IN THE AMOUNT OF SDR 12.1 MILLION (USD 18 MILLION EQUIVALENT)

Transcription

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 CREDIT IN THE AMOUNT OF SDR 12.1 MILLION (USD 18 MILLION EQUIVALENT) TO MONGOLIA FOR A SECOND ULAANBAATAR SERVICES IMPROVEMENT PROJECT Urban Development Sector Unit East Asia and Pacific Region March 31, 2004 Report No: MOG This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective March 3 1, 2004) Currency Unit = Tugrik (Tg) Tg 1000 = US$ US$l.OO = Tg1,177 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ADB AusAID CAS Duureg CBO CDS EGSPRS EIA EMP Ger ICR JICA JSDF Khoroo lpcd MUB NGO OSNAAG PIU PMU PSC RAP RPF UBSIP UBsIP2 USAG Asian Development Bank Australian International Development Agency Country Assistance Strategy Municipal district Community Based Organizations City Development Strategy Economic Growth Support and Poverty Reduction Strategy Environmental Impact Assessment Environmental Management Plan Traditional Mongolian felt and canvas tent Implementation Completion Report Japan International Cooperation Agency Japanese Social Development Fund Lowest municipal administrative level (sub-district) Liters per capita per day Municipality of Ulaanbaatar Non-governmental Organization Housing and communal services company Project Implementation Unit Project Management Unit Steering Committee of Second Ulaanbaatar Services Improvement Project Resettlement Action Plan Resettlement Policy Framework Ulaanbaatar Services Improvement Project Second Ulaanbaatar Services Improvement Project Ulaanbaatar Water and Sewerage Company Vice President: Country Director: Sector Director: Task Team Leader: Jemal-ud-din Kassum Ian Porter Keshav Varma Raja Iyer

3 FOR OFFICIAL USE ONLY MONGOLIA Second Ulaanbaatar Services Improvement Project CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALLE Country and sector issues... 3 Rationale for Bank involvement... 3 Higher level objectives to which the project contributes... 4 B. PROJECT DESCRIPTION Lending instrument... 4 Project development objective and key indicators... 4 Project components... 5 Lessons learned and reflected in the project design... 5 Alternatives considered and reasons for rejection... 5 C. IMPLEMENTATION Partnership arrangements Institutional and implementation arrangements Monitoring and evaluation of outcomes/results Sustainability 7 5. Critical risks and possible controversial aspects Loadcredit conditions and covenants... 9 D. APPRAISAL SUMMARY Economic and financial analyses Technical Fiduciary Social Environment Safeguard policies Policy Exceptions and Readiness 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 lwithout World Bank authorization.

4 Annex 1: Country and Sector or Program Background Annex 2: Major Related Projects Financed by the Bank and/or other Agencies Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Annex 9: Economic and Financial Analysis Annex 10: Safeguard Policy Issues Annex 11: Project Preparation and Supervision Annex 12: Documents in the Project File Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance Maps: IBRD IBRD 32972

5 MONGOLIA Second Ulaanbaatar Services Improvement Project PROJECT APPRAISAL DOCUMENT East Asia and Pacific Region EASUR Date: March 31, 2004 Country Director: Ian Porter Sector Director: Keshav Varma Project ID: PO74591 Lending Instrument:' SIL Team Leader: Raja Iyer Sectors: Water supply (loo%), Themes: Access to urban services for the poor (PI Environmental screening category: B Safeguard screening category: S2 Source Local Foreign Total Borrower IDA Others Total Borrower: MONGOLIA Responsible agency: Municipality of Ulaanbaatar, Sukhbaatar Square 11, Ulaanbaatar Contact person: Mr. Choimpog Bat, Chief of Economy and Strategical Policy Department Tel: Fax: yahoo.com FY I oo Annual Cumulative Does the project depart from the CAS in content or other significant respect? Ref PAD A.3 Does the project require any exceptions from Bank policies? Ref. PAD 0.7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board? No No 1

6 Does the project include any critical risk rated substantial or high? Ref. PAD C. 5 Does the project meet the Regional criteria for readiness for implementation? Ref. PAD D. 7 Yes Yes Project development objective: Ref PAD B.2, Technical Annex 3 Provide improved water supply to the urban poor in a sustainable manner. Project description [one sentence summary of each component] Ref. PAD B.3.a, Technical Annex 4 The project comprises four components: (a) The ger area water supply component, to improve water supply in the ger areas of Bayankhoshuu, Chingeltei, Dambadarjaa, Dari-Ekh; Naran, and Uliastai. (b) The city water supply component, to strengthen the primary network system in selected areas, support water conservation and leakage control, and expand monitoring of water flows and water quality. (c) The energy efficiency improvement component, to replace selected obsolete high energy consuming electrical equipment with energy efficient equipment. (d) The institutional development and project management component, to support further improvements in selected operational and commercial aspects of USAG, as well as overall management of the project. Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10 (a) Environmental Assessment (b) Involuntary Resettlement Significant, non-standard conditions, if any, for: Ref. PAD C.6 Board presentation: None Credit effectiveness : 1. Signing of the Project Agreement between the Municipality of Ulaanbaatar and IDA. 2. Signing of subsidiary loan agreement between Government and MUB, acceptable to IDA. 3. Signing of subsidiary loan agreement between MUB and USAG, acceptable to IDA. 4. Signing of the consulting contract for detailed engineering designs and project management. 5. Establishment of project financial management system acceptable to IDA. Covenants applicable to project implementation: Disbursement conditions: 1. For components (a) and (b) - Increase in tariffs in 2004 to meet USAG s financial objective of continued liquidity, i.e., operating revenues adequate to meet operating costs and debt service. 2. For component (c) - An additional 15% increase in tariffs in 2006 for all USAG customers, except for luosk supply. 2

7 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Over one third of Mongolia s population is poor, and income inequality has been rising. Incidence of poverty is growing in urban areas. The Government has adopted an Economic Growth Support and Poverty Reduction Strategy (EGSPRS) in July 2003 to accelerate pro-poor growth. The Bank s Country Assistance Strategy (CAS) for Mongolia, which is being presented to the Board in April 2004, will support Government s efforts to implement the EGSPRS. Improving urban services for the poor in Ulaanbaatar is consistent with CAS objectives. In 2002, an estimated 800,000 of Mongolia s population of 2.8 million lived in Ulaanbaatar. A little over 400,000 lived in 22 informal settlements (known as ger areas ); the majority of the residents of ger areas i s poor. The already poor living conditions in ger areas - poor housing; poor quality (often non-existent) access roads; inadequate drainage and flood protection; and very limited garbage collection - are worsening as a result of in-migration from the rural areas and from the provincial centers. Water supply in ger areas i s inadequate. Ger area residents rely on water kiosks, the majority of which are supplied by truck at infrequent intervals, particularly in winter. The average distance from a ger area residence to a kiosk is about 350 meters. Women and children carry water over poor roads, often uphill, in the harsh winter conditions. Consequently, the average water consumption in ger areas i s less than 10 liters per capita per day (lpcd), well below the accepted minimum requirements. Key issues in the water sector include: (a) urgent need to improve service to the ger areas; (b) reducing water losses in the city network and improving water quality; (c) conserving water through tariff reform; and (d) improving the financial viability of the sector by reducing costs and through full cost recovery. The Ulaanbaatar Services Improvement Project (UBSP), the Bank s first urban sector project in Mongolia, made a good start in addressing many of these issues. However, there is an unfinished investment and reform agenda which requires sustained engagement over the medium-term. In addition, there is a larger agenda of municipal development in Ulaanbaatar, for which a strategy has been developed by the Municipality of Ulaanbaatar (MUB) in consultation with various stakeholders, including donors. Support for MUB s development strategy requires not only significant infrastructure investments (in ger areas, as well as in the core city areas), but also capacity building in a number of areas, including urban planning, land management, strengthening municipal finances, and urban management at municipal, district, and sub-district (khoroo) levels. This broader agenda will be addressed through parallel financing under the donor harmonization initiative, being piloted in MUB. 2. Rationale for Bank involvement A number of donor agencies support the development of urban infrastructure, including water supply, in Mongolia. Among the multilateral development banks, the Asian Development Bank (ADB) is active in the sector. Within the context of its overall lending program, and in consultation with Government, ADB has supported urban infrastructure development, including

8 water supply, in the secondary towns through two projects, one completed and the other ongoing. At various recent fora, including the June 2003 Ulaanbaatar Donor Conference, the November 2003 Mongolia Consultative Group meeting in Tokyo, and the December 2003 donor harmonization meetings with the Mayor, ADB has indicated that the ADB Mongolia program for the next ADB planning period (starting 2004) i s unlikely to include support for urban infrastructure in Ulaanbaatar, in particular the water sector. Among bilateral donors, Japan, Denmark, and Spain have supported the water and wastewater sector in Ulaanbaatar (see Annex 2). The focus of their efforts has been to fund water supply or wastewater investments either upstream (e.g., source development) or at the end of the chain (e.g., wastewater treatment plant). They have not so far supported investments that improve service delivery to the urban poor in ger areas. Further, the water sector investment needs in Ulaanbaatar (especially to meet the needs of the underserved ger area residents) are very large and urgent, and cannot be met by bilateral donor support alone. The Bank has been involved in the water sector in Ulaanbaatar since 1997 through UBSIP, which has contributed not only towards the creation of assets, but also to institutional reform and movement towards financial sustainability. In the context of the overall needs of the sector, and the activities of the other donors, both multilateral and bilateral, continued Bank involvement in the water sector will contribute to improved service delivery for the poor, and further deepening of sectoral reform. 3. Higher level objectives to which the project contributes The EGSPRS highlights the need to improve the poor living conditions in Ulaanbaatar s ger areas, where the majority of the country s urban poor live. The Bank s CAS for Mongolia wi.11 support Government s efforts to implement the EGSPRS. The project is listed in the CAS as an instrument to support the objectives of Reducing Vulnerabilities and Consolidating the Transition, and the longer term country outcomes of improving service delivery for vulnerable groups in peri-urban areas and improving efficiency of infrastructure investments. B. PROJECT DESCRIPTION 1. Lending instrument The lending instrument is Specific Investment Loan, as the objective of the project is to construct water supply facilities to serve the poor. USAG, the Ulaanbaatar water and sewerage company, was established only in December 1997, and is not yet ready for a program loan. 2. Project development objective and key indicators The development objective of the Second Ulaanbaatar Services Improvement Project (UBSIP2) is to provide improved water supply to the urban poor in a sustainable manner. Key indicators are: (a) number of persons served by each kiosk in the project ger areas; (b) percentage of kiosks in the project areas which are connected to the piped network; and (c) financial status of USAG. 4

