Document of The World Bank FOR OFFICIAL USE ONLY TECHNICAL ANNEX FOR A PROPOSED GRANT WEST BANK & GAZA FOR AN EMERGENCY WATER PROJECT.

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY TECHNICAL ANNEX FOR A PROPOSED GRANT OF US$12.5 MILLION TO WEST BANK & GAZA FOR AN EMERGENCY WATER PROJECT July 7,2003 Report No: T7597 GZ 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 AFD CM CMPH DFID EH#2 EIP EMP EMRSP EQA ERSP ESSP EWOC EWP GDP GNI ICB SWC LCBS Ycld MCM MOF NCB NGO OP 8 PA PLO PMU PWA QC QCBS SAWSIP TFGWB USAID WBG WHO WSSP CURRENCY EQUIVALENTS (Exchange rate as of June 2003) Currency Unit: New Israeli Sheqalim (NIS) US$1 = NIS 4.35 WEIGHTS AND MEASURES 1 meter (m) feet (fi) 1 kilometer (km) miles (mi) FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS French Development Agency (Agence Francaise de De'veloppement) Construction Manager Cubic meters per hour Department for International Development (UK) East Herodian Well #2 Emergency Investment Program Environmental Management Plan Emergency Municipal Services Rehabilitation Project Environmental Quality Authority Emergency Response Program Emergency Services Support Project Emergency Water Operations Center Emergency Water Project Gross Domestic Product Gross National Income International Competitive Bidding Joint Water Committee Least Cost Based Selection liter per capita per day Million Cubic Meters Ministry of Finance National Competitive Bidding Non-Governmental Organization Operational Policies Palestinian Authority Palestine Liberation Organization Project Management Unit Palestinian Water Authority Qualification of Consultant Quality and Cost Based Selection Southern Area Water and Sanitation Improvement Project Trust Fund for Gaza and West Bank United States Agency for International Development West Bank and Gaza World Health Organization Water and Sanitation Services Project Vice President: Country Director: Country Coordinator: Sector Director: Sector Manager: Task Manager: Jean-Louis Sarbib Nigel Roberts Nicholas Krafft Emmanuel Forestier Francoise Clottes Suhail Jme'an

3 FOR OFFICIAL USE ONLY EMERGENCY WATER PROJECT TECHNICAL ANNEX Table of Contents A. BACKGROUND AND STRATEGY... 1 Impact of the Crisis... 1 The Water and Sanitation Sector... 2 SECTION SECTION SECTION B. BANK RESPONSE AND STRATEGY... 7 C. DETAILED PROJECT DESCRIPTION... 9 Objectives and Components... 9 Major Benefits and Risks SECTION D. STUDIES & TECHNICAL ASSISTANCE Procurement Arrangements Financial Management., SECTION E. INSTITUTIONAL ARRANGEMENTS & PROJECT IMPLEMENTATION Disbursement SECTION F. FINANCIAL AND ECONOMIC JUSTIFICATION SECTION G. ACTION PLAN ANNEXES: ANNEx1: LOGICAL FRAMEWORK AND KEY PERFORMANCE INDICATORS ANNEX 2: PROJECT COSTS AND FINANCING ANNEX 3: SELECTED WATER SUPPLY. POPULATION AND POVERTY DATA ANNEX 4: PROJECT PROCESSING SCHEDULE Map No. IBRD This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed I without World Bank authorization.

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5 WEST BANK AND GAZA EMERGENCY WATER PROJECT TECHNICAL ANNEX SECTION A. BACKGROUND AND STRATEGY Impact of the Crisis 1. The protracted and often violent struggle between Israelis and Palestinians over the last 30 months -a struggle that has come to be known as the Second Palestinian Intifada-has brought the Palestinian economic recovery that began in 1998 to an abrupt halt. The economy has shrunk by half, with gross national income (GNI) losses exceeding US$5.4 billion (the equivalent of one year of wealth creation), and lost investment opportunity standing at about US$3.2 billion. Real private gross domestic product (GDP) measured at factor cost has declined by almost 30 percent, the private sector s contribution to the economy has declined from 88 percent in 2000 to 61 percent in Raw physical damage now exceeds US$700 million. 2. The movement of people and goods is severely restricted both internally and between the Palestinians and Israeli areas, given the vast network of about 140 Israeli army check points and various blockades. The number of Palestinians officially permitted to work in Israel has been halved to about 30,000, with much lower levels at times of severe crises, and about 172,000 jobs were lost in the private sector, 5 1 percent of the pre-zntifada workforce. Unemployment has grown from 10 percent of the labor force in the third quarter of 2002, and now stands at 42 percent (53 percent if those not seeking work are included). 3. The number of poor has tripled to more than 2 million, since about 60 percent of households have lost more than half of their income. Families have been forced to liquidate their savings, accumulate debt, and resort to family and other social networks as a way to cope with the crisis. The poor have been getting even poorer, with average daily consumption slipping from US$1.47 to US$1.32 and food consumption declining by 25 to 30 percent on a per capita basis. The incidence of acute malnutrition among children has increased to 13.3 percent in Gaza (on par with Zimbabwe and just behind Congo); in the West Bank it now stands at 4.3 percent, averaging 9.3 percent overall. 4. Most of the large West Bank municipalities have been re-occupied by Israeli military forces for varying lengths of time since the end of March 2002, and have absorbed the bulk of the physical damage. Municipalities and Village Councils (the main forms of local governance in WBG and key deliverers of public services) have been pursuing various strategies to manage the fiscal deficit, such as reducing services and salaries, delaying non-emergency maintenance, and laying off temporary staff. In addition, the sheer physical difficulty and frequent danger of delivering municipal services and maintaining basic utilities has added an unwelcome new dimension to a severe fiscal management problem. The information on the impact of the crisis provided in this section relies heavily on two World Bank sources: Fifieen Months-Intifada, Closures and Palestinian Economic Crisis, March 2002; and Two years of Intifada, Closures and Palestinian Economic Crisis, February, 14,2003. Beginning in September,

6 5. Donor-funded emergency budget support has been crucial to the survival of the Palestinian Authority (PA), and has offset the decline in domestic revenue and the withholding of Palestinian revenues collected by the Government of Israel (GOI). Annual donor disbursements have doubled in the Intifada to just over US$l billion in At US$300 per person per year, this represents an unprecedented level of international financial commitment. 6. Donors have also led the way in helping the PA to rethink and reconfigure its governance framework, with a view to increasing efficiency and accountability. Recently, the PA adopted a serious program of policy and institutional reform, which had been advocated by donors and the Palestinian public for several years. The reform program is seen as essential to the evolution of a viable Palestinian state, and it is aimed at weeding out corruption by enforcing full public fiscal accountability, creating a predictable and transparent legal environment and building a modem, merit-based civil service. The Water and Sanitation Sector 7. Background. In recent months, one of the most notable changes in the status of municipal and village services in the West Bank and Gaza has been the deterioration of water services. Urban water systems have suffered from inadequate maintenance and appreciable physical damage.3 In rural areas, the situation is worse, since the population relies mostly on water transported by tankers that no longer meets WHO drinking water standards, and whose price has risen substantially since September 2000 as a result of increased transportation costs. 8. Based on a survey of 25 villages in the West Bank, Oxfam estimates that households now spend as much as a third of their total family income on water, and points out the serious impact this has on livelihoods, with farm animals dying and villagers being forced to sell their livestock at depreciated prices. Recent field work, carried out by USAID4 and DFID over the past 12 months, paints a similar picture of sharply increased water insecurity: People are much poorer; many have had no cash income since September 2000, making the purchase of water from vendors increasingly difficult. It is also very difficult to obtain credit from vendors or through social connections. As a result of closures and restrictions of mobility, the cost of tanker transport has increased, making water more expensive and putting additional economic burden on households. Data gathered in the field suggest that the price of water supplied by tanker has increased five-fold in many villages in the southern West Bank, from about NIS 4 (US$l.OO) to NIS 20 per cubic meter. In addition, waiting times for service are much longer, and water supply is erratic. During the summer season, the period of very severe water restriction has increased from 2-3 months to about 5-6 months. Water supply provided to many municipalities and villages from Israeli sources is increasingly erratic, due largely to discretionary and unpredictable Israeli rationing and lock-offs. People in the smaller municipalities and villages are increasingly resorting to water sources not fit for human consumption, typically dirty or infested cisterns used for watering livestock. According to the International Management Group database, estimated physical damage to the water and wastewater sector is around US$140 million (around US$60 million in water and US$SO million in wastewater) Village and Sanitation Program for West Bank of Palestine, Environmental Health Assessment -Phase I, July Hebron Water Access and Storage Project, Technical Proposal, August

