were urbanized. H. SANAA Strengthening N/A N/A 1. In 1984 prices

27 17 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 7: Studies Included in Project Study Purpose as derined at Status Impact of study appraisal redefined Sugarcane irrigation study Evaluate health hazards The study was not This study was made irrelevant associated with usage of undertaken. as sugarcane lands were polluted Rio Sauce waters for urbanized sugarcane irrigation and plan of action to alleviate hazards Water Resources Evaluate acquifer resources 100% Disbursed Rational usage of acquifer resources. Led to incorporation of Sunceri and Chamelec6n wells into the project. Leak Detection Program Detection and remove leaks 100% Disbursed Reduced leaks Mapping of Distribution Update distribution system 100% Disbursed Updated distribution system, System but maps have become obsolete Tariff Review Design Tariff Structure I100% Disbursed Improve technical understanding of tariff structure, but tariff remains under cost-recovery levels. Hydraulic Review Evaluate the primarv 100% Disbursed Revision of project design to distribution network better meet water needs and optimize resources. Meter Procurement Obtain accurate meter 100% Disbursed Improved bidding process readings Bidding Documents Assist in procurement process 100% Disbursed Elaborated bidding documents Works Planning Provide TA in administration 100% Disbursed Project works executed and coordination of project works Administration Improve project I 00% Disbursed Some administrative administration improvements. Inventory Improve management of 100% Disbursed Improved inventory procedures warehouses Job Titles and Salaries Evaluate classification ofjob 100% Disbursed Improved personnel policies titles and review salary structure Water Treatment Plants Prepare contract 100% Disbursed Assisted operation of "turnkey" water treatment plants Chamelec6n-Sunceri Design of pumping 100% Disbursed Completed designs and wells in Wells connections to wells operation Stage I Designs Elaborate Stage I designs and I 00% Disbursed Most works completed, some to elaborate budget for works finished by June Stage II Designs Elaborate Stage 11 designs 100% Disbursed Most works completed some to be finished by June DIMA Financial Analysis Delineate financial projectionls 100% Disbursed Improved decision-making and for DIMA planning, but still subject to political interference. Tariffs l_. below cost-recovery levels.

28 18 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 8A: Project Costs' Appraisal estimate (US$M) Revised Estimate Actual (US$M) April 1984 August 1990 June 1995 Item Local Foreign Total Total" Local Foreign Total costs costs costs costs San Pedro Sula Component ILA 2L9 383 A. Water Supply B. Water Distribution C. Water & Sanit. Network D. Storm/Drainage E. Maps/Leak Detection F. Inst. Strengthening G. Sugarcane Irrigation Study H. SANAA Component Physical Contingencies Price Contingencies Subtotal (Net of Interest/Fees) Interest/Fees TOTAL Based primarily on disbursement and cost sharing data 2. Estimate project costs in local and foreign currency are not available for this period. Table 8B: Project Financing' Source Appraisal estimate Project Restructuring Actual estimate (US$M) _(US$M) Estimate (US$M) l IBRD CDC Norwegian Grant French Grant (DREE) DIMA SANAA TOTAL _3 _ 1. Based on cost sharing data.

29 19 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 9: Economic Costs and Benefits The Economic Rate of Return (ERR) at appraisal: 13.5% The Economic Rate of Return at the completion of the project: 9.4% The same assumptions listed in the SAR were used to calculate the ERR for the implementation completion report, which included: (i) (ii) (iii) increased consumption over 1983 consumption is attributed to the project; benefits estimated from tariff and connection fee revenues and users' contribution to investments; TA costs not included, and (iv) investment costs were calculated using this methodology: (a) 100% of all water related project expenditures and 60% equipment; (b) well rehabilitation is assumed every 10 years at 40% of original cost and equipment at 100%. This assumption has been relaxed as the well rehabilitation sub-component was restructured; (c) Consulting costs for leak detection and construction supervision, 100%; (d) cost of secondary networks and connections not included. The revised analysis incorporated the delays in implementation and changes in scope and costs of project components.

30 20 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 10: Status of Legal Covenants Agreement Section Cove Present Original Revised Description of covenant nant Status fulfillment fulfillment Comments Type date date Municipal 2.02 (a) 10 C 06/95 Employ consultants to assist in project Contracts are in execution Project implementation. Agreement 2.02 (b) 10 CP 2/28/95 6/95 Employ consultants to serve as DIMA's (1) Contracts are in execution manager of finance and accounting; (ii) Manager of engineering and operations 2.05(b)(i) 9 C 6/92 Maintain records and procedures to record and monitor DIMA's subprojects 2.05(b)(iii) 9 C 6/95 Furnish to the Bank at regular intervals, not less frequent that semi-annually, information regarding DIMA sub-project 2.05(d) 9 C 12/31/91 6/95 After completion of DIMA's subproject, not Sent IFEP on 6/95 later than six months after closing date, furnish to the Bank a Project Completion Report CP 6/30/95 6/95 Update DIMA's record of private wells and 60% of the private firms paid. strengthen its registration and fee collection Collection impaired by lack of procedures. legal authority, which is being addressed by the Sector Law to be submitted to Congress 2.11(a) 5 C 2/28/85 6/92 Submit to the Bank a cost recovery mechanism for drainage services 2.11(b) 2 NC 11/30/85 6/92 The ratio of DIMA's accounts receivable The ratio of DIMA's accounts month's sales should not exceed 4 in 1987, receivable is at 5.0 at closing 3.3 in 1986 and 3.0 in 1987 and thereafter date 2.13(a) 2 CD 2/28/95 6/92 Furnish to the Bank revised water charge policy for unmetered consumption 2.13(b) 10 CP 6/30/85 6/92 Implement water charge policy referred to in Water tariffs remain below Section 2.13 cost recovery levels 2.14(a) 9 NC 12/31/87 6/92 Prepare study referred to in part G of the Study became irrelevant as Project sugarcane lands were urbanized 2.15(a) 10 CP 12/31/85 6/94 Prepare plan of actions for billing and Municipality is in the process of collection of civil works and goods of Part C billing and collecting of the Project 2.15(b) 10 CP 6/30/86 6/94 Implement plan of action referred to in Municipality is in the process of Section 2.15(a) billing and collecting l

