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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Water and Urban Unit 1 Ethiopia Country Department Africa Region Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 43-7 MILLION (US$65 MILLION EQUIVALENT) AND A PROPOSED GRANT IN THE AMOUNT OF SDR 23.5 MILLION (US$35 MILLION EQUIVALENT) TO THE FEDERAL. DEMOCRATIC REPUBLIC OF ETHIOPIA FOR AN URBAN WATER SUPPLY AND SANITATION PROJECT March 29, 27 Report No: ET 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 February 28,27) Currency Unit = Ethiopian Birr (ETB) ETB 1 = US$.12 US$1.49 = SDR 1 FISCAL YEAR July 8 - July 7 AfDB AAWSA BADEA DFID EBA EIA ESMF FA FMR ICB IDA IFC JBAR GOE GPN GPOBA MDG M&E MOFED MWR NCB PFM PMU QCBS RPF PASDEP PEFA WRDF RWB uwss ABBREVIATIONS AND ACRONYMS African Development Bank Addis Ababa Water and Sewerage Authority Arab Bank for Economic Development in Africa Department For International Development Environmental Baseline Assessment Environmental Impact Assessment Environmental and Social Management Framework Fiduciary Assessment Financial Monitoring Report International Competitive bidding International Development Association International Finance Cooperation Joint Budget and Aid Review Government of Ethiopia General Procurement Notice Global Partnerships for Output Based Aid Millennium Development Goals Monitoring and Evaluation Ministry of Finance and Economic Development Ministry of Water Resources National Competitive Bidding Public Financial Management Project Management Unit Quality and Coast Based Selection Resettlement Policy Framework Plan for Accelerated and Sustained Development to End Poverty Public Expenditure and Financial Accountability Water Resource Development Fund Regional Water Bureau Urban Water Supply and Sanitation Acting Vice President: Country Director: Sector Manager: Task Team Leader: Hartwig Schafer Ishac Diwan Jaime Biderman Yitbarek Tessema

3 ETHIOPIA FOR OFFICIAL USE ONLY A Urban Water Supply And Sanitation Project CONTENTS STRATEGIC CONTEXT AND RATIONALE... 3 Page Country and Sector Issues... 3 Rationale for Bank Involvement Higher level objectives to which the project contributes... 6 B. PROJECT DESCRIPTION Lending Instrument Project development objective and key indicators Project components Lessons learned and reflected in the project design Alternatives considered and reasons for rejection C. IMPLEMENTATION Partnership arrangements Institutional and implementation arrangements., Monitoring and evaluation of outcomesh-esults Sustainability Critical risks and possible controversial aspects Loadcredit conditions and covenants D. APPRAISAL SUMMARY Economic and financial analyses Technical Fiduciary Social Environment Safeguard Policies (Revised) E. POLICY EXCEPTIONS AND READINESS... 2 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 without 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. 23 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 Arrangements Annex 9: Economic and Financial Analysis Annex 1: Safeguard Policies 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 Annex 15: MAP IBRD

5 ETHIOPIA Urban Water Supply And Sanitation Project PROJECT APPRAISAL DOCUMENT DATA SHEET Date: March 29, 27 Country Director: Ishac Diwan Sector Manager/Director: Jaime M. Biderman Project ID: P11473 Lending Instrument: Specific Investment Loan Team Leader: Yitbarek Tessema Sectors: Water supply (85%);Sanitation (15%) Themes: Access to urban services and housing (P) Environmental screening category: Partial Assessment For LoandCredi t s/o thers : Total Bank financing (US$m.): 65. IDA Credit and 35. IDA Grant Borrower: FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA Addis Ababa Ethiopia Responsible Agency: Ministry of Water Resources Addis Ababa Water and Sewerage Authority Provincial Water and Sewer Authorities 1

6 Does the project depart from the CAS in content or other significant respects? Ref: PAD A.3 Does the project require any exceptions from Bank policies? Ref: PAD D. 7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated substantial or high? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Ref: PAD D. 7 []Yes [XI No [ ]Yes [x] No [ ]Yes [ IN [ ]Yes [XI No [x]yes [ 3 N o [x]yes [ ]No Project development objective Re$ PAD B.2, Technical Annex 3 The Development Objective of the Urban Water Supply and Sanitation Project is increased access to sustainable water supply and sanitation services in Addis Ababa and four secondary cities. Project description Re$ PAD B.3.a, Technical Annex 4 The project is designed (i) to produce and distribute more water to reduce the alarming gap between the supply and demand for water in Addis Ababa and four other secondary cities; (ii) to improve operational efficiency in all five cities by reducing non-revenue water, and improving financial management, billing and collection, and customer management; and (iii) to improve governance by the water boards and to introduce performance incentives for operators. Component 1: Addis Ababa Water Supply and Sanitation (US$85 million). Funding will be provided to Addis Ababa City to: (i) produce and distribute more water and improve sanitation services; (ii) improve operational efficiency by reducing non revenue water, and improving financial management, billing and collection, and customer management; and (iii) to improve governance by the water boards and to introduce performance incentives for operators. Component 2: Secondary Cities Water Supply and Sanitation (US$33 million). Funding will be provided to the secondary cities to: (i) produce and distribute more water and improve sanitation services; (ii) improve operational efficiency by reducing non revenue water, and improving financial management, billing and collection, and customer management; and (iii) to improve.governance by the water boards and to introduce performance incentives for operators. Component 3: Program Management and M&E (US$lmillion). Funding would be provided for costs associated with project implementation, to synthesize existing water and sanitation access data to determine baseline figures and to monitor progress under this project. This component also includes training, workshops and other capacity building measures and support for environmental and social management, Which safeguard policies are triggered, if any? Ref: PAD D. 6, Technical Annex 1 I The safeguard screening category is S2, and the environmental screening category is B. The project has triggered OP 4. 1 Environmental Assessment, OP Physical Cultural Resources, OP 4.12 Involuntary Resettlement, OP 4.37 Safety of Dams, and OP 7.5 Projects on International Waterways. Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: None Loadcredit effectiveness: None I Covenants applicable to project implementation: None 2

7 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues 1. Ethiopia is in its second cycle of developing a Poverty Reduction Strategic Plan (PRSP) - its Plan for Accelerated and Sustained Development to End Poverty (PASDEP) covering the period The main thrust of PASDEP is ensuring accelerated growth through a multi-faceted approach of tackling interlinked poverty traps, including the very low level of infrastructure, including water supply and sanitation. 2. The MDG targets for Ethiopia are achieving 63% access to safe water supply and 58% access to improved sanitation by 215. In the year 2 approximately 7 of the 5 million people in rural areas (13%) and 8 of 11 million people in urban areas (73%) had access to safe drinking water. Access to basic sanitation in the same year was 6% for rural and 62% for urban. The Government has also prepared an ambitious Universal Access Plan (UAP) targeting to provide universal access to safe water supply and sanitation by the year The major issues for water supply and sanitation development in the country include: 4. Low service levels: Water supply and sanitation coverage in Ethiopia is the lowest in sub- Saharan countries with only 42% and 28% for water supply and sanitation respectively. Limitedjnancing for expansion and improvement of service: Current investment in the WSS is well below what s required to achieve the targets. The annual cost of achieving the government plan is estimated to be US$35-45 million in the first few years and falling to US$2 million in the later years. A five fold increase in the current US$lOO million per year rate of investment (including this project) would be needed to achieve these targets. Also, user fees for services are often too low to provide for adequate maintenance of existing facilities. Decentralization and capacity constraints: With further decentralization, much more autonomy is devolved to the woredas, towns and rural communities to plan and manage their watersupply schemes. Government is in the process o f institutionalizing a sector support system that involves local private sector and other partners in providing the goods, works and services needed to plan, construct and maintain water supply and sanitation facilities, by providing business opportunities and increasing their capacity. However, the approach is new so the process needs time to internalize and institutionalize, so capacity remains a major issue. Stakeholder participation: To date stakeholder participation in the sector has been very limited. However, a trend is being set under the ongoing water supply and sanitation program, towards consultative process and participatory planning. Participation of the private sector is also growing. Though there is awareness on the efficiency and service improvement the private sector could bring about, progress i s slow. As part of the EUWI country dialogue, a multi stake holder forum that brought the key stake holders together in one hall to discuss on the water supply sanitation and hygiene sector coordination and agree on the way forward. Addis Ababa Water Supply and Sanitation: Addis Ababa i s the capital city of Ethiopia. In the last fifteen years the population has grown fiom 2 million to about 4 million, and the administrative area has increased from 22 to 54 square kilometers. This has put heavy pressure on the Addis City Administration and the Addis Ababa Water and Sewerage Authority to extend public services. Meanwhile, in the last 15 years little was invested on capital investments. As a result, demand far exceeds supply by about 5% and the distribution network reaches only about 55% of the service area. About half the population has less than 12 3

8 hours per day of water service, and a quarter have no service at all. Most un-served people live in lowincome areas at the periphery of the city, which has been incorporated into the city administrative area in recent years. 5. At present, Addis Ababa is served with 21, m3/day, of which 17, m3/day is supplied from the Legadadi, Dire and Gafersa dams, and 4, m3/day from the Akaki ground water field. This corresponds to 5 liters per capita per day or 35 lpcd taking account 35% water losses. In comparison, most comparable cities in Africa are provided with at least 1 lpcd. With a 3.5% population growth rate by 212 water production must increase by 15, m3/day to provide 75 lpcd. 6. The Addis Ababa Water and Sewerage Authority (AAWSA) is the sole entity responsible for providing water supply to the city. It was established as an autonomous body by order No. 68/1971 issued in It has since been re-organized in 1995 and 23. It is now entrusted to: (i) supply safe and adequate water within the limits of Addis Ababa City; (ii) provide wastewatedsludge collection and disposal; (iii) ensure that water resources are protected and conserved, (iv) determine the quantity of water to be supplied and wastewater to be disposed; and (v) ensue that water quality conforms to standards. To operate efficiently, AAWSA requires financial, procurement and human resources autonomy. At present these are delegated to AAWSA by the City, but not legislated. 7. AAWSA s Management Board is chaired by the Minister of Water Resources and includes representatives from MoFED, Addis Ababa City Government, Oromia region, as well as labour union representative. AAWSA s internal management team comprises a General Manager and three Deputy General Managers (technical, business development, and resource management) appointed by the Board who oversee eight departments, five services and eight branch offices. 8. Based on available statistics, about 12% of households in Addis Ababa have flush toilets that discharge to sewers or septic tanks, 63% of households use individual or shared pit latrines, and 25% do not have access to sanitation facilities. The occurrences of diseases are highest in densely populated areas where water supply, sanitation, and nutrition are inadequate. 9. A waste water master plan of the city was updated in 22. It divided the city into three catchments and set out sewer alignments and located stabilization ponds in each, one at Kality where the existing treatment facilities are located, and the others at Kotebe and Akaki on the eastern and southern sides of the city. There are 3 km of trunk sewers and 1 lun of secondary sewers and laterals in the Kality catchment. The sewerage system was designed on the basis of an average water consumption of 15 liters per capita per day to serve an equivalent population of 2,. Some 3 connections discharge about 6-7 m3/day into the sewer system corresponding to 4.8% percent of volume of billed water. The sanitation master plan also recognizes on site septic tanks and pit latrines, and calls for sludge to be collected by vacuum trucks and taken to drying beds, disposed in sanitary landfills, injected into the sewer network at selected sites, or applied to forestry lands. 1. The Kaliti wastewater treatment plant was commissioned in 1981 with a design capacity of 7,6m3/day flow and 3,5 kg/day biochemical oxygen demand. Treatment consists of inlet screens and grit chambers, two settling cambers, and two parallel pond systems, each made up of a facultative pond, a maturation pond and two polishing ponds. Sludge lagoons and drying beds were constructed in 1999 with treatment capacity of 11, m3/year of sludge. The new Kotebe sludge treatment facility is located about 4 km southeast of the Bole International Airport. It has 1 sludge lagoons and 2 drying beds. With four cycles per year the sludge drying beds treat approximately 5, m3/year. 11. Secondary cities: In Ethiopia there are 1 secondary cities with populations above 1,, all of which are in a similar situation when it comes to water supply and sanitation. Of these Awassa in the Southern Region, Jimma in Oromia Region, Gondor in Amhara Region, and Mekele in Tirgay Region with an 4

9 average population of 2, have been provisionally selected to participate in the Urban WSS Project. Final eligibility check will be made on the basis of completion of individual business plans that demonstrate that their performance, investment plan and tariff structure will result in financially viable utilities. In the event that any one o f the selected cities fails to meet eligibility criteria, and as the project time permits, the project will consider replacement with another city selected following the selection criteria. 12. Typical conditions in the four towns show that only 75% of households are served by the utility, two to five households share each residential connection, and the duration of supply is about 12 hours per day. All connections are metered, with several thousand new ones added each year. 13. Water production is at 3 liters per capita per day, but with more than 3% non-revenue water, actual consumption is only about 2 liters per capita per day. This is less than half what most African cities o f similar size require. Since 3% of the volume produced is not billed, and 25% of what s billed is not paid, the utilities are collecting tariffs on only half the volume of water produced. This combined with low tariffs (3 of 4 cities with $.25 per m3) results in operating revenues covering only about 75% of operating expenses, falling short o f the Government s full cost recovery policy, that i s recovery of recurrent, renewalheplacement of short life assets, and debt service. 14. Sanitation services are limited to on site septic tanks and pit latrines in the secondary cities, Piped sewerage is needed in the high-density, commercial centers of these cities and wastewater stabilization ponds are needed to treat their wastewater before it is discharged to surface sources. 2. Rationale for Bank involvement 15. Sector reform, particularly for urban water supply and sanitation requires time, expertise and large investments. The World Bank is the largest international development institution now active in the urban water sector. Other development partners, such as AfD, BADEA, the European Union, the European Investment Bank, and the African Development Bank together make a major contribution to the urban water sector, but look to the World Bank to lead the assistance effort. In particular the Bank has a large staff with significant experience/expertise in water engineering, regulation, commercial operation, stakeholder involvement, and services in low-income areas. It also has sufficient resources to permit engagement in the sector over a prolonged period, helping to ensure consistent policies and investments. Finally, urban water utilities will need substantial financing from private sources, and the Bank is perhaps uniquely positioned in terms of expertise and knowledge to assist the government in establishing the necessary conditions and environment to make this possible. The World Bank is well positioned to support the urban water supply in general and Addis Ababa in particular due to its long engagement in the sector in Ethiopia, including assistance with the development of a sector strategy for rural communities, towns and urban centers, and in assisting Addis to develop its current water tariff structure and billing system. 16. Currently, AfDB and BADEA are financing water works in two large cities (Harar and Kibre Mengist) in Ethiopia, and the World Bank is financing business planning, capacity building, and physical improvement in several others. AfD has appraised a 14m project to expand treatment capacity and reduce non-revenue water in Addis Ababa, but requires the City or another donor to finance half. IDA contribution will cover co financing. 17. The World Bank group is also able to offer Ethiopia a wide range of products that will contribute to developing the sector. The IFC is interested to finance private sector investors in Addis Ababa water supply and likely this requires a partial risk guarantee. 18. The Global Partnership for Output Based Aid has indicated its interest to contribute between US$5-1 million to the project for work in low income areas. Involvement will be subject to further approval by GPOBA panel of experts and donors. 5

10 3. Higher level objectives to which the project contributes 19. The recent guiding strategic framework for the five-year period 25-21, Plan for Accelerated and Sustained Development to End Poverty (PASDEP), puts much accelerated growth as its main thrust to break out of the self-perpetuating poverty traps. For all reasons, a major push on growth is at the centre of the PASDEP for the coming five-year period. 2. The Interim Country Assistance Strategy (ICAS) (May 1,26, Report number ET) covering FY 6-7, sees contribution to the country s growth agenda as one of the central underpinnings of Bank s support to the country. Improved access to safe water supply and sanitation is the core of government s plan and Bank assistance to strengthen the urban agenda and improve the urban infrastructure coverage level. The government plan is to double the current water supply access rate of 42% in 25 to 84% by , This UWSSP is designed to support operationalization o f the broader growth strategy, interpretation of the countries Integrated Water Resources Management policy, and contributing to the achievement of the MDG and interim country goals such as the UAP. B. PROJECT DESCRIPTION 1. Lending instrument 22. Sector investment loan is proposed, with an additional grant of between US$S and US$1 million from the Global Partnership for Output Based Aid. An Adaptable Program Loan instrument is not proposed because of the uncertainty in the long term institutional arrangements in Addis Ababa and the scope and timing of system expansion there. 2. Project development objective and key indicators 23. The Development Objective of the Urban Water Supply and Sanitation Project is increased access to sustainable water supply and sanitation services in Addis Ababa and four secondary cities. Accordingly, the project is designed to: Produce more water for all customers and extend the distribution network to unserved areas. Improve the operational efficiency of the participating water utilities by reducing nonrevenue water and improving financial management. Strengthen the autonomy o f existing water boards and utilities and introduce performance based contracts with utilities. Outsource selected activities to private sector providers to increase capacity and attract more investment. Construct public sanitation facilities in low income areas, finance priority elements o f municipal sanitation plans, and promote improved hygiene and sanitation practices. The following outcome indicators will be used to track project implementation: Volume of water produced. Number of new connections. Number of rehabilitated connections. Hours per day o f supply. Ratio of operating revenues to operating expenses. Number of people with access to improved water supply and sanitation in low-income areas. 6