7 9. Sector Issues and Strategy. In 2001, water supply levels on the West Bank were on average 90 I/c/d, quite low by international standards (less than one sixth of Israel s).6 Many areas of the West Bank, Hebron and Jenin in particular, were woefully underserved and had consumption levels well below average (see Annex 5).7 In the Hebron Governorate, for example, average piped supply was estimated at 55 Vc/d in 2001, and actual consumption about 40 I/c/d.8 Sixty percent of communities (mostly small villages accounting for about 7 percent of the Governorate s 458,000 population) have no access to piped supplies, and when the unserved urban population is included, the share of Hebron s population with no access piped supplies increases to 20 percent (about 97,000 persons). Figure 1 below indicates the distribution of supplies and average per capita consumption levels, as well as the distribution of services to communities in governorates. Further details are presented in Annex 5. Figure 1. Water Supply, and consumption by Governorates, 2001 I Fbpulation +Average Consunp!bn (UUD) I/ I Rcent of Papuhtbn in Served ComnLs -t Wrcent of Se~d Connunlies 10. As part of the Palestinian Development Plan, the Palestinian Water Authority (PWA) and the Ministry of Planning and International Cooperation identified the most pressing sector issues and formulated an overall strategy to address them. These issues are still relevant in the current context, and can be outlined as follows: Under-Znvestment: Historical under-investment in the sector has resulted in a lack of piped water to approximately a third of the Palestinian population in the West Bank, especially in rural areas. Sewage collection and treatment systems are also critically lacking throughout the Palestinian territories. Supply Constraints: Per capita availability of conventional water resources (surface water and groundwater) in the WBG is very low, standing at only 103 m3/capita/year, compared to 375 m3/capita/year in Israel; 170 m3/capita/year in Jordan; 1,200 m3/capita/year in Lebanon; and an average of 1,250 m3/capita/year for the whole MENA region. Water Supply in West Bank for Year 2001, PWA, December WHO recommends a minimum of 150 l/c/d. Poverw in the West Bank and Gaza, Summary, Middle East and North Africa Region, World Bank, January The consumption figure is net of unaccounted for water which PWA estimates at 40% on average. About 10 percent of this figure is due to poor metering and illegal connections. The balance (30%) is believed to be due to leakages from old and badly maintained networks and bad household connections. Actual consumption is thus estimated at 70 percent of supply. Infrastructure was a top priority in the Palestinian Development Plan (January 1999), as well as the fostering of an enabling environment for private sector development. Water and wastewater are the top priorities. In the West Bank, emphasis is given to drilling new wells to provide new water resources, followed by provision of water networks, sewerage collection systems and treatment, and institutional building programs. 3

8 Very Low Consumption Levels: Per capita municipal (domestic and industrial) consumption is less than 50 liters per day (after losses). High System Losses: Very high levels of losses in the West Bank (unaccounted for water (UFW) is around percent) are the result of poor construction, substandard materials, the corrosive environment, inadequate maintenance, illegal connections, and inadequate metering. Contamination Threats: Natural water resources are under threat from contamination by chlorides (salinity), by nitrates (from sewage and agricultural fertilizers), and by other chemicals from irrigation drainage and industrial and municipal effluents. Poor Service: Intermittent service, highly variable pressure, and inadequate pressure zoning result in regular and severe stress on the system and frequent pipe bursts. Inadequate Tariffs: Tariffs are inadequate to recover costs, and revenue collection efficiency is poor. Institutional Fragmentation: Regional management of the water sector is fragmented among municipal water departments, village councils, the West Bank Water Department (WBWD), and the Water Supply and Sewerage Authority (WSSA). This fragmentation is incompatible with efficient service delivery and the integrated management of the limited groundwater resources. 11. PWA has sought and obtained considerable technical and financial assistance from donors to implement an overall strategy that addresses these issues. This strategy can be outlined as follows: B Bulk Supply Improvement: Drilling new wells to alleviate the shortage of bulk water supplies, and upgrading existing wells that supply municipal water. Network Expansion: Extending water networks, particularly in unserved rural areas where water shortages are particularly acute. This will be done in cooperation with the relevant municipalities and village councils. Refugee camps will also receive special attention, in coordination with the United Nations Relief and Works Agency (UNRWA). System Loss Reduction: Reducing UFW, and thereby increasing the amount of water utilized, will alleviate over-extraction of groundwater aquifers (see below). Improving Network Management: Instituting measures to minimize UFW, including improving metering and billing, identifying illegal connections, improving leak detection and repair, and preparing network maps. Minimizing Contamination: Expanding the sewerage network will lessen contamination of groundwater from sewage and improve the environmental quality in urban areas. Establishing Policy Framework: Preparing and implementing an efficient and sustainable framework for system development, building on the Water Law approved in February of Tariff Reform: Instituting a system of tariffs, which will enable sustainable sector development while being affordable to households and vulnerable populations. Capacity Building: Building up PWA s technical, managerial and regulatory capacity. Institutional Reform: Undertaking major reforms that will separate policy and regulatory functions from service functions. Developing Regional Utilities: Entrusting water production and distribution to regional water and wastewater utilities/companies, thereby reducing fragmentation and increasing efficiency. 4

9 12. Strategy Implementation. Recognizing the increasing threat to public health, the increased economic burden on households, and the financial and operational constraints on municipalities and villages; in April 2002, PWA established the Emergency Water Operations Center (EWOC) in close consultation with and strong support from the donor and NGO communities. The purpose of the EWOC is to assist in responding to the growing humanitarian crisis through the prompt restoration of basic water and sanitation services in the West Bank. Specifically, EWOC is charged with: m Maintaining daily communications with water supply officials in affected areas. Coordinating damage assessments and definindprioritizing needs. Procuring and delivering required repair material, equipment, supplies and technical assistance. Organizing rapid responses to immediate water needs, including the procurement and delivery of emergency water supply commodities. 13. EWOC has functioned very well to date. In the first six months of operation, it disbursed about $1.15 million for emergency repair work, managing to get most severely damaged systems up and running and delivering spare parts as well as emergency supplies (including bottled water). Donors have recently made an additional US$4.4 million available to EWOC for continuing emergency work. The focus is now on restocking supplies, helping to improve local preparedness; and moving beyond mere crisis management to relieving social and economic hardship in the worst affected areas. 14. The Emergency Investment Prowam (EIP). lo The West Bank has long suffered from shortages of water, which have become increasingly acute as the conflict wears on. In response, PWA is stressing the need to implement a series of strategic investments on an emergency basis, and has prepared an Emergency Investment Program that aims to boost supply by drilling and equipping wells and installing pipelines to convey the additional water to areas of urgent need. The implementation of the program would yield an additional 7.6 million cubic meters (MCM) of water annually, and it is expected to provide nearly 250,000 (14 percent) of the West Bank s 1.8 million inhabitants with an adequate and reliable supply of water for the medium-term. 15. Given the restrictions currently in place on Palestinian access to the western and northeastern aquifer systems, the program is limited to the southern area of the West Bank, and the drilling of new wells is restricted to the eastern aquifer. While responding to the crisis, the program aims at fully utilizing available water rights to the eastern aquifer as a way to reduce dependence on the unreliable bulk supplies provided from the Israeli network, and is consistent with PWA s broad sector development strategy. The program focuses on the Hebron District, which has one of the highest poverty rates in the West Bank13 and, according to recent PWA data, is not only among the worst-served areas, but also suffers from frequent water supply rationing in the summer months - a situation greatly exacerbated by the crisis.14 lo West Bank Integrated Water Resources Management Plan, September 2002 (funded by USAID). PWA s strategy to alleviate water shortages in the northem areas is limited to continuing to provide support beyond the emergency needs through the EWOC framework, trying to improve the efficiency of the distribution networks and increasing the yield of existing wells through donor-supported program of well rehabilitation. Major investments in supply augmentation are pending the political resolution of water rights and access to the westem and northeastem aquifers. These and other issues in the north and central areas are being largely tackled through emergency assistance financed by donors long active in these areas, particularly Norway and Germany. West Bank Integrated Water Resources Management Plan, September 2002 (funded by USAID). l3 Poverty in the West Bank and Gaza, Summary, Middle East and North Africa Region, World Bank, January 2001) 14 Water Supply In [West] Bank for Year 2001, PWA, December

