Document of The World Bank

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Urban Development Sector Unit East Asia and Pacific Region Document of The World Bank IMPLEMENTATION COMPLETION REPORT (IDA-30410) ON A CREDIT IN THE AMOUNT OF US$ 30.9 MILLION EQUIVALENT TO THE KINGDOM OF CAMBODIA FOR AN URBAN WATER SUPPLY PROJECT January 21, 2004 Report No: 30003

2 CURRENCY EQUIVALENTS (Exchange Rate Effective February 2004) Currency Unit = Riel Riel 1.00 = US$ US$ 1.00 = Riels 3,982 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ADB CAS CC CCW DCA DPWS EDI ERR FRR IDA IDI IT lcd M&E MIME MIS MOEF MPP MPWT MRD NGO OED O&M PA PPWSA SAR SWSA TA TOR UFW UNDP WBI Asian Development Bank Country Assistance Strategy Coordination Committee for Water and Sanitation Sector Chruoy Chang War (water treatment plant) Development Credit Agreement Department of Potable Water Supply Economic Development Institute Economic Rate of Return Financial Rate of Return International Development Association Institutional Development Impact Information Technology Liter per capita per day Monitoring and Evaluation Ministry of Industry, Mines, and Energy Management Information System Ministry of Economy and Finance Municipality of Phnom Penh Ministry of Public Works and Transport Ministry of Rural Development Non Government Organization Operations Evaluation Department Operation and Maintenance Project Agreement Phnom Penh Water Supply Authority Staff Appraisal Report Sihanoukville Water Supply Authority Technical Assistance Terms of Reference Unaccounted for Water United Nations Development Programme World Bank Institute Vice President: Country Director: Sector Director: Task Team Leader: Mr. Jemal-ud-din Kassum Mr. Ian C. Porter, EACTF Mr. Keshav Varma, EASUR Mr. Luiz Claudio Martins Tavares, EASUR

3 CAMBODIA URBAN WATER SUPPLY PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 1 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome Sustainability Bank and Borrower Performance Lessons Learned Partner Comments Additional Information 21 Annex 1. Key Performance Indicators/Log Frame Matrix 23 Annex 2. Project Costs and Financing 26 Annex 3. Economic Costs and Benefits 28 Annex 4. Bank Inputs 31 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 33 Annex 6. Ratings of Bank and Borrower Performance 34 Annex 7. List of Supporting Documents 35

4 Project ID: P Team Leader: Luiz Claudio Martins Tavares Project Name: URBAN WATER SUPPLY PROJECT TL Unit: EASUR ICR Type: Core ICR Report Date: January 21, Project Data Name: URBAN WATER SUPPLY PROJECT L/C/TF Number: IDA Country/Department: CAMBODIA Region: East Asia and Pacific Region Sector/subsector: Water supply (96%); Central government administration (4%) Theme: Access to urban services for the poor (P); Infrastructure services for private sector development (S) KEY DATES Original Revised/Actual PCD: 10/08/1996 Effective: 05/01/ /02/1998 Appraisal: 05/22/1997 MTR: 06/01/ /01/2000 Approval: 02/17/1998 Closing: 12/31/ /31/2004 Borrower/Implementing Agency: Other Partners: KINGDOM OF CAMBODIA/PHNOM PENH WATER SUPPLY AUTHORITY; KINGDOM OF CAMBODIA/MINISTRY OF INDUSTRY; KINGDOM OF CAMBODIA/MINES AND ENERGY; KINGDOM OF CAMBODIA/COORDINATING COMMITTEE FOR THE WATER AND SANITATION SECTOR STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Jean-Michel Severino Country Director: Ian C. Porter Ngozi N. Okonjo-Iweala Sector Manager: Keshav Varma Keshav Varma Team Leader at ICR: Luiz Claudio Martins Tavares N. Vijay Jagannathan ICR Primary Author: Pierre de Raet 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: Sustainability: Institutional Development Impact: Bank Performance: Borrower Performance: HS HL SU HS S QAG (if available) Quality at Entry: Project at Risk at Any Time: No ICR S

