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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$200 MILLION TO THE ARGENTINE REPUBLIC FOR THE SECOND NORTE GRANDE WATER INFRASTRUCTURE PROJECT March 7, 2011 Sustainable Development Department Argentina, Paraguay and Uruguay Country Management Unit Latin America and the Caribbean Region Report No: AR This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following board consideration and the updated document will be made publicly available in accordance with Bank s Policy on Access to Information.

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3 CURRENCY EQUIVALENTS (Exchange Rate Effective March 1, 2011) Currency Unit = Argentine Peso AR$1.00 = US$0.248 US$1.00 = AR$4.03 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AGN BNA BP CAS CAF CF CMU CO CPS DA EA EIA EMP ESMF ETS FAP FM FMR FY GDP GoA HQ IADB IAU IBRD ICB IDA IFR IP IPP IPPF M&E MDG Mercosur National Audit Institution (Auditoría General de la Nación) National Bank of Argentina (Banco Naciónal de Argentina) Bank Procedures Country Assistance Strategy Corporacion Andina de Fomento (Andean Development Corporation) Consultation Framework Country Management Unit Country Office Country Partnership Strategy Designated Account Environmental Assessment Environmental Impact Assessment Environmental Management Plan Environmental and Social Management Framework Environmental Technical Specifications Fiduciary Action Plan Financial Management Financial Management Report Fiscal Year Gross Domestic Product Government of Argentina Headquarters Washington, D.C. Inter-American Development Bank Internal Audit Units International Bank for Reconstruction and Development International Competitive Bidding International Development Association Interim Unaudited Financial Reports Indigenous Peoples Indigenous Peoples Plan Indigenous Peoples Planning Framework Monitoring and Evaluation Millennium Development Goals Southern Common Market (Mercado Comun del Sur) MPF NBI NCB NG NGO NGR OECD O&M OM OP PAD PDO PROSAP- II PTA RP RPF SA SBD SEPA SIDIF SIGEN SIL TA TORs UCPyPFE Ministry of Federal Planning, Public Investment and Services (Ministerio de Planificación Federal, Inversión Pública y Servicios de Nación) Basic Unsatisfied Needs (Necesidades Básicas Insatisfechas) National Competitive Bidding Norte Grande Non Government Organization Norte Grande Region Organization for Economic Cooperation and Development Operation and Maintenance Operations Manual Operational Policy Project Appraisal Document Project Development Objective Second Provincial Agricultural Development Project Participation, Transfer and Maintenance of Works Agreement Resettlement Plan Resettlement Policy Framework Social Analysis Standard Bidding Document Procurement Plans Execution System ( ) Integrated Budget and Accounting System (Sistema Integrado de Información Financiera) General Syndicate of the Nation (Sindicatura General De La Nación) Specific Investment Loan Technical Assistance Terms of Reference Executing Unit within Coordinating Unit for Programs and Projects with External Financing (Unidad Coordinadora de Programas y Proyectos con Financiamiento

4 UEPEX Externo) Ministry of Economy s Information Unit (Unidad Informática de la Secretaría de Hacienda) WS WSS Water Supply Water Supply and Sanitation Vice President: Country Director: Sector Director: Sector Manager: Sector Leader: Task Team Leaders: Pamela Cox Penelope J. Brook Laura Tuck Guang Zhe Chen Michel Kerf Patricia Lopez

5 ARGENTINA Second Norte Grande Water Infrastructure Project CONTENTS I. Strategic Context... 1 A. Country Context... 1 B. Sectoral and Institutional Context... 2 C. Higher Level Objectives to which the Project Contributes... 5 II. Project Development Objectives... 6 A. PDO... 6 B. Project Beneficiaries... 6 C. PDO Level Results Indicators... 6 III. Project Description... 6 A. Introduction... 6 B. Project components... 7 C. Project Financing... 8 IV. Implementation... 9 A. Institutional and Implementation Arrangements... 9 B. Results Monitoring and Evaluation C. Sustainability V. Key Risks and Mitigation Measures VI. Appraisal Summary A. Economic and Financial Analysis B. Technical C. Financial Management D. Procurement E. Social (including safeguards) F. Environment (including safeguards) G. Other Safeguard Policies Triggered Annex 1: Results Framework and Monitoring Annex 2: Detailed Project Description Annex 3: Implementation Arrangements Annex 4: Operational Risk Assessment Framework (ORAF) Annex 5: Implementation Support Plan Annex 6: Team Composition iv

6 Annex 7: Norte Grande Development Program: MAP IBRD 38215R v

7 PAD DATA SHEET ARGENTINA SECOND NORTE GRANDE WATER INFRASTRUCTURE PROJECT PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN Urban, Water and Disaster Risk Management Unit (LCSUW) Date: March 7, 2011 Country Director: Penelope J. Brook Sector Director: Laura Tuck Sector Manager: Guang Zhe Chen Sector Leader: Michel Kerf Team Leader: Patricia Lopez Project ID: P Lending Instrument: Specific Investment Loan (SIL) Sector(s): WZ - General water, sanitation and flood protection (85%); BW- Public administration - Water, sanitation, and flood protection (15%) Theme(s): 71- Access to urban services and housing (70%); 84 - Pollution Management and Environmental Health (30%) EA Category: Full Assessment (Category A) Project Financing Data: Proposed terms: Variable-spread loan with a final maturity of 26 of years including a grace period of 7.5 years. [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: Source Total Project Cost: Cofinancing: Borrower: Total Bank Financing: IBRD IDA New Recommitted Borrower: Argentine Republic Total Amount (US$M) 240 Responsible Agency: Ministry of Federal Planning Public Investment and Services, Coordinating Unit for Programs and Projects with External Financing (UCFyFPE) Contact Person: Pablo Abal Medina Telephone No.: Fax No.: pmabal@minplan.gov.ar vi