10 ~ 16. The EIP has the following main components: (i) completing the drilling and equipping of 4 wells in Bani Na im area; (ii) equipping the existing East Herodian well #2; (iii) installing five transmission pipeline systems and related reservoirs to convey the additional water throughout the southern area of the West Bank; and (iv) rehabilitating and extending water distribution networks for high priority municipalities and villages that are seriously affected by water shortages. Donors have worked closely with PWA and each other in helping to support the investments urgently needed to ease the water supply situation in the West Bank, making the preparation of EIP a model of donor coordination. USAID, AFD and the Bank are committed to funding the implementation of the EIP. 17. The table below indicates the various investment packages and likely donor funding. Estimated to cost about US$75 million, the program is designed to allow different donors to fund various freestanding packages in parallel. The packages proposed for World Bank funding under the EWP are a key part of this wider donor-supported program. 18. Many donors including the Bank and USAlD have undertaken numerous technical, economic and institutional studies of the area over the last few years. Thus, the foundations of the program are well established and consistent with the broader sector strategy and the Bank s country strategy. USAID has already funded the design of the five proposed transmission pipelines and the ongoing implementation of the four wells and two booster stations at Bani Na im. In addition, they have indicated an interest in financing the implementation of the proposed West Hebron Villages carrier and the rehabilitation and extension of the distribution networks along the carrier. AFD has shown interest in funding the transmission line from Halhoul to Dura and Yatta. These three sets of investment closely complement the one identified and proposed for Bank financing. On the institutional side, USAID has already explored the feasibility of establishing joint service councils in the area, and DFID has shown an interest in supporting their implementation within the scope of a PWA s broader long-term strategy of establishing a single utility for service provision in the southern area of the West Bank. Table 1. The PWA s Emergency Investment Program in the Southern West Bank Program Component (i) Water supply augmentation WB m Equipping the existing East Herodian #2 well (yields 1.7 MCM) [US$2.0 m] posed Don USAID 8 Completion of the Bani Na im wells and booster station (yields 5.90 MCM) [US$lO.O m] (ii) Transmission pipelines and related reservoirs Installation of East Herodian pipeline [US$2.5 m] Installation of Halhoul-Nuba pipeline [US$4.4m] Installation of the Bani Na im- Halhoul-Yatta pipeline [US$19.0 m] Installation of the West Hebron Villages carrier pipeline [US$12.0 m] ~l 7- US$12.0 m Installation of US$44.4 m the Halhoul-Dura- Yatta pipeline [US$6.5 m] (iii) Installation and rehabilitation of distribution networks iv) Technical Assistance to PWA Total Cost 8 Rehabilitation of networks in Kharas and Nuba [US$2.5 m] Rehabilitation of 16 village networks and installation of 8 new village networks (serving 90,000 inhabitants) [US$14.0 m] US$16.5 m 1 ~~$2.0 m m Support to PMU [US$2.0 m] US$13.4 m US$55.0 m US$6.5 m IUS$74.9 m 6

11 19. Institutional Aspects and Sustainability. Given the conflict circumstances, PWA s current focus has been on socio-economic hardship relief through emergency repair, increased water supplies, and improved distribution networks in the areas of greatest need. In addition, where possible PWA is seeking to lay the groundwork required for future sector, institutional and managerial reform. 20. With regards to institutions, the creation of a southern water utility operating on a commercial basis is a strategic objective for the sector that would ensure the sustainability of current investments in the long-term. However, given the current conditions of protracted conflict, it is highly unlikely that this objective will be achieved. Discussions among donors and PWA have led to a consensus that a system of joint service councils is the optimal institutional structure that will help ensure the sustainability of investments, while serving as a first step towards the creation of the future southern utility. 21. Recent studies financed by donors, including USAID and DFID, have confirmed that municipalities understand the issues and are willing to cooperate in forming such councils. The project will provide support to PWA to enable it to effectively coordinate and collaborate with other donors in the creation of a framework for the development of joint service councils among the beneficiary municipalities and villages. PWA will work in consultation with USAID and DFID who have indicated their willingness to provide necessary technical assistance to help create local capacity to operate and manage retail services to the consumers. SECTION B. BANK RESPONSE AND STRATEGY 22. In the absence of a CAS, on February 28, 2000 the Executive Directors approved the Status Report to the Board on the Trust Fund for Gaza and West Bank and Strategic Outlook, which outlines the Bank s proposed strategy in WBG for the current period. The strategy aims at continuing to lay the institutional foundation for statehood through knowledge-based analytical and policy work, and operations that encourage the development of sound governance institutions at the central and sector levels; and, in the context of the current crisis, continue providing analytical and programmatic leadership to the collective donor effort to cope with the emergency, while initiating multi-donor operations to support the delivery of essential services and the maintenancekecovery of private sector activity. 23. The proposed project is focused on addressing specific, high priority issues in the water sector, and supports the Bank s already widely respected leadership in the collective donor effort to find effective ways to assist with the most negative social and economic consequences of the crisis. In addition, the technical assistance given to PWA will help support more effective system management at the local level (joint service councils) and sustain the foundation for the deeper institutional reforms. 24. Rationale for Bank Involvement. The Bank has had considerable global experience in designing and implementing operations in response to natural disasters and emergencies arising in conflict-affected settings. Developing countries are becoming increasingly aware of the need to put in place measures to prevent or reduce risks arising from crises. The number of Bank-supported emergency recovery projects has increased in the past ten years, and the Bank has come a long way in its own understanding of how to operationalize sustainable interventions in emergency situations. In WBG in particular, the Bank is often relied upon by the PA and donors to lead such efforts, and has done so successfully. For example: 7

12 The first three operations implemented by the Bank in WBG were all emergency in nature and benefited from simplicity in design, while contributing toward the establishment of Palestinian implementation capacity, given its absence at the outset. The Bank has already demonstrated an ability to respond rapidly and effectively to the current crisis in WBG through its US$12 million contribution to the Emergency Response Program (ERSP),16 launched in December only two months after the start of the second Intifada - in which the Bank and five other donors provided over US$37 million to create temporary employment opportunities through small-scale infrastructure micro-projects. The Bank s ability to mobilize resources and contribute by providing a framework for other donor assistance is illustrated by the Emergency Services Support Project (ESSP - TF US$20 million, FY02), which has mobilized over US$45 million in donor co-financing. The recently approved Emergency Municipal Services Rehabilitation Project (EMSRP- TF US$20 million, FY03), prepared in close coordination with the European Commission and the Government of Belgium, among others, will leverage at its inception over US$37 million in parallel financing. Additional donor co-financing is expected to follow once the proposed Municipal Fund is established. The Bank s Country Office has a comparative advantage by virtue of its highly skilled and experienced national and international staff, who can effectively administer and supervise emergency programs in the West Bank and Gaza. Through its various water studies and projects in WBG over the last 8 years, the Bank has gained a deep knowledge and understanding of the sector and demonstrated considerable practical and intellectual leadership. It has also built a strong relationship with PWA and other key donors in the sector. Thus, PWA and donors expect the Bank to play a leading role in times such as these. Finally, the Bank s comparative advantage and global experience, has been instrumental in implementing innovative institutional reforms in the sector pioneered under the Water and Sanitation Services Project (WSSP - TF US$25 million, FY97) and the Southern Area and Sanitation Improvement Project (SAWSIP- TF US$21 million, FY00) Lessons Learned from Similar Operations. An important lesson learned from recent emergency operations in WBG supported by the Bank relates to decentralization of project preparation and implementation, which greatly facilitates implementation at a time when central systems are unable to function effectively because of the security situation. Decentralization has worked well in all of the Bank-supported emergency projects in WBG. l5 Emergency Rehabilitation Project I and I1 (November 1994 and May 1996 respectively) and the Education and Health Rehabilitation Project (February 1998). l6 The Bank channeled a contribution to the Emergency Response Program(P ) of US$12 million through the Bankadministered Holst Fund and leveraged a further US$25 million in joint co-financing through the PEACE Facility in support of emergency job creation through infrastructure micro-projects. EMRSP is a municipal instrument, and does not address deeper supply and distribution problems in the water sector-at least, not in the short run. * The key institutional reform component of SAWSIP was restructured recently in response the termination of the contract with the international operator on grounds offorce majeure. Both actions were directly due to the current crisis. Given the circumstances, it is highly unlikely that the strategic objectives for the creation of the southem water utility can become a reality in the short-term. During this period of instability, the focus will be placed in addressing the pressing needs to supply additional water while pursuing the modest objective of establishing joint service councils, which would be a stepping-stone for the creation of the future southern utility. 8