5 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Background The objectives and design of the project must be assessed in the context prevailing in Cambodia in the mid-1990s. Despite the fact that Cambodia has abundant natural fresh water sources, only 32 percent of the country's population had access to safe water, and only 16 percent to sanitation. This was reflected in very low health indicators. About half of the population of Phnom Penh and its suburbs (estimated at about 1.1 million in 1995) had access to piped water, but for an average of 12 hours a day only. In Sihanoukville, only some 13 percent of the population of the central district, estimated at 50,000 in 1997, had access to piped water. On the institutional side, responsibility for water and sanitation was extremely fragmented among various ministries and organizations. The Phnom Penh Water Supply Authority (PPWSA) was under the Ministry of Interior (and therefore dependent upon the Municipality of Phnom Penh - MPP - and its Governor), while the Sihanoukville Water Supply Authority (SWSA) and other provincial water utilities were deconcentrated departments of the Unit of Potable Water Supply (UPWS) of the Ministry of Industry, Mines and Energy (MIME). After the 1991 peace accord, the donor community had started providing substantial support to the sector, mostly in the form of physical rehabilitation, technical assistance (TA) and training, mainly directed at Phnom Penh and a few provincial centers, including Sihanoukville. However, PPWSA needed considerable improvement in operational and financial management (at appraisal in 1997, unaccounted for water -UFW - was still 57 percent, down from 80 percent in 1993). SWSA could not finance new source developments to meet demand and needed restructuring to promote financial sustainability, commercial practices, and staff accountability. In February 1996, the Government issued its first Socio-economic Development Plan ( ) which accorded water and sanitation a high priority. The Plan's long-term objectives were for the water utilities to become self-sustaining commercial entities. In 1996, initial steps were taken to improve the sector's institutional framework: (i) a law providing for greater autonomy of public enterprises was enacted; (ii) PPWSA was established as a public enterprise mandated to operate according to commercial practices; and (iii) in recognition of the need to rationalize sector institutions, the Government created a Coordinating Committee for the Water and Sanitation Sector (CC) to recommend a long-term national strategy for sustainable and cost-effective urban water supply and sanitation. Assessment of objectives The objectives of the project were to: (i) improve drinking water coverage, quality and access in Cambodia's two biggest cities of Phnom Penh and Sihanoukville; (ii) improve the performance, both technical and economic, of the water utilities in these cities; (iii) enhance availability of water for commercial and industrial purposes in these two cities as a spur to economic growth and as a means of ensuring viability of the utilities; and (iv) help the Government develop and implement a sectoral investment program based on a well-articulated water and sanitation policy framework

6 These objectives were - and still are - highly relevant. They clearly addressed the physical problems and institutional issues of the sector at the time. They were consistent with the Government 's development objectives and with the CAS of 1995, the first prepared after the peace accord. The CAS emphasized the need for rehabilitating critical infrastructure and strengthening institutional capacity, including implementation performance and aid coordination. These objectives were reiterated in the 1997 CAS and, were consistent with the Bank's Water Resources Management Policy which was giving "...priority to countries where...the problems of...service efficiency...are serious". Other more direct considerations justified the relevance of the project: (i) PPWSA was the only institution capable of making large scale investments at the time and the most likely to demonstrate that service could be sustained when appropriate policies are adopted; (ii) it was in Phnom Penh, as the largest city, that the greatest impact and visibility from improved services could be expected; (iii) investment in PPWSA facilities was critical in ensuring that complementary transmission and distribution investments financed by other donors would not be left ineffective; and (iv) Sihanoukville was chosen for two reasons: water service was very limited while it is Cambodia's major port with the greatest potential for industrial, tourist, and commercial growth; and (v) last but not least, SWSA was to be the pilot for other provincial water utilities to move from rehabilitation to operation on the basis of commercial practices, the key long-term objective of both the Government's and the Bank. 3.2 Revised Objective: The objectives were not revised. 3.3 Original Components: The project was to be implemented between , in three components (a detailed description of the components are in the Staff Appraisal Report - SAR): 1) Expansion of water supply in Phnom Penh (base cost US$29.17 million). This component was to expand capacity, extend the network, and improve efficiency. It was to be implemented by PPWSA under a Project Agreement with IDA. 2) Expansion of water supply in Sihanoukville (base cost US$3.5 million). This component was to expand capacity by increasing water sources, improve efficiency, and help SWSA restructure into a commercial enterprise. It was to be implemented by MIME and SWSA. 3) Development of a water supply and sanitation policy (base cost US$2.08 million). This component was to help create institutions that could maintain and expand service in an efficient, equitable, and sustainable manner, consistent with public demands. The component was to be implemented by the CC. 3.4 Revised Components: There were two revisions, although neither affected the objectives of the project. There were also several reallocations