11 25. In achieving these outcomes and objectives, labor intensive construction methods for small diameter distribution piping throughout the city and improved sanitation services in low-income areas will be adopted. 26. As a result of the proposed project, up to 4 million urban residents in Addis and four other cities where the project is implemented will have increased access to potable water, and households in low-income areas will have improved sanitation facilities. In Addis Ababa water production is 5 liters per capita per day, of which only 35 lpcd reach consumers due to water losses. In secondary cities only 2 of the 3 lpcd produced reach consumers. Production should be at least 1 lpcd in Addis Ababa and 5 lpcd in secondary cities. The project aims (i) to increase water availability through source development, treatment expansion, and network extension and service connections; and (ii) to improve efficiency by reducing non-revenue water, improving financial and customer management, protecting catchments, and instilling awareness of water conservation in its customers. 27. The project will increase access to improved sanitation facilities, mainly for low income urban residents. In so doing, the project will improve drainage to avoid un-controlled sullage water discharges to streets and paths resulting fiom cooking, cleaning and bathing. 3. Project components 28. The project is designed (i) to produce and distribute more water in order to reduce the alarming gap between the supply and demand for water in Addis Ababa and four other secondary cities; (ii) to improve operational efficiency in all five cities by reducing non-revenue water, and improving financial management, billing and collection, and customer management; and (iii) to improve governance by the water boards and to introduce performance incentives for operators. 29. The project is an interim intervention to reduce the gap between supply and demand for water in Addis and other cities. The situation in Addis is such that the interim solution would only halve, but not eliminate, the supply-demand gap during the next five years at most. AAWSA has designed a long term water supply investment program estimated to cost US$55 million. Mobilization of such financing will require a consortium of donors including the private sector. To this end, the project will finance transaction consultants to design a private sector intervention that IFC and other private investors could finance, possibly with the support of MIGA. In the short term this would be a modest investment of US$2-4 million for a private contractor to further develop and manage one or more well fields and possibly manage water distribution in a portion of Addis Ababa. The intention is to introduce private sector participation on a relatively small scale to enable both the Government and the private sector to gain experience in private sector participation process in the water sector in Ethiopia, build confidence in one another as business partners, and pave the way for a larger investment in the future. 3. The following table sets out the costed components for the Project. Component Category 1. Addis Ababa WSS 1A. Increased access to water goods, works, consultants 1B. Improved operational efficiency goods, works, consultants 1 C. Institutional reform goods, consultants 1D. Project Management consultants, goods, training, operations Sub-Total Cost A!D GPOBA IDA US$m US%m US$m financing US$m

12 Component 2. Secondary City WSS 2A. Increased access to water Category goods, works, consultants cost US$m 29.4 AfD US%m. GPOBA US$m 4. IDA financing US$m B. Improved operational efficiency goods, works, consultants C. Institutional reform 2D. Project Management Sub-Total 3. Program Management Sub-Total 4. Unallocated Total * Unallocated for AAWSA goods, consultants consultants, goods, training, operations consultants, goods, training, operations oo " oo Component 1: Addis Ababa Water Supply and Sanitation (US%SS million) 1A. Increased access to water supply and sanitation 31. To meet basic services in Addis Ababa over the next five years, water production must be increased from 21, to at least 36, m3/day, bringing production up to 75 liters per capita per day. This component will finance capacity expansion at the Legadadi reservoir and water treatment plant, deep boreholes at selected sites within Addis Ababa, and the start of a new well field to the northeast or northwest of the City. Project funds will be used to increase production by 1, m3/day, and AAWSA and the Municipality will use their own revenues to construct sufficient boreholes to produce an extra 5, m3/day. The Project will also finance the extension of the distribution network to unserved areas of the cities and connect more customers. Special attention will be given to low-income areas by involving communities in the planning process and improving drainage to control septage flows. The sewer system in the Kalite catchment will be extended, and public sanitation facilities, managed by local service providers who charge a user fee, will be constructed. 1B. Improved operational efficiency and demand management 32. Given the high marginal cost of water in Addis Ababa and non-revenue water exceeding 35%, operational efficiency must be improved and water conservation must be instilled in consumers. Improved financial management, billing and collection, and customer management are also essential in establishing a financially viable water company that can pay the high cost of expansion needed later for Water 111. Financing under this sub-component will establish pressure zones within the distribution network and repair leaks at service connections and in distribution piping. AAWSA's financial management, billing/collection, and customer-management system will also be improved, and awareness for water conservation will be created. Catchment protection measures will be taken at the city reservoirs. 1C. Institutional support 33. Funding would be provided for operational policy development and revisions in the legal and an institutional framework for water supply, developing polices and measures for enhanced private sector participation and financing in this sector, and improving utility governance and efficiency. Stakeholder consultation measures are also included in this component. 8

13 1D. Project management 34. Funding would be provided to AAWSA for project management activities including for conducting EMS, monitoring and evaluation, project management support, financial audits and capacity building. Component 2: Secondary City Water Supply and Sanitation (US$33 million) 2A. Increased access to water supply and sanitation 35. Water production in the four secondary cities is about 3 liters per capita per day, of which about 25 lpcd actually reaches consumers. In comparison, water production in cities of this size in other countries in Africa is about 75 lpcd. On average, water production should be doubled in these cities. This component will finance increased water production as well as the extension of the distribution network and new connections, particularly in unserved areas. Selected low-income areas will receive special attention by involving the beneficiary communities in the planning process for the provision of water Supply and public sanitation facilities. Financing will also be available for the construction/expansion of wastewater treatment ponds and piped sewerage in higher density commercial areas. 2B. Improved operational efficiency 36. The water utilities in the four participating cities perform reasonably well, but operational efficiency could be improved by reducing non-revenue water and improving financial management, billing and collection, customer management. Under this sub-component the materials, equipment and costs associated with establishing pressure zones will be provided, as will leak repairs in the distribution network and at service connections. Financial management, billing/collection, and customer-management will also be improved. 2C. Institutional support 37. Funding will be provided to refine enabling legislation to provide more autonomy to the Water Boards and to develop procedures and codes of conduct. Operator contracts with performance targets and performance incentives would also be developed and tested. 2D. Project management 38. Funding would be provided to the four utilities for project management activities including for conducting EIAs, monitoring and evaluation, project management support, financial audits and capacity building. 39. Key Inputs for components 1 and 2: Expand water productioddistribution and wastewater treatmenthollection; add new service connections for water and wastewater; create pressure zones within the distribution network; repair leaks in distribution piping and at service connections; replace old meters; improve financial management, billing/collection and customer-management systems; create public awareness for water conservation; and implement a catchments management plan. Consultant services for design and supervision of the civil works, financial management, and water conservation will also be provided. 4. Key OutDuts for components 1 and 2: To improved access - that is, increase the number of people with improved water supply - water production, distribution, and connections will be increased to 9 percent of households; 24 hour per day service will be provided to all areas within the city; and sanitation plans will implemented. To improve operational efficiency and manage demand non-revenue water will be reduced by 1 percent, and 8 percent of costs will be recovered through tariffs (i.e. recurrent, renewalheplacement of 9

14 short life assets, and expansion excepting distributiodconnections for low-income households). To establish better performing utilities, autonomous water boards, with operators working under performance based contracts will be established. Component 3: Project Management and Monitoring and Evaluation (US$2 million) 41. The project management will involve sector institutions at federal and regional levels, city administrations and utilities. Funding would be provided for costs associated with project implementation, to synthesize existing water and sanitation access data to determine baseline figures and to monitor progress under this project and in meeting the overall water supply and improved sanitation access goals under the MDGs. This component also includes training, workshops and other capacity building measures and support for environmental and social management. 42. Kev Inputs for component 3: will include technical assistance, goods, operation support, and training for effective project implementation and improved monitoring of performance towards achievement of MDG goals. 43. Key outduts for component 3: will include improved system and enhanced capacity for effective monitoring and implementation of the project and its contribution for the broader sector MDG goals. 4, Lessons learned and reflected in the project design 44. The World Bank has been the major financer of urban WSS sector projects in the country and region. Its involvement has helped to build a wealth of experience that have been fed back into producing national implementation strategy and guidelines. 45. The Water Supply Development and Rehabilitation Project WSDRP supported the practical implementation of GOE s water resources management policy and its subsequent strategy and programs, in the context of the decentralization, through capacity building and pilot projects in 25 towns. 46. The follow on Water Supply and Sanitation Project builds on the lessons learned from previous projects. It was designed on the basis of decentralized, demand driven and performance based implementation with capacity building for both in the public and private sector. To ensure sustainability and financial viability of urban utilities, a stepped approach was institutionalized in the sector such that towns progress through the project cycle as they build their capacity to plan and manage their facilities and demonstrate that they can maintain them. 47. In the process several studies have been conducted and implementation of Bank supported projects and sector performance reviews conducted. Building on this foundation, the key lessons learned and reflected in the project are: Decentralization and corresponding capacity: Decentralizing responsibility for service delivery can improve the effectiveness and sustainability o f water supply for both urban and rural areas. It, however, requires adequate capacity and systems at all levels to be responsive to community needs and be accountable for policies, actions, and use of funds. Coordination amongpublic institutions: WSS by its nature is a decentralized cross cutting service that requires the clear definition of roles and responsibilities between different tiers of government and horizontally among public institutions. International and country experience showed how private and informal sectors can increase efficiency and improve sustainability in a decentralized environment. 1

15 Stake holder consultation and involvement: Local service delivery can be sustained, if it is built on consultation with stakeholders and clearly defined roles and responsibilities. Recognizing autonomy that goes with decentralized responsibility: Regional proclamations provide urban utilities with administrative and financial autonomy. In practice, however, municipalities need to respect the decision making by the Water Boards when it comes to business plans, acquiring competent staff and professional support, ring fenced accounts, and procurement. Full cost recovery as a goal: In Ethiopia urban utilities are required to fully cover their cost and be self sufficient. This however requires a process of expanding the system to achieve a sufficient revenue base to professionally operate it, and building capacity to efficiently operate it. A stepped approach in which utilities are required to gradually improve their technical, financial, and operational capacity and promote themselves towards full cost recovery has demonstrated itself to be a viable strategy. Use of existing government structures: Using existing Government institutional structures for program implementation is essential to ensure ownership and achieve long term sustainability objectives. However, adequate capacity and incentive systems need to be institutionalized in the public sector and complementary program support assistance needs to be arranged through contracted staff and acquiring short term professional support for specific shll areas. Local town support groups established under the ongoing WSSP have demonstrated that the key to build utilities capacity is to provide on the job and practical training. Establishing a net work of practitioners and facilitating exchange of best practice can serve a lot in improving sector performance. M&E and communication strategy; Information sharing is not much practiced in Ethiopia. As a result the availability and accessibility of information is a serious bottleneck for the development of the water sector. A concerted, well financed, effort is needed to implement and refine the proposed monitoring and evaluation system Donor coordination and sector program: Major financing and complementary implementation capacity is needed to achieve sector targets. The growing donor support for the government s sector program is key to minimizing transaction costs by supporting a single capacity building effort and national implementation strategy. 5. Alternatives considered and reasons for rejection A stand alone urban water supply and sanitation project for Addis Ababa only. 48. Given the alarming gap between the supply and demand for water in Addis Ababa and the emergency nature of the situation, a stand alone water project for Addis was given consideration. This would have permitted more resources to be dedicated to the urban water and sanitation sector and could be prepared quickly. Due to the interest of the GOE to address a few other cities in a similar situation and use the project as a vehicle for experience sharing among the bigger cities, this option was not used. At appraisal a final decision was made to invite Awassa from southern, Gondar from Amhara, Jimma from Oromia and Mekelle from Tigray regions. Capital investment will be contingent on the selected cities meeting the conditions for Step 4 (see annex 4) investments within one year of project effectiveness. Including a water component in a larger national urban development project. 49. The Bank is preparing a national urban Development Operation which aims at designing a municipal financing mechanism in line with the government fiscal decentralization. The urgency attached to the WSS situation of Addis Ababa city and the early stage of preparation of the UD operation led to dropping of this option with a consideration of ensuring linkage between the two operations in the UWSS project design and as the UD project develops. 11

16 C. IMPLEMENTATION 1. Partnership arrangements 5. The project has been prepared in consultation with AfD, which has already appraised and approved a 7 million investment to increase production and reduce unaccounted for water in Addis Ababa. AfD will primarily finance consultants to help manage the unaccounted-for-water program and IDA will finance a large part of the goods and works needed to implement it. It s expected that the UWSSP will have sufficient funds to finance all the four cities that have been identified by government During project identification and pre appraisal the IFC and the Bank team worked together to identify ways of introducing private sector participation in the sector, with a view towards later securing the $55 million investment required to finance Water 111. IFC will prepare an options study and seek private sector partners to finance a private intervention. It is expected that IFC will mobilize up to US$4 million. 52. Other donors are supporting the water and sanitation sector in Ethiopia. These include the African Development Bank which is currently investing $6m in rural water supply and sanitation. JICA is supporting rural water supply in two regions, DFID has pre-appraised a &loom project for rural and town water supply and sanitation. The Netherlands, through UNICEF, may contribute up to $1 OOm for rural water supply and sanitation. The EU and EIB are providing 33.2m to improve water supply services in 15 medium sized towns. All are expected to follow the implementation arrangements set out in the MWR s National WSS Program as agreed for the IDA-financed WSSP. 2. Institutional and implementation arrangements 53. This UWSSP will follow the implementation arrangement that was introduced by the WSSP and adopted by other donors. Implementation manuals for the overall project and for each region have been developed, which spell out institutional and implementation arrangements for the project and outline the rules of engagement for planning, appraisal, contracting, and implementation. In addition, standard operating procedures and terms o f reference for consultants to streamline implementation have been prepared. A stepped approach to implementation will be followed for urban water supply and sanitation, as described in Annex The following institutions will be involved in project implementation: Ministry of Water Resources (MWR): The MWR will be responsible for overall coordination and monitoring and evaluation o f the program, facilitation of capacity building and policy formulation. Its Water Resources Development Fund will be responsible for coordinating and monitoring the Federal Government s on-lending program for urban WSS sub-projects. Regional Water Resources Development Bureaus (R WBs): The RWBs are responsible for overall program planning, management, coordination and capacity building at the regional level. The RWBs play an important role in arranging technical assistance for towns and cities to qualify for grantshredits to improve their water supply facilities, and in appraising town/city business plans and designs. Water Boards (WBS): Water Boards are responsible for planning and managing town and city water supply systems. Water Boards enter into a performance agreements or contracts with a utility, who handles routine operations and maintenance and secures supplemental professional services to assist them to improve efficiency and expand the system over time. Water Utilities: Water utilities are accountable to their Water Board under a performance agreement or contract for the operation and maintenance of a water supply system. 12

17 55. Capacity Building. Like the existing WSSP, capacity building is embedded in the design of the UWSSP. The approach to capacity building will be learning by doing through project implementation. For water supply in the secondary cities, capacity building will be incorporated into technical assistance contracts to plan, design, supervise and improving operational efficiency. 56. To this end MWR is organizing practitioner specialist groups which can periodically meet to exchange experiences and lessons learned to improve services in participating cities. The World Bank institute (WBI) will facilitate a number of these workshops, and others will be led by consultants and town representatives involved in project implementation. For urban water supply practitioner specialty areas will include Water Board development, business planning and cost effective design, water supply operations like billing and collection and non-revenue water reduction. 57. Fundsflow and accountabilities. Special accounts will be maintained by the MWR for secondary cities and by AAWSA. The MWR will be responsible for consolidated accounting and reporting on the secondary cities. Annex 8 sets out disbursement arrangements, including the table of allocation of credit proceeds by expenditure category and financing percentage. The traditional SOE disbursement method will be followed, which uses a Special Account, SOE procedures and direct payment procedures. Annex 7 also sets out the uses of SOE and requirements for the special account, counterpart fund account and documentation. For GPOBA fund flow arrangement see Annex Procurement and contracting. Consistent with the Government s policy of decentralization, procurement and contracting urban water supply individual Water Boards will manage and directly contract for the goods, works and consultants needed to implement their part of the project. Standard bid documents for goods and works and requests for proposals for consultant services will be utilized. 59. AAWSA will prepare a procurement plan for its part of the project, and the MWR will maintain a procurement plan for the secondary cities based on those prepared by city consultants. AAWSA and the MWR submitted a procurement plan as part of the implementation manual showing detailed process and budget for the first eighteen months and indicative activities and budget for the project life. 6. The Ministry of Water Resources will oversee the implementation of the Environmental and Social Management Framework (ESMF) and the Resettlement Policy Framework (RPF). Towards this end, the ministry will recruit a Capacity Building Consultant who will be located in the National Project Coordination Unit (NPCU). This consultant will be responsible for implementing the provisions of the ESMF and RPF and will coordinate these activities with the relevant personnel of the regional city administrations. He will coordinate the preparation of the environmental and social sections of the Annual Report with AAWSA. 3. Monitoring and evaluation of outcomedresults 61. The Monitoring and Evaluation (M&E) system will complement the performance-based, stepped approach used in project implementation. Information on intermediate results, indicators, and arrangements for results monitoring are given in Annex 3. Responsibilities for M&E are held at various levels. The MWR and Regional Water Bureaus have staff who are responsible for the coordination of M&E activities, including environmental monitoring and evaluation activities. 62. Under the WSSP these staff have received initial training in M&E and, follow-up, on-the-job training is planned. Baseline and performance monitoring will be carried out by individual water boards, their utility operators and planning consultants. 63. M&E information is the same for planning, baseline and performance monitoring, but becomes more complete over time as measuring equipment is installed and operators are trained. 13