13 26. In addition, water is one of the few sectors in WBG where dialogue and reasonable working relationships still persist among the professionals on the Palestinian and Israeli sides, and where considerable donor involvement has also facilitated the dialogue between the Palestinian and Israeli parties. There appears to be a higher-level consensus that issues related to the management of scarce water resources, and the health risks attached to a breakdown in water and sanitation systems are too important to be left to the vagaries of the current crisis. Consultative mechanisms such as the Joint Water Committee (JWC) bring together Israeli and Palestinian professionals (including the military) periodically to discuss sector issues. These mechanisms are working and have proved effective in sorting out many problems. For example, upon consultation in a number of cases including the ongoing SAWSIP, Israeli military authorities have given special permits to a number of contractors and consultants in order to facilitate the movement of construction equipment and workers. 27. The situation favors the operation of international contractors, who are able to expedite the process of obtaining the necessary permits and clearances. However, there is a risk that key expatriate staff may depart quickly when serious conflicts materialize. 28. The above implies is that PWA must continue to deepen the dialogue with relevant Israeli technical, political and military authorities, keeping them fully apprised of plans and alerting them promptly when problems arise. Existing consultative mechanisms must be utilized effectively, and project design, management and procurement strategies must exploit, or at least take heed of the factors that foster success in the current context. Finally, contingency plans must be developed to deal with the various crises and blockages that may arise. SECTION C. DETAILED PROJECT DESCRIPTION Objectives and Components 29. Project Objectives and Development Outcomes. The main objective of the proposed project is to help alleviate the chronic shortages of safe water supplies, and reduce system losses, water costs and health risks. These objectives are consistent with PWA's strategy, in which highest priority is given to developing existing sources where water can be quickly conveyed and distributed to underserved consumers. 30. Project Components and Estimated Costs. The proposed project is a self-standing portion of a broader, coordinated donor-supported program.lg It is estimated to cost US$13.4 million (IDA, US$12.50 million and the PA, US$O.9 million in the form of payment of taxes), and will be implemented over a two and a half year period. It will be entirely financed on a grant basis from TFGWB, and includes the following main components: (i) rehabilitation and improvement of water supply transmission and distribution systems; and (ii) technical assistance and capacity building, as further detailed below. l9 The complementary components and packages to be financed by others are indicated in the following section. 9

14 Component I: Rehabilitation and Improvement of Water Supply and Distribution System (US$11.4 million). Package #I. East Herodian Well Equipment and Transmission Pipeline (US$4.5 million). This sub-component will finance: a) the supply and installation of electromechanical works for the existing East Herodian water well number two (EH#2), including well pump, booster pump and accessories, at an estimated cost of US$2.0 million; and b) the supply and installation of about 7.5 km of 16-inches diameter ductile iron water transmission pipeline to convey the water from EH#2 to the existing main north-south carrier at an estimated cost of US$2.5 million. Once operational, the well will discharge an additional 200m3/hr. EH#2 was drilled and tested in the second half of year 2000, just before the Intifada started. The cost of drilling was borne by EIB. The design and preparation of bidding documents for the two packages was prepared by an international consulting firm, and was financed by USAD. Package #2, HalhoulKharasINuba Transmission Pipeline (US$4.4 million). This sub-component will finance the installation of about 15km of 6 to 16-inch diameter ductile iron water transmission pipeline from the existing Halhoul regional water reservoir (capacity 25,000m3, financed by USAID) to Kharas and Nuba villages. The work includes construction of a l,000m3 on-ground water reservoir near Kharas and the connection pipelines to the proposed main pipeline, which will replace an old and much smaller (6-inch diameter) transmission pipeline, and convey water supplied from the north-south carrier (mentioned in package #1 above) through the existing Halhoul reservoir to the western villages. Special mitigation measures, such as the use of reducers and pressure reducing valves, are planned in case the proposed (12-inch diameter segment) transmission pipeline needs to be connected to the existing 6-inch diameter pipeline near Nuba village. This would be the case if the complementary investment package (# 1) of USAID outlined in the section below, is delayed. The entire additional amount of 1.7 MCM from EH#2 would be transferred to the western Hebron villages via the new pipeline, as well as a share of the 5.9 MCM proposed from the USAID developed Bani Na im well field (see complementary investment package #2 below). Pkg. #3, Distribution Network Rehabilitation Package (US$2.5 million). This sub-component will finance the rehabilitation of existing water networks in the villages of Kharas (about 34km of different diameter pipes) and Nuba (about 34km of different diameter pipes), and will be supported by complementary investment package #3 (see below). Component 2: Technical Assistance and Capacity Building (US$2.0 million). Project Management Unit (PMU) (US$0.5 million). This sub-component will finance the strengthening of the existing Project Management Unit (PMU) within PWA to enable it to effectively supervise project execution, and collaborate with other donors in the creation of a framework for the development of joint services council clusters, that will be responsible for operating and maintaining retail water distribution throughout the project area. 10

15 The project will finance a share of the PMU s operating costs, including office supplies, utility costs, rent, communication costs, local travel, office equipment and furniture, as well as rent for storage facilities and insurance. The PMU will operate throughout the duration of the Project and will have the principal implementation responsibility on PWA s behalf. It is already in place, and, during appraisal, its capacity and adequacy for the proposed project was reviewed and deemed acceptable. The recruitment of a project manager(s) and a procurement officer would further strengthen it. Technical assistance: (US$1.5 million). This sub-component will finance: a) the costs of the consultant services necessary for technical support, monitoring, engineering design, and preparation of bidding documents for Dura and Yatta villages distribution networks; and b) the cost of services of a Construction Management firm. 31. Complementary Investments: These would be undertaken in parallel, but independently, by USAID and AFD as part of the EIP. They include the following: Complementary Investment # 1: Works-Rehabilitation and Improvement of Water Supply and Distribution System. (US$61.5 million). Complementary Package # I: Westem Villages Transmission Line (US$12 million, financed bv USAID). The supply and installation of the remaining length, about 28km of ductile iron pipes, of the transmission pipeline, namely from Nuba to Al-Bira in the southern part of Hebron. The work also includes construction of four 500m3 ground water reservoirs near the Beit Ula, Deir Samit, Iskeik and AI-Bira villages and the connection pipelines to the main transmission pipeline. Complementaw Package # 2: Bani Na im bulk water supply and transmission pipe1 ine package: (US$29 million, financed by USAID). The supply and installation of electromechanical works for the existing Bani Na im water well field including well pumps, two booster stations, the piping system within the well field up to the downstream booster station, and the water carriers from the downstream booster station to both the existing Halhoul reservoir and to Yatta reservoir. The well field, once operational, would discharge about 5.8 MCM of water based on a 675m3/hr discharge rate into the water system. Three wells of the water well field were completely drilled and the forth is under drilling. The drilling of one of the wells was financed by the EIB and drilling the other three wells are financed by the USAID. An international consulting fm has been contracted to finalize the design, and it is expected that contacting for the implementation would start in the fourth quarter of Complementary Package # 3: Westem Villages Network Rehabilitation (US$14 million, financed bv USAID) The rehabilitation of existing or installation of new water distribution networks in several villages located around the main transmission pipeline from Nuba village to AI-Bira. 11

