FOR OFFICLAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICLAL USE ONLY PROJECT COMPLETION REPORT LESOTHO HIGHLANDS WATER ENGINEERING PROJECT (CREDIT 1747-LSO) JUNE 20, 1993 Infrastructure Operations Division Southern Africa Department Africa Regional Office ReportNo 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 EOUIVALENTS Currency Unit : Loti [plural: Maloti (M)'/] Loti 1.00 = 100 Lisente (Lis) Exchange Rate at Appraisal : US$1.00 = M 2.00 Loti 1.00 = US$0.50 Exchange Rate at Completion : US$1.00 = M 2.59 Loti 1.00 US$0.39 MEASURES AND EOUIVALENTS 1 millimeter (mm) : inches (in) or feet (ft) 1 meter (m) : in or 3.28 ft 1 hectare (ha) : 10,000 m 2 = 107,584 ft 2 1 kilometer (km) : 0.62 mile (mi) 1 square kilometer (km 2 ) 1 cubic meter per second (m 3 /s) : : square miles (mi 2 ) 353 cubic feet per second = 15,840 US gallons/minute 1 ton of oil equivalent (toe) : 40.5 million British thermal unit (BTU) 1 Gigawatt hour (Gwh) 1 million Kilowatt hours ABBREVIATIONS AND ACRONYMS CIM : Center for International Migration, Germany EC : European Community EDF : European Development Fund EIB : European Investment Bank JPTC : Joint Permanent Technical Commission LEC : Lesotho Electricity Corporation LHDA : Lesotho Highlands Development Authority LHWP : Lesotho Highlands Water Project ODA : Overseas Development Administration, United Kingdom PCR : Project Completion Report PWV : Pretoria-Witwatersrand-Vereeniging Area RSA : Republic of South Africa SDR : Special Drawing Rights UNDP : United Nations Development Programme USAID : United States Agency for International Development FISCAL YEAR Government of Lesotho : April 1 - March 31 1/ Maloti are at par and circulate alongside South Africa's rand.

3 FOR OFFICIAL USE ONLY THE WORLD BANK Washkgon, D.C U.S.A Office of Director-General Operations Evaluation June 10, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Lesotho Lesotho Hiahlands Water Entineerinf Proiect (Credit 1747-LSO) Attached is the report entitled "Project Completion Report on Lesotho - Lesotho Highlands Water Engineering Project (Credit 1747-LSO)" prepared by the Africa Regional Office with Part II contributed by the Borrower. One of the largest Engineering Projects (over US$51 million) prepared by the Bank, the project provided for the comprehensive technical, institutional, financial and *nvironmental preparation of the Lesotho Highlands Water Project with (current) estimated cost of US$2.4 billion. Preparation included Bank involvement in facilitating the drafting and signing of the international treaty between the Kingdom of Lesotho end the Republic of South Africa. The project achieved all its objectives, within time end cost and its institutional development success is noteworthy. Accordingly, the project is rated as highly satisfactory and its sustainability as likely. These ratings are confirmed by the current, smooth, implementation of the follow up investment project. The Project Completion Report is of good quality. The Project may be audited, together with the investment project. I This documnt has a restricted distribution end my be usd by recipients only fn the performance of their official duties. Its contents my not otherwise be disclosed without World gank authorization.

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5 FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT LESOTHO HIGHLANDS WATER ENGINEERING PROJECT (CREDIT 1747-LSO) TABLE OF CONTENTS PREFACE... EVALUATION SUMMARY... i ii PART I. PROJECT REVIEW FROM ASSOCIATION'S PERSPECTIVE Project Identity... 1 Background... I Project Objectives and Description... 2 Project Design and Organization... 4 Project Implementation... 4 Project Results... 5 Project Sustainability... 8 Association Performance... 8 Borrower Performance... 9 Project Relationship... 9 Consulting Services and Studies... 9 Project Documentation and Data... 9 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE PART III. STATISTICAL INFORMATION Related Bank Loans/Credits Project Timetable Cumulative Estimated and Actual Disbursements Project Costs and Financing Project Financing Project Result Studies Status of Covenants Use of Bank Resources Staff Inputs Missions This document has a restricted distribution and may be used by recipients only in the performance or their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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7 - i - PROJECT COMPLETION REPORT LESOTHO HIGHLANDS WATER ENGINEERING PROJECT (CREDIT 1747-LSO) PREFACE 1. This is the Project Completion Report (PCR) for the Highlands Water Engineering Project, for which Credit 1747-LSO (SDR 8.0 million, US$9.8 million equivalent) was approved on December 15, 1986, and declared effective on March 13, 1987, respectively. The project was cofinanced by the Govemment of Lesotho, European Development Fund (EDF), European Investment Bank (EIB), Overseas Development Administration (ODA) of the United Kingdom, the Govemment of France, Center for Intemational Migration (CIM) of Germany, United Nations Development Program (UNDP), United States Agency for International Development (USAID) and the Republic of South Africa (RSA). The credit was fully disbursed on April 11, 1990, and the Credit was closed on December 31, This PCR was prepared by the Infrastructure Operations Division of the Southern Africa Department (Preface, Evaluation Summary, Parts I and III). Part II has been prepared by the implementing agency for the project, the Lesotho Highlands Development Authority (LHDA). 3. Preparation of this PCR was based inter alia on the Report and Recommendation of the President, the Development Credit Agreement, supervision reports, correspondence between the Association and the Borrower and intemal Association memoranda.