9 3. Project components The project comprises four components (see maps IBRD and 32972): (a) The ger area water supply component, to improve water supply in the ger areas of Bayankhoshuu, Chingeltei, Dambadarjaa, Dari-Ekh, Naran, and Uliastai. (b) The city water supply component, to strengthen the primary network system in selected areas, support water conservation and leakage control, and expand monitoring of water flows and water quality. (c) The energy efficiency improvement component, to replace selected obsolete high energy consuming electrical equipment with energy efficient equipment. (d) The institutional development and project management component, to support further improvements in selected operational and commercial aspects of USAG, as well as overall management of the project. 4. Lessons learned and reflected in the project design The project builds on the lessons learned from the implementation of UBSIP, in particular: (a) improved engineering designs, balancing the extent of protection against freezing in the extreme weather conditions against the additional cost; (b) choosing between connecting kiosks to the network and supplying kiosks by truck, based on cost considerations; (c) better packaging of contracts, to avoid splitting work into many small contracts; and (d) more attention to sanitation, albeit through parallel financing. In addition, to ensure the financial sustainability of USAG, the financial objectives for the project have been agreed with Government, MUB, and USAG, and the required tariff increases in 2004 and 2006 towards achieving these objectives have been made disbursement conditions. The project design has also taken into account the experience of Central Asian countries of the former Soviet Union in the water sector, in particular with private sector participation. 5. Alternatives considered and reasons for rejection Taking into account the experience with UBSIP, a number of alternative project formulations were considered, before deciding on the current design: (a) a comprehensive urban services project covering all ger areas; (b) extending piped water supply and sanitation to all ger areas, and providing connections to properties; (c) including water operations of the housing and communal services company (OSNAAG) in the city water supply component to promote further water conservation; and (d) associating the private sector in the overall management of USAG. A comprehensive urban services project would require substantial investments in sectors such as roads, storm drains, and solid waste management. MUB, which is responsible for the non-water supply activities, is currently not in a position to borrow for these investments. It was therefore 5

10 decided to focus the current IDA project on water supply, where the Credit could be repaid through cost recovery from beneficiaries. The cost of extending piped water supply to the 16 (of the 22) ger areas of the city not covered by UBSIP2 would be well beyond the current borrowing capacity of USAG, which is only six years old, and is not yet in a strong financial situation. Providing house connections to all ger area properties through the project i s not currently feasible,.as most ger area properties do not have indoor plumbing. 'It was therefore decided to focus on selected priority ger areas, and to continue the service delivery approach adopted in U BSP of constructing additional water kiosks, and connecting the kiosks (wherever it is cost effective) to the piped network. However, the UBSIP concept is being expanded by providing connections to institutions and to residences which have indoor plumbing and acceptable on-site sanitation arrangements. Given the high cost of providing a sewerage service, the lack of indoor plumbing, and the very low water consumption in ger areas, improved low cost on-site sanitation is the only feasible option at the moment. Grant funding from the Japanese Social Development Fund (JSDF) is being sought to pilot a low cost on-site sanitation initiative in the project ger areas. It will be mainstreamed in the future, based on the results of the pilot, either through a future IDA project or with other donor funding. OSNAAG is now continuing the successful UBSIP water conservation program, including metering and replacement of plumbing fixtures, on its own account. It has also sought assistance from Korea to rehabilitate some of the remaining heat and water distribution centers. In view of these factors, it was decided not to include OSNAAG in the project. The possibility of involving the private sector in the overall management of USAG (through concession, lease contract, or management contract) was considered. A review of the water sector experience in the comparator Central Asian Republics of the former Soviet Union revealed that because of the risks involved, the water sector has not been able to attract private capital; only management contracts are in place in some of the countries. As USAG has already made significant strides under UBSIP in becoming a well run commercially oriented utility, a management contract for all of USAG is not a priority at this time. Instead, the project will focus on the involvement of the Mongolian private sector in managing water kiosks and operating water trucks. C. IMPLEMENTATION 1. Partnership arrangements While the project is free-standing, and does not have any other co-financiers, it is being piloted in Mongolia under the donor harmonization initiative discussed during the November 2003 Mongolia Consultative Group meeting in Tokyo, and builds on the June 2003 Donor Conference to support MUB Development. MUB convened a donor meeting in December 2003, where donors indicated that they would support MUB development to complement the IDA project. MUB is seeking parallel grant financing for a number of activities: (a) community based neighborhood infrastructure development and low cost on-site sanitation, for which an 6

11 application has been made to the Japan Social Development Fund (JSDF); (b) improvements to roads and storm drainage in ger areas, for which the feasibility study and environmental impact assessment (EIA) have been prepared; and (c) technical assistance for (i) building MUB capacity for urban planning and land management, (ii) improving municipal finances, and (iii) strengthening urban management capacity at municipal, district and khoroo levels. A number of donors are currently being approached to consider supporting (b) and (c) above. The Japanese Government has been approached for grant funding solid waste collection, transportation, and the construction of a sanitary landfill. 2. Institutional and implementation arrangements Because of its previous experience with UBSIP, Government has directed MUB to be responsible for overall project management, under the direction of the Project Steering Committee (PSC), and through the project management unit (PMU). The PMU will have adequate appropriately qualified staff (including some from USAG and from those who worked on UBSIP). The PMU, which has developed adequate capacity through implementation of UBSIP, will have its capacity further enhanced through: (a) training on Bank procedures, especially procurement, accounting and financial management, environment, and resettlement; and (b) technical assistance from international project management consultants. Compared to UBSIP, USAG will have an expanded role in project implementation. In addition to being represented on the PSC and in the tender committees, USAG will work closely with the PMU in a supporting role in construction supervision through the USAG Project Implementation Unit. USAG s capacity on selected priority operational and commercial matters (e.g., metering policy, house connection policy, communication strategy, etc.,) will be enhanced through institutional development technical assistance. 3. Monitoring and evaluation of outcomeshesults Annex 3 lists the main outcome indicators for the project, as well as the principal results indicator for each component. Additional indicators are listed in the various documents in the project files (e.g., in the Environmental Management Plan, EMP), and will also be monitored through half yearly progress reports. USAG and the PMU will collect the data required for monitoring and evaluation of outcomes/results - USAG, as part of its management information system, and the PMU, as part of its project management function - within their normal operating budgets. Social development outcomes of the project will be monitored by small-scale community studies on satisfaction level of the project communities. MUB and USAG will review the results regularly and take appropriate corrective action. 4. Sustainability Government requested the project as a follow-on to UBSIP, and MUB has taken the lead role in project preparation, with the active involvement of USAG, related Government agencies, and other key stakeholders, including the communities. Timely preparation of the feasibility study, the Environmental Impact Assessment (EIA), the EMP, the Resettlement Policy Framework 7

12 (RPF), and the Resettlement Action Plan (RAP), as well as their prompt internal reviews, further demonstrates Government commitment to the project. Financial viability of USAG is key to sustainability of project objectives, especially in view of USAG s failure to fully comply with the financial covenants of UBSIP relating to full cost recovery. The project design addresses this issue through: (a) least cost solutions for the investment program; (b) focusing on operational cost savings; (c) agreement on the financial objectives of USAG; and (d) tariff related disbursement conditions. In addition, tariff adjustments for water are part of the actions required under the Policy Matrix of the proposed Poverty Reduction Strategy Credit (PRSC). 5. Critical risks and possible controversial aspects The most significant risk to the achievement of the project s development objective is USAG s financial viability, which would have a serious impact on sustainability. Major risks for the investment components include: (a) significant delays in implementation; (b) substantial changes to the components described in the feasibility study; and (c) major cost escalation. The major risks for the institutional development and project management component are: (a) USAG and MUB not adhering to critical consultant recommendations and reports; and (b) delayed consultant mobilization and poor quality work by consultants. Appropriate risk mitigation measures have been built into the project design and in supervision arrangements. Potential reputational risks include: (a) major governance issues in either MUB or USAG, especially if they relate to the project; and (b) significant deviations from the RAP/RPF. Project related reputational risks would be managed through close supervision of fiduciary and safeguard aspects through effective use of Bank staff based in Ulaanbaatar and Beijing. Broader. governance issues would be addressed through on-going dialogue with the Government, in coordination with other major donors. Risks Financial viability of I USAG Project level governance issues Risk Mitigation Measures I Disbursement conditions Financial covenant Financial monitoring indicators Close supervision of fiduciary and safeguard issues Risk Rating with Mitigation S M 8

13 Implementation of investment program Institutional development of USAG Overall risk rating Readiness for implementation Progress monitoring through regular missions Selection of qualified consultant On-going dialogue with USAG/MUB I Modest risk M M M 6. Loadcredit conditions and covenants a. Conditions of Effectiveness i. ii. iii. iv. v. Signing of the Project Agreement between the Municipality of Ulaanbaatar and IDA. Signing of subsidiary loan agreement between Government and MUB, acceptable to IDA. Signing of subsidiary loan agreement between MUB and USAG, acceptable to IDA. Signing of the consulting contract for detailed engineering designs and project management. Establishment of project financial management system acceptable to IDA. b. Disbursement conditions i. For components (a) and (b) - Increase in tariffs in 2004 to meet USAG s financial objective of continued liquidity, i.e., operating revenues adequate to meet operating costs and debt service. ii. For component (c) - An additional 15% increase in tariffs in 2006 for all USAG customers, except for kiosk supply. D. APPRAISAL SUMMARY 1. Economic and financial analyses Economic Analysis. Quantitative economic analysis was carried out for the ger area water supply component, using the with and without project approach, based on the expected rise in average ger area water consumption from 7 lpcd to 15 lpcd, and using willingness to pay as a proxy for economic benefits. The analysis yielded an economic internal rate of return (EIRR) of 14.1%, and a benefit cost ratio of 1.2. The financial rate of return for the energy efficiency improvement component (used as a proxy for EIRR) is 25%. Sensitivity analysis carried out indicates that the returns for both components are robust. Appropriate least cost solutions have been adopted in all investment components (see Technical, below). Ger area kiosk supply tariffs (which are currently higher than apartment tariffs) are retained unchanged throughout the project period, and are lower than the willingness of ger area residents to pay for water. Because of the very low levels of water consumption, water bills constitute only about 2% of the household income of the poor in ger areas, and are below the accepted affordability thresholds. 9