31 21 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 10: Status of Legal Covenants Section Cove Present Original Revised Description of covenant nant Status fulfillment fulfillment Comments Type date date Municipal 2.16(a) 9 CD 6/30/85 6/92 Furnish to the Bank a study on DIMA's Project recruitment and personnel policies Agreement 2.16(b) 10 C 12/31/85 6/92 Implement plan of action referred to Section 2.16(c) 2.16(c) 9 C 6/30/85 6/94 Furnish to the Bank, DIMA's manpower DIMA has reduced the # of requirements and training needs employees/1000 connections, but has had difficulties in hiring and recaining key mgmt staff 2.16(d) 10 C 9/30/85 6/92 Implement referred to in Section 2.16(c) 2.16(e) 10 C 3/31/85 6/92 Employ data processing staff for DIMA 2.16(f) 10 C 2/28/85 6/92 Employ human resources manager for DIMA 2.17(a) 10 C 2/28/85 6/92 Reorganize DIMA in accordance with the Acuerdo Municipal 2.17(b) 9 C 2/28/85 6/92 Furnish to the Bank starting balance sheet for DIMA 2.18(a) 9 C 2/28/85 6/92 Submit to the Bank a plan for settlement of bills the MC owes DIMA 2.18(b) 10 C 6/30/85 6/92 Carry out a plan referred to in Section 2.18(a) 2.18(c) 10 C 6/30/85 6/92 Municipality will pay current bills for water Water rates deducted from elec. supply, sewerage and drainage services bills paid by the municipality. 2.18(d) 10 SOON 3/31/85 6/93 Install meters to measure municipal 18,195 installed with an consumption additional 9,000 meters to be installed by June (a) 10 C continuous 6/93 Separate accounts reflecting expenditures of the Loan Account will be maintained 4.01(b) 9 C 6/90 6/96 Records of separate accounts reflecting expenditures of the Loan Account will be retained, until one year after the Closing Date. 4.02(a) 1,2,9 CD 6/94 Furnish to the Bank audited financial Last audit report submitted on statements for DIMA annually. April 21, d) 1,2,9 CD 12/94 Furnish to the Bank financial statements of Last audit report submitted on the Municipality for each fiscal year, not April 21, 1995 later than four months after the end of year. l

32 22 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 10: Status of Legal Covenants Section Cove Present Original Revised Description of covenant nant Status fulfillment fulfillment Comments Type date date Municipal 4.03(b) 9 NC 4/30/85 6/94 Review adequacy of tariff structure and rates Tariff rates do not meet Project annually. economic costs or inflation Agreement l 4.04(a) 2 NC 6/92 Ensure that MC's total revenues are DIMA's net income would have sufficient to cover the sum of total expenses. been negative in if debt service requirements and capital the GoH had not serviced debt l expenditures not financed by borrowings. payments to the Bank. 4.04(b) 9 C N/A Submit semi-annually to the Bank five-year forecast of MC's revenues and expenses C N/A Incur no new debt for DIMA unless its net revenues to debt service requirement is 1.5 or greater C N/A Not undertake for DIMA any capital expenditures in excess of US1.0 million l annually without the approval of the Bank C 12/31/85 N/A Revalue annually DIMA's net fixed assets. 4.08(a) 9 C 6/30/86 6/92 Furnish to the Bank, an evaluation of DIMA insurance requirements. 4.08(b) 10 C 6/30/85 6/92 Put into effect insurance program referred to in Section 4.08(a). Key Covenant Types: I Acountslaudit 8 Indigenous people 2 Financial performance/generate revenue from beneficiaries 9 Monitoring, review and reporting 3 Flow and utilization of project funds 10 Project implementationot covered by categories Counterpart funding 11 Sectoral or cross-sectoral budgetary or other resource allocation 5 Management aspects of the project or executing agency 12 Sectoral or cross-sectoral policy/regulatory/institutional action 6 Environmental covenants 13 Other 7 Involuntary resettlement Status: C CD after delay NC SOON CP = complied with = complied with delay = not complied with = Compliancexpected in reasonably short time = complied with partially

33 23 IMPLEMENTATION COMPLETION REPORT HONDURAS: WATER SUPPLY AND DRAINAGE PROJECT (LOAN 2421-HO) Table 11: Bank Resources: Staff Inputs 1 Stage of Planned Actual project cycle Weeks US$ Weeks US$ Through appraisal N/A N/A N/A N/A Appraisal - Board N/A N/A ,000 Board - effectiveness N/A N/A ,000 Supervision N/A N/A ,200 Completion N/A N/A ,600 TOTAL N/A N/A , Due to the inordinately long period for project implementation, precise staff inputs for appraisal to supervision are not available. The following data reflects estimates based on confirmed project missions Table 12: Bank Resources: Missions Performance Rating Stage of Month/ Number of Days in Specialized Implemen- Development Types of project cycle year persons field staff skills tation status impact problems Through N/A N/A N/A N/A N/A N/A appraisal Appraisal to 6/ FNA; EGR N/A N/A Board 1/ FNA 3/ FNA 5/ FNA; EGR Board to 9/ FNA; EGR N/A N/A effectiveness Loan Officer 2/ FNA; EGR N/A N/A Supervision 10/ EGR N/A N/A 7/ FNA; EGR N/A N/A 10/ FNA; EGR 5//87 N/A N/A N/A 8/ N/A N/A N/A 11/ N/A 2 1 6/88 N/A N/A N/A 2 2 Disbursements suspended 3/ FNA; EGR 2 2 Disbursements 10/89 N/A N/A N/A 3 2 suspended. 5/ FNA; 2 EGR 3 2 Disbursements 8/ EGR suspended 5/ EGR 2 2 1/ FNA; EGR / FNA; EGR 2 2 2/ FNA; EGR 2 2 7/ FNA; EGR 2 2 3/ FNA; EGR 2 2 7/ FNA/EGR 2 2 4/ FNA; EGR S S Completion 6/ FNA; EGR S S 12/ EGR S S 12/ FNA; EGR S S FNA = Financial Analyst; EGR = Engineer