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9 - ii - PROJECT COMPLETION REPORT LESOTHO HIGHLANDS WATER ENGINEERING PROJECT (CREDIT 1747-LSO) EVALUATION SUMMARY Project Objectives 1. The main objectives of the Lesotho Highlands Water Engineering Project were to assist the Government of Lesotho in the design and preparation of the initial construction phase (Phase LA) of the Lesotho Highlands Water Project (LHWP) and to support the required institutional arrangements. 2. Major project components included: detailed design, preparation of tender documents and evaluation of bids for the construction of the Katse Dam, the transfer tunnel and a hydropower complex; detailed engineering for infrastructure improvements for the LHWP; studies on the environmental aspects, resettlement and rural development issues related to the LHWP; strengthening of Lesotho Highlands Development Authority (LHDA) through technical assistance, training and the provision of funds for its operating expenses; technical assistance to the Government of Lesotho to support its representation in the Joint Permanent Technical Commission (JPTC); a power generation planning study; and an investment planning and tariff study for the Lesotho Electricity Corporation (LEC) and a power generation planning study.' 3. The project was executed by LHDA with the assistance of consultants. Implementation Experience 4. Despite a complex and delicate environment involving two governments and the large number of institutions involved in project financing, implementation of the project was successful and led to approval of Bank financing of Phase IA of LHWP (Loan 3393-ILSO, approved on July 23, 1991). At appraisal, the project was scheduled for completion by February 28, 1990, and most of the components were completed on schedule. 5. The implementation of the project concentrated first on the recruitment of consultants and LHDA staff. Careful monitoring at the early stage of recruitment and adherence to the implementation schedule expedited project initiation. Appropriate training, together with 1 The power generation planning study was included as part of the investment planning and tariff study during implementation.

10 regular review of work performance, helped to build up the number and competence of Basotho staff. The various technical assistance assignments provided LHDA with the necessary skills for managing the project, supervising the engineering consultants, supervising the environmental and compensation studies and preparing relevant policy proposals and for implementing the financial management and accounting systems. 6. All designs were reviewed by an international panel of experts which convened at critical intervals of the design work. The findings of their reviews were incorporated in design modifications. Close and early coordination in the design of the hydropower and water transfer components ensured timely completion of the two major design tasks. Reviews by the panel of international experts also reduced the risks associated with the development of designs. Similarly, a panel of international experts reviewed the design of the action program for environmental and social aspects of LHWP (Phase 1A). Results 7. As the project was implemented along the lines envisaged at appraisal with no changes in focus, its stated objectives, namely, assisting in the design and preparation of the first phase of the LHWP and supporting the required institutional arrangements, were successfully achieved. The successful completion of the project not only laid the necessary engineering and institutional foundation for commencing the LHWP (Phase 1A) but also helped to secure the large amount of funds required for implementing it. 8. The project also financed detailed studies on the social and environmental aspects of the LHWP area which resulted in the adoption by the Government of Lesotho of a comprehensive environmental action plan. The effective and successful implementation of the environmental action plan will have positive impacts on the physical and social environment and the living conditions for residents in the LHWP area. In addition, the project funded the LEC development planning and tariff study which provided the necessary information for improving the management, operation and financial performance of LEC. Susnability 9. As the project was the engineering phase of the LHWP (Phase 1A) its sustainability will depend on the successful completion of the LHWP (Phase 1A) and subsequent operation of the water transfer and hydropower components, which in turn will depend, to a large extent, upon continued institutional development and strengthening of LHDA.

11 - iv - Findings and Lessons Learned 10. The main lessons drawn from the implementation of the Lesotho Highlands Water Engineering Project are: careful monitoring, close coordination in the implementation of various components and adherence to the implementation schedule at the early stage are crucial for the timely completion of the project (see para. 5.1); building up and strengthening the capacity of the implementing agency is critical for the success of the project (see para. 6.6); in particular, assignment of national staff to line positions, as opposed to functioning as counterparts, enhanced the responsibility of staff and the sustainability of the institutional arrangements. however, in attracting staff to the project implementing agency care should be taken not to cause a drain of skilled local staff from other government agencies (see para. 6.7); early focus, open information sharing and debate are essential for ensuring the agreement by all parties on a comprehensive environmental action plan (see para. 6.8);