14 Financial AnaZysis. The project will build on the foundation laid by UBSIP for the further development of USAG as an efficient water utility, operating on commercial principles. UBSIP financial covenants required USAG to generate adequate operating revenue to meet operating expenses and the greater of either depreciation or debt service. USAG has been able to generate adequate operating revenue to cover operating costs and debt service; however, in 2002 and 2003 it only met about 68% of depreciation. USAG needs to increase tariffs in 2004 (even in a without project scenario) to remain liquid, Le., generate adequate operating revenue to meet operating costs and service debt because: (a) there have been significant increases in salary costs as a result of wage increases; and (b) principal repayments of UBSIP commence in Government, MUB and USAG are committed to USAG s financial objectives of (a) continuing to maintain liquidity in 2004 and in succeeding years; (b) contributing 20% of the project costs as counterpart funds; (c) becoming commercially viable by 2008; and (d) establishing a Capital Expenditure Fund, to undertake future capital expenditure, without relying on grants from Government, MUB or donors. To achieve these objectives, a series of tariff increases are needed every two years, starting The ger area kiosk water supply tariff is much higher than the tariff for other customer categories; consequently (as was the case during UBSIP) it is not proposed to increase it during the project period. To maintain USAG s liquidity, water and wastewater tariffs need to be increased in 2004 by 50% for direct supply to OSNAAG and 40% for all other customers. Additional tariff increases of 15% are required in 2006 and 2008 to meet the above financial objectives. The 2004 and 2006 tariff increases are conditions of disbursement from the Credit for the investment components. It is noteworthy that even with tariff increases every two years, the 2010 water tariffs for apartments will still be only 77% of ger area kiosk tariffs. Annex 9 provides more details on economic and financial analysis of the project. 2. Technical Technical approaches adopted under the project have utilized experience gained with UBSIP, in particular: (a) the need for effective and least-cost insulation to protect against freezing of facilities; (b) the short construction period of less than six months during the year; and (c) the high cost of extending the distribution system to the ger areas, coupled with the fact that most ger area housing lacks winterized indoor plumbing, constrains the ability to provide a majority of the houses with connections. The project adopts appropriate least-cost solutions: (a) a combination of effective insulation, heating, and moving water in pipes; (b) initially providing connections to institutions and a limited number of houses, which have winterized plumbing; and (c) retaining water truck service for kiosks, where it is uneconomical to connect them to the piped network. In addition, the project focuses on: (a) reducing energy costs (which constitute over 50% of operating costs) through replacement of obsolete electrical equipment; and (b) providing support to USAG for outsourcing operation s of kiosks and water trucks to the private sector. 10

15 3. Fiduciary The financial management assessment concluded that both the PMU and USAG have adequate capacity to manage project financed activities. The PMU will revise the UBSIP project accounting system to meet current IDA financial management reporting (FMR) requirements by Credit effectiveness. See Annex 7 for more details. The financial management system assessment i s in the project files. The procurement capacity assessment concluded that while MUB/the PMU have implemented UBSIP satisfactorily, there is a need to further enhance procurement capacity through training, advisory support from Bank offices in Ulaanbaatar and Beijing, and guidance from supervision missions. Annex 8 provides further details on procurement. The procurement capacity assessment is in the project files. 4. Social Government is committed to the implementation of EGSPRS, an important element of which is to improve the living conditions of the poor in Ulaanbaatar. The project is a continuation of the efforts undertaken under UBSIP to, inter alia, improve water supply to ger area residents. The project therefore fits in well with the overall socio-political context. The June 2002 Law on Allocation of Land to Mongolian Citizens for Ownership, as well as the experience with implementation of resettlement in UBSIP, provide a good basis for payment of compensation for land acquired for the project and for resettlement of project affected people. The Social Impact Assessment (SIA) carried out during project preparation involved a socioeconomic survey of about 2,000 households, as well as consultations with project area communities, including community based organizations (CBOs) and non-governmental organizations (NGOs). During implementation, the NGOs will support the PMU in selecting relocation sites and undertaking rehabilitation activities for the estimated 7 households who will need relocation. An NGO will be selected for external monitoring and assessment of RAP implementation. The SIA confirms that there are no significant adverse social issues in the project, and appropriate mitigating actions will be taken through the EMP and the RPF/RAPs, where necessary. The SIA will also influence implementation of the parallel financed activities, e.g., community based neighborhood infrastructure development and low cost on-site sanitation, which were identified during the SIA. Please see Annex 10 for more details on social issues. The SIA, RPF, and RAP are available in the project files. 5. Environment The project will bring about positive health and environmental benefits to the residents of selected ger areas through improved supply of safe drinking water. There are no major environmental issues associated with the project. 11

16 Government and IDA reviewers found the EIA and EMP to be thorough and of high quality. Implementation of the EMP will ensure that temporary negative impacts during construction are properly mitigated. Please see Annex 10 for more details on environmental issues. The EIA and the EMP are available in the project files. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [I [XI Involuntary Resettlement (OP/BP 4.12) Ex1 [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I Ex1 Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI a. What is the safeguard screening category of the project? (Sl, S2, S3, SF) S2 b. What is the environmental screening category of the project? (A, B, C, FI) B c. If applicable, what are the key safeguard policy issues raised by the project? Environment and resettlement. See Annex 10 for more details. d. If applicable, what are the main results of any safeguard policy related studies, and how have they been incorporated into the project? The findings of the SIA, as well as the project EIA, have been taken into account in project design, e.g., location of kiosks, minimization of land acquisition and resettlement. The project s social and environmental impacts would be positive, as it would increase the availability of safe drinking water to the people in the ger areas. Temporary negative environmental impacts from construction would abate upon completion. A monitoring plan is integrated into the project through the EMP. The RPF and RAP address the minimal negative social impacts on project affected persons. e. What is the borrower s capacity to implement the safeguard policies recommendations, and, if the capacity i s insufficient, how will this capacity be brought to the required level? The borrower has implemented the resettlement aspects of UBSIP satisfactorily; however, the capacity to implement safeguard policies needs to be further enhanced. Four training courses for [I [XI * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas 12

17 environment and resettlement will be organized during the implementation stage to augment capacity. f. What type of consultations have been conducted related to safeguard issues? How did these consultations influence project design? Fifteen Khoroo leaders in the project ger areas were consulted during project preparation. Nearly 2,000 households were interviewed in order to explain the safeguard-related implications of the proposed project. Meetings with officials of MUB departments on policy issues relating to land acquisition and resettlement are reflected in the RPF. Views ascertained during consultations were generally supportive of the overall project design; however, they led to changes in the locations of some kiosks. g. When were the safeguard studies made available at the Infoshop? The draft RPF and the draft EIA were made available in the InfoShop on November 19,2003. The EMP and the RAP were released to the Infoshop on February 4, h. When and where were safeguard studies made available in the cooperating country? Both the English and the Mongolian versions of the draft EIA and the draft RPF were disclosed on November 3, 2003 in the MUB Office, and the District and the Khoroo offices; the final versions were placed on the MUB Website on December 15,2003. Notification of disclosure was given in the mass media on December 15, The final draft RAP was disclosed on February 6,2004 in the project ger areas at the same locations as the draft RPF. 6. Policy Exceptions and Readiness a. Does the project require any exceptions from Bank policies? If so, what are they and how are they justified? No exceptions are required. b. Have these been approved by Bank management? Not applicable. c. Is approval for any policy exception sought from the Board? No. d. Does the project meet the Regional criteria for readiness for implementation? If not, in what way(s)? Readiness Criteria: 1. Fiduciary (financial management and procurement) arrangements in place - Yes 2. Project staff and consultants mobilized - Core staff of the PMU will be in place by April 15, Signing of the detailed engineering design and project management consultant contract i s a condition for Credit effectiveness. 3. Counterpart funds budgetedreleased - MUB has approved the budget for PMU operating costs for

18 4. Tender documents for first year procurement prepared and approved -Consultant referred to in 2 will assist the PMU with the limited procurement activities (water meters, possibly telemetering and laboratory equipment) during the first year. 5. Disclosure requirements met - Yes 6. Results assessment arrangements completed: monitoring and evaluation (M&E) institutional obligations spelled out; M&E capacity in place; indicators specified; baseline data collected - Yes. 7. Co-financing agreements signed - Not applicable. 8. Land acquisition plans ready - Yes. 14

19 Annex 1: Country and Sector or Program Background MONGOLIA: Second Ulaanbaatar Services Improvement Project 1. Mongolia has made a largely successful transition to democracy and has established the framework of laws, policies, and institutions needed for a market-based economy. However, the transition to a market economy is unfinished, and challenges remain in a context of extremely difficult physical conditions - a harsh, cold climate; land locked between two large neighbors; large territory and dispersed nomadic population (making it the least densely populated country in the world) - and narrow economic base of livestock herding, cashmere, copper, and gold. 2. Over one third of the population is poor, and income inequality has been rising. The incidence of poverty is growing in urban areas. Government has adopted the EGSPRS in July 2003 to accelerate pro-poor growth. The Bank s Country Assistance Strategy (CAS) for Mongolia will support Government s efforts to implement the EGSPRS. Strengthening urban services in the ger districts of Ulaanbaatar is consistent with CAS objectives. Ulaanbaatar 3. Ulaanbaatar, Mongolia s capital city, is located in the foothills of the Khentii Mountain range, at an elevation of 1,350 meters, along the Tuul River and in valleys of its tributaries - the Tolgoit, the Selbe, and the Uliastai. Ulaanbaatar s climate is continental, with very cold and dry winters with limited snowfall, and short summers (June-August). The temperature is below zero C from November through May. The annual precipitation is 250 mm, of which 94% falls from April to October. 4. About 60% of Mongolia s population of 2.8 million is urban, and more than half the urban population lives in Ulaanbaatar. The estimated 2002 population of the urban part of MUB is about 800,000, of whom about half live in apartment buildings in the built up core of the city. About 400,000 live in 22 informal settlements, a significant number in Mongolian felt tents known as gers ; this has given rise to the term ger areas. The majority of the residents of ger areas is poor. 5. The population of Ulaanbaatar has increased by about 50% in the last five years, as a result of in migration from the rural areas and from the provincial centers. Most of the migrants have settled in ger areas, worsening the already poor living conditions - poor housing, often sited on hill sides and flood plains; reliance on coal and wood for heating in winter; poor quality (often non-existent) access roads; inadequate drainage and flood protection; and very limited garbage collection. 15

20 The Water Sector 6. Ulaanbaatar s water source is groundwater, pumped from four well fields along the Tuul River. In 2002 the water production was about 180,00Om3/d. The distribution network supplying the city core is 350 km long, and the raw water pipes connecting wells and pumping stations are 100 km long. Since the pipelines were constructed without corrosion protection, and because of their age, breakages and leakages are on the increase. 7. Ger area residents obtain potable water from about 358 communal water kiosks supplied with water tankers from the city system. Some kiosks are closed during winter because they are inaccessible to the tankers. Family members carry water from kiosks in containers for an average distance of about 350 meters. The daily water consumption of between 5-10 lpcd has been steady for years. Some households (less that 10%) also get water from private wells, springs and rivers, where the water i s sometimes of dubious quality. 8. Apartment buildings forming the city core are provided with the full range of municipal services. Apartment residents are supplied with running hot and the cold water, and central heating. The excessive water use by apartment residents (over 300 lpcd) has been slowly brought under control by installation of water meters under UBSIP. However, a considerable number of apartments are not yet metered. 9. The city core is served by separate storm-water and sanitary sewer systems. The sanitary network (1 10 km) discharges wastewater into a biological treatment plant. The vast majority of ger area residents use self-constructed pit latrines located in a corner of the plot. Gray wastewater is normally disposed in natural open holes in the ground, approximately one meter deep. Sector Institutions 10. Two institutions are currently responsible for water supply and sewerage in Ulaanbaatar. USAG, the Ulaanbaatar water and sewerage company, is the principal institution in the sector, while OSNAAG is USAG s bulk customer, distributing water to (and collecting wastewater from) the apartment buildings and institutions in the built up core area of the city USAG. USAG was incorporated under Mongolia s Partnership and Company Law in December 1997, and is responsible for the provision of potable water to users and for removal and disposal of wastewater. It is owned by MUB, and managed by a Director, who reports to a Board of Directors appointed by the Mayor. USAG has a staff of 1,100, of whom over 400 are involved in the delivery of water by truck and in the operation of kiosks. USAG supplies water directly to government buildings, institutions, commercial premises and some industries, and also services the ger areas, mainly through water trucks. USAG sells the majority of its water production in bulk to OSNAAG, the housing and communal services company, which in turn supplies the built up area of the city. 12. USAG has made considerable progress in its first six years as a company. It prepared a business plan for and restructured its organization; obtained a certificate of implementation of international accounting system; computerized all aspects of accounting work, 16