34 HONDURAS Appendix A WA TER SUPPL YAND DRAINAGE PROJECT (Loan 2421-HO) Supervision Mission AIDE MEMOIRE 1. A World Bank mission integrated by Ventura Bengoechea and Alfonso Zavala visited San Pedro Sula during December 4-8, The main objective of the mission was to supervise the progress made on the preparation of the Informe Final de Ejecucion del Proyecto (IFEP), the borrower's project completion report, following the loan closing on June 30, A second objective was to review the progress made on the completion of the last works being financed by the Commonwealth Development Corporation (CDC), who agreed to extend its loan until June 30, 1996, and by DIMA. Following are the mission's main findings and conclusions. IFEP Preparation 2. DIMA presented to the mission a draft of the IFEP, with its corresponding technical and financial annexes. The document appeared to be very complete and it will be presented to the General Manager shortly for his final review. DIMA agreed to send the final document to the Bank not later than December 22, The IFEP will be included as part of the Implementation Completion Report (ICR) of the project. 3. DIMA also presented to the mission a draft of the Operations Plan which will be submitted as an annex to the IFEP. The mission reviewed the document and suggested that DIMA expands the scope of the document to include more practical recommendations regarding water resources management, especially as it refers to the water supply, distribution, metering, billing and reduction of unaccounted for water. Progress of Physical Works 4. The project is nearly completed. The only works not yet completed are the storage tanks of phase II now under construction and the completion of a few activities which resulted from the cancellation of the contract with Cartellone, which were contracted as indicated on paras. 8 and 9. All these works are expected to be completed by the end of March Following is a summary of the progress made on each of the components of Phase II: (a) Purchase of DI pipe and accessories for the Rio Piedras y Santa Ana systems (100% completed); 1 Ventura Bengoechea joined the mission the last two days.

35 2 (b) Purchase of pumps and chlorination equipment for the Chamelec6n and Sunceri Wells (70% completed); (c) (d) (e) Construction of intake works and installation of the transmission mains (80% completed); Construction of pump stations (100% completed); and Construction of circular reinforced concrete storage reservoirs (40% completed). 6. DIMA informed that the surface intake of "El Zapotal", with a potential of 400 lps (and a safe yield of 165 lps), had been completed with their own funds and the Santa Ana WTP, financed with a Japanese Grant was well very advance. DIMA also informed that its General Manager and the Mayor of San Pedro Sula where that week in Japan to sign the second grant agreement for the construction of the Rio Piedras WTP. Once these two projects are in operation and with the works financed by the project, San Pedro Sula will have a good quality supply of water with a safe yield of 3,200 lps. These resources will be sufficient to supply the City of San Pedro Sula through the year 2005 under the actual population projections. Bidding of Remaining Works 7. DIMA informed about the bidding of the works remaining from the original contract with Cartellone which are summarized below: 8. Licitaci6n Puiblica DI-015/95, awarded on November 23, 1995 to Nacional de Ingenieros for L697,456.37, includes the following: (i) Line to El Payaso Tank (300m x 450mm 0) (ii) Lower Network / Pipe No.28 (350m x 400mm 0) (iii) Santa Ana main (300m x 450mm 0). 9. Licitacion Piiblica DI-016/95, tentatively awarded to CONTEC for L2,162,300.00, now in the process of being ratified, includes: (i) (ii) (iii) Reconstruction of pavements Rehabilitation of sidewalks, curbs, drainage troughs, land escaping and cleaning. Completion of pipe interconnections, cleaning and disinfection. Project Cost and Financing of the Current Works

36 3 10. The total cost of the works still pending, as of September 30, 1995, was L39.2 millions (Annex 1) which will be financed with funds from CDC (about L30 millions) and DIMA's own funds. As of this date, the total cost of works in process is estimated at US$1,100, The total project cost, based upon the preliminary data contained in the IFEP, is estimated to be around US$48.5 millions. From the preliminary data in the IFEP too, it is estimated that the project cost increased by 18% compared to its original cost. Disbursements 12. The Bank granted DIMA a four month grace period to submit disbursement requests after the June 30, 1995 loan closing date. This period is over and the mission was informed that a balance of US$1,150,000 would remain undisbursed of the original US$19.6 million loan. DIMA's Operational and Financial Management 13. DIMA's financial projections show a positive net cash flow for 1995 thanks to the assistance of the Central Government with the debt service. If DIMA assumes the debt service payments in the future, as established in the loan agreement, the financial projections would show a deficit unless operational revenues are increased. The mission recommended DIMA to revise its current tariff structure which is not adequate to deter high volume consumption. This tariff study shall be done in connection with the financial projections to study the impact of new rates under different demand elasticity scenarios 14. DIMA informed the mission about their intention to contract services such as meter reading, billing and collection and operational maintenance with the private sector. The mission recommended to DIMA that consistent with the conversations in Washington in April 1995 and with the sector reforms being proposed by the Central Government, consideration should be given to a long term concession with the private sector. The mission considers this a unique opportunity to begin this process because: (i) the possibility of tapping TA funds from the proposed Water and Sanitation Sector T echnical Assistance Credit to prepare the concession studies and documents; (ii) the need to increase the efficiency to improve the services without significantly increasing water rates; and (iii) investment needs to implement the wastewater treatment and environmental protection facilities planned with an estimated cost of US$50 millions. The mission expressed its concern that if the services are contracted individually, they may not get the efficiency gains desired which they could obtain from an integral concession with a proven private sector operating company. Compliance with Loan Covenants 15. The mission found DIMA in compliance with all except: 2.05 (b) (iii) of the Project Agreement with the Municipality related to the submittal of the Semiannual Report which is

37 4 past due; 3.01 (b) of the Loan Agreement related to the Subsidiary Agreement between the GoH and the Municipality for DIMA' s repayment of the debt o the Central Government; and 3.16 (a) of the Loan Agreement which refers to the study on the personnel and training needs that never took place because of the limitations imposed by the Civil Service laws. In relation to the semiannual report for the period ended June 30, 1995, DIMA agreed to submit it not later than December 22, In relation to servicing the debt DIMA will have to increase operational revenues and reduce costs as discussed earlier (Para. 13). San Pedro Sula, Honduras December 8, 1995 DIMA:: World Bank Lic. Guillermo Gale, Acting General Manager Ing. Ventura Bengoechea Task Manager (TRANSLA TED FROM ORIGINAL DOCUMENT IN SPANISH)