16 Complementary Packane # 4: Halhoul-Hebron-Dura-Yatta transmission pipelines: (US$6.5 million, financed bv AFD). The supply and installation of about 23km of 24-inch diameter ductile iron/steel water transmission pipeline from the existing Halhoul regional water reservoir to Dura and Yatta villages. The work also includes construction of a 5,000m3 on-ground water reservoir near Dura village and the connection pipelines to the proposed 24-inch diameter pipeline. 32. Key Project Performance Indicators.20 The key outcome indicator is: 0 Increase in quantity of water supplied (MCM). The output indicators to be agreed during Negotiations are: Number of new household connections. Number of household connections rehabilitated. Length of water pipelines installed and rehabilitated (km). 0 Identified packages are tendered and completed satisfactorily in accordance to the project plan. 0 Engineering designs and bidding documents for the Dura and Yatta villages are satisfactorily completed. Major Benefits and Risks 33. Benefits. The main benefit of the program and the project is improved water supply to an estimated 400,000 people in the Hebron Governorate through the program and 90,000 people in the Western Hebron villages through the project. Improved water supply translates into various nonmonetary and monetary benefits, such as: (i) improved health and hygiene through higher quantities and better quality of water; and (ii) reduced expenditures for buying water from water vendors. The Western Hebron villages households currently receive only a limited average amount of about 60 liters per capita per day (Vc/d) from the following sources: 34 Yc/d through the network; 17 Vc/d from rainwater harvesting and 9 Vc/d from water vendors. This already very low figure masks substantial local and seasonal variations. The price of water charged by vendors - NIS 20 per m3 (US$4.3 per m3) - is one of the highest in the world, and about four times higher than the average tariff of piped water in the Southern West Bank the highest in the ME" region (NIS 5 per m3 or US$1.18 per m3), and mainly attributed to water scarcity and movement restrictions. 34. It is assumed that water use from the network will double to about 70 l/c/d, displacing water supplied by vendors, while the amount of harvested rainwater will remain the same at 17 Wd. Based on these data, the shadow price of the incremental amounts of water is estimated at more than US$2 per m3 for the Western villages. Assuming the data for the Western villages are representative for the whole Hebron Governorate, the economic rate of return of the program is estimated at 21%. If the Bani Na'im well field and associated transmission as well as the Halhoul-Dura pipeline are excluded, thus including only the investments destined to the Western villages, the rate of return drops to 10%. 35. Risks. The project faces significant risks during implementation. In general, there is a risk that the volatile political and security situation could jeopardize smooth implementation, particularly if 2o See Annex 3 for Project Logframe with key performance indicators. 12

17 closures and curfews remain in place for an indefinite period. This risk is widely acknowledged by the donor community and is addressed in part through the Task Force on Implementation. The fact that three donors are participating in a coordinated effort will help to ensure a hearing with Israeli Authorities when problems arise as a result of their actions. 36. The following specific risks have been identified along with measures to mitigate their impact: Low Well Yield. There is a risk of the EH#2 well yielding less than the necessary 200 cubic meters per hour (CMPH) of water of acceptable quality. Test results have confirmed that the required quantity and quality of water is obtainable from the well. Procurement: To further minimize potential risks during the implementation phase, the contracting will be done separately for equipping the EH#2 well, the goods needed for the two pipelines, the works related to the installation of the pipelines, and the rehabilitation works for the villages of Kharas and Nuba. The equipping of the EH#2 well and goods will be tendered and awarded using International Competitive Bidding (ICB) procedures, using the standard bidding documents for supply and installation of equipment, as well as the standard bid evaluation report for goods and works. PWA will be assisted by an international consulting firm in preparing these documents in accordance with Bank procurement guidelines. National Competitive Bidding (NCB) procedures will be used for the installation of the pipelines and rehabilitation of the village networks. The risks of 'increased complexity of supervision associated with this approach are mitigated by the employment of an experienced, internationally recruited construction manager. Delays in finalizing bidding documents: PWA will prepare the bidding documents in accordance with the World Bank procurement guidelines. The designs for the EH#2 well pumping station and transmission pipeline are complete, while the detailed designs for the Halhoul-Kharas-Nuba pipeline and reservoir package are well underway. The tender documents for the procurement of goods and equipment needed for implementation have been issued for Bank' s review. Zsraeli Permissions: PWA has secured written confirmation from the Joint Water Committee and the Israeli authorities indicating their willingness to facilitate the movement of the contractors and goods to and from the project sites. Project Management: Although the PMU i s competent, it also has many other responsibilities. Thus further local technical expertise (project manager and procurement specialist) and, as noted above, an internationally recruited construction manager will be employed under the project to help oversee progress and manage the procurement issues that could arise. Donor Coordination: The proposed project is part of a wider program of relief and improvement for the southern West Bank, and has been developed in coordination with other donors, who are expected to be working in parallel. Delays in the implementation of other donor-financed components is a risk that is mitigated by the project's freestanding design. 37. Current Bank experience indicates that projects can be implemented even under the very difficult circumstances that exist today. Nonetheless, there is the possibility of further serious deterioration in the political and security conditions, to the point where extended border closures might halt delivery of material and supplies for long periods or force the evacuation of the contractor's staff. Short of such situation, though, the PMU has demonstrated its ability to cope with and adjust to the current conditions, and it has reaffirmed their strong commitment to continued timely implementation. Should the worse case scenario materialize, prior PWA consultation with Israeli authorities may minimize the overall impact of such circumstances. In any case, local contractors should be capable of completing the work; 13

18 therefore, foreign contractors will be required to ensure that their local subcontractors are fully involved in and conversant with project details. 38. Environmental Aspects. The proposed emergency project was prepared in accordance with Operational Policy (OP) 8.50 and will contribute to environmental improvements by increasing water service quality and coverage in small localities in the southern part of the West Bank. The identified subprojects will not require land acquisition or resettlement; thus, the project has been deemed category B in accordance with the World Bank Operational Policy 4.01 (January 1998). An Environmental Management Plan (EMP) was prepared by PWA in close coordination with the Environmental Quality Authority (EQA) and will be monitored through Bank supervision missions and reviewed during the project s mid-term review. The EMP gives general guidance on environmental issues, as well as on site assessments and designs that will be prepared for infrastructure sub-projects to be carried out under this project. In addition, the EMP elaborates on potential environmental impacts and recommends mitigation measures, for which the needs are likely to be limited. The costs, if any, would be borne under the rehabilitation and improvement component of the project. 39. Social Aspects. The key social and economic impacts are indicated in the section on benefits below. However, it should be noted that these impacts will be positive and considerable. In particular, the project would reduce hardship by increasing safe and reliable supply of water. Public health risks will also decrease, since there will be a reduction on the dependence on unsafe supplies of water. Reduced water costs will help households deal with the very difficult economic conditions, particularly for those already below the poverty line. Women, children and the disadvantaged will benefit significantly, since they bear the main burden of water collection and household chores. Given that the proposed pipelines will be laid or rehabilitated along existing public right-of-ways, there are no relocation issues, and no indigenous communities will be affected. SECTION D. STUDIES & TECHNICAL ASSISTANCE 40. The project will provide support to PWA to enable it to effectively coordinate and collaborate with other donors in the creation of a framework for the development of joint service councils among the beneficiary municipalities and villages, as a first step towards the creation of a regional utility. Recent studies financed by donors, including US AID and DFID, have confirmed that municipalities understand the issues and are willing to cooperate in forming such councils. PWA will work in consultation with USAID and DFJD who have indicated their willingness to provide necessary technical assistance to help create local capacity to operate and manage retail services to the consumers, given their experience in forming JSCs in the southern area of the West Bank. In addition, the project will finance technical assistance to the PMU, as detailed in the Component 2 section above. SECTION E. INSTITUTIONAL ARRANGEMENTS & PROJECT IMPLEMENTATION 41. Currently the Palestinian entities whose mandates directly affect the water sector are: (i) the National Water Council (NWC) chaired by the President of the Palestinian Authority and composed of 13 members representing public and private sectors; (ii) the Palestinian Water Authority (PWA), and (iii) various water utilities and municipalities covering different areas of the West Bank and Gaza. PWA has overall regulatory responsibility for the sector and provides policy guidance and support, as well as coordinates the work of donors active in the sector. 42. Project Management Unit. Day-to-day implementation will be the responsibility of the PWA s existing PMU. The latter was established by the PWA to facilitate effective monitoring and 14

