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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Water & Urban 2 Division Africa Region Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT (33220) ON A LOAN IN THE AMOUNT OF US$256.0 MILLION TO THE FEDERAL REPUBLIC OF NIGERIA FOR THE NATIONAL WATER REHABILITATION PROJECT December 28, 2001 Report No: This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective) Currency Unit = Naira US$ 1 = Naira (1992) Naira (1993) Naira (1994) Naira (1995) Naira (1996) Naira (1997) Naira (1998) Naira (1999) Naira (2000) FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS DWSQC ERR FGN FMWR HRDU ICR MTR NEPA NUWSRP NWRI NWRP O&M PMC PMO PPF PSP RC SAP SAR SWA UFW Departrnent of Water Supply and Quality Control Economic Rate of Return Federal Government of Nigeria Federal Ministry of Water Resources Human Resources Development Unit implementation Completion Report Mid-terrn Review Nigerian Electric Power Authority National Urban Water Sector Reform Program National Water Resources Institute National Water Rehabilitation Project Operation and Maintenance Project Management Consultant Project Management Office Project Preparation Facility Private Sector Participation Regional Consultant Structural Adjustment Program Staff Appraisal Report State Water Agency Unaccounted for Water { ~~~~~~~~~Vice President: Callisto Madavo (?ali~~~~~contry Director: Mark Tomlinson I

3 FOR OFFICIAL USE ONLY 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 4 5. Major Factors Affecting Implementation and Outcome 7 6. Sustainability 9 7. Bank and Borrower Performance 9 8. Lessons Learned Partner Comments Additional Information 12 Annex 1. Key Performance Indicators/Log Frame Matrix 13 Annex 2. Project Costs and Financing 14 Annex 3. Economic Costs and Benefits 17 Annex 4. Bank Inputs 19 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 21 Annex 6. Ratings of Bank and Borrower Performance 22 Annex 7. List of Supporting Documents 23 Annex 8. Borrower's Contribution 24 Annex 9. Implementation Schedule 32 Annex 10. List of Studies Completed 33 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.

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5 Project ID: P Team Leader: David A. Henley Project Name: WATER REHAB TL Unit: AFTU2 ICR Type: Core ICR Report Date: December 20, Project Data Name: WATER REHAB L/C/TF Nwnber: Country/Departmient: NIGERIA Region: Africa Regional Office Sector/subsector: WU - Urban Water Supply KEY DATES Original Revised/Actual PCD: 03/20/87 Effective: 08/27/92 08/27/92 Appraisal: 05/19/90 MTR: 06/20/96 06/30/96 Approval: 05/21/91 Closing: 06/30/99 06/30/2001 Borrower/Implementing Agency: Other Partners: FED. GOVT. OF NIGERIA/FMWR AND STATE WATER UTILITIES STAFF Current At Appraisal Vice President: Callisto E. Madavo E.V.K. Jaycox Country Manager: Mark D. Tomlinson C. Koch Weser Sector Manager: Letitia A. Obeng T. Pellegrini Team Leader at ICR: David Henley Elaine Patterson 1CR Primary Author: E. Warner; P. Kriss; E. Okongwu 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: U Sustainability: UN Institutional Developnment Impact: M Bank Performance: S Borrower Performance: U QAG (if available) Quality at Entry: Project at Risk at Any Time: Yes ICR U 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objectives, as stated in the SAR, were to: (i) improve the level of water supply service in selected urban and semi-urban areas by meeting the highest priority rehabilitation needs; and (ii) begin to address the most significant institutional weaknesses of State Water Agencies (SWAs) in order to improve their capability to efficiently operate and maintain water supply systems. The project was intended to provide a mechanism for financing sub-projects in individual states in order to meet the stated objectives.