8 Estimated Disbursements (Bank FY/US$ m) FY FY12 FY13 FY14 FY15 FY16 FY17 Annual Cumulative Project Implementation Period: July 15, 2011 December 31, 2016 Expected effectiveness date: June 30, 2011 Expected closing date: April 30, 2017 Does the project depart from the CAS in content or other significant respects? If yes, please explain: Yes No Does the project require any exceptions from Bank policies? Have these been approved/endorsed (as appropriate by Bank management? Is approval for any policy exception sought from the Board? Does the project meet the Regional criteria for readiness for implementation? Yes No Yes No Yes No Yes No Project Development objective The Project Development Objective is to increase sustainable access to sanitation and water supply services in the Norte Grande region of Argentina, by providing investments in infrastructure and supporting institutional development. Project description: Component 1: Water Supply and Sanitation Infrastructure. Carrying out of demand-driven subprojects consisting of the rehabilitation, upgrading and/or reconstruction of: (i) wastewater collection, conveyance, treatment and disposal systems, and (ii) water supply systems. Component 2: Institutional and Operational Development and Technical Assistance. Carrying out of: (i) tailored institutional and/or operational strengthening programs and technical assistance for participating WSS Service Providers, (ii) technical studies required to support the preparation and implementation of subprojects, and (iii) communication plans, dissemination and knowledge-sharing activities, and training and capacity building. Component 3: Project Management and Supervision. Carrying out of: (i) specialized independent technical, environmental and social supervision of subprojects implementation, (ii) Project audits, and monitoring and evaluation activities, and (iii) provision of administrative and operational support. vii

9 Safeguard policies triggered? Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Financing Agreement Reference Schedule 2, Section I.E.1 Schedule 2, Section I.E.2 Conditions and Legal Covenants: Description of Condition/Covenant Upon the selection of any given Subproject and prior to the carrying out of the pertinent works under said Subproject, the Borrower, through UCPyPFE-UEP, shall: (a) carry out and/or cause to be carried out an environmental/social assessment of the pertinent works, and based on the results of said assessment as determined by the Bank, approve and/or cause to be approved an environmental/social management plan or similar environmental or social safeguards instrument, acceptable to the Bank, for each said works (which plan or similar environmental/social safeguards instrument shall be based on the results of the environmental/social assessment mentioned herein, and the Bank s comments on the results of said assessment, if any), all in accordance with the provisions of the Environmental and Social Management Framework; and (b) immediately after said approval, implement and/or cause to be implemented (as the case may be) the corresponding environmental/social management plan (or similar environmental/social safeguards instrument) in accordance with its terms, and in a manner acceptable to the Bank. Without limitation to the pertinent provisions of this Agreement in respect of any given Subproject in which works are involved, and if as a result of the definition of the precise sitting alignments it is determined by the Bank that Resettlement will be involved, the Borrower, through UCPyPFE-UEP, shall: (a) prior to the carrying out of any said works, prepare and/or cause to be prepared and furnish to the Bank, a resettlement plan, acceptable to the Bank (which plan shall consistent with the pertinent provisions of the Resettlement Policy Framework); and (b) thereafter, implement and/or cause to be implemented, said resettlement plan in accordance with its terms and in a manner acceptable to the Bank. viii Date Due Recurrent Recurrent

10 Schedule 2, Section I.E.3 Schedule 2, Section II.B.4 With respect to the carrying out of any given Subproject and when so determined by the Bank as set forth in the IPPF and the Environmental and Social Management Framework, the Borrower, through UCPyPFE-UEP shall: (a) prior to the carrying out of any said Subproject, prepare and/or cause to be prepared and furnish to the Bank, an Indigenous Peoples Plan, acceptable to the Bank (which plan shall consistent with the pertinent provisions of the IPPF); and (b) thereafter, adopt and implement (and/or cause to be adopted and implemented) said Indigenous Peoples Plan in accordance with its terms and in a manner acceptable to the Bank. The Borrower, through MPF, shall, prior to the commencement of each calendar year during Project implementation, create, and thereafter maintain throughout each said calendar year of Project implementation, a specific budget line entry in the national annual budget (starting in calendar year 2011) in order to keep track of the corresponding expenditures incurred during Project implementation. Recurrent Recurrent ix