19 implementation of SAWSIP.21 The PMU is located in Bethlehem city in the southern part of the West Bank close to the project site, and will be strengthened by recruiting a project manager(s), a procurement officer, and a construction manager (a firm), all according to Bank guidelines for selection and employment of consultants. The procurement officer will be responsible for procurement related issues for both the proposed project and the SAWSIP. Preferably, the construction manager will be a qualified international firm responsible for facilitating the coordination with Israelis for: clearance of entry of goods and securing permits for mobility of staff and contractors' employees, in addition to managing the construction of the investment packages. 43. The PMU will be responsible for all project accounting, disbursement, monitoring and evaluation, and will ensure timely implementation of Project activities. It will also be responsible for the selection and employment of consultants and preparation of contracts for the locab'international technical consulting firmskonsultants, as well as procurement of works, goods and services. The PMU will be required to submit quarterly progress reports for IDA review, which cover the status of physical progress in implementing the various investment packages; updated commitment/disbursement data and variation orders, noting deviations, if any, from the implementation plan; and highlight key issues and constraints, mitigation measures planned and taken; and updated assessments of the quality and coverage of water service delivery in the benefited communities. The PMU will also prepare a detailed mid-term report that would serve as the basis for a Project Mid-Term Review in January Finally, PMU will prepare and submit an Implementation Completion Report (ICR) to IDA within four months of the project's closing date. 44. Project Implementation Plan (PIP). A draft Project Implementation Plan was prepared by PWA and discussed and agreed at appraisal. Its purpose is to detail how the Palestinian Authority intends to carry out the Project to its completion. The PIP complements the MOP and Technical Annex; it expands on important implementation arrangements, and is seen by PWA as a flexible implementation tool that would be reviewed periodically and adjusted when warranted. The PIP describes PWA as the focal point, fully accountable for Project oversight and coordination. Staffing and key staff positions for the PMU involved in implementation are also described in the PIP, as well as the role of the other participants in the process (PMU, construction manager and various ministries and donors), and the coordination mechanisms between the various actors. 45. There will be a Project Launch Workshop within one month of effectiveness. Part of the Bank supervision staff is located in the field for close monitoring of the Project and to provide timely assistance to the client. Supervision missions would take place according to Project requirements. The Project midterm review is tentatively scheduled for January The penultimate supervision mission (February-March 2006) would be used to launch the preparation of the ICR with PWA. Procurement Arrangements 46. The Project will finance civil works, goods, services, and operating costs. Procurement will be conducted in accordance with IDA guidelines for "Procurement under IBRD Loans and IDA Credits," January 1995 (revised in January and August 1996, September 1997, and January 1999); as well as those for "Selection and Employment of Consultants by World Bank Borrowers," January 1997 (revised September 1997 and January 1999, revised May 2002). The components not financed by IDA will be procured in accordance with PA regulations or guidelines of financing institutions. A General Procurement Notice (GPN) has already been issued in "United Nations Development Business" (UNDB) 21 After the termination of the operator contract, the PMU played a more active role in the implementation of the project. 15

20 prior to the publication of the first Specific Procurement Notice (SPN) and bidders who have expressed interest will be notified directly by the PMU. 47. Procurement Responsibilities. The PMU will bear overall procurement responsibility during all phases of the project. All contracts, purchase orders and bid evaluation reports will be retained and filed at the PMU office. 48. Procurement Methods. The procurement arrangements described below are summarized under Table A. Thresholds for procurement methods and prior review arrangements are summarized under Table B. 49. Civil Works. Civil works are not expected to be procured under ICB procedures. Due to the current situation of political volatility and the restrictive and difficult security measures in place, it is unlikely that international contractors will be interested in working in the sub-project areas. Bid packages with an estimated contract value of US$2,000,000 or less, up to an aggregate amount of US$5,000,000, will be procured using NCB procedures and documents, and advertised in at least two local newspapers. NCB contracts will be open to eligible foreign bidders if they wish to participate. Bid evaluations will be submitted on IDA s Standard Bid Evaluation Forms for Procurement of Goods and Works of April Goods. To the extent possible, goods will be grouped together in lots of similar items. Bid packages with an estimated contract value of more than US$200,000 equivalent will be procured using ICB procedures. Packages with an estimated contract value of US$lOO,OOO or more up to an aggregate amount of US$400,000 or equivalent will be procured using National Competitive Bidding (NCB) procedures and documents acceptable to the Bank. These contracts will require advertisement in at least two local newspapers. NCB contracts will be open to eligible foreign bidders if they wish to participate. Goods contracts estimated to cost less than US$lOO,OOO up to an aggregate amount of US$lOO,OOO will be procured using National or International Shopping (NS/IS) procedures and will require soliciting, receiving and evaluating competitive quotations from at least three qualified suppliers. Goods costing less than US$5,000 with IDA prior review and clearance, and under exceptional circumstances, will be procured through direct purchase from the nearest available source. 51. Services. For consultants services costing US$200,000 or more, the Quality and Cost Based Selection (QCBS) method will be used. In addition, the Least Cost Based Selection (LCBS) method will be used for the procurement of the construction manager contract. An advertisement for Expressions of Interest will be published in the UN Development Business and the use of IDA s Standard RFT and Evaluation Report will be required. For services costing less than US$200,000 up to an aggregate amount of US$500,000, the selection method would be QCBS or QBS. For services provided by firms costing less than US$50,000, up to an aggregate amount of US$500,000, the selection method will be Consultants Qualifications (CQ). Single Source Selection (SS) will be used under exceptional circumstances and would require IDA s prior review and no objection. 52. For individual consultant contracts estimated to cost US$50,000 or less, the selection method will be based on Section V of the World Bank Guidelines for Selection and Employment of Consultants by World Bank Borrowers, published in January 1997 and revised in September 1997, January 1999, and May Single Source Selection (SS) will be used under exceptional circumstances and would require IDA s prior review and no objection. 16

21 Table A: Project Costs by Procurement Arrangements (US$ million equivalent)' Procurement Method Expenditure Category ICB NCB 2 Other N.B.F. Total Cost 1. Works (4.17) (4.17) 2. Goods (6.16) (0.28) (6.44) 3. Consultant Services (1.79) (1.79) 6. Incremental Operating Costs (0.10) (0.10) Total (6.16) (4.45) (1.89) (12.50) Figures in parenthesis are the amounts to befinanced by the Bank. All costs include contingencies. 2/ Includes goods to be procured through nationalhternational shopping, direct purchase, direct contracting of consulting services, auditing cost, services of contracted staff of the Project Management Unit, technical assistance services, and incremental operating costs related to rent, utility charges, communication costs, travel costs, labor costs, ofice supply and equipment and delivery services. 53. Prior Review. (Table 2-B provides information on all prior review arrangements). The first two contract packages in each category and each procurement method (works, goods and services), irrespective of the estimated contract value, would be subject to IDA's prior review, in accordance with the applicable guidelines. Thereafter, all contracts for works with an estimated contract value above US$500,000 equivalent, any contract for goods with an estimated contract value above US$lOO,OOO equivalent would be subject to IDA's prior review. Contracts with individual consultants in excess of US$50,000 equivalent and with consulting f m s in excess of US$lOO,OOO equivalent, as well as all single-source contracts would be subject to prior review. All other contracts would be subject to postreview on a random basis during supervision missions and procurement audits. Total value of contracts subject to prior review: US$12.4 million. 17

22 Table B: Thresholds for Procurement Methods and Prior Review Contract Value Contracts Subject to Expenditure Threshold Procurement Prior Review Category (US$ ) Method (US$) 1. Works > 2,000,000 ICB All contracts 5 2,000,000 NCB Each contract above 500, Goods 1200,000 ICB All contracts < 200,000 NCB Each contract above 100,000 < 100,000 Isms < 5,000 Direct Purchase All Contracts 3. Services Firm: 2 200,000 QCBS, LCBS All contracts < 200,000 QCBS, QBS First two RFPs and contracts < 50,000 CQ and then all TORS, Individual: 2 50,000 See section V of Guidelines All contracts < 50,000 See section V of Guidelines First two contracts 54. Overall Procurement Risk Assessment: Average. 55. Frequency of procurement supervision missions proposed: One every six months (including special procurement supervision for post-reviewlaudits). Post review will be conducted on a sample of 10 percent of the sub-projects subject to post review. 56. Procurement Planning. The PMU has prepared a draft procurement plan for the main project activities. The plan would be revised on a quarterly basis and will be part of the project implementation plan. 57. Summary of Procurement Capacity Assessment. Since it was established, PWA has been working bilaterally with a number of donor countries and international agencies including the Bank. It has capable and experienced staff that have carried out and performed procurement processes in accordance with different donor rules and regulations. PWA has previous experience with Bank guidelines through the MIDP I, MIDP 11, Gaza Water Supply and Sanitation Project and the Southern Area Water and Sanitation Improvement Project. The PMU has previous experience with Bank procurement guidelines through the ongoing Southern Area Water and Sanitation Improvement Project. However, hiring a procurement specialist would strengthen the PMU. In addition, PWA will be assisted by a management construction firm in the preparation of the bidding documents in accordance with Bank procedures and guidelines, as well as during supervision of the construction works. Financial Management 58. Background: The Palestinian Water Authority, through the existing Project Management Unit (PMU) in West Bank for the on-going SAWSIP, will have the responsibility for the project implementation, as well as all aspects of financial management. The PMU was established in 1999 and has been responsible for SAWSIP s overall financial management, including accounting, monitoring, and 18