21 including billing and collection; has a functioning management information system; and has an excellent collection record of between 30 and 60 days. USAG s annual accounts are regularly audited, and its auditors and IDA staff have found its financial management system to be satisfactory. 13. USAG last made a profit in Its financial position has deteriorated since then, in part because of cost increases. Salary costs, determined by Government decisions on civil servant salaries, have increased and are about 30% of operating costs. Electricity costs are high (and are now over 50% of operating costs) due to obsolete, high energy consuming electrical equipment, as well as due to increase in electricity tariffs. In addition depreciation charges have increased. USAG s efforts at obtaining the tariff increases necessary for full cost recovery have not been successful, as it could not obtain the required MUB and Government approval. However, USAG has adequate cash balances, and has not required subsidies for either operational costs or for servicing its debt. 14. Annex 9 contains a detailed financial analysis of USAG. 15. OSNAAG. OSNAAG is wholly owned by MUB, and is responsible for most heat and water distribution centers (CTPs), the cold water and hot water distribution network from CTPs to consumers, and the sewerage network within the housing areas. OSNAAG buys bulk water from USAG, and pays USAG water and wastewater charges based on metered supply. In addition to water supply and sewerage, OSNAAG is also responsible for garbage collection from the apartment buildings, and other housing related services. 16. About 57,000 apartment consumers and about 2,700 institutional consumers are supplied by OSNAAG. OSNAAG initiated a water metering program by receiving water meters (provided under UBSIP) on lease from USAG, and has since continued the UBSIP initiated metering and plumbing fixture replacement program on its own account. By December 2003 about 15,000 meters had been installed at apartment rising pipes. OSNAAG has now moved to installing meters in individual apartments, and about 2,000 individual meters had been installed by December OSNAAG s metering and plumbing fixture replacement program, initiated under UBSIP, has been a major success in reducing water consumption. Per capita consumption in metered apartments has fallen by about 20-25% between 2000 and OSNAAG has a computerized billing and collection system, and its collection record is excellent. However, in recent years, OSNAAG has not been timely in settling its dues to USAG. 17. There have been discussions from time to time about integrating all water supply operations in USAG; these did not result in any concrete action, and no movement i s expected in the near term. In 2003 OSNAAG awarded management contracts to local private companies to manage some of its units (kontors), and intends to award such contracts for the remaining kontors in If regulated properly, the involvement of the private sector has the potential to further improve OSNAAG s operations. The issue of merging the water and wastewater operations of OSNAAG with USAG may need to be revisited in the context of preparing a medium term plan for the water and wastewater sector in MUB. 17

22 Donor Support to the Water Sector 18. UBSIP. UBSIP was the Bank s first urban sector project in Mongolia, and provided an IDA Credit of SDR12.3 million for water supply improvements. The project was approved in 1997 and closed in December The Credit financed: (a) improvements to water supply in seven ger areas; (b) strengthening of the existing primary network; (c) a water wastage reduction program, through the supply and installation of over 22,000 hot and cold water meters and plumbing fixtures; (d) supply of sewerage maintenance equipment; and (e) technical assistance for institutional development of USAG from a municipal department to a utility operating on commercial principles. 19. AusAID provided grant co-financing of A$6.125 million to support an upgrading program in five ger areas - access roads and foot paths, drainage and flood protection, bath houses and laundry, and garbage bins and collection trucks. 20. The project got off to a slow start because of the lack of familiarity of MUBEMU staff with IDA procedures, and was rated unsatisfactory at the time of the mid-term review. Project implementation picked up speed thereafter, although in view of the short annual construction season it still required an 18 month extension of the closing date. The Mongolia country portfolio performance review of 2002 rated UBSIP implementation to be highly satisfactory. The implementation completion review mission for the project (November 2003) found that the project (both the IDA portion and the AusAID portion) had been implemented satisfactorily and had achieved most of its objectives, especially in institutional development. As discussed earlier, for a variety of reasons USAG was unable to fully meet the financial objective of becoming a profitable utility. 21. Role of other donors, A number of other donors are active in the urban water and wastewater sectors. ADB has supported the sector in the secondary towns: the Provincial Towns Basic Urban Services Project was completed in 2002; and the Integrated Development of Basic Urban Services in Provincial Towns is now being implemented. 22. Japan supported the rehabilitation of Ulaanbaatar s water production facilities during , and i s currently finalizing arrangements for a US$12 million grant to improve the Upper Source (one of USAG s major water sources). Spain has recently provided a loan for rehabilitating Ulaanbaatar s main wastewater treatment plant. 23. The principal focus of these bilateral activities has been on the physical aspects, generally either upstream (e.g., Upper Source) or downstream (e.g., wastewater treatment plant). They have not so far provided support for improvement of water supply to ger area residents, which is a significant unmet need. In addition, they have so far relied on IDA to take the initiative in promoting institutional development and sectoral reform. 18

23 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MONGOLIA: Second Ulaanbaatar Services Improvement Project Latest Supervision (PSR) Ratings Sector Issue Project Implementation Progress (IP) Development Objective (DO) IDA-FINANCED 1. Reducing system losses and improving revenue collection in electricity distribution companies; improving reliability and financial sustainability in the distribution system. Energy Project 5/2001, (Cr.3503-MOG) S S 2. Improving basic infrastructure in ger areas, which house the majority of the urban poor, and rehabilitating the water supply system in the city. Ulaanbaatar Services Improvement Project, 5/1997 (Cr MOG) S S 3. Mitigating the adverse impact of Mongolia s economic transition on the poor segments of the vulnerable groups. Other development agencies JICA UNDP ADB Poverty Alleviation for Vulnerable Groups Project, 5/1995 (Cr MOG) (ICR#22232) 6/2001 Rehabilitation of Ulaanbaatar Water Supply ( ) Water, Sanitation and Hygiene Education Program foi2lst Century ( ) Cadastral Survey and Land Registration Project ( ) Outcome S Sustain. L Provincial Towns Basic Urban Services Project (completed in April 2002) Spanish Government Integrated Development of Basic Urban Services in Provincial Towns (on going) Rehabilitation of the Ulaanbaatar Wastewater Treatment Plant ( ) 19

24 Annex 3: Results Framework and Monitoring MONGOLIA: Second Ulaanbaatar Services Improvement Project Results Framework PDO Improved water supply to the urban poor in a sustainable manner Intermediate Results One per Component Component One: Constructionhepair of kiosks and their connection to the network Component Two: Replacement of large diameter pipeline Component Three: Replacement of obsolete high energy consuming electrical pumps and motors Component Four: Project management USAG institutional development Number of persons per kiosk Percentage of kiosks on network 0 Net profit/loss of USAG Component One: Annual completion targets Component Two: Annual completion targets Component Three: Reduced power consumption Component Four: Contract awards Implementation of key recommendations Connect new kiosks and increase their number as required 0 Take measures to either increase revenue or reduce costs, or both Component One: Monitoring progress in achievement of improved water supply to ger area residents (and to the under-served urban poor) Component Two: Monitoring progress in water conservation and improving water quality Component Three: Monitoring savings in energy costs Component Four: Efficient project implementation Monitoring USAG s development as a well-run utility 20

25 I E a / b E: L.C c c.c E E c V c G a L L 2 c u E 8 S 2 L -I g M a 2 2 % 0 O I r 4 0

26 Annex 4: Detailed Project Description MONGOLIA: Second Ulaanbaatar Services Improvement Project 1. The project, which is located in MUB, comprises four components: (a) ger area water supply; (b) city water supply; (c) energy efficiency improvements; and (d) institutional development and project management. Project Component 1 - US$13.8 million 2. The Ger Area Water Supply component would serve the estimated 2010 population of 250,000 in the ger areas of Bayankhoshuu, Chingeltei, Dambadarjaa, Dari-Ekh, Naran and Uliastai, as well as hospitals, schools, institutions and industries in these areas, through 160 kiosks and 7,500 connections. The city piped system would be extended in the ger areas to connect new kiosks, existing hosks rehabilitated under this component, and other users. However, water tankers would continue supplying several kiosks in Uliastai and Naran where connection to the city network is not feasible. The component comprises: (a) The supply and construction of about 8.2 km of ductile iron pipe and 70 km of insulated high-density polyethylene pipe (HDPE) with diameters ranging from 110 mm to 315 mm. (b) The supply and construction of about 3.8 km of insulated HDPE pipes, with diameters ranging from 110 mm to 160 mm, equipped with heat trace. (c) Construction of two pre-cast concrete reservoirs with volumes of 500 m3 and 1,000 m3, with associated heating houses and access roads. (d) Construction of three pumping stations with capacities from 60 to 100 l/s. (e) Construction or rehabilitation of about 111 new kiosks connected to the pipe system, and construction or rehabilitation of 29 kiosks supplied by truck tankers. (f) Providing water connection to about 16 institutions (hospitals, schools, clinics) and about 7,500 residential properties. (g) Supply and installation of about 10,000 water meters of various diameters. (h) Supply of 15 water tankers with 3 to 15 m3 volume of cistern, together with spare parts, as well as some spare parts for the existing fleet. (i) Supply of five fecal vehicles (vacuum type), with 3 to 15 m3 volume of cistern. (j) Supply and installation of various pumps and associated electrical equipment. Project Component 2 - US$3.4 million 3. The City Water Supply component would: strengthen the primary network system at proposed connections with the ger area network; support water conservation by extending telemetering, and leakage control through pipe repair and replacement; expand monitoring of water flow and pressure in the network, water levels in production wells, and water quality in wells, both in the network and at kiosks; and upgrade equipment in the chemical and bacteriological laboratory for analysis of water and wastewater. The component comprises: (a) Rehabilitation of network with about 12.2 km ductile-iron and steel pipes with diameters ranging from 250 mm to 600 mm. 22