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13 PROJECT COMPLETION REPORT LESOTHO HIGHLANDS WATER ENGINEERING PROJECT (CREDIT 1747-LSO) PART I: PROJECT REVIEW FROM ASSOCIATION'S PERSPECTIVE 1. Project Identity Project Name Credit No. RVP Unit Country Sector : Natural Resources Sub-sector Water Lesotho Highlands Water Engineering Project 1747-LSO Southern Africa Department, Infrastructure Operations Division Lesotho 2. Backeround 2.1 Lesotho is a small country completely surrounded by the Republic of South Africa. It is mountainous and possesses few natural resources. Agriculture is still the leading sector of the domestic economy, providing employment and contributing partially to income for about 70 percent of the population. The development of a modern industrial sector has been limited by the need to import nearly all raw materials and intermediate goods, the proximity of the highly industrialized economy of RSA, and the shortage of skilled entrepreneurial, managerial and technical manpower. As a result, Lesotho depends heavily on RSA for paid employment, imports, government revenue, monetary arrangements, electricity as well as transport routes. 2.2 Thus, a major objective of Lesotho's development strategy is to broaden its economic base and thereby reduce its vulnerability to external factors that results from its heavy dependence on RSA. However, given its slim resource base, Lesotho's ability to build a more self-reliant economy has been extremely limited. Water is the only natural resource that is in relative abundance in Lesotho. At present, only a small fraction of Lesotho's surface water resources (about 175 m 3 /s), dominated by the Senqu River system, is utilized. The prospect for a substantial increase in the economic exploitation of this resource has been enhanced by the growing water deficit in South Africa's industrial hub between Pretoria and Witwatersrand and its desire to supplement its domestic supplies with imported water from Lesotho. The feasibility of diverting large quantities of water of the Senqu River, from the natural south-westwardly flow north to the Pretoria-Witwatersrand-Vereeniging (PWV) area in RSA, was first studied in the 1950s, and again in the 1960s (under a UNDP-financed project executed by the Bank). These earlier studies did not result in a project because agreement could not be reached between the two governments on payment for water exports.

14 2.3 In 1978, the Lesotho and South African governments appointed a joint technical committee to study further a possible water transfer scheme. The resulting feasibility report (1979) recommended construction of a water transfer scheme of 35 cubic meters per second (m 3 /s), requiring the phased construction of four dams and about 100km of water transfer tunnels. The scheme also envisaged a hydropower generation component. 2.4 Following the review of the preliminary feasibility study, the two governments agreed on the preparation of a more detailed project layout and on the scope of another, more detailed, feasibility study. The cost of this feasibility study was shared by the two governments. Stage 1 of this study commenced in August 1983 and was completed in December of the same year. Lesotho's funding was made available through a grant from EDF. Financing from UNDP, with the Bank as the executing agency, provided a technical team to supervise the execution of the studies on behalf of the Government of Lesotho. The Stage 1 studies identified an optimal project layout and concluded that there were no unsolvable environmental, socioeconomic or legal difficulties. The two governments then agreed in 1984 to go ahead with Stage 2 of the feasibility studies and to increase the eventual quantity of water to be exported to 70 m 3 /s. The Stage 2 feasibility studies were completed in April The basic agreement to proceed with the implementation of the project was then reached through the signing of the "Treaty on the Lesotho Highlands Water Project between the Government of the Kingdom of Lesotho and the Government of the Republic of South Africa" (the Treaty) on October 24, The Treaty covered the rights and obligations of each party and specified the quantities of water to be delivered, the cost sharing provisions, and the scope and calculation of benefit (royalty) payments. It further set out the principles for financing, construction, operating and maintaining the LHWP. The Treaty provided that RSA would be responsible for all the costs of that part of LHWP related to the delivery of water to South Africa and Lesotho would be solely responsible for financing the hydropower component. Thus, Lesotho would assume virtually no financial obligation for the water transfer component. The Treaty also provided for the establishment of a number of institutions including the Joint Permanent Technical Committee and the Lesotho Highlands Development Authority. 2.6 The Lesotho Highlands Water Engineering Project covered the detailed design stage of the first construction phase of the LHWP. This multi-purpose scheme would allow the Lesotho Government to exploit an abundant natural resource as a means of generating revenues which would help broaden the country's economic base. The scheme would raise revenues for development from the sale of water to South Africa, generate hydroelectric power for domestic consumption and promote development of the project area. 3. Project Objectives and Description 3.1 The objectives of the Lesotho Highlands Water Engineering Project were to assist the Government of Lesotho in the design and preparation of the initial phase of the LHWP and to support the required institutional arrangements.