18 Baseline Information: Utilities from all the five cities have provided this information based on available records. However, the information needs to be updated regularly and reconfirmed when the utilities are equipped with the required equipment and establish the monitoring system. In addition, household surveys will be conducted at the beginning and end of the project in the five participating cities to estimate the number of people who have obtained improved water supply and sanitation services as a result of the project. Performance monitoring: The city utility operator will collect performance information on a regular basis. The city water board should submit semi-annual reports to MoWR and the World Bank with all information updated. 4. Sustainability 64. The Government has committed considerable resources in recent years to establishment of an enabling environment for sectoral development. The Water Resources Policy, developed with broad stakeholder participation, is rather bold in its pronouncements, for example, on decentralization, cost recovery, involvement of all stakeholders including the private sector, and coordinated planning for water supply and sanitation. The Water Sector Strategy and Water Sector Development Program have been developed based on the Policy. 65. Regional governments have taken an active role in the development of the Policy, Strategy, and Sector Development Program. In addition, they have implemented legislative reforms to improve the institutional arrangements - by establishing autonomous Water Boards, staffing water supply service units and reforming tariffs. 66. Recognizing that sustainability is a process, the key elements for sustainability of project benefits are: (i) demand responsive, approach to selecting cities; (ii) performance based, stepped approach to receiving assistance so that funding is provided first to put in place appropriate institutional arrangements, plan affordable systems with stakeholder consultation and build capacity for implementation and finally for investments; (iii) effective systems for monitoring and evaluation; (iv) adequately trained staff at all levels; (v) autonomy of service providers; (vi) performance agreements or contracts between service providers and water boards; and (vii) involvement of the private sector. 5. Critical risks and possible controversial aspects Description of Risk Slow pace of creating conducive environment and facilitation for the establishment of efficient, sustainable urban water supply services. These include (i) lack of autonomy of the utility in financial, procurement and staffing matters; and (ii) poor commercial practices including effective customer management and use of the private sector. Limited commercial practices affecting the establishment of a financially viable utility operating on full cost recovery. Probability H M Mitigation (i) significant work on sector policy development; (ii) utility, institutional and legal framework reform; and (iii) measures to install modern commercial and financial practices and measures. The UWSS project would strengthen them to: (i) improve their financial and customer management, (ii) reduce non-revenue water; and (iii) better serve low-income areas. 14

19 ' 3 Description of Risk Probability I Mitigation While the ongoing groundwater investigation of M Advance funds have been provided a deep aquifer is very promising, actual aquifer yields may be substantially lower than projected. to expand the groundwater investigation and begin the development of one or more well fields. 6. Loadcredit conditions and covenants 67. Effectiveness: The following events are conditions to the effectiveness of the Financing Agreement. AAWSA and MWR have adopted Project Implementation Manuals in form and substance satisfactory to the Association. MWR has employed a PCU Project Coordinator, a procurement specialist, and an additional accountant, all having experience and qualifications satisfactory to the Association. MOFED has entered into Subsidiary Agreements with AAWSA for the purpose of Project implementation, in form and substance satisfactory to the Association. D. APPRAISAL SUMMARY 1. Economic and financial analyses 68. AAWSA: Estimated (rounded) results of the financial and economic modeling are shown in the following table for the AAWSA investments of the Project. FNPV (Birr Million) 136 FIRR (Yo) ENPV EIRR (Yo) (Birr Million) Secondarv Citv: Estimated (rounded) results of the financial and economic modeling are shown in the following table for a typical secondary city of the Project. Results of Financial and Economic Analyses-Secondary City FNPV I FIRR(Yo) I ENPV I EIRR(Yo) I (Birr Million) (Birr Million) Complete details concerning the analysis, including methodology, assumptions and sensitivity for AAWSA, are contained in Annex Technical 71. Given the increasing gap between the supply and demand for water in Addis Ababa and the secondary cities, the success of the project is predicated on the production of more water. AAWSA must increase its production from 21, to 36, m3/day to provide basic water service for the residential, commercial and industrial needs of a city this size in Africa, and the secondary cities must nearly double their production from 3 to at least 5 lpcd. Twenty five percent of households in all five cities are not currently 15

20 served by the utilities, and those that are served, get water an average of 12 hours per day. Accordingly, system expansion, pressure zoning, and non-revenue water reduction are important. 72. Given Ethiopia s level of income limiting people s ability to pay high water tariffs, and the high demand for technical expertise in other sectors, the Project s design rationale is to emphasize on simple and known designs and to avoid expensive to operate or technically sophisticated solutions. Therefore, the Project involves water supply treatment and distribution civil works and goods that employ standard techniques and installations and that are well established in the country and the industry. AAWSA and the Regional Utilities are accustomed to these standards and designs and have executed previous projects with a similar level of complexity. They are considered by the World Bank, and international engineering experts employed by the Borrower to help prepare the Project, to represent an appropriate level of technology for Ethiopia. 3. Fiduciary 73. The financial management assessment for this project shows that the Project Implementing Entities have the required capacity to use the proceeds of the grant for the intended purpose. The existing accounting and reporting system of AAWSA is capable of producing accurate and reliable information regarding project resources and expenditures. The system will provide reliable records and reports on all assets and liabilities and financial transactions of the project, and sufficient financial information for managing and monitoring activities. The four cities water utilities prepare simple regular financial reports consisting of receipts and payments. MoWR will provide technical assistance to further strengthen the four cities water utilities. MoWR will consolidate the financial reports from the four cities water utilities with its records and produce consolidated reports. 74. An independent external auditor will perform the annual audits in accordance with International Standards on Auditing and the audited financial statements will be submitted to the Bank six months after the end of each fiscal year. 75. Detailed financial management assessment for the project is included in Annex The Ministry Water Resources (MWR) will be responsible for overall coordination, monitoring and evaluation of procurement activities under the project. Procurement activities for component 1 would be carried out by the AAWSA. The Water Utilities (Wvs) at Awassa, Jimma, Gonder and Mekele would be responsible for handling their procurements in the respective Regions. 77. An assessment of the procurement capacity of the Implementing Agency that included the organizational structure and the interaction of staff responsible for procurement at AAWSA and the water utilities at the four towns was carried out. 78. The AAWSA has limited capacity in handling donor financed contracts and large scale contracts. In addition the procurement procedures being followed by AAWSA were not filly consistent with the Bank guidelines and the staff of AAWSA do not have sufficient training on procurement. The Water Utilities in Awassa, Jimma, Gonder and Mekele also have very limited experience only on handling small value procurements. 79. The following actions have been agreed to build the capacity of the AAWSA and the Water Utilities in the four cities: One qualified consultant procurement specialist would be employed at the Ministry of Water Resource before effectiveness. 16

21 A procurement orientation workshop will be conducted for staff at AAWSA and the four WUs that are involved in the procurement decision-making process including tender committee members, Division Heads, Department Heads. Each of the W Us would review their institutional setup and restructure their internal procurement management system as required. Each of the Water Utility Operators would assigdemploy a procurement staff with at least a basic degree preferably in Engineering with sufficient knowledge on procurement whose primary responsibility would be to handle the procurements under the project. The Project Implementation manual that was developed under the Water Supply and Sanitation Project would be adopted for the project to ensure that it adequately meets the specific needs o f the Project. The PIM would include a description of a procurement monitoring and reporting system based on which the MWR would regularly review the procurement activities in each of the cities. 8. Detailed procurement management assessment for the project is included in Annex Social 81. The project design will take into account the employment needs of people living in low-income areas including community participation and labor intensive works. Furthermore, component 3 will fund the development of stakeholder consultation measures to ensure general public support of the project during implementation. Potential social issues resulting from land acquisition will be addressed in the context of the Resettlement Policy Framework (RPF) below. 5. Environment 82. The proposed investments are likely to incur some adverse environmental and social impacts requiring mitigation (i.e. soil erosion, soil and water pollution, a potential increase in malaria, loss of vegetation, traffic accidents and air pollution) due to the project s construction and rehabilitation activities under components 1 and 2. Since the potential adverse environmental and social impacts of future investments could not be identified prior to appraisal, the Borrower has prepared an Environmental and Social Management Framework (ESMF), including an Environmental and Social Management Plan (ESMP) for the project and Environmental Guidelines for Contractors to be included in the bidding documents. 83. The ESMF outlines the steps o f the environmental and social screening process (environmental and social screening form; assignment of the appropriate environmental category to the sub-project; carrying out the appropriate level of environmental work based on the screening results; public consultations process; procedures for review and clearance of the environmental and social screening results as well as separate EIA reports; and environmental monitoring and evaluation), 84. To ensure effective implementation of the ESMF and ESMP, the project will hire a Capacity Building Consultant to be located in the National Project Coordination Unit (NPCU) of the Ministry of Water Resources. The Capacity Building consultant will be responsible for carrying out environmental training relevant to the implementation of the ESMF and assisting city administration staff and utility staff in the regions as well as AAWSA staff in Addis Ababa in this regard; draft terms of reference are being prepared. 85. Environmental monitoring activities will be incorporated into the project s M&E System; monitoring indicators are included in the ESMP. Annual environmental monitoring reports will be prepared by AAWSA. These reports will provide summaries of (i) environmental screening forms; (ii) EIAs carried out in the course of the year; and (iii) a summary of the environmental monitoring carried out on systems at both construction and operation phases. The annual reports will be reviewed by the EPA and the Ministry of Water Resources, and copies will be sent to the World Bank. 17

22 6. Safeguard Policies 86. The project has triggered OP 4.1 Environmental Assessment, OP 4.11 Physical Cultural Resources, OP 4.12 Involuntary Resettlement, OP 4.37 Safety of Dams, and OP 7.5 Projects on International Waterways due to the planned investments under components 1 and 2. The safeguard screening category is S2, and the environmental screening category is B. The key safeguard policy issues raised by the project are (i) potential adverse environmental impacts such as soil and water pollution, loss of vegetation, and soil erosion due to the planned construction and rehabilitation activities; (ii) potential adverse social impacts that might result from the need for land acquisition and/or the loss of access to economic assets and livelihoods due to planned rehabilitation and investment activities; and (iii) an increase in water abstraction due the extension of piped water in some urban areas. In recognition of the need to identify, assess, mitigate, and monitor potential adverse environmental and social impacts of future investments, the Borrower has taken the following measures. 87. OP 4.1: Consistent with OP 4.1, the Borrower has prepared an Environmental and Social Management Framework (draft ESMF) because the exact locations and potential negative localized environmental and social impacts of the future investments could not be identified prior to appraisal. The ESMF includes (i) an Environmental and Social Management Plan (ESMP) which outlines the institutional arrangements for the implementation and monitoring of mitigation measures, cost estimates and time horizons. The ESMP will be included in the Project Implementation Manual; and (ii) Environmental Guidelines for Contractors to be attached to the bidding documents to ensure that the construction and rehabilitation activities are carried out in an environmentally and socially sustainable manner. 88. The ESMF was prepared in consultation with AAWSA in Addis Ababa, with the Town Water Boards of Jinima and Awassa, two secondary cities that could potentially benefit from the UWSSP, with the Environmental Protection Agency (federal level), and the World Bank country office. Staff involved in the operation of water systems in Addis Ababa, Awassa, and Jimma have also been interviewed. The ESMF was disclosed on February 14,27, in Ethiopia and at the Bank s Infoshop. 89. The National Project Coordination Unit (NPCU) of the Ministry of Water Resources will be responsible for the implementation of the ESMF. Towards this end, the NPCU will hire a Capacity Building Consultant who will be responsible for carrying out training of local project implementers in environmental and social screening, initial review of the screening results and EL4 Reports, review and update provisions of the ESMP and the Environmental Guidelines for Contractors in light o f actual developments under subprojects. The Capacity Building Consultant will assist city administration staff as well as utility staff in the regions and AAWSA staff in Addis Ababa in the environmental and social screening activities, oversee the implementation of the ESMP, and arrange for appropriate environmental training. The federal Environmental Protection Agency (EPA) will monitor the implementation of the ESMP. 9. OP 4.11: This policy has been triggered due to the possibility of chance finds during construction and rehabilitation activities. Any potential chance finds will be identified and dealt with in the context of the ESMF, appendix OP 4.12: Consistent with OP 4.12, the Borrower has prepared a Resettlement Policy Framework (RPF). The RPF identifies the future investments that are likely to entail land acquisition such as wells, water distribution networks including pipelines, public stand tabs, public water kiosks and other distribution-related facilities. The document outlines the resettlement and compensation principles outlining, for example: (a) the general framework within which any impact of the project on land andor people (land acquisition, resettlement, and livelihood restoration of affected people) will be addressed; (b) the minimization of displacement through design procedures; (c) the establishment of a cut-off-date and eligibility criteria for each sub-project under the project; (d) livelihood restoration; (e) compensation; and (f) consultation and grievance mechanism as well as the processes, entitlements and other provisions related to monitoring and evaluation; 18

23 grievance mechanisms; assistance to vulnerable people; implementation arrangements, and responsibilities for the different tasks involved in the implementation of the RPF. The RPF was disclosed on February 14,27, in Ethiopia and at the Bank s Infoshop. 92. Implementation of the RPF in Addis Ababa will be the responsibility of the Capacity Building Consultant to be located in the NPCU) with assistance from Social Consultants. The Capacity Building Consultant will also support the towns in the organization of resettlement planning (valuation commissions, censuses, payment of compensation); select consultants to develop appropriate resettlement action plans; participate in monitoring and evaluation (possibly through consultants for the most significant resettlement activities, if any). The Social Division of the federal Environmental Protection Agency (EPA) will monitor compliance of resettlement activities with the RPF, Ethiopian law, and OP OP 4.37: Consistent with OP 4.37, the Borrower has prepared a Dam Safety Assessment Report dated December 18,26, covering the Legedadi Dam, Gafarsa Dams, and Dire Dam. For security reasons, this report has not been disclosed to the public. The report s main finding is that, overall, the dams are in good condition. The report recommends that the Action Plan should include, as a minimum: (i) a spillway operation plan at Legedadi, including community training in flood emergency preparedness; (ii) establishing a monitoring program at all the three dams based on the priority elements identified during the workshop; the program should be based on a set of new baseline data (dam movements, deformations, seepage rates etc.); and (iii) collecting, or re-doing if necessary, as build drawings of the works. The implementation of this action plan will be supported under project component 1A. This Action Plan is expected to include institutional arrangements at the local level in cases of emergencies. 94. Catchment management: The appraisal mission visited Dire Dam and Legedadi Dam near Addis Ababa. It is recommended that as part of the capacity expansion at the existing Legedadi reservoir and treatment plant under component 1 A, this component also finance (a) an environmental and social assessment of the current activities around the reservoir (agricultural production, livestock grazing, sanitation, waste water and waste generation by the surrounding population) because the high levels of water turbidity due to fertilizer use, sanitation problems, and siltation at the dam have led to a fourfold increase in the water treatment costs over the last ten years; and (b) selected priorities of ASSWA s catchment management plant. To the extent that catchment management activities involve infrastructure investments such as small dualpurpose silt trap reservoirs or buffer strip works, environmental and social assessments will need to be completed and disclosed prior to the commencement of construction. The Bank will receive copies of these reports for review and clearance. The project may also want to consider treating the sludge at the water treatment plant prior to returning it to the river. 95. OP 7.5 (International Waterways): The Bank, on behalf of the Government of Federal Democratic Republic of Ethiopia, notified all the downstream riparians in accordance with OP/BP 7.5, concerning the proposed project. No unfavorable responses were received from any of the riparians based on international waterways issues. 96. The Bank staff have considered those aspects of the Project that might have an affect on the downstream riparians and are satisfied that the Project will not cause appreciable harm to the other riparians and will not be appreciably harmed by the other riparians possible water use. 19

24 Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.1) d Natural Habitats (OPBP 4.4) J Pest Management (OP 4.9) d Physical Cultural Resources (OPBP 4.11) J Involuntary Resettlement (OPBP 4.12) d Indigenous Peoples (OPBP 4.1) d Forests (OPE3P 4.36) d Safety of Dams (OPBP 4.37) d Projects in Disputed Areas (OPBP 7.6)* J Projects on International Waterways (OPBP 7.5) d E. POLICY EXCEPTIONS AND READINESS 97. The Project does not require any exceptions to Bank policies. 98. During preparation of the existing Water Supply and Sanitation Project a national policy framework for urban water supply was established. All regions in the country have had two years of experience in implementing the program, so are well acquainted with the implementation arrangements and conditions for obtaining investment grantdloans. Both the MWR and RWBs have taken ownership of the program and use it for all investments in the sector including their own. 99. The PIU in AAWSA has been established and mostly staffed, and a number of preparation studies are underway. * By supporting theproposedproject. the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 2