27 (b) Upgrading of West Reservoir pumping station with four pumps (630 l/s each) and associated pipes and specials. (c) Supply and installation of pressure reducing and flow control valves at various locations in the city. (d) Enhancement of telemetering system installed under UBSIP through expansion of monitoring and controls. (e) Enhancement of water quality monitoring in production wells through five monitoring boreholes, provision of equipment and upgrading sample collection sites. (f) Supply of spare pipes, specials and consumables to facilitate maintenance of the system and minor upgrades. (g) Supply and installation of laboratory instrumentation and equipment (binocular microscope, air-jacketed incubator, ion chromatograph, electronic pipette, glassware) for water and wastewater. Project Component 3 - US$3.3 million 4. The Energy Efficiency Improvement component would support the replacement of selected obsolete high energy consuming electrical equipment (pumps, motors, etc) with energy efficient equipment. The component comprises: (a) Supply and installation of about 90 submersible pumps with capacities from 15 to 45 I/s. (b) Supply and installation of two 1000 kw transformers and control systems for intake wells at the Upper Source. (c) Replacing 59 km of overhead wire lines by cable in the upper, central and meat complex well fields. Project Component 4 - US$2.5 million 5. The Institutional Development and Project Management component would include: (a) Preparation of detailed engineering designs, bidding documents and assistance with the procurement process. (b) Construction supervision and quality control, and construction management. (c) Assistance with overall project management, including technical, financial, environmental, and social aspects, as well as project reporting. (d) Supporting institutional development of USAG, in particular in the areas of communication (customer relations) strategy, internal financial controls, individual connections and metering policy, sanitation policy, private sector participation for operating kiosks and water trucks, and reducing operating costs (particularly energy costs and staff costs). 23

28 ~~ Annex 5: Project Costs MONGOLIA: Second Ulaanbaatar Services Improvement Project The estimated cost of the project is $22.98 million, inclusive of physical and price contingencies, taxes and duties. Cost estimates are based on typical engineering designs and on unit prices at mid Physical contingencies are estimated at 5% for civil works and equipment. Price escalation i s based on a projected national and international inflation rates of 5% and 2.5% per year respectively for 2005 and thereafter. Summary cost estimates are shown in the table below. Local Foreign Total Project Cost By Component and/or Activity US$ million US$ million US$ million Ger area water supply City water supply network Energy efficiency improvements Institutional development & project management Total Baseline Cost Physic a1 contingencies Price contingencies Total Prqiect Costs Total Financing Required 'Identifiable taxes and duties are $0.77 million, and the total project cost, net of taxes, is $22.21 million. The share of project cost net of taxes is 96.6%. Government has agreed to waive duties for goods imported for the project. 24

29 Annex 6: Implementation Arrangements MONGOLIA: Second Ulaanbaatar Services Improvement Project 1. MUB will have overall responsibility for implementing the project. MUB has established, jointly with the Ministry of Infrastructure, a Steering Committee for the Project (PSC), chaired by the MUB General Manager, to provide guidance for project preparation and implementation. (The MUB General Manager is also the Chairman of USAG.) The list of PSC members is shown in Annex 11 (Project Preparation and Supervision). 2. MUB has established a project management unit (PMU) for day to day management of the project. The PMU will put in place operating procedures, including procedures for: procurement and contract management; accounting and financial management; environmental monitoring; resettlement planning, budgeting, and implementation; and periodic reporting. These procedures will build on the experience of UBSIP and will meet current IDA requirements. More details are provided in the relevant annexes. 3. The PMU is headed by a Director, with adequate seniority and relevant experience. It will engage appropriate numbers of staff with expertise in accounting, procurement, environment, resettlement, engineering, construction management, and community development, and also at least one person with bilingual interpretation skills. It would also have adequate office space, office furniture and equipment including computers, printers, copiers and scanners, telephone lines, and vehicles. One half of the PMU incremental operating costs will be financed by MUB from counterpart funds, and the remainder will be financed from the Credit. 4. USAG, as the agency that will take over the project created assets, will have a key supporting role in project implementation, and qualified USAG staff would be seconded to work in the PMU from time to time. USAG would strengthen its Project Implementation Unit (PKJ), which is currently responsible for two other projects (the on-going rehabilitation of the wastewater treatment plant, supported by a Spanish loan, and the planned expansion of the Upper Source, which is expected to be supported by a Japanese grant). The PIU would work closely with the PMU on the preparation of detailed designs and preparation of bidding documents and construction management. However, the PMU would be responsible for the bidding process, including various approvals of documents, advertisements, evaluation of documents, and of bids received and award of contracts. 5. The PMU will be supported by consultants (funded by the Credit) on project management, including: (a) preparation of detailed designs and bidding documents; (b) bid evaluation and contract awards; (c) construction supervision and management; and (d) overall project management and reporting. Signing of the consultant contract will be a condition of Credit effectiveness. 6. PMU staff will be provided training by Bank staff on IDA procedures, especially procurement, accounting and financial management, environment, and resettlement. 25

30 7. The PMU will also be responsible for managing parallel financed activities, as and when funding for such activities i s firmed up. These include the management of a number of activities for which donor funding i s being sought: (a) community based neighborhood infrastructure improvements and low cost on-site sanitation improvements; (b) roads and storm drainage improvements in the six ger areas; (c) various initiatives for building MUB capacity on urban planning, land management, municipal finances, and urban management at district and khoroo levels; and (d) any other activities financed under the harmonization initiative. The PMU would have incremental additional staff to manage each of these activities, as and when required. 8. Duties and responsibilities of the PMU and the PIU, as well as the terms of reference of the consultants are available in the project files. 26

31 Annex 7: Financial Management and Disbursement Arrangements MONGOLIA: Second Ulaanbaatar Services Improvement Project Summary of the Financial Management Assessment 1. The Country Financial Accountability Assessment (CFAA) of November 2002 found the overall fiduciary environment in Mongolia to be weak. The public sector financial accountability system does not function well, and corporate governance remains inadequate. Given the existing weaknesses in the financial accountability framework, the CFAA recommends that ring-fenced control be maintained for Bank-funded investment projects until the systemic weaknesses are adequately addressed. 2. An assessment of the adequacy of the project financial management system (FMS) of the following project implementing agencies was carried out during project preparation and confirmed at appraisal: the MUB PMU, which was responsible for implementing UBSIP, and whose accounting personnel are expected to be involved in UBSIP2; and USAG, the main project beneficiary, which is a separate legal entity, which maintains its own books of account. The FMS assessment confirmed that the PMU and USAG have adequate financial management capacity to manage UBSIP2. The FMS assessment is in the project files. Audit Arrangements 3. Government will appoint an independent external auditor, acceptable to IDA, to conduct annual audits of (a) the project accounts and (b) USAG's accounts, in accordance with International Standards on Auditing, under terms of reference satisfactory to IDA. The audit will be financed from the proceeds of the Credit. The auditors will: (a) express an opinion on the annual financial statements; (b) determine whether the Special Account (SA) has (i) been correctly accounted for, and (ii) been used in accordance with the financing agreements; and (c) determine the adequacy of supporting documents and controls surrounding the use of Statement of Expenditures (SOEs) as a basis for disbursement. The auditors will furnish a separate Management Letter, which will: (a) identify any material weakness in accounting and internal control; (b) report on the degree of compliance with financial covenants of the Credit and Project Agreements; and (c) communicate matters that have come to the attention of the auditors which might have a significant impact on the implementation of the project. The audited financial statements will be submitted to IDA within six months after the end of each financial year of the agencies concerned. 4. The audit'reports of UBSIP were acceptable to IDA. USAG was not in compliance with the UBSIP financial covenant (that operating revenue exceed operating costs and the greater of depreciation and debt service) from Though the applicable tariffs generated adequate revenues to meet full operating costs, revenues do not meet full depreciation charges. With principal repayment of UBSIP commencing in 2004, and commitment to.provide counterpart funds of $4.4 million for UBSIP2 during , USAG needs to increase tariff in 2004 and thereafter at regular intervals. The project includes appropriate tariff increases in 2004 and 2006 as disbursement conditions for components (a) to (c). 27

32 Disbursement Arrangements 5. The proceeds of the Credit will be disbursed on the traditional system: (a) from the Special Account with reimbursements made based on full documentation, or against Statements of Expenditure; and (b) direct payments from the Credit account. Allocation of Credit Proceeds 6. Proceeds of the Credit would be disbursed against expenditure categories as shown in the table below. ALLOCATION OF CREDIT PROCEEDS Expenditure Category IDA Credit Amount in US$ Financing Percentage 1. Works 2. Goods % 100% of foreign expenditures, 100% of local expenditures (ex-factory cost), and 65% of local expenditures for other items procured locallv. 3. Consultants Services 1 SO 94% 4. Incremental Operational % costs 5. Unallocated 0.50 Total Use of Statements of Expenditures (SOEs) 7. Some of the proceeds of the Credit would be disbursed on the basis of SOEs as indicated in the table below. Expenditures Category Civil works Goods ~ Individual consultants Incremental operational cost Contracts less than US$ Equivalent 700, ,000 All through SOE 8. Expenditures exceeding the above limits will be made in accordance with respective procurement guidelines and provisions in the Credit Agreement against submission of full documentation and signed contracts. 9. The PMU will retain documentation supporting SOE disbursements during the life of the project and for one year after the receipt of the audit report for the year in which the last disbursement is made. These documents will be made available for review by the auditor and 28

33 IDA supervision missions. Should the auditors or IDA supervision missions find that any disbursements made are not justified by supporting documentation, or are ineligible, IDA may withhold further deposits to the SA until the Borrower has: (a) either refunded the amount involved; or (b) submitted evidence of other eligible expenditures that offset the ineligible amounts. Special Account (SA) 10. To facilitate disbursements from the Credit, the PMU shall maintain a separate US dollar Special Account (SA) at a commercial bank, on terms and conditions satisfactory to IDA, including appropriate protection against set off, seizure and attachments. The SA, which will cover the IDA share of eligible expenditures in all disbursement categories, will have an authorized allocation of $0.60 million, with an initial deposit of $0.40 million. When the amount withdrawn from the Credit account totals SDR1.5 million, the initial allocation will be increased to the authorized allocation. The SA should be replenished regularly, preferably monthly (but not less than quarterly) or when the amounts withdrawn equal 20% of the initial deposit, whichever comes first. All replenishment applications will be accompanied by reconciled bank statements from the depository bank, showing all transactions in the SA. The SA will be audited annually by independent auditors acceptable to IDA. Financial Management and Reporting Arrangements 1 1. Implementing Entity. MUB will have overall responsibility for implementing the project, with the PMU being responsible for day-to-day management, including budgeting, accounting and financial management, and periodic reporting. USAG will take over the project created assets. Both MUB and USAG have experience of implementing the previous IDAfinanced UBSIP (Credit No MN). 12. Funds Flow. IDA funds would be made available to Government at standard terms. The Government would on lend the Credit proceeds to MUB under a Subsidiary Loan Agreement. MUB would in turn on lend proceeds of the IDA Credit to USAG under a Subsidiary Loan Agreement. The foreign exchange risk will be borne by MUB. 13. IDA funds will be channeled either through the SA to the PMU or through direct payment. (See paragraphs 4 and 9 above.) Government counterpart funds will be channeled through the Counterpart Fund Account to be maintained by the PMU. The Counterpart Fund Account at PMU shall receive contributions from MUB and from USAG (preferably at quarterly intervals), which shall be adequate to meet project implementation requirements for the ensuing quarter. 14. Accounting Organization and Staffing. The financial management arrangement for the project will be handled as follows: (a) The PMU will be responsible for Project Financial Statements, including accounting and reporting, preparation of SOEs and withdrawal applications, supplier records, and processing and filing of disbursement vouchers and supporting documents. 29