23 reporting throughout the project implementation. The financial management system (FMS) at the PMU i s continuously reviewed during the Bank s regular supervision missions to ensure continuation of adequate financial management arrangements and the ability to generate reliable quarterly financial monitoring reports (FMR). Throughout the implementation of SAWSIP, the PMU maintained an adequate FMS. 59. The PMU is adequately staffed with a qualified finance officer. The PMU will prepare a full set of FMR on quarterly basis and submit them un-audited to IDA within 45 days from the end of each quarter. Also, the PMU will prepare annual financial statements, which will be audited by a qualified independent auditor acceptable to IDA. The audit report shall be sent to IDA within four months of yearend. Disbursement will be based on traditional disbursement methods. To facilitate implementation, a Special Account will be opened at commercial bank acceptable to IDA. 60. Financial Management Assessment: The financial management assessment of the PMU, conducted during a February 2003 supervision mission, revealed that it has in place adequate financial management systems that meet the IDA requirements. The operational procedural manual provides adequate level of segregation of duties and clear division of authorities and responsibilities. Also, the FM system is capable of producing reliable and timely project financial statements and FMR. 61. Accounting System: The project s primary accounting will be the responsibility of the PMU. Separate project ledger and accounting records would be established for EWP, as the PMU s accounting system (Bisan) is capable of maintaining multi-project accounts. The PMU accounting responsibilities will include maintaining all accounting records, supporting documents, undertake book-keeping of all financial transactions, prepare monthly bank reconciliation for the Special Account, quarterly FMR, prepare annual financial statements, examine supporting documents for the purpose of payments to contractors and third parties, prepare Withdrawal Applications for withdrawal of funds from the Grant Account and coordinate with the Ministry of Finance for countersignature, review and monitoring purposes. Accounting for the project will be on accrual basis in line with International Accounting Standards and PWA accounting policies and procedures. This implies that year-end adjustments for accounts payable and accounts receivable will be properly made. 62. The PMU will maintain supporting documentation for expenditures on activities managed under the Project. Books of accounts will be maintained on double-entry bookkeeping principles for the activities under the Project. Project records should be kept in auditable conditions at all times. The project accounting records and all supporting documents shall be maintained at PWA for at least one year after IDA has received the audit report for the fiscal year in which the last withdrawal from the Grant Account was made. 63. Budgeting System: The budgeting system is in place and linked to accounting. The PMU will prepare an annual budget plan and update it on quarterly basis to reflect actual implementation and latest forecasts. Where feasible, the PMU proposals for funding will be accompanied by a proposed budget, which would facilitate better planning and control. These plans will be periodically reviewed and updated along with the progress of the project. 64. Procedures of Internal Control: The Internal Control Procedures at the PMU were established in 1999 by qualified consultants, and are acceptable to IDA. The control policies and procedures provide reasonable assurance of (a) a proper authorization of transactions; (b) access to and use of assets and records; and (c) separation of custody of cash from authorization and record keeping, and separation of authorization from record keeping. 19

24 65. Flow of Funds: The Ministry of Finance (MOF) will establish a special account at a commercial bank according to IDA s terms and conditions. The PMU will be responsible for managing the Special Account, including preparation of withdrawal applications and sending copies to the Ministry of Finance for review, countersignature and monitoring purposes, reconciliation of the account to IDA s records, cooperate with IDA s supervision missions and coordinate with external auditors. 66. The Bank will finance 95 percent of the eligible consulting services excluding VAT (81 percent if VAT is included); 100 percent of the eligible foreign expenditures for goods; and 85 percent of eligible expenditures for works and local goods. The remaining percentage, which accounts for VAT, will be prefinanced by a VAT fund account established by PWA and replenished by the MOF as they collect the VAT payments from the contractors, and no later than 60 days after the payment has been made to the contractors. Disbursement will be based on traditional disbursement methods, using applications for direct payment, requests for special commitments, reimbursement, and replenishments to the Special Account accompanied by SOEs andor summary sheets with full supporting documents. The PMU/MA will maintain all supporting documents for year-end auditing and supervision missions reviews, these documents will be kept at PWA for at least one year after IDA has received the audit report for the fiscal year in which the last withdrawal from the Grant Account was made. 67. Financial Monitoring Reports (FMR): The PMU will prepare Financial Management Reports and send them non-audited to the Bank 45 days following the end of every quarter. The Financial Management Reports will include (a) a general progress report about Project implementation (b) the cost by component for the quarter (c) the costs incurred by type of expenses (d) the project balance sheet and (e) the acquisitions incurred on contracts under the established threshold. The project statement of accounts will be put in place to facilitate the automatic generation of the reports on financial controls. The contents and format of the reports have been prepared by the PMU and agreed during negotiations. The FMR will be reviewed by the project team and the financial management analyst in the Country Office, and will form the basis for the Country Office periodic review of the project s financial management activities. 68. Audit: The project accounts and the annual financial statements (project balance sheet, the flow of funds, and the statement of the Special Account) will be subjected to annual audits. The audit will be conducted in accordance to international standards on auditing, by an independent auditor acceptable to IDA, and under terms of reference cleared by IDA. The auditor will examine all sources of the funds of the project, as well as all incurred expenses including those related to the statements of the expenditures (SOEs) by ascertaining their conformity with the Trust Fund Grant Agreement. The auditor will express an opinion on the project financial statements, and will supply a separated viewpoint on the eligibility of all incurred expenses that are included in the SOEs. The audit report should be sent to IDA not later than four months after the end of the year. The auditor will be appointed by MOF. 69. In addition to external auditing, SOEs will be reviewed by supervision missions and IDA s country office to substantiate adequate supporting documents and accuracy, and to ensure consistent and efficient application of the financial management system. 70. Risks: The project s financial management risk is considered low. This consideration is mainly the result of the following: (a) financial management is entrusted to an experienced, well established PMU, (b) limited number of transactions with relatively large amounts which require intensive review and auditing, and (c) involvement of the Ministry of Finance in reviewing and countersigning each withdrawal application. The main risk would be the co-mingling of the two projects accounts handled by the same PMU (SAWSIP and EWP), or errors in posting payments between the two projects. This risk 20

25 will be mitigated through the set up of separate accounts and general ledger, and maintaining the financial transaction records totally separate. 71. In addition to the regular supervision missions, the financial management analyst at the Country Office would review the quarterly FMR, periodically review SOE samples, conduct visits to the PMU and ensure the sustainability and adequacy of the FM arrangements. Disbursement 72. Disbursements would follow traditional disbursement methods using applications for direct payment, requests for special commitments, reimbursement and replenishments to the Special Account accompanied by SOEs and/or summary sheets with full supporting documents. 73. Disbursement Arrangements. The proposed Grant of US$12.5 million equivalent will be disbursed over a period starting August 1, 2003 and up to the closing date of June 30, Table C below describes the allocation of the Grant proceeds according to each expenditure category. Retroactive financing would be available for eligible expenditures incurred after May 31, 2003, up to a maximum of US$0.5 million equivalent. Table C: Allocation of Grant Proceeds Expenditure Category Amount in US$ Financing Percentage million 1. Works % 2. Goods % foreign, and 85% of local expenditures 3. Consultants Services % (excluding VAT) 81 % (including VAT) 4. Operating Costs"' % 5. Unallocated ('l) 1.13 Total Grant Costs (i) Operating costs would include rent of ofice and storage spaces, insurance costs, communication costs, ofice supply, utility charges, banking charges and domestic travel. Auditing will be covered under consultancy services. (ii) Contingencies 74. Use of Statements of Expenditures (SOEs). Disbursement from the Grant Special Account will be fully documented for (i) contracts for goods costing more than the equivalent of $100,000; (ii) contracts for works costing more than the equivalent of $500,000; (iii) contracts costing more than the equivalent of $100,000 for services of consulting fim; and (iv) contracts costing more than the equivalent of $50,000 for services of individual consultants. Disbursement for all other expenditures will be made against SOEs with supporting documentation retained at the PMU premises and made available for IDA'S review during supervision. SOEs will be subject to an annual audit and semi-annual review by an independent auditor, as well as periodic review by the financial management analyst at the Country Office. 21