25 Country and sector issues Annex 1: Country and Sector or Program Background ETHIOPIA: Urban Water Supply and Sanitation Project 1. Ethiopia is in its second cycle of developing poverty reduction strategic plan (PRSP), A Plan for Accelerated and Sustained Development to End Poverty (PASDEP) covering the period is being finalized. The main thrust of this plan (PASDEP) is ensuring much accelerated growth through a multi faceted approach towards tackling the interlinked poverty traps. Low level of Infrastructure provision, with in which, water supply and sanitation is identified as key, among these traps. 2. Cognizant of the role improved WSS plays for economic growth, the plan sets ambitious targets of achieving 84% access to safe water supply by 21 from the 42% in 25. Access to improved sanitation is as low as 28% in 25 and the government plan is to achieve 8% in 21. In a big country like Ethiopia this means that 32 million more people had access to safe water supply and 39 million more people had access to improved sanitation by 21. A plan that goes much more beyond the MDG target with in a shorter time period. 3. The country s urban population in the year 25 is estimated to 12 million (16%) as projected from the 1994 national census, and is expected to double in the next 15 to 2 years. 4. The major issues for water supply and sanitation development in the country include: Low service levels: Water supply and sanitation coverage in Ethiopia is the lowest in sub-saharan countries with only 42% and 28% for water supply and sanitation consecutively. Limitedfinancing for expansion and improvement of service: Current investment in the WSS is too low as compared to what is planned. The annual cost of achieving government plan is estimated to US$35-45 million in the first few years and falling to US$2 million in the later years. The rate of investment in the sector including this project is about US$lOO million per year, requiring a four to five fold increase in investment. User fees for services are often too low to provide for adequate maintenance of existing facilities. Decentralization and capacity constraints: With further deepening o f the government decentralization, much more autonomy is devolved to the woredas, town utilities, and communities to plan and manage their water supply schemes. Government is in the process of institutionalizing a sector support system that involves local private sector and other partners in capacity building, and assisting in implementation of water supply and sanitation service improvement program. However, as the approach is new and the process needs time to internalize and institutionalize it, the constraint remains to be one of the major issues to be addressed. Stakeholder and private sector participation: To date stakeholder participation in the sector has been very limited. A trend is being set under the ongoing water supply and sanitation program, towards consultative process and participatory planning. Participation of the private sector and informal sectors is yet to develop. Though there is awareness on the efficiency and service improvement the private sector could bring about, the thrust is yet to develop with demonstrated performance. Rationale for Bank involvement 5. Sector reform, particularly for urban water supply and sanitation requires time, expertise and large investments. The World Bank is the largest international development institution now active in the urban water sector. Other development partners, such as AfD, BADEA, the European Union, the European 21

26 Investment Bank, and the African Development Bank together make a major contribution to the urban water sector, but look to the World Bank to lead the assistance effort. In particular the Bank has a large staff with significant experience/expertise in water engineering, regulation, commercial operation, stakeholder involvement, and services in low-income areas. It also has sufficient resources to permit engagement in the sector over a prolonged period, helping to ensure consistent policies and investments. Finally, urban water utilities will need substantial financing from private sources, and the Bank is perhaps uniquely positioned in terms of expertise and knowledge to assist the government in establishing the necessary conditions and environment to make this possible. The World Bank is well positioned to support the urban water supply in general and Addis Ababa in particular due to its long engagement in the sector in Ethiopia, including assistance with the development of a sector strategy for rural communities, towns and urban centers, and in assisting Addis to develop its current water tariff structure and billing system. 6. Currently, AfDB and BADEA are financing water works in two large cities (Harar and Kibre Mengist) in Ethiopia, and the World Bank is financing business planning, capacity building, and physical improvement in several others. AfD has appraised a 14m project to expand treatment capacity and reduce nonrevenue water in Addis Ababa, but requires the City or another donor to finance half. Early approval of this project would provide resources for institution building and detailed engineering studies for works that could be financed by IDA or other donors. 7. The World Bank group is also able to offer Ethiopia a wide range of products that will contribute to developing the sector. The IFC is interested to finance private sector investors in Addis Ababa water supply and likely this requires a partial risk guarantee. 8. The Global Partnership for Output Based Aid has indicated its interest to contribute between US$5-1 million to the project for work in low income areas. Higher level objectives to which the project contributes 9. The recent guiding strategic framework for the five-year period 25-21, Plan for Accelerated and Sustained Development to End Poverty (PASDEP), puts much accelerated growth as its main thrust to break out of the self-perpetuating poverty traps. For all reasons, a major push on growth is at the centre of the PASDEP for the coming five-year period. 1. The Interim Country Assistance Strategy (ICAS) (May 1,26, Report number ET) covering FY 6-7, sees contribution to the country s growth agenda as one of the central underpinnings of bank s support to the country. Improved access to clean water supply and sanitation is the core of government s plan and Bank assistance to strengthen the urban agenda and improve the urban infrastructure coverage level. The government plan is to double the current water supply access rate of 42% in 25 to 84% by This UWSSP is designed to support operationalization of the broader growth strategy, interpretation of the countries Integrated Water Resources Management policy, and contributing to the achievement of the MDG and interim country goals. 22

27 ~... World Bank financed Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ETHIOPIA: Urban Water Supply and Sanitation Project Sector Project IP DO Water Supply and Sanitation (ongoing) Water Supply and Sanitation S S Project (Cr. No. 391-ET and Grant NO. H85-ET) ter supply Protection of Basic Services (Grant S S NO. H224-ET) Water resources management (ongoing) Nile Basin Initiative NA NA Food security (ongoing) Food Security Project (Cr. No. S S 3646-ET) Community development - pastoralist Pastoralist Community S S regions (ongoing) Development Project (Grant No. H38-ET)...Î Decentralized service delivery (ongoing) CBDSD (Cr. No ET) S S Public sector capacity building - PSCAP (Cr. No ET) S S decentralization (ongoing) Productive Safety Nets Product Safety Nets (APL2) (Grant NA NA NO. H266-ET) Other Agencies: Water Sector Water Sector Urban Water Supply and Sanitation Urban Water Supply and Sanitation Urban Water Supply and Sanitation Urban Water Supply and Sanitation Rural Water Supply and Sanitation Rural Water Supply and Sanitation Water Sector Development Program UNDP supported National Water Supply and Sanitation Master Plan- Netherlands supported Afiican Development Bank - Harar Town Water Supply and Sanitation EU and EIB U WSS for 15 towns...l German Financial Cooperation ( Urban Towns.. Japanese Government/JICA - Eleven Urban Towns and RWSS in two regions Finida - Rural Water Supply in Amhara and Benshangul Regions... ADB- RWSS project 23

28 Annex 3: Results Framework and Monitoring ETHIOPIA: Urban Water Supply and Sanitation Project Results Framework 1. The UWSS Project Results Framework sets out the Project Development Objective and the Intermediate Results the project intends to achieve, with corresponding M&E indicators, and the way M&E information will be used to monitor results and make adaptations as needed during project implementation. Increased access to sustainable water supply and sanitation services for people living in Addis Ababa and four secondary cities Intermediate Outcomes A. Addis Ababa Increased water production Increased connections More reliable supply Improved cash flow Sanitation improved B. Secondary Cities Increased water production Increased connections More reliable supply Improved cash flow Sanitation improved roject Number of people with improved water supply and sanitation. Intermediate Volume of water produced. Number of new connections. Number of rehabilitated connections. Hours per day of supply. Ratio of operating revenues/expenses, Number of people with access to improved sanitation in low-income areas. Volume of water produced. Number of new connections. Number of rehabilitated connections. Hours per day of supply. Ratio of operating revenues/expenses. Number of people with access to improved sanitation in low-income areas. f Project Outcome Information To determines if access to water supply and sanitation has increased as planned. Use of Intermediate Outcome Monitoring To determine if key inputs will serve the targeted number of beneficiaries. To assess financial viability of utilities. To assess progress in increasing access to improved sanitation. To determine if key inputs will serve the targeted number of beneficiaries. To assess financial viability of utilities. To assess progress in increasing access to improved sanitation. 24

29 Arrangements for Results Monitoring 2. Institutional Issues. Monitoring and evaluation (M&E) for the project will be based on and compatible with the M&E system developed for the ongoing Water Supply and Sanitation Project. It will serve as a tool for implementers, to enable them to assess project implementation and undertake modifications on a timely basis so that the project development objective and intermediate results can be achieved. 3. The attached table (Arrangements for Results Monitoring) identifies institutional responsibilities for data collection and reporting. MWR will provide an electronic database for data entry, indicator calculations, and report generation. The Ministry of Water Resources and the Regional Water Bureaus have staff who are responsible for the coordination of M&E activities for rural and urban water supply. These specialists, together with the firm contracted to construct the computer based information system for the national water supply and sanitation program, will provide initial training for staff in AAWSA and the secondary cities in M&E, with follow-up, on-the-job training organized as needed. 4. Data collection. Responsibility for data collection is indicated in the Arrangements for Results Monitoring table. Detailed rules for the collection, processing and organization of M&E information will be part of the M&E manual, and summarized in this annex. The project includes a budget for M&E activities including staffing, training, mid-term and final evaluations, data collection, and technical reviews. Data collection will take place through normal operations reports and financial accounting, plus annual audits. Budget is also available to procure meters and other instrumentation required to monitor the water supply systems. 5. Capacity for implementing the MU system. Meetings, workshops and training events will take place as required during project implementation to hrther develop, implement and fine tune the M&E system and to build local capacity to manage it. An M&E capacity plan is incorporated in the project s capacity building activities. 25

30 I I I I

31 Monitoring and Evaluation for Urban Water Supply and Sanitation 6. The M&E requirements set out in the preceding pages are for the core indicators needed by the World Bank to track progress in improving operational efficiency and in providing more people with water. Monitoring consists of (i) a household survey conducted in each city at the beginning and end of the project that can be used to estimate the number of people who obtained improved water and sanitation services; and (ii) regular performance monitoring to measure progress in improving the efficiency of the participating water utilities. The performance information and the monitoring indictors are listed on the following pages. Operators should submit quarterly reports to their boards and semi-annual reports to the RWBs, MWR and WB. M&E information is the same for planning, baseline and performance monitoring, but becomes more complete over time as metering is improved and monitoring is integrated into system operations. 1, Preliminary-baseline survey. Cities should provide as much of this information as possible when applying for an improved water supply. Information should be based on utility records, observations, community discussions and best judgment. 2.. Baseline survey. Cities with the assistance of planning/design consultants should provide this information at the end of step 1, and again in step 2 before systems are rehabilitatedexpanded, when better metering and records are available. 3,. Performance monitoring: City utility operators should collect performance information on a regular basis. The city water board should submit semi-annual reports with all information updated. 1. Population of city - 2. Average number of persons per household - 3. Average number of persons per standpipe - 4a. Number of residential house connections - 4a.i Number of residential with access to yard tap 4b. Number of public standpipe connections - 4c. Number of institutional, industrial and commercial connections - 5, Average number of households sharing residential connections - 6. Number of connections with operating meters - 7. Production capacity (m3/day) (see 24 for actual) - 8. Transmission capacity (m3/hur) 9. Water storage volume (m3> - 1. Length of water distribution network (m) Terminoloav production = volume into supply consumption = volume billed (sold) revenue = cash collected income = billing operating expenses = salaries/wages/benefits, energy, consumables, spare parts, taxes, plus administrative costs, but not depreciation and interest expenses LC = local currency 27

32 b.Billings to (income from) institutional, industrial and commercial customers (LC) 26a.Volume of water paid by institutions (m3) 26b.Volume of water paid by industrialkommercial customers (m3) 27a. Cash collected (revenue) from residential customers, excluding connection charges (LC) 27b.Cash collected (revenue) from institutional/industrial/commercial customers, excluding connection charges (LC) - ' 28. Cash collected (revenue) for new connections (LC) Number ofstaff - 3. Operating expenses (excluding depreciation charges) Salaries and wages (LC) 32. Energy expenses (LC) + KWH and liters of fuel Total debt service (LC/year) End of year accounts receivable (LC) Replacement and expansion targets J Production and treatment replacemendexpansion (physical works and investment) J Distribution and storage replacement/expansion (physical works and investment) J New connections (number and investment) PERFORMANCE INDICA TORS Impact on consumers J Water coverage (percent of people served by utility) ([2]*[4a]*[5] + [3]*[4b]) /[l](check with 4A) J Water production (liters/capita/day) [24] / [ 11 J Percent of people with access to house connections [2]*[4a]*[5] / [l] = [A] (also % per YT) J Percent of people with access to standpipes [3]*[4b] /[l] = [B] J Percent of households without access to piped supply 1 - [A]- [B] J Average time between complaint and response (days) [22] J Average time between request for and installation of connection (days) [23] J Duration of supply (average hourdday) [ 121 J Revenue per person served (LC/persodyear) [27a] / {[ l]*([a] + [B])} (Formula check) J Annual cost of water for a household consuming 3m3 of water per month from a yard tap. [ 171 * 3 * 12 J Annual cost of water for a household consuming 3m3 of water per month from a standpipe. [18] * 3 * 12 J Average time to collect 2 liters of water [ii]/ [iii]* 2 (Check Formula Financial Performance J Amount billed per m3 into supply ([25a]+[25b]) / [24] J Cash collected per m3 into supply ([27a]+[27b]) / [24] J Amount billed (income) / operating expenses ([25a]+[25b]) / [3] J NRW (volume billed as percent of volume into supply) ([26a]+[26b]) / [24] J Value ofnrw as % of the operating expenses {([25a]+[25b]) - ([27a]+[27b])}/ [3] J Debt service ratio (debt service /revenue) [33] / ([27a]+[27b]+[28]) J Collection ratio (cash collected / amount billed) ([27a]+[27b])}/ ([25a]+[25b]) J Collection period (days) {[34] / ([27a]+[27b])} * 365 J Operating cost coverage (operating revenue / operating expenses) ([27a]+[27b]) / [3 + depreciation (replacement)] Operational Performance J Operating expenses per m3 into supply [3] / [24] J Energy expenditure per m3 into supply [32] / [24] J Labor costs (percent of total operating expenses) [3 11 / [3] J Staffing level (number per 1 connections) {[29] / ([4a]+[4b]+[4c])} J Average operating pressure (meters) [average of 13 a,b,c,...] * 1 J Metering level (percent of connections with functional meter) [6] / ([4a]+[4b]+[4c]) J Production capacity (volume into supply (m3/day) / production capacity (m3/day)) J Transmission capacity (flow capacity (m3/hour) /production capacity (m3hour)) [24] / [7] [8] / [7] / 24 J Storage capacity (storage (m3)/ production capacity (m3/day)) [9] / [7] 28

33 Annex 4: Detailed Project Description ETHIOPIA: Urban Water Supply and Sanitation Project Project development objective and key indicators 1. The Development Objective of the Urban Water Supply and Sanitation Project is increased access to sustainable water supply and sanitation services in Addis Ababa and four secondary cities. Accordingly, the project is designed to produce more water for all customers and extend the distribution network to unserved areas, and to improve the operational efficiency of the participating water utilities by reducing non-revenue water and improving financial management. The introduction of autonomous water boards and performance based contracts with operators, and outsourcing selected activities to private sector partners will also promote improved efficiency. Financing will be available to promote improved hygiene and sanitation practices, and to construct public sanitation facilities, the management of which is contracted to local service providers. 2. In achieving these objectives, labor intensive construction methods for small diameter distribution piping and improved water and sanitation services for low-income areas will be employed. 3. Water Sumlv: As a result of the proposed project, the 4 million residents o f Addis and 8, residents of the four other participating secondary cities will benefit from an increased, more reliable supply of water. Water production will be increased from 21, to 36, m3/day(5 to 75 lpcd) in Addis and 23,5 to 4, m3/day (3 to 5 lpcd) in the four secondary cities. The water distribution network will be extended to serve 4, more people (4, connections) in Addis and 2, more people (2, connections) in the four secondary cities. Baseline information on non-revenue water is not well hown in any o f the cities, but estimated to be between 2 and 35%. The proposed target of one third reduction would, for example, lower non-revenue water from 35 to 25%. 4. Sanitation: The project will increase access to improved sanitation facilities in low income areas of each city. In Addis Ababa the target will be to promote household latrines, hygiene and sanitation practice and construct fifty communal sanitation facilities that are managed by local service providers who will charge a user fee as stipulated in their contract. The target will be 2 facilities in each of the secondary cities. 5. Institutional Sumort: The four secondary cities currently have water boards that are relatively autonomous. The project will provide for facilitators to work with officials and water board members in participating secondary cities amongst others to review their enabling legislation and performance in the last years. In so doing the facilitator assist the water boards to prepare a procedures manual and code of conduct, and recommend changes in the enabling legislation. Project components 6. The project is divided into three components: (i) Addis Ababa water supply and sanitation; (ii) secondary city water and sanitation; and (iii) program management. The sub-components for Addis Ababa and the secondary cities are similar: (i) increased access to water; (ii) improved operational efficiency and demand management; and (iii) institutional support. 7. These, and indicative percentages of the total investment, are shown in the following table. 29

34 Component 1. Addis Ababa WSS 1A. Increased access to water Category goods, works, consultants cost US$m 52.3 Yo of total 44% Bank Financing US$ 44.3 % of Bank Financing 44% 1B. Improved operational efficiency 1 C. Institutional reform 1D. Project Management Sub-Total 2. Secondary City WSS 2A. Increased access to water goods, works, consultants goods, consultants consultants, goods, training, operations goods, works, consultants % 1% 1 Yo 66% 25% % 1% 1 Yo 66% 25% 2B. Improved operational efficiency 2C. Institutional reform 2D. Project Management Sub-Total 3. Program Management Sub-Total 4. Unallocated Total goods, works, consultants goods, consultants consultants, goods, training, operations consultants, goods, training, operations oo 1.oo Yo % % 28% 1% 1 Yo 6 Yo 1% oo 1.oo % % % 29% 1% 1% 4 Yo 1% Component 1: Addis Ababa Water Supply and Sanitation 1A. Increased access to water supply and sanitation 8. To address the water supply crisis in Addis Ababa where 21, m3/day are currently produced but more than 36, m3/day are needed to meet basic services, every effort must be made to increase the volume of supply. This component will finance capacity expansion at the existing Legadadi reservoir and water treatment plant, deep boreholes at selected sites within Addis Ababa and a new well field located just northwest of the city. It will also finance the extension of the distribution network to unserved areas and new connections. Special attention will be given to low-income areas including community participation and complimentary drainage. The sewer system in the Kalite catchment will be extended, and community sanitation facilities, managed under contract by local service providers who charge a user fee, will be constructed. Consultant services for design and construction supervision of the production works, and possibly network expansion will be financed by Am. 1B. Improved operational efficiency and demand management 9. With non-revenue water exceeding 35% in Addis Ababa and the high marginal cost of water, it is imperative that non-revenue water is reduced and water conservation is instilled in people. Improved financial management, billing and collection, customer management are also essential in establishing a financially viable water company that can finance the high costs of keeping up with growth. Under this sub-component the materials and equipment plus costs associated with establishing pressure zones and leak detection areas; and repairing leaks in distribution network and at service connections will be covered. AAWSA s financial management, billing/collection, and customer-management system will be improved. Public awareness for water conservation and hygiene and sanitation will be created. Catchment protection measures will be taken around the city reservoirs. 3