7 In March 1999, the Government requested, under the Phnom Penh component, to replace the district of Chamcar Morn by the district of Toul Kork to ensure consistency in network rehabilitation between the investment programs of IDA and the Asian Development Bank (ADB). This did not affect the material content (85 km of pipes and related fittings) of the component. The Development Credit Agreement (DCA) was amended to reflect the change. After the receipt of bids relating to the PPWSA component in June 1999, the Bank team identified an uncommitted balance of about US$12.5 million under the Credit and the possibility of financing additional investments of about US$5.2 million that would be consistent with project objectives. Savings of about US$10.0 million had arisen because the lowest bid for the turnkey contract for the rehabilitation/extension of the Chruoy Chang War (CCW) treatment plant was well below estimates. The difference was due to: (i) a substantial downward revision in cost estimates due to changes in technology, and civil works design; (ii) fierce competition among bidders after the tendering had attracted the interest of leading international firms; and (iii) a reduction in the risk premium sought by bidders following greater security in the country. Some saving were also due to cheaper procurement of other equipment. In October 1999, the Board approved a restructuring of the project on the following basis: 1) some US$5.2 million were reallocated to additional investments under the PPWSA component as follows: (i) extension of the distribution network to the airport area; (ii) additional computer equipment for the PPWSA accounting system; (iii) a reserve amount for the rehabilitation of the treatment plant; and (iv) an additional allocation for pipes and ancillary equipment for possible further extension of the distribution network. As part of the amendment to the DCA, the reference to 85 km of pipes was deleted, allowing for an undetermined length of distribution pipes in the service area. 2) the Government requested that the balance in savings, US$4.8 million, be applied to a pilot sanitation program in Phnom Penh aimed at testing some of the findings emerging from the sanitation studies under the Policy Component. These had confirmed: (i) the high receptivity to a demand responsive approach where communities and households are provided the level of service they want and are willing to pay for; and (ii) the interest of providers to invest in low cost sanitation technologies. Thus, the new component was seen by both the Government and the Bank as an important test and, if successful, as a model for duplicating the experience country-wide under future operations. The DCA was amended in January 2000, providing for a fourth component, sewerage infrastructure (base cost US$4.8 million), consisting of: (a) designing, constructing and extending sewerage infrastructure on a pilot basis, including: (i) installation of sewer pipes and house connections, (ii) installation of electrical and mechanical equipment, and (iii) construction of sewerage treatment facilities; and (b) the provision of goods, equipment, and technical services. PPWSA was made responsible for implementing this new component, including system operation and maintenance and cost recovery from users, with the Government remaining responsible for reimbursing the related portion of the Credit to IDA. Since deriving the findings of the consultations and participatory process carried out under the Sanitation Policy Study, the component' s objectives are also rated highly relevant to implementing the Government's and the CAS' development strategies (as it turned out, - 4 -

8 investments under this component were not implemented: see Section below). The restructuring led to a first postponement of the closing date to September 30, Assessment of design The design was highly satisfactory. It was well adapted to the situation prevailing in the mid-1990s, with flexibility and gradualism built in to account for changes in circumstances. Operational and financial targets were spelled out and spaced to match project implementation, thus facilitating M&E. Covenants were limited in number but realistic. Since SWSA is a deconcentrated department of MIME, a PA with IDA was not appropriate. Instead, targets were identified in the minutes of negotiations to gradually bring the entity to performing as a commercial enterprise. In view of the very low level of tariffs in Sihanoukville and the sensitive nature of their revision, disbursement under this component was subject to raising average tariffs to a level ensuring SWSA's financial viability. The policy component, introduced while preparation was under way, was designed in a manner allowing for flexible implementation and "learning by doing", given the many unknowns as to the receptivity to new ideas and best practices in the sector. Nevertheless, the project was highly demanding on the borrower and the implementing agencies, due to their lack of familiarity with Bank policies and procedures, especially in procurement and contracting. However, the project was moderately complex, the physical and financial targets having been clearly defined. No project management unit was envisaged so as to promote capacity building within each implementing agency. A successful launch workshop took place in November 1998, and a mid-term review was scheduled for end Quality at Entry: Quality at Entry is rated satisfactory based on: (i) the consistency of objectives with the Government's priorities for water services, poverty alleviation, and health, as well as with Bank strategy; (ii) the Government's commitment to sector reforms and the motivation of the management and staff of the two entities after the return of peace; and (iii) the detailed preparation and design which took into account the special and still very difficult circumstances faced by the country at the time. Other factors accounted for a high quality at entry. First, during preparation, a close dialogue with other donors, especially ADB, Japan, and France, had guaranteed coordination and complementarity in investment and TA. Second, the TA extended after the peace accords to PPWSA and other utilities had revealed a high level of interest and motivation among the staff, allowing for carefully calibrating subsequent TA and training to the level and at the pace most suitable to lead to results. Third, past interventions had demonstrated the need for flexibility in design and implementation. It was clear that further strides in operational and financial performance (e.g., towards commercialization) had to be made before embarking on policy reforms, so as to incorporate lessons learned and ensure the workability of policy recommendations in the local context. The Bank drew extensively from this past experience in conducting its dialogue during preparation. For instance, such an approach greatly facilitated the adoption by the Government of two key decisions prior to appraisal, the creation of PPWSA as an autonomous entity and the creation of the CC to conduct the policy reform