11 I. Strategic Context A. Country Context 1. Recovery from 2001 crisis. Between 2002 and 2008, real Gross Domestic Product (GDP) in Argentina grew on average 8.5 percent per year 1. This strong growth performance was supported by a dynamic expansion of private investment, internal consumption and exports. Continued primary surpluses, together with a successful restructuring of sovereign debt in 2005, led to a marked reduction in the debt-to-gdp ratios from 66.4 percent of GDP in 2002 to 47.1 percent of GDP (US$160.9 billion) by end-september The Government s economic strategy, aimed at supporting the growth momentum, included expansionary fiscal and monetary measures as well as active income policies. As a result, poverty has declined from 13.9 percent in June 2009 to 12.0 percent in June Unemployment is also falling, reaching 7.5 percent in September 2010, from a peak of 9.1 percent in September Economic slowdown and recovery. Economic activity started to slow in 2008 due to the impact of the global financial crisis. Real GDP growth declined to 6.8 percent in 2008 from 8.7 percent in 2007 according to official statistics. Economic activity declined further in 2009 due to a drop in external demand, declining commodity prices, and a severe drought that weighed on agricultural production. Fiscal performance deteriorated in 2009 on account of lower economic activity, counter-cyclical stimulus measures and a sharp decline in foreign trade (primary fiscal surplus fell from 3.1 percent of GDP in 2008 to 1.5 percent of GDP in 2009). The economy rebounded strongly in 2010, fueled by fast growth in internal absorption, external demand (mainly Brazil and China) and commodity prices. A revitalization of industrial activity in automobiles, basic metals and textiles, and a normalization of agricultural production following the previous year s severe drought have contributed to the economy s dynamism. Internal absorption has been boosted by consumption, investment and an expansion of public spending. Real GDP, as proxied by accumulated monthly economic activity, grew by 9.1 percent in With the onset of the worldwide economic crisis and domestic economic slowdown, the Government of Argentina (GoA) prioritized an infrastructure investment program as a key part of a countercyclical economic stimulus package. Following the crisis, infrastructure investment grew every year, reaching 4.67 percent of GDP in 2008, and has continued to grow strongly despite the recent economic slowdown. The GoA s Strategic Plan for Territorial Development sets out the two main objectives for its investment agenda: (i) consolidating market forces for the country s inclusion in the global economy and (ii) mitigating isolation asymmetries in the development of disadvantaged regions and communities to ensure a more equitable and sustainable growth for the country, particularly by bridging infrastructure deficits in poorer provinces The infrastructure investment program is a key piece of the GoA s strategy to overcoming potential bottlenecks to competitiveness and an essential means of tackling endemic poverty and regional inequalities as well as enhancing living standards in Argentina. 1 By mid-2005 real GDP had recovered to the level immediately before the recession. 2 Data based on official inflation figures, which are contested by market analysts Argentina del Bicentenario: Plan Estratégico Territorial. 1

12 4. The Norte Grande Region (NGR) epitomizes the marginalization, underdevelopment and extreme poverty. Despite the economic recovery in Argentina and overall decrease in poverty levels, growth has historically been unequally distributed and poverty still endures in the North of the country. The region includes the nine provinces of Catamarca, Chaco, Corrientes, Formosa, Jujuy, Misiones, Tucumán, Salta and Santiago del Estero. Although it covers one-third of the national territory and comprises about 7.5 million people, representing 21 percent of the population, it produces only 10 percent of the GDP and 8 percent of the country s total exports. In contrast to declining national poverty levels, poverty stands at 48 percent of the population (3.6 million people), with 24.6 percent (1.85 million people) living in extreme poverty. According to the Bank s Provincial Development Index, which compiles measures of poverty and deficits in social and basic infrastructure services for all twenty-four provinces, eight of the nine NGR provinces occupy the bottom eight spots. The proportion of homes with Basic Unsatisfied Needs (Necesidades Básicas Insatisfechas, NBI 4 ) is 18.6 percent compared to the national average of 14.3 percent. B. Sectoral and Institutional Context 5. The WSS sector faces significant challenges to increase coverage rates and improve service delivery. Sector policies have changed repeatedly and drastically over the last two decades. The concessions to private operators introduced in the 1990 s often resulted in opportunistic renegotiations and tariff changes. The economic and social crisis of 2001 led to a freezing of water tariffs which affected the utilities self-financing capacity. Many of the concessions were ultimately terminated. As a result of these upheavals, many companies are facing financial and operational difficulties and sector institutions have been weakened. With only 80 percent piped water supply and 48 percent piped sewerage coverage (2007), Argentina compares unfavorably with other upper-middle income countries and continues to lag behind some of its neighbors. The same is true of wastewater treatment, with only 10 percent of the collected wastewater receiving treatment. 6. Improving WSS services is a priority for the GoA which has launched an ambitious investment program in the sector. Water services are widely seen in Argentina as a fundamental basic necessity for the population, a vision which is quite common in the Latin America region and elsewhere in the world. The GoA recognizes that water, sanitation and wastewater treatment help guarantee the provision of certain public goods with important externalities such as health and environmental sustainability and is a allocating significant amounts from the federal Government as public subsidies for infrastructure investment. Concessional financing programs are commonly used worldwide including in OECD and middle income countries such as the US, Colombia and Mexico - to deal with these externalities and address problems of underinvestment in the sector. In Argentina, investments reached US$500 million in 2008, an increase of over 50 percent from the previous year (US$330 million), and almost five times the average of the previous five years (US$120 million for the period of ). 5 Increasing the efficiency of WSS provision is also an objective of the federal government support to the WSS 4 The NBI is a method of measuring poverty which uses indicators related to people s basic needs, namely shelter, sanitation, education, and minimum income. 5 These investments include only those managed at the Federal level through the Ministry of Planning, and therefore do not account for provincial and municipal governments' investments with their own resources, or those financed by privately managed WSS utilities, NGOs, and others. 2