35 1C. Institutional Support 1. Funding would be provided for sector policy revisions and development, work on the legal and institutional framework for water supply and sanitation, developing polices and measures for enhanced private sector participation and financing in this sector, and improving utility governance and efficiency. Stakeholder consultation measures are also included in this component. 1D. Project management 1 1, Funding would be provided to AAWSA for project management activities including for conducting EMS, monitoring and evaluation, project management support, financial audits and capacity building. Component 2: Secondary City Water Supply and Sanitation 2A. Increased access to water supply and sanitation 12. At present water supply in the four secondary cities is 35 liters per capita per day, of which about 25 lpcd actually reaches consumers. In comparison, water production in cities of this size in most cities in Africa is between 75 and 1 lpcd. On average, water production should be doubled in these cities. This component will finance increased production as well as the extension of the distribution network to unserved areas and new connections. Special attention will be given to low-income areas. Financing is also available for the constructiodexpansion of wastewater treatment ponds and piped sewerage to central commercial areas. 2B. Improved operational efficiency and demand management 13. The water utilities in the four participating cities are reasonably efficient, but operational efficiency could be improved by reducing non-revenue water and improving financial management, billing and collection, customer management. Under this sub-component the materials, equipment and costs associated with establishing pressure zones and leak detection areas; and repairing leaks in the distribution network and at service connections will be covered. Financial management, billing/collection, and customer-management can also be improved. 2C. Institutional Support 14. Funding will be provided for refining enabling legislation that provides autonomy to the Water Boards and for assisting them to develop procedures and codes of conduct that would benefit them as well as water boards in other towns in Ethiopia. Operator contracts with performance targets and performance incentives would also be developed and tested. 2D. Project management 15. Funding would be provided to the four utilities for project management activities including for conducting EIAs, monitoring and evaluation, project management support, financial audits and capacity building. Key Inputs for Components 1 and Key Inputs for components 1 and 2: Expand water production/distribution and wastewater treatment/collection; add new service connections for water and wastewater; create pressure zones within the distribution network; repair leaks in distribution piping and at service connections; replace old meters; improve financial management, billing/collection and customer-management systems; create public awareness for water conservation; and implement a catchment management plan. Consultant services for design and supervision of the civil works, financial management, and water conservation will also be provided. 31

36 17. Key Outputs for components 1 and 2: To improved access - that is, increase the number of people with improved water supply - water production, distribution, and connections will be increased to 9 percent of households; 24 hour per day service will be provided to all areas within the city; and sanitation plans will implemented. To improve operational efficiency and manage demand non-revenue water will be reduced by 1 percent, and 8 percent of costs will be recovered through tariffs (i.e. recurrent, renewalheplacement o f short life assets, and expansion excepting distributiodconnections for lowincome households). To establish better performing utilities, autonomous water boards, with operators working under performance based contracts will be established. Component 3: Project Management and Monitoring and Evaluation 18. Project management will involve sector institutions at federal and regional levels, city administrations and utilities. Funding would be provided for costs associated with project implementation, to synthesize existing water and sanitation access data to determine baseline figures and to monitor progress under this project and in meeting the overall water supply and improved sanitation access goals under the MDGs. This component also includes training, workshops and other capacity building measures and support for environmental and social management. 19. Key Inputs: Inputs include technical assistance, goods, operation support, and training for effective project implementation and improved monitoring of Performance towards achievement of MDG goals. 2. Key outputs: Outputs include improved system and enhanced capacity for effective monitoring and implementation of the project and its contribution for the broader sector MDG goals and UAP. Stepped Approach to Urban Water Supply 21. Appraisal Criteria: The GOE has provisionally identified Addis Ababa City and four other secondary cities (Awassa, Gondar, Jimma, and Mekelle) to benefit from the project, provided they meet selection criteria established in the National WSS Program, as described herein. All four cities will receive assistance during implementation to preparehefine their business and expansion plans, improve operational efficiency, and strengthen their oversight boards. A final check on compliance with the appraisal criteria will be made before construction financing is approved. Operations, financial management, billing and revenue collection, and M&E systems are in place and efficient. Proposal for system expansion and continued operational efficiency improvement is acceptable. Business plan including tariff structure and cost recovery strategy is acceptable. Financial projections show that the utility can cover recurrent, renewalheplacement of short life assets, and repay its share of capital investments. Utility financially and managerially autonomous. Board composition complies with statute, all members meet regularly according to schedule, and actively involved in planning. The proposed project and business plan must have been developed in consultation with stakeholders and be endorsed by the Municipality or Woreda. Financial Policy: Towns with established Water Boards must have a good cash collection record to qualify for a step 4 loan through the MWR. They will be required to repay that loan to Water Resources Development Fund (WRDF) on behalf of MoFED, so are required to show in their business 32

37 plans how tariffs will be phased up to full cost recovery and to demonstrate that customers are willing and able to pay the tariffs required. Towns will also be required to have satisfactory financial management and monitoring and evaluation systems. 23. Utility Water Boards are expected to enter into a performance-based contract with their utility operator, and provide for long term higher-level professional support for functions beyond the capacity of the operator. 24. Consultation Process: Stakeholder consultation will be a key component of project design at the city level. Local officials and potential users o f the system are to be informed and consulted from the outset to ensure that they understand the process, understand that they own the facilities and are engaged so that systems are designed to meet consumer priorities. Sanitation and hygiene promotion will be carried out in conjunction with improvement of the water supply system to promote household investment in sanitation and behavior that ensures health benefits are realized. 25. Linkage between Municipality and Town Water Board: For urban water supply, the town water board will be the key body to over see implementing agency and will receive technical assistance from the Regional Water Bureau and consultants. Municipalities will be key stakeholders responsible for ensuring that town water boards are appointed and are functioning according to the principles of establishment. Eventually, municipalities could be expected to contribute to financing a share of the investment costs in water supply and sanitation facilities in order to reduce tariffs, though this is not expected during the life of the current project. The regions will facilitate experience sharing across water boards and municipalities as part of their capacity building and monitoring and evaluation process. 26. Performance based stepped approach to Urban Water and Sanitation: The MoWR has adopted a demand driven and performance based approach that links physical investment to capacity building and business planning to ensure that investments are efficient and targeted at towns that will sustain their facilities. These steps elaborated below will be followed by the UWSSP in providing the assistance to the selected cities. A diagram of,the stepped approach i s shown on the next page. Under this projects, cities would be expected to be moving to step 4, however, they may need assistance at the beginning to fully comply with requirements for step 3. Step I - Towns receive assistance to form Water Boards, conduct initial assessment, consult with stakeholders and prepare applications for further assistance. Step 2 - Town Water Boards with approved applications receive further assistance for planning and design, sanitation planning, preparation of business plans, operator performance contracts, capacity building for Water Board members and utility staff, and implementation of immediate service improvements. Step 3 - Town Water Boards with approved project proposals receive assistance to tender works contractors, supervise construction, and continued capacity building of the Board and operator. Step 4 - Town Water Boards that have already received grants to improve their water supply systems and have established creditworthiness may qualify to borrow for further expansion of their systems including assistance with design, tendering of works contractors, construction o f facilities, construction supervision, and capacity building. 33

38 ~ Stepped Approach to Water Supply STEP 4 Exvansion: STEP 1 Technical Assistance to establish Town Water Boards and prepare avvlication: Technical Assistance to Towns to form Water Board, carry out initial assessment, identify immediate service improvements, consult with stakeholders and prepare application for Step 2. Main Criteria to Oualifv foi Stev 2 (grant): Application filed with basic information on existing water supply and sanitation & needs Autonomous Town Water Board created and Board members appointed Stakeholder consultations held regarding program requirements, est. costs, tariffs & contribution required Key utility staff in place for capacity building Proposed immediate service improvements within per capita ceiling and according to positive list STEP 2 Planning, capacity building and immediate service imvrovements: Phase 1: Technical Assistance to Town Water Board & utility to build capacity o f board members and operator, implement financial & mgmt systems, implement immediate service improvements, prepare preliminary design for rehabilitation and expansion, feasibility studies, sanitation plan and business plan. Phase 2: Borehole sitting, drilling Final design & tender docs. STEP 3 Rehabilitation or initial investment - towns not previously improved with grant financinq Investment financing & Technical Assistance to Town Water Boards to implement business plans, rehabilitate and expand water & sanitation facilities and carry out further capacity building of Board and utility during construction and for at least a year after. Main Criteria to Oualifi for Step 2, ahase 2 and Stev 3(grant): SteD 2. Phase 2: Project proposal acceptable Business plan acceptable Board meeting as scheduled & involved in planning Stakeholder consultations held Immediate service improvements completed Revenue covers current O&M costs + allowance for renewal and replacement of short life assets Technical and administrative staff trained at basic level Utility operating autonomously with accountability in place Step 3: Reconfirm the above based on final design Local contribution deposited to bank account Investment financing & Technical Assistance to financially viable utilities for longer term expansion, incl. construction supervision - financed through internally generated cash and lending on commercial terms. Main Criteria to Oualifv for Ytev 4 (loan): Proposal for further development & expansion of the system is acceptable Business plan acceptable Operations, financial management, billing and revenue collection & M&E systems in place and efficient (as confirmed by independent audit) Full cost recovery tariffs in place for existing system Contribution deposited to account Utility operating efficiently with adequately trained technical and administrative staff, performance agreement and provision for external technical assistance Board meeting as scheduled & involved in planning 34

39 Distribution System Management and Non-revenue Water Reduction 27. Addis Ababa and the other participating secondary cities intend to use part of the grandcredit for non-revenue water reduction and better system control so that water can be distributed throughout the entire system. 28. Improvement of the meter readingbilling; chain: Manual meter reading and data transfer is typically a major source of errors and, potentially, corruption. The introduction of electronic, hand-held meter reading devices is essential. A barcode that will be glued on each customer meter must be scanned by the meter reader and only then it is possible to enter the reading. Data transfer from the device to the billing system is done electronically, eliminating another source of error. Billing software should have an interface that is compatible with the software of the meter reading equipment. 29. Production Metering: Procurement and installation of production flow meters. 3. Replacement of Leaking Service Connections: The vast majority of all hidden leaks is expected to be found on service connections including the connecting point to the main pipe. In case a leaking service connection is detected, the entire service connection, including the pipe saddle, shall be replaced. Typically, 1% of all service connections need replacement. 31. Leak Repair on Primau and Secondary lines: Only a small portion of hidden leaks are likely to be found on primary and secondary pipelines. However, a budgetary provision for the procurement of repair materials and the execution of repair works is needed. 32. Imurovement of Meter Testing; Facilities: Water meter test benches for household and commerciavindustria1 connections are required. 33. Procurement of Customer meters: Provision should be made to purchase household and commercial meters for those that can not be repaired. 34. Vehicles and motor bicycles for Leak Detection Crews: Leak detection crews can only fulfill their duties efficiently if they have their own dedicated vehicles. 35. Leak Detection Equipment: Procurement of Leak detection equipment. 36. Imurovement of Operational Sub-Systems: Distribution system restructuring to hydraulically isolate subsystems, improve capability to better control pressure and distribute water throughout the system. Also, installation of bulk meters to measure inflow/outflow to/from the sub-systems. 37. DMA Establishment: Design, construction and commissioning of small hydraulically discrete parts of the distribution network (District Metered Areas) each consisting of about 1, service connections. DMAs allow leak detection teams to focus on problem areas. DMAs are equipped with an inflow meter, a pressure reducing valve and a pressure logger. This will be limited to areas of the cities where leakage is highest. 38. m: Utilities should incode their system layout into a GIs. 39. Hydraulic Modeling: The utilities should prepare a hydraulic model of their primary and secondary distribution system. Consultant services can be arranged help with the process. 4. Proiect Imulementation Consultancy: The utilities should secure consultant assistance for project planning, design, construction supervision, plus management assistance non-revenue water reduction, and improved financial and customer management. 35

40 Water Supply and Sanitation Services in Low Income Areas Incorporating Output Based Aid Introduction 41. The project will pay special attention to the improvement of water supply and sanitation services in low-income areas of the participating cities. Areas would be prioritized and selected on the basis of their existing water supply coverage, with,unserved areas given preference. For the purposes of the Project low-income areas refer to those communities where almost all of the households would be served by public taps and/or individual yard taps. Households which can afford internal plumbing and water appurtenances such as sinks, showers and flush toilets may be located within low-income areas but would not qualify for assistance. They would be required to pay the full cost of connections up front. 42. In addition to improving water supply services, the Project will finance improved communal sanitation facilities, and improved drainage where the increased supply of water would result in muddy streets and pathways. Communal sanitation facilities can include pit latrines, showers, and clothes washing basins. Community facilitators (sociologists and an engineer) would assist communities to plan their water and sanitation facilities, and, in the process, promote improved hygiene and water conservation practices. Local private operators would be contracted by the sub-city to operate and maintain the communal sanitation facilities for a fee. Local private operators may also be contracted by the water utility to manage the water distribution system within the area, including operation of public taps, billing and collection for individual connections, and nonrevenue water reduction. Environmental Guidelines for Contractors will be attached to all bidding documents for constructiodrehabilitation contracts. 43. For the purposes of the low-income component of the project, communities can be divided into (A) areas with good access and drainage where most secondary piping is already constructed but more yard taps are required; (B) areas with adequate access and drainage but with limited distribution piping and few yard taps; and (C) areas with poor access and drainage where prolonged and intensive community facilitation will be needed to plan the water and sanitation facilities, and develop a resettlement action plan if households must be relocated to gain access to and secure sites for community sanitation facilities. Financing Arrangements 44. m: Output Based Aid shifts the focus from subsidizing the expenditure required to build infrastructure to subsidizing the delivery of an agreed output. In the case of the UWSSP, the exact outputs are to be determined and will be clearly defined in the grant agreement. They would apply only to clearly targeted households and would relate to the delivery of water to households (via the use of tertiary distribution pipes, pipe connections to the yard tap and yard or other forms of tap). The details of the exact outputs that need to be fulfilled prior to grant disbursement will be clearly defined in the grant agreement. The level of ongoing performance required will also be specified in the grant agreement. 45. The water utility, city or region would pre-finance the construction of the tertiary distribution piping and connections within a low-income area, and would be repaid periodically when portions of the work have been completed and independently verified. Although the majority of subsidy payment is made after verification that outputs have been delivered, a small advance payment (typically up to 1% of the entire grant agreement amount) may be made at the time the grant agreement is signed to help with start-up costs. 36

41 46. OBA grant agreements would be signed between the World Bank and the MOFED. Ministry of Water Resources (MoWR) for the four secondary cities and AAWSA in the case of Addis Ababa will sign sub-grant agreement with MoFED. It should be noted that GPOBA participation is conditional on approval by the GPOBA panel of experts and donors and by the World Bank. 47. IDA: In order to ensure consistency of approach, IDA funds for tertiary distribution piping and connections in low income areas will follow the OBA procedure. However, normal Bank financial and procurement procedures would be used for other elements of the project financed by IDA such as consultant services and other works like secondary distribution piping, sanitation facilities and drainage. See the financial and procurement management sections of the PAD for further information. 1 Grant Agreements OBA grant Proposed Institutional Framework and Fund Flow with Key Stages in OBA Arrangement Funds flow arrangements 48. Unlike conventional lending, OBA funds (whether originating from GPOBA or IDA) flow after defined outputs have been verified as delivered. Grant agreement arrangements for funds flow would be as follows (refer to above figure). 49. World Bank would be signatory to the grant agreements and would disburse funds after receiving a report from the independent verifier setting out what functioning outputs (as defined in the grant agreement) have been delivered during the period. Typically, this would occur on a quarterly basis. 5. MoFED will be the counter part for the grant agreement and will sign sub-grant agreements with MoWR for the secondary cities. As such the MoWR would be responsible for coordinating and monitoring the program, including consolidation of reports and maintaining the designated account into which the GPOBA trust fundada account would make payments for the city water utilities (after delivery of outputs). Construction under the OBA component would be pre-financed by the participating utilities, cities or Regional Water Bureaus. The Urban Water Department of the Regional Water Bureaus would assist the cities to secure consultant services to plan and build the capacity of the city water 37