9 With respect to risks, the main financial risk rested with the ability of PPWSA, as the agency responsible for the largest component around 85 percent of the project, to achieve the agreed operational targets. This risk was mitigated by four factors: highly specialized TA; a twinning arrangement with a consortium of Australian utilities; annual reviews of tariffs; and a pilot partially program to finance the cost of connections for the poor. The risk of the Government not being able or willing to undertake policy reforms was mitigated by the following: a close collaboration underpinned by an agreement that policy-making would be based on a participatory approach; flexibility in policy formulation and institutional proposals, based on learning by doing; and several EDI (now WBI) seminars involving all stakeholders. One risk could not be mitigated, however, i.e., a possible return to political instability or a deteriorating security situation. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Outcome is rated highly satisfactory. The project has achieved all its major objectives, realizing the benefits anticipated, with few exceptions. Although the SWSA component is rated satisfactory, an overall rating of highly satisfactory is based on the fact that the PPWSA component represented some 85 percent of the project in terms of costs/financing and provided benefits to the whole population of Phnom Penh. There were four objectives: First, in Phnom Penh, the coverage of drinking water has far exceeded appraisal targets. Virtually the whole city, i.e., about 750,000, (excluding suburbs and peri-urban areas) has now access to water 24 hours a day with a quality meeting international standards. In Sihanoukville, coverage targets were also exceeded, with about 25 percent of the downtown area of the central district now having access to a good quality water and with much greater regularity than before. Second, the technical and financial performance of PPWSA has been remarkable and may be considered as best practice, certainly among developing countries. Two facts illustrate the turnaround in the utility: (i) by early 2004, UFW was down to percent, from 57 percent at appraisal; and (ii) as of June 2004, PPWSA had pre-paid over 40 percent of the sub-loan to the Government. The assessment of SWSA's performance must necessarily be prudent because the first full year of operation under the new conditions will be 2005 and data are preliminary. SWSA has achieved some encouraging results during project execution, with some operational indicators improving. However, further improvements will be slow to achieve, because parts of the transmission lines and the network are very old, and also because of the limited capacity of the utility to expand the network. The objective of restructuring SWSA into a sustainable commercial enterprise was not fully achieved, because it has little flexibility in financial management and is subject to political pressures and influences from the local authorities. As a result, the objective of transforming SWSA as a "role model" for other small provincial utilities was not achieved. Third, the increase in availability of water has had a direct impact on promoting commercial and industrial activities. In Phnom Penh, water is no longer a constraint for any activity, whether domestic or commercial. In Sihanoukville, an increasing number of small enterprises, hotels and - 6 -

10 restaurants are now connected to the network. However, should large industries settle in the area in the near future, they would probably still have to develop their own sources. Fourth, the Government has developed and adopted water and sanitation policies based on global experience, including private sector participation in service delivery. Currently, donors, including the Bank, are designing their interventions on the basis of the new policy framework. Surely, it will take several years to assess the outcome in terms of benefits to consumers. 4.2 Outputs by components: Expansion of water supply in Phnom Penh. Achievements are rated highly satisfactory, with all sub-components rated in this category. Objectives were exceeded. Key indicators for PPWSA for are presented in Annex 1, Table 1. The rehabilitation/extension of the Chruoy Chang War (CCW) treatment plant is rated highly satisfactory. Together with the expansion of two other plants with Japanese and French assistance, the rehabilitation/expansion of the CCW plant, to a level of 65,000 m3/day brought total capacity to 235,000 m3/day, which will satisfy demand up to With a second phase of 65,000 m3/day of the CCW plant planned for , demand should be satisfied to about As noted in Section 3.4, after Credit effectiveness, revisions in costs were made to allow for changes in technology and civil works design, bringing tendering under the turnkey contract to about US$15 million, against US$23.7 million estimated at appraisal. Delays were not excessive and were due mainly to four factors. First, at times heavy rains prevented civil works to be carried out on schedule. Second, while civil works were completed satisfactorily, the contractor had difficulty in managing the procurement of the electro-mechanical equipment. Third, shipments of goods from overseas were sometimes subject to restrictions. Finally, some equipment, mainly pipes supplied by sub-contractors overseas, was of poor quality requiring replacement of many orders. The consultant responsible for construction supervision reacted quickly to the latter situations by taking prompt corrective actions, such as conducting quality tests at production sites outside Cambodia. Notwithstanding the delays, the timely actions by the consultant led to improved performance by the contractor and the end product is of very high quality. The performance of the supervision consultant was highly satisfactory throughout. The plant started operating in March In 2004, PPWSA was expected to produce 180,000 m3/day (or 77 percent of capacity), with sales amounting to 150,000 m3 (on the basis of a UFW of percent). Rehabilitation of the CCW plant involved the resettlement of some 20 families. After discussions with the community, PPWSA and the local authorities, the families chose a cash grant to resettle in another area. One year after resettlement, the families were interviewed and confirmed that they were fully satisfied with their new habitat. Distribution network and connections. This sub-component is rated highly satisfactory. Upon closing of the Credit, this component had become the largest in terms of IDA funds disbursed, some US$11.8 million. In total, 586 km of pipes were laid against 85 km estimated at - 7 -