13 sector. The GoA is channeling funds through several programs to promote operational efficiency and service quality improvements. Important initiatives are also underway at the local level to reorganize regional utilities. Such initiatives are not always optimally coordinated, which has generated some duplication of efforts and inconsistencies between different programs. Initial steps have been taken however to harmonize investment criteria, rationalize federal programs, and coordinate donor activities. 7. The NGR suffers from particularly acute problems in the WSS sector. The NGR is characterized by low coverage rates, poor service levels, contamination of water sources, limited availability of water resources (Chaco, Jujuy, Catamarca), high investment needs, limited funding, as well as governance and institutional challenges. The models for service provision within the region are wide-ranging. Seven out of the nine provinces in the NGR entered into concession contracts with private operators, most of which subsequently underwent renegotiation 6. While the situation of the different service providers varies significantly, all have been negatively affected by the economic and social crisis of 2001 and by institutional instability. As a result, the NGR is the most deprived region after the Metropolitan Region of Buenos Aires 7, with nearly 15 percent of the population (more than 1 million people) lacking piped water supply and 61 percent of the population (more than 4.5 million people) without piped sewerage services. As shown in Graph 1, the NGR presents some of the biggest disparities in terms of WSS coverage, with four of its nine provinces ranking the lowest in the nation and only two provinces above the national average. Graph 1: Water Supply and Sanitation Coverage in the Provinces of Argentina % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% Water Supply Sanitation 10.0% 0.0% Capital Federal T. de Fuego Santa Cruz Chubut Neuquen Jujuy Mendoza Salta Entre Rios Rio Negro San Luis La Pampa La Rioja Corrientes Tucuman Catamarca Santa Fe Cordoba San Juan Buenos Aires Formosa Chaco Sgo. del Estero Misiones 8. In order to address the historical imbalances that have impeded the development of the NGR, the GoA has requested Bank support to the ongoing Development Program for the Norte Grande Provinces. This Program has thus far been financed by the GoA, the Inter-American Development Bank (IADB) through a US$2.4 billion package of loans covering water supply 6 Some provinces continue to provide the services in their main localities through concessions with privately owned operators (Santiago del Estero, Misiones, Formosa, Corrientes), others have undergone recent private to public processes (Catamarca, Salta ), and others are served by provincially owned entities (Chaco, Jujuy, Tucuman). 7 In the Metropolitan Region of Buenos Aires nearly 18 percent of the 14 million residents live in extreme poverty, primarily in the peri-urban areas surrounding the capital city, where 28.6 percent (close to 4 million people) lack household access to water supply and 54.2 percent of the population (more than 7.5 million people) lack household access to sewerage services. 8 Access to service % from the National Census of Population and Housing (2001). 3

14 and sanitation (WSS), energy, transport, and competitiveness, the Andean Development Corporation (CAF), and the World Bank through the first Norte Grande Water Infrastructure (P120211) and Road Infrastructure Projects (P120198) approved in December The Program is part of the GoA s strategy to correct historical imbalances among regions, with an emphasis on the implementation of infrastructure works to stimulate and integrate production. Annex 7 shows a map of the region with the investments financed thus far by the NG Development Program. 9. The Project will address infrastructure gaps as well as sustainability issues in order to generate long-lasting performance improvements in the WSS sector of the NGR. Moving towards greater cost recovery for service providers while maintaining affordability for users, especially the poorest, is a key challenge in the NGR. Nevertheless, a positive trend has been observed in the last few years, thanks to several reviews of rate structures and pricing levels which were deemed socially acceptable. The Project will seek to build on these successes and on the GoA s commitment to give the NGR prioritized access to concessional public funding and to improve institutional capacity in the region. 10. The Project is the second of two projects for water infrastructure in the Norte Grande Region. The first Norte Grande Water Infrastructure Project (P120211), approved by the Board on December 20, 2010, focuses on water supply and urban drainage, while this second project focuses mainly on sanitation infrastructure. Originally prioritized by the Borrower as a single operation for US$400 million, the operation was split in order to respond promptly to the need to prepare and implement priority investments in water supply under the first operation, which are relatively simpler from a technical perspective, while allowing additional time to consider the approach to financing the sanitation investments which present more complex technical, economic and safeguards issues. This Second Norte Grande Water Infrastructure Project (P125151), which is the object of the present PAD, focuses on subprojects that are considered to be Category A as per the World Bank Environmental Assessment Safeguard Policy (OP/BP 4.01) (while the first Project P focuses on Category B subprojects). Both Projects (P120211, P125151) will provide technical assistance specifically designed to accompany the preparation of the works which they finance 9 and each will support a different universe of service providers throughout the region. In addition, the first loan (P120211) includes technical assistance and institutional strengthening for regional sector entities (with policy, regulation, and oversight functions) in the entire NGR and will therefore facilitate the implementation of the works to be financed under the second Project (P125151). 11. The proposed Project (P125151) like the first Norte Grande Water Infrastructure Project (P120211) - has been designed as a framework operation. At the onset of Project preparation, two sanitation subprojects that had reached an advanced preparation stage were proposed by the Government for funding under the proposed Project. These subprojects are the Gran Resistencia Metropolitan Area Sanitation System in Chaco Province and the Santiago del Estero Sanitation and Wastewater System in Santiago del Estero Province. Preparatory activities 9 During the preparation of the first NG Water Infrastructure Project (P120211), it was envisaged that this first Project could support the preparation of sanitation subprojects. However, during the preparation of the Second NG Water Infrastructure Project (P125151), it was agreed with UCPyPFE that each Project will support the preparation of subprojects which they finance to maximize the use of the TA available under each loan and to maintain within the Second NG Water Infrastructure Project (P125151) the preparation of studies and safeguard instruments designed to support the more complex sanitation investments. 4