42 utilities, and supervise them. They will also maintain a data base for regular utility performance monitoring under the National Water Supply and Sanitation Program AAWSA would be the counterpart to one of the sub-grant agreements. AAWSA would have the obligation to deliver the outputs as defined in the grant agreement before any payment is made. AAWSA would contract for works to be carried out in accordance with World Bank procurement requirements and the relevant measures proposed in the Environmental and Social Management Framework (ESMF). AAWSA or the City would pre-finance the works. After receiving a report from the independent verifier setting out what functioning outputs (as defined in the grant agreement) have been delivered during the period, typically on a quarterly basis, GPOBNIDA would make a payment directly into the AAWSA designated account. Institutional arrangements 52. Proiect Management Units would employ a sociologist and engineer to coordinate and monitor the program in each city. 53. Communitv facilitators consisting of a engineer and sociologists with community development experience would assist low income communities to plan and implement their water and sanitation programs. 54. Contractors would carry out works in compliance with the Environmental Guidelines for Contractors. They may play a role in taking some of the pre-financing burden to expedite construction if they so choose. 55. Independent verifiers would periodically verify that the claimed number of connections have been made and that the works comply with the defined requirements (as set out in the grant agreement). After verification, subsidy payments would be made by the World Bank into the designated accounts. The verifier would be contracted by the participating cities and approved by the World Bank. 56. Local private companies may be contracted by the water utility to construct water and sanitation facilities within the low income areas, and to manage the sub-distribution systems within those areas. Local private companies would also be contracted by woredas or sub-cities to operate and maintain community sanitation facilities. Implementation Arrangements 57. Outputs and disbursements: The required outputs will be clearly defined and set out in the grant agreements. These will consist of an agreed number of connections to agreed specifications and timelines in the cities. The utilities would be responsible for pre-financing the works. Once carried out, an independent consultant would verify that the connections meet the required specifications and that water services have been delivered to the new connected households at a satisfactory level and for a specified number of months (to be defined in the grant agreement). Receipt of confirmation of the delivery of these outputs would be followed by an authorization for an agreed level of funds transfer to the utility for each connection carried out (to be defined in the grant agreement). 58. Targeting: Within Addis and the four other cities, low income areas would be identified by the city government and the utility. Within these assigned geographic zones, a further screening may consist of ensuring that only dwellings without internal water appurtenances are targeted. Only households falling within the targeting criteria would be eligible for subsidies. 38

43 59. Consumer contribution: Qualifying households would be required to pay an up fi-ont connection charge which may be of the order of 1-2% of the cost o f the service connection between the street and the water meter within household compounds. Beneficiaries could make equal re-payments over a 2-3 year period along with their water bill. 6. Tariff rate: It s anticipated that most households would share the water tap in their neighbor s compound. For this to happen it s important that yard tap customers be allowed to pay a low, flat rate tariff up to about 1-15 m3/month. This would allow three to five households to share a common tap, without necessarily moving up in the normal graduated tariff rate schedule. The tariff will cover the utilities operating cost for producing and distributing water. 61. Unit subsidv: The initial unit subsidy per connection to be financed by GPOBA and IDA under an OBA format would be based on the independent engineer s estimate for the low income areas to be served in the first year of the program, taking account of previous contract pricing and possibly the results of competitive bidding processes. The unit subsidy may vary for city to city, and can be adjusted from time to time. 62. Planning and desim: Planning and design of the distribution system within participating low income areas would be supervised by the utility or a relevant city department. They in turn would hire the services of a community facilitation team to assist the cornniunity to lay out the distribution system and identify households that would pay the up-front yard tap connection fee. The facilitators would also assist residents to plan their sanitation facilities, solid waste management collection, and improved drainage as required. In the process they would promote improved hygiene and water conservation practices. 63. As part of the planning and design process, the relevant utility or city department would ensure that the environmental and social screening process as described in the Environmental and Social Management Framework (ESMF) is carried out. The screening results would indicate potential negative environmental and social impacts and qualified personnel would recommend the appropriate mitigation and monitoring measures. 64. Active community participation is essential in planning and design in low-income areas because of the likelihood that arrangements will have to be made to relocate some households within the community to improve access and to make room for community sanitation facilities. The project will hire qualified social consultants to address any potential social issues due to land acquisition and prepare Resettlement Action Plans, as required, in compliance with the Resettlement Policy Framework (RPF) that has been prepared separately for the Project. Resettlement action plans, approved by the Government and IDA, would be required for all loss of property and income. 65. Procurement: Community facilitators could be provided by NGOs at their cost, or contracted as firms or individuals by the water utilities. All facilitators must meet the requisite educational and professional qualifications for their assignments. First NGOs would be invited to present a technical proposal setting out their understanding and approach to the assignment and the qualification of the proposed facilitators. Selection would be on the basis of the technical merit of their proposal. If suitable NGOs are not found, an advertisement would be placed in a local newspaper for interested candidates to submit their qualifications. Shortlisted candidates would then be invited to a workshop to better understand the assignment and requisite skills, and requested to associate with others to present a complete team and a technical proposal. Final candidate teams will be invited to present their technical proposal to the selection committee. 39

44 66. Civil works will be procured by the utilities according to World Bank procurement guidelines for OBA including national competitive bidding, employing standard bid documents. By using these procedures, the OBA project will meet the expenditure-based requirements for subsidy disbursements without the need for further evidence of output costs. Works will be packaged to maximize local employment opportunities. Approach to Sanitation in Commercial and High Income Residential Areas 67. In low income residential areas water supply and sanitation planning and implementation will be integrated (see the following section on water supply and sanitation in low income areas). In high income residential areas sanitation will be based on on-site septic tank systems financed by the owner. For highincome residential areas and multiple family housing developments, the project would explore legal means of requiring builders to provide community collection and treatment/disposal systems. With this policy change, developers would be required to finance sewers and community associations would be required to contract local private operators. In other, higher-density, mostly commercial areas, where onsite disposal is not possible, the Project will finance the constructiodextension of piped sewers. Wastewater stabilization ponds and sludge drying beds would also be financed. 4

45 Annex 5: Project Costs ETHIOPIA: Urban Water Supply and Sanitation Project Project Cost Sharing Component 1. Addis Ababa WSS 1A. Increased access to water 1B. Improved operational efficiency Category goods, works, consultants goods, works, consultants cost US$m AfD US$m GPOBA US$m 6.. IDA financing US$m C. Institutional reform 1D. Project Management Sub-Total 2. Secondary City WSS 2A. Increased access to water goods, consultants consultants, goods, training, operations goods, works, consultants B. Improved operational efficiency 2C. Institutional reform 2D. Project Management Sub-Total 3. Program Management Sub-Total 4. Unallocated Total goods, works, consultants goods, consultants consultants, goods, training, operations consultants, goods, training, operations oo oo IDA Financing Component 1. Addis Ababa WSS 1A. Increased access to water 1B. Improved operational efficiency Category goods, works, consultants goods, works, consultants cost US$m Yo of total 44% 19% Bank Financing US$ m % of Bank Financing % % 1C. Institutional reform 1D. Project Management goods, consultants consultants, goods, training, operations Yo 1 Yo % Yo Sub-Total 2. Secondary City WSS 2A. Increased access to water 2B. Improved operational efficiency goods, works, consultants goods, works, consultants % 25% 3% % % yo 2C. Institutional reform 2D. Project Management goods, consultants consultants, goods, training, operations % %.21 Yo.28 % Sub-Total 3. Program Management Sub-Total 4. Unallocated Total consultants, goods, training, operations oo % 1% 1 Yo 6 Yo % % 1.oo 1% 1.oo 1% % 1 1% 41

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53 Annex 6: Implementation Arrangements ETHIOPIA: Urban Water Supply and Sanitation Project Program Management 1. The project follows government s decentralized implementation arrangement which provides autonomy to the urban utilities to plan, implement and operate their system. The primary responsibility for implementation of urban water supply and sanitation improvements will rest with Town Water Boards, who will contract consultants to assist with planning, design, feasibility studies, capacity building, procurement and construction supervision as well as works contractors and suppliers. 2. The regional Water Bureaus will coordinate and monitor the over all program and facilitate the reform process. The RWDBs will also be primarily responsible for appraising readiness of Town Water Boards to receive further assistance. The Federal ministry of water resources (Mom) through its National Program Coordination Unit (NPCU) will assume technical oversight and arrange additional technical assistance and capacity building activities and provide federal level support to the reform process as and when requested by the utilities. 3, Under the ongoing Water Supply and Sanitation Project guidelines, toolkits and manuals were developed and on the job training is being provided to number of urban utilities to build their capacity and prepare them for effectively implementing investments. The secondary cities identified under this project are expected to receive capacity building assistance to strengthen their organizational arrangement, prepare their business plan and enter into a performance agreement between the manager and the water board. 4. The following institutions will be involved in project implementation: Ministry of Water Resources (MWR): The MWR will be responsible for overall coordination and monitoring and evaluation of the program, facilitation of capacity building and policy formulation. Its Water Resources Development Fund will be responsible for coordinating and monitoring the Federal Government s on-lending program for urban WSS sub-projects. The MWR will oversee the implementation of the ESMF and the RPF. Towards this end, the Ministry will recruit a capacity building consultant who will be located in the National Project Coordination Unit (NPCU). This consultant will be responsible for implementing the provisions of the ESMF and RPF and will coordinate these activities with the relevant personnel o f the regional city administrations. He will coordinate the preparation of the environmental and social sections o f the Annual Report with AAWSA. Regional Water Resources Development Bureaus (R WBs): The RWBs are responsible for overall program planning, management, coordination and capacity building at the regional level. The RWBs play an important role in arranging technical assistance for towns and cities to qualify for grantskredits to improve their water supply facilities, and in appraising t odcity business plans and designs. City Administration: The City Administration is responsible for appointing the water board chair person and other members according to the provisions of the enabling proclamation. The City Administration also approves investment plans and tariff adjustments. 49

54 Water Boards (?E?s): Water Boards are responsible for planning and managing town and city water supply systems. Water Boards enter into a performance agreements or contracts with a utility operator, who handles routine operations and maintenance and secures supplemental professional services to assist them to improve efficiency and expand the system over time. Water Utility Operator: Water utility operators are accountable to their Water Board under a performance agreement or contract for the operation and maintenance of a water supply system. City administrations: The city administrations are responsible for facilitating the stake holder consultation process and passing the local legislations needed to support the reform. Performance agreement: There should be a performance agreement between the Town Water Board and the General Manager of the utilities, which would set out agreed performance targets in accordance with the business plan and the operator should be responsible for reporting on performance indicators. Professional support to water board and operator: Utilities may need to have access to higher level professional support for such things as non-routine maintenance, quality assurance, planning for expansion and even such routine functions as billing, accounting and procurement. Cities will need to secure professional support on an ongoing basis through retainer contracts, franchising agreements or other means. The practitioner specialist groups on town water supply business planning and operations should explore alternatives and propose standard contract agreements. Capacity Building 5. Town Water Board and operator capacity building: Consultants will be contracted to assist cities Water Boards and operators to plan water supply and sanitation systems and to build capacity for oversight and management. Water Board members will learn about program development, management and monitoring and evaluation primarily by going through the planning process with the consultants. Operator staff will learn necessary skills primarily through on-the-job training by consultants. The Regional UWSS team will monitor progress at the Town Water Board level and can also provide technical assistance. 5

55 ~~ UWSSP- Diagram of Institutional Arrangements 1. Ministry of Finance and Economic Development (MOFED). t ji AAWSA Water Boards receive grant and Loan and administers SA. 2i. Ministry of Water Resources (MWR).WSS Program Coordination Unit. 2ii. Ministry of Water Resources (MWR) Water Resources Development Fund (WRDF). 3. Regional Water Resources Development Bureau Project Implementation Support Units. 5. Secondary Cities Water Boards receive grant and Loan.... Tasks at each stage i 1. Signs credit/grant agreement and subsidiary loan agreement with AAWSA. I : 6. Contractors, Consultants, Suppliers, and Trainers. i i. a. Release funds to Cities water Boards based on appraised projects and agreed financing schedule, b. Program management, support to Regions, & M&E; review and reconcile periodic financial, procurement and physical accomplishment reports from Regions and individual cities i 2ii. Implementation agency; conduct final i appraisal of project proposals and monitor i implementation ",, i 3. a. Coordinate Regional program; Pre appraise proposed projects from the Cities. i b. Monitor implementation and provide technical i support: assistance in review and refinement of i i i policy and legislations. i c. Implement Regional capacity bldg program i i d. Compile physical and procurement reports, :. consolidate and submit to MWR a. Identification, proposal preparation and i implementation of projects. i b. Environmental and social management i 6. a. Provision of services, goods, i works & on the job training. i b. Participate in training, i practitioner forum.... i i i i 51

56 Annex 7: Financial Management and Disbursement Arrangements ETHIOPIA: Urban Water Supply and Sanitation Project Introduction 1. The financial management assessment is conducted in line with the Financial Management Practice Manual issued by the FM Board on 3 November 25. The objective of the assessment is to determine whether the implementing entities have acceptable financial management arrangements, which will ensure: (i) the funds are used only for the intended purposes in an efficient and economical way; (ii) the preparation of accurate, reliable and timely periodic financial reports; and (iii) safeguard the entities assets. As part of the FM assessment, the team visited Ministry of Water Resources (Mom), Addis Ababa Water and Sewerage Authority (AAWSA) and Awassa and Jimma Water Supply and Sewerage Enterprises. The FM assessment was conducted during the months of January and February 27. Country Issues 2. The recently completed Joint Budget and Aid review (JBAR) and the Fiduciary Assessment (FA) show that Ethiopia has made significant progress in strengthening public financial management in recent years. As part of the JBAR, the Bank in collaboration with other donors, conducted a Public Financial Management (PFM) status review using the Public Expenditure and Financial Accountability (PEFA) framework. Out of the fourteen indictors covered under this review, Ethiopia met 7 of the indictors related to the planning, budgeting and reporting systems. Generally, Ethiopia scores high in macroeconomic management, including aggregate fiscal discipline and minimizing fiscal risks. Satisfactory progress was also noted in budgeting and accounting reform, though the adequacy and quality of budget reporting leaves room for improvement and remains a key concern. 3. The FA, which was completed in early 25, notes that considerable progress has been made in implementing FM reforms in both federal and regional level administrations. The areas of improvements include budget processes, internal controls and cash management. Also, some steps have been taken in reforming internal and external audits. Nevertheless, there are some weak areas that require attention. These include delays in financial reporting (both in-year and annual), inadequate capacity of the auditorsgeneral to discharge their responsibilities; and weakness in legislative scrutiny of audited financial reports. At Regional level, the situation varies from region to region. The roll-out of PFM reforms occurred first in SNNP and Tigray regions, with the support o f the Government and donor initiatives to support these reforms. They both show improvement in the overall public finance function and a consequential reduction in fiduciary risk. Other Regions are at an earlier stage of investment in PFM or have not yet commenced their plans and therefore demonstrated less progress in PFM improvement. More recently, Amhara and Oromiya have improved their performance significantly, as evidenced by timeliness in closure o f accounts and also implementation of the budget and accounts reforms. 4. Ethiopia s public financial management reforms have been managed by the Expenditure Management and Control sub-program (EMCP) of the government s civil services reform program. EMCP has developed a revised strategic plan to implement the nine components of the sub-program Mobilization behind the EMCP (in terms of financial and human resources), as a key component of the Public Sector Capacity Building Program (PSCAP), is now a priority. 52

57 Summary of Program Description 5. The proposed project development objectives are to: Reduce the supply-demand gap for potable water in selected urban areas in Ethiopia; Improve access to improved sanitation in selected urban areas of Ethiopia; and Improve the performance of selected urban water and sewer utilities through sector reform and increased private sector participation. Risk Assessment and Mitigation Risk Inherent risk Country level Entity level Project level Control Risk Budgeting Risk rating S S S S S M Risk Mitigating Measures Incorporated into Project Design The project has a capacity building component to strengthen the financial management systems o f I A S Establishment o f an integrated PCU in AWWSSA to coordinate project activities. The PCU has recruited a finance officer. Recruitment of an additional accountant at MoWR is one o f the effectiveness conditions Conditions for negotiations, Board or Effectiveness (Y/N) Y N Remarks There is a civil service reform Project, which is ongoing and being undertaken by the government in developing the accounting and auditing profession and improve the salary scale of civil servants. This will have a long-term effect rather than a short-term effect. Only AAWSA has previous experience in implementing donor-financed projects; the other four towns water utilities do not have any experience o f implementing donor-financed project. MoWR and Regional Water Bureaus will provide technical assistance to town water utilities The project has a capacity building component All implementing agencies prepare annual budget and they prepare regular reports comparing budget and actual 53

58 Risk Accounting Internal Control Funds Flow Financial Risk rating S M S S Risk Mitigating Measures Incorporated into Project Design The project has a capacity building component to strengthen capacity at all levels The accountant to be hired for MoWR will provide technical support to town water utilities The project will design Conditions for negotiations, Board or Effectiveness (Y/N) N N Y N Remarks The four towns water utilities maintain simple accounting records, they do not produce complete balance sheet and profit and loss account All the implementing agencies have relatively good internal control systems, the internal control system includes internal audit activities Funds may not flow on time from MoWR to town water utilities. Finance Officers at MoWR will visit regions to ensure that utilities submit regular SOEs for replenishment of the DAs There could be delays in getting financial reports from town water utilities. reports Submission of the audited WSS project accounts for the year ended 7 July 26 will be a condition for Y AAWSA and MoWR will close their accounts, within three months after the end of each fiscal year so that the auditors will have three months to complete the audit H-High, S-Substantial, M-MI erate, L-Low 6. The overall financial management risk rating for this project is assessed as Substantial. Strengths 7. The country s discipline in executing budget and complying with the existing government regulations are the major strengths indicated in most of the PFM diagnostic works conducted so far. AAWSA has a previous experience in implementing donor-financed projects, including Bank-financed projects. To implement the project properly, AAWSA established an integrated PCU with adequate and experienced staff. 8. The four towns water supply and sanitation enterprises do not have any experience in implementing donor-financed projects. They only maintain basic accounting records; they do not produce balance sheet and profit and loss account. All of them are in the process of updating their accounting systems to record all financial transactions so as to produce complete financial statements. 54