6 The objectives appear to have been consistent with the implicit goal to improve provision of water to as many people as possible within the urban and semi-urban areas of Nigeria through rehabilitation and institutional strengthening. They were reasonable in the light of the sector situation where there was universal high demand for water versus very low production; systems were operating at 20 to 30 percent capacity largely due to their state of disrepair and under-maintenance; and institutional weaknesses stemming from the lack of autonomy and consequent weak incentives to run efficiently SWAs. It is noteworthy that given the state of disrepair of the nation's water assets, the government wanted a national project that would catalyze the process of gradual improvements throughout the country. The project design took account of its complexity and nationwide coverage, and risk containment measures were built-in to minimize problems related to: capacity of the Federal Government to manage a project that is geographically widely dispersed; and the states' commitment to providing counterpart funding. Administrative measures were set up to handle the former risk through the setting up of a project management consultant team (PMC) within the Project Management Office (PMO) at the federal level; regional consultants (RCs) located in zonal offices to handle groups of SWAs; quarterly reporting along a format identified at appraisal and refined as the project developed; annual workshops to be attended by all participating SWAs and the Federal Ministry for Water Resources (FMWR); the Bank also planned for increasing its supervision efforts. Counterpart funds were deducted directly from the federation accounts of each participating state which addressed the second risk. 3.2 Revised Objective: N/A 3.3 Original Components: The original components as stated in the SAR include: i. Setting up of a mechanism for financing the highest priority rehabilitation needs of state water supply systems through subloans of up to US$10 million equivalent per state; ii. Rehabilitation of existing facilities by repair or replacement of civil works, plant and equipment with the objective of restoring the output of water supply systems to their original design capacities wherever possible; iii. Leakage detection and repair program; iv. Institutional strengthening components to improve operation and maintenance, financial management, staffing and stores management; v. Strengthening the Department of Water Supply and Quality Control (DWSQC) of FMWR, including: (a) developing policy guidelines for design and maintenance of water supply systems, water quality standards, equipment standardization, standards for water treatment chemicals, improved tariff structures and cost recovery, and manpower development; (b) establishing and maintaining a database to monitor key performance indicators of SWAs; (c) establishing and maintaining a water resource and water quality database for both surface and groundwater sources used for domestic and industrial purposes; (d) identifying the most critical training needs in the sector and assessing the capability of local training institutions to meet those needs; and (e) carrying out special studies of general interest to the sector, such as pollution and water quality studies, review of tariff structures, fixed assets valuations and so forth

7 Assessment Overall, the design of the project components appears to have been adequate to address the objectives as stated in the SAR. A project design flaw has been noted, however, in the project's emphasis on upfront reduction of unaccounted-for-water (ufw) without the appropriate level of funding, even though the Bank had little detailed knowledge of the condition of the systems at appraisal. It now appears that while the early emphasis on minimizing leakage is excellent in theory, many systems had so little water in them that there was no practicable way of identifying potential leaks early in the project without major expensive condition surveys of the distribution systems. It was not until after rehabilitation of production systems was completed that leaks could in fact be readily detected. 3.4 Revised Components: The project components were not revised, but there was a revision in the Allocation of the Proceeds of the Loan in March 1999, largely to distribute the unallocated funds in Category 5 of the Loan Agreement and to fund the appropriate Categories in line with the actual procurement packaging. As indicated in the table below, much of the equipment and materials was procured as part of civil works' contracts and was therefore re-classified as such. Allocation of the Proceeds of Loan 3322 Cat. Component OriH. Cost Revised Cost 1. EQUIPMENT & MATERIALS 134,000,000 27,600, CIVIL & BLDG WORKS 61,000, ,900, PROJ MGT, TRG, TECH STUDIES, & ENG 35,600,000 69,000, PROJECT PREP FUND 400, , UNALLOCATED 25,000,000 0 Total 256,000, ,000, Quality at Entry: This project's appraisal preceded the QAG and Quality at Entry ratings. The project's objectives were consistent with the then articulated sector strategy. Lessons were incorporated from the experience of five earlier projects, which influenced the mix of components. The project did not consider major reform, including Pravate Sector Participation (PSP), as the initial means to bring about sustainable sector improvements largely because of great variation in the evolution of the SWAs, and PSP in water had not, at the time of appraisal, become mainstream. Rather, it was considered essential to focus on increasing the awareness of all SWAs of their weaknesses and possibilities through generic technical studies, dissemination of findings at national level seminars and workshops, and promotion of policy changes. This was intended to lay the foundation for further development, including major policy reforms. Additionally, the political and institutional environment at the time was not conducive to introducing major and sustainable reforms. With respect to the project's intemal design, it now appears that a few project features could have been done differently. For example, project preparation could have been more advanced; pre-engineering estimates were done for only four out of the then 22 SWAs followed by a quick assessment of the remaining. It took about 30 months from the date of project effectiveness to award the first physical works contract due to delays in designs and preparation of bidding documents. Based on discussions with the project team, it is noted that while advanced preparation would have been desirable, it could not have been done due to lack of funds. At the time, the project unit saw no other recourse but to await withdrawals from the project loan for the needed preparation. -3 -