38

39 Appendix B MUNICIPAL WATER DIVISION San Pedro Sula, Cortes FINAL PROJECT EXECUTION REPORT HONDURAS WATER SUPPLY AND SEWERAGE PROJECT Loan No HO August 1995 (Translatedfrom its original version in Spanish)

40 PRINCIPAL ABBREVIATIONS AND ACRONYMS IAD MASPS IDB IBRD CDC DIMA DSA ICB INA LCB MSP MSPS PAHO SANAA SECPLAN Intenational Development Agency Metropolitan Area of San Pedro Sula Inter-American Development Bank International Bank for Reconstruction and Development Commonwealth development Corporation Divisi6n Municipal de Aguas Direccion de Saneamiento Ambiental International Competitive Bidding Instituto Nacional Agrarian National Competitive Bidding Ministry of Public Health Municipaliaty of San Pedro Sula Panamerican Health Organization National Autonomous Service of Acueductos and Alcantarillados Secretary of Plannification

41 Brief of the Project Execution 1 -The Government of Honduras, as of December 7, 1984, signed the Loan Agreement HO with the International Bank for Reconstruction and Development (IBRD) and as of January 2, 1985, the Loan L with the Commnonwealth Development Corporation (CDC), to cofinance the Water Supply and Sewerage Project for the city of San Pedro Sula. The termination of the project was scheduled for December 31, 1990, which, for causes outside of DIMA's control, was prolonged, in the component of IBRD, until June 30, 1995 and on the CDC, until June 30, The Project was implemented in two periods, the first comprehended the period and the second one comprehended in between the period of , with an intermnediate period of reactivation from 1990 to The Project comprehends extensions and improvements of the now existent systems of drinkable water and sewerage existent, and includes a component for institutional development Period During this period, in the drinking water component, the following works, goods and services were bid and awarded: a) Perforation of Wells, b) Network Construction, c) Distribution and Conduction, d) Supply of piping, valves and accessories and e) Design and Supervision of the Storage Tanks. In reference to the component of Institutional Strengthening, the following was awarded: a) Mapping of water distribution system, b) Exploration and evaluation of groundwater, c) Supervision of the Project, d) Detection and Control of water leaks and e) All of the Consultancies necessary for the Institutional Strengthening of DIMA. Of all the above, only the construction of wells and the Institutional Strengthening were implemented during this period. In this period CDC and IBRD, for mora in the payment of the Government external debt, suspended as of November of 1987 disbursements to the on-going loans, continuing with the implementation of the Project in a limited form with their own funds. See Semestral doc., ISJ95, Annex No. 7 of Apendix A. (June 30, 95) Period During this period, the government negotiated the adjustment of the external debt with the credit organisms, reaching the reactivation of disbursements of the World Bank in the first semester of 1991 and with CDC on January 22, Previous to the negotiations to reactivate, DIMA updated the Project, adapting it to the new sources of groundwater in Sunceri and Chamelec6n, that modified, with the approval of the IBRD, the inital considerations of the SAR. The actualization divided the job into two stages whose final design was done through direct contracting of Professional Services of two independent consulting firms for the distribution network and the transmission lines from the Chamalec6n and Sunceri wells, respectively, that constituted the works of the First Stage. (Fig. No. 1). 4. In December of 1992 it was contracted, directly, the Professional Services of a National Consulting firm, to complete the works of Stage 1, consisting of: a) Construction Blueprints, b) Determination of quantities and cost estimate, and c) soil investigations and identification of existing infrastructure. At the same time, DIMA: i) Renegotiated and actualized the acquisition of Ductil Iron Piping and Accessories, ii) Elaborated the ICB Documents for the acquisition of the pipe for the Secondary Network and the construction of the Stage 1, and iii) Elaborated the documents for the preparation of the Final Designs, selection of Supervision of the Project and Documents for the

42 aquisition of Goods and Services for the Stage II of the Project. See Fig. No. 1 and 2 (Storage tanks, pump stations, intakes, tranmission lines and water treatment plants) Period. The construction works for the First and Second Stages of the Project were contracted during this period. As of June 30, 1995, there is a 97% advance in the execution of the First Stage and a 30% in the works of the second Stage. The chronological detail of the contracts can be seen in Annex No. 2 of Appendix A. ISJ95. Summary of the Project description and its objectives. 6. In the Loan Agreement with the Bank, the Project is divided into two components: The first and bigger, is the Improvements to the Systems of Drinking Water and Sewerage of the city of San Pedro Sula, that includes a Technical Assistance component for the Institutional Strengthening of DIMA and the second one, a Technical Assistance to SANAA to support the formulation of a solid financial policy at a national level in the water sector, implementation of the recommendations considered necessary to improve its financial and operational management and to improve the planning at a national level. 7. The objectives of the Project contained in the Staff Appraisal Report included: a) to make DIMA a technically strong institution and financially independent through the strengthening of its administration, b) To eliminate the water shortage that affects the majority of the population of San Pedro Sula through the expansion of the drinking water system, c) To provide the water service to the growing population of the urban area of San Pedro Sula, estimated to reach inhabitants in 1994, by expanding the distribution network, d) to provide with drinking water and sewerage connections to the poor population of lower income neighborhoods and e) To reduce the floodings (that affect the population of low income) by expanding the drainage of storm waters system (See Fig. No. 3) 8. Due to delays in its execution and the findings of the evaluation of the source of ground water, the original conception of the project, its objectives and costs were modified with the purpose of actualize and adequate it to the financial circumstances. Highlights of the program of actualization include: i) In 1990, are excluded the components of Drainage and the Study of Risk in the Watering of the Sugar Cane with wastewater. This same year, DIMA presents to the Bank the modifications to the original design such as: a) Incorporation of the wells fields of Sunceri and Chamelec6n, b) Incorporation of the Sunceri and Chamelec6n tranmission lines, c) Modification of the storage volumes and d) Separation of the distribution network by pressure zones controled by tanks instead of pressure regulating valves. 9. The Reductions on the Project costs is made through the elimination of some components of the system, which not only affect its objectives but make its execution feasible, taking place as described: The first one in 1990, in the components B and E, thus: In Component B the length of the tubing in the intermediate network is reduced in 5 Km and in Component E they are substituted for the updating of the blueprints pending network mapping, the field restitution of the photogrametric works with DIMA's personnel. The second one in 1992, as result of the scope revision done by Mena and Manucci of the design parameters and is used in the dimensioning of the Drinking Waters System, that modify the components A and B of the Project, thus: Component A: a) of 6