11 appraisal. The reallocation and the ability of PPWSA to mobilize resources to expand the network and install connections were key in dramatically reversing the financial position of PPWSA (see below). At the end of 2003, PPWSA had 105,777 connections, exceeding the appraisal target of 90,397 by 17 percent. On the basis of 7 members per household, some 750,000 now have access to piped water 24 hours a day with a water quality meeting international standards. Given the success of this component in expanding service, PPWSA will have to suspend the extension of the network in , unless capacity is raised to 300,000 m3/day with the second phase of the CCW treatment plant. The pilot program targeted to the poor for financing domestic connections is rated highly satisfactory. The scheme, designed as a revolving fund, was meant to help the poor connect to the network. The program was slow to start due to insufficient information on potential beneficiaries, initial skepticism on the part of PPWSA and, as a corollary, an insufficiently pro-active dissemination campaign. With the assistance of NGOs, PPWSA assumed a more active role in 2001, and the number of connections rose rapidly thereafter to reach a total of 6,708 by end The program has proved extremely successful and popular among the low-income groups. Under the successor project, the program is being considerably extended to reach 30 percent of the estimated low-income population of 430,000 living in the suburban and peri-urban areas of Phnom Penh. The operational and financial performance of PPWSA is rated highly satisfactory. The operational and financial performance of PPWSA changed dramatically over the implementation period. At appraisal, the UFW ratio, at 57 percent, was one of the highest in Asia. At first, progress was limited, with UFW declining to 35.5 percent in 2000, and only with an increase in tariffs in January 2001 was PPWSA able to maintain adequate revenues. Dramatic progress took place starting during 2001, with UFW declining consistently to reach 17 percent in 2003, with operating revenues improving correspondingly. This is to be compared to an appraisal estimate of UFW of 40 percent for PPWSA's personnel has acquired the know-how to monitor UFW very tightly inter alia through a fully computerized system (see below). The experience of PPWSA in reaching such an operational performance level may be considered best practice in the EAP region. Thanks to its progress in reducing UFW associated with the aggressive increase in the number of connections that improved the sales, PPWSA was able to avoid raising tariffs to the extent projected in Tariffs were raised only twice, in June 1997 before appraisal, and in January PPWSA succeeded in gradually adopting the recommendations of the Water Supply Policy Study, i.e., a reduced dispersion of rates within each category and between categories. As a result, the average nominal tariff increased moderately from Riels 762 in 1997 to 987 per m3 in 2003 (corresponding to US$0.26 and US$0.25, respectively), well below the level of Riels 1,118 estimated at appraisal to be required in Since changes in tariffs require Government's approval, PPWSA acted in a very responsible and effective way in fine-tuning its UFW and tariff policies. The PA provided for four financial covenants. All were met on time, except for one delayed by only one year. Annual audits of financial statements were received on time by the Bank, with no material issues raised by the external auditors. The operational and financial performance of PPWSA was considerably enhanced with the installation of a high-performance - 8 -

12 management information system (MIS) in The dramatic improvement in the financial situation of PPWSA is illustrated by the following. By 2002, the cash position of PPWSA had become so strong that in September 2002 the entity requested the Government to pre-pay reimbursements of the principal under the sub-loan. Two such pre-payments were made in 2003, one for Riels 28.4 billion in March and one for Riels 4.5 billion in September; and a third payment was made in June 2004, for Riels 4.5 billion, for a total of Riels 37.4 billion, out of a total principal disbursed by the Bank of Riels 91.1 billion, or about 41 percent. In addition, PPWSA prepaid interest payments amounting to Riels 4.4 billion. The twinning arrangement is rated highly satisfactory. At the time of preparation, the Australian Government (AusAid) agreed to provide US$250,000 in grant funds to finance a twinning arrangement between an Australian water utility to be selected under Bank guidelines and PPWSA, under TORs agreed by the Bank. A consortium of two utilities was selected with the main objective of improving the institutional effectiveness of PPWSA. The experience proved extremely valuable in developing a greater awareness among PPWSA' staff of the need to bring integrated solutions to identified problems Expansion of water supply in Sihanoukville. This component is rated satisfactory. Key indicators for SWSA for are presented in Annex 1, Table 2. Construction works. This sub-component is rated satisfactory. SWSA' s personnel demonstrated excellent performance in achieving the physical objectives of the component: the volume of water available and of treated water was raised as estimated at appraisal. Total capacity was raised from about 2,000 m3/day to 6,000 m3/day, including three new wells having an effective capacity of 2,000 m3/day. For the first quarter of 2004, production of clear water amounted to 360,000 m3, corresponding to an effective use of capacity of about 4,400 m3/day, but sales amounted to only 265,000 m3 due to a UFW of 26.3 percent should be the first year of normal operation since the system has stabilized, with an effective use of capacity of 4,000-5,000 m3/day. Improvement in the distribution system did not require the construction of a new high-level reservoir as expected at appraisal, because the existing reservoirs, both in high elevations, could be rehabilitated satisfactorily. The system was extended from 32 km to 52 km and the number of connections increased from 921 at appraisal to 2,658 at closing of the Credit in March 2004, a 14 percent increase over the SAR target for end With an average of 7 persons per connection, the number of people served is over 18,000, or about 25 percent of the present population of the downtown area of the central district of Sihanoukville, against 13 percent in SWSA has been unable to reduce its UFW substantially since 1997, because the transmission lines are about 60 years old. UFW has fluctuated between 25 and 30 percent, reaching 26.3 percent in the first quarter of It is expected to decrease only slightly over the next few years on account of the new distribution lines, then it may rise again. Despite the very good technical performance of SWSA, construction was considerably delayed, for reasons beyond its control. First, the design stage took longer than expected because basic data, such as topographic surveys, city maps, and other baseline information were poor and scanty due to destruction of many city records during past conflicts. To that extent, the delay cannot be blamed on any particular actor since the technical appraisal was largely based on feasibility studies - 9 -