15 were launched with the objective of including these two subprojects as fully prepared investments ready for financing during the first year of Project implementation 10. However, the assessment concluded that in-depth additional discussion and studies would be needed to identify the best technical solutions and to ascertain the economic and environmental sustainability of these subprojects. The overall design and structure of the Project was therefore revised to adopt a framework approach that accommodates the need to undertake such studies and allows flexibility in the final choice of investments. This design provides the opportunity to include these and/or other subprojects as they are identified, designed and shown to meet eligibility criteria. The framework approach supports the Borrower s strategy of securing financing for basic infrastructure in the sanitation sector in Norte Grande. Currently, the Norte Grande Development Program financed by the IADB is fully committed and the Bank s commitment under the proposed Project will provide an incentive for municipalities and provinces to allocate the necessary planning tools and resources to the preparation of these complex subprojects. The framework approach also facilitates the delivery of TA at an early stage of subproject preparation thereby ensuring Bank s technical support to subproject design, and to the preparation of accompanying environmental and social studies. 12. The Project complements the ongoing Development Program for the Norte Grande Provinces. In line with the GoA s strategic priorities, the Bank is supporting a large investment lending program in the Norte Grande Region, including the first Norte Grande Water (P120211) and Road Infrastructure Projects (P120198), the Second Provincial Agricultural Development Project (PROSAP-II, P106684), aimed at improving agriculture productivity and agricultural support services to increase farmers competitiveness and market access, and additional financing under the Small Farmer Development Project (PROINDER-P102446), aimed at increasing productive and organizational capacity in participating poor rural communities. During implementation, close coordination with other ongoing operations in the region will be sought, through joint supervision missions 11 and development of appropriate synergies among the respective investments and technical assistance programs. C. Higher Level Objectives to which the Project Contributes 13. By increasing investment and improving the efficiency and sustainability of service provision in the WSS sector, the Project will assist Argentina in getting closer to achieving the water and sanitation targets of the Millennium Development Goals (MDG 7) 12 and will contribute to raising the standard of living of low income population in the NGR. Currently, Argentina is on track to increase water supply accessibility to 84 percent and sanitation services to 55 percent; which is a substantial achievement, but still far from Argentina s 2015 MDG targets of 90 percent accessibility for water supply and 75 percent accessibility for sanitation services. The Project and its objectives support the vision outlined by the GoA to combat poverty and inequality through infrastructure investments and are consistent with the World Bank Group Country Partnership Strategy (CPS) discussed by the Board on June 9, 2009 (Report No AR) for The main objective of the CPS is to provide selective support to influence 10 As described in the ISDS from 07/30/2010 according to the original Project (P120211) design. 11 Coordination with the IADB counterparts is ongoing, with a commitment from GoA and task teams to continue coordination activities, including joint missions to the extent possible, during implementation. 12 MDG 7 on environmental sustainability sets a target of reducing by half the proportion of people without sustainable access to safe drinking water and basic sanitation. 5

16 specific outcomes in support of Argentina s strategic development goals under three pillars: (i) sustainable growth with equity; (ii) social inclusion and (iii) improved governance. The project will contribute to all three CPS pillars by supporting investments in basic water supply and sanitation facilities in poor and marginalized regions of the country as well as sustainability and improved institutional performance. As guiding principles for all components and financed activities, the Project is designed to promote: (i) the planning of all interventions based on agreed eligibility criteria; (ii) the identification of targets for each intervention whose attainment will be used as an indication of success; and (iii) the participation of stakeholders through meaningful consultation, facilitating access to relevant and timely information to foster Project s ownership. II. Project Development Objectives A. PDO 14. The Project Development Objective is to increase sustainable access to sanitation and water supply services in the Norte Grande region of Argentina, by providing investments in infrastructure and supporting institutional development. B. Project Beneficiaries 15. Project beneficiaries include people in the nine NGR provinces who will have new or improved access to water supply and sanitation services and those benefiting from improved environmental conditions as a result of wastewater collection and treatment. Considering the preliminary pipeline of candidate subprojects presented in Annex 2 and the available resources, the project is expected to benefit at least 400,000 people, of which an estimated 52% are female, through improved sanitation services. C. PDO Level Results Indicators 16. PDO success will be monitored by the following outcome indicators: (i) Number of people in urban areas within the NGR with access to sewerage and wastewater treatment services as a result of the infrastructure built under the Project; (ii) Number of new household sewerage connections built or benefiting from rehabilitation works built under the Project; and (iii) Evidence that at least three (3) service providers of the total supported under the Project 13 have undertaken and achieved the targets (including operational and financial targets) agreed upon in an institutional strengthening program financed by the Project. III. Project Description A. Introduction 17. The Project has been designed as a framework project comprising several sanitation and water subprojects, each of which will be selected for funding during project implementation from 13 The Project expects to support at least 4 service providers from the NGR during implementation through an institutional and operational strengthening program (see Annex 1). 6