43 wells built in Chamelec6n and 4 en Sunceri, the number of well to operate was reduced to 6 (4 and 2 respectively) and b) As a consequence of the previous, the acquisition of equipment and construction of civil work was reduced in the same amount; in the Compoent B: Reduction of the diameters of the pumping tubing, b) Reduction of 11.8Km of tubing, by elimination of tubes in the distribution circuits of the Alta, Media y Baja networks. The third one and the last one in 1994, together with the Supervision Mission of the World Bank, that suppress some of the works of the physical work of the stage II of the project, in Component B, thus: a) Santa Ana Intake b) Conducting Line of Santa Ana, c) Tanks Santa Ana II and III, d) Line to tanks Santa Anall-Santa Ana III, e) Line of Distribution Santa Ana III to lower areas and f) Lines and Pump Stations of the Mesetas-Rio de Piedras-Presentaci6n Centeno. See Table No. 1. Analysis of the Project Objectives 10. The objective to eliminate the shortage and to guarantee the water supply to the population of San Pedro Sula will be reached in January 1996 with its completion, date on which the city will count with lm 3 /s additional of water for a total capacity of production of.3.2 m 3 /s and with only 63,390 connctions. The SAR overstimated the urban population of San Pedro Sula in 1994 when indicated 625,000 inhabitants, when in reality the census of 1988 and its projection to the year 1995 show an estimate of 400,000 inhabitants for which the capacity of production will exceed the demand of the year 2010 (table No. 2). Actually, with the incorporation of the wells of Sunceri, of the aqueduct El Zapotal and new wells perforated by DIMA, the supply in the lower areas was improved immediately, specially in the area of Cabafias, Cabafiitas and Barandillas who during the last 20 years received rationed service. Putting into service the distribution networks has improved the capacity of transport of the system and therefore its handling. The horizon of the benefits further than the year 2000 obtained in the continuity of the service, in the medium and high areas, will be reduced with the elimination of the stations and the pressure lines of Las Mesetas, Rio Piedras-Prestaci6n Centeno. To secure its continuity and consequent benefits, DIMA has planned its construction in a near future. (Future Operations, P6g. No.9) The objective in providing severs for the collection of wastewater to the population of lower income and to sanitize the channels that cross the populated urban area in the component for Drainage of wastewater, are reached with the culmination of the sanitary works of the Project of Drainage and Urban Ways financed with funds of Loan No. 849 SF-HO of the Inter-American Development Bank (IDB) and with funds of the loan of IDA No.522HG-008, of the International Development Agency that benefits 15 colonies through the improvements to the water systems and to 27 with sanitary drainage totaling a population of approximately 80 thousand inhabitants (See Aide Memoire of April, 87). The completion of the works of the component storm waters included into the IDB loan, mitigates partially the effect of the floodings over the population urban-marginal. 12. The objective of the institutional improvement is reached partially, with the significant strengthening of DIMA during the period of , falling later due to the lack of adequate personnel policies, high management turnover and the politicization of the company. Evidence of this improvement are the indicators of Annex 10, of

44 Appendix A of ISJ95. To recuperate from the institutional deterioration and to optimize the good use of the benefits of the Project and to comply with the compromise of the Aide Memoire of June, 95, DIMA elaborated an Operational Action Plan, taken forward to consideration of the General Manager in August of 1995, the plan includes actions that will strengthen the Management of the Company. (See Appendix B). 13. In the period , the objective to make DIMA a financially independent Institution is reached as shown by the estates of the results of those periods. From 1996 DIMA will be financially affected by two factors, fundamentally; the service payments to current loans and the currency devaluation. To comply with the contractual compromise DIMA will execute an action plan based on the recommendations of the Financial Consultants. (See Appendix C. Financial Projections). 14. Component G of the Project was considered unnecessary, therefore, eliminated, since in a short term the use of wastewaters to water the sugar cane will be suppressed as result of the sanitary works in process. 15. The objective of the water quality, will be reached in a 95% with the termination of the treatment plants financed with funds from a donation from the government of Japan and of the Government of Honduras, at present in process of construction and with the completion of the chlorination stations financed with funds from the loan, which are in process of bidding and the completion of works is been programmed for April On the other hand, the coverage objectives of more than 96% are met, however, the ones on reduction to 30% of unaccounted-for-water, are instead estimated to be around 45%. The Operational Plan contains especific actions for its reduction. It is worth to mention how difficult was to comply with this objective before the completion of the Project, due to the difficulty of implementing the metering programs in an aqueduct running dry and with components of the project not finished. The initial results of this effort, if the necessary resources for the implementation of the Operational Plan are assigned, will be felt by the end of With the project have been acquired 27,500 water meters of which 18,195 have been installed by September of 1995, estimating that the rest will be installed before June of 1996 for a coverage of the 63% in micrometering. 17. Even if the reductions to the components of the Project reduced the horizon of the revised physical benefits, projected to the year 2010, these ones were superior to the estimated benefits in the SAR that only reached to the year Original Cost and Financing. (Including 8.9 millions of interests and commissions) 18. The original cost of the Project of Drinking Water and Drainage was estimated in US$1.0 (US$32.6 millions of the SPS component) financially distributed as follows: US$19.0 millions from World Bank, US$11.0 millions (LE. 9.1 millions) of the CDC, US$10.7 millions by DIMA and US$300 thousand from a donation of the Norwegian Government. The original closing date of the IBRD Loan was December 31, of This date was extended into four (4) opportunities, fixing as last date June 30, 1995, giving four additional months to justify the disbursements ( In the case of CDC the original closing date of the loan is extended until June 30, 1996). 19. Into the original estimate of costs were excluded works for an amount of US$5.9 millions (See table No.3). The distribution of the Project costs by component to June 30, 1995, are shown in Annex No. 2 of the Appendix A.ISJ95.