13 carried out in the mid-1990s, when the security situation in and around Sihanoukville had not been fully restored. Second, MIME and the Ministry of Economy and Finance (MOEF) were inexperienced in procurement and contract negotiations, causing long delays in approval and processing. Third, the disbursement condition under the DCA was only fulfilled in June 2000, when the Government agreed to an increase in tariffs of about 11, 20 and 12 percent for the three consumption blocks. Fourth, delays were also due to constraints on logistics at the port, a factor also beyond SWSA' s control. Because of these delays, the sub-component is not rated highly satisfactory. Despite a delay of over three years, quality of the works is considered very good and the performance of the supervision consultant was highly satisfactory. Time required to test the water facilities and to complete the installation of connections was one of the reasons for extending the closing date from September 2003, to December 31, 2003, (second extension), and again to March 31, 2004, (third and final extension). TA to MIME and SWSA is rated satisfactory. The objective was to help SWSA move to an entity performing under commercial standards and to test the feasibility of replicating such an outcome in other secondary towns under a subsequent operation. TA was provided in three areas: (i) project preparation and implementation, where support in planning, management, and engineering was needed on a day-to-day basis, given SWSA's inexperience with Bank-financed projects; (ii) procurement, socio-economic surveys to establish the customer base and the level of effective demand for water services, and studies on long-term water sources; and (iii) accounting and information technology. In addition, the main contractor provided extensive hands-on training in O&M to SWSA' staff. Since project completion was much delayed, a full assessment of SWSA's performance under the new operational conditions is not yet possible. However, preliminary results indicate progress in operational performance: (i) the connection target was achieved, as noted already; (ii) UFW performance improved slightly, but further progress will be limited due to aging of some transmission lines; and (iii) collection efficiency remained well over 90 percent. As a deconcentrated department of a ministry, SWSA has little authority over many areas affecting its operations and finances. As such, there has been little progress in providing greater financial autonomy to ensure long-term sustainability beyond the investments of the present project. This is illustrated in the area of tariff setting, where the decision belongs to MIME and the Governor of the province, and therefore political considerations inevitably prevail. Since appraisal, tariffs were raised only twice in June 2000 and in July For the first quarter of 2004, the average tariff stood at Riels 1,332.4 per m3 or US$0.33. Resistance by the authorities to tariff adjustment led to an average tariff consistently below the level required to improve the long-term financial position of SWSA in a sustainable manner. As a result, the operating ratio remained substantially above the level agreed at negotiations or the SAR targets, although some improvement was achieved during project implementation. Financial performance was also short of expectations with respect to the average collection period that remained well below the target of 60 days as SWSA has little power to enforce payment of water bills by the public administration, at national and provincial levels. In sum, although SWSA' s financial situation has stabilized thanks to improved operational performance, increases in the number of connections, and increases in tariffs, the conditions

14 required for SWSA to develop into a commercial enterprise could not be fully met as long as it remains an administrative body dependent on MIME. In addition, SWSA is constantly subject to the vagaries of local interests and influences. Despite insistence on the part of the Bank throughout project execution, the Government failed to relax the institutional and operational constraints under which SWSA operated, thus preventing its rising to the challenge of achieving results normally expected from commercial enterprises Development of a water supply and sanitation policy. Achievement is rated highly satisfactory. With the assistance of consultants, the CC was quick to launch the preparation of a long-term policy to develop an efficient and cost-effective national water supply and sanitation sector and to rationalize the institutional framework. Draft policy frameworks covering urban water and sanitation were discussed at a WBI-sponsored seminar in April A Water Sector Policy Letter was sent to the Bank in December 1999, one year ahead of the date required in the DCA, and a National Policy on Water Supply was approved by the Government in June The policy is based on the key features of global experiences, i.e., a demand-based approach, private sector participation and cost recovery. With regard to urban sanitation, one immediate outcome of the draft policy framework was the decision by the Government in April 1999, to transfer responsibility for sewerage to MIME, thereby greatly simplifying the organization of the sector. In February 2003, the National Policy for Urban Sanitation was approved, based on the following principles: a demand-responsive approach, appropriate technologies, private sector and community participation, coverage of O&M costs, and tariff levels that are fair and tied to users' willingness to pay. To demonstrate its commitment to its new vision for the sector, in 2000 the Government requested a successor project from the Bank to implement the new policies in provincial towns. This led to the active preparation of the Provincial and Peri-urban Water and Sanitation Project in parallel with the execution of the Urban Water Supply Project. The successor project, approved by the Board in April 2003 (Cr KH), greatly benefited, in concept and design, from the experiences garnered from the first project. With the support of the Bank/UNDP Water and Sanitation Program, between the Government also developed a rural water supply and sanitation policy based on the following: a demand-responsive approach, private sector and community participation, promotion of hygiene, sustainable management of the water environment, and appropriate incentives and subsidies for the communities with limited ability to pay. Two factors led the Government and the Bank to undertake a study of a regulatory framework for water and sanitation and the drafting of a regulatory law for the sector. First, substantial savings under the policy component had materialized as early as 1999, as a result of the Government's use of individual consultants rather than consulting firms as envisaged at appraisal, thereby freeing funds for other priority studies in policy areas. Second, the request by the Government for a successor project argued for speeding up the preparation of a regulatory framework and accompanying legislation. Although not anticipated at appraisal, this output fell logically under the medium-to-long-term objectives of the policy component. A consulting firm, specialized in