17 a pipeline of potential investments 14. The pipeline subprojects were identified by the UCPyPFE based on the priorities indicated by provinces during the preparation of the ongoing IADB financed Water Infrastructure Project 15 (see Annex 2). The investments will be fully funded by the federal Government from loan proceeds and will be transferred to the provinces once completed. The Project will also provide technical assistance to support pipeline development and subproject preparation through its component 2. To help encourage investment in sanitation and provide capacity building in the NGR, the technical assistance would include a broader group of municipalities and provinces than those that would be ultimately funded under the investment component of the project. 18. Specific subprojects approved for funding will need to comply with the technical, economic, financial, institutional, environmental and social eligibility criteria set forth in the Project s Operational Manual, as well as with consultation and disclosure requirements. Consideration for funding will be made on first-come, first-served, basis from those subprojects that are ready for implementation. Subproject proposals will be examined in the context of: (i) consistency with Project objectives, in particular their poverty reduction potential; (ii) compliance with all eligibility criteria; and (iii) level of subproject s ownership and results of stakeholder consultation at the local level. 19. Works financed under the subprojects will be operated by the providers in charge of the services within the different provinces, who will commit to provide O&M funding and operate the subproject in accordance with Project rules and an Action Plan to be prepared by the Province for the sustainability of the investments. During the preparation of each specific subproject, the relevant service provider will undertake a capacity and needs assessment and will benefit from an institutional and operational strengthening program financed under the Project to help address the established targets and address identified weaknesses. B. Project components 20. Component 1: Water Supply and Sanitation Infrastructure (US$209 million, with US$169.5 million of Bank funding 16 ): Carrying out of demand-driven Subprojects consisting of the rehabilitation, upgrading and/or reconstruction of Participating Provinces : (i) wastewater collection, conveyance, treatment and disposal systems, such as wastewater treatment plants, pumping stations, main collectors and secondary sewerage networks; and (ii) water supply systems including, for instance, production and distribution systems that are considered category A from their environmental impact assessment perspective. 21. Component 2: Institutional and Operational Development and Technical Assistance (US$15 million, all financed by the Bank): (i) Carrying out of tailored institutional and/or operational strengthening programs and provision of technical assistance for participating WSS Service Providers to improve their institutional organization, investment planning, management 14 The Project will focus on sanitation investments although it could eventually fund water supply investments that are considered Category A as per the World Bank Environmental Assessment Safeguard Policy (OP/BP 4.01) and thus would be excluded for funding under the first Norte Grande Water Infrastructure Project. 15 Water Infrastructure Project: Northern Provinces Development (AR-L1015), IADB, This Project is part of the overarching Norte Grande Development and Integration Program. 16 These amounts include price and physical contingencies. 7

18 capabilities and technical, operational, commercial and financial efficiency including, for instance: (a) the development of WSS-related management and information systems; (b) the development of WSS customer databases and cadastres; (c) the provision of technical assistance related to strategic planning, energy efficiency and operational efficiency programs; (d) the carrying out of analysis of cost-recovery options and optimization of rates and subsidy structures; (e) design and implementation of macro- and micro-metering (including minor works), and non-revenue water reduction programs; (f) the provision of technical assistance for institutional reorganization; and (g) the design of training programs for operation and maintenance of systems and installations (focused on wastewater treatment plants, water treatment plants and pumping stations), and the carrying out of studies related thereto, all under terms of reference acceptable to the Bank 17 ; (ii) Carrying out of technical studies required to support the preparation and implementation of Subprojects, for instance, feasibility studies, analysis of alternatives, engineering designs, economic and financial analysis, socio-economic surveys, environmental and social impact assessments and management plans (including screening and risk assessments, support to the preparation of safeguard instruments and monitoring) and other studies related thereto, all under terms of reference acceptable to the Bank; and (iii) Carrying out of communication plans, dissemination and knowledge-sharing activities related to the Project, and training and capacity building for the institutional strengthening of UCPyPFE and Participating Provinces. 22. Component 3: Project Management and Supervision (US$15 million, all financed by the Bank): (i) Carrying out of specialized independent technical, environmental and social supervision of Subprojects implementation, as required; (ii) Carrying out of Project audits and monitoring and evaluation activities under the Project; and (iii) Provision of administrative and operational support (including the provision of Operating Costs) to UCPyPFE in the administration, monitoring, coordination and supervision of Project implementation. 18 C. Project Financing Lending Instrument 23. In agreements reached with the GoA, a SIL (Specific Investment Loan) lending instrument has been selected for an amount of US$200 million for the Project. Repayments will be annual, with a total maturity of 26 years, including 7.5 years of grace. Project Cost and Financing Project Components Project cost (US$M) IBRD Financing (US$M) % Financing 1. Water Supply and Sanitation Infrastructure 176,5 143,1 81% 2. Institutional Dev. and TA % 3. Project Management and Supervision % 17 If both the first (P120211) and second (P125151) NG Water Infrastructure Projects were to finance works operated by the same service provider, only one Project would generally support the entire institutional strengthening program for that service provider. This component, and subcomponent (ii) can also support service providers or subproject preparation in provinces that do not have an infrastructure subproject financed under Component As mentioned in paragraph 10 above, implementation arrangements for both the first and the second NG Water Infrastructure Projects are the same. Each Project will fund its share of the combined management and supervision costs. 8