34 (b) USAG s financial department, which currently consists of 13 staff, will be responsible for USAG Corporate Financial Statements. 15. Monitoring and Reporting. The PMU will provide IDA with financial monitoring reports (FMRs) in accordance with the Guideline to Borrowers issued on November 30, The FMRs shall include: (a) Discussion of Project Progress; (b) a Balance Sheet; (c) Sources and Uses of Funds; (d) Uses of Funds by Project Activities; (e) Physical Progress Report; (f) Procurement Status Report; and (g) Special Account Reconciliation Statements. The reports shall emphasize linkages between expenditures and physical progress. The PMU will be responsible for submitting the FMRs to IDA on a half yearly basis, as part of the project half yearly progress report. 16. Financial Management Action Plan. The implementing agencies have agreed to carry out a time-bound action plan to strengthen the financial management system, as per table below. Actions 1 Responsibility Completion by Date Financial Management System and Reporting Install a computerized project accounting system at the PMU capable of producing the FMRs, annual financial statements, and required statutory reports. PMUKonsultant Credit Effectiveness Financial Management Manual PMU to finalize and adopt the FM manual, satisfactory to IDA Internal Audit Function Training Train USAG accounting staff and internal audit inspectors on the concepts of internal control and internal audit inspectors on internal audit functions. Audit I PMU Consultant Credit Effectiveness March 31, 2006 Appoint an independent auditor to audit the Project Financial Statements and USAG Corporate Financial Statements. 1 PMUAJSAG March 3 1,

35 Annex 8: Procurement MONGOLIA: Second Ulaanbaatar Services Improvement Project Procurement Capacity Assessment 1, The Mongolia Country Procurement Assessment Report was issued on September 12, A separate procurement capacity assessment of the implementing agency, carried out during project preparation, rated the procurement risk as average ; the Procurement Capacity Assessment Report of October 2003 is available in the project files. The report finds that while MUB, the implementing agency, has successfully implemented UBSP, there is a need to further enhance its procurement capacity through: (a) Staff training - IDA procurement staff will provide in-depth training prior to Credit effectiveness, with emphasis on case studies, including preparation of bidding documents, bid evaluation for NCB and ICB equipment and works contracts, consultant selection, and contract management. (b) Procurement advisory support from Bank offices in Ulaanbaatar and Beijing on an ongoing basis, as well as from Headquarters, as needed. (c) Additional guidance from IDA staff during supervision missions. (d) Inclusion of an international procurement specialist in the consultant team which will support the PMU on project management. Procurement Methods 2. Procurement procedures and arrangements satisfactory to IDA were agreed with MUB. All works and goods financed under the Credit would be procured in accordance with World Bank Guidelines for Procurement under IBRD Loans and IDA Credits, dated January 1995, and revised January and August 1996, September 1997, and January 1999 (the Guidelines). Consultants would be engaged in accordance with the World Bank Guidelines for Selection and Employment of Consultants by World Bank Borrowers dated January 1997, revised September 1997, January 1999, and May NCB contracts would be based on the Model Bidding Documents (MBD) agreed between the World Bank and the Government. The Bank s standard bidding documents (SBD) and bid evaluation forms will be used for ICB contracts, and for all procurement categories for which a corresponding MBD has not been agreed. Table A provides summary information agreed with MUB on the project elements, their estimated costs and methods of procurement for contracts financed by the IDA Credit and other sources. MUB will comply with the Bank s procurement procedures and policies for the IDA-financed contracts. In case of any discrepancies between Mongolian policies and Bank requirements, Bank policies and guidelines would prevail. 4. The General Procurement Notice (GPN) for the project was published in dgmarket online on January 15,2004, and the UN Development Business, No 623 dated January 31, Civil works contracts with estimated value equal to or greater than $0.7 million equivalent, contracts for goods with estimated value equal to or greater than $100,000 equivalent, as well as consulting services with estimated value equal to or greater than $100,000 would be advertised as Specific Procurement Notices in UN Development Business and dgmarket on-line, well known 31

36 technical magazines, and at least one newspaper of national circulation in Mongolia. Other contracts would be advertised in at least one Mongolian newspaper with a national circulation. Those contractors who express interest in bidding, as well as consultants who expressed interest in providing services in response to the GPN, would also be notified. Procurement Arrangements 5. A total value of $22.35 million equivalent of works, goods and services will be procured in this project. The PMU, with assistance from the project management consultants, would manage all procurement using procedures outlined below. 6. Civil Works ($5.85 million, of which $1.93 million IDA-financed) would be divided into 11 contract packages with sizes in the range $50,000 to $980,000. Four contracts, estimated to cost more than $0.7 million each (about $3.5 million equivalent in total) would be procured using ICB procedures; the remaining seven contracts (about $2.4 million in total) would be procured using NCB procedures. Interested foreign bidders may also bid for NCB contracts. 7. Goods ($14.23 million, of which $14.22 million IDA-financed) would be divided into 10 contracts. ICB procedures will be used for procurement of pumps, steel, CI and HDPE pipes and specials, water meters, pumps and motors, and other equipment grouped in contract packages with estimated value equal to or greater than $100,000 equivalent. Spare parts for the existing vehicle fleet, estimated to cost less than $100,000 equivalent, would be procured through NCB procedures. 8. Services ($1.66 million, of which $1.55 million IDA-financed). Consultants will be appointed on a sole source basis for detailed engineering design and construction supervision for the period ending December 31,2005. A consulting firm would be selected on the basis of quality and cost (QCBS) for follow-up construction supervision, construction management, and institutional strengthening. Firms for specific tasks such as auditing ($20,000) would be selected on the basis of Consultant Qualification Selection Method (CQ). Standard Request for Proposals (RFP-July 1997, revised in April 1998, July 1999, and March 2002) would be used for selecting consultants. Individual consultants required for the monitoring of the environmental management plan and resettlement ($40,000) would be selected in accordance with paragraphs 5.1 to 5.3, Section V of the Consultant Guidelines. Procurement arrangements for consultants selection are shown in table Al. 9. Incremental costs ($0.60 million, of which $0.30 million IDA-financed) include costs in connection with the upgrading and maintenance of the Project Management Unit. 10. Not IDA-financed ($634,000, direct contracting). Contracts for provision of electrical connections ($52,000), land acquisition and resettlement ($27 1,OOO), and USAG incremental costs ($3 lo,ooo), which are entirely financed from counter part funds, would be contracted directly. 32

37 Prior Review Threshold 11. IDA prior review thresholds would be as follows: (a) all ICB civil works contracts; (b) the first two NCB civil works contracts, irrespective of value; (c) the first goods contract valued at more than $100,000, the first contract valued at less than $100,000, and all goods contracts with value equal to or greater than $500,000 equivalent; (d) all consulting contracts with firms, valued at more than $100,000 equivalent, (e) the first two consulting contracts with firms valued less than $100,000 equivalent; and (f) the first contract for an individual consultant, irrespective of value, and all contracts valued at or more than $50,000 equivalent; and (g) annual budgets of incremental operational costs. The total value of contracts subject to prior review is estimated to be $19.80 million, about 89% of the estimated value of all project contracts. 12. In the case of consulting contracts above the threshold, IDA review would include the shortlist, the proposed RFP, the technical and financial evaluations, and the result of negotiations. For contracts below the threshold, IDA would be notified of the technical evaluation prior to opening the financial proposal. Terms of reference for consulting services would be subject to prior review, regardless of the value of the contract. The thresholds for IDA reviews are summarized in table B. Procurement Contract Packaging and Procurement Plan 13. Table C shows the summary of contract packaging for civil works, goods and services. The packaging has been prepared on the basis of experience gained under UBSP, the short annual construction period in Mongolia, and the anticipated capabilities of Mongolian and foreign contractors and suppliers. A detailed procurement plan is available in the Project Files. Domestic Preferences 14. For goods contracts procured under ICB procedures, qualified domestic bidders will be eligible for a preference equal to 15 percent of the cost, insurance and freight (CIF) price or the sum of the custom duties and import tax payable by a non-exempt importer, whichever is less. For works contracts to be awarded on the basis of ICB, qualified domestic contractors will be eligible for a margin of preference equal to 7.5 percent. Advance Contracting and Retroactive Financing 15. Retroactive financing of up to $1.50 million equivalent would be applied for expenditures made after February 15, 2004 for consulting services required for detailed engineering designs and project management, consistent with procurement guidelines, and for MUB s incremental PMU operational costs. 33

38 Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Expenditure Category ICB 1. Works (1.16) 2. Goods (14.20) 3. Services 0.00 (0.00) 4. Incremental costs 0.00 (0.00) 5. Land acquisition 0.00 Procurement Method' NCB Other' N.I.F.~ Total Cost 2.34 (0.77) 0.03 (0.02) 0.00 (0.00) 0.00 (0.00) (0.00) 0.00 (0.00) 1.66 (1.55) 0.60 (0.30) (0.00) 0.00 (0.00) 0.00 (0.00) (0.00) (1.93) (14.22) 1.66 (1.55) 0.91 (0.30) 0.27 (0.00) (0.00) (0.00) (0.00) (0.00) Total 'Figures in parentheses are the amounts to be financed by the Credit. All costs include contingencies. 2 Includes consulting services and PMU incremental operational costs. 3Includes electrical connections and PIU incremental operational costs. Table Al: Consultant Selection Arrangements (US$ million equivalent) Selection Method' Services QCBS QBS SFB LCS CQ Other N.I.F. Expenditure Category Total cost A. Firms (0.94) (0.00) (0.00) (0.00) (0.02) (0.56) (0.00) (1.52) B. Individuals (0.00) (0.00) (0.00) (0.00) (0.00) (0.03) (0.00) (0.03) C. Incremental costs (0.00) (0.00) (0.00) (0.00) (0.00) (0.30) (0.00) (0.30) Total (0.94) (0.00) (0.00) (0.00) (0.02) (0.89) (0.00) (1.85) 'Including Contingencies, figures in parenthesis are amounts to be financed by IDA Credit QCBS = Quality-Cost Based Selection Method CQ = Consultants Qualification Selection Method Other includes direct appointment of a firm, individual consultants carrying out monitoring, and PMU incremental cost N.I.F. = Not IDA Financed 34