26 75. Special Account (SA). A SA will be opened by MOF in a commercial bank acceptable to IDA in order to facilitate disbursements against eligible expenditures under the Grant. The SA would be operated by the PMU under terms satisfactory to IDA. IDA would, upon request, make an authorized allocation of 10 percent of the Grant. This percentage will be reviewed once implementation has commenced for a possible increase depending on the speed of disbursement. 76. The SA replenishment applications will be documented according to IDA guidelines, including a bank statement of the SA, and a reconciliation bank statement of the SA against IDA records. Replenishment applications will be submitted regularly (preferably bimonthly, but not less than monthly). SECTION F. FINANCIAL AND ECONOMIC JUSTIFICATION 77. The proposed emergency Project is being prepared under emergency recovery assistance procedures (OP 8.50). Limited time and availability of economic data prevent detailed analysis, a recognized constraint in preparing such operations. However, a preliminary analysis was undertaken and the findings indicate that if the data for the Western villages are representative for the whole Hebron Governorate, the economic rate of return of the program is estimated at 21 percent. If the Bani Na im well field and associated transmission as well as the Halhoul-Dura pipeline are excluded, thus including only the investments destined to the Western villages, the rate of return drops to 10 percent. SECTION G. ACTION PLAN 78. The following have been agreed as conditions of effectiveness: 0 0 Conclusion of a Subsidiary Agreement between the Palestine Liberation OrganizatiodPalestinian Authority and the Palestinian Water Authority, satisfactory to IDA. Submission to IDA of a legal opinion that the Trust Fund Grant Agreement has been duly authorized or ratified by the Recipient and is legally binding upon the Recipient in accordance with its terms. The legal opinion shall also state that the Subsidiary Agreement has been duly authorized or ratified by, and executed and delivered on behalf of, the parties thereto, and is legally binding upon them, in accordance with its terms. 22

27 Annexl: Logical Framework and Key Performance Indicators Hierarchy of Objectives Sector-related WBG Assistance Strategy Goal: Key Performance Indicators Sector indicators: Data Collection Strategy Sector I country report: Critical Assumptions and Risks (From Goal to Bank Mission) 1. Continue developing essential and sustainable infrastructure systems and services. 2. Continue providing analytical and programmatic leadership to the collective effort to assisting with the emergency situation. Project Development Objective: 1.1 Improved service coverage. 2.1 Continued donor coordination towards the support of the water sector and the PWA. 2.2 Increased donor aid mobilized towards water Fector Outcome I Impact Indicators WBG Assistance Strategy progress reports. Economic and Sector Reports. Project Reports Favorable political climate and continued commitment of donors to support the Palestinian people. (From Objective to Goal) Help alleviate the chronic shortages of safe water supplies, and reduce system losses, water costs and health risks in the southern area of the West Bank Increase in quantity of water supplied (MCM). PWA quarterly and annual reports. User survey reports. Donor financing is timely available for implementation of proposed donor-financed portions of the EIP. Level of violence does not escalate to the point where investments are destroyed or unable to be maintained. Outputs for each component: Output indicators: Project reports: (From Outputs to Objective) 1. Successful rehabilitation of planned distribution networks and transmission pipelines, namely: - EH#2 well is equipped and transmission pipeline is completed. - Halhoul-Nuba transmission pipeline is completed and Kharas reservoir is built. - Kharas and Nuba distribution networks are rehabilitated. 1.1 Number of new iousehold connections. 1.2 Number of household :onnections rehabilitated. 1.3 Length of water Jipelines installed and.ehabilitated (km). Project supervision and progress reports. Construction manager progress reports. User s survey reports. Level of violence does not escalate and mobility of staff and workers allow supervision and maintenance of investments financed by the project. Construction manager ensures quality of goods and equipment, as well as of the implementation of works. 23

28 Hierarchy of Objectives 2 PMU adequately monitors project implementation. Key Performance Indicators 2.1 Identified packages are tendered and completed satisfactorily in accordance to the project plan. Data Collection Strategy Critical Assumptions and Risks Project ComponentdSubcomponents: 2.2 Engineering designs and bidding documents for the Dura and Yatta villages are satisfactorily completed. Inputs: (budget for each component) Project reports: (From Components to Outputs) 1. Rehabilitation and improvement of water supply transmission and distribution systems. IDA: US$11.4 million Project supervision and progress reports. Pipes, fittings and construction material are permitted to enter project sites, at a reasonable cost and without delays. 2. Technical Assistance and Capacity Building IDA: US$2.0 million Workers and staff are able to travel to project site. Auditor and technical consultants are hired without delays. 24

29 ~~ Annex 2: Project Costs and Financing West Bank and Gaza: Emergency Water Project Estimated Project Costs Proiect C!m"ent Locall Foreign1 Totall IDA1 PA a) Equiping the East Herodian Well 1.1 Supply and installation of equipmnt for East Her" Well b) East Herodian Pipeline 2.1 F'rocuremnt of Materials - East Herdan Pipeline Installation of Pipes -East Herodian Pipeline c) Halhoul - Nuba Pipelie 3.1 Prccuremnt of Materials - Halhoul-Nuba Pipeline 3.2 Installation of Pipes - Halhoul-Nuba Pipeline d) Kharas Reservoir 4.1 Kharas Reservoir e) Rehabilitation of Nuba and Kharas Distribution Networks 5.1 Rehabilitation works of Was Distribution Network 5.2 Goods for Rehabilitation of Kharas Distribution Network 5.3 Rehabilitation works Nuba Distribution Nehvork 5.4 Goods for Rehabilitation of Nuba Distrib.Network

30 Annex 3: Selected Water Supply, Population and Poverty Data Figure 1: Population and Water Consumption by Community, Hebron Governorate, West Bank, d 70 s a 60 : oooO 40 5 $ 6Mx)O s Total Population +Awage Consumption per capita (UCID) Source: See Table A5-3 below. Table 1: Population and Communities Served by Piped Water Supply by Governorate, West Bank

31 Table 2: Water Supply and Consumption by Governorate, West Bank 2001 Table 3 Population and Water Supply by Municipality and Village, Hebron Governorate

32 ~ 27 I COlllIIIunitY Beit Awwa 28 Dura 29 Qilqis 30 AI-Sikkeh _ Average Average Total Supply per Consumption Total Population Supply capita per capita Population Served (MC) r wm).(l/c/d) Twas Al-Majd Dir A1 -Asal Afuqa Dir AI-AsaI Atahta Kherbit Abu Hamid 37 Al-Rebeieh 38 Beit Al-Rush Altahta Beit AI-Rush Alfuga Beit Amra AI-Bireh Al-Buri Notes: 1) MCM = Million Cubic Meter; Vc/d = Liters Per Capita - - per day 2) Consumption estimated at 70% of supply Source: Water Supply in the West Bank for Year 2001, PWA, December

33 Table 4 Estimated Local Poverty Rates, West Bank and Gaza, 1997 District Locality Incidence of Poverty Number of Poor (% OfLoeal Population) ( 0%) I 1 West Bank Jenin AI Yamun Jenin Jenin Jenin Ya bad Jenin Qabati ya Nablus Nablus 7 Nablus Qabalan 20 I Nablus I Biddva I 16 I 5.2 I Nablus Nablus Salfit A1 Jiftlik Total Nablus Ramallah Ramallah Ramallah Ramallah Ramallah Total Ramallah Jerusalem Jerusalem Jerusalem Total Jerusalem Bani Zeid Bir Zeit Silwad Beitunya Ramallah AI Ram Biddu Abu Dis