19 Project Components Project cost (US$M) IBRD Financing (US$M) Total Baseline Costs 206,5 173,1 % Financing Physical contingencies % Price contingencies % Total Project Costs % Front-End Fee % Total Financing Required % IV. Implementation A. Institutional and Implementation Arrangements 24. Borrower and Implementing Agency: The Borrower is the Argentine Republic and the Implementing Agency will be UCPyPFE within the MPF. 19 At present, the UCPyPFE is coordinating several programs financed by multilateral development banks, including the Water Infrastructure Project in the NGR co-financed by the IADB 20 and the first NG Water Infrastructure (P120211) and NG Road Infrastructure Projects (P120198) financed by the Bank. 25. Project Management and Implementation: The UCPyPFE will be in charge of Project administration and execution through a dedicated unit, which is the same unit as the one in charge of the implementation of the first NG Water Infrastructure Project. Works will be centrally executed and the UCPyPFE s unit will coordinate all program activities including the handling of procurement, contracting, and payments to contractors, acting as necessary to meet the Bank s contractual conditions. Through this unit, the UCPyPFE will coordinate with other entities at the national and provincial levels, with the MPF providing overall oversight. Flow of funds will be centralized and there will be no transfers of funds to provinces (details provided in Annex 3). Although the UCPyPFE is currently managing a relatively large volume of projects (financed by the Bank and other multilateral institutions), it will assign a specific group of professionals (with new contracting as required given the additional needs) to handle the NGR water and sanitation projects, in particular fiduciary, environmental, social and meaningful communication issues, so there will be sufficient capacity in the implementation unit to manage the projects. See Annex 3 for details on the agreed institutional strengthening program for environmental and social management for UCPyPFE and the provinces. 26. Subproject operation: Upon completion, the WSS assets will be transferred to the provinces under a Participation, Transfer, and Maintenance of Works Agreement (PTA) to be signed with the MPF. The provinces would then generally transfer them, as appropriate, to their WSS service providers for their management, operation and maintenance under the appropriate administrative instrument according to the existing service provision model in the particular province. Under these agreements, the service provider will provide the financial resources to 19 The UCPyPFE was created by Resolution 165/2000 of the Ministry of Infrastructure and Housing, and its duties and responsibilities were modified by Executive Decree 1,142/ Implementation of the IADB Program, although at the onset suffered significant delays mostly due to capacity constrains at the local level for the preparation of the subprojects, is well underway, with 100% of the funds committed and current good standards in the preparation of bidding documents, procurement and supervision of ongoing works. 9

20 properly manage, operate and maintain Project-financed works or, in case of operational deficit, the Province will provide funding. 27. Technical and environmental supervision. Large or complex works will be supervised by a specialized independent consulting firm. The UCPyPFE will provide further supervision and regularly inspect the works, as well as the implementation of the Environmental Management Plan (EMP) and any social impact mitigation measures during construction. Consulting services for the supervision of major investment works will be hired before the contracts for the respective works are signed, according to terms of reference agreed upon with the Bank. 28. Eligibility criteria for Participating Provinces in the NGR: Provinces participating in the program must comply with the following criteria: (i) (ii) (iii) (iv) Sign the Participation, Transfer and Maintenance Agreement with the MPF; Allocate and demonstrate that they have sufficient budgetary resources to operate and maintain Project financed works, as applicable; Demonstrate sufficient and sustainable technical and institutional capacity to manage, operate and maintain the investments 21 ; and Prepare an Action Plan to address sustainability of the subprojects, including the measures and targets that will lead to its sustainable operation. 29. General Eligibility Criteria for Subprojects: Without exception, the following general eligibility criteria 22 must be met for projects to be considered and financed under the Project: (i) Subprojects must largely benefit low income populations 23 and be consistent with Project objectives; (ii) Subprojects included in the Project must have complete technical designs, be economically viable and financially sustainable, be managed by stable institutions and warrant satisfactory environmental and social management; (iii) Compliance with the economic, financial, legal, technical, institutional, social and environmental eligibility criteria will be documented in relevant satisfactory studies 24, be approved by the UCPyPFE and have the formal No Objection of the Bank; (iv) Current and estimated revenues of the subproject, or the provincial WSS service providers (including any applicable subsidies from provincial or federal budget) must cover the current and estimated cost of operating and maintaining actual and future projects; (v) Participating WSS service providers will benefit an institutional and operational institutional development program establishing the targets and other measures that will support the sustainability of the investments and the overall provision of WSS services and address any identified weaknesses; (vi) The guidelines of the Project s Environmental and Social Management Framework (ESMF) must be followed to ensure compliance with applicable social and environmental 21 These may be government institutions or a public or private company holding a concession. 22 Eligibility criteria are further detailed in the Project s Operations Manual. 23 At least 40% of investments will benefit low-income population as defined using Index of Household Material Deprivation (NBI), Unsatisfied Basic Needs Index, or Human Development Index or subproject specific socio-economic surveys. 24 Studies will follow agreed ToR and guidelines described in the OM. 10