39 Table B: Thresholds for Procurement Methods and Prior Review Expenditure Category 1. Works 2. Goods 3. Services Contract Value Procurement Threshold Method (US$ thousands) > =700 ICB <700 >=loo e 100 NCB ICB NCB Contracts Subject to Prior Review (US$ thousands) All>= 700 ($3,510) First two ($1,350) First irrespective of value and all > 500 ($13,000) First ($31 1 Firms Individuals >= 100 >=loo < 100 >50 Single Source Selection QCBS Incremental PMU Not applicable Not applicable Operational Cost ($600) Total value of contracts subject to prior review: I $19,793 CQ IC One ($600) All ($1,000) First two contracts ($8) First contract irrespective of value, and all contracts at or above $50,000 ($4) Annual budget OVERALL PROCUREMENT RISK ASSESSMENT: AVERAGE Frequency of procurement supervision missions proposed and post-review. One every six months (includes special procurement supervision for post-review/audits). During supervision one in four non-prior review contracts will be post-reviewed. The ratio will be reviewed and modified as appropriate, at the time of the mid-term review, based on experience. 35

40 ~~ Table C: Proposed Procurement Packaging Code Method Value of packages Contract package Tgmil I US$mil ~~ ~ B PEG01 VLGOl PPGOl WMGO1 TKGO1 Goods HDPE pipes ICB 9, ,525 Valves and specials ICB 1, Pumm and accessories ICB Water meters ICB Water and wastewater trucks ICB D Not-IDA Financed Land acquisition and resettlement Nla USAG incremental cost (PIU) Nla Electrical connections Nla Sub-total Total Cost of the Project 28,

41 Annex 9: Economic and Financial Analysis MONGOLIA: Second Ulaanbaatar Services Improvement Project FINANCIAL ANALYSIS 1. Project Costs and Financing Plan. As indicated in Annex 5, the estimated project cost is $22.98 million, including physical and price contingencies, as well as duties and taxes. Detailed project costs, and the assumptions used for computing project costs, are available in the project files. The front page of the PAD provides the summary financing plan for the project. IDA will finance $18 million, and the balance will be financed by USAG and MUB. MUB will finance $0.57 million (towards 50% of PMU operating costs, and resettlement) and USAG will finance $4.41 million. Details of the financing plan are available in the project files. 3. IDA Credit Terms and On-lending. IDA funds would be provided to the Government at standard IDA terms, with 40 years maturity and a 10-year grace period, 0.75% administrative charge, and a commitment fee of 0.5% on undisbursed Credit balances. Government would onlend the Credit proceeds to MUB under a subsidiary loan agreement at an annual interest rate of 1% and a repayment period of 40 years, including 10 years of grace. MUB, in turn, would onlend the Credit proceeds to USAG at an annual interest rate of 5% and a repayment period of 20 years, including 5 years of grace. MUB will bear the foreign exchange risk. Execution of the Subsidiary Loan Agreements between the Government and MUB, and between MUB and USAG, would be a condition of Credit effectiveness. 4. The interest rate of 5% for USAG is significantly lower than market interest rates in Mongolia. In addition, similar long term loans are not available in Mongolia. However, in view of the poverty focus of the project, such concessional terms are considered acceptable. It is noted that MUB will receive significantly better terms from Government, with the interest rate being only marginally higher than IDA terms. The higher interest rate to USAG is considered acceptable because MUB will bear the exchange risk. The shorter repayment period would provide MUB with some funds prior to MUB having to repay Government; the exact amount would depend on the movement of the exchange rate. MUB would retain these funds in a separate account and invest any surplus in public goods benefiting the poor. 5. Disbursement. The front page of the PAD provides a summary of the project disbursement over the period of seven IDA fiscal years, FY05 - FY 11. Details of disbursement percentages and disbursement arrangements are outlined in Annex 7. Financial Analysis of USAG 5. Current Status. USAG, which was incorporated under Mongolia s Partnership and Company Law in December 1997, underwent substantial financial and organizational reform under UBSIP. Its accounts are now fully computerized and in 1998 it was issued a certificate of implementation of the international accounting system. USAG s annual accounts are regularly audited, and the audit reports have been found acceptable by IDA. 37

42 6. USAG enjoyed a sound financial position until 1999, with a 5% profit on operating revenues in 1999 and a cash surplus. Further, until 1999 USAG had no outstanding long-term debt servicing costs. From 2000, despite retaining its cash surplus, USAG was unable to meet the UBSIP revenue covenant of having sufficient revenues to cover operating expenditures and the higher of either depreciation or debt service. USAG s net operating income before depreciation continued to be positive in the period However, under the commercial accounting system, new assets deployed under various donor funded projects (UBSIP Credit, Danish Loan, Spanish Loan, Japanese Grant) are now capitalized in USAG s books, and depreciation has been increasing year on year. As a result, in years 2002 and 2003, net operating income covered only about 68% of depreciation. 7. In 2001, USAG sought a tariff increase to enable it to fully meet the UBSIP financial covenant. Although the proposal was initially approved by MUB, at the Government s direction, MUB authorized only a partial tariff increase in October USAG has since then submitted proposals to MUI3 for a 50% increase in bulk water and waste water tariffs charged to OSNAAG, to enable it to meet the UBSIP covenants. However, in view of the upcoming national elections in June 2004, and USAG s current healthy cash balances, MUB has deferred the decision on the requested tariff increase. Tariff increases in 2004 are critical (even without the current project) to enable USAG to make debt service payments, especially as UBSIP repayments commence in Billing and Collection. USAG s collection performance i s excellent. The average debt collection period improved from two months in 2000 to less than one month in In 2003, receivables again increased to almost two months, because of delays in payments by OSNAAG, USAG s bulk customer. However, USAG expects receivables to improve in 2004, when the management contracts awarded by OSNAAG are expected to result in more efficient collection of water bills and their faster transfer to USAG. USAG should explore with OSNAAG the possibility of direct credit of the amounts due to USAG, as OSNAAG s customers pay their water bills. 9. Financial Objectives for USAG. Government, MUB and USAG have agreed that USAG s financial objectives for the project will be to: (a) Continue to maintain liquidity (i.e., generate adequate operating revenue to meet operating expenses and debt servicing costs) in 2004, and the ensuing years. (b) Contribute 20% of the overall project costs as counterpart funds, in a timely manner, as per implementation requirements. (c) Become commercially viable by 2008 (Le., generate adequate operating revenues to fully meet operating expenses, depreciation charges, and interest costs). (d) Establish a Capital Expenditure Fund to fully utilize excess cash (i.e., beyond the minimum cash balances required to meet worlung capital requirements) to replace aging assets and to undertake system expansion to provide improved service, particularly to the underserved residents of ger areas. 10. Tariff Increases. USAG s tariffs have not undergone any revision since October With the projected increase in costs (salary, power and depreciation charges) as well as commencement of repayment of UBSIP Credit in 2004, the current tariffs do not generate adequate revenues to fully cover operating expenses and debt service costs. Therefore, even 38

43 without the UBSIP2 project, USAG needs to increase tariffs in 2004 to meet its financial objective of maintaining liquidity. Further tariff increases are needed at regular intervals to meet the agreed financial objectives. Tariff increases are proposed every two years, starting October 2004 (Le., after the June 2004 national elections, and the September 2004 local elections), and thereafter in July of 2006,2008, and USAG s sales can be classified as: direct supply to customers, comprising (a) institutions, (b) apartments, and (c) ger area kiosks; and bulk supply to OSNAAG. The tables below indicate USAG s proposed water and wastewater tariffs to its customer categories after each increase. Ger area kiosk water tariffs (which are currently much higher than the tariffs for other categories) will remain at their current level of 500 Tg/m3 throughout the project period. Both water and wastewater tariffs for other customer categories will increase in 2004, (by 50% to OSNAAG and 40% to other customers) and 15% each in 2006 and 2008 to all categories. It is to be noted that even with tariff increases every two years, the 2010 water tariffs for apartments will still be only 77% of ger area kiosk tariffs. Water Tariff Structure of USAG (In Tg/cubic meter) Wastewater Tariff Structure of USAG (In Tg/cubic meter) Customer Category Institutions Apartments Ger Areas OSNAAG I 147 I 169 I 194 I 224 [ 271 I360 Not Applicable 72 I 108 I 124 I 143 I 164 I 199 I Summary Financial Projections. The table below provides a summary of USAG s financial projections for the period , based on tariff increases as indicated above. It will be seen that: (a) USAG has adequate cash balances throughout; (b) makes a profit from 2008; (c) maintains an operating ratio at or below 0.60 from 2008; (d) has a debt service coverage ratio in excess of 1.5 from 2005; and (e) has a growing Capital Expenditure Fund from These will enable USAG to be financially viable, and independent of grant support for capital expenditure from either Government or donors. Detailed financial projections and the underlying assumptions are available in project files. 39

44 Summary of USAG's Financial Projections (In Tg Million) Particulars Operating Revenue ,935 9,838 14,199 17, ,818 42,581 Capital Expenditure Fund (balance) Operating Ratio Debt Service Coverage Ratio ,425 9,659 32, " Credit Conditions. Increase in USAG's tariffs in October 2004 (as per the proposed tariff table above or suitably modified if actual costs and/or revenues are different from the assumptions) to meet the financial objective of continued liquidity in 2004 would be a condition of disbursement from the Credit for the physical investment components, Le., components 1, 2 and 3. In the event of the tariff increase not being implemented in 2004, appropriate tariff increase in 2005 to ensure liquidity in 2005 would be a condition of disbursement from the Credit for the physical investment components, Le., components 1, 2 and 3. A further increase in USAG's tariffs in July 2006 (except to ger area kiosks) by at least 15% would be an additional condition of disbursement from the IDA Credit for the Energy Efficiency Improvement component. 14. Financial Monitoring Indicators. The principal financial monitoring indicator for USAG is its Net ProfitLoss position. In addition, the following other key financial indicators will be regularly monitored and tracked in the half yearly progress reports: (a) water tariff, by customer category; (b) wastewater tariff, by customer category; (c) operating revenues; (d) days accounts receivable; (e) counterpart funds to UBSIP2; (f) operating ratio; (g) debt service coverage ratio; and (h) capital expenditure fund balance. (See Annex 2, Table A, USAG Performance Indicators. 1 40