45 20. the costs to the end of the Project are estimated in US$48.5 millions (US$38.3 millions of component of SPS), seven millions on top of the original budget, but which present value is almost the same than the estimated one in the SAR). This breach was covered by DIMA with a contribution of the Government of Honduras of US$4.8 millions, amount assigned and paid inside the General Budget of the Republic. Assuming an increase of the construction cost in US$ of the 4% annual in the period of , the resulting value of the investment,minus the excluded, will reach US$32.5 millions or a real increase in the order of the 18% (38.3/32.5). 21. The increase on the cost in the construction works of the First Stage, due to an scaling, was of approximately 11 % of the value in Lempiras of the contract. In the works of the Second Stage, is estimated an 8%. 22. The costs of the budgets basis contracts of Design and of Supervision of works of the Second Stage, were underestimated in the revision of 1992 (See table of the Annex No. 6 of Appendix A, ISJ95), due to the consideration of the idea to use a contracting model sustained in base of individual consultants that reduced substantially the general expenditures, social benefits and utilities. In the case of the construction works of the First Stage, the analysis of unit costs of construction in 1993 the direct costs were underestimated, similar situation exist for the construction costs of the Second Stage. Project Benefits: 23. With the Project completion, the population of San Pedro Sula and the DIMA, will achieve improvements in the amount, quality of the drinking water and service, full coverage, improvements in the management and increased earnings. 24. The growth on the supply and conduction of the system capacity will benefit immediately the actual population of 390,000 inhabitants comprehended into the area of the Project. This will represent an increase of the 77% to the 96% of the population that will receive drinking water at their homes (equivalent to 180,000 inhabitants) in a period of 7 years (88-95). In a special manner and in a immediate form, the population of the area of Cabanas, Cabanitas, Barandillas, etc., with the incorporation on April of 1995, of the field of wells of Sunceri, warranting a 24 hours continuous supply, in contrast with the 3 hours average in the last years. To the horizon of the year 2010 the population benefited in the area of the Project will be of the 460,000 inhabitants (Mena and Mannucci, Design Parameters Revision, SPS, Feb-92). 25. With the increase in the supply from Im3/S by the end of 1995, DIMA will achieve an immediate improvement of the service in a quantity and quality by warranting the continuous 24 hours delivery to the population of the San Pedro Sula comprehended into the area of the Project. 26. On the other hand, with the desinfection stations the bacteriological quality of the water will be improved, these ones are complemented with the water treatment plants donated by the Government of Japan and the Government of Honduras, works with which the 95% of the water produced will be treated. 27. The operation and maintenance of the system will improve significantly with the implementation of the Operational Plan, which comprehends technical assistance,

46 equipment, elaboration of blueprints of the Sub-systems and the works of detection, control and reduction of leaks. 28. As result of the coverage extension, continuity of the service and of the technical assistance to the conmmercial system, the operational deposits will be strengthened growing from Lps 11.4 millions in 1990 to Lps millions in To the date the operational deposits cover the costs of operation, administration, commercial, depreciation, service to the debt and the investment. 29. From the social point of view, the project has a positive impact over the population of low income to by incorporating an population of 80,000 inhabitants of the marginal zones and incrementing the coverage and the supply (IDA Loan 522 HG-008 Paragraph 11). 30. The macro and micrometering component, will permit to implement immediately a program for reduction of unacounted-for-water, with the following benefits in the commercial and operational area. This program will warrant that the benefits of the Project reach the horizon of design, throughout actions oriented to a better management an a rational use of water by the users, which will not be attained under the acting patterns of consumption. 31. With the incorporation of the investment in the Project of Millions of Lempiras strengthen significantly the financial structure of DIMA. The obligations in relation to the internal rate of return of 10.8 and the 2.3 limit of monthly revenues as accounts receivable Execution: 32. DIMA executes the Project through a Coordination Unit, which leans on the existent organization, under a matrix organization. This unit is responsible for planning, controlling and integrating the different activities to be realized by the functional areas in reference to designs, supplies, construction and supervision. (See Appendix D). 33. The acquisition of the goods and services of the Project, in the components financed with WB funds and CDC, follow the proceedings and rules of the Bank and the ones financed with counterpart funds follow the Honduran Law for Contracting. 34. The contracting of goods and services is done through the four big groups, namely: 1) Supervision Contract, 2) Design Contract, 3) Contracts for Construction of Works and 4) Supply Contracts. The Annex No. 8 of the Appendix A, ISJ95, presents the list of all the contracts, contracting formats, costs and dates of termination. 35. During its execution, the Project faced problems, which extended it duration and modified the reach of the original work, the following must be highlighted 1. Institutional factors. Inside the institutional factors that had a significant influence, we have: a) The politicization of the enterprise, that weakens the organization of their patterns and limits the administrative capacity of the General Management, b) Lacks the experience in the internal administration of DIMA in the handling of Investment Projects financed with external funds, c) Lacks the flexibility to contribute the counterpart funds conveniently an d) Changes in personnel responsible for the Project.

47 2. External factors The most important ones associated with the project are: a) During the period , macroeconomic factors the oblige the Government of the Republic to not pay the external debt and as a consequence, suspension of disbursements to the approved loans. b) Part of the contribution in Sterling pounds from CDC were exchanged to Lempiras by the Government of Honduras at the time of renegotiation of the debt of the Government of Honduras with said organisms resulting in a decrease of the real value of the contribution of CDC, c) the inflation associated with the monetary loss of the Lempira against the dollar, incremented the initial costs with similar consequences to the prior literal. 3. Contractors and Consultants Actions In general the contractual relationship with the pros ders of goods and services was satisfactory. Nevertheless, we should highlight the inconveniences caused by the resolution of the construction contract No. 001/94 of the First Stage, of March 28, 1995 (See Aide Memoires of Feb. 95 and April 95), result of the inappropriate administration of the contract on the construction enterprise side, with the consequent problems of contract liquidation in the closing operations and termination of construction works. 4. Other factors The opposition of the users to the installation of the meters in areas without supplies, the delay in the incorporation of the new sources of supply prevent a program implementation of micrometering and delay the execution of contractual obligations on coverage and reduction of water not accounted. Sustainability 37. To warranty sustainability of the institutional and construction benefits contained in the Project objectives, the Government created by Legislative Decree no of February 16, 1984, the Municipal Division of Waters and under the Bank's Loan Agreement it was established, amongst others, a component of Institutional Strengthening for DIMA. 38. The institutional component reach significant accomplishments in the period of ; from this period the accomplishments reached have been reduced as a result of the personnel escape, deterioration of equipment, tools and loss of momentum of the network cadasters. 39. To overcome and warranty future sustainable actions will be necessary to implement: i) Healthy salarial politics, ii) Politics for timely renewal of equipment, iii) Intensive training program in the operational area, iv) The Operational Plan. 40. The financial health of the institution only could be warranted if there are established mechanisms that would allow to overcome the financial load generated by the debt service, the devaluation of the Lempira and the inflationary process, that could demand a raise in the tariffs to levels higher than the willingness to pay of the user. 41. DIMA's administration has been affected by political factors, example of the prior is the General Administration which in the last five years has experimented five changes (See Institutional Analyses. Hazen and Sawyer-Saybe and Associates. April 95) 42. To overcome the prior problems, the Government of the Republic develops together with the financial institutions the State Modernization Program, inside of which is