15 utility regulation, submitted its final report in November 2001, and drafted a regulatory law. The latter is still under review by the Cambodian administration and is expected to be finalized under the new project Sewerage infrastructure. This component is not rated. As indicated under Section 3.4, this pilot component was added in late 1999 to test the recommendations of the Urban Sanitation Policy study. The location agreed by MPP, MOEF, and the Bank was the district of Toul Kork in Phnom Penh, an area well known to PPSWA. Based on the policy study, two key principles were retained: low-cost and willingness to pay. Thus, the concept and design were based on a mix of public and "low-cost" sewers, technology preferences and willingness to pay expressed by the targeted population through surveys, and a tariff level covering all of PPWSA's O&M expenses and, possibly, a small portion of the investment costs. The design provided for the construction of a sewage treatment plant and related equipment, installation of 18.2 km of public sewers and 14,167 communal connections. Implementation of the component was interrupted in mid 2002, with the appointment of a new Governor of Phnom Penh, following local elections in February While the nature and location of the component had been agreed with the previous city administration, MOEF, and PPWSA, protracted discussions took place between the Bank and officials of the new city administration regarding two issues. The new Governor rejected the modalities for cost recovery and the choice of Toul Kork. He proposed instead a section of the downtown area of Phnom Penh for which other and new priority infrastructure investments were envisaged, namely improvements in drainage and roads to cope with the severe flooding and waterlogging occurring during the rainy season. Then two obstacles emerged to pursuing implementation of the component. First, bids had been received for Toul Kork, and there was no time before Credit closing to complete preparation and construction in another area of the city. Second, a solution to the drainage problems in the downtown area of the city was a radically different project. In June 2002, the Bank recognized the need for a proper sequencing of investments and decided to terminate further work on the pilot program. Instead, it agreed to redirect efforts towards preparing a broader program covering drainage, sewerage, and road improvements for the same downtown area of the city to be financed under the successor project. However, this in turn was dropped at the December 2002 Decision Meeting of the successor project for lack of IDA funds. Most of the unused funds under the component were reallocated to further extend the water supply distribution networks under the PPWSA and SWSA components. Although the component was dropped, most of the preparatory work - feasibility studies, design, and bidding documents - retains its value. Two other positive outcomes - though modest - are the know-how in sanitation acquired by PPWSA staff and the exposure of the municipality of Phnom Penh to Bank policies and operations in the water and sanitation sector. 4.3 Net Present Value/Economic rate of return: At appraisal, the ERR for the PPWSA component was estimated at 18.8 percent, based on investments to be financed under the project. A rate of return was recalculated at completion in May 2004, on the basis of all investments undertaken by PPWSA since appraisal, including those

16 financed under grant by bilateral sources under tied aid. Some of these capital investments were very large. Since all PPWSA's operational and financial data are aggregated, it was not possible to recalculate a rate of return solely on the basis of the IDA project. Therefore, recalculated rates are necessarily approximate. The result was an ERR of 8 percent. However, if all investments financed under tied aid are estimated, under reasonable assumptions, to have been procured under ICB, the EER rises to 12 percent, a rate that can be considered as proxy for the IDA project. For the SWSA component, the ERR at appraisal was estimated at 10.1 percent. The recalculated rate is 11 percent. SWSA did not undertake projects financed from other sources after appraisal. The overall ERR was estimated at 17.2 percent at appraisal, the recalculated rate is 8 percent, and the rate adjusted for ICB procurement, as noted above, is 12 percent, as the PPWSA component represented some 85 percent of the project in terms of costs/financing and benefits provided. 4.4 Financial rate of return: For the PPWSA component, the FRR was estimated at 13.6 percent at appraisal. The recalculated rate is 6 percent, and the adjusted rate, on the basis of ICB procurement, is 10 percent. The FRR for the SWSA component was estimated at 11.2 percent at appraisal. The recalculated rate is negative, because SWSA was unable, as already noted, to generate enough operating revenue due to its lack of autonomy and its limited capacity to extend its distribution network to sell more water. 4.5 Institutional development impact: The Institutional Development Impact (IDI) for the project as a whole is rated substantial. However, a clear distinction must be made between the various entities involved. The rating is high for the PPWSA, which has become a financially viable and strong water utility, with dramatic improvements in organization, profitability, and operational performance. PPWSA has undergone fundamental changes, including company culture. It has moved from an inward-looking utility plagued by operational problems to an outward-looking entity, familiar with global developments and best practices and confident in its dealings with bilateral and multilateral financial institutions as well as with international contractors and suppliers. On the domestic market, it has gained the respect of the Government, as well as of public and private users. In South-East Asia, it is regarded as a model and is solicited for sharing its experience at seminars and other professional events. Specific IDI developments were achieved in the following areas: effective management and control of production and distribution facilities; financial information and accounting data available in real time; computerization generalized throughout the entity; and human resource development through in-house and overseas training. PPWSA financed, with its own resources, a training center set up on its premises for its staff and open to personnel from other water utilities. The management team is fully aware that the future of the entity depends on its ability to strengthen middle management and attract highly qualified young staff. In that connection, its compensation policy is to reach levels comparable to those of the private sector within a few years. The rating is substantial for the SWSA. The entity's management has increased its capacity in operational matters, mainly in planning and coordinating different phases in project