8 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective. It is important to note the difficult macroeconomic, strategic and political sector setting in which the project developed. The project was conceived, prepared and appraised during the structural adjustment program (SAP, 1986 to 1993). In 1992, as a result of poor public resource management, the Bank and IMF withdrew support to the SAP, and shortly thereafter, new lending was halted. The value of the Naira took a precipitous decline during the project. Real wages of public employees, including those of the SWAs decreased by a factor of about 10 (1986 to 1997), and the ratio of wages of SWA employees to those of comparable positions in the private sector stood at about 1:25 by end Political difficulties peaked following the annulment of national elections in June Changes in government appeared to be the norm then. There were frequent changes in all levels of government and undue interference in management of the SWAs, including frequent and sudden changes in senior SWA management. The above factors severely affected employee morale and productivity, and consequently limited the impact of the project. The project's overall outcome is currently judged as unsatisfactory. The objective to improve the level of water supply service in selected urban and semi-urban areas by meeting the highest priority rehabilitation needs was partially met. Rehabilitation was done on production works in 150 schemes in 37 states (as against 22 states at appraisal) increasing their potential output from about 43 to 87 percent of total installed capacity, or an increase in average daily production from 0.7Mm3 to 1.4Mm3 (compared with SAR expectations of I.7Mm3). The impact of this achievement is, however, limited by two factors: (i) the above figures indicate possible production quantities when there is adequate power supply and water treatment chemicals; but this has not been the norm for most of the SWAs due to nationwide power supply problems; and (ii) no provision was made for rehabilitation of the delivery network, which remains in very poor condition. In fact, only 0.8Mm3 per day production was actually achieved in 1999 because of the power supply problem; improved power supply has long been expected and anticipated, leading to a satisfactory rating during project implementation, however given that the inadequate power supply persists, the overall outcome must be considered as unsatisfactory. The level of water supply service has also been improved marginally by the leak detection and repair program piloted under the project. Partial preventive maintenance and passive methods of ufw control were introduced and institutionalized with leak detection units in a few of the SWAs. The objective was met to begin to address the most significant institutional weaknesses of the SWAs in order to improve their capability to efficiently operate and maintain water supply systems. Diagnostic studies were done to expose SWAs to their technical and institutional areas of greatest need. As a result, improved edicts were designed and mostly implemented. The project put in place procedures to maintain the rehabilitated assets, including manuals of practice for preventive maintenance, basic management information systems, budget and accounting systems, customer registration, asset bases, and billing and collection procedures. The types of procedures and their usage differ according to the specific level of development of a particular SWA. Continued assistance would be required to further upgrade and strengthen the systems and procedures reinforced by enabling policies of the state governments with respect to the tariff and autonomy. An additional outcome of the project, not identified at appraisal, has been the raising of awareness among all key stakeholders of the states in Nigeria of the need to run potable water supply operations as a business and also of the need to attend to the larger water resources management issues. This was achieved through regular national seminars with political support from the highest levels of government, regional seminars supported by state govemors, local workshops and hands-on technical assistance when requested by the - 4 -

9 SWAs. Sector professionals and policy makers also participated in a Governors' Seminar and Donors' Conference during February 2000, supported by the World Bank Institute, which exposed them to alternative modes to reform their institutional status quo to bring about sustainable sector development. These activities were a precursor to the development and adoption of the National Water Supply Policy (1999) and also brought the attention of donors to the water sector. As a result, the sector is more proactive towards its future development, including active moves towards PSP in some states. This remarkable change in awareness and attitude is considered to be a major success of the project. It is important to note that the project dealt with emergency works averaging about US$6.0 million per state. It is recognized that the networks are old, possibly prematurely so due to a history of neglect. In some cases, additional bursts have occurred on the rehabilitated assets caused by the inability of the network to withstand post-rehabilitation water pressures. Extensive leakages continue at service connection pipes and within consumer premises due to past inferior plumbing standards. Some SWAs have initiated steps to replace service connections, install meters, enforce the plumbing standard codes that were developed under the project and to continue the pilot leak detection and repair program. Clearly, the intermediate steps currently being taken by the cash-strapped SWAs are not sustainable without additional financial and technical support to continue to make incremental improvements as a first step, and eventually major capital inflows to bring about comprehensive and sustainable change. A thoroughly prepared strategy was implemented to train staff at all levels through the formation of a Manpower and Training Committee (MTC) comprising the National Water Resources Institute (NWRI, the agency responsible for technical training), the Human Resources Development Unit (HRDU) of the PMO, and representatives of each SWA. The Bank's supervision team provided advice to the MTC. The basis of the strategy was the design of "hands-on" technical training nationwide. An outreach program of on-the-job training emerged, which came to be known as the Nigeria Water Supply Training Network. Success of this outreach program led to its replication in other projects in Africa with large capacity building components. Additionally, a satellite training unit was constructed and equipped in Enugu to support regional training. It is noted that while the SWAs participated in the training and institutional development program, only a few were able to fully implement and sustain the improvements, largely because of lack of recurrent funds for spare parts and tools, all stemming from their weak operating environment and incentive system. The project's implicit financial objective required elimination of government subvention through regular tariff increases combined with cost containment, and a target was set for the SWAs to increase their cash operating ratio from 15 to 100 percent. Only 3 SWAs were able to meet this target (and only for a short period during implementation); 17 others showed some improvement in their own cash flows; while 9 showed steady decline; the remainder did not provide data. Overall, the data indicate a reduction in the level of subvention and an increase in revenue from the sale of water, but the tariff policy remains weak. The incentive to improve financial efficiency was inadequate in light of frequent changes in SWA management stemming from a prolonged period of government instability. 4.2 Outputs by components: Annex 8 provides a list of targeted and achieved outputs. The project successfully set up a mechanism for financing rehabilitation through subloans to each of the participating states through a Project Management Office (PMO) at the FMWR. The PMO was staffed with project management consultants who designed and helped to implement the project's administration to ensure accountability. Regional consultants were then engaged and located in zonal offices to provide closer supervision to groups of SWAs; they were reinforced by zonal engineers who gave grass-roots support; reporting was done on as quarterly basis