21 safeguard policies including preparing the necessary instruments and undertaking consultation and disclosure, and in particular: a) The subproject must provide an EIA acceptable to the environmental authority of the relevant province and the Bank. The EIA will incorporate the results of public consultations, prepared following the guidelines of the ESMF. b) The EIA must include mitigation measures and programs for the construction and operation phases. In the case of subprojects involving involuntary resettlement or affecting indigenous peoples, specific provisions will be outlined in a Resettlement Plan (RP) or Indigenous People Plan (IPP). c) All costs associated with the implementation of the subproject EMP, RP and/or IPP and any mitigation measures and monitoring programs must be budgeted for (under Component two of the Project). d) The subproject must demonstrate sustainability from an environmental and social standpoint, which entails preventing: (i) permanent negative impacts on protected areas or cultural heritage; (ii) negative impacts on species threatened by extinction; (iii) negative environmental impacts that cannot be mitigated to acceptable levels; and (iv) social costs deemed unacceptable and/or unable to be mitigated by the affected communities. B. Results Monitoring and Evaluation 30. Project progress reports will be prepared by the UCPyPFE and submitted to the Bank on a semi-annual basis. These reports will indicate the progress made under the different components of the Project and measure performance against the results indicators established in the results framework (Annex 1). Progress reports will also include: (i) disbursement performance over the period covered by the report and an updated disbursement calendar; (ii) a report on status of procurement actions, and an updated procurement plan for activities under each of the project s components; (iii) progress in the implementation of the Action Plan for the sustainability of the subprojects, in the Institutional Strengthening programs entered into by Service Providers and in the Environmental and Social Management Plans, laying out problems identified as well as documenting Project impacts in the areas of intervention; (iv) status of Bank safeguard implementation/compliance; (v) potential developments that could affect project implementation, which should consist of a review of the main risks and the impact of envisioned mitigation measures; and (vi) an annual operation plan for the following year. C. Sustainability 31. Long term project sustainability will be proactively addressed by: (i) the signing of PTA committing to the provision of WSS services in a context of economic and financial sustainability, including an Action Plan aimed at ensuring proper management, operation and maintenance by the service provider, with a specific commitment from the province to provide 11

22 necessary O&M funding 25 and a commitment from the service provider to operate the subproject; (ii) the funding of an institutional development component to strengthen and improve the quality of subproject preparation and the operational and efficiency of the participating WSS service providers; (iii) if appropriate, utilizing effective and sustainable wastewater treatment processes which require low O&M costs and are potentially able to generate energy (i.e. income to support the financing of O&M expenses); and (iv) the first NG Water Infrastructure Project (P120211) which will support the strengthening of the regulatory and monitoring capabilities of provincial authorities to promote a more efficient and sustainable provision of WSS services. These arrangements will be supported during implementation by ongoing technical dialogue between the Bank and GoA. Dialogue on sector financing policies at the federal level will continue during implementation, in particular in the likely upcoming period of discussion of sector policy notes. Sustainability is also underpinned by the strong ownership and commitment of the GoA and Provinces to the overarching NGR Devolvement Program. V. Key Risks and Mitigation Measures 32. Potential risks are summarized in the Operational Risk Assessment Framework (see Annex 4). The overall implementation risk for this Project is rated as High. Risks identified are manageable and mitigation measures are in place. The two main risks identified are: (i) the need to strengthen implementing capacity at the federal and provincial levels to successfully implement the Project within a five-year implementation period (particularly in the areas of subproject design, environmental and social safeguards and supervision of large complex works); and (ii) the technical and financial sustainability of WSS service providers. Mitigation measures for these risks are an integral part of the Project s design (see Annex 4). VI. Appraisal Summary A. Economic and Financial Analysis 33. The Project is expected to generate a broad set of economic benefits, including improved environmental conditions and access to sewerage and wastewater treatment services particularly in urban and peri-urban areas, all of which are expected to improve health conditions and the quality of life in the NGR. The approach for economic evaluation, as in the first Norte Grande Water Infrastructure Project (P120211), has focused on developing cost benefit and financial analysis methodologies which will be used in the screening and evaluation of subprojects to be funded under the Project and will permit the analysis of the sustainability of the operation and maintenance of the investments (as well as the identification of any operational deficit requiring concessional funding). B. Technical 34. The allocation of funds to specific sub-projects during the implementation of the Project will be demand-driven. The Project will fund sanitation works to be defined during the 25 Provinces will be asked to include a budgetary line allocating the resources required for any public support required to the WSS service provision from the provincial budget as applicable. Based on the experience with other ongoing Bank financed projects, typically provinces in Argentina, including some from the NGR, have complied with their commitments to provide counterpart funding related to their participation in federal programs financed by Bank projects. 12