59 Weaknesses and Action Plan Significant Weaknesses Action Responsible body Completion Lack of adequate staff at the Finance Department of MoWR Recruitment of an additional accountant at the Finance Department of MoWR to further strengthen the existing capacity MoWR Before effectiveness Delays in getting regular financial reports on timely basis Organizing continuous training for finance staff of all implementing agencies MoWAAWSA Regular Implementing Entities 9. Ministry of Water Resources (MoWR), Addis Ababa Water Supply and Sewerage Authority; and Awassa, Gondar, Jimma and Mekelle Water Supply and Sewerage Enterprises will implement the project. MoWR will coordinate project activities for the four enterprises. Each of the enterprises will implement the project activities in its town. Regional Water Bureaus will provide technical assistance to the four enterprises. AWSSA will be responsible for the implementation of the proposed project activities to be undertaken in Addis Ababa city. Budgeting 1. AWSSA and the four enterprises prepare annual budget. Annual budgets are approved by their respective board of management. Each of the PIUs prepares quarterly and annual reports comparing budget and actual. The regular reports are submitted to the board of management for review and followup. The proceeds of the project will be included in the annual budget of the IAs. Accounting 11. AAWSA has a complete accounting system. It follows accrual-basis of accounting on a double entry accounting system. It follows the International Financial Reporting Standards in recording and reporting financial transactions. It has a financial management manual, the manual includes complete chart of accounts-the chart of accounts will be revised to accommodate the recording and reporting of the project transactions. The finance function of AAWSA is the responsibility of the Finance Department; the Head of the Finance Department reports to the Deputy General Manager for Resources Management of AAWSA. In total, the Finance Department has thirty staff with adequate of qualifications and experience, seven of them has first degree in Accounting. For the day-to-day follow-up of the project financial transactions, a new finance office has been in place under the PCU. The finance officer reports to the Head of the PCU administratively and to the Head of the Finance department technically. 12. The four cities water utilities maintain basic accounting records. They maintain ledgers for cash, receivables, payables, revenue and expenditures. They do not maintain complete records for fixed assets, depreciation, stock, provisions, and taxation. As a result of incomplete records, they do not produce annual financial statements; they prepare statements of receipts and payments on regular basis. Each of the town water utilities has adequate staff to look after the existing financial transactions. With a few 55

60 days training, the staff of the town water utilities are capable of recording and reporting the financial transactions of their offices. 13. MoWR is currently implementing a Bank-financed project, Water Supply and Sanitation Project (WSSP). The finance function for the existing project is being handled by the Finance Department of MoWR. To strengthen the Finance Department of MoWR, contractual staff have been employed and an additional accountant will be hired to strengthen the project finance team. As MoWR will manage one of the Designated Accounts, the staff working for the existing project and the additional accountant will look after the financial transactions of the proposed project. The financial management manual and other formats for the existing project will be equally applicable for the proposed project as the implementation arrangements for the two projects are more or less the same, the only change MoWR will do is to assign account numbers for receivables, payables, revenue and expenditures and communicate the same to town water utilities. Internal Control and Internal Auditing 14. Internal control comprises the whole systems of control, financial or otherwise, established by management in order to (i) carry out the project activities in an orderly and efficient manner; (ii) ensure adherence to policies and procedures; and (iii) safeguard the assets of the project and secure as far as possible the completeness and accuracy of the financial and other records. 15. AAWSA and the other cities water utilities have good internal control systems, which help the management of the project in achieving the project objectives in an orderly and efficient manner. Thus, the main focuses of the internal control system are placed on the following: - Segregation of duties - Physical control of assets - Authorization and approval - Clear channels of command - Arithmetic and accounting accuracy - Integrity and performance of staff at all levels - Supervision 16. All of the implementing agencies have internal audit units reporting to the general manager of their respective offices. For example, AAWSA has seven internal auditors, who perform post audit activities. The internal audit units will include the project financial transactions in their work program. 56

61 Fund Flows and Disbursement Arrangements Flow of funds to Implementing Agencies GranVCredit Account Designated Account A-AWSSA Designated Account B-MoWR (including allocations for the four enterprises) Birr account Payment to contractors/ suppliers/ I Payment to contractors/ suppliers/ Consultants I I Payment to contractors/ suppliers/ Consultants I Payment to contractors/ suppliers/ Consultants suppliers/ suppliers/ 17. To transfer money from the grant proceed, two Designated Accounts (DAs) will be opened-da-a for AAWSA and DA-B for the four towns water utilities and MoWR. AAWSA will be responsible for the management DA-A and MoWR will be responsible for DA-B. AAWSA may effect payments from DA-A or transfer money into local currency account from the DA and effect payments from the local currency account. Each of the town water utilities will get money from DA-B based on approved proposal and grant/financing agreement to be entered into between MoWR and each of the town water utilities. Each of the town water utilities will open a separate bank account for the project. The town water utilities will keep records on receipts and uses of funds, and will submit regular financial reports to MoWR. Subsequent transfers will be made on the basis of utilization reports. All supporting documents will be kept in each of the town water utilities. Disbursement Methods 18. The project will start with the disbursement methods based on designated Account Advance, Direct Payment and Special Commitment. At the beginning of the project, the designated accounts will be replenished on the basis o f statements of expenditures. It is possible to use the interim unaudited financial reports for the replenishment of the DA after IDA is satisfied with the adequacy of the financial arrangements. Proceeds from the GPOPA will be disbursed according to the GPOBA guidelines. 57

62 Minimum Value of Applications 19. The minimum value for Direct Payment and Special Commitment will be USD 1,,. Reporting on Use of Credit Proceeds 2. The supporting documentation for reporting eligible expenditures paid from the designated accounts will be summary reports of Statements of Expenditure (SOEs) and records evidencing eligible expenditures for payments against contracts valued above USD 2, for works and goods, USD 1, for consulting firms and USD 5, for individual consultants. 21. The supporting documentation for direct payment requests should be records evidencing eligible expenditures (copies of receipt, supplier s invoices, etc). 22. The project will submit a bank statement and a reconciliation of the designated accounts together with the withdrawal application on a monthly basis. 23. All supporting documentation for SOEs will be retained at each of the implementing agencies and must be made available for review by periodic World Bank review missions and external auditors. 24. The formats of the interim un-audited financial reports have been agreed during the negotiations and attached to the disbursement letter. Designated Accounts 25. The total allocation of the Designated Account will be USD 7 million for DA-A an USD 3 million for DA-B respectively. Counterpart Contribution 26. The Government will make all arrangements necessary to ensure the timely mobilization of the counterpart funds required for project implementation. The government contribution will be in the form of salaries of civil servants working on the project, office spaces and other operating costs related to the project. Retroactive Financing 27. Government has requested retroactive financing for up to USD 1 million to cover eligible expenditures incurred under categories 1, and 2 after April 1,27 and up to the date of the grant signing. 58

63 Table C: Allocation of Credit proceeds Category (1) Works and Goods (a) for Part A - AAWSA (b) for Part B - Secondary Cities Amount of the Credit Allocated (Expressed in US$) 41,25 2 1,34 Amount of the Grant Allocated (Expressed in US$) 15,1 5,3 Percent of expenditure to be financed 1% 1% (2) Consultants (a) for Part A - AAWSA (b) for Part B - Secondary Cities (c) for Part C - MWR 1, ,25 2, % 1% 1% (3) Training (a) for Part A - AAWSA (b) for Part B - Secondary Cities (c) for Part C - MWR 2 3 1% 1% 1% (4) Operating Costs (a) for Part A - AAWSA (b) for Part B - Secondary Cities (c) for Part C - MWR % 1% 1% (5) Unallocated TOTAL 1, 65, 3, 35, Financial Reporting 28. The existing accounting and reporting system of AAWSA is capable of producing accurate and reliable information regarding project resources and expenditures. The system will provide reliable records and reports on all assets and liabilities and financial transactions of the project, and sufficient financial information for managing and monitoring activities. The four cities water utilities prepare simple regular financial reports, including of receipts and payments. MoWR will provide technical assistance to further strengthen the four cities water utilities. MoWR will consolidate the financial reports fkom the four cities water utilities with its records and produce consolidated reports. 29. AAWSA and MoWR will produce Interim Unaudited Financial Reports (IFRs) and submit the same to IDA forty-five days after the end of each quarter. At a minimum, the financial reports should include the sources and uses o f funds, expenditures by main expenditure classifications, beginning and ending cash balances and other supporting schedules. The formats of the IFRs will be agreed during negotiation. Auditing 3. Since the Federal Auditor General is responsible for auditing all government funds, it will conduct the audit or assign other external auditor to the project. The existing external auditor for AAWSA and MoWR is the Audit Services Corporation. AAWSA and MoWR will submit audited financial statements six months after the end of each fiscal year. Since AAWSA is an independent 59

64 organization, it will prepare an entity accounts (the notes to the accounts will include the financial transactions of the project). The auditor will express a single audit opinion on the entity accounts. MoWR will prepare consolidated project financial statements and the auditors will express a single audit opinion on the project accounts. In addition, Regional Audit Bureaus undertake regular audits on the accounts of utilities The latest available audited financial statement for AAWSA is for the year ended 7 July 24. AAWSA is in the process of closing its accounts for the year ended 7 July 25 and 26. AAWSA intends to close its accounts for the year ended 7 July 26 by the end of this fiscal year. The audited financial statements for Water supply and Sanitation Project (WSSP), which is implemented by MoWR, for the year ended 7 July 26 has been received by the Bank. Conditions For Effectiven ess. 32. Recruitment of an additional accountant for the Finance Department of MoWR will be one of the effectiveness conditions. Financial Covenants 33. The recipients shall maintain a financial management system and prepare project financial statements in accordance with International Accounting Standards. AAWSA and MoWR shall submit audited financial statements no later than six months after the close of each fiscal year. In addition, AAWSA and MoWR shall submit interim unaudited financial reports forty-five days after the end of each calendar quarter. Supervision Plan 34. Considering the nature of the project, the Bank s supervision mission should be as regular as possible. Each year, there should be at least two supervision missions. 6

65 Procurement Environment Annex 8: Procurement Arrangements ETHIOPIA: Urban Water Supply and Sanitation Project 1. Public procurement in Ethiopia follows the federal structure of the government. Procurement at Federal level is governed by the procurement code issued by the Federal Government in January 12,25 and the Procurement Directives released in July 24. At Regional level the procurement code is enacted by the Region government and the procurement directive is adapted to each Region based on the model prepared by the Federal Government. 2. The Country Procurement Assessment Report (CPAR) done in 22 identified weakness in the country procurement system. The Government has taken the following actions based on the recommendation of the CPAR: (i) A new procurement code has been enacted at federal level and at the four major regions that would be included in the project; (ii) an independent Public Procurement Agency with monitoring functions has been established at Federal level; (iii) new Federal Procurement Directives were issued in July 25; (iv) Standard bid documents for procurement of works, goods and selection of consultants have been prepared and distributed to Federal and Regional government bodies; and (v) procurement has been fully decentralized to implementing agencies. However, gaps in capacity building still remain, as the large training program envisaged in the CPAR action plan could not be implemented in full. In addition Independent regulatory bodies have not been established in the regions. It has been reported that professional staff have been assigned at the Oromia region and that similar efforts have been made at the SNNPR. However, there is a need for firther actions to make the regulatory agencies at each of the regions fully staffed and functional. General 3. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 24 revised October 1, 26; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 24 revised October 1,26, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The various thresholds indicated below are for the purpose o f the initial procurement plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 4. Procurement of Works: Works procured under this project would include: Water treatment plant expansion, Dam Rehabilitation, Drilling Bore holes, Restoration of existing water supply and sewage treatment plants, repair and maintenance of water supply networks, expansion of piped water and sewer networks in urban areas. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank for all NCBs. Works estimated to cost less than USD 1,, per contract may be procured using NCB. Shopping method can be used for contracts with estimated values less than USD 5,. 5. Output Based Aid: Funds would be provided for low income areas under a separate grant agreement that would be signed between the Bank and MoFED. The MoFED will in turn sign sub-grant agreement with the MWR and AAWSA. The funds would be disbursed against clearly defined outputs after independent verification. The measurable outputs shall include number of new connections that 61

66 meet the agreed specifications, level of services and period of service. Payments shall be made based on an independent Engineering estimate for the first year and based on updated unit rates taking into account the actual results of the procurement process for the following year. Procurement o f goods, works and selection of service providers shall be done in accordance with the World Bank procurement guidelines. The detail procedures and procurement arrangements for the OBA would be agreed and defined in the grant agreement. 6. Procurement of Goods: Goods procured under this project would include: Supply of pipes and fittings, water meters, vacuum Trucks, vehicles, motorcycles, electro mechanical equipment and laboratory equipment. The procurement will be done using the Bank s SBD for all ICB. Goods and Equipment contracts estimated to cost less than USD 2, per contract may be procured using NCB using national SBD agreed with or satisfactory to the Bank. Shopping method shall be used for contracts with estimated values of less than USD 5,. 7. Selection of Consultants: Consultant services under the project shall include: Engineering Design and Supervision Services, EIA, technical assistance for policy and legal kame work analysis, studies related to implementation of Institutional reorganization and capacity building. Most contracts with firms will be awarded through the use of the Quality and Cost Based Selection (QCBS) described under sections of the Consultant Guidelines. Consulting Services for audit and other contracts of a standard or routine nature may be procured under the Least Cost selection method (LCS) described under section 3.6 of Consultant Guidelines. Consulting assignments costing less than USDlO,OOO may be procured through the Selection based on Consultants Qualifications (CQS): Short lists of consultants for services estimated to cost less than USD 2, equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Contracts for individual consultants (IC) will be done by comparison of the qualifications of at least three candidates, in accordance with Section V of the Consultant Guidelines. Single-source selection (SSS) will be used in exceptional cases in accordance with Sections 3.9 to 3.13 of the Consultant Guidelines. 8. Operating Costs: Expenditures made for operational costs such as fuel and stationery will follow Ethiopian Government practices in accordance with the Federal Public Procurement Directives of July 25 or, whenever those Directives do not apply, commercial practices commonly used for the same purposes. 9. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, will be presented in the Project Implementation Manual. 1. Standard Bid Documents and Manuals: The Bank s standard bid documents (SBD) will be used for all tenders for procurement of goods and works under International Competitive Bidding (ICB). Domestic preference would be applicable under ICB in accordance with clause 2.55 and Appendix 2 of the Bank s guidelines. The Government s standard bidding documents for procurement of goods and works for National Competitive Bidding (NCB) were reviewed by the Bank and found to be generally consistent with the Bank s guidelines and procedures. However, some provisions in the Government s standard bidding documents need to be adjusted to ensure that the documents are fully compatible with the Bank s guidelines. The standard documents of the government can be used for the procurement of goods and works provided that: (i) the standard documents are used for NCB without pre-qualification only; (ii) margin of preference is not applicable; (iii) bidders are given a minimum of 3 days to submit bids from the date of availability of the bidding documents; (iv) Foreign bidders are not excluded from participation; and (v) Results of evaluation and award of contract are published. Detail comments have been provided by the Bank for revision of the bidding documents. 62

67 11, The procurement procedures shall be outlined in the Project Implementation Manual (PIM). The SBDs to be used for procurement of goods and works using NCB that are revised as per the comments provided and found to be acceptable by the Bank would be provided to each of the Utilities and the AAWSA with the PIM. Assessment of the agency s capacity to implement procurement 12. The National Program Coordination Office of the Ministry Water Resources (MWR) will be responsible for overall coordination, monitoring and evaluation of procurement activities under the project. 13. A highly qualified procurement specialist with sufficient experience on ICB and selection of International consultants would be employed by the MWR to co-ordinate and follow-up the procurement activities and provide support to the AAWSA and the four cities. The consultant would be responsible for providing training for the management staff and tender evaluation committees in the four regions. In addition the consultant would be responsible for taking the lead role in the preparation of bidding documents for ICB contracts and RFP for selection of International consultants and the preparation of evaluation reports until the capacity of the cities and AAWSA is adequately strengthened to handle the procurements. The employment of an International Procurement specialist is under process at AAWSA and the consultant would be responsible for providing support to AAWSA on handling the procurements under this project. 14. Procurement activities for component 1 would be carried out by the AAWSA. The Water Utilities (WUs) in Awassa, Jimma, Gonder and Mekele would be responsible for handling their procurements in the respective Regions. The Water Utilities would be initially responsible for handing procurement using shopping and NCB procedures and selection of consultants where the short-list is comprised of national firms only in their respective regions. Procurement of ICB contracts and selection of International consultants would be fully delegated to the WUOs after confirming that the WUO have enhanced their capacity to a satisfactory level. The Regional water resource development bureaus would provide engineering and technical support to the water utilities. The WUOs would assign qualified professional staff to work with the International Procurement Consultant throughout the entire procurement process including procurement planning, preparing bidding & RFP documents and evaluation of bids and proposals in order to enable them to build their capacity. The WUs would be delegated to handle national procurement using NCB and shopping immediately after (i) employment or assignment of a qualified staff; (ii) participation of the staff in the training program if already not adequately qualified; and (iii) implementation of the Orientation program. Further delegation would be given to the WUs after conducting an assessment and confirming that they have the built the capacity to handle the procurements. 15. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Samuel Haile Selassie and Abiy Admassu from January 16 to 18,27 and February 2,27. The assessment reviewed the organizational structure for implementing the project and the interaction between the project s staff responsible for procurement and the regions at the relevant units in each of the offices. 16. The AAWSA has limited capacity in handling donor financed contracts and large scale contracts. The procurement procedures being followed by AAWSA were not fully consistent with the Bank guidelines. The deviations noted include (i) use of merit point system (5% finance, 4% technical and 1% delivery) for procurement of standard goods; and (ii) bracketing (rejection of bidders with prices that vary more than 2% from the adjusted Engineers estimate) for works. In addition the staff of AAWSA do not have sufficient training on procurement. 63