10 Based on this experience, institutional capacity has been developed at the national level to manage future projects. Additionally, a very detailed monitoring system was set up to gauge performance of the SWAs. Even though the SWAs were involved in the design of the system and adapted it (state level) to help them comply with the reporting needs of the project, many of them were not able to regularly submit the data requirements because their own intemal data collection and reporting systems remained very weak despite the technical help provided by the project. Each SWA executed a sub-project focusing on rehabilitating some selected water supply schemes by repair or replacement of civil works, plant and equipment. About 150 priority urban and semi-urban schemes in 36 states and Federal Capital Territory (FCT) were selected for rehabilitation, increasing their output to about 1.4Mm3/day or 77 percent of the targeted increase (see 4.1 section). Leak detection programs were piloted as planned with the aim of teaching staff how to implement such programs so that they could continue incrementally to work on their entire systems. While the pilot was carried out fairly well, many of the SWAs (80 percent) did not continue the program beyond the pilot. The six that did continue reported initial decreases in ufw through year 1997, but ufw increased again as a result of the increased pressure in the distribution system brought about by the completed rehabilitation. Thus, the target to reduce ufw from 60 to 25 percent in five years was not reached. The ufw problem proved to be more difficult and beyond the capacity of the SWAs to implement because (i) the problem was much greater than anticipated at appraisal; (ii) there was limited availability of project funds for ufw reduction; and (iii) the low initial water pressure making leak detection difficult (see 3.3 section). Each SWA was to be assisted by technical operational consultants to implement a very detailed set of guidelines for technical operational improvements, including Operation and Maintenance(O&M), staffing and stores management. About 33 percent of the SWAs were able to take advantage of this component, and they instituted preventive maintenance procedures. A similar arrangement was made for financial consultants to help upgrade accounting and financial systems and improve billing and collection procedures. About 57 percent of the SWAs actually engaged and worked with local financial consultants who helped to improve their budgeting and accounting systems and procedures and carried out relevant training. Support, both technical and financial, was provided during the last two years of the project, and only SWAs who were capable of preparing and executing the bidding process within the given timeframe were able to take advantage of it. A human resource development and training component was successfully carried out through the setting up of an MTC and a Training Network achieving success with "hands-on" technical training (see 4.2 section). A Manpower Audit and Training Needs Analysis was successfully carried out in each SWA, which formed the basis for regularly held training courses. A total of 12,863 trainee weeks were achieved for 27 SWAs. The project was instrumental in establishing a Nigerian Water Supply Association as a professional body, which is functioning well. In line with the emerging needs of the project, the component to strengthen the DWSQC was redesigned, and emphasis was placed on the promotion of sector reformn, policy development and communications within the sector. Finally, several studies were conducted and effectively used during the course of the project, including feasibility studies for new sub-projects, safety assessment of dams, plumbing codes, design reviews, manpower, budgeting and accounting. A list of these studies is included in Annex

11 4.3 Net Present Value/Economic rate of return: Most rehabilitation works under the project have been carried out successfully, and the actual possible production has been increased by 720,000m3/day to a level of 1,423,000m3/day. This is a large increase, in line with the indicative works appearing in the SAR and corresponds to 255 million m3/year. Currently, however, only a part of the possible capacity is utilized, mainly due to the lack of reliable power in the country. In 1999, out of a total production capacity of about 1.4 million m3/day, 0.8 million m3/day (58%) was actually produced. From an economic point of view, justifying an investment which has consistent low utilization ratios due to lack of power (or other reasons) is difficult, as the value of future water sales is lower than that of current sales. The assumption used in the preparation of the SAR, stating that increased tariffs will be adequate to assure SWAs' autonomy was, in perspective, somehow overly ambitious. Average water tariffs currently range from about US$0.05/m3 to about US$0.60/m3 with the majority of states at the lower end of the range. Indeed, there is a minority of states that is still grappling with the issue of whether or not to impose a charge for urban water supply. The fact that most states did not increase tariffs substantially, even in Naira terms, reflects a defacto large decrease in real prices of water. Further discussion of the economic ex-post analysis is provided in Annex Financial rate of return: A financial rate of return on the project's investments was not calculated at appraisal. The SWAs functioned as government departments, they were weak in accounting, record keeping and financial management in general. Annual audits were the exception; only nine were able to produce audited consolidated accounts in 1988 at the time of appraisal; recurrent subvention from state governments was very high -- averaging over 50 percent of the operating cash flows of the SWAs; the average tariff was minimal as most state governors then considered potable water as a social service. The SAR examined the limited financial data available and set targets for the SWAs to be monitored throughout project implementation. As indicated in the performance indicators in Annex 1, while some level of improvement was achieved, most of the SWAs remain financially weak. Adequate and reliable accounting systems are in place in only a small number of SWAs. Even among these the submission of annual financial reports is still slow and delayed by up to 24 months. As the financial management competence is still weak in the SWAs, this complicates the work of the external auditors. The water rate is only minimal in practically all of the states ranging from about US$0.05/m3 to US$0.60/m3. The ratio of average water rate to cash operating cost increased from 27 percent in 1992 to 47 percent in There remains an urgent need for comprehensive financial management reforms in the SWAs in line with larger reforms in the policy environment. 4.5 Institutional development impact: The project provided invaluable support for emerging SWAs through its training and institutional development program organized largely through the MTC and NWRI (See 4.1 above). It succeeded in raising awareness with respect to the requirements for achieving technical, operating efficiency and financial management through external exposure to well-functioning utilities. It also helped raise awareness on alternative modes of reform through detailed technical studies and wide dissemination of findings. As a result, some SWAs took the preparatory steps to request new projects to support major policy reforms. This would be reflected in the National Urban Water Sector Reform Project planned for FY03. (See section 6.1). 5. Major Factors Affecting Implementation and Outcome - 7 -