48 fortified, amongst others, the Municipal Management in the Water and Sanitation, this program has foreseen technical assistance for the aspects related with the participation of the private sector in the reorganization of DIMA. Comments to the Actions of the financial Institutions 43. The Project has been financed with funds from the World Band (WB), the Commonwealth Development Corporation (CDC) and the Government of Honduras. it must be mentioned that the support given by this institutions has been determininlg o overcome the problems iose during the execution of the Project. 44. The positive action of the WB in the assignment of technical assistance in additio n to the one contemplated in the SAR and the Loan Agreement, allowed the Ieactivating and the conditioning for execution. Another aspect to mention is the extension of the ioan closing date, which ones were extended in four occasions to warranty the disposability of the resources of the loan. The opportune interventions of the supervision missions and of the staff responsible for the same, contributed to set mechanisms to face the problems of operational character. 45. CDC accepted to renegotiate de debt with the Government of Honduras, which allowed the continuation ot the Project and facilitated the necessary actions to contract goods and services and gave the necessary extensions to be able to warranty the disbursements and timely disposition of the funds. 46. The Government of Honduras backed the Project and it participation was deciseive for its conclusion, by assuming the responsibility to guarantee the executive body, by including the Project in the renegotiation of the debt and in the assignment of additonlal resources no available to DIMA and the municipality. 47. Without the participation of the IDB and IDA, which covered the financial costs of the components eliminated from the loan by the existing financial restrictions, the objectives of the Project would only be reached partially. In this sense, the IDB finances the component of Sewerage and Storm waters and the IDA finances these same components for the marginal areas, plus an important component of the distribution of waters in those areas. 48. The Government of Japan provides financial support to the improvement, expansion and treatment of the superficial system of water of Santa Ana and the construction of the tank Santa Ana II, complemented the effort of the Bank, CDC and the Government of Honduras, warranted a better quality of water for the population of San Pedro Sula. 49. The actual conditions of amortization of the loans. that associated to the exchange losses impose a strong financial load on the institution, as well as indicated b the financial projections. To date there has not been defined anv mechanism that would allow DIMA to face the problem, through ways alternate to the tariff. Future Operations 50. DIMA's future operations are enclosed into four big working areas, being: a) Institutional Strengthening, b) Drinking Water, c) Sanitary Sewerage and d) Environment. The level of implementation of the prior components vary from an idea

49 level to projects ready for bidding. The table No. 4 groups the totality of future operations of the institution. 51. institutional Strengthening The development and perfecting of the Plan of Operations elaborated by DIMA, will allow to strengthen the Sustainability of the benefits obtained with the implementation of the works for the Water and Sewerage Project and includes actions oriented towards: improvement of the management in the Commercial and Administrative System. Another priority aspect are the works related to the Water Not Accounted Reduction. that in the present reaches a 459%o and which reduction will improve substantially DIMA's finances and the operation and maintenance of the system. 52. Drinking Water The horizon of the design for the year 2010 (revised in March ' 92) will be reached when the works of the Master Plan that were not executed with the iresources of the loans, for reasons named before, will be realized. Inside these componenits the weather stations are of special importance and the pressure mains of Las Mesetas Rio Piedras-Presentacion Centeno, that allow to cover the deficit generated by the stations variation in the production of the sources of Rio Piedras and Santa Ana and which during the winter time allow the reduction of pumping time by taking advantage of the high performance of the superficial sources. The rest of the works must be executed in the next four years to warranty the benefits of the Project to the year By the high energy costs and the existing potential deficit in it supply, DIMA contemplates the construction of a Regional Aqueduct of Rio Lindo (See fig. No. 4), with preliminary estimates of investment in the order of the US$85 millions. This project, whose conception is orientecd to warranty a gravity supply to the AMVS, under a concessionaire program to the private sector interested, it is of special importance due to its economic and management advantages and by being framed into the new politics of modernization of the estate. PIMA, in the Mission of April, 1995, to Washington, brought to the consideration of the International Finance Corporation (IFC), the study of technical feasibility of this project. With its implementation the associated municipalities associated to ZMVS could give exclusive dedication to the service contribution, with substantial reduction of the produ4ion cost. To the date they have manifested their interest to participate in its execution: Pont Mousson of France, Ingenieros Civiles Asociados the Mexico and specialized Spanish enterprises. During this Mission was discussed among the parties with the intervention of IFC and WB, the possibility of participation of the private initiative in the management of the services of provision of drinking water, sewerage and improvement of the Environment in the area of the project integration. 54. Wtastewater Treatment Under the terms of the Loan agreement IDB 849/SF-HO, DIMA counts with the Final Designs of Collectors and Treatment Plant, necessary to above the increment of discharge of the wastewaters resulting form the increase in it supply of drinking water, that by the end of the year 2010 is projected into 2,810 L/s. The total estimate of this works is of US$50 millions, having started the appropriate financing measures. 55. Ihe_Environment With the recent creation of the Directorate of Hidryc Resources, whom is responsible for the control of the spills and management of the water producing basins, DIMA considers important to deepen into the studies of Impact of the discharges