45 Financial Rate of Return 15. The major portion of project investments relate to improvements in ger area water supply. These improvements will result primarily in more convenient and reliable water supply, and will not increase water consumption significantly. Further, as the water tariff in ger areas i s already high, it is not being increased during the project. As such, the financial rate of return of the ger area water supply component is lower than the discount rate. The justification for this component is purely on economic and social grounds. 16. The energy efficiency improvement component results in annual gains through the use of modem, technically more efficient equipment and electrical installations. The component has a robust financial rate of return of 25%. 17. Because of the disparate nature of investments under the city water supply component, it is not appropriate to compute a financial rate of return for it. In view of the difficulties in determining financial benefits from the technical assistance component, a financial rate of return was not computed for this component. 18. Details of the computations of financial rate of return are available in the project files. Counterpart Funds 19. The tables below show the annual counterpart fund requirements from USAG and MUB. Once the agreed tariff increases are implemented, USAG would have adequate cash balances to provide the required counterpart funds. MUB s counterpart fund contributions peak at Tg 162 million in 2008, which is quite modest. MUB has confirmed that it would make the required funds available in a timely manner. Item MUB s Counterpart Funds

46 ECONOMIC ANALYSIS 20. Economic Costs. The financial analysis has been the point of departure for the economic analysis. Financial costs have been converted to reflect economic costs at a standard conversion factor of 85%. Unskilled labor i s assumed to account for 75% of labor input and skilled labor for 25%. Shadow wage rate factor has been assumed to be 0.71 for skilled labor and 0.36 for unskilled labor, with a weighted rate of Economic Benefits. The major benefit of improved water supply in the ger areas is the expected rise in the average consumption of water from 7 lpcd to 15 lpcd by connecting kiosks to the network and consequent improved supply. As the project intends to increase supply to ger areas by reducing unaccounted for water (UfW) in USAG, the additional long term benefits of the water supply component of the project will be slower growth in water production. Successful reduction of UfW will be important to the achievement of the project economic benefits. 22. Affordability. Tariff increases forecast under the project will ensure that water supply services (and sewerage for apartment residents) remain affordable to all consumer groups and household expenditures on water and wastewater will be within the generally accepted guidelines of not exceeding 3-5% of the household income. The current expenditure on water and wastewater accounts for 2.7% of the average monthly city household income. The tariff increases envisaged in 2004 will increase this to 3.6% of household income. A separate household survey in ger areas established willingness to pay at about Tg723/m3 as compared to the current tariff of Tg 500/m3 for kiosk supply. The average ger households today spend 1.1% of household income on water and wastewater, as compared to 1.5% after project implementation (assuming average ger household consumption will reach 15 lpcd). Maintaining the current water tariffs in the ger areas throughout the project area will also ensure that the weakest income groups will have access to affordable water supply in the future. 23. Methodology. The methodology used in the Economic Analysis is the without and with project approach, quantifying the expected incremental volume of water supplied to the consumers in the ger areas for each year. A full analysis quantifying all economic benefits has not been undertaken; instead Willingness To Pay (WTP) has been used as a proxy for the value of the economic benefit. Based on the results of the household survey of October 2003, WTP in the ger areas was determined to be Tg 723/m Results of the Economic Analyses. The economic analysis shows that the ger area water supply component has an EIRR of 14.1% and a benefit cost ratio of 1.2. Sensitivity tests done on the assumptions indicate that the EIRR will be in a satisfactory range of 10-12% under adverse assumptions. These results understate the economic benefits to some extent, because the models do not capture non-quantifiable benefits, such as improved health and hygiene, and significant savings in time spent by women and children fetching water. 25. For the improved energy efficiency component, the FIRR has been used as a proxy for EIRR because only limited additional economic benefits have been identified beyond the financial benefits, e.g., overall reduction in energy consumption in the country. These economic benefits have not been quantified. Further details of the economic analysis are available in the project files. 42

47 Annex 10: Safeguard Policy Issues MONGOLIA: Second Ulaanbaatar Services Improvement Project SOCIAL 1. In line with local laws and IDA requirements, the following documents were prepared by MUB, with assistance from their consultants: o Social Impact Assessment (SIA), including ethnicity and gender; o Resettlement Policy Framework (RPF), and Resettlement Action Plan (RAP) These documents are available in the project files. The draft RPF was placed in the Infoshop on November 19,2003, and the RAP on February 4, SIA. The SIA included a household survey of 2,000 families in the six project ger areas, as well as consultations and individual interviews with various social groups, including women, the elderly, and the poor. Consultations were also held with local leaders - khoroo leaders, and representatives of CBOs and NGOs active in the area. MUB, district, and khoroo level staff, as well as staff of the PMU were involved in the design and preparation of the SIA. 3. Resettlement. The Feasibility Study (FS) selected the design option with minimum land acquisition and resettlement. Based on field surveys carried out after the preliminary engineering designs were completed, it is estimated that 47 households and one kindergarten will be affected, of whom five households would need to relocate, and the others would be partially affected. An RPF, consistent with Bank OP 4.12, was first prepared to underpin all project land acquisition and resettlement; a RAP, consistent with the RPF, has been prepared subsequently. Lessons learned from UBSIP resettlement, as reflected in the UBSIP resettlement assessment carried out by the Ecological Research Center (an NGO), were also taken into account in the development of the RPF and the RAP Khoroo leaders in the six project ger areas were consulted during project preparation. Meetings were held with MUB officials on resettlement policies, and with NGOs and CBOs on mitigation of negative impacts. The socioeconomic survey (carried out as part of the SIA) involving about 2,000 households, provided baseline information about the project population, including poverty and income level, family size, employment and migration pattern, etc,. The results of these consultations have been reflected in the RPF. The draft RPF was reviewed by MUB officials, and disclosed in the district and khoroo offices. 5. MUB will make the necessary budget arrangements for timely payment of compensation to the affected persons as specified in the RAP. Resettlement implementation will commence in June Project resettlement will be handled by a designated PMU staff, who will be provided necessary training (along with all personnel associated with resettlement implementation). The PMU will furnish periodic progress reports on resettlement implementation. An NGO will provide an annual external monitoring report, starting from Ethnic Minority Groups. There are 29 ethnic groups in Mongolia, all of whom are the descendants of either Mongolian nomadic tribes or groups of Turkic origin who have become Mongolized over time. According to the 2000 census, Khalkh Mongols were 81.5% of the national population; in the project areas, the Khalkh constitute 93% of the population. Mongolian census documents neither define ethnicity nor contain questions on language or 43

48 religious identification. The main parameter of ethnicity appears to be identification with a given geographical area, such as the place from where the head of the household or his forefathers came from. 7. Ethnic distinctions among the Mongol sub-groups are relatively minor. Language or tribal differences are not considered to be significant political or social issues. Ethnic minorities do not appear to be discriminated against in Mongolia in terms of allocation of residential plots or opportunities for employment. The Bank s OD 4.20 on Indigenous People does not apply. 8. Gender. Mongolia is a relatively gender-equal society, in which men and women have similar access to social services, and where there i s relative gender equality in terms of basic human rights. Mongolian women, in comparison to men, enjoy similar levels of health; higher life expectancy; higher levels of education, though enrolment and attainment rates have fallen for both women and men since the transition to a market based economy; and lower, but relatively high levels of participation in the labor force. 9. One of the key elements of the SIA included consideration of gender. Significant numbers of female-headed households, single women, those with children, and the elderly were contacted during the SIA and during project preparation in general. Improved water kiosk operation in ger areas will directly benefit women and girls in particular, in their traditional role as the main transporters of water at the household level. ENVIRONMENT 10. Studies. The EIA was conducted by MUl3 s project preparation consultants to: (a) identify and assess environmental impacts of the project (both positive and negative, short term and long term, reversible and irreversible); and (b) recommend mitigation measures or any change in project designs, in light of any identified negative impacts. The EIA was prepared based on data collected by the team, comprising the environmental specialist, domestic experts and engineers from various Government offices, as well as field surveys of project ger areas, and consultations in the project areas. Government and IDA reviewers found the EIA to be thorough and of high quality. 11. The EIA was prepared for a comprehensive urban services project in the ger areas, covering water supply, roads and storm drainage, garbage collection, bath houses and laundry. Because of MUB s inability to borrow for the other sectors, UBSP2 will only support investments in water supply. This annex therefore discusses only the water supply aspects of the EIA. Parallel financing is being sought for roads and storm drainage, community based neighborhood infrastructure, low cost on-site sanitation, etc. The respective funding agencies will be encouraged to implement the investment programs supported by them consistent with the EIA. 12. Safeguards-related risks. No environmental risks were identified. Rather it was found that the proposed project will bring about positive health and environmental benefits to the proposed ger areas through the supply of safe drinking water. 13. Alternatives. Since the ger areas are under-serviced in terms of potable water supply, only the with project scenario would bring the positiveheneficial impacts that would 44

49 significantly improve the living conditions and enhance the social and economic development of those areas. Alternatives examined included: providing water to the ger households through water tankers feeding kiosks on a daily or other basis; piped water from local boreholes, the quality of water from which is acceptable only with some chlorination; and connecting the kiosks to the city network. The option of connecting to the city network was chosen where it was cost effective. 14. Consultations. Consultations were carried out with the communities using household survey questionnaires (2000 respondents) and interviews with key stakeholders. Key stakeholders were defined as households in the project area, civil society organizations, government agencies, khoroo leaders and other key persons in the community such as teachers, health workers, doctors etc. The project concept was received enthusiastically. Concern was expressed about the impacts during the construction phase, but it was recognized that these would persist only until project completion. All people met expressed a strong desire for better conditions in the ger areas. The most significant changes made to project design relate to the locations of water kiosks within each khoroo. 15. Identified Impacts. The majority of the impacts identified are regarded as positive. The most significant positive impact of the project in the operation phase will be the availability of an increased quantity of safe drinking water on a sustainable basis, thus meeting a basic need for a healthy, productive life for the people in ger areas. The proposed water supply schemes will ensure better service delivery, which would enable supply of safe water at convenient public points. This will reduce the drudgery in fetching the daily water needs particularly among women and children. The time and labor saved due to the better and more convenient service could provide opportunities for income generation, especially for women. Construction of water supply pipelines is likely to have negative impacts on noise and air quality but only in the shortterm. 16. Mitigation plan. Details of mitigation measures, their location, time frame and the responsible agencies for their implementation and supervision have been provided in the EMP. This covers such areas as surface and ground water management, air quality control, noise management, construction site waste, removal of soil by layer and separate stockpiling, covering piles to limit wind erosion, careful placement of soil stockpiles, construction of runoff channels and water storage, and correct orientation of roads and paths. A series of Guidelines on site clearance, construction methodology, and debris disposal have been provided as part of the annexes to the EMP. 17. Capacity and Commitment. An environment cell in the PMU will implement the EMP, and will be staffed with at least one professional with experience in water and sanitation. PMU staff will be trained on environmental regulations and their application, environmental management in the improvement of urban services, urban vegetation management, mitigation measures and their implementation, public consultation, monitoring, progress reporting. An environmental specialist from the supervision consultant team will ensure that construction is done in an environmentally sound manner. 45