12 5.1 Factors outside the control of government or implementing agency: The factors include: (i) low level of interest by the business community once the tendering process started: The first set of tenders produced little response; there was scepticism from the business community within Nigeria, and the international community was not responsive to the tendering process (e.g. hesitance to open letters of credit, and little response from foreign banks with respect to contract securities); (ii) very high inflation; and (iii) banking industry distress, which occurred during the mid-1990s, and delayed the flow of counterpart funds; the PMO estimated that a total of N162 million in counterpart funds were lost during the banking crisis. 5.2 Factors generally subject to government control: The factors include: (i) Unreliable Electricity Supply A major production constraint was the unreliability of the national power system run by the Nigerian Electric Power Authority (NEPA). Power outages were very frequent, estimated well in excess of 50 percent of the operating time at many of the waterworks. This resulted in (a) SWAs having to use altemative power sources at higher cost; (b) accelerated deterioration of the assets and failure of electrical equipment; and (c) reduction in water supply to consumers. (ii) Scarcity of Petroleum Products Most of the contracts suffered delays as a result of a national scarcity of petroleum products, which resulted in arbitrary increases in the price of petrol and diesel required by the SWAs to run their systems (the back-up generators) and by the contractors for their vehicles and equipment. (iii) Governance Problems There were frequent changes in all levels of govemnment and undue interference in the management of SWAs, including frequent and sudden changes in senior SWA management. There was also constant interference by state governnments in the administration of contracts and on procurement issues which added to project delays. Additionally, early in the project, bureaucratic delays at the federal level led to a late start in recruiting the project management consultants. This in turn triggered further delays in recruiting the regional consultants and in having the subloan agreements signed between the federal and state governments. (iv) Changes in Import Procedures at the port and changes in pre-shipment inspection agents resulted in significant delays in goods clearance and doubling the delivery time. (v) Instability in Management at the state government levels made it difficult to introduce and sustain agreements on tariff policies and to improve the incentive environment of the SWAs. (vi) The Splitting up of States increased the task of monitoring and supervision and complicated matters such as submission of audit reports and achieving financial viability. Many of the new states required much more comprehensive support from the PMO than was provided by the project. 5.3 Factors generally subject to imnplemnenting agency control: The factors include: i. Start-up delay; many of the SWAs were overwhelmed by the project's administrative requirements, which led to delays in fulfilling their conditions for participating in the project. ii. Time slippages on procurement decisions. iii. Delays in procurement leading to 200 percent average time overrun to contract completion. iv. Performance monitoring was weak largely due to frequent changes in SWA management. 5.4 Costs and financing: At appraisal, total project costs were estimated at US$306.7 million to be financed by the Bank (84 percent); Government of Japan (lpercent); Federal Governnent (2 percent); and State Governments (13 percent). The final cost was US$294.5 million; the financing pattern was similar to the appraisal intent. As - 8 -