15 The Project consisted of the following parts: part A. Prject Praration i. Optimization studies, geotechnical investigations, detailed engineering, preparation of tender documents and evaluation of bids for the construction of: (a) (b) (c) a hydropower complex; the Katse Dam, including all ancillary structures and diversion works; and the transfer tunnel from Katse to the hydropower complex, including the terminal structures. ii. Detailed engineering for infrastructure improvements, including upgrading of existing roads and bridges, and construction of new access roads and bridges. iii. Studies on the environmental aspects (health, archeology, ecology and wildlife conservation) of the LHWP. iv. Resettlement and related regional development studies, including relevant censuses. jart B. Lesotho Highlands Development Authority: 1. Strengthening of LHDA through: (a) (b) (c) (d) (e) the provision of consultants' services in the fields of engineering, finance, accounting, insurance, resettlement, environment and administration; the acquisition of office furniture, equipment and vehicles; the provision of support services by various government authorities; the development and operation of an in-service training program, including provision of overseas scholarships; and the provision of funds for its operating expenses. ii. Establishment of a panel of experts to advise on dam, tunnel and hydraulic design and safety aspects and a panel of environmental experts.

16 - 4- Part C. Technical Assistance: i. Support of the Borrower's representation in JPTC. Part D. Studies: i. An investment planning and tariff study for the Lesotho Electricity Corporation. ii. A power generation planning study. 3.3 In addition and parallel to the preparation activities under Part A of the Project, geotechnical investigations, detailed engineering, preparation of tender documents and evaluation of bids for the construction of the delivery tunnel from the tail pond of the hydropower complex to the Ash River outlet in RSA, including the terminal structures and syphon-type crossings under various rivers, were carried out and financed by agencies of RSA pursuant to the Treaty. 4. Project Design and Organization 4.1 The Lesotho Highlands Water Engineering Project was identified in 1982 when the feasibility study was commissioned. Subsequently, the Government of Lesotho formally requested Bank assistance in carrying out the project. From the beginning the design of the project was carried out within the overall framework of the country's development strategy, namely, to broaden its economic base and to promote sustainable development. The project's objectives were clearly understood by all the relevant parties involved, and the design and organization of the various components of the project were well coordinated. Execution of the Engineering Project was the responsibility of LHDA, which was provided for by the Treaty and established under Lesotho law in November The Project was appraised in October 1985 and the credit negotiated in May As is evidenced by the smooth process of implementation the scope and scale of the project were consistent with its stated objectives and the project was well prepared. 5. Project Implementation 5.1 Implementation Schedule At appraisal, the project was scheduled for completion by February 28, 1990, and most of the components were completed on schedule. The implementation of the project concentrated first on the recruitment of consultants and LHDA staff. Careful monitoring at the early stage of recruitment and adherence to the implementation schedule expedited project initiation. Close and early coordination in the design of the hydropower and water transfer components ensured timely completion of the two major design tasks. Reviews by a panel of international experts also reduced the risks associated with the development of designs. Despite the large number of institutions involved in the project financing, no delays were experienced during the implementation of the components financed by the Engineering Project.

17 5.2 Project Costs and Financing The total cost of the project was estimated at US$51.3 million at appraisal, comprising US$37.8 million (or 74 percent) in foreign costs and US$13.5 million (or 26 percent) in local costs. Estimated and actual costs and funding for the project are detailed in Table 5 in Part III. The Credit was approved by the Board on December 11, 1986, and the Development Credit Agreement was signed on December 15, Original financing under the Engineering Credit was for the amount of SDR 7.8 million (US$9.75 million equivalent), or 19 percent of the estimated total cost. Further funding for the project was provided by CIM of Germany, EDF, EIB, ODA, the Government of France, the Government of Lesotho, RSA, USAID and UNDP. As specified in the Development Credit Agreement, the execution of the EDF Loan Agreement and the EIB Loan Agreement was condition of credit effectiveness and the credit became effective on March 13, Final IDA disbursement under the Engineering Project was US$10.43 million due to the fall in the dollar against SDR during project implementation. 5.3 Disbursements In order to expedite disbursements, a Special Account in US dollars was established in the United Kingdom and operated by the Central Bank of Lesotho on terms and conditions satisfactory to the Association. AR IDA eligible expenditures were prefinanced from the Special Account, unless otherwise previously agreed to by the Association. The annual audit of LHDA's accounts also covered the Special Account and associated statements of expenditures. The estimated and actual disbursements of the Credit are given in Table 3 in Part III. As can be seen from the Table, there were no significant variances between estimated disbursements at appraisal and actual disbursements and the last disbursement was made on April 11, The credit was closed, as originally planned, on December 31, 1990, and the Special Account was closed on February 4, Project Results 6.1 Piject Objective As the Engineering Project was implemented along the lines envisaged at appraisal with no changes in focus, its stated objectives, namely, assisting in the design and preparation of the first phase of the LHWP and supporting the required institutional arrangements, were successfully achieved. The successful completion of the Engineering Project has laid the necessary engineering and institutional foundation for commencing the LHWP (Phase IA), which is partly financed by the Bank (LN 3393-LSO). 6.2 Engineering Designs The designs of the Katse dam and the transfer tunnel were carried out by a joint venture consisting of firms from France, RSA and the United Kingdom. The delivery tunnel was designed by another joint venture composed of firms from RSA. The design services for the hydropower component were provided by firms from France and the United Kingdom. All designs were reviewed by an international panel of experts which convened at critical intervals of the design work. The findings of their reviews were incorporated in design modifications. Selection of design consultants financed by the Credit was carried out according to IDA guidelines.