17 implementation, and in day-to-day operations. The performance level of the workforce in O&M was raised thanks to the training provided by the main contractor and other individual consultants. However, the SWSA was hardly exposed to procurement and contracting matters and to financial issues. The rating for MIME is modest. The main IDI of the project was limited to developing knowledge of procurement, financial management, and contract negotiations among UPWS' staff. The policy component exposed several high officials of MIME and of other ministries to global experiences and best practices, including on regulatory matters, but little capacity was built in terms of ability to generate and produce policy-oriented documents in a timely manner. So far the internal discussions and reviews of the draft Regulatory Law have raised a greater awareness of sector issues in a competitive environment among Government officials and further processing of the draft law should similarly expose parliamentarians. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Two factors substantially affected the outcome of the project in a positive manner. First, intensive inputs from the Bank and a constant dialogue with the borrower guaranteed close scrutiny of progress, but, at the same time, permitted the Bank team to react swiftly and flexibly to problems. Second, the performance of the supervision consultant was exemplary in terms of professional input, judicious advice, quick reaction and training. Two factors negatively impacted project execution, one substantially, the other partially. Past conflicts had a substantially adverse effect on the start of project implementation in Sihanoukville, causing a serious delay in the delivery of project benefits to the population. While the deficient quality of some equipment procured abroad caused delays in implementing the PPWSA component, these were kept manageable thanks to the vigilance of and the rapid corrective measures taken by the supervision consultant. 5.2 Factors generally subject to government control: The failure of the Government to provide greater autonomy to the SWSA substantially affected SWSA's performance negatively. The situation was exacerbated by MIME's and MOEF's heavy administrative procedures and inexperience in procurement and contract negotiations. The change of heart of MPP with respect to the nature and location of the pilot sanitation program partially affected the project, in that it created uncertainty with respect to the relative investment priorities in the eyes of the Government and the municipality and, as a result, caused delays. 5.3 Factors generally subject to implementing agency control: Strong commitment and effective management substantially affected the outcome of the PPWSA component. The PPWSA showed creativity and a readiness to adopt a new culture, new methods of working, and new tools, such as state-of-the-art IT. This played a key role in leading the PPWSA to exceed all SAR expectations and targets. The performance of the PPWSA has led to an unintended benefit by creating a positive image, in the country and abroad, of what can be achieved in the water sector

18 5.4 Costs and financing: Final costs of the project are estimated at US$35.3 million against an appraisal estimate of US$41.6 million, or about a 15 percent saving. However, costs borne by the Government and the PPWSA are difficult to fully quantify. Disbursements by IDA amounted to US$30.1 million, against US$30.9 estimated at appraisal, or 97.4 percent. The structure of costs and financing is substantially different from what was envisioned at appraisal due to the large savings on the turnkey contract. The closing date of the Credit was extended three times, for a total of 15 months after the original date, a postponement justified by the emphasis on serving as many areas as possible. 6. Sustainability 6.1 Rationale for sustainability rating: The sustainability of the overall project is rated highly likely, on the basis of the rating for the PPWSA component. Sustainability of the PPWSA component is rated highly likely. All conditions have been met for PPWSA to maintain the benefits achieved over the economic life of the project. It has developed the capacity to maintain the level of service presently available and has the means of extending coverage to the suburbs and peri-urban areas of the city. Its financial position permits it to borrow from international financial institutions under non-concessional loans and service the debt, and, if it were not for the country risk, it could even borrow from commercial banks. Its human resource and compensation policies are gradually converging to those prevailing in the private sector. The entity and its management have gained an indisputable credibility with the Government, the municipality and the population. Although there is a high commitment on the part of SWSA's management to maintain the benefits achieved so far, their sustainability over the economic life of the project is unlikely for the following reasons. First, there is no realistic prospect of a change in status of SWSA. In addition to a lack in decision-making, SWSA is unable to resist political and/or administrative pressures or decisions impacting negatively on its operations. Second, and for the same reason, SWSA' staff does not have the skills, incentives, and culture required to move to a more independent management of the entity. Third, SWSA is unable to adopt the necessary measures to protect the catchment area of the lake from increased encroachment from public and private buildings, whose construction is often authorized by the central or provincial authorities. This is all the more regrettable since according to past records, the lake and its surrounding area were property of SWSA before the Khmer Rouge era. This situation has deteriorated rapidly over the recent past, despite numerous warnings from the Bank, and poses a serious threat to the expansion of service and to the welfare of the population. Moreover, pollution of the source is bound to increase. Fourth, SWSA is facing a serious imbalance in its operations in that it does not have the financial resources to install connections at a sufficiently rapid pace (only 50 connections per year) to match its effective capacity and therefore raise its operating revenues by selling more water. The sustainability of the policy component is rated likely. The benefits derived from the new policies have hardly had a chance to materialize by Credit closing, as their implementation only