13 indicated in Annex 2, there were shifts in order to fund the appropriate Loan Categories in line with the actual procurement packaging. 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability of the works financed under the project is rated as unlikely largely due to the continued absence of an enabling incentive and operating environment within the SWAs. An important key to sustainability of the operations of the SWAs is financial autonomy through full cost recovery. However, only 3 of the SWAs were able to attain a current ratio of 100 percent for any time at all. Maintenance culture is still very limited. We note, however, that thanks to the project efforts in promoting studies and policy discussions among key stakeholders and also to the relative stability of key management staff at the federal level, sector issues have now been brought to the national agenda. The sector is now supported by an improving policy environment as discussed below. The recent transition to civilian rule has been marked by commitment of the new administration to bring about necessary policy and institutional reforms to ensure sustainability among receptive states. The Federal Government adopted and published a policy paper, and plans are underway to implement the reforms based on the new policy. At the state level, several states have initiated PSP studies with a view to reforming the institutional status quo for their operations. A follow-on project, the National Urban Water Sector Reform Program (NUWSRP), has been designed to enable the government to establish the regulatory, policy and legal framework to attract private operators in water utility management in states that have accepted the reforms. The NUWSRP is targeted for fiscal year Transition arrangement to regular operations: The project dealt with the agencies responsible for the regular operation of project assets, and institutional strengthening and operations efficiency measures were intended to allow the SWAs to improve on their operation and maintenance practices. 7. Bank and Borrower Performance Bank 7.1 Lending: Project preparation was done by a team of experienced professionals and was consistent with the sector strategy in place at that time. Some of the lessons leamed from previous projects in the water supply sector were integrated into the design of the institutional support and training program. However, the following design flaws have been noted: (i) the project failed to reflect and carry out risk assessment related to start-up delays (based on experience of Bank projects in Nigeria); the need for this type of assessment was critical given that preparation was not advanced at the start of the project; (ii) there was no apparent justification for the project's emphasis on upfront ufw reduction without an appropriate level of funding for this component and in the absence of detailed knowledge of the condition of the systems; and (iii) no attention was given to repair of the distribution network which constrained delivery of water. For these reasons, Bank lending could be considered unsatisfactory. 7.2 Supervision: -9-

14 The project unfolded during a very difficult political and economic period in Nigeria. The value of the Naira took a precipitous decline during the project. This was exacerbated by the banking distress in the country, all of which affected the timing and availability of counterpart funding and contributed to slowing the pace of project execution. In FY95, the Bank's management considered cancellation of the project due to the continued weak country situation. However, there was no support in the country for cancellation; moreover, terminating the large number of contracts then under execution would not have been an easy endeavor. With respect to supervision, team composition was adequate as was the range of expertise. Continuity in task management, including regular supervision and participation in all of the annual project meetings contributed enormously to keeping the project on track. The Borrower particularly commended the Task Manager for his perseverance in not only project supervision but in (a) raising the profile of the water sector through national and intemational seminars during a very difficult period in the country's economic and political transition; and (b) through this effort attracting external donors back to the sector. The regularity and timeliness in handling procurement issues by the Resident Mission staff proved to be effective; the presence of an engineer in the Resident Mission enabled the Bank to visit all of the numerous project sites and provide timely advice. A total of 18 headquarters-led missions were completed with three missions per year during the first two years and two missions each year thereafter. 7.3 Overall Bank performance: Overall Bank performance is considered satisfactory. Borrower 7.4 Preparation: Basically, there was a collaborative relationship throughout the project between the Bank and Borrower. Similar to the observation above related to Bank performance, the project was not sufficiently advanced when it became effective; the scope was too great to be efficiently executed; and the federal government imposed an implementation system that was too complex. For these reasons, preparation is considered unsatisfactory. 7.5 Government implementation performance: Due to the factors subject to govemment control that caused difficulties during implementation as noted in Section 5, the Borrower's implementation performance is considered unsatisfactory. 7.6 Implementing Agency: The project was implemented at the Federal level by the FMWR and its coordinating unit, the PMO. At first, federal officials and the PMO were overwhelmed by the complex administrative needs of the project and unfamiliarity with Bank procurement procedures, and they experienced considerable delays in recruiting the project management consultants and setting up the accounting system and procedures. After start-up delays were ironed out with the help of foreign technical experts in the PMO, capacity was built at the Federal level in project administration. It is noteworthy that after three years of foreign technical assistance, a local project manager successfully headed the PMO. It is also noteworthy that despite major staffing shifts among high-level government officials in Nigeria during the project period, there was continuity at the senior policy level in the water sector at the federal level, which aided the effective knowledge transfer, relatively smooth project monitoring, sector capacity building, policy formulation and dissemination. At the state level, the participating SWAs, were a diverse group of agencies with varied development challenges. Overall, their performance was satisfactory. They were eager to participate in the project and - 10-