18 Tender Documents and Bid Evaluation Tender documents for the major civil works for the water transfer component, i.e., Katse dam and reservoir, transfer tunnel and delivery tunnel, were issued on October 16, Tenders were received on April 20, 1990 and their evaluation was completed in August 1990 and contracts were awarded in December As construction activities for the hydropower component have to start later than the water transfer component, tenders for the hydropower component are phased and later than those for the water transfer component. Tenders for the civil works were invited in October 1992 and those for electro-mechanical equipment in November Securing Financing for the LHWP (Phase IA' The LHWP (Phase 1A) is a huge undertaking even by international standards, with total cost estimated at US$2,414 million. Raising such a large sum of funds for a small, resource-poor country like Lesotho presented a major challenge. In addition, as the costs of the water transfer and hydropower components were the respective responsibilities of RSA and the Government of Lesotho (para. 2.5) funding arrangements for the two components had to be different. Under the Credit a financial advisor was retained to assist LHDA in raising the financing for the water transfer component. To maximize international financing of the civil works, tenders were invited on a financed basis and funding raised by contractors and suppliers in the form of export credits and associated commercial loans was sought. This strategy proved successful and resulted in the receipt of bids from major exporting countries supported by offers of significant export credits and commercial loans. To ensure that debt service payments for the offshore lenders would be met in a timely manner and to provide some comfort for lenders who might otherwise be reluctant to assist in the financing, the Bank agreed to the establishment of a trust in which it would participate and share any shortfalls in repayments with other lenders on a pari passu basis. To complement the offshore lending, LHDA also developed a strategy for obtaining the on-shore financing from sources within Lesotho and RSA. As a result, financing for most items related to the water transfer component was secured before the start of construction of the LHWP (Phase IA). A financial advisor, funded by the European Economic Community, assisted in the coordination of the financing for the hydropower component. 6.5 Advance Infrastructure and Access Roads Another important result of the Engineering Project was the construction of advance infrastructure for the LHWP (Phase IA). The first contracts for engineering services were awarded in 1987 and contracts for the initial section of the access roads to project sites were awarded in early 1988 with financing provided by the Development Bank of Southern Africa (DBSA). All advance infrastructure, including the access roads were completed during Institutional Development One of the major components of the Engineering Project was to assist in the establishment and strengthening of LHDA. The LHDA was established in November 1986 by order of His Majesty King Moshoeshoe II (Order No. 23) and charged with the execution of the engineering, construction, and operation and maintenance of the LHWP, including the hydropower component. LHDA's current management structure evolved during the implementation of the Engineering Project. Initially, the chief executive had direct supervisory responsibility for all of LHDA's departments (technical, finance and accounting). In 1988, additional departments (environment, legal, public relations, training and infrastructure)

19 - 7 - were created and the positions of deputy chief executive and assistant to the chief executive were established. In 1989, the capital finance division, in charge of coordinating and monitoring the securing of finance for the LHWP (Phase LA) construction project was created and a second deputy chief executive was appointed. The various technical assistance assignments financed under the Engineering Project provided LHDA with the necessary skills for managing the project, supervising the engineering consultants, supervising the environmental and compensation studies and preparing relevant policy proposals and for implementing the financial management and accounting systems. 6.7 Training and Human Resources Development During the implementation of the Engineering Project, LHDA gradually built up its staff from 60 at the end of FY87 to 248 regular employees and about 20 semi-skilled workers in non-permanent positions by FY90. Careful monitoring of the work performance and appropriate training helped to build up the competence of Basotho staff. Out of its total work force, 68 higher level positions in the fields of accounting, administration, engineering, environment, finance and legal services were filled with Basotho staff. Practically all Basotho staff in higher level positions took over direct line positions and were not assigned on a counterpart arrangement basis. This approach proved to be extremely successful as it greatly enhanced the sense of responsibility of the staff and prepared them for early career advancement. LHDA's salary levels are attractive enough to retain qualified staff who otherwise might be looking for employment elsewhere, either in the local private sector or in neighboring countries. However, the build-up of LHDA's staff was achieved, to some extent, through the hiring of qualified staff from other government agencies. This caused some difficulties in the affected agencies. These difficulties have been mitigated by restructuring the Fourth Education Project (Credit 1512-LSO) to expand the overseas training of Basotho professionals for upgrading their skills through two-year programs so that they could fill positions vacated by those hired by LHDA. In addition, various donors have provided fellowship programs, primarily in engineering, for Basotho professionals. Also, in response to the general decline of the real value of civil service salaries and in order to retain qualified staff the Government of Lesotho instituted a special allowance scheme for technical staff working in other government agencies. 6.8 Social and Environmental Aspects The project produced a three-pronged environmental action plan (EAP), based on extensive studies made before and during the project, to be implemented during the LHWP (Phase 1A) project. The EAP comprises (i) a natural environment and heritage plan protecting flora, fauna and places of historical interest, (ii) a compensation plan for households losing dwellings, farmland and/or grazing land, and (iii) a rural development plan to further enhance the standard of living of the affected households by providing skills training and infrastructure in addition to the compensation measures. Government has adopted a compensation policy and enacted relevant regulations. The EAP will serve as a pilot for many of the measures in the National EAP implemented by Ministry of Planning with donor support. The project further prepared for implementation of the EAP during LHWP (Phase LA) in two ways: (i) construction of advanced infrastructure took place during the project which gave opportunity to apply and modify compensation and resettlement policies on a pilot basis, and (ii) LHDA got the time to build up and give experience to an environmental division now charged with implementation responsibility for the EAP. LHDA's environmental division was supported