50 of wastewaters of the city into the river Chamelecon, likewise the necessary studies to determine the potential risks of contamination of the acquifers that supply the city with the water form the population that actually is located on above of them. Findings 56. During the execution of the Project were found the following findings: 1. The inflationary service, the debt and devaluation service and the relatively low value of the tariff put in danger the financial independence of DIMA. 2. The benefits obtained with the Project in continuity and quantity can be affected in the future due to the 70 percent of the supply of the city is done by pumping, which associated to the high energy costs and the existing supply deficit 3. As result of the accelerated growth of San Pedro Sula and of its neighbor communities, DIMA will be obliged to modify its organization to take advantage of its economy of scale to facilitate services to this vecinities. Exists a consensus of this project in the vecinities associated with the ZMVS. 4. The experience obtained from the application of the matricial organization in the execution of the Project, even if positive, establish the necessity for future operations where to apply this model of project execution, where to effect actions of training of the personnel of the institution to warrant a participation effective and where to integrate to the organizational structure of DIMA. 5. To warranty the Sustainability of the benefits of the Project, will be necessary an effort Ex Post that will allow to recover or strengthen institutional achievements actually debilitated, like: a) The unit of control of scapes, b) The training program for the personnel of DIMA, c) the renewal of equipment and d) the cadaster of network and registration of users. 6. The incorporation of the Project, its complexity operational and of maintenance, oblige DIMA to: i) The development, perfecting and implementation of the Plan of Operations, ii) A Program of Selection of Personnel and Training guiared essentially to improve the operation and maintenance of the different components of the system.

51 OBJETIVOS. METAS V.- ULTADO0 CUADRO No. 1 Proyecto de Agua y Drenaje Prestamo 2421-HO COM^PONEONTES OBJETIVOS METAS RESULTADOOS1 COMENTA8tiOS :K..XOM K. M :-:.: s ws:..x A taeloias al Surmnmstro de agua potable Elimanar la escacez de agua que afecta Construccion de 18 pozos Construldos 15 El concepto original de suministro se moddiic Como resultado de la eva a la mayoria de la poblac.dn de S P S Rehabiitaci6n de 7 pozos Rehabitiados 7 luacedn del acutero. se incorporan Ios campos de pozos de Claarmelecon y Constiucci6n de 3 estacones de cloracion A construir 2 Sunceri Obtener intorme de evaluacion de acuifeto B Meloras a( sistema de conduccn. d,s- Gacantizar ef suministro de agua a la Retabiitar Obras de Toma 2 Rehabilitadas 2 La capacidad ociosa permite garanlizar el serwico aun elminmando tribucion y alniacenaje poblaci6n de S P S hasta el alo 1994 Construlr linea cond Rio de Piedras 1 03 km No hay moddicaci6n/en elecucron componentes Construli linea cond Santa Ana 1 56 km Se posteiga su elecucon La oplimizacion de la operacion requlcie de las esntcaones y ineus tde Construir redes primaris 46 km Construldos 54 - reobombeo Construir estacones de bombeo 2 (booster) Se posterga elecuctin El almacenale es sitfconte al ano 2000 Construir lanques de almaceje 2 (30 ml m3) Se cambia capacidad 5675 m3 Se agregan 2 llneas de rebombeo C Meloras a la Red Secundaisa e inslala- Praveer de servicos a la poblacon de Construe R S para agua potable 15 knm Construldos 27 5 km- Con londos del Piesbrno 2421 HO y del Proyeclu AID 522 fir,0u8 nose a l1, cdon de miicroniedrdores batos rogresos Construir llaves pibllcas 25 Se eliminan red Bo Marginados (beneliciados en A P y e.i A I1 I Instalar nuevas conexiones 5000 Se han lnstalado 15 rnil superando nietas originales Remplazar Red Secundaria detectuosa Se susttuye tuente tfoanciera Micromedicion en pioceso de instalaceon, macroniedidores licrananse Instalar meddores Sc mantiene la meta Instalar 6 macromedodores Se instalartn en 12 tanquen y 6 pozos E Mapco y delecciarn de tigas del Sisle Actualria, planos de tos sistenras Dbbular los napas actuatizados del snstema de Se elaboran tos planos de los sisteemas El programa se desarrolla en el perlodo inia de Agiia Polataie Capacrtai personial en servwco para A P de la ciudad (mncluye A N y A Pluvial) Ptometer elabora el Progiama de Se cumplen las ielas pefo no se logia su sosreiil:,wl1ao continual con el Piogrania Elaborar e miplemental un progranra de Control Deteccion y Contiol de Fugas de tugas Meoc e eudr oe Suminrstrar YNIvCIo de Aguas Negras a Construir R S de aguas negras 10 km Se elimina del proyecto Este componente se fulanria con tondos del prtstamo SF-HO No 849 del vones al sistema de Aguas Negras la poblaci6n de baqos ingfesos Inslalar nuevos servrclos 40DO Se lilmina del proyecto BID y con tondos del AID a Itaves del Proyecto 522 HG-008 Ver solicitud de DIMA y aprobaci6n del Banco pafa camb,ar fuentede financ.amlenlo SVN5:55.: ::- :-55 -::....C5. K M D Meloras al smisen a de Aguas Lluvws Reducir 1as inundaciones que at-e-ct-an 6Construir mte-rceptoces 3 km Se eltinma del pioyecto Este componente se financra con fondos rlel prdstamo SF HO No B49 del pfincipalmente a la poblac.on de bajos BID Ver solicitud de DIMA y apfobacion de[ Banco para caniblar luemte rngreos de financiarmento... a?..- >~~ ~.n:..-a'.ni&495v.'v.91~~~~~/8e.455 "'' 4.-i? F Meqor as COperac or ales e In stntucron ales Fonlalecer la adrmnirnrstracron de DIMA Contratar consu ltor es Se contratan I=o cons ultofes Las metas se a mpi la n pof la prolongaci6n del proy ecto para lograf una rnshltucron lecnrcamenle Adquirir todo el equipo necesadio Se equrpa DIMA con vehiculos, las mismas se cumplen inicalmente pero no se logra su soslenibsihdad sana y finarce,amente mndepediente computadoras,radios, etc y materiales y debtdo a que la empresa no cuentas con politicas adecuadas que ga acce3orros fanilcen la peimanenc,a del personal y la renovaci6n del eq.,po G. Esl,dios cle rsgns a la saluld por wlgo Prepaiar un estud,o sobre niesgos y un plan de Se eamina del Pfoyeclo Ehminado debido a que a corto plazo. cuando se lerlm,,en I05 col-ki.,es y 1. _de caia cde *Licar conl agua3s nlegras lmitigacon planta de tralamiento de aguas negras. se dqala, de regar co., ag,,.,,