15 cooperated with the project requirements, some of which turned out to be very demanding on their capabilities. Many of the SWAs would have preferred to have consultants working solely with them individually as opposed to having regional consultants in charge of five to seven states. The pace of implementation was slowed by (i) difficult logistics related to the wide geographical spread of the project; (ii) the mismatch between the weak capacity of many of the SWAs and the procedural demands of the project; and (iii) the frequent changes in management at the senior level of the states and the SWAs. However, the SWAs were always ready to take the required steps within their control to respond (within their capacity) to the demands of the project. During the project period, the implementing agencies gained considerable experience and became very responsive to the needs of the project, rating an overall performance grading of satisfactory. 7.7 Overall Borrowver performance: Overall Borrower performance is considered unsatisfactory. 8. Lessons Learned The Reform Issue. While the project was limited in its scope to rehabilitation and institution building within the SWAs,and hence limited in its impact, the Bank rightly used the project as a vehicle to initiate and promote major policy reforms nationwide. This was done through engaging all SWAs in discussions at seminars held at the national, regional and local levels. Because of the Bank's steadfast focus on reforming the policy environment of the SWAs supported by relevant project-financed studies, the sector was well positioned to be on the national agenda once the political environment stabilized. It is important to note that this global engagement of SWA officials throughout the project could not have been effectively done without the emergence of a champion in the country interested in initiating reforms and carrying them through. Smaller Projects In a federal country such as Nigeria, where logistics are often very difficult, it is important to keep projects relatively small and focussed on only a few states at a time. In spite of the administrative set-up for the project, the management infrastructure turned out to be incapable of effectively and efficiently supervising the large number of sub-projects, particularly in the initial stages, which led to lengthy start-up delays. The lesson here is that while nationwide policy approaches, consensus-building seminars and marketing of policy reforms are necessary and still required, executing a large number of sub-projects simultaneously dispersed throughout the states should be avoided. In retrospect, the preferred and more viable approach for a national project might have been to focus on full scope rehabilitation in a limited number of commercial capitals, for example, while raising awareness and building capacity within all of the SWAs. Additionally, because of the small scale of the detailed work items, and practical difficulties of incorporating sub-projects in several states into a single contract, a large number of small contracts resulted. These could not attract international contractors; it overstretched the national capacity as the small contractors could not handle the cumulative value of works. Handling a large volume of small contracts is generally not an efficient way to do things in the water sector in Nigeria. Distribution Networks In designing water supply works (rehabilitation and/or expansion), it is important to keep in perspective the need to get water to the ultimate beneficiary. In many of the SWAs, while the production facilities were rehabilitated, the benefits from this rehabilitation were constrained by an aged and generally inadequate distribution network. Clearly, the project intended to focus only on highest priority rehabilitation needs, which it did, but in the process, other "priority" needs evolved. One might

16 also add that the project was intended to jump start the momentum in the states. Additional works could have been financed by the SWAs themselves or the state and federal governments had there been political stability and continuity in the policy dialogue at the state level. In any event, projects need to take a more holistic planning approach for water supply systems. Advanced Preparation In the interest of efficient pace of implementation, it is recomnmended that project preparation be well advanced prior to project effectiveness. This would help minimize start-up delays and realize project benefits sooner rather than later. Correspondingly, funds need to be secured for project preparation in advance of the expected loan effectiveness. It is noted that Nigeria, at the time of appraisal, was reluctant to fully utilize the Bank's Project Preparation Facility mechanism for detailed preparation. Indicators and Targets Collection of reliable indicators was a continuing difficulty under the project, despite significant effort and resources having been spent on it. Considerable work needs to be done commencing early in the project cycle to involve project agencies in the monitoring process, to tie monitoring more closely to project implementation, and to demonstrate the use and maximize the value of these indicators. Additionally, projects need to focus on indicators that are easily measurable by the SWAs without the need for additional investments in manpower or technology. With respect to the project targets, many of them were not achievable largely because they were globally set and did not reflect detailed knowledge of specific SWAs. If a nationwide project were to be implemented again, the targets need to be customized to groups of like SWAs as opposed to one general set of targets, which turned out to be unachievable by many. 9. Partner Comments (a) Borrower/implementing agency: The Borrower has received a copy of the draft ICR but has not to date commented. (b) Cofinanciers: A copy of the draft ICR was sent to the Govermnent of Japan for review and comment. (c) Other partners (NGOs/private sector): 10. Additional Information

17 Annex 1. Key Performance Indicators/Log Frame Matrix Outcome I Impact Indicators: Indicator/Matrix Projected in last PSR Actual/Latest Estimate Production of potable water increased from 188,000 to 1,430,000 cubic capacity increased to 1,430,000 cubic meters meters per day per day however actual delivery has only reached about 800,000 cubic meters per day due to persistent shortcomings in electricity supply. UfW reduced from 60% to 25% estimated at about 40 % COR of SWAs increased from 15% to 100% 45% Staff training in SWAs increased from 0.1% to 5% of staff time. 1.5% Systems under preventive maintenance increased from zero to 100% 20% Output Indicators: Indicator/Matrix Projected in last PSR Actual/Latest Estimate Refer Annex 8 End of project Note: The above data needs to be read with caution for the following reasons: 1. Not all of the SWAs reported 2. Those reporting provided incomplete data for some years 3. With respect to ufw, the majority of systems had neither production nor consumption meters 4. The databases within the SWAs remain very weak

18 Annex 2. Project Costs and Financing PROJECT COST BY COMPONENTS AS AT JUNE 2001 ITEM Appraisal Estimate (US$ Million) Actual (US$ Million) Local Foreign Total Local Foreign Total I Equipment and Material C;..l r-d Building WIvrk- l Tn ^ Operational Support Project Management ! Engineering, Studies and ~~~~~~.._?._._._._ _ Technical Assistance 6 Refinancing of PPF Advance Physical Contingencies Price Contingencies Duties l Total Note: Under Component 2 equipment and materials were put together with civil and building work under combined contracts. Appraisal Estimate (US$ M) t Actual (US$ M) Disbursed Local Foreign Total Local Foreign Total World Bank - IBRD % Government of Japan % Federal Government of Nigeria % State Govemments % Total %