20 - 8 - by a full-time environmental advisor and two meetings of an international panel of experts reviewing the preparation of the EAP. Agreement on the compensation policies and the cost sharing of the rural development plan between the two participating governments was reached only after long discussions. IDA facilitated the process by providing technical assistance through missions and by promoting open and timely sharing of information between the parties. The early and open discussions also contributed to building consensus within LHDA (the engineering units and the environmental division) on the scope and content of the EAP. The EAP was created fully in line with World Bank guidelines and is of high quality. This is due to a combination of (i) LHDA taking ownership of the development of the EAP and putting priority on it, and providing resources for the work, and (ii) Bank supervisory staff giving the EAP due attention in all project components, adequately supported by environmental specialist mission staff. 7. Project Sustainabilitv 7.1 The project not only contributed to the successful completion of the engineering works for the LHWP (Phase IA) but also actively supported the institutional development of the LHDA. The LHWP (Phase 1A) is financed partly by an IBRD loan (Loan 3393-LSO) and the institutional development and strengthening of LHDA in practically all fields continue to be supported by the LHWP (Phase IA). Efforts are also continuing to replace expatriates with Basotho staff as and when the latter acquire the requisite experience. The present organizational structure of LHDA will require changes as the implementation of the LHWP (Phase 1A) nears completion, in order for it to become ready for the operating phase of water transfer and hydropower generation. To ensure that the appropriate institutional structure and capacity are in place before the start of operations LHDA has agreed under the LHWP (Phase IA) to undertake an organizational review and training assessment. The agreed recommendations of such studies will be implemented by LHDA by October 31, Thus, to a large extent, sustained institutional development will depend on LHDA's effort and capacity to implement in a timely fashion the required changes in its own structure as the project moves on to subsequent stages. 8. Association Performance 8.1 The main rationale for the Association's involvement in the Engineering Project stemmed from its belief that the LHWP is in the best economic interest of Lesotho as it offers a unique opportunity to convert water into export revenue. At the request of the Government of Lesotho the Bank helped to guide the complicated and delicate negotiations between Lesotho and RSA and acted as the lead agency in the raising of the massive amounts of funds required for implementing the project. The Association's involvement in the Engineering Project not only ensured the successful completion of the engineering phase but also sent strong signals to international contractors and financial institutions confirming the desirability as well as the feasibility of the project, and was instrumental in securing the necessary financing for the project. Because of its impartiality the Association was able to act as the "honest broker" in a complex and delicate environment involving two governments and a large number of consultants, thus ensuring the economic, financial and environmental viability of the LHWP while at the same time

21 - 9 - promoting the widest possible international cooperation in the LHWP. The complexity and sensitivity of the project required considerable flexibility and freedom for managers to make quick decisions. 9. Borrower Performance 9.1 The implementing agency for the project, LHDA, performed very well during the implementation of the project, particularly given its rapid rate of growth during the period in question. LHDA's accounts have been audited by independent auditors acceptable to the Association since its establishment in 1986, and the audit reports were submitted to the Association within four months of the end of each fiscal year. LHDA's performance in this regard has also been satisfactory. The audits did not raise any issues. 10. Project Relationship 10.1 The Association's relationship with the Government of Lesotho and LHDA, the implementing agency, on the project has been very satisfactory. 11. Consultine Services and Studies 11.1 The Engineering Project financed consultants for the technical assistance components and the design of a component of the water transfer facilities. The consultants were shortlisted by the Government of Lesotho and selected in accordance with the Association's guidelines. Consultants financed from other sources were recruited in accordance with the respective financing agencies' requirements. The RSA-financed consultants for the water transfer component were familiar with the project because of their participation in the feasibility study and provided valuable continuity. The Association was very actively involved in reviewing the progress and recommendations of the consultants in close cooperation with LHDA. All consultants have performed to the full satisfaction of LHDA. 12. Project Documentation and Data 12.1 The Development Credit Agreement in the case of Credit 1747-LSO was appropriate for achieving project objectives. The inclusion of the execution of the EDF Loan Agreement and the EIB Loan Agreement as additional conditions of credit effectiveness ensured that financing from other sources for the project was made available at the early stage of project implementation. The provisions regarding the execution of the project and the financial covenants were particularly useful in ensuring the close consultation and cooperation between the Association

22 and LHDA during every stage of the project implementation. As the project was an engineering credit, no staff appraisal report was produced. However, the Memorandum and Recommendation of the President provided a useful framework for both the Association and LHDA for project supervision and implementation.