68 17. The Water Utilities in Awassa, Jimma, Gonder and Mekele have very limited experience in procurement. The utilities have been generally handling small value procurements and the procurement was managed by the tender committee members. None of the utilities in the four regional cities have staff with knowledge in Donor financed procurement. The tender committee members were selected from different departments in the cities administration. Tender committees of WUOs are composed of professionals and support staff representing the respective WU departments 18. Procurement decisions are approved by the Utility manager at Awassa, Jimma, and Mekele. However at Gonder contract award of more than ETB 5, (Approx. USD 57,) are approved by the Water Board. 19. The following actions have been agreed to build the capacity of the AAWSA and the Water Utilities in the four cities. I Action 1. One qualified consultant procurement specialist would be employed at the Ministry of Water Resource before effectiveness to assist in the management of the procurement functions and building procurement capacity. The consultant would be responsible for providing technical assistance for (i) preparing and delivering procurement capacity building workshops at AAWSA and the four cities; (ii) Preparing bidding documents, bid evaluation reports, and contract documents; (iii) mentoring procurement staff at the MWR, and the four cities; (iv) reviewing procurement documents; and (v) reviewing the institutional setup for managing procurement and making recommendations for building capacity. 2. A procurement orientation workshop will be conducted for staff at AAWSA and the four WUs that are involved in the procurement decision-making process including tender committee members, Division Heads, Department Heads. The Orientation would be conducted during launch of the project. Each of the W Us would review their institutional setup and restructure their internal procurement management system as required. 3. Each of the Water Utility Operators would assigdemploy a procurement staff with at least a basic degree preferably in Engineering with sufficient knowledge on procurement whose primary responsibility would be to handle the procurements under the project. Intensive training would be provided to the staff if required. 4. The Project Implementation manual that was developed under the Water Supply and Sanitation Project would be adopted for the project to ensure that it adequately meets the specific needs o f the Project. The PIM should include a description of a procurement monitoring and reporting system based on which the MWR would regularly review the procurement activities in each o f the cities. In addition the PIM should include clear information on all key aspects of procurements processing, including roles and responsibilities and records management, 2. The overall project risk for procurement i s high. Responsible MWR MWR, W Us and AAWSA WU MWR Date by effectiveness by effectiveness Within three months of effectiveness and before any disbursement is made to the city. by effectiveness 64

69 Procurement Plan 21. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement and selection methods. The plan has been agreed between the Borrower and the Project Team on February 27,27 and is available at MWR (National Project Coordination office) and AAWSA (Project preparation and follow up office). It will also be available in the project s database and in the Bank s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Frequency of Procurement Supervision 22. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended yearly supervision missions to visit the field to carry out post review of procurement actions. Details of the Procurement Arrangements Involving International Competition 23. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting: 1 Ref. No Contract Estimated Procurement P-Q Domestic Review Expected Comments (Description) cost Method Preference by Bank Bid- ( ) (yesho) (Prior / Opening Post) Date ~ 1. Addis Ababa Water and Sewerage Authority 1.1 Increased access to water and sanitation Legedadi Treatment Plant Capacity 5,4 ICB Yes Yes Prior Aug. 28 Expansion Dam Rehabilitation 5 ICB Yes Yes Prior July 28 Drilling and equip 75 Production Boreholes 12, ICB No Yes Prior June 28 Water, Wastewater Multiple and drainage for low 8, ICB No Yes Prior contracts income areas Procurement of New Vacuum Trucks 4, ICB No Yes Prior Sep. 28 Equipment, spares and Rolling Stock 2, ICB No Yes Prior Dec

70 I No. Contract (Description) Estimated ( ) 4 Procurement Method Preference (yeslno) by Bank (Prior I Post) Bid- Opening fittings for transmission and Primary and secondary distribution line Supply of water meter, pipes and fittings for tertiary distribution line Supply of vacuum truck Supply of Water Quality Laboratory Ea uioment. 3,89 ICB Jan ICB Prior 6 ICB Prior 25 ICB Prior Nov. 27 Civil Works (Source development, transmission and 1,195 ICB No Yes Prior distribution work) Supply of pipes and fittings for transmission and Primary and 1,2 ICB No No Prior secondary distribution line Supply of vacuum truck 8 ICB No Yes Prior 4 Supply of Water Quality Laboratory 25 ICB No Yes Post Equipment. 4. Mekelle - I Civil Works (Source development, I 1,49 I ICB No Prior transmission and distribution work) - Civil Works (Drying 1,2 ICB No bed) I Prior Supply of pipes and fittings for ~ transmission and 1 2,1 I ICB No No Prior Primary and I 1-7- Mar. 28 Apr. 28 Nov. 27 Nov. 27 Jan. 28 Aug. 28 Jan Supply of pipes and fittings for tertiary 9 ICB distribution line Supply and installation of electro-mechanical equipment 5 ICB - No - No - Prior Prior Jan. 28 Jan

71 - 1 Ref. No Contract Estimated Procurement P-Q Domestic Review Expected Comments (Description) cost Method Preference by Bank Bid- ( ) (yes/no) (Prior / Opening Post) Date Supply of vacuum truck Procurement of transportation means (Vehicle and/or motor cycle) 6 65 ICB ICB No No Yes Yes Prior Prior Nov. 27 Nov. 27 Laboratory Equipment 25 ICB No Yes Prior Nov. 27 Civil Works (Source development, transmission and distribution work) Supply of pipes and fittings for transmission and Primary and secondary distribution line Supply of pipes and fittings for tertiary distribution line Supply of vacuum truck Supply of Water Quality Laboratory Equipment. 1,64 ICB No Yes Prior Mar. 28 2,6 ICB No No Prior Jan ICB No Yes Prior Nov ICB No Yes Prior Nov ICB No Yes Post Nov. 27 (b) ICB contracts for procurement of goods and works estimated to cost above USD 2, per contract and all direct contracting will be subject to prior review by the Bank. 24. Consulting Services (a) List of consulting assignments with short-list o f international firms. 1 Ref. No Description of Assignment Estimated Selection Review Expected Comments.cost Method by Bank Proposals (Prior / Post) Submission Date Legedadi Treatment Plant Capacity 75 QCBS Prior Oct. 27 Expansion Water Line Extension & New 1,35 QCBS Prior Aug. 27 Connection Drilling and equip 75 Production 1,567 QCBS Prior Dec. 27 Boreholes Water, Wastewater and drainage for 1,44 QCBS Prior Feb. 28 low income areas Engineering and Studies 1, QCBS Prior Multiple 67

72 ~ 12 I 13 2 Description of Assignment EIA and RAP Network Rehabilitation Replacing malfunctioning Water Meters Sub-system Isolation and Installation of Bulk meters Mav uvdatina Public Awareness Creation AAWSA Oraanizational Reform Corporate Financial and Business Planning Private Sector Participation Capacity Building Estimated Selection Review Expected Comments cost Method by Bank Proposals (Prior / Post) Submission contracts 1, QCBS Prior Multiple contracts 1,851 QCBS Prior Multiple contracts 995 QCBS Prior Multiple contracts 463 QCBS Prior 3 OCBS Prior June QCBS Prior Multiple contracts 5 OCBS Prior Feb QCBS Prior Jan QCBS Prior Jan. 28 1,1 QCBS Prior Multiple contracts 1 Consultancy for the design review 34 QCBS Prior Jan. 28 and supervision for water supply system including auxiliary buildings 1 Consultancy for the design review and supervision for water supply system including auxiliary buildines 19 QCBS Prior Jan Consultancy for the design review 191 QCBS Prior Jan. 28 and supervision for water supply system including auxiliary buildings 1 Consultancy for the design review 19 QCBS Prior Jan. 28 and supervision for water supply system including auxiliary buildings (b) Consultancy services estimated to cost above USD 1, per contract for firms and USD 5, for individual consultants and all single source selection of consultants will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than USD 2, equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 68

73 Annex 9: Economic and Financial Analysis ETHIOPIA: Urban Water Supply and Sanitation Project Financial and Economic Internal Rates of Return 1, AAWSA. Results of the financial and economic modeling are shown in Table 9.1 for AAWSA. FNPV (Birr Million) 136 FIRR (%) ENPV EIRR (%) (Birr Million) The difference between the FlRR and ERR are estimated VAT taxes for selected portions of the Project. Taxes are estimated to represent 15 percent of the cost of new civil works, engineering and equipment investments. Model Methodolop and Key Assumptions 3. The model is a with and without cost benefit models, with a 15 year analysis period and a 1 percent discount rate. All monetary amounts are in 27 Birr. A condensed worksheet of the model is shown at the end of this Annex. An electronic version of the complete financial model is in IRIS for the Project. 4. For the Base Case, Table 9.2 illustrates the principal assumptions. Average Tariff Increase Increase in Potable WaterA'ear Increase in Customers Domestic Standposts Commercial & Institutional Without Project With Project Notes 5.% For the 5 Project years only, after than the increase is 1.O Mm Mm3 By Project end 12, 16, Ditto 75 1,5 Ditto 12, 16, Ditto 5. As shown in Table 9.2, under the Project, 44,3 new connection are added to the AAWSA system. In addition, the Project provides about an additional 1, cubic meter per day in potable water supply (36.5 million cubic meters per year). 6. The Based Case model for AAWSA assumes an IDA plus AFD investment of just over US75 million, which represents civil works and the associated engineering and supervision, goods related to potable water supply and sanitation and project management. The investment amount used in the model does not include Sector Reform or Training and Workshops. Sensitivity and Switching Analysis. 7. Key risks outlined in Section C4 of the PAD are modeled for their effect on the AAWSA Base Case results in four scenarios as follows: Scenario 1. No tariff increases. 69

74 Scenario 2. Incremental water produced by the Project i s reduced by 2 percent caused by less than expected groundwater yields and/or less than successful reductions in nonrevenue water. 8. Results of the sensitivity analysis are shown in Table 9.3 below: FIRR (%) Base case Scenario > The same scenarios were then modeled to determine what adjustment would be necessary to cause the NPV to equal zero. The results for AAWSA are shown in Table 9.4. Scenario 1 2 Value When NPV=O Tariff Increase = 3.2%, (versus 5 % in Base Case) New Water is 52% less than Base Case Implications for Proiect Implementation 1. As shown above, regular small tariff increases while the Project is underway is very important for the Project s long-run sustainability. In addition, regular tariff increases will be required even after this Project is completed in order to afford any large scale basin transfer. Thus, small increases now will help to reduce the likely much larger increases that will come with any basin transfer scheme Secondary Citv. The methodology used the financial and economic benefits for a typical secondary city are the same as described above for AAWSA, with one exception. Given the less dense and more rural nature of the secondary cities, for the economic benefits it was assumed that unconnected households would save time by having a water connection closer to the home. 12. Following the economic analysis used in the PAD for the on-going IDA financed Water Supply and Sanitation Project (Cr. 391, H85), and updating the wage data for 27 hourly rates, the economic benefit of time savings not having to fetch water is calculated as follows: The daily rate for labour in the secondary cities is Birr 1 per day. In a typical secondary city, 25 percent of the population is not close to a water point now and would save the 2 hours per day from the Project s investments. It is assumed that two hours per day per household on average can be saved by the Project, of which 5% would go to productive uses and 5% to leisure activities. 13. Investment in a secondary city is assumed to be US$8 million, the number of domestic water connections doubles from about 8, to 16,, and water production increases by 1.8 million cubic meters per year. 14. With these assumptions, the following financial and economic benefits are calculated. FNPV FIRR (%) ENPV EIRR (%)

75 Annex 1: Safeguard Policies ETHIOPIA: Urban Water Supply and Sanitation Project 1. The project has triggered the safeguard policies OP 4.1 Environmental Assessment; OP Physical Cultural Resources; OP 4.12 Involuntary Resettlement; OP 4.37 Safety of Dams; and OP 7.5 Projects on International Waterways. The project s environmental screening category is B, and the safeguard screening category is S2. The sections below describe the steps taken by the Borrower to address potential adverse environmental and social impacts that might result from future project activities. 2. OP 4.1 Environmental Assessment: This policy has been triggered due to potential adverse environmental and social impacts such soil erosion, soil and water pollution, a potential increase in malaria, loss of vegetation, traffic accidents and air pollution that might result from the project s construction and rehabilitation activities under components 1 and 2. Consistent with OP 4.1, the Borrower has prepared an Environmental and Social Management Framework (draft ESMF) because the exact locations and potential negative localized environmental and social impacts of the future investments could not be identified prior to appraisal. 3. The ESMF outlines an environmental and social screening process which includes (a) the completion of the environmental and social screening form (appendix 3) by qualified personnel; (b) the assignment of the appropriate environmental category to the sub-project; (c) the recommendation regarding the appropriate level of environmental work based on the screening results; (d) public consultations; (e) review and clearance of the environmental and social screening results as well as separate EIA reports; and (f) environmental monitoring and evaluation. 4. The ESMF includes an Environmental and Social Management Plan (ESMP) which outlines the institutional arrangements for the implementation and monitoring of mitigation measures, cost estimates and time horizons. For example, potential groundwater contamination due to the construction and operation of new drilled wells is to be mitigated through proper designs and construction techniques as well as periodic water quality testing and the planting of shbs to prevent contamination of well water. Monitoring will be the responsibility of the implementing agencies for each sub-project as well as water testing by the Federal Ministry of Water Resources. While the costs of mitigation measures are included in the construction contracts, the cost of monitoring (water testing) will cost $5, per year during project operation. Similarly, monitoring of the implementation of mitigation measures at the Legedadi dam will amount to $1,. The ESMP will be included in the Project Implementation Manual. The federal Environmental Protection Agency (EPA) will monitor the implementation of the ESMP. 5. The ESMF furthermore includes Environmental Guidelines for Contractors to be attached to the bidding documents. These guidelines are designed to ensure that construction and rehabilitation activities are carried out in an environmentally and socially sustainable manner. 6. The ESMF was prepared in consultation with AAWSA in Addis Ababa, with the Town Water Boards of Jimma and Awassa, two secondary cities that could potentially benefit from the UWSSP, with the Environmental Protection Agency (federal level), and the World Bank country office. Staff involved in the operation of water systems in Addis Ababa, Awassa, and Jimma have also been interviewed. The ESMF was disclosed in Ethiopia and at the Bank s Infoshop on February 14, Environmental monitoring activities will be incorporated into the project s M&E System; monitoring indicators are included in the ESMP. Annual environmental monitoring reports will be prepared by AAWSA. These reports will provide summaries of (i) environmental screening forms; (ii) EIAs carried out in the course of the year; and (iii) a summary of the environmental monitoring 71

76 carried out on systems at both construction and operation phases. The annual reports will be reviewed by the EPA and the Ministry of Water Resources, and copies will be sent to the World Bank. 8. The National Project Coordination Unit (NPCU) of the Ministry of Water Resources will be responsible for the implementation of the ESMF; draft terms of reference are being prepared. Towards this end, the NPCU will hire a Capacity Building Consultant who will be responsible for carrying out training of local project implementers in environmental and social screening, initial review of the screening results and EL4 Reports, review and update provisions of the ESMP and the Environmental Guidelines for Contractors in light of actual developments under sub-projects. The Capacity Building Consultant will assist city administration staff as well as utility staff in the environmental and social screening activities, oversee the implementation of the ESMP and RPF, and arrange for appropriate environmental training. 9. OP 4.11 Physical Cultural Resources: This policy has been triggered due to the possibility of chance finds during construction and rehabilitation activities. Any potential chance finds will be identified and dealt with in the context of the ESMF, appendix OP 4.12 Involuntary Resettlement: This policy has been triggered due to the potential need for land acquisition under components 1 and 2. Consistent with OP 4.12, the Borrower has prepared a Resettlement Policy Framework (RPF). The RPF identifies the future investments that are likely to entail land acquisition such as wells, and water distribution networks including pipelines, public stand tabs, public water kiosks and other distribution-related facilities The document further outlines the resettlement and compensation principles outlining, for example: (a) the general framework within which any impact of the project on land andor people (land acquisition, resettlement, and livelihood restoration of affected people) will be addressed; (b) the minimization of displacement through design procedures; (c) the establishment o f a cut-off-date and eligibility criteria for each sub-project; (d) livelihood restoration; (e) compensation; and (9 consultation and grievance mechanisms. The RPF further describes the processes, entitlements and other provisions related to monitoring and evaluation; grievance mechanisms; assistance to vulnerable people; implementation arrangements, and responsibilities for the different tasks involved in the implementation of the RPF. The RPF was disclosed in Ethiopia and at the Bank s Infoshop on February 14, Implementation of the RPF in Addis Ababa will be the responsibility of the Capacity Building Consultant to be located in the NPCU with assistance from Social Consultants. The Capacity Building Consultant will also support the towns in the organization of resettlement planning (valuation commissions, censuses, payment of compensation); select consultants to develop appropriate resettlement action plans; participate in monitoring and evaluation (possibly through consultants for the most significant resettlement activities, if any). The Social Division of the federal Environmental Protection Agency (EPA) will monitor compliance of resettlement activities with the RPF, Ethiopian law, and OP Funding of compensation and land acquisition for resettlement sites (if any need) will be funded by the towns benefiting from the project. Every sub-project will have to assess budget needs for the funding of compensation and resettlement, and to identify and secure potential sources of funding. The RPF highlights that under OP 4.12, the Bank does not disburse against cash compensation and other resettlement assistance paid in cash, or against the cost of land (including compensation for land acquisition). However, the Bank may finance the cost of land improvement associated with resettlement activities. In the unlikely event where resettlement housing would need to be constructed, this can, however, be funded by the IDA loan, as well as related consulting services, supervision, monitoring and evaluation. 72