19 Annex 2a. Disbursement Summary by Fiscal Years YEAR AMOUNT $ 1,993 17,754,875 1,994 6,893,418 1,995 15,345,320 1,996 37,876,903 1,997 60,167,815 1,998 36,203,237 1,999 15,661,530 2,000 41,418,014 2,001 19,1 19,575 TOTAL 250,440,688 UNDISBURSED 5,559,312 LOAN/CREDIT DISBURSEMENTS: CUMMULATIVE ESTIMATED and ACTUAL BY FISCAL YEAR 30 JUNE - 1,993 1,994 1,995 1,996 1,997 1,998 1,999 2,000 2,001 APPRAISAL ESTIMATE 32,800,000 77,800, ,300, ,200, ,500, ,800, ,400, ,200, ,000,000 ACTUAL 17,754,875 24,648,293 39,993,613 77,870, ,038, ,241, ,903, ,321, ,440,688 ACIUAL AS % OF ESTIMvATE 54% 32% 30% 42% 62% 71% 76% 91% 98%A DATE OF FINAL DISBURSEMENT JUNE'1993 JUNE1994 JUNE1995 JUNE'1996 JUNE1997 JUNE1998 JUNE'1999 JUNE'2000 JUNE

20 Annex 2b. Disbursement Profile 300 _ IBRD DISBURSEMENT PROFILE + Actual -a--target _4-Actual Target C STATE GOVERNMENTS' DISBURSENT PROFILE Actual -_- Target *-20-10_ Actual FEDERAL GOVERNMENT DISBURSENT PROFILE Actual -_ -Target Acul Trget

21 Annex 3. Economic Costs and Benefits The project's two main objectives as set in the SAR were to: (i) improve the level of water supply service in selected urban and semi-urban areas by meeting highest priority rehabilitation needs; and (ii) address the most significant institutional weaknesses of SWAs in order to improve their capability to efficiently operate and maintain water supply systems. As stated previously in the main text of the ICR, the first objective of achieving physical improvements in the water supply production and delivery system has largely been met, and most of the indicative rehabilitation works have been executed. The second objective, addressing the institutional weakness of SWA to improve their efficiency and financial autonomy has experienced some problems. The project's performance is examined in the country's context. The implementation period has extended over about nine years and experienced some delays. The period within which the works has been executed has been extremely difficult. The country's macroeconomic situation has been consistently deteriorating during most of the project's execution, and poverty in the country increased rapidly. During the military regimes, which govemed the country in the 1990s, Nigeria has had various impasses with the Bank. The fact that the project teams have succeeded in pushing ahead with the some of the reforms, and continued to implement the physical work program satisfactorily is remarkable by itself. An additional factor which is important to take into consideration when addressing the project's economic performance, is the dire state of the country's energy sector. Nigeria is going through a substantial energy crisis, which has severely impacted and curtailed the delivery of electricity to the country. As water supply production and delivery are closely related to, and based on energy production, the situation has seriously impacted the water supply sector. Thus, the benefits of the facilities rehabilitated by the project, can not be accurately measured at this time. When a reliable power supply is restored, production will be substantially larger. Most rehabilitation works under the project have been carried out successfully and the national actual possible production has been increased by 720,000m3/day to a level of 1,423,000m3/day. This is a large increase, in line with the indicative works appearing in the SAR and corresponds to 255 m3 million/year. Currently, however, only a part of the possible capacity is utilized, mainly due to the lack of reliable power in the country. In 1999 out of a total production capacity of 1.4 million m3/year Nigeria produced, 0.8 million m3/day (58%) was actually produced. From an economic point of view justifying an investment which has consistent low utilization rations due to lack of power (or other reasons) is difficult, as the value of future water sales is lower than that of current sales. However, it is important to isolate the issues which are exogenous to the project, while addressing its execution. The assumption used in the preparation of the SAR, stating that increased tariffs will be adequate to assure SWAs' autonomy was, in perspective, somehow overly ambitious. Average water tariffs range from about USSO.05/m3 to about USSO.60/m3 with the majority of states at the lowest end of the range. Indeed, a minority of states are still grappling with the issue of whether or not to impose a charge for urban water supply. The fact that most states did not increase tariffs substantially, even in Naira terms, reflects a de facto large decrease in real prices of water. The states participating in the project have not implemented the conditionality appearing in the "criteria for state eligibility for sub-loans" (Annex 3.5, SAR) which mentioned explicitly that states wanting to achieve a sub-loan agreement with the FGN "would undertake to implement a program of phased tariff increases which would be based on annual tariff adjustments sufficient to enable the SWA to meet all cash operating costs from internally generated revenue within a five year period."