23 PROJECT COMPLETION REPORT LESOTHO HIGHLANDS WATER ENGINEERING PROJECT (CREDIT 1747-LSO) PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE Introduction 1. The implementation of the Lesotho Highlands Water Engineering Project was a critical stage in the development of the Lesotho Highlands Water Project (LHWP). It represented concrete evidence of the commitment of the parties to the Treaty to proceed with the implementation of the LHWP. The generous financial support and goodwill received by the Lesotho Government from bilateral and multilateral development aid agencies was a strong catalyst in stimulating a receptive environment among the international contracting and financial communities thereby paving the way for the eventual successful fund-raising program for the construction phase of this complex scheme. Project Benefits/Results 2. The engineering project provided an ideal opportunity for establishing a sound institutional and financial foundations for the successful implementation of the construction phase of the LHWP. With the financing provided by the donor community, as well as direct contributions by both parties to the Treaty, it was possible to procure key services to supplement LHDA's own expertise. 3. Apart from the services usually associated with "engineering projects", the Lesotho Highlands Water Engineering Project included services in two key areas. These were technical assistance for institutional support to LHDA and financial advisory services. The technical assistance provided by a reputable engineering consultancy firm greatly enhanced LHDA's capability in supervising and monitoring the preparation of designs and tender documents. Similarly, the financial advisory services provided by an international merchant bank, were critical in facilitating the successful mobilization of the massive financing required for the major construction works of the Water Transfer component of the LHWP.

24 The engineering project also provided financing for wide-ranging studies into environmental and resettlement aspects of the LHWP. These studies have resulted in the formulation of a comprehensive Environmental Action Plan which is being implemented parallel to major construction works and is aimed at ameliorating the negative impacts of the LHWP on the communities in the project area. Conclusion 5. The Lesotho Highlands Water Engineering Project greatly facilitated the preparation of the LHWP and has ensured the timely and successful implementation of the construction phase of the project.

25 PART m: STATISTICAL INFORMATION

26 TABZLA Related Bank Loans and Credits PROJECT TITLE YEAR OF STATUS LO N/CREDIT PURPOSE APPRAISAL (l COMPLETE) C0MMENTS Seven Towns Provision of water to Project revised. Water Supply 20,000 new consumers; New water schemes Project Improvement of service built for 2 out 887-LSO to 21,000 current of the 7 towns, consumers; and remaining 5 were strengthening of WSB' rehabilitated. Lesotho Highlands Water Project (Phase 1A) 3393-LSO Providing the necessary physical investments and institutional support for the transfer of water to RSA and preparing for later construction phase of LHWP; and the generation of hydropower ongoing Water and Sewerage Branch of the Ministry of Water, Energy and Mining

27 Proiect Timetable TABLE 2 ITEX( PLANNED DATE REVISED DATE ACTUAL DATE Identification Mission Pre-Appraisal Mission 10/85 08/85 08/85 Appraisal Mission 12/85 11/85 Credit Negotiation 09/15/86 05/12/86 Board Approval 12/11/86 12/11/86 Credit Signature 12/15/86 Credit Effectiveness 03/87 03/13/87 Project Completion 02/28/90 04/20/90 Credit Closing 12/31/90 12/31/90 Account Closing 02/04/91 ' Date when bids for the major construction works for the water transfer component were received.

28 TABLE 3 Cumulative Estimated and Actual Disbursements (US$ million) CUMULATIVE DISBURSEMENTS AT END OF QUARTER BANK FISCAL YEAR AND APPRAISAL REVISED QUARTER ENDING ESTIMATES ESTIMATESa/ ACTUAL FY 1987 September 30, December 31, 1986 March 31, June 30, FY 1988 September 30, December 31, March 31, June 30, FY 1989 September 30, 1988 December 31, March 31, June 30, FY 1990 September 30, 1989 December 31, March 31, June 30, FY 1991 September 30, 1990 December 31, March 31, 1991 June 30, FY 1992 September 30, Original Credit Closing Date: December 31, Actual Credit Closing Date: December 31, Last Disbursement: April 11, Account Closing Date: February 4, a/ As at November 30, 1987.

29 TABLE 4 Page 1 of 2 Project Costs and Financing A. Proiect Costs (US$ million) APPRAISAL ITEMS ESTIMATESa ACTUAL Geotechnical Investigations - Water Transfer (including Dam) Hydropower Component Delivery Tunnel 2.29 Sub-total 9.48 Engineering Design - Water Transfer (including Dam) Hydropower Component Delivery Tunnel Access Roads (including infrastructure) 1.14 Sub-total Technical Assistance Operating Expenses 4.39 Vehicles/Equipment 0.34 Training 0.42 Special Studies 1.29 Services by Government Agencies 0.73 Sub-total Physical Contingencies 4.75 Price Contingencies 4.41 Sub-total 9.16 TOTAL PROJECT COST lb 49.39c a November 1986 prices b Taxes included were negligible as most items were not subject to taxation. C Breakdown of actual costs for the project components not available from LHDA.

30 -18 - TABLE 4 Page 2 of 2 B. Proaiot Financing (US$ million) SOURCE PLANNED FINAL IDA Government of Lesotho EDF EIB UNDP ODA Government of France 1.60 USAID CIM RSA TOTAL

31 TABLE 5 Page 1 of 2 Prolect Results A. Direct Benefits This section is not applicable. B. Economic Impact This section is not applicable. C. Financial Impact This section is not applicable.

32 Table 5 Page 2 of 2 D. Studies STUDIES PURPOSE AS DEFINED STATUS IMPACT OF STUDY AT APPRAISAL Environmental i) to confirm that the The adoption by Studies LHWP would not create the Government conditions which would of Lesotho of a allow the spread of vector natural environor water-borne diseases; ment and heritage ii) to determine whether plan. rare or unusual vegetation or wildlife could be adversely affected by the project and what protective measures should be taken; and iii) to identify any significant archeological resources which may be affected by the project and outline feasible preservation measures. Completed Resettlement i) to outline a viable Adoption by the and Regional resettlement program; Government of Development ii) to design a Lesotho of a Studies compensation program for compensation property losses and plan and a rural inundation of arable development land; and plan. iii) to draw up a regional development plan for the population adversely affected by the project. Completed Investment i) to provide the i) establish- Planning and necessary information for ment of a train- Tariff Study determining the scope and ing program for for LEC' cost of a distribution LEC staff; system expansion scheme; ii) implementaii) to identify further tion of a techtechnical assistance and nical assistance training requirements; program; and iii) to provide the basis iii) implementafor agreeing on an action tion of new tariff plan for improving LEC's structures. operations and tariffs; and iv) to outline a strategy for future investments in power generating capacity. Completed a. The power generation planning study was included as part of the investment planning and tariff study during implementation.

33 Status of Covenants TABLE 6 COVENANTS UNDER LOAN/CREDIT AGREEMENT SUBJECT STATUS Section 3.04 Section 3.04 Section 3.04 Section 4.01 Section 4.01 LEC (i) to commence not later than 6 months after the date of effectiveness of the EDF Loan Agreement, the preparation of an investment planning and tariff study; (ii) to complete the study within 18 months; and (iii) to submit the findings to the Association for review. Borrower shall commence not later than 3 months after the completion of the above-mentioned study the preparation of a power generation planning study; (ii) complete the study within 6 months; and (iii) submit the findings to the Association for review. Borrower shall implement the recommendations of said studies taking into account the Association's comments and in accordance with a timetable acceptable to the Borrower and the Association. LHDA to have its accounts, financial statements and the Special Account for each year audited; to furnish to the Association not later than 4 months after the end of each such year, certified copies of its audited financial statements and an auditor's report. LHDA to (i) maintain separate records and accounts reflecting expenditures with respect to which withdrawals from the Credit Account are made on the basis of statements of expenditure; and (ii) retain until 1 year after submission of the audit report for the fiscal year in which the last disbursement from the Credit Account was made, all records evidencing such expenditures. Complied with Complied with Complied with Complied with Complied with

34 TABLZ 7 Use of Bank Resources A. Staff InRuts STAGE OF PROJECT CYCLE STAFF WEEKS Through Appraisal 24.0 Appraisal through Board Approval Board Approval through Effectiveness 18.1 Supervision B. Missions STAGE OF MONTH/ NO OF STAFF SPECIALI- PERFORMANCE TYPE PROJECT YEAR PERSONS WEEKS IN ZATION RATING OF CYCLE THE FIELD REPRESENTEDA STATUS' PROBLEMS Pro-appraisal / EC,FA / EN,FA Appraisal 10/ EC,EN,FA Supervision / EN,FA,PS 1 01/ FA,PS 1 08/ FA 1 11/ EC,FA,PS 1 03/ FA,PS 1 07/ EC,FA,PS 1 09/ FA 1 11/ EC,EN,FA,PS 1 02/ EC,EN,ES,FA,PS 1 11/ FA,PS 1 05/ FA,EN,EC,PS 1 a. EC - Economist, EN = Engineer, ES - Environmental Specialist, FA Financial Analyst, PS - Procurement Specialist. b. 1 - Problem free or minor problems.